26 October 2011

Cultural Identity and Marks

'The Case of the Zia: Looking Beyond Intellectual Property Laws to Protect Cultural Rights' (forthcoming in Chicago-Kent Journal of Intellectual Property) by Stephanie Turner explores an ongoing dispute in US trademark law involving use of the Zia pueblo 'sacred sun' symbol.

Turner comments that the Zia have been using the symbol in religious ceremonies since 1200 C.E.
The symbol now appears on the New Mexico State flag, letterhead, and license plate, and on commercial products ranging from chemical fertilizers to portable toilets. The tribe claims that the State appropriated the symbol without permission in 1925, and that the continued use of the symbol by various parties dilutes its sacred meaning and disparages the tribe in violation of Section 2(a) of the Trademark Act. This Article tells the Zia story, focusing on the harms the tribe faces when others appropriate its symbol and the possible solutions. It concludes by suggesting that indigenous groups like the Zia should move beyond intellectual property laws in the fight to protect their cultural rights.
Turner concludes -
... the fight to protect cultural rights is not an easy one. Over the past twenty years, the people of the Zia Pueblo have seen both successes and failures in their fight to protect their sacred sun symbol. But what is perhaps most striking about the Zia story is that non-legal measures — including education, political lobbying, and respectful negotiations — have proven far more effective in the tribe’s fight than has trademark law.

As we have seen, the Zia attempted to protect their sacred sun symbol twice during the 1990s by blocking registration under Section 2(a) of the Trademark Act. In both cases, the Zia succeeded at stopping commercial entities from obtaining registered trademarks containing the symbol. But they did not succeed thanks to trademark law; rather, they succeeded by exerting social and political pressure. Those attempts were symbolically important, but also costly and wearing, resulting in no helpful legal precedent. The Albuquerque Hearings further revealed that trademark law as it stood—and even the recommended changes—could at most provide an incomplete remedy for the harms incurred by tribes like the Zia. Even an improved version of trademark law would not provide the Zia with a sufficient amount of control over their symbol, nor would it provide them with monetary and other benefits for outsiders’ uses of their symbol.

This is not to say that our current trademark regime is entirely ineffective. To the contrary, for indigenous groups that can afford to use the legal system, it may indeed be one useful option. It is also entirely possible that a legal solution exists for the harms incurred by groups like the Zia. Amending Section 2(a) of the Trademark Act to include tribal insignia represents one possibility, though it may not be the best or only one. Certainly, the Government should continue to consider modifying trademark law to protect more fully tribal insignia and Native American cultural rights more generally.

Even as trademark law is an imperfect solution, the case of the Zia demonstrates that non-legal measures can fill the gaps and play a significant role in protecting cultural rights. The Zia repeatedly have turned to non-legal approaches over the past twenty years: they have educated the USPTO, demanded reparations from the State, garnered the political help of a Senator, and pressed Congress to fashion a new legal remedy. The Zia have not always achieved the results they sought, but their efforts did lay the foundation for the creative and effective system that the tribe uses today. By negotiating informally with commercial entities and the State, the tribe attains benefits — including donations to its scholarship fund, positive publicity, and political sway — that it never could find through trademark law.

The case of the Zia undoubtedly is unique and cannot speak to the needs of every indigenous group. But it strongly suggests that, in the current climate, indigenous groups should take a similar approach in the fight to protect their cultural rights. Indeed, Native American tribes can go even further than the Zia have in exploiting non-legal tools. The possibilities are endless — “protests, lobbying for legislation, and other methods of political pressure” are just a few. This lesson might prove most helpful to tribes that face situations like that of the Zia — that is, for those that seek specifically to protect their tribal insignia. But those whose claims would fall within the scope of trademark law — for example, groups seeking to protect their tribal names, and, indeed, the Native Americans hoping to cancel the Washington Redskins’ trademarks — should heed this lesson as well. Even more generally, indigenous groups who might turn to other intellectual property laws—including copyright and patent—to protect their cultural rights should consider looking to non-legal approaches in addition or instead. For ultimately, the case of the Zia shows us that non-legal measures may just be the most effective tools of all.


