More Unfair Claims about Fair Use This Time in New Zealand

by George Robert Barker

In two earlier papers2 I outlined how some stakeholders, large companies and private advocacy groups are currently engaged in a concerted effort to enact major copyright policy changes in Asia Pacific.

In this paper I review another new report this time written for Google in New Zealand, authored by Deloitte: Access Economics (2018) in New Zealand, entitled “Copyright in the digital age: An economic assessment of fair use in New Zealand”. This new report purports to assess the economic effect of introducing in to New Zealand law a US style statutory fair use exception to copyright found in the section 107 of the US Copyright Act of 1976 (henceforth called US Style fair use).

This new Deloitte New Zealand (Deloitte) report is in fact very similar to, and copies a lot of the material, from another paper in Australia written for Google in Australia, again by Deloitte: Access Economics (2018), also entitled ‘Copyright in the Digital Age’, which was the subject of one of my previous (second) review papers mentioned above Barker (2018). It is notable that as with the Australian report, the New Zealand report carries the same rider from Deloitte: “This report is prepared solely for the use of Google. This report is not intended to and should not be used or relied upon by anyone else and we accept no duty of care to any other person or entity. The report has been prepared for the purpose developing an analytical framework for assessing the introduction of fair use”.

In this paper I review a number of errors in the New Zealand report. Many of these errors replicate the Australian Report. However this report includes significant new material, as there are key new elements in the Deloitte New Zealand report to address.

The new material is in part due to differences between Australian and New Zealand law, and the fact Deloitte New Zealand replaced the anecdotal evidence in the Australian report, with anecdotal evidence from interviews in New Zealand to make its case more relevant to the local market. The New Zealand report also relied heavily on a model from Scotchmer (2004) to make the case for US style fair use. This was not presented or relied on in the Australian report. I therefore provide a number of additional sections on this in my review of chapter two of the Deloitte report. I also present a new critique of the Deloitte economic model of the responsiveness of US style fair use in my review of chapter five of the Deloitte report, and include a new and better model that clearly contradicts Deloitte’s predictions.

The main conclusions of my review of the Deloitte New Zealand Report outlined below however remain the same as that for the Deloitte Australia Report.

Deloitte New Zealand’s report claims that “the digital economy represents a big opportunity”3 for economic growth of the New Zealand economy, but that this growth cannot be maximized unless the legal framework supports innovation better. It suggests that adopting a US style fair use system will do just that. The report also claims that under New Zealand’s fair dealing system significant downstream value is lost, that cumulative innovation is reduced and that there would be no negative affect on creative output from introducing US style fair use. In fact, the report goes as far as to say creative output would increase under US style fair use, and that transaction costs would be lowered. As I will demonstrate here, these assertions are untrue and fundamentally flawed and this report should not be relied on by policy makers, – especially given the rider on the report noted above.

Assertion 1: Deloitte’s report claims that substantial downstream value is lost as a result of the current policy settings

  1. There is a logical flaw in Deloitte’s assertion that US style fair use is needed because substantial value is forgone under current law. Current copyright law enables the licensing of creative works for new purposes by agreement of the parties. Logically therefore if there was substantial value in downstream usage then licensing markets would develop to unleash that value by agreement. Deloitte’s claim thus seems theoretically unlikely and Deloitte provides no evidence to prove otherwise. It immediately appears that Fair Use is really being advocated to secure Free Use.

Assertion 2: Deloitte’s report claims that this downstream value is lost due to the current policy settings reducing cumulative innovation, and asserts that US style fair use can remedy that.

