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An important new paper was recently posted to SSRN by Commissioner Joshua Wright and Joanna Tsai.  It addresses a very hot topic in the innovation industries: the role of patented innovation in standard setting organizations (SSO), what are known as standard essential patents (SEP), and whether the nature of the contractual commitment that adheres to a SEP — specifically, a licensing commitment known by another acronym, FRAND (Fair, Reasonable and Non-Discriminatory) — represents a breakdown in private ordering in the efficient commercialization of new technology.  This is an important contribution to the growing literature on patented innovation and SSOs, if only due to the heightened interest in these issues by the FTC and the Antitrust Division at the DOJ.

http://ssrn.com/abstract=2467939.

“Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts”

JOANNA TSAI, Government of the United States of America – Federal Trade Commission
Email:
JOSHUA D. WRIGHT, Federal Trade Commission, George Mason University School of Law
Email:

A large and growing number of regulators and academics, while recognizing the benefits of standardization, view skeptically the role standard setting organizations (SSOs) play in facilitating standardization and commercialization of intellectual property rights (IPRs). Competition agencies and commentators suggest specific changes to current SSO IPR policies to reduce incompleteness and favor an expanded role for antitrust law in deterring patent holdup. These criticisms and policy proposals are based upon the premise that the incompleteness of SSO contracts is inefficient and the result of market failure rather than an efficient outcome reflecting the costs and benefits of adding greater specificity to SSO contracts and emerging from a competitive contracting environment. We explore conceptually and empirically that presumption. We also document and analyze changes to eleven SSO IPR policies over time. We find that SSOs and their IPR policies appear to be responsive to changes in perceived patent holdup risks and other factors. We find the SSOs’ responses to these changes are varied across SSOs, and that contractual incompleteness and ambiguity for certain terms persist both across SSOs and over time, despite many revisions and improvements to IPR policies. We interpret this evidence as consistent with a competitive contracting process. We conclude by exploring the implications of these findings for identifying the appropriate role of antitrust law in governing ex post opportunism in the SSO setting.

Microsoft wants you to believe that Google’s business practices stifle competition and harm consumers. Again.

The latest volley in its tiresome and ironic campaign to bludgeon Google with the same regulatory club once used against Microsoft itself is the company’s effort to foment an Android-related antitrust case in Europe.

In a recent polemicMicrosoft consultant (and business school professor) Ben Edelman denounces Google for requiring that, if device manufacturers want to pre-install key Google apps on Android devices, they “must install all the apps Google specifies, with the prominence Google requires, including setting these apps as defaults where Google instructs.” Edelman trots out gasp-worthy “secret” licensing agreements that he claims support his allegation (more on this later).

Similarly, a recent Wall Street Journal article, “Android’s ‘Open’ System Has Limits,” cites Edelman’s claim that limits on the licensing of Google’s proprietary apps mean that the Android operating system isn’t truly open source and comes with “strings attached.”

In fact, along with the Microsoft-funded trade organization FairSearch, Edelman has gone so far as to charge that this “tying” constitutes an antitrust violation. It is this claim that Microsoft and a network of proxies brought to the Commission when their efforts to manufacture a search-neutrality-based competition case against Google failed.

But before getting too caught up in the latest round of anti-Google hysteria, it’s worth noting that the Federal Trade Commission has already reviewed these claims. After a thorough, two-year inquiry, the FTC found the antitrust arguments against Google to be without merit. The South Korea Fair Trade Commission conducted its own two year investigation into Google’s Android business practices and dismissed the claims before it as meritless, as well.

Taking on Edelman and FairSearch with an exhaustive scholarly analysis, German law professor Torsten Koerber recently assessed the nature of competition among mobile operating systems and concluded that:

(T)he (EU) Fairsearch complaint ultimately does not aim to protect competition or consumers, as it pretends to. It rather strives to shelter Microsoft from competition by abusing competition law to attack Google’s business model and subvert competition.

It’s time to take a step back and consider the real issues at play.