The 19 page 'Copyright Law and the Digitisation of Cultural Heritage' (Victoria University of Wellington Centre for Accounting, Governance & Taxation Research Working Paper No. 77) by Susan Corbett & Mark Boddington comments that -
It has become common practice for cultural heritage institutions (CHIs) to digitise their collections. There are however certain aspects of this practice which are ethically or legally contentious. From an ethical perspective, the treatment of indigenous cultural heritage by New Zealand CHIs is acceptable; CHIs are sensitive to the cultures of indigenous communities and follow strict codes of practice when seeking to digitise items originating from these communities. Hence we argue that this should remain a matter of internal regulation. The public image of a CHI would be harmed were it not to follow culturally sensitive and ethical practices. Hence this likelihood acts as a strong societal deterrent which, although it is not part of a legal enforcement mechanism, nevertheless bears with it the element of public shame and also likely monetary penalty, since the numbers of visitors are likely to be reduced following such behavioural practices.

Conversely however, many New Zealand CHIs presume that their contractual relationships with visitors to the institution and its website permit them to override the public good exceptions that exist in copyright law. If this practice is permitted to become a norm, without passing through the usual democratic procedures required for the law making process, we suggest there will be serious implications for both copyright law and cultural heritage policies. Legislative amendment is required to provide that contractual provisions may not oust the public good exceptions provided in copyright law.
The authors conclude that -
Today many cultural heritage institutions are sensitive to the cultures of indigenous communities and follow carefully drawn-up frameworks and codes of practice when seeking to acquire items from these communities for their collections. Although this has been described as "soft law" with "no real enforcement mechanisms", we believe this is not necessarily fatal. It is undeniable that the public image of a modern cultural institution would be severely harmed were it not to follow culturally sensitive and ethical practices. Hence this likelihood acts as a strong societal deterrent which, although it is not part of a legal enforcement mechanism, nevertheless bears with it the element of public shame and indeed also likely monetary penalty imposed on the institution since the numbers of visitors are likely to be reduced following such behavioural practices.

Conversely however, many cultural heritage institutions appear to assume that their contractual relationships with visitors to the institution and the institutional website permit them to override the public good exceptions that exist in copyright law. If this practice is permitted to become a norm, without passing through the usual democratic procedures required for the law making process, we suggest there will be serious implications for both copyright law and cultural heritage policies. Legislative amendment is required to provide that contractual provisions may not oust the public good exceptions provided in copyright law. In the meantime, as a matter of good practice, a cultural heritage institution should ensure that its terms and conditions of entry to the physical institution, and also those terms and conditions which regulate visitors to their website, do not override the traditional copyright balance between users of copyright works and copyright owners.


'Maximizing Autonomy in the Shadow of Great Powers: The Political Economy of Sovereign Wealth Funds' (Columbia Law and Economics Working Paper No. 395) by Kyle Hatton & Katharina Pistor argues that -
Sovereign Wealth Funds have received a great deal of attention since they appeared as critical investors during the global financial crisis. Reactions have ranged from fears of state intervention and mercantilism to hopes that SWFs will emerge as model long-term investors that will take on risky investments in green technology and infrastructure that few private investors are willing to touch. [W]e argue that both of these reactions overlook the fact that SWFs are deeply embedded in the political economy of their respective sponsor-countries. This paper focuses on four countries that sponsor some of the largest SWFs worldwide: Kuwait, Abu Dhabi, Singapore and China. Each of these countries has been governed for decades by elites whose grip on power has been tied to the economic fortune of their country and their ability to pacify, or at least balance against, foreign powers. We argue that for these four countries, both the motives for establishing SWFs and the strategies they employ can best be explained by an “autonomy-maximization” theory.

In a world where uncertainty - both economic and political - looms larger as a concern in the wake of the global financial crisis and political upheavals, such as the revolutions in Tunisia, Libya, and Egypt, elites use an increasingly diverse array of tools to protect their autonomy within the global system and hedge against unexpected turmoil. SWFs serve ruling elites by concentrating substantial resources, which can be used to pay-off domestic adversaries, to insure the economy against major downturns and thereby mitigate public discontent, to signal cooperation to major foreign powers, and to increase legitimacy in the global arena by presenting governance structures familiar to the West. We employ a comparative case study analysis to highlight the critical importance of these political economy dynamics in the establishment of SWFs, their governance structures, and their behavior in both normal times and during times of crisis.
The authors conclude -
A widely accepted definition of SWFs holds that these entities are government-owned and controlled, and have no outside beneficiaries or liabilities beyond the government itself, so they are responsive to the expressed interests and objectives of the government. There are competing conceptions of what constitutes “governmental interest” in a democratic society, but a discussion of public choice vs. public interest politics is beyond the scope of this paper. This paper suggests that in countries without electoral democracy, such as China, Singapore, Kuwait, and Abu Dhabi, the government is comprised of ruling elites, who are not directly accountable to the public in general: it is easy to see how “governmental interest” becomes tied to the interests of the ruling elite. Indeed, the internal governance structures of the SWFs themselves ensure that SWF management is directly accountable to the ruling elite in each sponsor country. Consequently, it is unsurprising that SWFs can be, and are, wielded to advance the interests of those elites. First and foremost among these interests is the maintenance of their privileged position.

