The University of Chicago Law School Faculty Blog

Audio: Randy Picker Discusses DRM

On the current edition of the Intellectual Property Colloquium podcast, hosted by UCLA (and former Chicago) professor Doug Lichtman, Paul H. and Theo Leffmann Professor of Commercial Law Randy Picker discusses digital rights management with Princeton's Ed Felten. According to Ben Sheffner's Copyrights & Campaigns blog,

Lichtman's interview with Picker focuses on a topic that gets much less attention than it deserves: how DRM enables pro-consumer business models. The discussion of how the Microsoft Xbox gaming console's business model -- artificially low console subsidized by Microsoft-only games -- is particularly interesting. And Picker takes the public's dislike of DRM head-on: "They hate it, but that doesn't mean anything." Picker explains that much of the "hatred" comes from looking only at the downsides of DRM, but ignoring the benefits: fostering business models that would be either more expensive or nonexistent if not for DRM.

You can listen to or download the podcast here.

The Google Book Search Settlement: A New Orphan-Works Monopoly?

I have posted on SSRN a preliminary paper on the Google Book Search settlement. That is very much a live legal issue, so I cut the draft short somewhat to get it into circulation at a point that it might be relevant (take that Harry Edwards!). There is much more that could be done on antitrust doctrine and probably some profitable comparisons to other questions of mandatory access (I get at some of these in my slides for the talk at the Columbia conference on the settlement).

In any event, the paper is here. The abstract is below the fold.

The End of Bailouts

Not in real life—those will be with us for some time unfortunately—but the end of the seminar. I think that we all learned a great deal. Yesterday, we heard five more student presentations: Madoff; Continental Illinois; Sweden; Ratings Agencies; and Consumer Mortgage Issues. Very much worth downloading and reviewing.

Bailing Out the Bailouts

The economy continues to struggle and we are doing do-overs on the first wave of bailouts. In the bankruptcy world, we talk about Chapter 22s and Chapter 33s—firms that have been in Chapter 11 bankruptcy two and three times. Unfortunately, as the case of AIG seems to suggest, we need a similar nomenclature for bailouts (AIG 3.0no?).

If a seminar can be simultaneously lively and depressing, we have hit that mark in the bailouts seminar this quarter (David Weisbach may have done so also in his climate change seminar). The class bailouts blog is full of interesting posts. Last week, student presentations started and we heard about AIG; LTCM; Japan; Iceland; and municipal financial distress. If you are interested in getting a better handle on any of those situations, download the slides and go to some of the materials that the students have put together at the blog.

Fairey v. Associated Press: Yes He Can

The lawsuit filed yesterday by Shepard Fairey against the Associated Press raises some basic questions about what copyright does and doesn’t do. Today’s New York Times describes the background  and displays the two critical images. The first is a photograph snapped by Mannie Garcia for the Associated Press (there seems to be dispute over the copyright to the photograph between Garcia and the AP, but that isn’t my issue today). The second is a now iconic poster created by Fairey based upon the Garcia photograph.

The lawsuit suggests that Fairey used the Garcia photograph as a “visual reference” in creating two Obama posters. I am not quite sure what that means. I take that to mean that Fairey looked at the Garcia photograph while he created the Obama posters. An alternative use of the Garcia photograph would be something more akin to a remix or a mash up, where the transformations resulting in the new work are directly made on the original work.

I think that there are good reasons to treat those two cases differently. In snapping Obama’s picture, Garcia did not obtain a right over other images portraying Obama’s original look, pose and posture. Another photographer taking exactly the same picture at exactly the same time would have full rights as to the image she took, and Garcia could not somehow block the second photographer merely because he had simultaneously taken the same picture.

Government’s Promise: Taking Away Property?

On this day of new opportunities, it seems almost churlish to point out how large the gaps are sometimes between political viewpoints. The lead editorial in the New York Times today is, appropriately enough, on government’s promise. The Times focuses on a possible amendment to the bankruptcy code to allow mortgage modifications on primary residences in Chapter 13. With house prices dropping, many mortgages are underwater. Chapter 13 currently precludes the reduction of those mortgages to now-current market prices. The Times favors an amendment that would allow just that. As the Times puts it: “The bankruptcy amendment cannot stop all foreclosures. But it is the starting point. And it would be a prime example of government doing for individuals what they cannot do for themselves—opening a courthouse door that is closed to them by law.”

