By Simon Grey, on August 23rd, 2011
Stephan Kinsella details just how much trouble one can get into because of IP laws. Please note that this doesn’t even include file-sharing:
In his paper Infringement Nation: Copyright Reform and the Law/Norm Gap, law professor John Tehranian explains how the normal activities (see pp. 543-48) of a typical Internet user–he takes an “average American, …take an ordinary day in the life of a hypothetical law professor named John”–someone who does not even engage in P2P file sharing–could result in up to $4.5 billion in potential liability annually, for copyright infringement. The acts include:
-having his email program “automatically reproduce the text to which he is responding in any email he drafts. Each unauthorized reproduction of someone else’s copyrighted text—their email—represents a separate act of brazen infringement, as does each instance of email forwarding….” (twenty emails in an hour: $3 million in statutory damages);
-distributing in his Constitutional Law class copies of three just-published Internet articles presenting analyses of a Supreme Court decision handed down only hours ago;
-absentmindedly doodling a sketch of the Guggenheim museum on a notepad during a boring faculty meeting, i.e. making an unauthorized derivative work;
-reading a 1931 e.e. cumming poem to his Law and Literature class, an unauthorized public performance;
-emailing to his family five pictures his friend took of a local football game–his friend owns the copyright;
-having a Captain Caveman tattoo and revealing it while swimming at the local university pool: violating Hanna-Barbera’s copyright by the reproduction and public display;
-singing Happy Birthday to a friend at a restaurant and recording it on his smartphone videocamera, an unauthorized public performance and reproduction of a copyright-protected work–as is the painting on the wall of the restaurant that is captured in the video footage; and
-reading on his email a magazine that itself has clips of interesting items from other publications, a contributory infringement leading to up to $7.5 million of liability.
Obviously, some of the scenarios are a little more far-fetched than others. However, the very first item is very concerning: copyright violations occur when you reply to an email?! Are you serious?
Now, I realize that a lot of people view the opposition to IP as simply a bunch of nerdy white guys wanting to get out of paying for music. And while this typecasting is undoubtedly true in some cases, it doesn’t change the fact that IP is a gargantuan monopoly system that presents a large number of problems for ordinary citizens who act in good faith. Most people aren’t trying to rip someone off by responding to their emails, yet the laws in place operate under this very assumption.
It is obvious, then, that something needs to change. You don’t have to support file-sharing to make a coherent objection to the current system. Given that the laws ensure that every American is a lawbreaker, a good response would be to simply say that certain things shouldn’t be given automatic copyright protection (like email replies, for example). Better yet, one could argue that copyright should be opt-in, which would minimize most people’s liabilities. There is simply no sense in having a system that makes everyone a lawbreaker in order to further the economics interests of an elite, politically-connected few.
By Ajay Shah, on June 15th, 2011
Somewhere in 2010 or so, I personally started getting much more gloomy about India’s problem of corruption. For a snapshot of the zeitgeist, see this group of articles from August 2010. A large swathe of the economy operates in close contact with government. If government will not sensibly make rules, and then fail to impartially enforce rules, then the entire enterprise of the market economy is under threat. In the months that followed, the topic of corruption exploded in the Indian public policy discourse. The two main events were the Commonwealth Games scandal and the 2G Spectrum scandal. But alongside these, many smaller events also played a role, such as the Adarsh Housing Society scandal.
The two spoilers I was, at first, hoping that this energy would be channeled into making progress on core issues of governance. But sadly, the first flush of interest in the field was wasted thanks to the Anna Hazare spoiler followed by the Baba Ramdev spoiler. These have provided comic relief, but more importantly they have taken the focus away from the genuine problem of corruption. They have helped increase an entrenched sense of pessimism that nothing can be done about corruption (given that these prominent efforts were irrelevant).
However, the lesson is not that nothing can be done about corruption. The lesson is that such spoilers are not the answer. Genuine institutional reform is. The problem of corruption will resist quick fixes proposed by people who only dimly understand it. Careful thinking in incentives and public administration is required, in diagnosing where corruption comes from and how it can be addressed. Now that the two spoilers seem to be getting out of the way, can we get back to this main quest?
The main quest Under the topic of `sensibly making rules’, we have had two kinds of problems. The first is the problem of old Indian thinking, where socialism and autarky have impeded good sense. But alongside the process of this obsolete economics being weaned out of the system, the new problem is that of hard-driving entrepreneurs rigging the system to make rules that favour themselves.