The task of maximizing autonomy is, however, complex. The privileged position of ruling elites in non-democratic countries is dependent on domestic stability, security of the state against foreign rivals, and the maintenance of substantial autonomy relative to superpowers to which they might otherwise be vulnerable. Without domestic stability, elite status is fragile and will last only until the next coup or mass uprising; a foreign invasion would topple existing elites or at least subsume them into a hierarchy with foreigners at the top. Finally, as autonomy relative to superpowers decreases, the ability to direct state action toward benefiting the elite is restricted and domestic legitimacy may be threatened.

SWFs are well-suited toward serving an autonomy-maximizing function in the domestic arena. The creation of a SWF ensures that wealth stays under the control of the ruling elite rather than passing into the hands of the population as a whole. In the Gulf, the extraction and sale of oil could transform a royally monopolized resource into dispersed wealth, but concentrating the resultant revenues into a SWF ensures continued royal control. In Asia, export led growth could increase the purchasing power of the domestic population, but sterilizing the returns by concentrating them in a SWF protects against destabilizing currency crises and the rise of new wealthy classes who might challenge the existing elite for political control of the state.

Further, once accumulated in a SWF, wealth can be strategically deployed in the domestic market to protect the status of elites. It can be used to “buy off” potential political rivals, expand the institutional space for political allies (increasing the benefits of aligning oneself with the existing elite), and to fund social programs that satisfy the needs of the population as a whole for the foreseeable future. Finally, SWFs ensure that domestic stabilization strategies can be maintained even in the face of shocks to the system like oil price or production declines or falling trade volumes. Collectively, these effects substantially improve domestic stability. SWFs are equally well-suited to maximizing autonomy in the international context by improving state security and mitigating the impact of volatile global markets on the domestic economy. First, administering wealth through the public sector rather than funneling it to the private bank accounts of the ruling class (as is done in a substantial number of resource-rich countries) legitimizes the sponsor-state government in the eyes of the international community.

In terms of the particulars of administering the fund, SWF investment decisions can also be made to directly induce potential threats to state security not to attack or to convince a third party to guarantee the security of the state. Even without such a direct bargain, deploying capital in other countries creates economic ties that discourage confrontation, and to create relationships that provide leverage in times of crisis.

SWFs can also be used to maintain substantial autonomy relative to superpowers that might otherwise exert pressure to limit the sponsor-country’s range of viable domestic policy choices. This is relevant in particular for small countries that cannot effectively maintain their own external security. First, SWFs diversify the revenue stream of the sponsor-country, insulating against the effects of changes in the terms of trade or other exogenous shocks, such as commodity price fluctuations. Maintaining foreign-currency-denominated assets also decreases vulnerability to currency crises, which effectively increases the range of available domestic policy choices in the long term. Further, SWF investments can be directed toward injecting capital or liquidity into the economies of superpowers during their own periods of crisis, with the expectation that this assistance will be remembered during future interactions. SWFs can also be used to fulfill unspoken “dollar-recycling” obligations that, if unmet, might lead to interventions by western countries. Finally, SWFs can also be used to secure access to natural resources or markets for primary exports, ensuring the long term viability of current industrial policy in sponsor countries and providing insurance against protectionism in developed countries.

More recently, SWFs have become an important force in global financial relations, not primarily because of their size, which is still dwarfed by private investment vehicles, but because of their ability and willingness to invest at times when private investors take flight. These investments have given rise to a series of interpretations. Some have stressed the potential danger that these ‘neo-mercantilist’ organizations may pose to the capitalist system. Others have painted a more positive picture by suggesting that SWFs could help enhance global social welfare by investing their resources to spur development in less developed countries, or to invest in green technology in an attempt to save the planet from climate change. In contrast, this paper suggests that these investments too are best understood as part of a general strategy aimed at autonomy maximization. SWFs have invested widely in the global financial system, and are as such dependent on it. Their willingness to step in when private investors took flight is therefore not without self-interest. In addition, by helping to stabilize global finance they were able to either confirm existing relations of reciprocity or establish similar relations. As discussed in the case studies, for the Gulf States the financial crisis created an opportunity to reciprocate the security umbrella the US has offered them in the past. For China, the crisis created an opening to position itself not only as a challenge to US dominance, but as a relational player.