  1. The logical flaw here is the paper omits to mention the inherent limitations already imposed by law on copyright. This creates a fallacy of omission. Copyright only protects the expression of an idea, not the idea itself. Downstream copyright users are therefore entitled to adapt and use the ideas of upstream creators or innovators; they are just not allowed to directly copy their expression of the idea without consent. Copyright is therefore not as broad as claimed, and does not impose significant restrictions on downstream innovation in the first place. To substantiate its claims that cumulative innovation is reduced by copyright however the paper relies on an article by Scotchmer (1991) that is on patents and doesn’t even mention copyright.4 Moreover, while patent coverage is broad, copyright is inherently more limited. In particular while patents protect underlying ideas – copyright only protects the expressions of ideas. The Deloitte paper further relies on a book by Scotchmer (2004)5 but fundamentally misrepresents, and misunderstands what Scotchmer said about the breadth of copyright in that book, leading Deloitte to make fundamental errors, and rendering its analysis of copyright law unreliable.
  2. Copyright is best analysed using a differentiated products model rather than a monopoly model that was relied on by Deloitte.6 Given copyright only offers limited protection there are little or no barriers to entry from competitors offering a differentiated product. Copyright is therefore best understood as creating a property right, not a monopoly. However, instead of using a differentiated products economic model, the Deloitte paper relies on an inappropriate monopoly economic model of copyright.7 This is perhaps unsurprising, given the misrepresentation of the breadth of copyright noted above. A differentiated products approach supports keeping all copyright exceptions as narrow as possible (including fair dealing, US style fair use and socalled safe harbours), and accepts the fact that the scope of copyright exceptions ought to narrow further as the internet and digital technology causes transaction costs to decrease, dismissing as fundamentally misplaced the concerns embedded in the erroneous monopoly model relied on by Deloitte that doing so will upset the balance between access and incentives.8
  3. Copyright doesn’t prevent cumulative innovation, it actually creates the market, which can permit and enable it. The paper seems to suggest however that although copyright creates the basis for market agreements the cost of negotiation facing downstream innovators may prevent such agreements, and reduce innovation. But this assumes the value generated by downstream innovation is so low it cannot justify negotiating costs. It also fails to mention that where the small cost of negotiating a license from the rights holder can be passed through, no downside innovation may be prevented. Instead of enabling cumulative innovation US style fair use instead creates a bias towards less fundamentally innovative, more derivative works, or even disguised imitation. Highly original, or highly creative upstream works draw less on earlier copyright works, and therefore benefit less from US style fair use, and will be competitively disadvantaged by a US style fair use law. This in turn will lead to less highly creative, original or low “net borrower” works, without which downstream innovation will be limited.

Assertion 3: Deloitte’s report suggests that creativity is booming in the digital world and claims US style fair use will benefit creative output.

  1. On the contrary however the digital age has had a net negative impact on the creative sector, with the negative effects of massive online infringement outweighing the benefits the digital age has brought. A recent review of the evidence in New Zealand film industry (Barker 2016b) suggest the digital age has had a net negative impact on the creative sector, contrary to Deloitte’s claim:
    • Total screen industry revenues as measured by Statistics New Zealand’s Screen Industry Survey (SIS) which commenced in 2005 shows that from 2005-2015, there is a shortfall of total screen industry revenues over the ten-year period of approximately $4.6 billion against what they would have been had they kept pace with inflation and economic growth. This estimate includes just over $3 billion in the production and post-production9 (PPP) sector.
    • Alternative scenarios described in more detail Barker (2016b) involving historical data yield estimates for the shortfall in PPP revenues ranging from estimates of $3.94 billion in total over the ten-year period from 2005 to 2015, including a $600 million shortfall in the final year, to a considerably higher estimate, where the shortfall in PPP revenues reaches $4.3 billion in the last year (2015) alone. This upper scenario further suggests that by the end of the 14-year period 2001-2015, the shortfall in total screen industry revenues would have been $9 billion in the last year (2015) alone. In other words, total screen industry revenues in 2015 would have been closer to $12 billion in 2015, rather than $3 billion actual.
    • At the same time, screen industry employment is also down and there has been no measurable increase in film and TV output during the data available from 2011.

