As Public Knowledge and other public interest advocates have pointed out (page 15), experts agree that industry studies highlighting losses due to IP infringement use questionable methodology. Now the Government Accountability Office (GAO) is making the same point in a report titled “Observations on Efforts to Quantify the Economic Effects of Counterfeit and Pirated Goods.”
The report notes that one key assumption underlying many counterfeiting and piracy studies is that a consumer who bought a counterfeit good would pay the same price for it as a legitimate good. Thus, the acquisition of a counterfeit or pirated product represents a lost sale to the owner of the intellectual property (IP). The report points out that while this assumption applies in some situations, it cannot be generalized. For example, in situations where a consumer is deceived into believing that he is purchasing a counterfeit, he may pay the same price as the legitimate product. This is true most often true in the case of counterfeit pharmaceutical products. However, the level of deception varies depending on the type of product. For audiovisual products, such as movies, consumers are not likely to be confused that they are purchasing a counterfeit. Yet, a blanket substitution of the value of the legitimate goods for counterfeit goods, presents an extremely high estimate of the level of loss from infringement.
Further, the report also notes that estimates of the effect of counterfeiting and piracy on industries related to IP industries do not take into account the two-fold effect: 1) that a counterfeit of similar quality but lower price leaves the consumer with extra disposable income and 2) this extra income would go back to the U.S. economy. In addition to these shortcomings, the report also notes that possible positive effects of counterfeiting and piracy on the economy should be considered.
Despite these problems with most studies, the GAO points out that government agencies including the FBI and the Dept. of Commerce have relied on industry studies even when industry trade associations have refused to divulge their data sources and methods. What is worse, the report notes that three widely cited estimates of piracy losses sourced to U.S. government agencies – the Federal Bureau of Investigations (FBI), Customs and Border Protection (CBP), and the Federal Trade Commission (FTC) – cannot be substantiated.
Another point repeated in a few places in the report is the fact that the effects of piracy and counterfeiting vary depending on the industry. For instance levels of deception as to whether a good is counterfeit or not are higher for pharmaceutical products than for audiovisual works.
All this is not to suggest that counterfeiting and piracy are not a significant problem. They are and the report points this out. Yet, the report buttresses our argument that IP policy should be based on evidence and not faith in rights-holder assertions. The GAO report points to a disconnect within the government. One part is pointing to problems with estimates of IP infringement while others place blind reliance on industry studies and assertions and make policy and law based on it.
What is ironic is that the report is a result of a mandate under the Prioritizing Resources and Organization for Intellectual Property (PRO IP) Act directing the GAO to conduct such a study. That Act cites to studies similar to the ones examined by the GAO and uses their findings as one of the justifications for its passage. Public interest would have been served better had Congress first commissioned a study similar to the GAO study and then passed legislation. Instead the PRO IP Act subjects ordinary Americans to increased penalties for all manner of IP infringements based on industry assertions. Further, rhetoric such as harms to health and safety were used to justify treating all forms of IP infringement under the same banner and with the same severity.
While it is likely that herculean efforts will be required to change current laws, we hope that going forward, the government’s IP policy will be based on sound data. Current processes such as the ongoing IP enforcement review by the Intellectual Property Enforcement Coordinator (IPEC) and the Special 301 process should take note of the GAO report. We hope that the IPEC will distinguish between various kinds of IP infringement and recommend dealing only with those that actually affect consumer health and safety or adversely affect the economy, thereby preserving scarce law enforcement resources for other more pressing needs such as fighting crime and terrorism. We also hope that the United States Trade Representative (USTR) will consider the GAO’s report while reviewing rights-holder submissions about loss from piracy and counterfeiting in foreign countries as evidence warranting their placement on watch lists.