The actual context in which SWFs were established and operate, we suggest, is crucial for understanding their role and the attractiveness of various investment opportunities at any given point in time. Modeling SWFs according to the standard accounts of state control over economic activities, which are derived primarily from the historical experience of the West, misses these critical aspects—and is therefore bound to miss the critical determinants of SWF behavior both domestically and internationally.

Anxiety and Justice

Noted R v Wade [2011] QCA 289 in which the Queensland Supreme Court has allowed Bowan Wade to withdraw his plea of guilty to murder.

Media reports indicate that Wade was 19 at the time of the killing in 2009. There is no indication of his background.

The Court found that Wade did not plead guilty in the exercise of his free choice. It found instead that Wade pleaded guilty in a desperate attempt to terminate the criminal proceedings, which he found unbearably anxiety-producing. There was psychological evidence that Wade experienced a heightened state of arousal when confronted with a situation for which he was not prepared and did not deal well with large crowds of people.

In his affidavit for the appeal Wade stated that -
When in prison for the [murder] he was a voluntary patient with the prison mental health service for about 18 months during which time he was prescribed the drugs Avanza, Seroquel, Valium, Zyprexa and Risperidone. He said he didn't know what diagnosis he had been given or what the drugs were meant for. He stopped taking his medication "in about November or December 2010". Some psychiatrists were telling him he did not have anything wrong with him but others were telling him to keep taking the drugs. At the time of his guilty plea, he was not taking any medication. He considered that, after ceasing his medication, he was "less able to deal with stress and ... would sometimes blurt out things that [he] shouldn’t say".
Wade had requested to not be present at his trial and requested that his legal representatives provide him with witness statements to read during the trial so as to distract him from his environment. He had maintained to his legal representatives that he was not guilty of murder. Those representatives can, of course, advise but not make decisions on a defendant's behalf.

Muir JA concluded that -
The appellant, when in prison prior to his trial, had been taking what Dr Frey described as a bewildering array of psychotropic medications "including a major tranquiliser", "an anti-psychotic ... sometimes also given in extreme cases of anxiety". There was evidence that the appellant was subject to panic attacks and became anxious "when confronted with new situations and large groups". He was "housed in a small unit at the gaol because he doesn’t cope well with crowds of people". He had said that he didn’t want to be present in court during his trial and had queried the necessity for his presence.

The appellant’s conduct described by [his representative], and revealed by the transcript of proceedings at first instance, was consistent with the behaviour of a person suffering from a panic attack and/or pronounced anxiety. Part of this conduct was the appellant’s request to be furnished with witness statements to read during the proceedings so that he could divert his attention from his surroundings, assisting him to control his outbursts. The evidence establishes to my satisfaction that the appellant’s intention to plead not guilty to murder, to which he had consistently adhered, was overwhelmed by his desire to escape from the courtroom as he felt he would be unable to cope.

The appellant's evidence, supported by the evidence of the psychologist ... shows that the appellant’s response to the environment he found himself in on 21 March 2011 went beyond the feelings of stress, pressure and agitation that would normally be felt by an accused in the appellant’s situation. The appellant’s mental and emotional state was such that his ability to make a rational decision on how to plead was substantially impaired. As a result, his plea of guilty could not be said to have been made in the exercise of his free choice.

On the present state of the evidence, the appellant has an arguable case in respect of the murder charge. The medical evidence does not point unequivocally to an intention to cause grievous bodily harm or kill. Although the appellant made admissions which were damming on their face, he told different people different things, weakening the evidentiary value of the admissions. Also the admissions most harmful to his defence are inconsistent with the medical evidence. For the above reasons, the appellant has established that there was a miscarriage of justice and that the guilty plea should not stand.
Chesterman JA similarly concluded that -
It is to be expected that every accused in a criminal trial will experience one or more of a variety of emotions; anxiety, fear and tension which, in turn, are likely to produce agitation and/or depression. The degree of the emotion experienced will often be extreme. The fact that an accused experiences such emotions and pleads guilty either because of them or while affected by them will not, at least ordinarily, be a reason for not accepting a plea of guilty as a true confession of guilt. For that to happen, as the cases show, "there must be a strong case and exceptional circumstances".

