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If you haven’t been following the ongoing developments emerging from the demise of Grooveshark, the story has only gotten more interesting. As the RIAA and major record labels have struggled to shut down infringing content on Grooveshark’s site (and now its copycats), groups like EFF would have us believe that the entire Internet was at stake — even in the face of a fairly marginal victory by the recording industry. In the most recent episode, the issuance of a TRO against CloudFlare — a CDN service provider for the copycat versions of Grooveshark — has sparked much controversy. Ironically for CloudFlare, however, its efforts to evade compliance with the TRO may well have opened it up to far more significant infringement liability.

In response to Grooveshark’s shutdown in April, copycat sites began springing up. Initially, the record labels played a game of whac-a-mole as the copycats hopped from server to server within the United States. Ultimately the copycats settled on grooveshark.li, using a host and registrar outside of the country, as well as anonymized services that made direct action against the actual parties next to impossible. Instead of continuing the futile chase, the plaintiffs decided to address the problem more strategically.

High volume web sites like Grooveshark frequently depend upon third party providers to optimize their media streaming and related needs. In this case, the copycats relied upon the services of CloudFlare to provide DNS hosting and a content delivery network (“CDN”). Failing to thwart Grooveshark through direct action alone, the plaintiffs sought and were granted a TRO against certain third-parties, eventually served on CloudFlare, hoping to staunch the flow of infringing content by temporarily enjoining the ancillary activities that enabled the pirates to continue operations.

CloudFlare refused to comply with the TRO, claiming the TRO didn’t apply to it (for reasons discussed below). The court disagreed, however, and found that CloudFlare was, in fact, bound by the TRO.

Unsurprisingly the copyright scolds came out strongly against the TRO and its application to CloudFlare, claiming that

Copyright holders should not be allowed to blanket infrastructure companies with blocking requests, co-opting them into becoming private trademark and copyright police.

Devlin Hartline wrote an excellent analysis of the court’s decision that the TRO was properly applied to CloudFlare, concluding that it was neither improper nor problematic. In sum, as Hartline discusses, the court found that CloudFlare was indeed engaged in “active concert and participation” and was, therefore, properly subject to a TRO under FRCP 65 that would prevent it from further enabling the copycats to run their service.

Hartline’s analysis is spot-on, but we think it important to clarify and amplify his analysis in a way that, we believe, actually provides insight into a much larger problem for CloudFlare.

As Hartline states,

This TRO wasn’t about the “world at large,” and it wasn’t about turning the companies that provide internet infrastructure into the “trademark and copyright police.” It was about CloudFlare knowingly helping the enjoined defendants to continue violating the plaintiffs’ intellectual property rights.

Importantly, the issuance of the TRO turned in part on whether the plaintiffs were likely to succeed on the merits — which is to say that the copycats could in fact be liable for copyright infringement. Further, the initial TRO became a preliminary injunction before the final TRO hearing because the copycats failed to show up to defend themselves. Thus, CloudFlare was potentially exposing itself to a claim of contributory infringement, possibly from the time it was notified of the infringing activity by the RIAA. This is so because a claim of contributory liability would require that CloudFlare “knowingly” contributed to the infringement. Here there was actual knowledge upon issuance of the TRO (if not before).

However, had CloudFlare gone along with the proceedings and complied with the court’s order in good faith, § 512 of the Digital Millennium Copyright Act (DMCA) would have provided a safe harbor. Nevertheless, following from CloudFlare’s actual behavior, the company does now have a lot more to fear than a mere TRO.

Although we don’t have the full technical details of how CloudFlare’s service operates, we can make some fair assumptions. Most importantly, in order to optimize the content it serves, a CDN would necessarily have to store that content at some point as part of an optimizing cache scheme. Under the terms of the DMCA, an online service provider (OSP) that engages in caching of online content will be immune from liability, subject to certain conditions. The most important condition relevant here is that, in order to qualify for the safe harbor, the OSP must “expeditiously [] remove, or disable access to, the material that is claimed to be infringing upon notification of claimed infringement[.]”

Here, not only had CloudFlare been informed by the plaintiffs that it was storing infringing content, but a district court had gone so far as to grant a TRO against CloudFlare’s serving of said content. It certainly seems plausible to view CloudFlare as acting outside the scope of the DMCA safe harbor once it refused to disable access to the infringing content after the plaintiffs contacted it, but certainly once the TRO was deemed to apply to it.

To underscore this point, CloudFlare’s arguments during the TRO proceedings essentially admitted to knowledge that infringing material was flowing through its CDN. CloudFlare focused its defense on the fact that it was not an active participant in the infringing activity, but was merely a passive network through which the copycats’ content was flowing. Moreover, CloudFlare argued that

Even if [it]—and every company in the world that provides similar services—took proactive steps to identify and block the Defendants, the website would remain up and running at its current domain name.

But while this argument may make some logical sense from the perspective of a party resisting an injunction, it amounts to a very big admission in terms of a possible infringement case — particularly given CloudFlare’s obstinance in refusing to help the plaintiffs shut down the infringing sites.

As noted above, CloudFlare had an affirmative duty to to at least suspend access to infringing material once it was aware of the infringement (and, of course, even more so once it received the TRO). Instead, CloudFlare relied upon its “impossibility” argument against complying with the TRO based on the claim that enjoining CloudFlare would be futile in thwarting the infringement of others. CloudFlare does appear to have since complied with the TRO (which is now a preliminary injunction), but the compliance does not change a very crucial fact: knowledge of the infringement on CloudFlare’s part existed before the preliminary injunction took effect, while CloudFlare resisted the initial TRO as well as RIAA’s efforts to secure compliance.

Phrased another way, CloudFlare became an infringer by virtue of having cached copyrighted content and been given notice of that content. However, in its view, merely removing CloudFlare’s storage of that copyrighted content would have done nothing to prevent other networks from also storing the copyrighted content, and therefore it should not be enjoined from its infringing behavior. This essentially amounts to an admission of knowledge of infringing content being stored in its network.

It would be hard to believe that CloudFlare’s counsel failed to advise it to consider the contributory infringement issues that could arise from its conduct prior to and during the TRO proceedings. Thus CloudFlare’s position is somewhat perplexing, particularly once the case became a TRO proceeding. CloudFlare could perhaps have made technical arguments against the TRO in an attempt to demonstrate to its customers that it didn’t automatically shut down services at the behest of the RIAA. It could have done this in good faith, and without the full-throated “impossibility” argument that could very plausibly draw them into infringement litigation. But whatever CloudFlare thought it was gaining in taking a “moral” stance on behalf of OSPs everywhere with its “impossibility” argument, it may well have ended up costing itself much more.

In my article published today in The Daily Signal, I delve into the difficulties of curbing Internet-related copyright infringement.  The key points are summarized below.

