Economics is the science of how nations and people create, accumulate and exchange wealth. Copyright law, which is written by legislatures, bureaucracies and courts, is often about who is entitled to a share of created wealth.
Every successful business understands that competitive advantage goes to the company that makes the rules. If it doesn’t make the rules, its rival will. In effect, you can either be part of your competitor’s legal strategy or they can be part of yours. Obviously, it’s more profitable if they are part of your strategy. (Shell, 2004, p. 1)
Shell said that “intellectual property – a special class of property rights that covers products of the human imagination – has assumed an especially important role in business strategy.” (21)
Intellectual property (IP) takes four forms: patents, copyrights, trademarks and trade secrets. In this brief paper I will discuss one patent and one copyright case separated by about 100 years – Ford Motor Company and Napster -- that highlight the advantages of building and defending a strong IP strategy to control competition.
Patent Infringement: ALAM vs. Ford Motor In 1903 in Detroit 40-year-old Henry Ford rolled out a revolutionary, new technology – mass production of reliable, inexpensive automobiles. Five weeks into the venture he was sued for patent infringement by the Association of Licensed Automobile Manufacturers (ALAM), a group of leading car manufacturers in the U.S.
At the turn of the century automobiles were expensive, hand-crafted status symbols for the wealthy. Ford was determined to make the auto available to Everyman. ALAM was equally determined to put him and hundreds of others like him out of business.
Organized in 1900, ALAM acquired a strategic property asset: a pioneer patent, the so-called Selden Patent, covering all gasoline-powered cars using internal combustion engines. (13) ALAM’s strategy was to enroll the leading auto manufacturers in their association and give them an equity state in the Selden Patent. With a growing legal war chest, ALAM would attack the rest of the nascent industry through patent infringement litigation.
The weakest companies, unable to afford a patent suit costing tens or hundreds of thousands of dollars, either paid ALAM’s modest royalty demands or closed shop. By 1903 the Selden Patent controlled the market. (14)
Ford, however, represented a more threatening situation for ALAM. It didn’t want an influx of mass-produced cars into the market, so it sought to eliminate Ford from the auto industry. When Ford tried to join ALAM, he was refused a license. Next, it slapped him with the patent infringement suit.
Instead of capitulating, Ford fought back. This was not an insignificant decision on his part at the time. With only $36,000 in profits, Ford could be wiped out by a costly lawsuit. Two events soon strengthened his position. First, other unlicensed car manufacturers rallied to his defense. Second, business at Ford was booming. In 1906 Ford introduced the Model N, making the car maker the highest-volume manufacturer in the car market. In 1908 Ford introduced the Model T, which established the car maker as the industry leader. (15)
Disaster struck in 1909. Surprising nearly everyone, the judge presiding in the case between Ford and ALAM upheld the Selden Patent. Ford and his allies were ordered to pay millions of dollars in back royalties. General Motors settled with ALAM, paying it $1 million. ALAM began suing Ford customers for buying “unlicensed” cars.
Many expected Ford to capitulate. They were wrong. He fought on and filed an appeal. The national media proved helpful. They picked up the story and sided with Ford. Shell quoted from a Detroit Free Press editorial that Ford deserved, “to win the applause of all men with red blood; for this world dearly loves the fighting man, and needs him too, if we are to go forward.” (16)
Finally, after spending eight years in court and close to $500,000 in legal fees, Ford won. A federal appeals court overturned the prior judge’s ruling, holding that the Selden Patent covered only those gas-powered cars that used the “Brayton” engine. Ford used the more fuel-efficient “Otto” engine, unknown to Selden. (16)
With only one year remaining on the Selden Patent, ALAM capitulated and dissolved. Henry Ford emerged not simply the victor in a high-profile lawsuit but an American folk hero who triumphed over wealthy businessmen and their high-priced attorneys. (16)
As a free-market advocate, I side with Ford in this battle. I believe it’s always better to remove trade barriers, create a level-playing field among competitors, and let the consumer decide. In my opinion it was unfair of ALAM to try to eliminate competition by over-stating the dubious claims of its patent. In the end the better product prevailed and the consumer benefited.
Copyright Violation: Napster vs. RIAA
One hundred years later in a battle strikingly similar to Ford’s another young entrepreneur challenged an association representing members of a well-established and lucrative industry – the Recording Industry Association of America (RIAA).
In 1998 19-year-old Northeastern University student Shawn Fanning had created the first peer-to-peer file sharing platform. His software allowed users to swap digital music files over the Internet that was stored on their personal computers. College students and millions of music fans loved this new technology downloaded from a website called Napster.
Fanning soon appeared on the cover of Wired magazine. Venture capitalists lined up to bankroll Napster with designs of turning it into a public company and making Fanning a dot.com multi-millionaire. But as Shell explained Napster “needed to copyright licenses from the music industry in order to set up a legitimate business selling songs on the Internet.” (17)
The major record labels were alarmed by Napster, which overnight could destroy their business model of selling CDs through retail outlets. The RIAA, which represented the record labels, sued Napster in federal court in California on copyright violations, and asked the court to shut down Napster’s website and have the start-up pay it millions in damages.
Shell said Napster’s defense team argued it copied nothing. It merely allowed its users to do so. “Napster was, they said, an online version of a VCR.” (17)
The RIAA won a quick legal victory. It got the court to issue a preliminary injunction and shut down the Napster website until the case went to trial. Once in court, the Napster defense crumbled. The judge ruled that Napster’s VCR argument was flawed. It said Napster was essentially a burglar’s key allowing users access to almost any song ever recorded. Napster was found guilty of massive copyright violations, was ordered permanently shut down, and required to pay millions in damages to the record industry.
Ironically, years later Roxio would buy the Napster trademark and launch a new, legal Internet subscription music service.
I sided with the RIAA in this case because I believe in the legitimacy of copyrights and the rights of “creative workers,” i.e., artists, writers, filmmakers, etc., to be compensation for their creative production.
Conclusion: Calling the Bluff vs. Bluffing
The similarities between the Ford and Napster cases are striking, according to Shell. Two entrepreneurs who had developed new, cheaper technologies for doing business were going mano-o-mano against industries determined to keep prices high and resist new technologies. “And in each case a dominant industry association unwilling to negotiate intellectual-property licenses filed a bet-the-company lawsuit against the innovator, sparking intense media coverage.” (17)
But then the differences emerge. (See Appendix.)
Shell said Henry Ford possessed a stronger strategy “calling the bluff of a cartel holding a weak legal hand.” (17) His challenge was marshalling the resources to pursue a lengthy and expensive strategy to its final conclusion, and getting a second court, one outside of New York, to hear his appeal.
Fanning, on the other hand, possessed the weaker strategy confronting “iron-clad property rights. He and his backers were hoping that their dubious legal argument would combine with negative publicity to bring the RIAA to the bargaining table.” (17) Fanning was the bluffer in this case, and the industry crushed him.
Valenti, J. (2002). Copyright Quotes. Retrieved May 2 2009, from http://citationmachine.net/cm50/index.php?reqstyleid=2&reqsrcid=39&mode=form&more=&source_title=Web%20Page&source_mod=&stylename=APA
Shell, G. R. (2004). Make the Rules or Your Rivals Will. New York, NY: Crown Business, pp. 1-31.
To success in intellectual property ligation Shell believes a legal strategy must possess one or more “strong factors.” These include: legal merits, public legitimacy, strategic position, resources, and access. (30)