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.” He writes, “I see no way to reconcile the MADA restrictions with [Android openness].”

Conveniently, however, Edelman neglects to cite to Section 2.6 of the MADA:

The parties will create an open environment for the Devices by making all Android Products and Android Application Programming Interfaces available and open on the Devices and will take no action to limit or restrict the Android platform.

Professor Korber’s analysis provides a straight-forward explanation of the relationship between Android and its OEM licensees:

Google offers Android to OEMs on a royalty-free basis. The licensees are free to download, distribute and even modify the Android code as they like. OEMs can create mobile devices that run “pure” Android…or they can apply their own user interfaces (IO) and thereby hide most of the underlying Android system (e.g. Samsung’s “TouchWiz” or HTC’s “Sense”). OEMs make ample use of this option.

The truth is that the Android operating system remains, as ever, definitively open source — but Android’s openness isn’t really what the fuss is about. In this case, the confusion (or obfuscation) stems from the casual confounding of Google Apps with the Android Operating System. As we’ll see, they aren’t the same thing.

Consider Amazon, which pre-loads no Google applications at all on its Kindle Fire and Fire Phone. Amazon’s version of Android uses Microsoft’s Bing as the default search engineNokia provides mapping services, and the app store is Amazon’s own.

Still, Microsoft’s apologists continue to claim that Android licensees can’t choose to opt out of Google’s applications suite — even though, according to a new report from ABI Research, 20 percent of smartphones shipped between May and July 2014 were based on a “Google-less” version of the Android OS. And that number is consistently increasing: Analysts predict that by 2015, 30 percent of Android phones won’t access Google Services.

It’s true that equipment manufacturers who choose the Android operating system have the option to include the suite of integrated, proprietary Google apps and services licensed (royalty-free) under the name Google Mobile Services (GMS). GMS includes Google Search, Maps, Calendar, YouTube and other apps that together define the “Google Android experience” that users know and love.

But Google Android is far from the only Android experience.

Even if a manufacturer chooses to license Google’s apps suite, Google’s terms are not exclusive. Handset makers are free to install competing applications, including other search engines, map applications or app stores.

Although Google requires that Google Search be made easily accessible (hardly a bad thing for consumers, as it is Google Search that finances the development and maintenance of all of the other (free) apps from which Google otherwise earns little to no revenue), OEMs and users alike can (and do) easily install and access other search engines in numerous ways. As Professor Korber notes:

The standard MADA does not entail any exclusivity for Google Search nor does it mandate a search default for the web browser.

Regardless, integrating key Google apps (like Google Search and YouTube) with other apps the company offers (like Gmail and Google+) is an antitrust problem only if it significantly forecloses competitors from these apps’ markets compared to a world without integrated Google apps, and without pro-competitive justification. Neither is true, despite the unsubstantiated claims to the contrary from Edelman, FairSearch and others.

Consumers and developers expect and demand consistency across devices so they know what they’re getting and don’t have to re-learn basic functions or program multiple versions of the same application. Indeed, Apple’s devices are popular in part because Apple’s closed iOS provides a predictable, seamless experience for users and developers.

But making Android competitive with its tightly controlled competitors requires special efforts from Google to maintain a uniform and consistent experience for users. Google has tried to achieve this uniformity by increasingly disentangling its apps from the operating system (the opposite of tying) and giving OEMs the option (but not the requirement) of licensing GMS — a “suite” of technically integrated Google applications (integrated with each other, not the OS).  Devices with these proprietary apps thus ensure that both consumers and developers know what they’re getting.

Unlike Android, Apple prohibits modifications of its operating system by downstream partners and users, and completely controls the pre-installation of apps on iOS devices. It deeply integrates applications into iOS, including Apple Maps, iTunes, Siri, Safari, its App Store and others. Microsoft has copied Apple’s model to a large degree, hard-coding its own applications (including Bing, Windows Store, Skype, Internet Explorer, Bing Maps and Office) into the Windows Phone operating system.