U.S. industries that rely on copyright protection (such as motion pictures, music, television, visual arts, and software) are threatened by the unauthorized Internet downloading of copyrighted writings, designs, artwork, music and films. U.S. policymakers must decide how best to protect the creators of copyrighted works without harming growth and innovation in Internet services or vital protections for free speech.

The Internet allows consumers to alter and immediately transmit perfect digital copies of copyrighted works around the world and has generated services designed to provide these tools. Those tools include, for example, peer-to-peer file-sharing services and mobile apps designed to foster infringement. Many websites that provide pirated content—including, for example, online video-streaming sites—are located outside the United States. Such piracy costs the U.S. economy billions of dollars in losses per year—including reduced income for creators and other participants in copyright-intensive industries.

Curtailing online infringement will require a combination of litigation, technology, enhanced private-sector initiatives, public education, and continuing development of readily accessible and legally available content offerings. As the Internet continues to develop, the best approach to protecting copyright in the online environment is to rely on existing legal tools, enhanced cooperation among Internet stakeholders and business innovations that lessen incentives to infringe.

Yesterday my essay on this topic was published as part of a Heritage Foundation Special Report on Saving Internet Freedom.  The essay reviews threats to copyrighted works posed by the Internet and describes public and private essays to deal with Internet-related copyright infringement.  The essay concludes as follows:

“A variety of approaches—many of which are private, voluntary initiatives requiring no new laws or regulations—have been deployed to combat online copyright infringement, and new ones are being developed. While these efforts have not eliminated infringement, which remains a substantial problem, they are having some success.

There is no “silver bullet.” Curtailing online infringement will require a combination of litigation tools, technology, enhanced private-sector initiatives, public education, and continuing development of readily accessible and legally available content offerings. As the Internet continues to develop, the best approach to protecting copyright in the online environment is to rely on existing legal tools, enhanced cooperation among Internet stakeholders, and business innovations that lessen incentives to infringe.”

Earlier this week Senators Orrin Hatch and Ron Wyden and Representative Paul Ryan introduced bipartisan, bicameral legislation, the Bipartisan Congressional Trade Priorities and Accountability Act of 2015 (otherwise known as Trade Promotion Authority or “fast track” negotiating authority). The bill would enable the Administration to negotiate free trade agreements subject to appropriate Congressional review.

Nothing bridges partisan divides like free trade.

Top presidential economic advisors from both parties support TPA. And the legislation was greeted with enthusiastic support from the business community. Indeed, a letter supporting the bill was signed by 269 of the country’s largest and most significant companies, including Apple, General Electric, Intel, and Microsoft.

Among other things, the legislation includes language calling on trading partners to respect and protect intellectual property. That language in particular was (not surprisingly) widely cheered in a letter to Congress signed by a coalition of sixteen technology, content, manufacturing and pharmaceutical trade associations, representing industries accounting for (according to the letter) “approximately 35 percent of U.S. GDP, more than one quarter of U.S. jobs, and 60 percent of U.S. exports.”

Strong IP protections also enjoy bipartisan support in much of the broader policy community. Indeed, ICLE recently joined sixty-seven think tanks, scholars, advocacy groups and stakeholders on a letter to Congress expressing support for strong IP protections, including in free trade agreements.

Despite this overwhelming support for the bill, the Internet Association (a trade association representing 34 Internet companies including giants like Google and Amazon, but mostly smaller companies like coinbase and okcupid) expressed concern with the intellectual property language in TPA legislation, asserting that “[i]t fails to adopt a balanced approach, including the recognition that limitations and exceptions in copyright law are necessary to promote the success of Internet platforms both at home and abroad.”

But the proposed TPA bill does recognize “limitations and exceptions in copyright law,” as the Internet Association is presumably well aware. Among other things, the bill supports “ensuring accelerated and full implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights,” which specifically mentions exceptions and limitations on copyright, and it advocates “ensuring that the provisions of any trade agreement governing intellectual property rights that is entered into by the United States reflect a standard of protection similar to that found in United States law,” which also recognizes copyright exceptions and limitations.

What the bill doesn’t do — and wisely so — is advocate for the inclusion of mandatory fair use language in U.S. free trade agreements.

Fair use is an exception under U.S. copyright law to the normal rule that one must obtain permission from the copyright owner before exercising any of the exclusive rights in Section 106 of the Copyright Act.

Including such language in TPA would require U.S. negotiators to demand that trading partners enact U.S.-style fair use language. But as ICLE discussed in a recent White Paper, if broad, U.S.-style fair use exceptions are infused into trade agreements they could actually increase piracy and discourage artistic creation and innovation — particularly in nations without a strong legal tradition implementing such provisions.

All trade agreements entered into by the U.S. since 1994 include a mechanism for trading partners to enact copyright exceptions and limitations, including fair use, should they so choose. These copyright exceptions and limitations must conform to a global standard — the so-called “three-step test,” — established under the auspices of the 1994 Trade-Related Aspects of Intellectual Property Rights (TRIPS) Agreement, and with roots going back to the 1967 amendments to the 1886 Berne Convention.

According to that standard,

Members shall confine limitations or exceptions to exclusive rights to

  1. certain special cases, which
  2. do not conflict with a normal exploitation of the work and
  3. do not unreasonably prejudice the legitimate interests of the right holder.

This three-step test provides a workable standard for balancing copyright protections with other public interests. Most important, it sets flexible (but by no means unlimited) boundaries, so, rather than squeezing every jurisdiction into the same box, it accommodates a wide range of exceptions and limitations to copyright protection, ranging from the U.S.’ fair use approach to the fair dealing exception in other common law countries to the various statutory exceptions adopted in civil law jurisdictions.

Fair use is an inherently common law concept, developed by case-by-case analysis and a system of binding precedent. In the U.S. it has been codified by statute, but only after two centuries of common law development. Even as codified, fair use takes the form of guidance to judicial decision-makers assessing whether any particular use of a copyrighted work merits the exception; it is not a prescriptive statement, and judicial interpretation continues to define and evolve the doctrine.

Most countries in the world, on the other hand, have civil law systems that spell out specific exceptions to copyright protection, that don’t rely on judicial precedent, and that are thus incompatible with the common law, fair use approach. The importance of this legal flexibility can’t be understated: Only four countries out of the 166 signatories to the Berne Convention have adopted fair use since 1967.

Additionally, from an economic perspective the rationale for fair use would seem to be receding, not expanding, further eroding the justification for its mandatory adoption via free trade agreements.

As digital distribution, the Internet and a host of other technological advances have reduced transaction costs, it’s easier and cheaper for users to license copyrighted content. As a result, the need to rely on fair use to facilitate some socially valuable uses of content that otherwise wouldn’t occur because of prohibitive costs of contracting is diminished. Indeed, it’s even possible that the existence of fair use exceptions may inhibit the development of these sorts of mechanisms for simple, low-cost agreements between owners and users of content – with consequences beyond the material that is subject to the exceptions. While, indeed, some socially valuable uses, like parody, may merit exceptions because of rights holders’ unwillingness, rather than inability, to license, U.S.-style fair use is in no way necessary to facilitate such exceptions. In short, the boundaries of copyright exceptions should be contracting, not expanding.