The evidence of Dr Frey is just sufficient to make the case exceptional. The level of emotional distress and panic with a consequential inability to cope with the trial can be seen to have deprived the appellant of the capacity, at the time when called upon to plead, to make a free choice in his own interests. The appellant’s mental state at the commencement of the trial was abnormal. Although conscious of what he was doing, and of the consequences, the plea was compelled by psychological processes which took from him a sufficient degree of self control and awareness of his own interests that to allow the conviction to stand would amount to an injustice.

A relevant factor in concluding that the conviction should be set aside is that it is for the most serious offence known to the criminal law, and the only one which carries a mandatory term of life imprisonment. The consequences for the appellant are so serious it is easier than in other cases to discern a miscarriage of justice if the conviction were allowed to stand.
The Court ordered that the appeal be allowed, Wade's guilty plea be set aside, his conviction be set aside and that there be a re-trial.

That trial will presumably grapple with inconclusive medical evidence as to cause of death and incriminating admissions that were disputed or demonstrably wrong.

24 October 2011

Juveniles in Detention

Juvenile justice in Australia 2009-10 [PDF], a 250 page report from the Australian Institute of Health & Welfare notes that -
In Australia, the state and territory governments are responsible for dealing with young people who are involved in crime. One major aspect of the juvenile justice system is the supervision of children and young people who have committed or are alleged to have committed an offence. This report presents information on the young people under juvenile justice supervision, both in detention and under community-based supervision, and the characteristics of their supervision.

Most young people are under community-based supervision

There were around 7,250 young people under juvenile justice supervision on an average day during 2009–10, and most (86%) were under community-based supervision. Western Australia and the Northern Territory did not provide standard data for 2009–10 and where possible, national totals were calculated using available data (see Chapter 3 for details). Young people aged 10–17 years were almost 6 times as likely to be under community-based supervision as in detention on an average day, although Indigenous young people were only 4 times as likely to be under community-based supervision.

However, the propensity to be under community-based supervision rather than in detention varied among the states and territories (excluding Western Australia and the Northern Territory), and ranged from 4 times as likely in New South Wales to 11 times in Victoria. This variation reflects differences in legislation, policy and practice, including the range of supervised orders and options for diversion that are available in each of the states and territories.

Overall, however, few young people are under juvenile justice supervision. Just 0.3% of young Australians were under supervision on any given day in 2009–10.

Young people spend half the year under juvenile justice supervision

The average length of time spent under supervision during 2009–10 was six months, and young people spent 3 times as long under community-based supervision as in detention (almost 6 months under community-based supervision compared with 2 months in detention). Among the states and territories (excluding Western Australia and the Northern Territory), the average length of time spent under supervision ranged from five months in the Australian Capital Territory to seven months in Tasmania.

Indigenous young people spent more time under supervision than non-Indigenous young people, especially in detention. Indigenous young people spent 2.5 more weeks in detention during the year than non-Indigenous young people, but just 4 more days, on average, under community-based supervision.

Almost half of those under supervision have never been in detention

A sizeable proportion of those under supervision have only ever had community-based supervision—44% of those under supervision during 2009–10 have never been in detention. However, this was less likely for Indigenous young people: only 32% of Indigenous young men and 42% of Indigenous young women had never been detained, compared with 46% of non-Indigenous young men and 49% of non-Indigenous women.

Cancersticks Inc

'Social and health costs of tobacco smoking in Australia: level, trend and determinants' by Azizur Rahman & Ann Harding in (2011) 6(4) International Journal of Statistics and Systems 477-489 is a reminder of why we might want to shape the use of trade marks in plain paper packaging of tobacco products.

The authors state that -
In this paper, a major health related issue tabacco smoking in Australia has been addressed. Findings reveal that tabacco smoking is the largest single cause of death and a key risk factor for some deadly diseases in Australia. The overall social and economic costs of tabacco smoking are huge, and rapidly increasing over time. Although the trent in smoking is slowly decreasing during recent decades, the current adults smoking prevalence rate is about 23 per cent. More than a quarter of households in Australia have weekly expenditure on tabacco products and nearly one in each ten households spent more than 50 dollars per week for smoking. Specific socioeconomic characteristics such as households with unemployed reference person, hacing two or more unemployed persons, and in renting dwellings have significantly higher smoking expenditure. The demographic attributes show that more males are smoker than females and smoking rate is higher among younger aged adults for both sexes.
They conclude -
Findings have revealed that smoking rate is higher among younger aged adults for both sexes and then it decreases with increasing at middle to older age. The men smoking rate is higher than the women smoking rate among all age groups. Besides, the trend of adult smoking is slowly decreasing in Australia during recent decades, and the current prevalence rate of tobacco smoking is about 23 per cent. In addition more than a quarter of households in Australia have weekly expenditure on tobacco products, and nearly one in each ten households spent more than 50 dollars per week for smoking.

