Is the DNS blacklisting mechanism included in the PROTECT-IP and SOPA bills contrary the spirit of the Internet and American innovation? A post in The Hill’s "Congress Blog" says it is. But less than a year ago, its main author was singing a different tune. DNS filtering is not only an American innovation, it's Paul Vixie's innovation.
PIPA/SOPA: Responding to Critics and Finding a Path Forward
Intellectual property (IP) infringement on the Internet is not limited to digital content. Counterfeit goods, often of poor quality, are widely available online through retail websites and online auctions. Counterfeiters sell goods such as infant formula or baby shampoo that expose young children to serious health risks. Illegal online pharmacies sell counterfeit prescription and non-prescription drugs to consumers for a variety of health conditions. At best, these drugs may simply be ineffective; at worst, they can be harmful, or even lethal, to consumers. Consumers shopping online may inadvertently purchase counterfeit goods, especially luxury goods such as jewelry, cosmetics, handbags, garments and shoes. Often these products are sold on sites that appear legitimate, charge reasonable prices, and may even link to the customer service of the brand owner. A 2011 study found that traffic to forty-eight sites selling counterfeit goods averaged more than 240,000 visits per day or more than 87 million visits per year. As Director of Immigration and Customs Enforcement John Morton put it, “Intellectual property violations have become big-time international crime. We’ve got to focus and do something about it.”
Against this backdrop, in September 2010, Senators Patrick Leahy (D-Vermont) and Orrin Hatch (R-Utah) introduced S. 3804, the Combating Online Infringement and Counterfeits Act (COICA), one of the first serious efforts by Congress in recent years to crack down on online piracy and counterfeiting. A modified version of COICA was introduced in 2011 in S. 968, the Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act (PROTECT IP Act or PIPA). Most recently, Rep. Lamar Smith (R-Texas) and his co-sponsors introduced H.R. 3261, the Stop Online Piracy Act (SOPA). While these bills have important differences, many of their enforcement mechanisms are the same. In particular, the legislation enables Internet intermediaries, including Internet service providers (ISPs), payment processors (e.g. credit card companies), ad networks, search engines, domain registrars, and domain registries to take action against websites that are dedicated to infringing activities, in particular foreign sites that are otherwise outside of the jurisdiction of U.S. law enforcement and current remedies.
PIPA/SOPA has generated considerable controversy, much of it driven by false or misleading information. Much of this has been driven by “Internet exceptionalists.” For these advocates, the Internet is inherently different from the offline world and should be off-limits to the societal rules that a democratically-elected government wants to impose on it. Any attempt to impose limitations on illegal activities is decried as the first step to totalitarian repression. For example, the Electronic Frontier Foundation (EFF), using some especially over-the-top language, calls SOPA “censorship,” a “massive piece of job-killing Internet regulation,” and claims it will “break the Internet.” As we will show in this report, these claims are completely false.
Some criticism of PIPA/SOPA is driven by individuals and interests groups who oppose the current state of U.S. copyright law. These opponents believe (or hope) that the Internet Age marks the end of intellectual property rights. They generally believe U.S. copyright laws are too expansive and do not want to see them enforced. They bring criticism against PIPA/SOPA in the hopes of blunting the effects of policies they do not like.
Other opponents of PIPA/SOPA are simply willfully blind to the current severity of the problem of online piracy and counterfeiting. For example, Andreessen et al. argue that “the [Digital Millennium Copyright Act] gives rights-holders a way to take down specific infringing content, and it is working well.” Such a claim is clearly false given the level of piracy today and the fact that the DMCA only applies to domestic sites and users. For the most part, this report will not address claims made by those who refuse to recognize even basic facts, such as that online piracy is a substantial problem that hurts the U.S. economy. The interested reader can find this information in other reports.
Other critics make claims about the effects of PIPA/SOPA that are simply inaccurate. Some Internet engineers claim that the measures enabled by the legislation would “break the Internet” in general or its domain name system in particular. Network engineers frequently claim that certain technologies “break” the Internet in whole or in part. These statements do not mean that the Internet itself will cease to work; they are complaints about deviations from certain narrow engineering principles, protocols, or standards that may not be widely used or even widely understood. This does not necessarily translate into any meaningful implications for the average user. For example, many Internet engineers have insisted that network address translation (NAT), a technology used in the routers that provide Internet connectivity to millions of homes and businesses, breaks the Internet by violating core principles such as the end-to-end principle and the use of globally unique identifiers. According to this critique, NAT also breaks specific protocols such as Session Initiation Protocol (SIP) used for voice-over-IP (VOIP) calling. Yet the Internet continues to thrive and users still make VOIP calls.
