A few weeks ago two U.S. congressional representatives — Rick Boucher and John Doolittle — proposed legislation to ostensibly protect the fair use rights of consumers in the wake of a sustained attack on these rights by various copyright lobbies. Much discussion ensued.

The Recording Industry Association of America (RIAA) predictably complained that the “FAIR USE Act” would effectively “legalize hacking.” In other quarters, critics are suggesting that the bill doesn’t go far enough.

Tim Lee notes, for example, that Boucher and Doolittle have launched more ambitious fair use bills in the past, only to have them quashed by Hollywood. This time, Boucher and Doolittle have proposed only modest fair use reforms — for example, allowing consumers to make a compilation of audiovisual works for classroom use, skip commercials and objectionable content, and transmit files over a home network. You see, in politics you often get just one shot at passing a significant reform. Should this bill pass, it would take the wind out of the sails of fair use movement, which has been asking for more sweeping changes. Fair use proponents are understandably disappointed.

Lee also points out, however, that the chief target of the bill is not really fair use; it’s the Grokster decision, which, as most intellectual property analysts agree, discourages high-tech innovation by making the inventors of groundbreaking products liable for the infringing activities of their customers. So, if a particular technology facilitates copyright violations, the content industry can now literally sue it out of existence — even if the technology has substantial non-infringing uses.

Gary Shapiro, CEO of the consumer electronics association (CEA), wrote a nice opinion piece for Business Week that lays out the problem from his industry’s perspective:

Calculating risk is a vital component of every new product launch, particularly in the consumer-electronics industry. . . So imagine a manufacturer that predicts high demand and profit potential for a legitimate new product, but could be sued under an obscure provision of federal law for literally billions of dollars for rolling a single prototype off the assembly line. No rational entrepreneur would launch that product.

If potential liability of billions of dollars for manufacturing a consumer-electronics device sounds crazy, meet the recording industry’s biggest hit since the Beatles: massive copyright lawsuits against legitimate innovators and technologies. These lawsuits are not against pirates, but against so-called “secondary infringers.”

This is legalese for suing a manufacturer for something a consumer does unlawfully (even without the manufacturer’s knowledge) using an otherwise lawful product. For example, when XM Satellite Radio (XMSR) made available to its subscribers an innovative satellite radio that allows listeners to time-shift their favorite music programs, the music industry sued. When Kaleidescape launched an innovative entertainment system that organizes and stores movies on a home server to be viewed in any room, the DVD industry sued.

Under a little-noticed change in law secured by record label lobbyists and the Recording Industry Association of America, the music industry trade association, such lawsuits can seek damages of $150,000 per copyrighted work infringed. Because a “work” can be defined as a single song, in the case of an audio device like an MP3 player that permits access to millions of songs, the potential risk is incalculable

His main point is that content industry’s tactics have created a climate of fear that discourages innovation. There are countless new devices for which consumer demand would be unquestionably high. But technology companies are deciding against bringing these devices to market because of the litigation risk. And, that is not how capitalism is supposed to work.

Shapiro goes back to Joseph Schumpeter, the great economic theorist, who maintained that businesses must either embrace new technologies by giving up old methods and products or cede the market share to those who will. Of course, Schumpeter’s theories of creative destruction assume free competition: that firms will bring new technologies and products to market in competitive environment and that customers, not government, will be the ultimate arbiters of who wins.

Recent history shows that Hollywood doesn’t like free competition. That’s why Hollywood’s business model for digital media is based on the premise that it can sue its opponents into oblivion. In other words, when all else fails, fight back with laws and regulations.

The good news is that regulatory measures typically amount to temporary stopgaps, not sources of enduring competitive advantage. Value always migrates to innovative players, the way that the telegraph business lost out to telephones, or the way that PCs displaced the mainframe.

The bottom line is that intellectual property laws were never intended to put the breaks on technological change — quite the opposite. In theory, intellectual property law exist to reward creativity and investment. But today, the content industry is using these laws perversely — not to promote innovation, but to quash anything that remotely threatens its existence.

This change in intellectual property law threatens the chain of creativity and innovation on which we (and future generations) depend. As Cory Doctorow put it, holding back technology to preserve broken business models is like allowing blacksmiths to veto the internal combustion engine in order to protect their horseshoes. That’s why I think the FAIR USE Act is a step in the right direction, even if it doesn’t accomplish all that we might like.