In the service of creating and maintaining a competitive platform, each of these closed OS’s bakes into its operating system significant limitations on which third-party apps can be installed and what they can (and can’t) do. For example, neither platform permits installation of a third-party app store, and neither can be significantly customized. Apple’s iOS also prohibits users from changing default applications — although the soon-to-be released iOS 8 appears to be somewhat more flexible than previous versions.

In addition to pre-installing a raft of their own apps and limiting installation of other apps, both Apple and Microsoft enable greater functionality for their own apps than they do the third-party apps they allow.

For example, Apple doesn’t make available for other browsers (like Google’s Chrome) all the JavaScript functionality that it does for Safari, and it requires other browsers to use iOS Webkit instead of their own web engines. As a result there are things that Chrome can’t do on iOS that Safari and only Safari can do, and Chrome itself is hamstrung in implementing its own software on iOS. This approach has led Mozilla to refuse to offer its popular Firefox browser for iOS devices (while it has no such reluctance about offering it on Android).

On Windows Phone, meanwhile, Bing is integrated into the OS and can’t be removed. Only in markets where Bing is not supported (and with Microsoft’s prior approval) can OEMs change the default search app from Bing. While it was once possible to change the default search engine that opens in Internet Explorer (although never from the hardware search button), the Windows 8.1 Hardware Development Notes, updated July 22, 2014, state:

By default, the only search provider included on the phone is Bing. The search provider used in the browser is always the same as the one launched by the hardware search button.

Both Apple iOS and Windows Phone tightly control the ability to use non-default apps to open intents sent from other apps and, in Windows especially, often these linkages can’t be changed.

As a result of these sorts of policies, maintaining the integrity — and thus the brand — of the platform is (relatively) easy for closed systems. While plenty of browsers are perfectly capable of answering an intent to open a web page, Windows Phone can better ensure a consistent and reliable experience by forcing Internet Explorer to handle the operation.

By comparison, Android, with or without Google Mobile Services, is dramatically more open, more flexible and customizable, and more amenable to third-party competition. Even the APIs that it uses to integrate its apps are open to all developers, ensuring that there is nothing that Google apps are able to do that non-Google apps with the same functionality are prevented from doing.

In other words, not just Gmail, but any email app is permitted to handle requests from any other app to send emails; not just Google Calendar but any calendar app is permitted to handle requests from any other app to accept invitations.

In no small part because of this openness and flexibility, current reports indicate that Android OS runs 85 percent of mobile devices worldwide. But it is OEM giant Samsung, not Google, that dominates the market, with a 65 percent share of all Android devices. Competition is rife, however, especially in emerging markets. In fact, according to one report, “Chinese and Indian vendors accounted for the majority of smartphone shipments for the first time with a 51% share” in 2Q 2014.

As he has not been in the past, Edelman is at least nominally circumspect in his unsubstantiated legal conclusions about Android’s anticompetitive effect:

Applicable antitrust law can be complicated: Some ties yield useful efficiencies, and not all ties reduce welfare.

Given Edelman’s connections to Microsoft and the realities of the market he is discussing, it could hardly be otherwise. If every integration were an antitrust violation, every element of every operating system — including Apple’s iOS as well as every variant of Microsoft’s Windows — should arguably be the subject of a government investigation.

In truth, Google has done nothing more than ensure that its own suite of apps functions on top of Android to maintain what Google sees as seamless interconnectivity, a high-quality experience for users, and consistency for application developers — while still allowing handset manufacturers room to innovate in a way that is impossible on other platforms. This is the very definition of pro-competitive, and ultimately this is what allows the platform as a whole to compete against its far more vertically integrated alternatives.

Which brings us back to Microsoft. On the conclusion of the FTC investigation in January 2013, a GigaOm exposé on the case had this to say:

Critics who say Google is too powerful have nagged the government for years to regulate the company’s search listings. But today the critics came up dry….

The biggest loser is Microsoft, which funded a long-running cloak-and-dagger lobbying campaign to convince the public and government that its arch-enemy had to be regulated….

