Ethics @ Work: Upstart start-ups shoot first, ask questions later

Some firms provocatively violate intellectual property rights to create pressure on the owners.

Business ethics 88 (photo credit:)
Business ethics 88
(photo credit: )
I have written a few times about the practice of "preemptive piracy" - firms that provocatively violate intellectual property rights to create pressure on the owners to sell or license their rights. For example, most industry experts presume that Napster's original business model was not to make money by being a panderer for pirated music, but rather to use the availability of pirated music to pressure the record companies to agree to license songs for sale through Napster's distribution network. (This is eventually what actually happened, but Napster itself went bankrupt in the middle.) You Tube obtained licensing agreements with many content providers only after the latter realized that some of their content was going to appear there with or without their consent. The newest example is Scrabulous, Facebook's on-line knockoff of the Scrabble crossword game. The copyright on the 70-year-old game is held by Hasbro, as well as the trademark (which could be considered violated by the obvious take-off on the Scrabble name). Even though the game has been around since 2005, and featured on Facebook for months, just this week Hasbro wrote a letter to Facebook asking them to remove the game. The reactions of the "victims" in these cases vary. In the case of You Tube and Facebook, they are not indignant, but merely looking for their fair share. Many media companies were quick to settle deals with You Tube, and Hasbro announced right away that they were seeking an "amicable agreement." (Even when victims come out shooting they are sometimes only creating leverage for a favorable agreement; that Hasbro immediately acknowledged their willingness to negotiate is very significant.) In the case of Napster, the record companies were aggressive and vindictive, and totally unwilling to negotiate - suggesting either that Napster's business model was fundamentally flawed or - at least as likely - that the record companies were in a state of denial regarding the future of their industry and their need for an on-line presence. One question is: Can such a tactic ever be ethical? After all, using other people's intellectual property without their permission is against the law - it's a tort (damage). One answer to this question is that torts are different than crimes. Criminal penalties are always meant to deter crimes, but tort awards are sometimes meant merely to compensate owners for their loss. This approach is controversial in the case of actual physical damage, where damage payments never really compensate the damaged party. But in the case of intellectual property, where the damages are usually just lost sales, this approach makes more sense. (Some theorists, such as Richard Posner of the University of Chicago, say that even criminal penalties are not meant to deter absolutely, and are designed not to over-deter in cases where committing a crime could be worth the cost to the victim.) Even if we are willing to grant this controversial premise, the question remains: Why does it have to work this way? If the original object of Facebook is to make a deal with Hasbro, or the original goal of You Tube is to make a deal with CBS, why didn't they just approach the rights owners with a proposal and hammer out an agreement? How can their bargaining position be stronger when they are vulnerable to a lawsuit? I think there are two answers to this question, one tending to defend the practice and one tending to indict it. One answer is that the rights owner only wants to negotiate with the most promising candidate. Licenses are generally most valuable when they are exclusive, but if I have a dozen untested Web sites all clamoring to use my game on-line, how do I guess which one will turn into the next Facebook and which will fade into oblivion? The cleverest thing is just to look the other way when pirating is in its early stages, and enter the scene when my rights seem to be really worth something. As Josh Quittner of Fortune magazine wrote: "If I were an evil genius running a board games company, I might do this: Wait until someone comes up with an excellent implementation of my games and does the hard work of coding and debugging the thing and signing up the masses. Then, once it got to scale, I'd sweep in and take it over. Let the best pirate site win!" This explanation, that the copyright owners connive in the preemptive piracy game, is supported whenever the owners take a long time to bring legal action. The other, less generous, answer is that most of the companies engaging in this practice are not afraid of being sued for damages because they don't have any assets at risk. A limited-liability corporation can't lose more than its asset value, which for most of these companies is already deep in negative territory. (In legal parlance, they are "judgment proof" - you can impose millions of dollars of damages on them, but they will not actually have to pay.) This explanation is supported if the companies suddenly turn careful when they obtain capital. Since Hasbro waited a long time to sue, and since Facebook only adopted Scrabulous after they were already rolling in dough, this particular case favors the first explanation. On the ethical issue, I am inclined to make two fundamental distinctions: • Open versus furtive: Any furtive infringements are unethical. This is entirely outside the category of "preemptive piracy" intended to spur negotiations. An infringement may be furtive either by trying to avoid the attention of the copyright owner, or by taking elaborate steps to insulate the company from the infringement (as Napster did with their peer-to-peer system). Hiding behind your lack of assets is yet another kind of pusillanimity. • Actual damage versus diversion of revenue. If Scrabulous somehow gave Scrabble a bad image, then it would be unethical to "shoot first and ask questions later." But if the only issue is how to divvy up the proceeds, this is a question that can be resolved later in the game, even if negotiations take place only after the infringement. Note that in this particular case the originators of Scrabulous not only acted openly but claim that they actually notified Hasbro of their on-line game. And there's only money at stake. No wonder Hasbro is seeking an amicable agreement instead of a shooting war sought by the victims of Napster. ethics-at-work@besr.org,/b> The author is research director at the Business Ethics Center of Jerusalem (www.besr.org), an independent institute in the Jerusalem College of Technology.