5th-amendmentRecently I had a conversation with two other attorneys that reinvigorated an interest in this topic: Whether the government could take intellectual property whenever it deemed appropriate, use it for a public purpose, and pay the previous owner just compensation. In other words, could IP become subject to the government’s eminent domain powers (or limitation on its powers, however you decide to view the 5th Amendment), similar to real and other personal property? I had spent a long time mulling over this subject almost 4 years ago, when I decided to draft a law review article on it.  After a long discussion on the pharameutical industry and anti-trust issues tied to U.S.’s IP policy, the subject is on my mind again.  Could we see a drastic example of this? (i.e., could the cure for cancer be taken by the government and sold to generic pharmaceutical makers for low-cost public consumption?)  We have already seen smaller scale examples.  Here is the relevant part of my 2007 article regarding the issue (feel free to leave comments):

An Eminent Consequence: Why Copyrights Could Become Subject to Eminent Domain

The Fifth Amendment states, in the negative, “nor shall private property be taken for public use, without just compensation.”[1]  This Clause elicits the inference that the government has the power to take certain private property, but the power is limited by the requirements that the taking be only for a public use, and that the government pay the owner just compensation for harm done.[2]  Ambiguity in the Constitution is not an anomaly, and the clause conferring eminent domain power to the government is no exception.  The assessments to be made when analyzing a taking under the Fifth Amendment include (1) whether the thing to be taken actually constitutes private property, (2) whether that private property is being taken for a public use, and (3) what comprises just compensation.[3]  If all three are satisfied according to the meaning conferred under the Constitution, then such private property may be legally taken without successful objection by the owner of the property.[4]

A.  Intellectual Property as Private Property

The U.S. Supreme Court recognizes that the eminent domain power conferred under the Fifth Amendment applies to the states via the Fourteenth Amendment.[5]  When read literally, private property must be taken to invoke the Takings Clause.  Land, because of its limited nature, is coveted by the government for particular uses which are easily attributable to the public interest.  Hence, the Clause chiefly applies in cases involving the disposition of real property.[6]  In such cases, the Court has deferred to legislative judgment when analyzing public need for the use of the takings power.[7]  If another form of private property exhibits such a public need, it is reasonable to believe that the Court would show similar deference when analyzing such a case under the Eminent Domain Clause.[8]

The Court has expressed that the takings power may be applied to private property other than real property.  In Phillips v. Washington Legal Foundation,[9] the Court was confronted with a case involving the state’s use of interest on lawyers’ trust accounts (”IOLTA”) to pay for legal services provided to the needy.  The Court held “that the interest income generated by funds held in IOLTA accounts is the ‘private property’ of the owner of the principal.”[10]  In Brown v. Legal Foundation of Washington,[11] the Court reaffirmed that the interest earned was private property.  The Court likened the transfer of the interest to a per se taking, stating that the transfer of interest “seems more akin to the occupation of a small amount of rooftop space in Loretto.”[12]  In Loretto v. Teleprompter Manhattan CATV Corp.,[13] the occupation of rooftop space constituted a per se taking of private property under the Fifth Amendment.  Accordingly, in Brown, the Court found the transfer of interest applicable under the Takings Clause.[14]

Two sources could potentially provide states with the authority to take a privately owned patent from one company and have another company manufacture the same patented product.[15]  First, a government’s eminent domain power, already executed for the redevelopment of land and buildings, may be extended to intellectual property such as prescription drug patents.[16]  In a presentation to the National Legislative Association on Prescription Drug Prices, Law Professor Kevin Outterson proposed that “[s]tates may exercise this power against pharmaceutical patents, just as they have always exercised eminent domain over real property.”[17]  Second, in 1999, the U.S. Supreme Court held in Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank[18] that states are generally immune from patent infringement if due process, by way of just compensation, is afforded to the patent owner.  The Court in Florida Prepaid stressed that a state’s infringement of a patent is not by itself unconstitutional, as long as some remedy is provided.  In fact, “only where the State provides no remedy, or only inadequate remedies, to injured patent owners for its infringement of their patent could a deprivation of property without due process result.”[19]  Thus, per this decision, a state may take a privately held patent, as long as it pays just compensation to the patent owner.  This holding seems odd considering the lengths to which the Supreme Court has gone to uphold absolute protection of intellectual property.  Nevertheless, interpreted broadly, this holding highlights the fact that protection for intellectual property is not an absolute right, and government intervention may supersede the exclusivity of this right.