Now reframe this from a different political perspective. What individuals lack is the right to take property from others. Individuals facing foreclosure lack the ability to grab shares of New York Times stock from the Sulzbergers so that they can sell those shares to pay off their debts. Government indeed makes it impossible for individuals to do that on their own.

I am not sure whether I think mortgage stripdown should be generally permitted on a going forward basis for new mortgages. I have never thought through the question fully. But it is important to recognize the important difference between a going-forward regime and one that applies to pre-existing mortgages. Of course all the bite is in the latter—and indeed versions of the mortgage stripdown bill would apply only to past mortgages.

But the central question is whether the rights of the mortgage holder are sufficiently property like that they are entitled to constitutional protection from after-the-fact taking, just like presumably the stock held by the Sulzbergers in the New York Times. I don’t know that I know the answer to that question either, but in 1982, the Supreme Court regarded it as sufficiently difficult that it avoided it in U.S. v. Security Industrial Bank, 459 U.S. 70 (1982) (“no bankruptcy law shall be construed to eliminate property rights which existed before the law was enacted in the absence of an explicit command from Congress”).

What I think I can say with greater confidence is that it is hard to give much credence to a view of government’s promise that operates off of such an incomplete understanding of what property rights are and when they are contested.

Bailouts

I am doing a seminar on bailouts this quarter with Professors Baird and Henderson. The syllabus is evolving but is here if you are interested. I put together some introductory material on the 1930s for class last week; the newspaper headlines from the time of Roosevelt’s first inauguration are really quite striking. The powerpoint slides also include links to many of the statutes enacted during Roosevelt’s first 100 days, plus key bailout statutes such as both versions of the Frazier-Lemke Act.

And for those interested in reading more blogging, students will be blogging about the readings each week. Posts will go up Monday and Wednesday of each week. Today’s posts on the 1979 bailout of Chrysler are available here. 

Car Bailouts and Democracy

There has been a bit of a discussion in the blogosphere over whether Treasury’s actions under the TARP in bailing out the car industry should be thought of as anti-democratic. Robert Reich argued this Wednesday and Gordon Smith and David Zaring have addressed the issue—here and here—as well.

I have struggled to follow the discussion. Congress passed the original bailout bill and that created whatever authority it created. Treasury either does or does not have power under the bailout bill to act, but that authority arose in a standard act of our democracy.

Congress subsequently considered a specific bailout bill for the auto industry and failed to enact that legislation. What does that do to the legal authority of Treasury to act under TARP? Absolutely nothing, say it again. An effort to enact a bill that fails can’t have the effect of altering preexisting legislation. The only way for Congress to alter prior legislation is to pass new legislation. The current Congress may believe that the prior legislation doesn’t reach the case that the proposed legislation purports to address, but they can’t implement that understanding of the prior law without enacting new legislation. This is true, as is the case here, when it is precisely the same Congress acting in both contexts, that is to say, when the same Congress has passed the original legislation and has subsequently attempted to pass new legislation to address the purported failure in the first legislation. The failed legislation is just another version of post-enactment legislative history.

Treasury either does or does not have power to act under the original bailout bill as to the car industry. The fact that Congress considered passing legislation directly addressing the car industry doesn’t alter the prior legislative act. All of that is noise. Failed legislation doesn’t alter passed legislation and it is that passed legislation that establishes what Treasury can and cannot do under the TARP.

GM and Chrysler Get TARP Funds

The White House announced this morning that loans would be made to General Motors and Chrysler under the terms of the bailout act’s troubled asset relief program (the TARP). General Motors will receive $13.4 billion in three chunks ($4 billion on the loan closing date of December 29, 2008; $5.4 billion on January 16, 2009; and $4 billion on February 17th, 2009 (with the last payment described as being contingent on congressional action)). Chrysler will receive a single payment of up to $4 billion on December 29, 2008. (The term sheets are here and here.)

The loan contemplates the creation of a car czar—actually, more woodenly, the “President’s Designee”—who will manage the two loans. GM and Chrysler are required to submit restructuring plans by February 17, 2009 with full plans ready to go by March 31, 2009.

