Ranking Member of the House Committee on Commerce last fall. In those letters, the Commission stated that "[a]dditional legal protections for databases may well be warranted, especially in light of the ease of piracy of some databases." At the same time, the Commission highlighted several "areas of concern that may warrant further study," particularly regarding possible unintended, deleterious effects on competition and innovation that could arise from broad or ambiguous database protection legislation.

This Statement derives from the same considerations that informed the Commission's letters last year. It first provides a brief overview of H.R. 1858. It then summarizes the general issues of intellectual property and competition policy and the specific concerns raised by the Commission last year. The Statement then highlights several respects in which H.R. 1858 appears responsive to those concerns. It also, however, identifies several possible problems and ambiguities with the Bill that may warrant further examination. Finally, the Statement addresses the proposal in H.R. 1858 to assign enforcement responsibility to the Commission and notes the significant new burden it would place on the Commission's resources.

I. OVERVIEW OF H.R. 1858

H.R.1858 is designed to provide additional legal protections to databases that are not entitled to protection under copyright law following the Supreme Court's decision in Feist Publications v. Rural Telephone Services, which abolished "sweat of the brow" copyright protection for non-creative, factual compilations. Although H.R. 1858 is based on a misappropriation model, the Bill addresses core issues similar to those that arise in the context of intellectual property policy, as well as antitrust policy. These issues involve how best to protect both the ability of initial innovators to realize returns on their investments in developing a database and the ability of follow-on innovators to access databases to serve as building blocks for ongoing innovation competition.

The Bill defines a database as follows:

"a collection of discrete items of information that have been collected and organized in a single place, or in such a way as to be accessible through a single source, through the investment of substantial monetary or other resources, for the purpose of providing access to those discrete items of information by the users of the database. However, a discrete section of a database that contains multiple discrete items of information may also be treated as a database."9 "Information" is defined as including any intangible material capable of being thus collected and organized, except for "works of authorship." 10

The Bill generally prohibits the selling or distributing to the public in commerce of a "duplicate" database "in competition with" an original database.11 To be a "duplicate," the second database must be "substantially the same" as the original, and must have been made by extracting information from the original. 12 To be "in competition with" the original, the second database must "displace[] substantial sales or licenses of the original" and "significantly threaten[] the opportunity to recover a return on the investment" therein. 13

This prohibition is subject to an exception for certain specified "permitted acts," 14 similar to the fair use defense in existing copyright law,15 and to exclusions that reserve to the public domain government databases and databases required by law,

Identical letters from Federal Trade Commission to House Committee on Commerce Chairman Tom Bliley and Ranking Member John D. Dingell, dated September 28, 1998. The letter to Chairman Bliley is attached.

7499 U.S. 340 (1991).

The Supreme Court has described the tort of misappropriation as taking material that has been acquired as the result of organization and the expenditure of labor, skill, and money, and then appropriating that material and selling it as one's own. International News Serv. v. Associated Press, 248 U.S. 215, 239 (1918). Although state law varies, a plaintiff asserting a misappropriation claim has generally been required to prove five elements: (i) the plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendant's use of the information constitutes free-riding on the plaintiff's efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the availability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be threatened. National Basketball Ass'n v. Motorola, Inc., 105 F.3d 841, 845 (2d Cir. 1997).

9H.R. 1858, § 101(1).

10 Id., § 101(3).

1 Id., § 102.

12 Id., § 101(2).

13 Id., § 101(5).

14 Id., § 103.

15 17 U.S.C. § 107.

databases related to Internet communications, computer programs, individual facts and other individual intangibles, and telecommunications subscriber list information. 16 H.R. 1858 also exempts from liability telecommunications and information services and facilities providers who act only as conduits for the publication of duplicate databases.17 In a provision that appears to have its origins in patent misuse and copyright misuse caselaw, H.R. 1858 denies database protection to those who "misuse" it. 18