Under the topic of `impartially enforcing rules’, the puzzle is: How do we get humble civil servants in enforcement agencies (CBI / Police / SEBI / RBI / TRAI) to go about doing their job? This task is under fire from three points of view. On one hand, humble civil servants are often outgunned by the sophistication of hard-driving entrepreneurs. When the civil servant is presented with a sufficiently complex scheme, he might just not have the energy to unravel it and pinpoint the skullduggery. It requires an exceptional capability in government, by Indian standards, to hammer down the details of the shennanigans that firms might undertake [ example]. The second problem is that politically powerful people might try to block investigations. The third problem is simple outright corruption, where the humble civil servant is bribed to not do an investigation properly. In the real world, all three elements are at work. And then, we need the surrounding infrastructure of courts such as SAT and the Supreme Court. These are required to play two kinds of rules. First, when a government agency tramples upon an innocent, the courts have to protect the innocent. Second, when these agencies smell an agency that is about to fold and not actually go through with an investigation or the following court process, they have to be tough about it, as the Supreme Court has been doing in recent months.
To make a difference to corruption, we have to go after these questions. This requires a slow careful process on three fronts:
- Recruiting top quality individuals, who combine high competence with the highest ethical standards,
- Modifying rules and procedures so as to make them more robust to corruption, and
- Strengthening the courts.
There will be no quick results, but over time, this hard work will yield results.
 
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By Simon Grey, on April 25th, 2011
Just to clarify from an earlier post, my stance on protecting IP is that is wrong for the government to do so, but I have no issue if a private business wants to protect its intellectual creation. Furthermore, I am not a piracy positivist. I do not believe that people have a “right” to IP for free. If they can capture another’s idea for free, more power to them. If they have to pay, so be it. No one has a right to information. In keeping with the above, I would recommend reading this article at Cracked. To me, this seems like the perfect way to handle IP protection. Obviously, the government isn’t cracking down like it used to, so businesses have built designed their own protections to ensure that they actually paid when people use their product. This seems to be the optimal way of handling this issue, especially since IP law has devolved into a massive redistributionist scheme for big business (cf. Apple’s recent lawsuit, Microsoft’s recent lawsuit, Google’s recent lawsuit, etc.) Why not let people protect their own intellectual “property,” and stop this headache of a legal system? This system does not seem to make any difference to the big companies and has a tendency to screw over the small time inventers and innovators (ever heard if patent trolls?)
By Ajay Shah, on October 8th, 2010
The much awaited decision of the Supreme Court in the matter of ICICI v. Official Liquidator of A.P.S. Star Industries is now available. The case had come as an appeal against a decision of the Gujarat High Court which invalidated transfer of Non-Performing Assets between banks. The decisions of the High Court and the Supreme Court are important in illuminating the legal foundations of Indian finance.
Background
Various borrowers owed a total of Rs. 52.45 crores to ICICI (Amongst which one of the borrowers was M/s A.P.S. Industries). These loans were classified as Non-Performing Assets (NPAs) by ICICI. ICICI transferred these NPAs to Kotak Mahindra on “as is where is” basis by way of a Deed of Assignment. Consequently, the Kotak Mahindra became the full and absolute owner of the debts and as such the entity legally entitled to receive the repayments of debts.
M/s A.P.S. Star Industries subsequently went into liquidation. Kotak Mahindra filed a Company Application in the winding up proceedings of A.P.S. Star, praying for being substituted in the place of ICICI (As it was now the owner of the debt). Though the transfer document between ICICI and Kotak was held to be valid the company court held that such transfers of NPAs was not allowed under the Banking Regulation Act of 1949 (BR Act).
The High Court ruling
On appeal a Division Bench of the Gujarat High Court upheld the observation of the Company Court on the following main grounds:
- Section 6 of BR Act gives and exhaustive list of activities a bank is allowed to carry out and sale of NPAs is not present in the list.
- Since banks prohibited from trading activities (See section 8 of the BR Act) and the sale of NPAs is essentially trading, such transfer was invalid.
- Such trading of NPAs would mean transfer of NPA from one banks balance sheet to another without any resolution and therefore against the health of the banking industry.
- Since individual loans were lumped together and bought there was no way to ascertain the value of individual loans and the amount recovered from them. This made such loans essentially speculative trading.
- Since the customer is forced to transact with another bank now and also he is being lumped with other loans, this amounts to violation of the relationship between the bank and the customer.
- By legislating s.5 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Parliament has made it clear that only securitisation companies can buy NPAs and not banks.
The Supreme Court ruling
To much relief of the banks, the Apex Court has set aside the impugned judgment and order, laying down the following important legal propositions:
- Section 6(1) of the BR Act is a general provision and enumerates topics as fields in which banks can carry on their business. This is the core banking business. However, RBI, being the regulator, under Section 21 and 35A can issue directions having statutory force, laying down parameters enabling banks to expand their business. Such parameters will define `banking business’. (¶ 13)
- RBI, by issuing guidelines authorized banks to deal in NPAs and such guidelines cannot be held ultra vires of the Act. Such guidelines have statutory force and hence inter se transfer of NPAs between banks is permissible. (¶ 14)
- The 2005 guidelines of RBI are not to eliminate NPAs but to restructure the same. Such restructuring cannot be treated as trading. (¶ 15)
- The SARFAESI Act was enacted enabling specified SPVs to buy the NPAs from the banks. However, from that it does not follow that banks cannot transfer their own assets. (¶ 21)
Deeper issues
While the judgment seems to set law in the correct direction, it raises other questions. The borrowers had argued that the only legal way of transferring financial assets is under Section 5 of the SARFAESI Act which reads:
“Notwithstanding anything contained in any agreement or any other law for the time being in force, any securitisation company or reconstruction company may acquire financial assets of any bank/FI..”
