Income-contingent IP enforcement: Paying for your right to party

We all know the issue with copyright and patent enforcement whereby some creative upstart uses some IP without permission only to be slapped down by the IP rights holder. And we all know that economics does not help us out much here to sort out what to do beyond: if you could just work out a deal before the fact some version of efficiency will arise. But the counter to that Coasian outcome is, of course, transaction costs in the sense of ‘who can be bothered’ to go to all that trouble when we don’t know if there is real money on the table. So the default is to hard-handed rules of thumb that stifle innovation and other opportunities and leave the world frustrated.

That was some preamble to a glimmer of light. Last year a toy start-up, GoldieBlox, was launched with an ad campaign. Here it is:

So far so good. Rube Goldberg machines are great although half built ones are just a mess.

This is actually a changed version. The first version had a song from the Beastie Boys. Not their original one but a more child friendly one.

Anyhow, the controversy was a bit over-played. The Beastie Boys apparently didn’t try and enforce copyright and it was GoldieBlox who sued (a good guess is for publicity although legally it is just preemption to sort out liability before more innovation occurs). In other words, it is the type of ‘before the fact’ settlement Coase would have encouraged. It turns out the Beastie Boys had a problem with their work being used in advertising.

Last week, the Beastie Boys and GoldieBlox settled the dispute:

The filing, spotted by Eriq Gardner, notes that the Beastie Boys granted GoldieBlox a retroactive license that requires the toy maker to pay 1 percent of its revenue to charity until the payout amounts reach $1 million.

The $1 million figure seems steep. Even though million viewed the GoldieBlox video, the company had to remove the video after 10 days and it remains unavailable on YouTube — meaning the license worked out to $100,000 a day. Meanwhile, GoldieBlox’s original fair use argument, based on parody, had at least a different chance of holding up in court. So is this a case of a rich music group brow-beating a little company into submission?

Not really. Recall that GoldieBlox appears to have acted cynically from the get-go, exploiting the controversy for maximum marketing effect. And while $1 million sounds like a lot for a small company, the fact that the payouts are tied to its revenue mean that GoldieBlox will only pay that amount if it sells $100 million worth of its toys in the coming — which may never happen at all.

Whatever else is going on here there is some great efficiency to this type of settlement. GoldieBlox were able to make use of the work for a time (obviously no longer) but the penalty has not sent them bankrupt right now as it possibly could have. Instead, the Beastie Boys have extended them a loan that is payable based on revenue generated. Thus, in ramping up, there is some extra costs of GoldieBlox but if they become really successful that goes away so there is no real reduction in their incentive to grow their business.

This case is unusual in lots of ways but the structure of the settlement is quite innovative and it would be nice to see income-contingent IP settlements become more commonplace.