As to enforcement, the Bill vests what the Commission understands to be exclusive jurisdiction in the Commission to enforce, implement by rule-making, and seek remedies for violations of its basic prohibition. 19 The Bill also calls upon the Commission to report to Congress on its effects within three years.20 Subject to a limited preemption of inconsistent State law,21 the Bill preserves Federal and State antitrust, intellectual property, communications, and contract law.22

II. THE BACKGROUND TO THIS STATEMENT: INTELLECTUAL PROPERTY AND ANTITRUST POLICY AND THE COMMISSION'S COMMENTS ON PRIOR PROPOSED DATABASE PROTECTION LEGISLATION

As noted above, H.R. 1858 raises core issues of how to protect both investments in databases and access to databases similar to those at the intersection between intellectual property and antitrust policy. It is well recognized that despite the apparent tension between the antitrust and intellectual property laws, the two bodies of law share the common purpose of promoting innovation and enhancing consumer welfare.23 Intellectual property law provides incentives for first-generation innovation by protecting innovators from unfair free-riding. Antitrust law recognizes that certain misuses of intellectual property rights may harm competition by, for example, permitting a monopolist to leverage its market power from the market covered by the patent or copyright into other markets, or to foreclose a competitor's or second-generation innovator's access to an important input.24

H.R. 1858 presents issues about how to strike this delicate balance. As the Commission stated in its letters last year, a legislative remedy that effectively and accurately targets free-riders on databases appears desirable. Databases play an integral role in many facets of our economy, and collecting and organizing factual data is often an expensive and complex process. Free-riding by those who merely copy and resell or give away existing databases may reduce incentives for database providers to create new databases or to introduce existing databases in new media that can more effectively deliver more information to consumers. As recent cases such as ProCD v. Zeidenberg 25 and Warren Publishing v. Microdos Data Inc.26 show, the proliferation of digital technologies has rapidly reduced the costs and difficulty associated with copying and distributing vast amounts of data, thereby facilitating freeriding. Although it may be too early to tell, current protections and remedies for database misappropriation, such as those available under contract and copyright law, may be inadequate.

In crafting legislation to protect the incentives of first-generation database producers, however, it is important to keep in mind the need to preserve opportunities and incentives for follow-on innovators, who may need access to the initial innova

16 H.R. 1858, § 104. The exclusion of protection for databases required for Internet communications is essential to maintain the open networking practices that have facilitated the dramatic growth of electronic commerce in recent years. Computer programs may be protected by copyright, and otherwise protectable databases are not denied protection merely because they are included in computer programs. Telecommunications subscriber list information remains subject to FCC regulation under the Communications Act of 1934.

17 H.R. 1858, § 106(a).

18 Id., § 106(b).

19 Id., § 107.

20 Id., § 108.

21 Id., § 105(b).

22 Id., § 105(a), (c), (d).

23 Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990); United States Department of Justice & Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property § 1.0 (1995).

24 See generally ANTITRUST LAW DEVELOPMENTS (FOURTH) at 282-85, 953-81 (1997).

25 86 F.3d 1447 (7th Cir. 1996) (holding that the defendant's copying of the contents of a CDROM database of 3,000 telephone directories and resale of it in an online format violated the licensing agreement accompanying the CD-ROM).

26 115 F.3d 1509 (11th Cir.) (en banc), cert. denied, 522 U.S. 963 (1997) (holding that the defendant's copying of a cable system directory and reselling of it in a software format did not constitute a copyright violation because of the uncreative nature of the directory).

tion for use as a stepping stone.27 Last year, the Commission expressed several concerns regarding the potential effects on competition of the database protection legislation then proposed, Title V of H.R. 2281 (the "Collections of Information Antipiracy Act"). The Commission highlighted the following dangers inherent in ambiguous language that could be read to preclude certain reasonable uses of existing databases to produce new products or services of value to consumers:

• 15-Year Term. The 1998 bill limited the civil and criminal liability that it created to a term of 15 years from the date of “the investment of resources that qualified the portion of the [database] for protection under this chapter that is extracted or used." The Commission questioned whether 15 years was too long a term, given that information technology product cycles are typically short and misappropriation law has typically protected only investment in gathering "hot," i.e., short-term valuable, information.28 The Commission also highlighted the uncertainties involved, particularly for a potential defendant, in attempting to apply any fixed term that runs from the point of "investment of resources" in a database, given that such investment is often ongoing.

