Investor liability -- law & economics theory
A recent law review comment takes a law and economics approach to the topic of “tertiary” copyright liability, also known as “investor liability.” The comment, written by University of Chicago law student Benjamin Glatstein, argues that liability should be imposed on venture investors because it would yield efficiency gains, by placing the burden of preventing infringement on parties able to do so with the lowest relative cost.
Glatstein also looks at the social costs of imposing tertiary liability, including the fact that increased legal risk would have a chilling effect on investments: “Some investments on the margin, which might have been socially beneficial, will not be funded because of the additional transaction costs and risk.”
He notes that “the costs, both monitoring and litigation, may be substantial. On balance, it is not obvious that we would be better off with tertiary liability if the tertiary party is not able cheaply to detect and deter infringement.” This seems like a sober conclusion. But then he opines that it will be “relatively easy” for investors to reduce risk, for example, through the use of declaratory judgment proceedings, in which a start-up company would need to go to court to get an advance ruling regarding infringement as a condition to receiving a venture capital investment.
This may reflect the limitations of a theoretical approach that is not in step with the realities of venture investing. More likely would be the use of due diligence, product design reviews and/or legal opinions, and the structuring of investment relationships in some circumstances to minimize an active role, such as by taking observer seats rather than active board seats.
While we doubt that investors can easily internalize the costs of preventing infringement, especially through tools such as declaratory relief, the author is to be commended for a thoughtful treatment of difficult subject matter. He makes the point that the test for infringement must not “cast too wide or uncertain a net” in order to keep tertiary liability within socially beneficial bounds. The comment is entitled “Tertiary Copyright Liability”; the citation is 71 U. Chi. L. Rev. 1605 (Fall 2004) and available on Lexis or Westlaw or from the University of Chicago Law Review.
In a recent case, eBay was held not to have induced patent infringement merely because it had invested and taken an observer seat.
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