It’s also worth noting that simple marketplace observations seem to undermine assertions by Internet companies that they can’t thrive without fair use. Google Search, for example, has grown big enough to attract the (misguided) attention of EU antitrust regulators, despite no European country having enacted a U.S-style fair use law. Indeed, European regulators claim that the company has a 90% share of the market — without fair use.

Meanwhile, companies like Netflix contend that their ability to cache temporary copies of video content in order to improve streaming quality would be imperiled without fair use. But it’s impossible to see how Netflix is able to negotiate extensive, complex contracts with copyright holders to actually show their content, but yet is somehow unable to negotiate an additional clause or two in those contracts to ensure the quality of those performances without fair use.

Properly bounded exceptions and limitations are an important aspect of any copyright regime. But given the mix of legal regimes among current prospective trading partners, as well as other countries with whom the U.S. might at some stage develop new FTAs, it’s highly likely that the introduction of U.S.-style fair use rules would be misinterpreted and misapplied in certain jurisdictions and could result in excessively lax copyright protection, undermining incentives to create and innovate. Of course for the self-described consumer advocates pushing for fair use, this is surely the goal. Further, mandating the inclusion of fair use in trade agreements through TPA legislation would, in essence, force the U.S. to ignore the legal regimes of its trading partners and weaken the protection of copyright in trade agreements, again undermining the incentive to create and innovate.

There is no principled reason, in short, for TPA to mandate adoption of U.S-style fair use in free trade agreements. Congress should pass TPA legislation as introduced, and resist any rent-seeking attempts to include fair use language.

Today, the International Center for Law & Economics released a white paper, co-authored by Executive Director Geoffrey Manne and Senior Fellow Julian Morris, entitled Dangerous Exception: The detrimental effects of including “fair use” copyright exceptions in free trade agreements.

Dangerous Exception explores the relationship between copyright, creativity and economic development in a networked global marketplace. In particular, it examines the evidence for and against mandating a U.S.-style fair use exception to copyright via free trade agreements like the Trans-Pacific Partnership (TPP), and through “fast-track” trade promotion authority (TPA).

In the context of these ongoing trade negotiations, some organizations have been advocating for the inclusion of dramatically expanded copyright exceptions in place of more limited language requiring that such exceptions conform to the “three-step test” implemented by the 1994 TRIPs Agreement.

The paper argues that if broad fair use exceptions are infused into trade agreements they could increase piracy and discourage artistic creation and innovation — especially in nations without a strong legal tradition implementing such provisions.

The expansion of digital networks across borders, combined with historically weak copyright enforcement in many nations, poses a major challenge to a broadened fair use exception. The modern digital economy calls for appropriate, but limited, copyright exceptions — not their expansion.

The white paper is available here. For some of our previous work on related issues, see:

The free market position on telecom reform has become rather confused of late. Erstwhile conservative Senator Thune is now cosponsoring a version of Senator Rockefeller’s previously proposed video reform bill, bundled into satellite legislation (the Satellite Television Access and Viewer Rights Act or “STAVRA”) that would also include a provision dubbed “Local Choice.” Some free marketeers have defended the bill as a step in the right direction.

Although it looks as if the proposal may be losing steam this Congress, the legislation has been described as a “big and bold idea,” and it’s by no means off the menu. But it should be.

It has been said that politics makes for strange bedfellows. Indeed, people who disagree on just about everything can sometimes unite around a common perceived enemy. Take carriage disputes, for instance. Perhaps because, for some people, a day without The Bachelor is simply a day lost, an unlikely alliance of pro-regulation activists like Public Knowledge and industry stalwarts like Dish has emerged to oppose the ability of copyright holders to withhold content as part of carriage negotiations.

Senator Rockefeller’s Online Video Bill was the catalyst for the Local Choice amendments to STAVRA. Rockefeller’s bill did, well, a lot of terrible things, from imposing certain net neutrality requirements, to overturning the Supreme Court’s Aereo decision, to adding even more complications to the already Byzantine morass of video programming regulations.

But putting Senator Thune’s lipstick on Rockefeller’s pig can’t save the bill, and some of the worst problems from Senator Rockefeller’s original proposal remain.

Among other things, the new bill is designed to weaken the ability of copyright owners to negotiate with distributors, most notably by taking away their ability to withhold content during carriage disputes and by forcing TV stations to sell content on an a la carte basis.

Video distribution issues are complicated — at least under current law. But at root these are just commercial contracts and, like any contracts, they rely on a couple of fundamental principles.

First is the basic property right. The Supreme Court (at least somewhat) settled this for now (in Aereo), by protecting the right of copyright holders to be compensated for carriage of their content. With this baseline, distributors must engage in negotiations to obtain content, rather than employing technological workarounds and exploiting legal loopholes.

Second is the related ability of contracts to govern the terms of trade. A property right isn’t worth much if its owner can’t control how it is used, governed or exchanged.

Finally, and derived from these, is the issue of bargaining power. Good-faith negotiations require both sides not to act strategically by intentionally causing negotiations to break down. But if negotiations do break down, parties need to be able to protect their rights. When content owners are not able to withhold content in carriage disputes, they are put in an untenable bargaining position. This invites bad faith negotiations by distributors.

The STAVRA/Local Choice proposal would undermine the property rights and freedom of contract that bring The Bachelor to your TV, and the proposed bill does real damage by curtailing the scope of the property right in TV programming and restricting the range of contracts available for networks to license their content.

The bill would require that essentially all broadcast stations that elect retrans make their content available a la carte — thus unbundling some of the proverbial sticks that make up the traditional property right. It would also establish MVPD pass-through of each local affiliate. Subscribers would pay a fee determined by the affiliate, and the station must be offered on an unbundled basis, without any minimum tier required – meaning an MVPD has to offer local stations to its customers with no markup, on an a la carte basis, if the station doesn’t elect must-carry. It would also direct the FCC to open a rulemaking to determine whether broadcasters should be prohibited from withholding their content online during a dispute with an MPVD.

“Free market” supporters of the bill assert something like “if we don’t do this to stop blackouts, we won’t be able to stem the tide of regulation of broadcasters.” Presumably this would end blackouts of broadcast programming: If you’re an MVPD subscriber, and you pay the $1.40 (or whatever) for CBS, you get it, period. The broadcaster sets an annual per-subscriber rate; MVPDs pass it on and retransmit only to subscribers who opt in.

But none of this is good for consumers.

When transaction costs are positive, negotiations sometimes break down. If the original right is placed in the wrong hands, then contracting may not assure the most efficient outcome. I think it was Coase who said that.

