On Rogue Websites Legislation: When You've Got Them by the Bucks, Their Hearts and Minds Will Follow

It's often been said of struggling political candidates that patriotism is the last refuge of scoundrels. Historically, it's been a sound strategy, often enabling the "scoundrel" to steal a comeback victory by standing up for flag and country. In the digital age, the patriotism ploy has been updated with the clever buzz phrase called "Internet freedom." The most recent to hoist that flag are venture capitalists, some of whom are employing it against legislation that aims to stop stealing online.

Here's the issue: what to do about a growing number of rogue websites, mostly based overseas, that exist almost exclusively to steal and sell counterfeit goods such as prescription drugs, auto parts, and digital content such as movies and music. Traffic in this protected, intellectual property, is depriving U.S. companies of billions of dollars every year -- theft that costs jobs and also deprives the U.S. Treasury of necessary tax revenue. Even critics of pending legislation to protect intellectual property concede online theft is a problem.

The legislation at issue (The PROTECT IP Act in the Senate and the Stop Online Privacy Act in the House) would enable the U.S. Attorney General to seek court permission to shut down a website that has no significant use other than illegal traffic in goods that are protected by U.S. intellectual property law. The legislation also provides for voluntary and private actions by those affected by rogue sites. Although no action happens without a court order, critics say the legislation would ask too much of Internet sites to expect their help in enforcing U.S. law.

But instead of reasoned debate or, better yet, a cooperative search for solutions, some members of America's venture capital community would rather set up straw men to be knocked over with arguments that are not supported by the facts and essentially vilify artists and other members of the creative community when they try to defend their rights. These members of the 1% increasingly present a false choice between Internet freedom and fighting theft. While protecting artists is important, copyright is a small part of what the rogue site legislation is about and tries to get readers to focus on "Hollywood" instead of health, all while shaking the talisman of "innovation" and chanting "fear, uncertainty, doubt."

The CEO of the Consumer Electronics Association, Gary Shapiro, posted recently on Huffington Post that the rogue sites bills "swing the balance irresponsibly in the copyright owners' favor at the expense of all Americans who use the Internet every day....[CEA] hosted [in Washington] more than a dozen venture capitalists who are urging Congress to oppose passage of the two bills, because of the danger they present to Internet start-ups and U.S. competitiveness."

Why are venture capitalists so publicly up in arms? VCs are a group of 1%-ers that usually like to fly below the radar (even when flying commercial) so what was the last straw about the rogue sites bills that is dragging them out in the open? Well, a little digging discovered a possible explanation: it's about the money.

Section 107 of the Stop Online Privacy Act ("Denying US Capital to Notorious Foreign Infringers") suggests that the U.S. government develop a list of foreign infringers to determine whether bad actors should "be prohibited from raising capital in the United States." In other words, the government could recommend that some VCs can't get richer by backing a foreign web site that profits from theft, and underwriters can't float that IPO, either.

And, that language opens the door to an even more frightening circumstance for the VCs: If notorious foreign infringers are prohibited from raising capital in the United States, then shouldn't notorious American infringers also be? This seems axiomatic in flyover states,

Of course, these days a One Percenter breathlessly waiving the talisman of innovation isn't the most sympathetic figure. When the Tea Party and Occupy Wall Street are equally stoking public anger about the rich getting richer, VCs crying poor ain't "winning". So, it appears that Mr. Shapiro's criticism is a red herring wrapped in a straw man inside a smoke screen about "innovation" and "Internet freedom." But to further paraphrase Churchill, perhaps there is a key -- that key is the VCs financial interest.

Yet neither bill interferes with legal web sites, political discourse, or any of the routine Internet activity that Americans engage in and will continue to engage in without a peep from their government or any industry. And, rather than discouraging innovation, protecting intellectual property is all about innovation -- by enabling creators of all types to earn a living as a result of their own ingenuity. Of course, one Percenters are not that interested in entrepreneurs who are "earning a living," they want the "three handle" on the first day of IPO trading. At least.

It's important to be clear that there are many, many venture capitalists who are very thoughtful and smart people who patiently put capital at risk every day in the finest traditions of the free market system -- and at the highest end of the risk curve. So it would be a mistake to paint that community with too broad a brush -- just as it is a mistake for Mr. Shapiro to do so. They don't all agree with him. The good guys know that there is a difference between innovation and theft -- but while this seems obvious, that distinction seems to be lost in a grandiose belief that the positive effects of crime are justified by "innovation" and "Internet freedom."

Is it so surprising that Mr. Shapiro tells us that "many of the VCs who came to Washington with CEA were among the 130 entrepreneurs, founders, CEOs and executives, who collectively have been involved in 283 technology start-ups, who wrote a letter to Congress in opposition of [the rogue sites bills]."

When you've got them by the bucks, their hearts and minds will follow.