The decision in Florida Prepaid, together with the decisions in the IOLTA cases, fuel the prospect that intellectual property could viably become subject to a state’s eminent domain power.  This idea was considered seriously by legislators in the District of Columbia, when David A. Catania, Councilmember of the Committee on Health, introduced the Prescription Drug Compulsory Manufacture License Act of 2005.[20]  The bill proposed that, under eminent domain authority, a state should be able to require a compulsory license to produce a patented pharmaceutical product.  Further, the state should be able to pass that license on to a generic firm to produce the product in an effort to alleviate pharmaceutical prices.[21]  At a public hearing concerning the bill, Professor Kevin Outterson stated the following:

[I]ntellectual property proponents are making a push to call patents, copyrights and trademarks “intellectual property” so they are covered by eminent domain protections.  The Supreme Court has gone along with this argument.  States have the right, for a public purpose, to take private property as long as they pay just compensation.  If we can do it with a house, why should the state not be able to, not take the patent right, but force pharmaceutical manufacturers to give us a non-exclusive license?  Given that this policy would positively impact Medicaid recipients and employees of the state, eminent domain should be available to serve this public purpose.[22]

Though the bill’s sponsor, Catania, backed off from the eminent domain idea, the precedent was set for the novel theory.  Eminent domain’s application to intellectual property may be close in time.

Substituting copyrights for patents in such a bill, and under the “private property” assessment in an eminent domain analysis, is, unfortunately, easily envisioned.  As mentioned previously, copyright owners have campaigned for years that copyrights are in fact “private property,” as that word is meant under the Fifth Amendment.  The writers of Catania’s bill agreed, stating that “intellectual property proponents are making a push to call patents, copyrights and trademarks ‘intellectual property’ so they are covered by eminent domain . . . .”[23]  Although there are shortfalls in the parallel between intellectual property and “private property,” the current prevailing campaign by Congress and in the Court is to equate the two.[24]  Thus, it is not the inherent nature of copyrights that calls for application of the eminent domain process.  Instead, it is the incorrect insistence that copyright proponents themselves have made for over two hundred years that invites the application of copyrights to this process.  In sum, copyrights satisfy the first step in the eminent domain analysis not by their own attributes, but because they have been mistakenly forced into this assessment by their own sponsors.

B.  A Public Use for Copyrights

The Supreme Court, within the last century, has claimed that the public use provision within the Takings Clause does not particularly mean what it literally says.[25]  In practice, there is now no requisite public use of the property taken.[26]  Rather, the Court has explicitly rejected any “use by the public” test for public use.[27]  Specifically, the Court has stated that “[i]t is not essential that the entire community, nor even any considerable portion . . . directly enjoy or participate in any improvement in order [for it] to constitute a public use.”[28]  Moreover, the Court has expressly provided that the legislature’s determination will receive deference as “well-nigh conclusive” of the public interest in the taking.[29]  Provided with the Court’s deference, the legislature needs only a good reason, or purpose, to take private property in the public interest.

Most recently, in Kelo v. City of New London, the Court held that “a State may transfer property from one private party to another if future ‘use by the public’ is the purpose of the taking . . . .”[30]  The Supreme Court has conveniently reduced “use by the public” to a “carefully considered” economic plan[31] that serves a broadly defined public purpose.[32]  In fact, the Court has approved of takings for “public use” in a purely economic context.  In Hawaii Housing Authority v. Midkiff, the Court approved a statute allowing the state to take land from lessors and transfer it to lessees in order to reduce the concentration of land ownership.[33]  The Court concluded that eliminating the “social and economic evils of a land oligopoly” qualified as a valid public use.[34]  In Ruckelshaus v. Monsanto Co., the Court concluded that eliminating a significant barrier to entry in the pesticide market and thereby enhancing competition constituted a public use.[35]  This line of decisions under the Takings Clause increases the likelihood that intellectual property, under copyright proponents’ stretched definition, may be taken for public use.