But taking away the ability of content owners to restrict access to their content during a bargaining dispute effectively places the right to content in the hands of distributors. Obviously, this change in bargaining position will depress the value of content. Placing the rights in the hands of distributors reduces the incentive to create content in the first place; this is why the law protects copyright to begin with. But it also reduces the ability of content owners and distributors to reach innovative agreements and contractual arrangements (like certain promotional deals) that benefit consumers, distributors and content owners alike.

The mandating of a la carte licensing doesn’t benefit consumers, either. Bundling is generally pro-competitive and actually gives consumers more content than they would otherwise have. The bill’s proposal to force programmers to sell content to consumers a la carte may actually lead to higher overall prices for less content. Not much of a bargain.

There are plenty of other ways this is bad for consumers, even if it narrowly “protects” them from blackouts. For example, the bill would prohibit a network from making a deal with an MVPD that provides a discount on a bundle including carriage of both its owned broadcast stations as well as the network’s affiliated cable programming. This is not a worthwhile — or free market — trade-off; it is an ill-advised and economically indefensible attack on vertical distribution arrangements — exactly the same thing that animates many net neutrality defenders.

Just as net neutrality’s meddling in commercial arrangements between ISPs and edge providers will ensure a host of unintended consequences, so will the Rockefeller/Thune bill foreclose a host of welfare-increasing deals. In the end, in exchange for never having to go three days without CBS content, the bill will make that content more expensive, limit the range of programming offered, and lock video distribution into a prescribed business model.

Former FCC Commissioner Rob McDowell sees the same hypocritical connection between net neutrality and broadcast regulation like the Local Choice bill:

According to comments filed with the FCC by Time Warner Cable and the National Cable and Telecommunications Association, broadcasters should not be allowed to take down or withhold the content they produce and own from online distribution even if subscribers have not paid for it—as a matter of federal law. In other words, edge providers should be forced to stream their online content no matter what. Such an overreach, of course, would lay waste to the economics of the Internet. It would also violate the First Amendment’s prohibition against state-mandated, or forced, speech—the flip side of censorship.

It is possible that the cable companies figure that subjecting powerful broadcasters to anti-free speech rules will shift the political momentum in the FCC and among the public away from net neutrality. But cable’s anti-free speech arguments play right into the hands of the net-neutrality crowd. They want to place the entire Internet ecosystem, physical networks, content and apps, in the hands of federal bureaucrats.

While cable providers have generally opposed net neutrality regulation, there is, apparently, some support among them for regulations that would apply to the edge. The Rockefeller/Thune proposal is just a replay of this constraint — this time by forcing programmers to allow retransmission of broadcast content under terms set by Congress. While “what’s good for the goose is good for the gander” sounds appealing in theory, here it is simply doubling down on a terrible idea.

What it reveals most of all is that true neutrality advocates don’t want government control to be limited to ISPs — rather, progressives like Rockefeller (and apparently some conservatives, like Thune) want to subject the whole apparatus — distribution and content alike — to intrusive government oversight in order to “protect” consumers (a point Fred Campbell deftly expands upon here and here).

You can be sure that, if the GOP supports broadcast a la carte, it will pave the way for Democrats (and moderates like McCain who back a la carte) to expand anti-consumer unbundling requirements to cable next. Nearly every economic analysis has concluded that mandated a la carte pricing of cable programming would be harmful to consumers. There is no reason to think that applying it to broadcast channels would be any different.

What’s more, the logical extension of the bill is to apply unbundling to all MVPD channels and to saddle them with contract restraints, as well — and while we’re at it, why not unbundle House of Cards from Orange is the New Black? The Rockefeller bill may have started in part as an effort to “protect” OVDs, but there’ll be no limiting this camel once its nose is under the tent. Like it or not, channel unbundling is arbitrary — why not unbundle by program, episode, studio, production company, etc.?

There is simply no principled basis for the restraints in this bill, and thus there will be no limit to its reach. Indeed, “free market” defenders of the Rockefeller/Thune approach may well be supporting a bill that ultimately leads to something like compulsory, a la carte licensing of all video programming. As I noted in my testimony last year before the House Commerce Committee on the satellite video bill:

Unless we are prepared to bear the consumer harm from reduced variety, weakened competition and possibly even higher prices (and absolutely higher prices for some content), there is no economic justification for interfering in these business decisions.

So much for property rights — and so much for vibrant video programming.

That there is something wrong with the current system is evident to anyone who looks at it. As Gus Hurwitz noted in recent testimony on Rockefeller’s original bill,

The problems with the existing regulatory regime cannot be understated. It involves multiple statutes implemented by multiple agencies to govern technologies developed in the 60s, 70s, and 80s, according to policy goals from the 50s, 60s, and 70s. We are no longer living in a world where the Rube Goldberg of compulsory licenses, must carry and retransmission consent, financial interest and syndication exclusivity rules, and the panoply of Federal, state, and local regulations makes sense – yet these are the rules that govern the video industry.

While video regulation is in need of reform, this bill is not an improvement. In the short run it may ameliorate some carriage disputes, but it will do so at the expense of continued programming vibrancy and distribution innovations. The better way to effect change would be to abolish the Byzantine regulations that simultaneously attempt to place thumbs of both sides of the scale, and to rely on free market negotiations with a copyright baseline and antitrust review for actual abuses.

But STAVRA/Local Choice is about as far from that as you can get.

[Cross posted at the CPIP Blog.]

By Mark Schultz & Adam Mossoff

A handful of increasingly noisy critics of intellectual property (IP) have emerged within free market organizations. Both the emergence and vehemence of this group has surprised most observers, since free market advocates generally support property rights. It’s true that there has long been a strain of IP skepticism among some libertarian intellectuals. However, the surprised observer would be correct to think that the latest critique is something new. In our experience, most free market advocates see the benefit and importance of protecting the property rights of all who perform productive labor – whether the results are tangible or intangible.

How do the claims of this emerging critique stand up? We have had occasion to examine the arguments of free market IP skeptics before. (For example, see here, here, here.) So far, we have largely found their claims wanting.

We have yet another occasion to examine their arguments, and once again we are underwhelmed and disappointed. We recently posted an essay at AEI’s Tech Policy Daily prompted by an odd report recently released by the Mercatus Center, a free-market think tank. The Mercatus report attacks recent research that supposedly asserts, in the words of the authors of the Mercatus report, that “the existence of intellectual property in an industry creates the jobs in that industry.” They contend that this research “provide[s] no theoretical or empirical evidence to support” its claims of the importance of intellectual property to the U.S. economy.

Our AEI essay responds to these claims by explaining how these IP skeptics both mischaracterize the studies that they are attacking and fail to acknowledge the actual historical and economic evidence on the connections between IP, innovation, and economic prosperity. We recommend that anyone who may be confused by the assertions of any IP skeptics waving the banner of property rights and the free market read our essay at AEI, as well as our previous essays in which we have called out similarly odd statements from Mercatus about IP rights.

