1. Copyright market
Another alternative in considering whether parallel imports qualify fair use defense is the market approach. Economists tend to characterize intellectual property law as a regime designed to resolve a type of market failure stemming from the presence of "public goods"
characteristics. A public good is typically described as having two characteristics. First, once produced, they are virtually inexhaustible because supplying additional access to new users would not obstruct the supply available to others. Second, and most importantly, it’s difficult, if not expensive, to prevent persons who have not paid for access from using a public good.145 Due to the second characteristic, it is commonly believed that public goods require government control or taxation because they will be under-produced if left to the
145 See M.OLSON,THE LOGIC OF COLLECTIVE ACTION:PUBLIC GOODS AND THE THEORY OF GROUPS 14 (1971):
"A common, collective, or public good is here defined as any good such that, if any person Xi in a group X1,..., Xi..., Xn consumes it, it cannot feasibly be withheld from others in the group."; see also, E.MANSFIELD, PRINCIPLES OF MICROECONOMICS 70 (1974).
private market, for the fear of free riding problem146.
All copyrighted works; digital works in particular, exhibit certain public goods characteristics. Once the literary work is made available to the public, its content might be used by countless consumers without exhausting the supply. A book or DVD may be simultaneously read or viewed by a number of persons without physically depriving others of its use. Furthermore, it’s very hard to prevent a free-rider to access those works once they are created. However, government control and taxation is generally deemed not an appropriate approach for these literary works because freedom of expression and idea will very likely be curtailed by the chilling effect resulted from government control. Instead, copyright statutes create special property rights for authors to sell the physical copies of their works and, at the same time, retain control over the reproduction and other uses of the work embodied in those copies, in order to exclude free-riders. In other words, by doing so, Copyright Law allows a private market for intellectual property to function. In addition, Copyright Law makes it easy to transfer this property right with lower transaction cost by specifically defining the scope of these exclusive rights, and setting out the legal consequences of license and assignment. It also provides an enforcement mechanism for the
146 A familiar example of a public good is national defense. Since it’s impossible to distinguish one person who has paid for defense and the other who does not, government control and some kind of compulsory payment, such as taxation, is necessary to eliminate free rider problem and achieve the optimal amount of defense. It’s generally believed that if the purchase of defense is left to private market mechanisms, defense service will be produced less than optimal amount because of the fear of free riding problem.
infringement, and thus secures the predictability of transaction and facilitates the operation of this private market.
When copyright market functions, people who would like to copy or use creative works may identify copyright owners, bargain with them and pay royalties to get the authorizations.
Therefore, if copies are made without permission, the court assumes that the defendant could have, and should have proceeded through the market, but failed to do so, and accordingly imposes penalty on the defendant for their failure to make use of this existing mechanism.
However, copyright market does not always function adequately; sometimes bargaining may be extremely expensive, or it may be impractical to obtain enforcement against free-riders, or other market flaws might preclude desirable property exchanges. In those cases, the market cannot be relied on to mediate public interests in dissemination of the original works and private interests in gaining rewards from them. In some extreme cases, the legislative branch may correct market dysfunction by imposing a regulatory solution such as a compulsory licensing scheme.
2. Market Failure and Fair Use
When market failure occurs, people who would like to make use of the original works may not effectively gain the permission through purchase even if they want to. When this happens, penalty on these users may be unjustifiable. Professor Wendy Gordon in Boston University therefore proposed a market failure approach in the analysis of fair use doctrine,
arguing that “[f]air use should be awarded to the defendant in a copyright infringement action when (1) market failure is present; (2) transfer of the use to defendant is socially desirable; (3) an award of fair use would not cause substantial injury to the incentives of the plaintiff copyright owner.”147
Where the socially desired transfer of the copyrighted work is unlikely to take place voluntarily, or where special circumstances, such as market flaws, impair the market's ability to serve as a measure of how resources/copyrighted work should be allocated, the threshold market failure element is satisfied. The court should further determine if the use is more valuable in the defendant's hands than in the hands of the copyright owner, which makes the transfer to defendant socially desirable. Fair use is often found where defendant's use of the work is noncommercial and creates external benefits to society, such as the use for educational or other nonprofit purposes. The third element then requires the lack of substantial injury to copyright owners’ incentives. If the use would impair copyright owner’s incentives to create another original work, the court should deny fair use defense.