The smoking expenditure of Australian households increases with increasing levels of weekly income up to 1000 dollars and then decreases with increasing income. It is noted that more than a half of the Australian households have total income between one and a thousand dollars per week. The renter households have higher smoking expenditure than households owning dwelling without or with mortgage as well as other tenure type, and households with unemployed reference person have relatively more smoking expenditure than households with employed reference person or the reference person not in labour force. All levels of smoking expenditure are more common within households having two or more unemployed persons. Moreover smoking is the largest single cause of death and one of a critical risk factor for some deadly diseases in Australia and the overall social costs of tobacco smoking are increasing over time. So, more effective and multistage policy can be developed and implemented for reducing social and health costs of Australia. It is important that the potential new policy (such as actions of social awareness) could not only target at national and/or state levels, but also it could be initiated at local levels.

Finally, future research will generate small area tobacco smoking estimates in Australia, because the estimates of health related characteristics including the youth and adults smoking behaviours are not very common at small area levels due to the lack of enough sample information in small geographic areas.


'The Private and Social Costs of Patent Trolls' (Boston University School of Law, Law and Economics Research Paper No. 11-45) by James Bessen, Michael Meurer & Jennifer Ford argues that -
In the past, non-practicing entities (NPEs) - firms that license patents without producing goods - have facilitated technology markets and increased rents for small inventors. Is this also true for today’s NPEs? Or are they “patent trolls” who opportunistically litigate over software patents with unpredictable boundaries? Using stock market event studies around patent lawsuit filings, we find that NPE lawsuits are associated with half a trillion dollars of lost wealth to defendants from 1990 through 2010, mostly from technology companies. Moreover, very little of this loss represents a transfer to small inventors. Instead, it implies reduced innovation incentives
The authors go on to state that -
In 2010, operating companies in the US found themselves in lawsuits initiated by nonpracticing entities (NPEs) more than 2,600 times, over five times more often than in 2004 (Patent Freedom 2011). Is this a good thing or a bad thing?

NPEs are firms that do not produce goods, rather they acquire patents in order to license them to others. In principle, NPEs can perform the socially valuable function of facilitating markets for technology. Some inventors lack the resources and expertise needed to successfully license their technologies or, if necessary, to enforce their patents. NPEs provide a way for these inventors to earn rents that they might not otherwise realize, thus providing them with greater incentives to innovate. For example, economic historians find evidence of a robust market for technology during the nineteenth century that allowed individual inventors to earn returns on their inventions in the era before the rise of the large R&D laboratories (Lamoreaux and Sokoloff 1999). Optimists argue that the current crop of NPEs perform a similar function and should not be discouraged (Hosie 2008, McDonough 2006, Shrestha 2010, Myhrvold 2010, Morgan 2008).

On the other hand, the recent surge in NPE-related litigation may be more insidious. Critics, including many technology firms, compare these NPEs to the mythical trolls who hide under bridges built by other people, unexpectedly popping up to demand payment of tolls (see, for example, Temple 2011). The critics call these NPEs “patent trolls,” claiming that they buy up vaguely worded patents that can be construed to cover established technologies and use them opportunistically to extract licensing fees from the real innovators. Indeed, there has been a general and dramatic rise in patent litigation that some analysts attribute to rapid growth in the number of patents with unclear or unpredictable boundaries (Bessen and Meurer 2008, FTC 2011). To the extent that the recent NPEs opportunistically assert “fuzzy patents” against real technology firms, they can decrease the incentives for these firms to innovate. Innovators deciding to invest in new technology have to consider the risk of inadvertent infringement as a cost of doing business. This risk reduces the rents they can expect to earn on their investment and hence decreases their willingness to invest.

Using empirical evidence, this paper investigates the effect of the current crop of NPE litigation on innovation incentives and on social welfare. We begin by estimating the private losses to publicly listed companies who are defendants in NPE patent litigation by measuring the reaction of the defendant firm’s share price during the days following the filing of the lawsuit.

Using a database of patent lawsuits collected by Patent Freedom (2011), we perform 4,114 of these event studies from 1990 through 2010. In theory, investors respond to the news of a lawsuit filing by reducing their expectations of future earnings for the defendant firm. This reduction should reflect all the costs the firm faces from the suit, including lost business, fees paid to settle the case, etc., depending on how investors expect the suit to be resolved. Investors also consider the loss or delay of profits from future opportunities. The total change in expected profits is reflected by a drop in the share price.