The Mercatus report, though, exemplifies many of the concerns we raise about these IP skeptics, and so it deserves to be considered at greater length.

For instance, something we touched on briefly in our AEI essay is the fact that the authors of this Mercatus report offer no empirical evidence of their own within their lengthy critique of several empirical studies, and at best they invoke thin theoretical support for their contentions.

This is odd if only because they are critiquing several empirical studies that develop careful, balanced and rigorous models for testing one of the biggest economic questions in innovation policy: What is the relationship between intellectual property and jobs and economic growth?

Apparently, the authors of the Mercatus report presume that the burden of proof is entirely on the proponents of IP, and that a bit of hand waving using abstract economic concepts and generalized theory is enough to defeat arguments supported by empirical data and plausible methodology.

This move raises a foundational question that frames all debates about IP rights today: On whom should the burden rest? On those who claim that IP has beneficial economic effects? Or on those who claim otherwise, such as the authors of the Mercatus report?

The burden of proof here is an important issue. Too often, recent debates about IP rights have started from an assumption that the entire burden of proof rests on those investigating or defending IP rights. Quite often, IP skeptics appear to believe that their criticism of IP rights needs little empirical or theoretical validation, beyond talismanic invocations of “monopoly” and anachronistic assertions that the Framers of the US Constitution were utilitarians.

As we detail in our AEI essay, though, the problem with arguments like those made in the Mercatus report is that they contradict history and empirics. For the evidence that supports this claim, including citations to the many studies that are ignored by the IP skeptics at Mercatus and elsewhere, check out the essay.

Despite these historical and economic facts, one may still believe that the US would enjoy even greater prosperity without IP. But IP skeptics who believe in this counterfactual world face a challenge. As a preliminary matter, they ought to acknowledge that they are the ones swimming against the tide of history and prevailing belief. More important, the burden of proof is on them – the IP skeptics – to explain why the U.S. has long prospered under an IP system they find so odious and destructive of property rights and economic progress, while countries that largely eschew IP have languished. This obligation is especially heavy for one who seeks to undermine empirical work such as the USPTO Report and other studies.

In sum, you can’t beat something with nothing. For IP skeptics to contest this evidence, they should offer more than polemical and theoretical broadsides. They ought to stop making faux originalist arguments that misstate basic legal facts about property and IP, and instead offer their own empirical evidence. The Mercatus report, however, is content to confine its empirics to critiques of others’ methodology – including claims their targets did not make.

For example, in addition to the several strawman attacks identified in our AEI essay, the Mercatus report constructs another strawman in its discussion of studies of copyright piracy done by Stephen Siwek for the Institute for Policy Innovation (IPI). Mercatus inaccurately and unfairly implies that Siwek’s studies on the impact of piracy in film and music assumed that every copy pirated was a sale lost – this is known as “the substitution rate problem.” In fact, Siwek’s methodology tackled that exact problem.

IPI and Siwek never seem to get credit for this, but Siwek was careful to avoid the one-to-one substitution rate estimate that Mercatus and others foist on him and then critique as empirically unsound. If one actually reads his report, it is clear that Siwek assumes that bootleg physical copies resulted in a 65.7% substitution rate, while illegal downloads resulted in a 20% substitution rate. Siwek’s methodology anticipates and renders moot the critique that Mercatus makes anyway.

After mischaracterizing these studies and their claims, the Mercatus report goes further in attacking them as supporting advocacy on behalf of IP rights. Yes, the empirical results have been used by think tanks, trade associations and others to support advocacy on behalf of IP rights. But does that advocacy make the questions asked and resulting research invalid? IP skeptics would have trumpeted results showing that IP-intensive industries had a minimal economic impact, just as Mercatus policy analysts have done with alleged empirical claims about IP in other contexts. In fact, IP skeptics at free-market institutions repeatedly invoke studies in policy advocacy that allegedly show harm from patent litigation, despite these studies suffering from far worse problems than anything alleged in their critiques of the USPTO and other studies.

Finally, we noted in our AEI essay how it was odd to hear a well-known libertarian think tank like Mercatus advocate for more government-funded programs, such as direct grants or prizes, as viable alternatives to individual property rights secured to inventors and creators. There is even more economic work being done beyond the empirical studies we cited in our AEI essay on the critical role that property rights in innovation serve in a flourishing free market, as well as work on the economic benefits of IP rights over other governmental programs like prizes.

Today, we are in the midst of a full-blown moral panic about the alleged evils of IP. It’s alarming that libertarians – the very people who should be defending all property rights – have jumped on this populist bandwagon. Imagine if free market advocates at the turn of the Twentieth Century had asserted that there was no evidence that property rights had contributed to the Industrial Revolution. Imagine them joining in common cause with the populist Progressives to suppress the enforcement of private rights and the enjoyment of economic liberty. It’s a bizarre image, but we are seeing its modern-day equivalent, as these libertarians join the chorus of voices arguing against property and private ordering in markets for innovation and creativity.

It’s also disconcerting that Mercatus appears to abandon its exceptionally high standards for scholarly work-product when it comes to IP rights. Its economic analyses and policy briefs on such subjects as telecommunications regulation, financial and healthcare markets, and the regulatory state have rightly made Mercatus a respected free-market institution. It’s unfortunate that it has lent this justly earned prestige and legitimacy to stale and derivative arguments against property and private ordering in the innovation and creative industries. It’s time to embrace the sound evidence and back off the rhetoric.

UPDATE: I’ve been reliably informed that Vint Cerf coined the term “permissionless innovation,” and, thus, that he did so with the sorts of private impediments discussed below in mind rather than government regulation. So consider the title of this post changed to “Permissionless innovation SHOULD not mean ‘no contracts required,'” and I’ll happily accept that my version is the “bastardized” version of the term. Which just means that the original conception was wrong and thank god for disruptive innovation in policy memes!

Can we dispense with the bastardization of the “permissionless innovation” concept (best developed by Adam Thierer) to mean “no contracts required”? I’ve been seeing this more and more, but it’s been around for a while. Some examples from among the innumerable ones out there:

Vint Cerf on net neutrality in 2009:

We believe that the vast numbers of innovative Internet applications over the last decade are a direct consequence of an open and freely accessible Internet. Many now-successful companies have deployed their services on the Internet without the need to negotiate special arrangements with Internet Service Providers, and it’s crucial that future innovators have the same opportunity. We are advocates for “permissionless innovation” that does not impede entrepreneurial enterprise.

Net neutrality is replete with this sort of idea — that any impediment to edge providers (not networks, of course) doing whatever they want to do at a zero price is a threat to innovation.