Substantiality of Duplication. The 1998 bill generally prohibited the extraction of "all or a substantial part, measured either quantitatively or qualitatively, of a collection of information... so as to cause harm to the actual or potential market for that other person... The Commission highlighted the vagueness of a "quantitatively or qualitatively... substantial" test, and the chilling effect its uncertainty could have on a potential defendant. The Commission suggested that copyright precedent could not properly be applied by analogy, since such precedent is premised on the facts/expression dichotomy that is unique to copyright, typically looking for copying of expression that minimally "exceeds that necessary to disseminate the facts," 29 or making stylistic judgments 30 that are alien to non-expressive collections of data.

• Potential Competition. The 1998 bill proposed to protect claimants of database protection against competition by duplicators not only in markets actually exploited by the claimant before entry by the duplicator, but also in "potential market[s]" that the claimant specifically planned to or might typically be expected to exploit in the future. The Commission highlighted ambiguities in this provision which could have a chilling effect on follow-on users, and noted that it appeared to provide more protection for databases than is available for works protected by existing copyright and misappropriation laws. Most importantly, the Commission expressed concern that by effectively enabling a database owner to exclude others from entering a secondary market without even entering such a market itself, the 1998 bill could conflict with a fundamental shared policy of intellectual property and antitrust policy: encouraging "the creation of transformative works." 31

• Single-Source Databases and Anticompetitive Misuse of Database Protection. The Commission highlighted the "increased potential for anticompetitive conduct where there exists only a monopoly source for a particular type of information." The Commission noted the risk that database protections that entrench such monopolies may facilitate such anticompetitive practices as charging supracompetitive prices, restricting output, leveraging market power into other markets and denying essential inputs of information to competitors. 32 The Commission cautioned that "antitrust law cannot alleviate all of the potential competitive problems associated with sole-source databases," since antitrust law

27 See generally Federal Trade Commission Staff, ANTICIPATING THE 21ST CENTURY: COMPETITION POLICY IN THE NEW HIGH-TECH, GLOBAL MARKETPLACE, vol. I, ch. 6 (May 1996).

28 See, e.g., National Basketball, 105 F.3d at 845 ("the surviving hot-news' INS-like claim is limited to cases where [inter alia] the information is time-sensitive").

29 See, e.g., Harper & Row Pub., Inc. v. National Enter., 471 U.S. 539, 564 (1985); Salinger v. Random House, 811 F.2d 90, 98 (2d Cir. 1987); see also Iowa State Univ. Research Found. Inc. v. American Broadcasting Co., 621 F.2d 57, 61-62 (2d Cir. 1980) (use involving 8% of a videotape held to be substantial).

30 See, e.g., New Era Pubs. Int'l v. Carol Pub. Group, 904 F.2d 152, 158 (2d Cir. 1990).

31 Luther R. Campbell, aka Luke Skywalker v. Acuff-Rose Music, Inc., 510 U.S. 569, 579 (1994) (finding a transformative work to be a fair use under copyright law); see also RESTATEMENT (THIRD) OF UNFAIR COMPETITION, § 38, cmt. c, at 412-13 (noting general limitation of misappropriation law to the originator's primary market).

32 Sole source databases have been the subject of substantial litigation concerning allegations of anticompetitive conduct by a monopolist. In its 1998 letters, the Commission cited two examples involving telephone directories: Great Western Directories v. Southwestern Bell Tel. Co., 63 F.3d 1378 (5th Cir. 1995), modified, 74 F.3d 613 (1996), and Direct Media Corp. v. Camden Tel. and Telegraph Co., 989 F. Supp. 1211 (S.D. Ga. 1997).

permits certain uses of lawfully acquired monopoly power and the essential facilities doctrine of antitrust law has been limited in its application thus far.33 The Commission's letters last year concluded by suggesting three key areas in which the 1998 bill might be improved:

(1) limiting the term of protection to less than 15 years and precluding perpetual protection for databases that are maintained on an ongoing basis;

(2) defining more clearly the degree of copying required to trigger liability; and (3) excluding "potential competition" protection and/or strengthening "fair use" type defenses.