In other words, when giving protection won’t serve disincentive for copyright owner to create, fair use should be granted. For example, where transaction cost is so high that copyright owners and the potential users find that the costs of locating and bargaining with each other exceed the profit they might expect to gain from the transaction, no reasonable person would
147 Wendy J. Gordon, Fair Use As Market Failure: A Structural and Economic Analysis of the Betamax Case and Its Predecessors,82COLUM.L.REV.1600, 1614 (1982)
even enter into negotiations. In this case, enforcement of copyright would unjustifiably benefit the copyright owner; conversely, it would significantly harm the potential user who is denied access, as well as the general public who might benefit from the use. Therefore, Courts’ refusal to enforce the owner's exclusive right of control here, which does not deprive him of any revenues he would otherwise receive, may be the only way to allow use of the work.
3. Market failure in gray market
The above market failure problem, in my view, appears in gray market. The costs for an individual to negotiate with copyright owners in order to acquire permission for his importation are so high that exceeds the profit both the importer and copyright owner could gain from the transaction. In addition, how can an innocent purchaser in a given territory know the geographic restriction that copyright owner initially impose on in the first sale of his works when importing them to another territory? In view of Article 87 (4), Article 87bis, and “The Meaning of Certain Amount in Article 87bis”, for example, suppose one purchased
“two” lawful copies of audiovisual works (i.e. VCD or DVD) from an authorized U.S.
distributor, then imported them to Taiwan for the purpose of preserving materials in nonprofit academic, educational or religious institutions; because the amount he imports already exceeds the permissible amount in “The Meaning of Certain Amount” ( under this regulation, only one copy is permissible), to avoid the violation of Article 87(4), he or she first need to
confirm whether Taiwan is an authorized market in the original copyright license agreement granted by copyright owner to the U.S. distributors. If not, he needs to seek copyright owner’s consent by paying royalties. However, the costs involved in bargaining and reaching an agreement here is extremely high. It includes the costs of time and resources in the efforts to locate the copyright owner, to review the terms and conditions in original license contract between copyright owner and U.S. distributors, to negotiate with the copyright owner and determine how much the monetary value for this authorized importation is. This is particularly costly when the copyright owner is in a third country other than U.S. or Taiwan.
The overall transaction cost would conceivably exceed the profits gained from the transaction since only one excessive copy requires copyright owner’s consent. The copyright market here can’t function properly and the threshold market failure element is thus fulfilled.
Second element is easily satisfied in this hypothetical as well because those parallel imports here are for nonprofit use and contributes to social welfare, which makes their importation socially desirable. The importer’s use of these works makes them more valuable.
In addition, the third element is also met here because copyright owner’s incentive to create another original work won’t be impeded since parallel imports are actually genuine goods authorized by copyright owners to distribute in U.S. This type of parallel imports therefore should be justified under fair use doctrine.
D. Recommendation
The existing all-out restrictions in Article 87 of Taiwan’s Copyright Law, though with exceptions in Article 87bis, do not properly address the legal issues arising from parallel imports. In my opinion, neither a complete ban nor a complete permission approach with respect to parallel imports serves the ultimate objective of Copyright Law. Fair use application on a case-by-case basis, I believe, is a more adequate approach. This Thesis consequently recommends Taiwan’s Legislative Yuan to lift current ban on parallel imports and apply fair use doctrine instead.
