Six Strategies to Protect Clients Against IP Theft

Around the world, companies involved in the production and distribution of intellectual property are engaged in an epic battle that will impact their profitability and perhaps even their survival. These companies include the makers of music, movies and videos, software, electronic games, and other types of products.

Many of these companies are losing millions of dollars per year to an unpleasant side effect of the digital age ' the theft of their copyrights, trademarks, or other intellectual property rights through illegal activities such as counterfeiting and file-sharing. Despite advances in digital rights protection technology, the cost of piracy keeps rising.

Many companies victimized by this piracy are still struggling to develop effective strategies to minimize losses. Part of the problem is globalization ' specifically, the increased ability of rogues working mostly in emerging markets to produce large-scale counterfeit goods and distribute them quickly, economically, and ubiquitously all over the world. But another part of mounting a defense is cultural and closer to home. It is the collective attitudes and habits of millions of mostly young people who can access free or cheap versions of copyrighted works on the Internet and feel little remorse in downloading them ' and passing them on to friends.

Attorneys and other professional advisers can help intellectual property companies create and implement effective strategies for protecting their rights and products. While these strategies take various forms depending on a company's business and the profile of the perpetrators who steal their products, they begin with a common thread ' namely, the conviction to fight back. Companies that build an anti-piracy plank into their culture and reinforce it with consistent communications and actions will produce a long-term positive impact on their revenues, profits, and competitive positions.

An Array of Strategies

Let's separate an array of actions that have been effective against piracy into six broad strategies:

1. Estimating losses

2. Profiling perpetrators

3. Filing complaints

4. Communicating with the public (including enforcement
actions)

5. Encouraging legitimate commerce

6. Pursuing litigation and damage claims

Because each type of strategy has distinct benefits, a broad corporate policy to combat piracy should include several or all of them in a comprehensive plan supported by top management.

Estimating Losses

Companies can use techniques that have been developed by government entities and academic researchers to estimate losses from intellectual property counterfeiting or theft. Due to the fragmented and underground characteristics of most piracy, these methods are not exact. But they can help to cost-justify corporate anti-piracy initiatives, and they also may be useful in supporting claims for losses or damages. Here are some general guidelines that can serve as a starting point:

• The Counterfeiting Intelligence Bureau of the International Chamber of Commerce (“ICC”) has estimated that counterfeit goods (of all types) account for 5-7% of total world trade.
• The International Federation of the Phonographic Industry (“IFPI”) has estimated that sales of illegal CDs accounted for 14% of total global sales.
• The Recording Industry of America has placed the annual loss in U.S recorded music sales at $4.6 billion.
• The Motion Picture Association of America (“MPAA”) has placed the annual global loss in motion picture industry revenue at $18.2 billion.

A more detailed method of estimating losses was developed for evaluating the U.S. music recording industry by Stephen E. Siwek of the Institute for Policy Innovation. Beginning with an industry projection of worldwide illegal song downloads per year, it estimated that U.S. recording industry losses to downloading were $3.7 billion per year, using the following methodology:

• The U.S. portion of the global music market was estimated at 60.7%, which translated into 13.2 billion illegal U.S. downloads annually.
• Absent piracy, the analysis estimated that 20% of illegal downloads would have been bought legitimately. (It weighted the implied legal lost sales at 90% download and 10% CD.) This resulted in a weighted price per lost sale (both mediums) of $2.30. After factoring out the costs of making and distributing each unit, the average profit lost per sale was $1.40.
• The $1.40 was multiplied by 2.64 billion lost unit sales (due to pirated substitutions) to create the $3.7 billion estimate of annual losses in U.S. music industry profit due to downloading.

The key points that companies can learn from this methodology are: 1) begin with the most accurate and authoritative global or industry loss estimates available; and 2) make realistic assumptions about the portion of pirated activity that replaces legitimate sales opportunities. Because the audience of down-loaders tends to be young and have limited discretionary income, it is safe to assume that the majority of illegal downloads do not replace legal sales (although they may be harmful in other ways).