Of course, other events also affect the share price on any given day, including events that affect the market generally and idiosyncratic events that affect the firm being studied. We use standard methods to control for the effect of the market and we average over a large number of lawsuits to filter out random idiosyncratic price changes. This allows us to estimate the average percentage change in the defendant’s stock price for each lawsuit filing and the change in market capitalization of outstanding common stock. Aggregating the change in market capitalization over two decades, we find that the aggregate loss of wealth to these firms exceeds half a trillion dollars. Over the last four years, the loss of wealth exceeds $83 billion per year.

This private loss might seem surprisingly large, but it does not necessarily mean that this litigation harms society. The effect on society depends on two considerations.

First, there is a static effect on net social welfare. To the extent that litigation involves socially wasteful activity, such as a diversion of firm resources from production to litigation support, it reduces social welfare. Such activity implies a “deadweight” loss. On the other hand, to the extent that the losses just represent transfers of wealth from one party to another — perhaps from large defendants to independent inventors — then the static effect on social welfare could be neutral. Second, there is a dynamic effect: this litigation could increase or decrease innovation incentives overall, thus affecting future social welfare. The large private losses seem to imply a disincentive for the defendants, who are largely technology firms after all. But perhaps transfers to the patent holders constitute a positive incentive to them that more than compensates for the disincentives imposed on the defendant firms. Then the dynamic effect could be to increase innovation incentives overall.

Some general evidence leans against such an optimistic evaluation. The literature on litigation commonly finds that the loss of wealth experienced by defendants is, in fact, largely a deadweight social loss; little of it flows to the plaintiffs (Bhagat and Romano 2002). Moreover, the large magnitude of lost wealth in these patent cases seems hard to reconcile with a story of transfers to independent inventors — in recent years the losses comprise a significant fraction of total US R&D spending. If these losses were offset by massive transfers to independent inventors, we think we would have heard or read reports documenting this bonanza and a corresponding surge in research activities by small inventors. There is little evidence that NPE litigation has produced massive transfers to independent – or any other sort of – inventor.

Nevertheless it is helpful to look specifically at evidence of the wealth actually transferred to NPEs and to inventors as a result of NPE litigation. Using the financial statements of publicly listed NPE firms, we obtain upper bound estimates on these transfers. We find that relatively little of the wealth lost by defendant firms shows up as a transfer to NPEs and relatively little of the funds flowing to NPEs is transferred to outside inventors.

These findings allow us to draw some conclusions about the effect of the recent surge in NPE litigation on markets for technology, how the current crop of NPEs are different from those in the past, and how this affects innovation incentives.

Lex Aviatica

'The Emerging Lex Aviatica' by Brian Havel & Gabriel Sanchez in (2011) 42(3) Georgetown Journal of International Law 639-672 argues that -
Since the advent of international commercial air travel, every airline has been straitjacketed by treaty-based restrictions which mandate that, in order to be eligible to provide international air services on behalf of its home state, it must be owned and controlled by citizens of the home states (or by the home state itself). This citizenship “purity” requirement, commonly referred to as the “nationality rule,” is reinforced by national laws requiring substantial (share) ownership and effective control of national air carriers by the home state or its citizens. The combined effect of these treaty and national law restrictions has been to prevent airlines from merging across borders or from establishing subsidiaries in other states. Consequently, airlines are locked out of transnational capital markets at a time when the global operating environment (including oil price spikes and lingering demand weakness in the wake of the Great Recession) has never been more challenging. In this Article, we identify an emerging normative transition, which we dub the “lex aviatica,” that is attempting to displace the treaty-based nationality rule. This transition is rooted in an evolving consensus among airlines and sympathetic government officials. Thus, in contrast to its conceptual antecedent, the “lex mercatoria,” through which the merchant class consciously broke with the common law, the emergent lex aviatica suggests a lawmaking process where not only is the state no longer the sole actor or regulator, but there is an appreciably more open-textured collaboration between merchant and state. The Article analyzes how this normative transition could transform the global regulatory order for international aviation, liberating commercial and investment opportunities that will allow the industry that globalized the world to become global itself. ...

Under a right of establishment regime, a state would no longer demand that an airline incorporated and having its principal place of business in its territory should also demonstrate the “purity” of its national ownership profile before being authorized to provide domestic or international services. But neither would airlines throw off all permanent regulatory connections to states, or procure phantom licenses from states in which they do little or no business — a crack in the commercial order that allowed flags of convenience to destabilize the global shipping industry.