Legislatures may soon claim that the economic inefficiencies resulting from its own government-granted monopolies in copyrights and patents may just prove reason enough for federal and state governing bodies to follow the lead of David Catania and the District of Columbia.  The public purpose in that specific instance, to alleviate pharmaceutical prices to the consuming public,[36] would surely pass the Supreme Court’s current public use doctrine.  As discussed, in the copyright arena, a similar situation may have already surfaced with iTunes and the iPod.[37]  That problem may worsen as the music industry collapses into one media conglomerate,[38] and the right to sell music is decided by one company, or even one person.  Surely, if breaking up a land oligopoly serves a public purpose, constituting a valid taking of land,[39] so could breaking up a media oligopoly, constituting a “valid” taking of copyrights.

Under this hypothesized exercise, a state might implement legislation calling for compulsory licensing of copyrights for just compensation.  In this way, the government will force the transfer of certain rights to the use and sale of a copyrighted product from one private party to another, or many others.  The price, just compensation, will be paid by the government.  In effect, the result of the process is similar to a right of first sale.[40]  The transferees will be similarly situated entities with the capabilities of marketing and selling such products to the public.  The result will be increased competition, increased output, and decreased prices to the public, which legislatures will call a beneficial public purpose.  This directly mimics the purely economic benefit in Midkiff-the Supreme Court has already given its blessing to this supposed public use, taking from A and giving to the rest of the alphabet.  Again, in Kelo, the Court approved such a maneuver.[41] 

In the context of eminent domain as applied to copyright, the benefit could be deemed public because of the facilitation of public access to information.  Moreover, if the same practice is duplicated for patented technology such as Apple’s AAC codec technology,[42] market frustration and fragmentation will be alleviated by technological homogeneity.  As a result, the consuming public will not have to ask whether the music they are buying will work with their respective player, and the 180 legal music downloading services launched in 2004[43] will sell more downloads.  Presumably, the holding in Florida Prepaid will extend to copyrights, leaving the state immune from an infringement suit as long as due process is granted by paying just compensation for the taking.

The ease with which the proposed system fits within the legal framework for “public use,” and the compelling justifications that seemingly create valid benefits for imposing the process, should be heeded by copyright proponents.  Open eyes do not have to strain to foresee the possibility and its apparent suitability under current Supreme Court interpretation.  This should be enough to curtail current practice and interpretation.

C.  Just Compensation for Copyrights

The U.S. Supreme Court has stated that “[t]he Fifth Amendment does not proscribe the taking of property; it proscribes taking without just compensation.”[44]  Just compensation is measured by the property owner’s loss, not the government’s gain.[45]  The owner must be returned to a position as if the property had not been taken; he is entitled to no more.[46]  If the net loss is zero, however, then just compensation due will be zero.[47]  On its surface, this raises a concern for those who might invest in property; but even in the open market, those investors would receive nothing in return for this investment because there is no expectation of a return.

In the case of a copyright owner, just compensation will be the loss of the right to sell the copyrighted product.  A copyright is not limited, and therefore the sale, or lease, of a copyright is not a one-time transaction.  Profits from the sale of a copyrighted product are earned over time by collecting royalties.  Therefore, the current net loss to the copyright owner will be the future right to collect royalties.  In such a case, just compensation would be difficult to measure, if not impossible.  Nonetheless, by using a system which calculates actual sales and downloads of the copyright, just compensation could be measured and paid over time, just as royalties are collected.  However, it is possible that the legislation would not include future profits in “just” compensation.[48]  In this case, a reasonable royalty, including interest and costs, would be calculated and paid.[49]  This raises an important concern for copyright owners because most revenue generated by copyrights is earned over a long period of time.  Legislation, by neglecting to include future profits in just compensation, would be getting off easy without accounting for an adequate return on investment.  Again, this possibility should encourage copyright owners to change the course of their current campaign to ensure that this does not become a reality.          

D.  Research and Development

In the patent arena, the adverse effect on research and development is the most recognized and wholly legitimate argument against the use of eminent domain.[50]  Opponents argue that compulsory licensure of patents will undermine the incentives for research and development.[51]  In light of the huge costs associated with research and development,[52] companies investing in patents will be hesitant to spend such time and money on their creations if their creations can be taken away.

