Here we reproduce a recently-commissioned review which shows that the gulf between economic theory of intellectual property and the practical work of a judge in deciding cases is not nearly as great as one might imagine. The book under review here is the Handbook on the Economics of Copyright: A Guide for Students and Teachers, edited by Richard Watt, published by Edward Elgar, 2014 ISBN: 978-1-84980-852-1, Hard cover, 351 pp. Price: £130.00. The reviewer: Richard Arnold (Judge of the High Court of England and Wales, Chancery Division) and the review was first published online in JIPLP on 20 April.
Here is what the reviewer had to say:
Although there were some early pioneers of the study of the economics of copyright, such as Arnold Plant, the subject only really began to develop in the 1980s. Now there is a substantial literature on the subject, and it is of increasing importance. As this collection reveals, the subject is a multi-faceted one. I would divide it into three main branches. The first is the study of copyright markets: analysis of the functioning of markets in subject matter protected by copyright (and related rights, such as performers' rights). This includes such matters as the earnings of authors, the impact of infringement and the efficiency of collecting licensing. Practitioners in this branch face huge difficulties in obtaining data for analysis, but persistent efforts have enabled some useful work to be done. The second main branch is the study of copyright law from an economic perspective: what are the economic consequences of such matters as copyright term and copyright scope? Much of the past work in this branch has focused on term, including term extensions, but practitioners are now starting to look at the harder question of scope, such as the effect of particular limitations and exceptions. The third main branch is the study of copyright policy from an economic perspective: how, informed by an economic understanding of copyright, should we frame legislation? Much of this work is concerned with the purposes of conferring copyright protection, and involves trying to understand how those purposes are served, or disserved, by particular policies. The first branch is largely empirical, while the other two are more theoretical.
Given the rapid growth in the field, this new book is a welcome addition to the literature. It is edited by Richard Watt, Associate Professor of Economics and Finance at the University of Canterbury, New Zealand, a leading figure in the field, who has also contributed seven of the 18 chapters. Other chapters have been contributed by several of the most prominent scholars in this area, including Wendy Gordon, Christian Handke, Paul Heald, Stan Liebowtiz and Ruth Towse. The collection is divided into five sections: ‘the economic theory of copyright’; ‘the legal structure of copyright and the public domain’; ‘licensing and authors' earnings’; ‘copyright collectives’ (ie collective management organisations); ‘copying and copyright piracy’; and ‘other issues in the economics of copyright law’. As these section titles indicate, the chapters cover a broad range of topics. Each chapter provides an overview of the current state of research into that topic. Many indicate areas where further research is needed. A couple make an original contribution to the subject under discussion.
According to the publishers, the book is ‘pitched at a level designed to be accessible to advanced undergraduate and postgraduate students in economics and law’, ‘covers all of the topical content that a student of copyright economics should know’ and provides teachers with ‘all the required material to provide a comprehensive overview of the subject’. It should be emphasized, however, that this is not a textbook. Further, some of the chapters, particularly those contributed by Prof Watts, assume that the reader already has a grounding in economics and thus knows (for example) what an inverse demand curve is and can follow moderately sophisticated mathematical modelling. As a lawyer without a training in economics, but some acquaintance with many of the issues discussed, I found some of the chapters easier to follow than others. No doubt for the same reason, I found some of the chapters more enlightening than others.
For me, probably the most interesting single contribution was Stephen Margolis's chapter on ‘law and economics of copyright remedies’. This illustrates quite neatly both the problems and the virtues of the law and economics approach. On the debit side, Margolis relies on a difference which exists in US law, namely that an account of profits is available as a remedy for copyright infringement but not patent infringement, as reflecting the fact that copyright infringement is usually intentional while patent infringement is frequently inadvertent. He also considers that this shows that patent remedies accommodate efficient infringement while copyright remedies do not. I assume he is right about US law (I have not checked). Under English law, however, an account of profits is equally available for both types of infringement. Now Margolis may say that this shows that English law is defective by comparison with US law. I think it shows that the availability of different remedies in different legal systems is not based on economic considerations. Nor I am convinced that economic analysis has much to contribute in deciding whether an account of profits is an appropriate remedy for patent infringement. On the credit side, Margolis persuasively analyses the correct approach to deducting costs on an account of profits. As he explains, two different rules can be identified in case law, namely the fully allocated costs rule (which allows the defendant to deduct an appropriate allocation of its fixed costs) and the incremental costs rule (which does not allow the defendant to do so). Margolis demonstrates that, in real-life multi-product companies, the fully allocated costs rule is more economically accurate than the incremental costs rule. Here the law can learn from economics. It is therefore unfortunate that Margolis's analysis (which he first published in an article in 2007) was not cited to the Court of Appeal of England and Wales when it adopted the incremental costs rule in Hollister Inc v Medik Ostomy Supplies Ltd  EWCA Civ 1419,  Bus LR 428.