Instead, each airline company will show a real regulatory link — a “strong link” or “corporate affinity” — to a state which provides the airline’s license and imposes safety and security oversight as well as labor, taxation, immigration, environmental, and other regulatory requirements. At minimum, affinity would be demonstrated by familiar corporate law tests like principal place of business, place of incorporation, place of central administration, and place of permanent residence.

The right of establishment can be exercised by any foreign national to acquire (or merge with) an airline in another state, or to set up a subsidiary of a foreign airline in another state, so long as the airline acquired or set up in the other state submits to the regulatory jurisdiction of that state.135 In a post-national regulatory environment, airlines may well have corporate affinity with several states and therefore require multiple licensing, or the parent company may hold a principal affinity with a single state and operate elsewhere through subsidiaries which themselves have an affinity with other states. The lex aviatica will evolve new models of airline licensing to reflect this altered commercial paradigm.

British Airways, exercising its new right of establishment, could organize a subsidiary in the United States (“BA-America”). BA-America would be a U.S. company licensed to provide both domestic (cabotage) and—post-nationality clause—international services under U.S. bilaterals. Additional ASA requirements, in particular that airlines have their principal place of business in and receive operating authority from the states which designate them to provide services under the treaties, would already be satisfied as a matter of corporate affinity. Or, under the same right of establishment, British Airways could acquire or merge with a standing U.S. air carrier, say its oneworld alliance partner American Airlines, without risk to the combined entity’s eligibility to serve international routes. Either option would allow British Airways to add a sizeable North American infrastructure to its longstanding European brand presence.

Even after the nationality rule has withered away, trade in air services would still be dominated by a bilateral system where traffic rights are assigned by sovereign fiat. While states have largely accepted the desideratum of more liberal external air transport policies, they have not yet stepped away from their directive role in bilateralism and toward multilateral fora such as the WTO.139 We are not convinced, however, that a razing of the bilateral system is needed before significant air transport globalization can occur. If the nationality rule is toppled by an emerging lex aviatica, the bilateral treaty system will, even without further change, be converted into a more spacious realm of investment and market opportunities. After all, as we have mentioned, if airlines are allowed to set up operations in strategically selected foreign states under nondiscriminatory legal regimes, they will be able to consolidate the bilateral market access opportunities negotiated by those states in order to build substantial transnational route networks.

Under bilateralism, for example, a merged multinationally owned airline comprising American Airlines, British Airways, and Japan Air Lines would still have substantial global reach across the European, North American, and Asia-Pacific markets. And the global marketplace would behave no differently in those circumstances than its domestic counterpart. Rival carriers in these regions would seek other merger partners or takeover targets in a bid to rationalize costs, pool resources, or combine route networks. Carriers with more modest ambitions would continue to serve regional networks or to provide point-to-point service on selected high-density long-haul routes. The commercially transformative difference would be that, released from the grip of the nationality rule, airlines could join the world’s other global manufacturing and service industries in using rights of establishment to circumvent national barriers to free trade. Abolition of the nationality rule, in fact, would also be a cost-efficient policy for states which are unwilling to tear down the entire bilateral system at the same time.
They conclude that -
The lex aviatica has emerged from the blended work of an engaged community of airline leaders, state officials, commentators, and other stakeholders. Its Grundnorm, borrowed from one of IATA’s populist shibboleths, is “airlines doing business like any other business.” To that end, this emerging normative order has destabilized the nationality rule in bilateral air services treaties, and has suggested a replacement paradigm that respects the regulatory role of the state using a right of establishment. Some of the lex aviatica is law already (where states have waived the nationality clause, or modified their inward investment rules, for example), but a good deal of it is law-in-themaking. As with its conceptual progenitor, the lex mercatoria of the medieval merchant class, it reflects a deep dissatisfaction with the burden of a commercial and regulatory environment that cannot sustain the needs of its principal participants. And like the lex mercatoria, this evolving post-national body of law is multipolar in its origins; there is no single authority or government responsible for its promulgation, but there are evident signs that some of the world’s most economically powerful states are actively contributing to its development. We cannot predict when we will cease speaking of the lex aviatica as a process of coming-to-be.

As with so many international legal endeavors, it remains at some appreciable risk of political reversal. But the transformative promise of the lex aviatica, its Aristotelian dynamis, will be to bring global air transport regulation into harmony with the industry’s natural cosmopolitanism.