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Competition and the Legal Environment: Intellectual Property Rights in the Early American Film Industry

Introduction The story of the American film industry during its first decade is one that confirms the critical role property rights play in promoting economic progress. The absence of appropriate, well-defined, and enforced sets of intellectual property rights hampered the development of the young industry. Specifically, the process of obtaining and defending patent rights combined with the lack of copyright protection for films greatly encouraged unproductive forms of competition. Thomas Edison and other pioneers of motion picture technology used the Patent Office and the courts to their best advantage in securing broad interpretations of their patent claims. As a consequence, they initiated countless infringement suits, siphoning scarce resources away from productive and innovative activities. In the absence of copyright protection, there was rampant duplication of prints and the production of blatantly derivative remakes. The attending uncertainty poisoned the business climate to the degree that, by 1907, " two-thirds of the films shown in the United States were imported " (Robinson, 1996, 96). It took the formation of the patent pool, the Motion Picture Patent Company, and the evolution of copyright protection through the common law to bring the destructive behavior to an end. The poor performance of the early industry raises something of a paradox. How is it that both the existence of intellectual property rights for innovation and the complete absence of protection for films created incentives for negative-sum forms of rivalry? This paper attempts to answer this question by examining the dynamic relationship between the behavior of early film companies and the legal process. The first section focuses on how the patent process shaped the competitive efforts of film entrepreneurs. The second 2 section looks at the effects of copying and plagiarism and the subsequent development of copyright protection through the creation of precedent in the courts. The historical record very much supports the evolutionary perspective advocated by Robert Merges and Richard Nelson (1992; 1994). These authors have argued that the efficacy of an intellectual property right system greatly depends upon the attributes of the intellectual property in question. This paper argues that the highly interdependent and decentralized nature of technical advance that characterized film technology called for patent rights to be narrowly defined. Broad patent claims held by several patentees covering different components of film's technological system resulted in the proliferation of litigious actions. In addition to the prohibitive court expenses, the diminution of competition that comes …