Profiling Perpetrators

Another useful strategy is to develop a detailed profile of the types of people and companies who are violating the company's rights and products including their ages, states or regions of residence, methods, and preferences. Again, industry surveys can be useful, and companies also can develop internal feedback channels for building accurate profiles.

The MPAA has developed the following profile for its industry:

• Over 90% of initial release movie piracy results from individuals taking camcorders into movie theaters. The profile has encouraged movie studios to increase security at premier events, which has greatly inhibited the “camcorder-up-the-sleeve” method of piracy.
• MPAA: “The typical movie pirate is male, between the ages of 16-24 and lives in an urban area.” This type of profile data can help to target enforcement communications and warnings in media that will be seen and heeded by pirates.

Based on its profile, the MPAA has concluded that four types of entities collude to make and distribute pirate films. They include:

• Suppliers ' People who take camcorders into premiers.
• Release Groups ' The entities to whom Suppliers channel their wares for broader release.
• Facilitators ' These entities run search engines that help pirates find new stolen movies for downloading.
• File-sharers and down-loaders ' The mass audience of young people who are the end-users of pirated music.

Understanding the hierarchy and flow of pirated movies has helped studios choke off key distribution points through enforcement actions.

Filing Complaints

A variety of government and Chamber of Commerce resources can be used to make authorities aware of suspected or actual piracy. A clearinghouse for learning more about them is the site www.stopfakes.gov, operated by the International Trade Administration of the U.S. Department of Commerce. The site includes a phone number (1-866-999-HALT) and an online form for filing a complaint with the Office of Intellectual Property Rights. The site also includes links to other agencies involved in protecting rights, including the Patent and Copyright Offices, FBI, U.S. Customs and Border Protection, and the Department of Justice.

Communicating with the Public (Including Enforcement Actions)

One of the most effective ways to fight piracy is to make sure that the public in general, and perpetrators specifically, understand the risks associated with these activities. Advertising and publicity can be effective tools, but even more impact can be created through legal proceedings against perpetrators. The media like to report court cases about intellectual property theft, and exposure of criminal or monetary sanctions helps to alert casual down-loaders and file-sharers (and their parents) to the consequences.

Even if civil or criminal cases are not cost-effective for companies in the short run, they can produce long-range benefits. For example, a few years ago, the Recording Industry Association of America (“RIAA”) was widely criticized for bringing lawsuits against individual file-sharers and down-loaders, including college students. However, those lawsuits produced the side-effect of causing colleges to look closely at their own legal exposure for enabling Internet piracy. Shortly after the suits were initiated, several prominent colleges agreed to increase security or pay fees to the music industry so that their students could gain legal access to music downloads.

Companies should consider adopting the ethic that every incident of intellectual property theft is worth pursuing because this will send a strong message that will be reinforced in the day'to-day behaviors of its managers, employees, and eventually consumers. The steps in pursuing violations should be documented, so that individual employees do not have to rely on their own consciences to make difficult decisions.

Encouraging Legitimate Commerce

Another type of strategy may be the most important for creating long-term success. It involves a thorough review of the company business models and an assessment of changes that can be made to discourage piracy by making legitimate commerce more appealing. The music industry has faced this issue through a perplexing challenge.

In the past, the industry's model has been built around retailing whole albums of music (in physical form) for $14-18 each. However, the download world of e-music revolves around the single-track sale, and Apple's iTunes and other online music stores have popularized the 99-cent-per-track price point.

Gradually, the large major recording companies are coming to accept the validity of the 99-cent single track download sale. As they do, they are taking a major step toward making legitimate online music a more attractive option. Here are a few other examples of recent business model enhancements that encourage legitimate commerce in the music industry:

• Sony BMG reached a licensing agreement with MySpace to stream music videos of its artists in return for sharing part of MySpace's advertising revenue. To prevent pass-along sharing of downloads, MySpace offers copyright infringement protection services to its partners.
• SpiralFrog, an advertiser-supported online music service, formed an agreement with Universal Music Group to offer free downloads of its music in return for a share of advertising revenue.
• Slacker is a Web site that reached agreements with EMI Music, Universal Music Group, Sony BMG Music Entertainment, and Warner Music to make the “big four” labels' content available to its users. Slacker allows users to create personalized Internet radio stations based on music genre or favorite artists, and these stations then can be transferred to Slacker Portable Players.