Chet Kanojia (Aereo CEO) following the Aereo decision:

It is troubling that the Court states in its decision that, ‘to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.’ (Majority, page 17)That begs the question: Are we moving towards a permission-based system for technology innovation?

At least he puts it in the context of the Court’s suggestion that Congress pass a law, but what he really wants is to not have to ask “permission” of content providers to use their content.

Mike Masnick on copyright in 2010:

But, of course, the problem with all of this is that it goes back to creating permission culture, rather than a culture where people freely create. You won’t be able to use these popular or useful tools to build on the works of others — which, contrary to the claims of today’s copyright defenders, is a key component in almost all creativity you see out there — without first getting permission.

Fair use is, by definition, supposed to be “permissionless.” But the concept is hardly limited to fair use, is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright (see, e.g., Mike Masnick again), which otherwise requires those pernicious licenses (i.e., permission) from others.

The point is, when we talk about permissionless innovation for Tesla, Uber, Airbnb, commercial drones, online data and the like, we’re talking (or should be) about ex ante government restrictions on these things — the “permission” at issue is permission from the government, it’s the “permission” required to get around regulatory roadblocks imposed via rent-seeking and baseless paternalism. As Gordon Crovitz writes, quoting Thierer:

“The central fault line in technology policy debates today can be thought of as ‘the permission question,'” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”

But it isn’t (or shouldn’t be) about private contracts.

Just about all human (commercial) activity requires interaction with others, and that means contracts and licenses. You don’t see anyone complaining about the “permission” required to rent space from a landlord. But that some form of “permission” may be required to use someone else’s creative works or other property (including broadband networks) is no different. And, in fact, it is these sorts of contracts (and, yes, the revenue that may come with them) that facilitates people engaging with other commercial actors to produce things of value in the first place. The same can’t be said of government permission.

Don’t get me wrong – there may be some net welfare-enhancing regulatory limits that might require forms of government permission. But the real concern is the pervasive abuse of these limits, imposed without anything approaching a rigorous welfare determination. There might even be instances where private permission, imposed, say, by a true monopolist, might be problematic.

But this idea that any contractual obligation amounts to a problematic impediment to innovation is absurd, and, in fact, precisely backward. Which is why net neutrality is so misguided. Instead of identifying actual, problematic impediments to innovation, it simply assumes that networks threaten edge innovation, without any corresponding benefit and with such certainty (although no actual evidence) that ex ante common carrier regulations are required.

“Permissionless innovation” is a great phrase and, well developed (as Adam Thierer has done), a useful concept. But its bastardization to justify interference with private contracts is unsupported and pernicious.

In our blog post this morning on ABC v. Aereo, we explain why, regardless of which test applies (the majority’s “looks-like-cable-TV” test or the dissent’s volitional conduct test), Aereo infringes on television program owners’ exclusive right under the Copyright Act to publicly perform their works. We also explain why the majority’s test is far less ambiguous than its critics assert, and why it does not endanger cloud computing services like so many contend.

Because that post was so long, and because the cloud computing issue is key to understanding the implications of this case, this post pulls out the cloud computing argument from that post and presents it separately.

In our April essay on these pages, we identified several reasons why the Court could and should rule against Aereo without exposing innovative cloud computing firms to copyright liability:

  1. Both fair use and the DMCA’s safe harbor likely protect cloud hosting services such as Dropbox so long as they respond to takedown notices and are not otherwise aware of the nature of the content uploaded by their users;
  2. Cloud computing services typically lack the volitional conduct necessary to be considered direct infringers; and
  3. If consumers acquire licensed content from cloud services such as Amazon or Google, and stream themselves that content from the cloud, the services’ privity with rights holders should render them safe from copyright infringement liability.

The Court explicitly endorsed our privity argument and implicitly acknowledged our point about DMCA and fair use. As the Court wrote:

[A]n entity that transmits a performance to individuals in their capacities as owners or possessors does not perform to ‘the public,’ whereas an entity like Aereo that transmits to large numbers of paying subscribers who lack any prior relationship to the works does so perform.

The majority’s “looks-like-cable-TV” test (the dissent’s name for it, not ours) actually offers a clearer basis for distinguishing cloud services than the dissent’s (and our earlier blog post’s) volitional conduct test.

Many commenters lament that the Court’s decision leaves cloud computing in peril, offering no real limiting principle (as, they claim, applying the volitional conduct test would have). Vox’s Timothy B. Lee, for example, opines that:

The problem is that the court never provides clear criteria for this “looks-like-cable-TV” rule…. The Supreme Court says its ruling shouldn’t dramatically change the legal status of other technologies…. But it’s going to take years of litigation — and millions of dollars in legal fees — to figure out exactly how the decision will affect cloud storage services.

But the Court did articulate several important limits, in fact. Most significantly, the opinion plainly excepts transmission of underlying works “own[ed] or possess[ed]” by subscribers from its definition of public performance. It also circumscribes what constitutes a public performance to transmissions from a person to large groups of people “outside of [her] family and [her] social circle,” and reinforces that fair use limitations continue to protect those who perform copyrighted works.

At the same time, the Court characterizes Aereo—and the aspect of the service that give rise to its liability—as “not simply an equipment provider…. Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast.”

Crucially, Aereo makes available to each of its subscribers copyrighted content that he or she does not necessarily otherwise own or possess—even if the company also offers its viewers “enhancements” much like a modern cable system. As we noted in our previous post, this distinguishes Aereo from the cloud computing services to which it is compared:

Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content.

Even if the Court’s holding were applied in contexts beyond traditional television programming, how many cloud services actually deliver content—rather than just enhancing it, as a DVR does—that its users do not otherwise own or possess? Vanishingly few, if any. Most obviously, talk of the risks Aereo poses to cloud storage and digital lockers—services that, by definition, apply only to content provided by the user and thus previously “owned or possessed” by the user—is simply misplaced.

Insofar as the transmission of third-party content is the defining characteristic of a “looks-like-cable-TV” system, the Court’s test actually offers a fairly clear delineation, and one that offers no risk to the vast majority of cloud services. This may remind many of Justice Potter Stewart’s infamous “I know it when I see it” test for adjudging obscenity, but it firmly removes a large swath of cloud computing services from the risk of direct copyright liability under Aereo.

And to the extent that some cloud services might seem to fail this test—YouTube, for example—those services (like YouTube and unlike Aereo) routinely obtain performance licenses for the content they provide. Although some of YouTube’s content may not be legally provided to the service, that doesn’t affect its direct copyright infringement liability. Instead, it merely affects the indirect liability YouTube faced before Aereo and continues to face after Aereo. And any such providers that do not currently obtain public performance licenses can and will simply do so with small textual amendments to their existing content licenses.

In other words, the Court’s ruling boils down to this: Either get a license to provide content not already owned by your subscribers, or provide only that content which your subscribers already own. The crux of the Aereo ruling is remarkably clear.