However, Chief Justice Kapadia, while writing the judgment observed in ¶ 21 that `the SARFESI Act 2002 was enacted enabling specified SPVs to buy the NPAs from the banks’. As discussed, this statement seems to be missing out that even good debts which are not NPAs can be bought by those SPVs under s. 5 of the SARFESI Act. May be this is an inadvertent omission, but it is interesting to observe that Justice Kapadia previously also in Transcore v. Union of India (2008) 1 SCC 125 observed (in ¶ 20) that `it is only when these assets in the hands of the bank/FI becomes sub-standard, doubtful or loss then the account or asset becomes classifiable as a NPA and it is only then that the NPA Act comes into operation’. The same is reiterated in ¶ 30. Clearly, these observations do not quite fit with the literal interpretation of s. 5. Probably the pedantic have got another question lingering in their minds: `Can a bank/financial institution sell off a debt, which is not a NPA, to a securitisation/assets reconstruction company?’
One also asks what remains of Section 6 of the BR Act which describes what activities banks can take part in. Justice Kapadia states `In other words, the 1949 Act allows banking companies to undertake activities and businesses as long as they do not attract prohibitions and restrictions like those contained in Sections 8 and 9′. This would mean that while the legislature drafted Section 6, this is irrelevant today. He also goes on to state `Thus, RBI is empowered to enact a policy which would enable banking companies to engage in activities in addition to core banking process it defines as to what constitutes “banking business”.’
This implies that there is unfettered power with RBI to define what business banks can take part in. This is unusual as it seems that there are no parliamentary control over what banking business can imply. Unlike `securities’ which is defined under the Securities Contract Regulation Act by Parliament and only the central government may modify it by notification, (and therefore no regulator is free to define any instrument as a security and regulate it) `banking’ seems to be under a Henry VII clause for RBI. There seems to be no provision under the BR Act allowing the central government (let alone the RBI) to change the definition of `banking’. The judgment however empowers RBI to do so without and rider or guidelines. This also goes against the principles of interpreting laws as it makes all provisions in Section 6(a) to (o) irrelevant.
Conclusion
The judgment reveals the state of financial laws in the country which are unable to guide the judiciary unambiguously. The judicial interpretations also seem to alter the nature of the laws and the drift between the letter of the law and its meaning continues to increase.
By Winton Bates, on November 24th, 2009
The authors of ‘Governance Matters’, Daniel Kauffman, Aart Kraay and Massimo Mastruzzi, tell us that the World Bank’s rule of law index captures “perceptions of the extent to which agents have confidence in and abide by the rules of society, and in particular the quality of contract enforcement, property rights, the police and the courts, as well as the likelihood of crime and violence” (Working Paper 4978, p 6).
On the basis of that description the index seems highly relevant to assessment of whether societies have institutions that enable their members to live in peace with one another. (For background on reasons why I am interested in such indexes see: Is a ‘good society’ index a good idea?)
I think it would be more appropriate to describe this index as a legal institutions index than as a rule of law (RoL) index. The rule of law is the ancient principle that no-one, not even the king, is above the law. It possible for a jurisdiction to have a relatively high score on the World Bank’s RoL index even though its legal foundations for rule of law may be somewhat tenuous e.g. Hong Kong. (Someone might be interested in a previous post on the question: Is rule of law an esoteric concept?)
As with the five other indexes in the World Bank’s suite of governance indicators the RoL index is based on perceptions based data reflecting the views of a diverse range of people, including tens of thousands of household and firm survey respondents and thousands of experts working for the private sector, NGOs, and public sector agencies. The aggregation method gives greater weight to indicators that are correlated with each other.
The RoL index seems to cover similar ground to the Legal structure and property rights sub-index (LSPR) of the Fraser Institute’s economic freedom index. Indicators incorporated in the LSPR cover: judicial independence, impartial courts, protection of property rights, military interference in legal and political processes, integrity of the legal system, contract enforcement and regulatory restrictions on sale of property.
The chart below shows how closely the World Bank’s RoL index and the Fraser Institute’s LSPR index correspond to each other. The blue diamonds represent actual indexes and the pink diamonds represent the predicted value of the LSPR index using linear regression.
In later posts relating to good society indicators I will use the World Bank’s RoL index as an index reflecting the quality of legal institutions.
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