Companies should think outside-the-box in revamping their business models to make legitimate online commerce more appealing. For example, it may not seem intuitive to invite a piracy-enabling Web site to form a joint venture for promoting legitimate commerce. But this type of partnering can turn a negative into a positive, reduce enforcement costs, and send a clear message to customers of the partner company that times have changed and piracy is no longer tolerated.

Pursuing Litigation and Damage Claims

Although this strategy is listed last, it should not always be considered a “last resort.” As we have discussed, litigation against intellectual property perpetrators captures headlines and can deter millions of people from pirating intellectual property. Also, attorneys may be able to sustain damage claims greater than actual losses established in the first strategy.

The calculation of damages in entertainment industry infringements cases is similar in structure to that of other industries, relying on facts, data, and a clear understanding of profits and distribution channels. Additionally, the law does not regard entertainment litigation differently from other intellectual property cases, so attorneys may cite case precedent from other industries. However, it is important for attorneys to understand that the entertainment industry has a unique set of financial arrangements that potentially can influence court awards or settlements. Damage claims should include:

• Actual losses suffered by the copyright owner as a result of the infringement.
• Profits made by the infringer from the use of copyrighted material.
• Indirect profits of the infringer, such as promotional benefits through illegitimate use copyrights or trademarks.
• Prejudgment interest.

And depending on the specifics of the case, may also include:

• Statutory damages.

Choose a Recipe ' and Stick To It

In summary, attorneys and other professional advisers can play a valuable role in helping intellectual property companies reduce financial loss and other costs of piracy and counterfeiting. A combination of the six strategies described in this article will be effective. The whole recipe is stronger than any of the ingredients. The more consistently the strategies are communicated and enforced, inside and outside the company, the more effective they will be in protecting the company's valuable intellectual property over time.

---

Stefano Vranca is a Principal in the Litigation Support & Forensic Accounting Group at Rothstein Kass (www.rkco.com) He is based in Beverly Hills and can be reached at [email protected].

Around the world, companies involved in the production and distribution of intellectual property are engaged in an epic battle that will impact their profitability and perhaps even their survival. These companies include the makers of music, movies and videos, software, electronic games, and other types of products.

Many of these companies are losing millions of dollars per year to an unpleasant side effect of the digital age ' the theft of their copyrights, trademarks, or other intellectual property rights through illegal activities such as counterfeiting and file-sharing. Despite advances in digital rights protection technology, the cost of piracy keeps rising.

Many companies victimized by this piracy are still struggling to develop effective strategies to minimize losses. Part of the problem is globalization ' specifically, the increased ability of rogues working mostly in emerging markets to produce large-scale counterfeit goods and distribute them quickly, economically, and ubiquitously all over the world. But another part of mounting a defense is cultural and closer to home. It is the collective attitudes and habits of millions of mostly young people who can access free or cheap versions of copyrighted works on the Internet and feel little remorse in downloading them ' and passing them on to friends.

Attorneys and other professional advisers can help intellectual property companies create and implement effective strategies for protecting their rights and products. While these strategies take various forms depending on a company's business and the profile of the perpetrators who steal their products, they begin with a common thread ' namely, the conviction to fight back. Companies that build an anti-piracy plank into their culture and reinforce it with consistent communications and actions will produce a long-term positive impact on their revenues, profits, and competitive positions.

An Array of Strategies

Let's separate an array of actions that have been effective against piracy into six broad strategies:

1. Estimating losses

2. Profiling perpetrators

3. Filing complaints

4. Communicating with the public (including enforcement
actions)

5. Encouraging legitimate commerce

6. Pursuing litigation and damage claims

Because each type of strategy has distinct benefits, a broad corporate policy to combat piracy should include several or all of them in a comprehensive plan supported by top management.