    Instead of relying on reliable data and analysis, the Deloitte report relies on discredited earlier research like The Sky is Rising Report.10

  2. Even reports previously quoted by Google in its submissions to the Australian Productivity Commission clearly show US style fair use has a negative impact on Copyright Industries. These reports have been strongly discredited for overstating the positive impacts of US style fair use, 11 but both showed clear and irrefutable negative impacts on Copyright Industries:
    1. A 2012 Singapore study12 that found that the introduction of a US style fair use law in Singapore in January 1, 2005 was correlated with a fall in the economic growth rate of copyright related industries by 58%, within five years of its introduction. Before the law changed average growth rate of copyright related industries was 14.16% and after it slowed to 6.68%.13
    2. A 2012 Australian study14 also showed that fair use exceptions in the US are associated with a lower rate of growth of value-add in what it calls copyright exceptions industries in the US, compared to the same industries in Australia.
  3. The paper claims that US style fair use will lead to more creative output on the assumption that regulators are better judges of creative opportunity than markets while ignoring the cost to creators of free exceptions. The fundamental flaw in Deloitte Access Economics approach is that they presume a legislated/litigated US style fair use outcome will lead to more optimal outcomes than a market driven solution. Market based licensing solutions however offer the best approach to perceived problems. Copyright licensing is entirely flexible, and entirely technology neutral.
  4. Going back to first principle, logic dictates that copyright should be strengthened, not weakened, in the digital age.15 The reason why copyright assigns an exclusive property right to the creator of a work is that society benefits when more and better quality creative works are created. It is the property right which incentivises and enables the creator to create more, and actively distribute their work. With the advent of the digital age, or the digitisation of content and the internet, costs of copying have fallen and continue to fall, piracy or free riding on upstream creators works without paying is thus more feasible and has clearly increased. This has resulted in significant reductions in economic returns for creators. This is why now is precisely the wrong time to introduce US style fair use. The digitisation of content and the internet justifies stronger copyright, not weaker copyright.

Assertion 4: Deloitte’s report claims that transaction costs would be lower under a US style fair use system.

  1. Technological innovation should be able to assist in the development of new licensing markets and should lower transaction costs. Markets are generally best placed to establish the appropriate value split between original creators and downstream users. As technology progresses and transaction costs reduce it should be easier, not harder, for this to occur. Examples of this technological progress include, but are not limited to, Artificial Intelligence and distributed ledger (e.g. Blockchain). Fair use will only remove the incentive for technology companies to develop technology enabled market solutions.
  2. The report doesn’t assess total transaction costs, it only considers transaction costs for downstream users. The only ‘evidence’ presented is the selected statements or opinions of a non random, non representative or biased sample of a small number of copyright users falling into a limited range of categories (e.g. libraries and universities), the paper does not consider the actual transaction costs of creators whose work they use.16 The efficiency of the law depends on total transaction costs and consideration of the well-being or costs and benefits accruing to both sides of any transaction. Indeed the fundamental economic rationale for copyright, versus copy-privilege (or US style fair use) derives from the differences in total transaction costs under each rule. In this regard it is generally accepted that compared to copy-privilege, copyright save on transaction costs by allocating the entitlement to creators (who are few) rather than potential users (who are many).17 The copyright rule is thus in general likely to be more efficient than a copy privilege rule like US style fair use.

It is disappointing that the Deloitte report presents such an unbalanced picture of the impacts of Google’s proposal to adopt US style fair use in New Zealand, and that it doesn’t present any real new evidence. Given the big data capabilities of Google, and the financial capacity to support credible research, it is disappointing that this report doesn’t move the dialogue forward in a constructive and balanced manner.

A more useful contribution would be an examination of the practical limitations of licensing which may be addressed by digital technologies, including machine learning, artificial intelligence and distributed ledger in order to enhance innovation. The report’s blindness to the opportunities of licensing is fundamental to its misinterpretation of copyright which does not prevent any use; it merely requires the creator’s consent.