III. THE RESPONSIVENESS OF H.R. 1858 TO THE COMMISSION'S CONCERNS

H.R. 1858 differs significantly from the former H.R. 2281. Although the Commission notes several concerns with H.R. 1858 in the next Section, the Bill appears responsive to several of the Commission's original concerns.

(a) Substantiality of Duplication. Instead of asking whether a qualitatively or quantitatively substantial amount of data has been extracted from the original database, H.R. 1858 asks whether the two databases are “substantially the same." 34 No formulation appears possible that would exclude an element of judgment, but this new formulation appears clearer than that of the 1998 bill, and reduces the risk that data, as distinct from the database as a whole, will be protected.

The Bill further provides that "a discrete section of a database that contains multiple discrete items of information may also be treated as a database." 35 This provision also raises issues of judgment: how many is "multiple"? The closest the Bill comes to answering that question is elsewhere in its definition of “database,” in which it requires that a database reflect "the investment of substantial monetary or other resources." If this is interpreted as requiring a reasonable common sense determination of substantiality, small sections of databases that lack real independent value will be excluded. Thus, the Bill appears to require that the alleged "database" be both (i) discrete and (ii) substantial in terms of what went into it. Furthermore, the "discrete section" provision does not mandate that such a section be deemed a database; instead, it "may" be treated as such. If this is interpreted to allow room for reasonable judgment as to whether the section is ultimately best characterized as a database as opposed to a mere extract, it appears that overprotection of minor elements of a database can be avoided.

(b) Potential Competition. The Bill does not expressly protect database creators with respect to markets that they might potentially enter, and requires that the duplicate database "displace[] substantial sales or licenses of the database." 36 That which does not yet exist is not normally said to be "displaced." Accordingly, this provision appears to require that there actually be "sales or licenses" of the original database in the market in which the two compete before the duplicate competes therein. In this respect, H.R. 1858 appears fully responsive to the concerns voiced by the Commission last year.

(c) Single-Source Databases and Anticompetitive Misuse of Database Protection. H.R. 1858 addresses the monopoly and misuse issues raised by the Commission last year in Section 106(b). Consistent with the general policy that factual databases should not be protected more than copyrighted and patented works, this provision looks to copyright and patent misuse precedent as a potential guide.37 It also specifically addresses issues of monopolistic pricing and output limitations on sole source databases,38 leveraging of monopoly power into new markets,39 and denial of essential facilities.40 In these respects, it appears highly responsive to the Commission's concerns. However, Section 106(b) also raises several novel issues of interpretation, discussed in the next Section, which may give rise to uncertainty and litigation.

33 For discussion of the essential facilities doctrine, see, e.g., MCI Communs. Corp. v. AT&T, 708 F.2d 1081, 1132 (7th Cir.), cert. denied, 464 U.S. 891 (1983). For extensive discussion of whether, when, and how to mandate access to competitively significant inputs, see Federal Trade Commission Staff, ANTICIPATING THE 21ST CENTURY: COMPETITION POLICY IN THE NEW HIGH-TECH, GLOBAL MARKETPLACE, vol. I, ch. 9 (May 1996).

