Imagine your average filesharer, too timid to Fight the Man, who is wondering what to do in light of the RIAA's most recent round of litigation, especially given the RIAA's announcements that these lawsuits will now be rolling out weekly. Chances are, if your average filesharer is sued, he'd rather settle than risk the ridiculous $750 to $150,000 fine per song for copyright violation. But even settling is expensive, from $2,000 (if you're twelve years old) to $17,000 or more--far more than most people are capable of paying (or willing to pay) at just a moment's notice.
A couple of solutions to this problem have appeared, from personal pleas to a peer-to-peer donation system that connects people who are sued to people who wish to donate. But all of these solutions rely upon the altruism of people who are upset about the RIAA and who have some extra money to spare.
Why rely on altruism? You have a very large group of people, a very small number of whom will face fairly serious consequences. Nobody knows whether he'll be forced to face those consequences, but it is fairly certain that everybody finds some value to eliminating the impact in the event that such consequences attach to him. How much would you be willing to pay for a guarantee that, if you're sued, your settlement costs would be paid in full? If you're willing to pay a little bit, and enough people are willing to pay a little bit, then you have a market for private litigation insurance.
The Basic Idea
Right now filesharers are essentially required to self-insure for the possibility of a suit: that is, if they're afraid that they'll be hit by the RIAA, they'll have to start saving money now to pay off the settlement costs later. There are at least two problems with this. First, there is a natural trade-off to accumulating enough money fast and not having to save too much (i.e., forego spending). Let's say you want to build up a sufficiently large nest egg in one year: if you're insuring against a $2,000 settlement, that's $170 per month, which is no small change; if you're insuring against a $17,000 settlement, that's a whopping $1,400 per month. Over five years (a ludicrously long time-scale, but this is for educational purposes only), insuring for the $2,000 settlement falls to a much more reasonable $34 a month, but you'd be unprepared to pay settlement costs until five years after today. And preparing for the $17,000 settlement still requires saving almost $300 each month--not easy, unless you're rich enough to be buying overpriced CDs in the first place. Second, because of this trade-off between speed of accumulation and amount of savings, people are unlikely to self-insure: each person is likely to think, "It's not worth that much money every month to avoid the miniscule risk that I'll be sued." As a result, when the lawsuits hit a tiny fraction of filesharers, almost everybody breathes a sigh of relief--but that tiny fraction is completely out of luck, and funds.
The answer to this dilemma: litigation insurance. Litigation insurance isn't a novel concept: the analogous patent infringement liability insurance is "[a] form of professional liability insurance for manufacturers, users and sellers accused of infringing a patent holder's rights." The idea is that a potential defendant pays either a fixed sum or a smaller regular sum in exchange for the promise that, if they are hit with a suit, insurance will pay the cost of the settlement. Large-scale litigation insurance works when self-insurance (i.e., saving) doesn't because people who aren't willing to pay $50 per month to prepare for a relatively small settlement several years from now may be more than willing to pay $20 per month (or $200 right off the bat) to prepare for a very large settlement immediately. Now it's true that litigation insurance against the RIAA's suits would only reimburse a few "lucky" defendants--but even those who aren't sued buy peace of mind by paying the one-time or regular fee.
[Note: I'm assuming here, of course, that the only thing people care about is paying settlement costs.]
Pros/Cons
There are at least two nice things about RIAA litigation insurance. First, people will join it out of self interest, which is always more reliable than altruism: the price is worth the peace of mind. Second, such a scheme could actually be profitable if enough people join, meaning that there is also a incentive for somebody to set up such an insurance scheme.
But there are also some problems. First, a litigation insurance scheme requires a critical mass of participants before it breaks even. It's possible that, even with the RIAA's recent suits, people consider the risk of a lawsuit so small that they're unwilling to pay even a nominal fee to avoid that risk. This first problem can be solved by publicity and, paradoxically, by more regular lawsuits from the RIAA, which will raise people's perceptions of the risk of being sued.
The far more serious problem (suggested by James Grimmelmann) is that the RIAA could adjust its litigation strategy to account for the presence of insurance. For instance, it could only settle if people pay all of their insurance proceeds, in addition to some additional fine. It could be more subtle and simply refuse to settle until the defendant discloses the amount of his insurance. Or it could simply raise the settlement cost per case to such a degree that insurance would become unprofitable.
This second problem is somewhat more difficult to overcome. Whoever runs this private insurance could keep the list of beneficiaries secret: it's unclear to me what power the RIAA would have to force the insurance provider to divulge that list. I'm not entirely sure whether the RIAA can only agree to settle if some amount is paid in addition to insurance proceeds--after all, it'd be analogous to the RIAA only agreeing to settle if a defendant pays the settlement out of pocket, rather than from donations. While I wouldn't put such a move beyond the RIAA, hopefully by that point the publicity against it will be so bad that it will simply allow insurance to pay for the settlement costs.
This is only a tentative proposal, and perhaps a largely theoretical one. But it's one way to strike back at the RIAA's lawsuits, through perfectly legal means. Comments and suggestions are welcome.