Estimating Losses

Companies can use techniques that have been developed by government entities and academic researchers to estimate losses from intellectual property counterfeiting or theft. Due to the fragmented and underground characteristics of most piracy, these methods are not exact. But they can help to cost-justify corporate anti-piracy initiatives, and they also may be useful in supporting claims for losses or damages. Here are some general guidelines that can serve as a starting point:

• The Counterfeiting Intelligence Bureau of the International Chamber of Commerce (“ICC”) has estimated that counterfeit goods (of all types) account for 5-7% of total world trade.
• The International Federation of the Phonographic Industry (“IFPI”) has estimated that sales of illegal CDs accounted for 14% of total global sales.
• The Recording Industry of America has placed the annual loss in U.S recorded music sales at $4.6 billion.
• The Motion Picture Association of America (“MPAA”) has placed the annual global loss in motion picture industry revenue at $18.2 billion.

A more detailed method of estimating losses was developed for evaluating the U.S. music recording industry by Stephen E. Siwek of the Institute for Policy Innovation. Beginning with an industry projection of worldwide illegal song downloads per year, it estimated that U.S. recording industry losses to downloading were $3.7 billion per year, using the following methodology:

• The U.S. portion of the global music market was estimated at 60.7%, which translated into 13.2 billion illegal U.S. downloads annually.
• Absent piracy, the analysis estimated that 20% of illegal downloads would have been bought legitimately. (It weighted the implied legal lost sales at 90% download and 10% CD.) This resulted in a weighted price per lost sale (both mediums) of $2.30. After factoring out the costs of making and distributing each unit, the average profit lost per sale was $1.40.
• The $1.40 was multiplied by 2.64 billion lost unit sales (due to pirated substitutions) to create the $3.7 billion estimate of annual losses in U.S. music industry profit due to downloading.

The key points that companies can learn from this methodology are: 1) begin with the most accurate and authoritative global or industry loss estimates available; and 2) make realistic assumptions about the portion of pirated activity that replaces legitimate sales opportunities. Because the audience of down-loaders tends to be young and have limited discretionary income, it is safe to assume that the majority of illegal downloads do not replace legal sales (although they may be harmful in other ways).

Profiling Perpetrators

Another useful strategy is to develop a detailed profile of the types of people and companies who are violating the company's rights and products including their ages, states or regions of residence, methods, and preferences. Again, industry surveys can be useful, and companies also can develop internal feedback channels for building accurate profiles.

The MPAA has developed the following profile for its industry:

• Over 90% of initial release movie piracy results from individuals taking camcorders into movie theaters. The profile has encouraged movie studios to increase security at premier events, which has greatly inhibited the “camcorder-up-the-sleeve” method of piracy.
• MPAA: “The typical movie pirate is male, between the ages of 16-24 and lives in an urban area.” This type of profile data can help to target enforcement communications and warnings in media that will be seen and heeded by pirates.

Based on its profile, the MPAA has concluded that four types of entities collude to make and distribute pirate films. They include:

• Suppliers ' People who take camcorders into premiers.
• Release Groups ' The entities to whom Suppliers channel their wares for broader release.
• Facilitators ' These entities run search engines that help pirates find new stolen movies for downloading.
• File-sharers and down-loaders ' The mass audience of young people who are the end-users of pirated music.

Understanding the hierarchy and flow of pirated movies has helped studios choke off key distribution points through enforcement actions.

Filing Complaints

A variety of government and Chamber of Commerce resources can be used to make authorities aware of suspected or actual piracy. A clearinghouse for learning more about them is the site www.stopfakes.gov, operated by the International Trade Administration of the U.S. Department of Commerce. The site includes a phone number (1-866-999-HALT) and an online form for filing a complaint with the Office of Intellectual Property Rights. The site also includes links to other agencies involved in protecting rights, including the Patent and Copyright Offices, FBI, U.S. Customs and Border Protection, and the Department of Justice.

Communicating with the Public (Including Enforcement Actions)

One of the most effective ways to fight piracy is to make sure that the public in general, and perpetrators specifically, understand the risks associated with these activities. Advertising and publicity can be effective tools, but even more impact can be created through legal proceedings against perpetrators. The media like to report court cases about intellectual property theft, and exposure of criminal or monetary sanctions helps to alert casual down-loaders and file-sharers (and their parents) to the consequences.