Meanwhile, the volitional conduct test, like most legal tests, doesn’t offer a bright line, despite some commenters’ assertions that it would have been a better grounds for deciding the case. While the volitional conduct test is an imprecise, sliding scale—regardless of the type of service or the underlying relationship between end-users and content providers—the Court’s Aereo test offers relatively clear rules, imposing direct liability only on services that transmit without a public performance license content that its users do not already own or possess.

For the many cloud services we know and love—and for the cloud computing startups yet to exist—the Court’s decision in Aereo should be little cause for concern. Legitimate hand-wringing over potential threats to the cloud will have to wait until another day.

Yesterday, the Supreme Court released its much-awaited decision in ABC v. Aereo. The Court reversed the Second Circuit, holding that Aereo directly infringed the copyrights of broadcast television program owners by publicly performing their works without permission. Justice Breyer, who wrote the opinion for the Court, was joined by five other Justices, including Chief Justice Roberts, Justice Kennedy, and the liberal-leaning bloc. Interestingly, Justice Scalia dissented on textualist grounds, joined by his conservative-leaning colleagues Justice Thomas and Justice Alito.

As this split illustrates, debates about intellectual property often don’t break down along partisan or ideological lines, and the division between the majority and the dissent in Aereo focused entirely on how to interpret the copyright statute, not on the underlying philosophical merits of property rights or policy judgments regarding the costs and benefits of stronger or weaker IP.

The majority, relying on both the legislative history and the text of the Copyright Act of 1976, emphasized that the Act sought to foreclose the workaround by cable companies of broadcasters’ copyrights that the Supreme Court had previously sanctioned in a duo of cases—and that Aereo’s conduct was functionally almost identical to the unauthorized retransmissions by cable companies prior to the 1976 Act.

Justice Scalia dissented on two grounds: first, that the majority based its reading of the statute on legislative history, a practice he opposes as a means of divining a statute’s meaning; and second, that the majority relied on a vague and inapt comparison between Aereo’s allegedly infringing conduct and cable companies’ pre-1976 retransmissions of broadcast network programming.

We argue here, building on our amicus brief and our previous blog post on Aereo, that, regardless of which test applies, Aereo infringes on television program owners’ exclusive right under the Copyright Act to publicly perform their works. Moreover, we argue that the Court’s test in Aereo is far less ambiguous than its critics assert, and that it does not endanger cloud computing services like so many contend.

The Court Adopts (Some of) Our Arguments

In our brief, we reviewed two key Supreme Court rulings that influenced how Congress rewrote the Copyright Act in 1976. As we explained:

In the 1960s, two owners of programming aired over broadcast television separately brought copyright infringement suits against cable companies that—like Aereo—retransmitted television broadcasts of the plaintiffs’ works without compensating the owners. Fortnightly Corp. v. United Artists Television, Inc., 392 U.S. 390 (1968); Teleprompter Corp. v. CBS, Inc., 415 U.S. 394 (1974). In both cases, this Court found for the defendants, holding that a cable company’s retransmission of a television broadcast signal did not constitute a “performance” of that program under the Copyright Act in force at the time. Dissatisfied with these rulings, Congress effectively abrogated Fortnightly and Teleprompter in the Copyright Act of 1976, defining a transmission of a performance as a performance itself. 17 U.S.C. § 101. Although Congress’s immediate reason for making this change was to bar cable companies from retransmitting broadcast television programs without compensating their owners, the law was written so as to be as future-proof as possible.

We argued that for the Court to find that the Copyright Act does not reach Aereo’s conduct would run contrary to the law’s text and purpose, for Aereo designed its system to evade copyright in much the same way as cable companies operated prior to 1976. The Court agreed with this analogy, holding that:

By means of its technology (antennas, transcoders, and servers), Aereo’s system receives programs that have been released to the public and carries them by private channels to additional viewers. It carries whatever programs it receives, and it offers all the programming of each over-the-air station it carries [alterations, citations, and quotation marks omitted].

Furthermore, in our April essay on these pages, we identified several reasons why the Court could and should rule against Aereo without exposing innovative cloud computing firms to copyright liability:

  1. Both fair use and the DMCA’s safe harbor likely protect cloud hosting services such as Dropbox so long as they respond to takedown notices and are not otherwise aware of the nature of the content uploaded by their users;
  2. Cloud computing services typically lack the volitional conduct necessary to be considered direct infringers; and
  3. If consumers acquire licensed content from cloud services such as Amazon or Google, and stream themselves that content from the cloud, the services’ privity with rights holders should render them safe from copyright infringement liability.

The Court explicitly endorsed our privity argument and implicitly acknowledged our point about DMCA and fair use. As the Court wrote:

[A]n entity that transmits a performance to individuals in their capacities as owners or possessors does not perform to ‘the public,’ whereas an entity like Aereo that transmits to large numbers of paying subscribers who lack any prior relationship to the works does so perform.

What about Dropbox and similar services? The Court took pains to note that its opinion does not consider “whether the public performance right is infringed when the user of a service pays primarily for something other than the transmission of copyrighted works, such as the remote storage of content.” The Court also cited the Digital Millenium Copyright Act of 1998, observing that “to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.”

Below, we first discuss Justice Scalia’s dissent, and explain why Aereo’s volitional conduct with respect to copyrighted works sufficed to render the company directly liable for infringement, even under Scalia’s standard. We next discuss the implications for cloud computing, and explain why the Court’s test may in fact be clearer than the volitional conduct test, actually offering more legal protection for cloud computing than the dissent’s standard would.

Aereo Is Liable for Copyright Infringement Under the Volitional Conduct Test

Scalia, ever the critic of judges relying on legislative history and exercising too much discretion over substantive law, rejected what he called the majority’s “looks-like-cable-TV” standard. Instead, he argued that the Court should adopt the volitional conduct test used by various federal appellate courts, writing that “[a] defendant may be held directly liable only if it has engaged in volitional conduct that violates the Act.”

Scalia then asserted that Aereo is more like a copy shop than a video-on-demand service, because Aereo allows its customers to choose which programs they view and when to activate the copying function. Therefore, Scalia argued, Aereo “plays no role in selecting the content, [and] cannot be held directly liable when a customer makes an infringing copy.” Distinguishing Aereo’s conduct from that of Netflix, Scalia noted that the latter company’s “selection and arrangement [of content] constitutes a volitional act directed to specific copyrighted works and thus serves as a basis for direct liability” (or would so serve if Netflix lacked the requisite licenses).

Yet even if Justice Scalia is right that the volitional conduct test would be easier for courts to apply in future cases than the majority’s “looks-like-cable-TV” test—and, as we discuss below, we believe this widely-held view is incorrect—it does not follow that the dissent properly applied the volitional conduct test to Aereo.