This argument is not as successful in the copyright arena, making copyrights more apt to be subject to eminent domain.  Although research and development plays an integral part in the development process of a patent, demanding substantial investments of time and money,[53] these investments of time and money are not usually as substantial in the development of a copyright.  A songwriter does not employ a research and development team as does a pharmaceutical company.[54]  During the mid-1990s, one patent was granted in the software industry for every $10 million spent on research and development.[55]  It is difficult to imagine that the same level of investment is usually expended to create a song, book, or painting.[56]  Thus, the fear of expending resources for little return must be far less with copyrights than with patents.  Following this intuition, Nobel Prize winner and renowned economist Robert Lucas offers the following comparison of copyrights with patents:

If we do not enforce copyrights to music, will people stop writing and recording songs? . . . . Not likely . . . . If so, then protection against musical ‘piracy’ just comes down to protecting monopoly positions: something economists usually oppose, and with reason.

. . . . [But w]hat about pharmaceuticals? . . . Here millions are spent on developing new drugs.  Why do this if the good ideas can be quickly copied?[57]

In this light, unfortunately, it is easy to envision the government’s prospective argument that compulsory licensing of copyrights would not destroy the copyright creation process in the same way that compulsory licensing of patents might destroy the incentive to invest in patent creation.  Because the incentive does not disappear, and because lower costs are more easily covered by payment of just compensation, the primary argument that prevents subjecting patents to the eminent domain process does not translate to the copyright arena.  Copyright campaigners should take note of this and amend their practices accordingly.

 


 

         [1]  U.S. Const. amend. V.

         [2]  Donald J. Kochan, “Public Use” and the Independent Judiciary: Condemnation in an Interest-Group Perspective, 3 Tex. Rev. L. & Pol. 49, 60 (1998) (”The government is given the power to take property for public uses when it is necessary to control the governed, but it is obliged to control itself by compensating property owners harmed by its actions and by taking property only for public use.”).

         [3]  See Brown v. Legal Found. of Wash., 538 U.S. 216, 231-32 (2003).

         [4]  Id. at 232.

         [5]  See Chi., Burlington & Quincy R.R. Co. v. Chicago, 166 U.S. 226, 239 (1897).

         [6]  See, e.g., Kelo v. City of New London, 125 S. Ct. 2655 (2005); Berman v. Parker, 348 U.S. 26 (1954); Haw. Hous. Auth. v. Midkiff, 467 U.S. 229 (1984).

         [7]  Berman, 348 U.S. at 33 (”If those who govern the District of Columbia decide that the Nation’s Capital should be beautiful as well as sanitary, there is nothing in the Fifth Amendment that stands in the way.”).

         [8]  But see Leonard C. Gilroy, Reason Foundation, Statewide Regulatory Takings Reform: Exporting Oregon’s Measure 37 to Other States (2006), available at http://www.reason.org/ps343.pdf (examining eminent domain and the need for a movement toward stronger property rights and a limit on eminent domain’s application).

         [9]  524 U.S. 156 (1998).

        [10]  Id. at 172.

        [11]  538 U.S. 216 (2003).

        [12]  Id. at 235.

        [13]  458 U.S. 419, 421 (1982) (holding that the occupation of rooftop space constituted a per se taking of private property under the Fifth Amendment).

        [14]  Brown, 538 U.S. at 235.

        [15]  Barbara T. Dreyfuss, Patents Pending: A D.C. Official Takes a Renegade Approach to Get Lower-Priced Drugs for Residents, The American Prospect Online Edition, Feb. 23, 2005, www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=9237.

        [16]  Id.; Volokh, supra note 1, at 1167.

        [17]  Kevin Outterson, States May Reduce Drug Prices with an Eminent Domain Process for Pharmaceutical Patents, Presentation to the National Legislative Association on Prescription Drug Prices, www.nlarx.org/present/modelpharmEDpresent.html (last visited April. 1, 2006).

        [18]  527 U.S. 627, 643 (1999).

        [19]  Id.

        [20]  Bill 16-114, Comm. on Health, Council of the District of Columbia, 16th Council Period (D.C. 2005) (codifed as amended as the Prescription Drug Excessive Pricing Act of 2005, D.C. Code § 28-4551 (2006)), available at http://www.dccouncil.washington.dc.us/images/00001/20050211092234.pdf.