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2 Barker (2016) and Barker (2018)
3 Deloitte NZ (2018) “Copyright in the digital age: An economic assessment of fair use in New Zealand” page v and page 20
4 Deloitte Access Economics NZ, ‘Copyright in the Digital Age An economic assessment of fair use in New Zealand’, page 56 https://www2.deloitte.com/nz/en/pages/economics/articles/copyright-nz-digital-age-google.html. The paper purports to explain what it calls “The economics of second generation innovation” on page 56 section A.3, and the role of copyright law and in particular fair use, using the analysis of Scotchmer (1991), that paper however related solely to patents. Scotchmer, S. 1991, ‘Standing on the Shoulders of Giants: Cumulative Research and the Patent Law’, Journal of Economic Perspectives, 5(1): 29-41.
5 ibid p53 and p54.
6 Yoo C. (2004) Copyright and product differentiation. (2004) 79 N.Y.U. L. Rev. 212
7 The paper places heavy reliance on the economic monopoly model of copyright adopted by the Australian Law Reform Commission (ALRC) and the Productivity Commission (PC). The PC looked at all forms of intellectual property and used an economic model that assumed IP creates monopolies. That may have been correct for patents, as noted above, but is certainly incorrect for copyright.
8 See Yoo C. (2004) on page 269 Yoo was writing in the USA and focused his discussion of the limited and declining role for copyright exceptions on fair use. However the same point is true both for: (1) the fair dealing exceptions, which are also damaging to the licensing market (as the collapse of the education publishing market following Canada’s extension of its fair dealing purposes to education demonstrates); and (2) the so-called internet safe harbours adopted in the US Copyright Digital Millennium Act that have spread around the world.
9 The production and post-production sector are involved in making screen productions, such as films, television programs or television commercials. Production refers here to all work leading up to and including filming, such as hiring crew, choosing locations and building sets. Post-production refers to all the work involved in putting scenes together to complete a production, such as editing, physical and digital effects, sound and picture post production.
10 The Sky Is Rising, authored by Mike Masnick (of the blog, Techdirt), for the Computer and Communications Industry Association (CCIA), that misrepresents the state of the entertainment industry in the United States, falsely claiming “there has been an explosion in creative output over the past couple of decades”. This report has been thoroughly discredited see Barker, George Robert, (2016) Claims to Expand Copyright Exceptions Driven by ‘Bad Science’ Available at SSRN: https://ssrn.com/abstract=2795498 or http://dx.doi.org/10.2139/ssrn.2795498
11 See George Barker & Ivan Png 2013, Unfair Evidence on Fair Use,3 June, available at https://law.anu.edu.au/news/cle/unfairevidence-fair-use; George R Barker 2013, ‘Agreed Use and Fair Use: The Economic Effects of Fair Use and Other Copyright Exceptions’ paper presented to the 2013 Annual Congress of the Society for Economic Research on Copyright Issues (SERCI), MINES ParisTech, Paris (France). Barker, George Robert, (2016) and Dr George S. Ford (2016) “The Economic Impact of Expanding Fair Use in Singapore: More Junk Science for Copyright Reform” Perspectives: Phoenix Centre for Advanced Legal and Economic Public Policy Studies http://phoenix- center.org/perspectives/Perspective16-01Final.pdf;
12 Ghafele, R. and Gibert, B.(2012) The Economic Value of Fair Use Counterfactual Impact Analysis In Singapore Oxfirst Available at: http://fordhamipconference.com/wp-content/uploads/2013/03/2013.ghafele.present.pdf page 5
13 This immediate short run or static loss of revenue and sales in the copyright market from statutory fair use laws outlined above will have a further dynamic effect of reducing investment in creative activities and creation of copyright works over time. The short run or immediate loss of revenue and sales in the copyright market from the fair use law will therefore have a negative feedback effect over time, reducing future copyright output and the overall size of the copyright market over time.
14 In 2012 the Australian Digital Alliance (ADA) commissioned and released two reports written by Lateral Economics (LE) that adapted and applied to Australia, the methodology used by Computer & Communications Industry Association (CCIA) in the US and EU – see Lateral Economics (LE) Report for Australian Digital Alliance (ADA) (2012) Excepting the Future: Internet Intermediary Activities and the Case for Flexible Copyright Exceptions and Extended Safe Harbour Provisions Part 1 http://www.digital.org.au/media/167 and Part 2 http://www.digital.org.au/media/166
15 See Barker (2017) ibid p4 and p33; Beard T. R., Ford G. S., and Stern. M. (2016) “Fair Use in the Digital Age” at http://www.phoenix-center.org/pcpp/PCPP51Final.pdf
16 see Delloitte Access Report pp 50-52
17 See George Barker (2019) Copyright Law and Copyright Exceptions. In Encyclopedia of Law and Economics, Marciano, Alain, Ramello, Giovanni Battista (Eds.) Springer-Verlag New York ISBN 978-1-4614-7754-9 forthcoming