Policymakers should understand that no bill that targets foreign infringing sites would be acceptable to ideologically-driven advocates, including those who populate Internet standards bodies, regardless of their claims that they also want to reduce piracy. However, other critics have raised reasonable questions about aspects of the legislation, particularly of SOPA. While the countermeasures proposed in PIPA/SOPA that make it more difficult to distribute, locate, and earn revenue from foreign infringing websites should be adopted, policymakers should also listen to the legitimate concerns of stakeholders who make good-faith efforts to improve the legislation, rather than kill it. In particular, policymakers should ensure that the enforcement mechanisms in PIPA/SOPA are targeted, fair, and effective. Finding a reasonable solution to the problem of online piracy and counterfeiting is too important to let hysterical, ideological posturing and threats influence public policy. It is time for policymakers to take a deep breath and consider this issue on the basis of facts and rational argumentation.
In summary, Congress should:
- Recognize that online piracy and counterfeiting are serious problems in need of new policy solutions;
- Create new countermeasures that narrowly but aggressively target websites clearly dedicated to infringing activities, especially U.S.-directed foreign sites;
- Encourage and enable intermediaries in the Internet ecosystem to disallow the use of their services to distribute, locate, and earn revenue from online infringement;
- Demonstrate to other nations that combatting online infringement, including by blocking illegal sites, will neither “break the Internet” nor harm free speech; and
- Take into account the concerns of stakeholders who are negotiating in good faith to reduce online infringement, such as by ensuring that legislation is not overly broad or vague.
The purpose of this report is threefold: 1) to respond to the inaccurate claims that have been made about PIPA/SOPA by opponents of the legislation, particularly with regards to DNS filtering; 2) to offer an assessment of legitimate areas of concern that policymakers should address before proceeding with legislation; and 3) to propose an alternative solution to the most controversial aspect of SOPA.
Copyright Compromises: Creators’ Rights, ISP Efficiency & Consumer Welfare
On October 12, 2011, Senior Analyst Daniel Castro will speak on a panel about the role of ISPs in protecting intellectual property. The panel is part of the conference Copyright Compromises: Creators’ Rights, ISP Efficiency & Consumer Welfare, sponsored by the Information Economy Project at the George Mason University School of Law. Other notable presenters inculde Daniel Polsby, Dean of George Mason University School of Law and Keith Epstein, General Attorney & Associate General Counsel, AT&T.
Patent Boxes: Innovation in Tax Policy and Tax Policy for Innovation
An effective corporate tax system reflects current economic realities. As such, the U.S. corporate tax system is in need of reform, for it reflects economic realities of a generation ago. Today, the U.S. economy faces intense global competition for economic advantage, particularly in innovation-based, higher wage industries. Moreover, the economy is based more on innovation and intellectual property (IP). IP is also more mobile, as companies can perform R&D and patent in countries around the world. Therefore, nations that hope to grow and attract innovation-based business establishments need tax policies that promote both the conduct of research and its commercialization.
Toward that end, a number of countries recently have adopted or expanded R&D tax incentives as well as developed new tax incentives to spur the commercialization of that R&D. These incentives or “patent boxes” (so-called because there is a box to tick on the tax form) allow corporate income from the sale of patented products to be taxed at a lower rate than other income. Eight nations (seven in Europe) have enacted patent box regimes that incentivize firms to patent or produce other related innovations. And a ninth, the UK, is set to put in place the incentive in 2013.
Proponents of patent boxes argue that they increase country competitiveness not only by spurring firms to invest more in innovation but also by providing a more competitive corporate tax climate for increasingly innovation-based firms. Skeptics claim that patent boxes do not actually address market failure because firms already have all the incentives they need to commercialize innovation in the marketplace.
This report seeks to inform the debate on whether patent boxes can help promote R&D and commercialization and if a patent box is appropriate for the United States. It articulates two economic rationales for why the United States should follow our European and Asian competitors and institute a patent box system. First, a patent box reduces the financial risk involved in innovation, better matching firm rewards with societal benefits, including the creation of high-wage jobs. If a patent box is designed in a way that links the incentive to the conduct of R&D and production of the patented product in the United States, it would go even further in spurring the creation and location of more innovation-based jobs in the United States. Second, a patent box would lower the effective corporate tax rate for knowledge-based establishments located in the United States, making it easier for them to compete against establishments in nations providing robust innovation incentives.
A patent box that significantly reduces the corporate tax rate on revenue from qualifying IP, based in part on the extent to which corresponding R&D and production is conducted domestically, would provide firms with a much stronger incentive to innovate and produce in the United States.
As such, Congress should establish a patent box regime modeled after those of other nations, allowing companies in the United States to pay a significantly lower rate on corporate income from patented products where the share of profits that are taxed at the lower rate depends on the extent to which related R&D and production is conducted within the United States.