        [21]  Committee on Health, Council of the District of Columbia, Draft Committee Report on Bill 16-114, the “Prescription Drug Compulsory Manufacture License Act of 2005″, at 3-4 (Mar. 23, 2005), available at http://www.nlarx.com/modelleg/docs/DCRprtCompulsoryLicensing16-114.doc.

        [22]  Id. at 4.

        [23]  Id. (emphasis added).

        [24]  The continued extension of the copyright term toward perpetual protection, and the decisions by the Court to uphold these extensions, shows that Congress and the Court have slowly but surely agreed that intellectual property owners should be afforded the same rights as private tangible property owners.  See Eldred v. Ashcroft, 537 U.S. 186, 204 (2003).

        [25]  Kochan, supra note 147, at 51-52.

        [26]  Id.

        [27]  Rindge Co. v. Los Angeles County, 262 U.S. 700, 707 (1923).

        [28]  Id.

        [29]  Berman v. Parker, 348 U.S. 26, 32 (1954).

        [30]  125 S. Ct. 2655, 2661 (2005).

        [31]  Id. at 2661.

        [32]  Id. at 2663.

        [33]  467 U.S. 229, 231-32 (1984).

        [34]  Id. at 241-42.

        [35]  467 U.S. 986, 1015-16 (1984).

        [36]  Outterson, supra note 162.

        [37]  Hsu, supra note 99, at 122.

        [38]  See Press Release, IFPI, supra note 119 (noting that currently, 71.7% of the recording industry’s global market share is allocated to just four companies).

        [39]  Haw. Hous. Auth., 467 U.S. at 231.

        [40]  Douglas Clement, Creation Myths: Does Innovation Require Intellectual Property Rights?, Reason, Mar. 2003, at 35, available at http://www.reason.com/news/show/28703.html (”Boldrin and Levine emphasize that . . . . innovators should be given ‘a well defined right of first sale.’ . . . [a]nd creators should be paid the full market value of their invention, the first unit of the new product.  That value is . . . the current value of everything it’s going to earn in the future.”).

        [41]  Kelo, 125 S. Ct. at 2661.

        [42]  Apple, supra note 122.

        [43]  Press Release, IFPI, supra note 119.

        [44]  Williamson County Reg’l Planning Comm’n v. Hamilton Bank, 473 U.S. 172, 194 (1985).

        [45]  Brown v. Legal Found. of Wash., 538 U.S. 216, 237 (2003).

        [46]  Olson v. United States, 292 U.S. 246, 255 (1934).

        [47]  Brown, 538 U.S. at 237-38.

        [48]  Committee on Health, supra note 166, at 11 (stating that Councilmember Catania responded that “the current body of law supports the idea that such a payment would not include compensation for lost profits”).

        [49]  Id. (”[U]nder equitable principles of fairness, a reasonable, not excessive royalty would be appropriate.”).

        [50]  Outterson, supra note 162.

        [51]  Id.

        [52]  Committee on Health, supra note 166, at 11 (summarizing Sharon Treat’s testimony that “drug companies often cite research and development as huge costs”).

        [53]  Id.

        [54]  Clement, supra note 185, at 38 (”Much of the high cost of pharmaceutical R&D . . . is due to the inflated values placed on drug researchers’ time because they are employed by monopolists.”).

        [55]  James Bessen & Robert M. Hunt, The Software Patent Experiment, 2004 Fed. Res. Bank of Phila. Bus. Rev. 27 (2004), available at http://www.phil.frb.org/files/br/brq304rh.pdf.

        [56]  The music industry will argue that recording costs are relatively high, but these costs are steadily in decline because new technology makes music recording inexpensive.  See supra note 37.

        [57]  Clement, supra note 185, at 37 (quoting Robert E. Lucas, Jr., Nobel Laureate and Economist, Univ. of Chi.).


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This entry was posted on Thursday, July 2nd, 2009 at 11:04 am.
Categories: Copyright Caucus, Patent Prospects, Trademark Trends ~ by Ian McClure.

One Comment, Comment or Ping

  1. Andy Johnson

    Ruckelshaus v. Monsanto Co., 467 U.S. 986, 1003–04 (U.S. 1984) (“We therefore hold that to the extent that Monsanto has an interest in its health, safety, and environmental data cognizable as a trade-secret property right under Missouri law, that property right is protected by the Taking Clause of the Fifth Amendment.”)

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