Even if civil or criminal cases are not cost-effective for companies in the short run, they can produce long-range benefits. For example, a few years ago, the Recording Industry Association of America (“RIAA”) was widely criticized for bringing lawsuits against individual file-sharers and down-loaders, including college students. However, those lawsuits produced the side-effect of causing colleges to look closely at their own legal exposure for enabling Internet piracy. Shortly after the suits were initiated, several prominent colleges agreed to increase security or pay fees to the music industry so that their students could gain legal access to music downloads.

Companies should consider adopting the ethic that every incident of intellectual property theft is worth pursuing because this will send a strong message that will be reinforced in the day'to-day behaviors of its managers, employees, and eventually consumers. The steps in pursuing violations should be documented, so that individual employees do not have to rely on their own consciences to make difficult decisions.

Encouraging Legitimate Commerce

Another type of strategy may be the most important for creating long-term success. It involves a thorough review of the company business models and an assessment of changes that can be made to discourage piracy by making legitimate commerce more appealing. The music industry has faced this issue through a perplexing challenge.

In the past, the industry's model has been built around retailing whole albums of music (in physical form) for $14-18 each. However, the download world of e-music revolves around the single-track sale, and Apple's iTunes and other online music stores have popularized the 99-cent-per-track price point.

Gradually, the large major recording companies are coming to accept the validity of the 99-cent single track download sale. As they do, they are taking a major step toward making legitimate online music a more attractive option. Here are a few other examples of recent business model enhancements that encourage legitimate commerce in the music industry:

• Sony BMG reached a licensing agreement with MySpace to stream music videos of its artists in return for sharing part of MySpace's advertising revenue. To prevent pass-along sharing of downloads, MySpace offers copyright infringement protection services to its partners.
• SpiralFrog, an advertiser-supported online music service, formed an agreement with Universal Music Group to offer free downloads of its music in return for a share of advertising revenue.
• Slacker is a Web site that reached agreements with EMI Music, Universal Music Group, Sony BMG Music Entertainment, and Warner Music to make the “big four” labels' content available to its users. Slacker allows users to create personalized Internet radio stations based on music genre or favorite artists, and these stations then can be transferred to Slacker Portable Players.

Companies should think outside-the-box in revamping their business models to make legitimate online commerce more appealing. For example, it may not seem intuitive to invite a piracy-enabling Web site to form a joint venture for promoting legitimate commerce. But this type of partnering can turn a negative into a positive, reduce enforcement costs, and send a clear message to customers of the partner company that times have changed and piracy is no longer tolerated.

Pursuing Litigation and Damage Claims

Although this strategy is listed last, it should not always be considered a “last resort.” As we have discussed, litigation against intellectual property perpetrators captures headlines and can deter millions of people from pirating intellectual property. Also, attorneys may be able to sustain damage claims greater than actual losses established in the first strategy.

The calculation of damages in entertainment industry infringements cases is similar in structure to that of other industries, relying on facts, data, and a clear understanding of profits and distribution channels. Additionally, the law does not regard entertainment litigation differently from other intellectual property cases, so attorneys may cite case precedent from other industries. However, it is important for attorneys to understand that the entertainment industry has a unique set of financial arrangements that potentially can influence court awards or settlements. Damage claims should include:

• Actual losses suffered by the copyright owner as a result of the infringement.
• Profits made by the infringer from the use of copyrighted material.
• Indirect profits of the infringer, such as promotional benefits through illegitimate use copyrights or trademarks.
• Prejudgment interest.

And depending on the specifics of the case, may also include:

• Statutory damages.

Choose a Recipe ' and Stick To It

In summary, attorneys and other professional advisers can play a valuable role in helping intellectual property companies reduce financial loss and other costs of piracy and counterfeiting. A combination of the six strategies described in this article will be effective. The whole recipe is stronger than any of the ingredients. The more consistently the strategies are communicated and enforced, inside and outside the company, the more effective they will be in protecting the company's valuable intellectual property over time.

---

Stefano Vranca is a Principal in the Litigation Support & Forensic Accounting Group at Rothstein Kass (www.rkco.com) He is based in Beverly Hills and can be reached at [email protected].