34 H.R. 1858, § 101(2).

35 Id., § 101(1).

36 Id., § 101(5)(A).

37 Id., § 106(b)(6). 38 Id., § 106(b)(2). 39 Id., § 106(b)(3). 40 Id., § 106(b)(4).

IV. SUBSTANTIVE ISSUES ARISING UNDER H.R. 1858

In searching for an appropriate balance between protection and access to stimulate both first- and second-generation database production and use, the substantive provisions of the Bill (Sections 101 to 106) make several choices and employ several concepts that may warrant further study. The principal areas that appear likely to give rise to concerns or ambiguities are noted below:

(a) Term of Protection. H.R. 1858 contains no term limit to database protection. This absence eliminates the ambiguities noted by the Commission in the case of ongoing database maintenance, but heightens concerns regarding possible perpetual protection. If protection under the Bill were indeed perpetual, databases would in a sense be more protected than copyrighted or patented innovation, and the balance between protection and competition would be tilted against competition.

On the other hand, certain other terms, discussed further below, might operate to limit the term of protection as a practical matter. As the Commission noted in its 1998 letters, the common law of misappropriation has generally limited protection to relatively short terms despite the lack of a statutory term limit.42 The “in competition with" requirement of Section 101(5) of H.R. 1858 limits protection to that necessary to prevent a "significant[] threat [to] the opportunity to recover a return on the investment in the collecting or organizing of the duplicated database." Under this provision, it appears that once a database creator that has already recovered its "return on investment," it is no longer entitled to the protection afforded by H.R. 1858.43 Similarly, the misuse defense of Section 106(b), which, for sole source databases, may effectively condition protection on reasonable licensing or sale terms,44 might provide grounds for limiting protection of old databases. Nonetheless, as drafted, the Bill provides no clear term limitation to protection on which a potential defendant could readily rely.

The perpetual protection danger and the issue of whether some form of safe harbor can be constructed to protect those seeking to duplicate old databases may merit further study.

(b) Section 101(3): Exclusion of Collections of "Works of Authorship" from Protection. Section 101(3) defines "information" as excluding "works of authorship," and thereby excludes collections of works of authorship from the Bill's database protection regime. This provision appears ambiguous as to whether the phrase "works of authorship" is intended to incorporate by reference caselaw under the Copyright Act, 17 U.S.C. § 102. It would be useful to clarify this ambiguity, and also to clarify the purpose of this exclusion.45

(c) Section 101(5): The "In Competition With" Requirement. As noted above, the requirement in H.R. 1858 that a duplicate be “in competition with" the original database to give rise to potential liability appears responsive to the Commission's concerns about prior proposals that might have protected database owners with respect to markets that they have yet to enter. The requirement that "the opportunity to recover a return on the investment in the collection or organizing of the duplicated database" be "significantly threaten[ed]" 46 also appears consistent with the underlying policy goals: the purpose of protection is to provide an appropriate incentive for database creation, not opportunities for monopoly profits over and above those necessary to stimulate production.

The more difficult issue, which may merit further study, is what level of return should be protected. The insertion of the word "reasonable" before "return" may be appropriate as a start to encourage those administering the Bill to develop stand

41 A similar ambiguity may remain: Section 109, the effective date provision, provides that the Bill applies to the sale and distribution after its enactment of a database collected and organized thereafter. Whether databases initially created before the effective date but updated thereafter will be grandfathered is unclear.

42 See supra, note 28.

43 As noted below, determining what constitutes a "return on investment" within Section 101(5)(B) will require interpretation and judgment.

44 See H.R. 1858, § 106(b)(2).

45 Under existing copyright law, no such distinction is made between compilations of works of authorship and other compilations. For each, Feist denies protection based on the "sweat of the brow," but there may be protection if the work involved in compilation meets the statutory requirement of originality. See, e.g., Publications Int'l Ltd. v. Meredith Corp., 88 F.3d 473, 480 (7th Cir. 1996) ("The creative energies that an author may independently devote to the arrangement or compilation of facts may warrant copyright protection for that particular compilation. This also extends to the compilation of preexisting materials that is the work product of others. There is no dilution of the originality requirement, for a compilation's originality flows from the efforts of 'industrious collection' by its author.") (citations omitted). See also 17 U.S.C. § 101 ("The term 'compilation' includes collective works.").

46 H.R. 1858, § 101(5)(B).