In my view, there are two steps to implement this application. First is to integrate specific circumstances that qualify fair use of parallel imports into Fair Use Section of Taiwan’s Copyright Law (Article 44-64). Although Article 59bis providing national exhaustion doctrine for copies of original work lawfully acquired within Taiwan’s territory is categorized as a type of fair use, it does not specify the circumstances where parallel importation is justified on the basis of fair use. In addition to the circumstances specified in Fair Use Section, the second step is to leave for the judge to evaluate the factors articulated in Article 65. This will possibly lead each parallel imports case to a different outcome depending on how judges weigh those factors. Judges should keep in mind that, when exercising their discretion in weighing fair use factors, public interest and market failure concerns must be taken into account. In other words, when public interest outweighs copyright owner’s private interest, courts should favor fair use assertions. Similarly, when
market failure happens and the other economic balance tests are met, parallel importation should be justified to redress the dysfunction of a copyright market.
Nonetheless, to lift the complete ban may bring about a confrontation with Section 301 threat as U.S. may deem the lift as an indicator that shows Taiwan’s reluctance to offer adequate protection for U.S. copyright holders. Since both Taiwan and U.S. are WTO members, and parallel imports issues apparently involve free movement of goods between U.S. and Taiwan, I believe the dispute settlement mechanism in WTO is a better forum for Taiwan to resolve this problem as opposed to unilateral negotiations with U.S.
CHAPTER VII CONCLUSION
Although TRIPs and WCT do not require members to restrict parallel imports or adopt national exhaustion doctrine, and explicitly left this issue for each Member State to decide, Taiwan’s Legislative Yuan nevertheless enacted strict restriction on parallel imports in Article 87(4), which is undoubtedly a product of U.S. Section 301 threat and as discussed above, it has incurred adverse effects on both U.S. and Taiwan.
Due to criticisms for years, the Legislative Yuan finally amended Copyright Law, and eliminated criminal penalty for parallel importers in 2003. However, the 2003 Amendment essentially does not really liberalize the gray market. The benefits of parallel importation rest on distributing those copyrighted products to another market free from penalities, yet under current Copyright regime, the distributors of parallel imports are still subject to criminal
penalties.148
Political concerns should not outweigh a sound copyright policy. Copyright amendments should be designed to fulfill the purpose of the Copyright Law and be drafted to minimize undesirable effects. Rather than an all-out restriction or a complete permission for parallel imports, this Thesis proposed to lift the existing parallel import ban, and apply fair use as a means to regulate parallel imports in a case-by-case manner. Specifically, when the court applies fair use doctrine under Article 65, public interest and market failure theory should be taken into account. In other words, courts should favor parallel imports where public interest concerns outweigh copyright holder’s personal interest, or where market flaws occur so that parallel importers may not efficiently reach an agreement with copyright holders due to unreasonably high transaction cost.
Nevertheless, lifting the parallel import ban would probably, once again, lead Taiwan to encounter tremendous pressure from potential Section 301 sanction by U.S. As indicated above, Section 301 itself has been analyzed by WTO panel as a “prima facie” violation of WTO rules; U.S. actually does not have legitimate justification to impose its Section 301 sanction.149 Conversely, complete ban on parallel imports might risk Taiwan to be charged
148 As indicated above, Article 91bis (2) subjects distributors of parallel imports to a maximum of three year imprisonment.
149 Although WTO panel eventually did not rule Section 301 a violation of WTO rules, by bringing the action challenging Section 301, European Union effectively curtailed the ability of the United States Trade
Representative to impose sanctions regarding intellectual property under Section 301. See United States-Section 301-310 of the Trade Act of 1974, WTO Doc. WT/DC152/R (Dec. 22, 1999)
as a violation of quantitative restriction prohibition under WTO laws. Given the complexity of this issue which involves not only the trade between Taiwan and the U.S., but also the international trade flow in global market, this Thesis proposes to negotiate with the U.S. under multilateral WTO framework, rather than through bilateral agreement.
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