The term sheet announces key restructuring targets. These include a bond exchange to reduce public unsecured debt by two thirds. As to labor contracts, Japanese parity is the order of the day. Average US employee compensation is to match by December 31, 2009 average US compensation for Toyota, Honda and Nissan; job-banking practices are to be ended and fired and laid-off employees are to receive no more than customary—non-auto? Non-US auto?—severance pay; and work rules are to be modified to again match those of the three Japanese US manufacturers.

As to the big picture, three points. First, this should remove the specter of an immediate bankruptcy filing—in 2008—by General Motors or Chrysler. This will push these issues out for two months and into the hands of the Obama administration and the new Congress. It was optimistic to think that a restructuring deal could be cut on the timeline of last week and this now creates a more realistic window. Second, the labor blueprint calls for Japanese parity by the end of 2009 and that is much sooner than the UAW was willing to agree to last week. The critical issue is whether the UAW will move on that without a bankruptcy filing. Third, the term sheet says remarkably little about the dealership network. There is a general call for rationalization of workforce, suppliers and dealerships but there are no restructuring targets or term sheet requirements by February 17, 2009 for dealerships.

On to more technical matters. First, the GM loan is being made to GM, not GMAC. There have been some speculation Treasury would act through GMAC so as to make it harder for other industrial firms to seek funding under the TARP. That wasn’t done. GMAC also might fit more naturally in the definition of financial institution set forth in the bailout legislation, but as I’ve suggested before (here and here), I think Treasury has sufficient flexibility to lend to GM and Treasury has gone that route.

Second, the government has backed away from trying to take loans senior to existing secured loans. An early version of the auto bailout bill did that and that raised a variety of contractual and constitutional problems (see my post here on that). The term sheet calls for the government’s new loan to be secured and first but only to the “extent legally and contractually permissible.”

Third, doing the loan through the TARP rather than through the separate auto bailout legislation has constrained the government in setting the loan terms. The December 10, 2008 version of the auto bailout bill created a number of bankruptcy specific provisions for the government loan, including that the loan (i) would not be dischargeable in bankruptcy; (ii) would be exempt from the automatic stay; and (iii) would not be modifiable through a plan of reorganization, absent government consent. The TARP loans won’t have those protections and presumably will be subject to the ordinary rules of bankruptcy, as the bailout out bill doesn’t give Treasure broad authority to preempt the Bankruptcy Code.

There is one provision in the term sheet that seems to try to get around that. The term sheet provides that after a bankruptcy filing by GM or Chrysler, Treasury has the right to convert its facility into a debtor-in-possession facility. I’m not sure what to make of that. Chrysler gets all of its funds immediately on closing and GM will have received all of its funds by February 17, 2009. I assume that the government expects that neither of these firms will file for bankruptcy before that date. I don’t see how a lender, the government or anyone else, unilaterally converts its prepetition loans into debtor-in-possession loan status.

Cars and Tarps Redux

Since my post last Friday on whether the automobile companies fit within the definition of “financial institution” in the bailout legislation, there have been a number of posts pursuing this question. David Zaring largely agrees, I think, with my original analysis, in which I suggested that the statute offered sufficient ambiguity to allow treasury to move forward. Mike Rappaport thinks that I am clearly wrong, while Eric Posner seems to believe Treasury can act, especially in a world of Chevron deference. And Rick Hills believes that, given all of this, there is little reason to search for a proper legal answer; instead the question is one of trust: do we think that the courts will get it right or that Treasury will.

We should review the bidding. If the bailout legislation simply referred to “financial institution” without providing a definition of that term, we would expect the agent charged with implementing the statute to create a definition. That would almost certainly be Treasury in the first instance, and we might conclude, as Eric does, that Treasury would be well within its statutory authority to cover the automobile companies, especially given Chevron.

In contrast, if the statute actually provides a definition, then presumably we are stuck with that definition. If the statute said that “financial institution means Randy Picker, professor at the University of Chicago Law School” I guess I’d have to take the $700 billion. That would be an odd statute to be sure, but it would be the statute written by Congress. The definition is the definition.