First, Aereo does in fact “curate” the content it offers, in several respects. In its attempt to drive a Mack truck through the 2nd Circuit’s holding in Cartoon Network that a cable company doesn’t publicly perform works by offering its users remote DVR service, Aereo built a business model around over-the-air television content—which represents only a small fraction of the content Aereo could have obtained from free, publicly accessible sources (e.g, the Internet). Aereo also selected the cities in which it installed the dime-sized antennas that pick up over-the-air programming.

Perhaps most importantly, as far as we can tell, Aereo does not offer all the ATSC broadcasts transmitted over-the-air in the cities where the service is available. In New York, for example, Aereo claims to offer 16 channels (and several virtual sub-channels), but it doesn’t claim to offer such channels as WMBQ-CD, WDVB-CD, WNYZ-LP, or WASA-LD—all of which are broadcast over-the-air throughout central New York, according to AntennaWeb. Meanwhile, Aereo does offer Bloomberg TV—a non-broadcast channel for which Aereo voluntarily sought and acquired licenses to retransmit.

Second, evaluating whether Aereo’s actions to make available over-the-air programming embody sufficient volition to render the company itself—as opposed to its users—directly responsible for performing broadcast television turns on more than the extent to which Aereo curated its offerings. As the Court explained, Aereo built a complex system of “antennas, transcoders, and servers” for the sole purpose of monetizing broadcast television shows. In “providing this service,” the Court noted, “Aereo uses its own equipment, housed in a centralized warehouse, outside of its users’ homes.” If Aereo merely bought some office space near the top of a New York skyscraper, along with some general-purpose servers connected to the Internet via fiber-optic broadband, the company could certainly rent out these assets to the general public without facing any liability for directly publicly performing copyrighted broadcast programs. Even if some of Aereo’s subscribers placed tiny antennas in their allocated spaces and configured their server instances to stream broadcast television to themselves, Aereo would—at the very worst—face liability for vicarious copyright infringement. But this is not how Aereo operated.

Aereo has, in other words, actually taken numerous “volitional” steps to make available copyrighted content to its subscribers. And while it also offers some services ancillary to the transmission of content (most notably remote-DVR functionality), it offers those as adjuncts to its core function of transmission, not as standalone services.

Had Aereo prevailed, the company and its competitors would likely have pursued other technical workarounds to monetize other types of copyrighted works without their owners’ permission. Although Aereo chose to start with over-the-air broadcast programming—presumably because it could plausibly argue that its subscribers already had an implied right to view over-the-air broadcasts—broadcast television is hardly the only form of valuable content that the public can lawfully access free of charge in one way or another. What about cable television networks that stream some of their shows online for free? Or news websites that allow unauthenticated users to access a limited number of stories free of charge each month? If Aereo had convinced the Court to bless its business model, it would have sent copyright owners a very clear message: don’t publicly distribute your works in any format, or else.

The Court’s Holding Doesn’t Imperil Cloud Services

Many commenters lament that the Court’s decision leaves cloud computing in peril, offering no real limiting principle (as, they claim, applying the volitional conduct test would have). Vox’s Timothy B. Lee, for example, opines that:

The problem is that the court never provides clear criteria for this “looks-like-cable-TV” rule…. The Supreme Court says its ruling shouldn’t dramatically change the legal status of other technologies…. But it’s going to take years of litigation — and millions of dollars in legal fees — to figure out exactly how the decision will affect cloud storage services.

But the Court did articulate several important limits, as we note above. Most significantly, the opinion plainly excepts transmission of underlying works “own[ed] or possess[ed]” by subscribers from its definition of public performance. It also circumscribes what constitutes a public performance to transmissions from a person to large groups of people “outside of [her] family and [her] social circle,” and reinforces that fair use limitations continue to protect those who perform copyrighted works.

At the same time, the Court characterizes Aereo—and the aspect of the service that give rise to its liability—as “not simply an equipment provider…. Aereo sells a service that allows subscribers to watch television programs, many of which are copyrighted, almost as they are being broadcast.”

Crucially, Aereo makes available to each of its subscribers copyrighted content that he or she does not necessarily otherwise own or possess—even if the company also offers its viewers “enhancements” much like a modern cable system. As we noted in our previous post, this distinguishes Aereo from the cloud computing services to which it is compared:

Cloud computing providers, on the other hand, offer services that enable distinct functionality independent of the mere retransmission of copyrighted content.

Even if the Court’s holding were applied in contexts beyond traditional television programming, how many cloud services actually deliver content—rather than just enhancing it, as a DVR does—that its user do not otherwise own or possess? Vanishingly few, if any. Most obviously, talk of the risks Aereo poses to cloud storage and digital lockers—services that, by definition, apply only to content provided by the user and thus previously “owned or possessed” by the user—is simply misplaced.

Insofar as the transmission of third-party content is the defining characteristic of a “looks-like-cable-TV” system, the Court’s test actually offers a fairly clear delineation, and one that offers no risk to the vast majority of cloud services. This may remind many of Justice Potter Stewart’s infamous “I know it when I see it” test for adjudging obscenity, but it firmly removes a large swath of cloud computing services from the risk of direct copyright liability under Aereo.

And to the extent that some cloud services might seem to fail this test—YouTube, for example—those services (like YouTube and unlike Aereo) routinely obtain performance licenses for the content they provide. Although some of YouTube’s content may not be legally provided to the service, that doesn’t affect its direct copyright infringement liability. Instead, it merely affects the indirect liability YouTube faced before Aereo and continues to face after Aereo. And any such providers that do not currently obtain public performance licenses can and will simply do so with small textual amendments to their existing content licenses.

In other words, the Court’s ruling boils down to this: Either get a license to provide content not already owned by your subscribers, or provide only that content which your subscribers already own. The crux of the Aereo ruling is remarkably clear.

Meanwhile, the volitional conduct test, like most legal tests, doesn’t offer a bright line, despite some commenters’ assertions that it would have been a better grounds for deciding the case. While the volitional conduct test is an imprecise, sliding scale—regardless of the type of service or the underlying relationship between end-users and content providers—the Court’s Aereo test offers relatively clear rules, imposing direct liability only on services that transmit without a public performance license content that its users do not already own or possess.

For the many cloud services we know and love—and for the cloud computing startups yet to exist—the Court’s decision in Aereo should be little cause for concern. Legitimate hand-wringing over potential threats to the cloud will have to wait until another day.

Conclusion

Strange bedfellows aside, the Supreme Court reversed the Second Circuit and adopted a rationale similar to the one we articulated in our amicus brief. Even under the volitional conduct test advocated by Scalia in his dissenting opinion, Aereo should lose, just as we argued in our previous post on the issue. This will not be the last time the Court wrestles with applying the nearly 40 year-old Copyright Act to novel technology, but Aereo stands little chance of undermining the cloud computing sector. Although the great IP debate will surely continue, this much is settled law: You cannot build a business model around the idea of rebroadcasting copyrighted network content without paying for it.