The FTC is also a loser because it ran a high profile two-year investigation but came up dry.

EU regulators, take note.

The Federal Trade Commission’s recent enforcement actions against Amazon and Apple raise important questions about the FTC’s consumer protection practices, especially its use of economics. How does the Commission weigh the costs and benefits of its enforcement decisions? How does the agency employ economic analysis in digital consumer protection cases generally?

Join the International Center for Law and Economics and TechFreedom on Thursday, July 31 at the Woolly Mammoth Theatre Company for a lunch and panel discussion on these important issues, featuring FTC Commissioner Joshua Wright, Director of the FTC’s Bureau of Economics Martin Gaynor, and several former FTC officials. RSVP here.

Commissioner Wright will present a keynote address discussing his dissent in Apple and his approach to applying economics in consumer protection cases generally.

Geoffrey Manne, Executive Director of ICLE, will briefly discuss his recent paper on the role of economics in the FTC’s consumer protection enforcement. Berin Szoka, TechFreedom President, will moderate a panel discussion featuring:

  • Martin Gaynor, Director, FTC Bureau of Economics
  • David Balto, Fmr. Deputy Assistant Director for Policy & Coordination, FTC Bureau of Competition
  • Howard Beales, Fmr. Director, FTC Bureau of Consumer Protection
  • James Cooper, Fmr. Acting Director & Fmr. Deputy Director, FTC Office of Policy Planning
  • Pauline Ippolito, Fmr. Acting Director & Fmr. Deputy Director, FTC Bureau of Economics

Background

The FTC recently issued a complaint and consent order against Apple, alleging its in-app purchasing design doesn’t meet the Commission’s standards of fairness. The action and resulting settlement drew a forceful dissent from Commissioner Wright, and sparked a discussion among the Commissioners about balancing economic harms and benefits in Section 5 unfairness jurisprudence. More recently, the FTC brought a similar action against Amazon, which is now pending in federal district court because Amazon refused to settle.

Event Info

The “FTC: Technology and Reform” project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology. The Project’s initial report, released in December 2013, identified critical questions facing the agency, Congress, and the courts about the FTC’s future, and proposed a framework for addressing them.

The event will be live streamed here beginning at 12:15pm. Join the conversation on Twitter with the #FTCReform hashtag.

When:

Thursday, July 31
11:45 am – 12:15 pm — Lunch and registration
12:15 pm – 2:00 pm — Keynote address, paper presentation & panel discussion

Where:

Woolly Mammoth Theatre Company – Rehearsal Hall
641 D St NW
Washington, DC 20004

Questions? – Email mail@techfreedom.orgRSVP here.

See ICLE’s and TechFreedom’s other work on FTC reform, including:

  • Geoffrey Manne’s Congressional testimony on the the FTC@100
  • Op-ed by Berin Szoka and Geoffrey Manne, “The Second Century of the Federal Trade Commission”
  • Two posts by Geoffrey Manne on the FTC’s Amazon Complaint, here and here.

About The International Center for Law and Economics:

The International Center for Law and Economics is a non-profit, non-partisan research center aimed at fostering rigorous policy analysis and evidence-based regulation.

About TechFreedom:

TechFreedom is a non-profit, non-partisan technology policy think tank. We work to chart a path forward for policymakers towards a bright future where technology enhances freedom, and freedom enhances technology.

The International Center for Law & Economics (ICLE) and TechFreedom filed two joint comments with the FCC today, explaining why the FCC has no sound legal basis for micromanaging the Internet and why “net neutrality” regulation would actually prove counter-productive for consumers.

The Policy Comments are available here, and the Legal Comments are here. See our previous post, Net Neutrality Regulation Is Bad for Consumers and Probably Illegal, for a distillation of many of the key points made in the comments.

New regulation is unnecessary. “An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive,” said Geoffrey Manne, Executive Director of ICLE. “If the Internet really is ‘open,’ shouldn’t all companies be free to experiment with new technologies, business models and partnerships?”

“The media frenzy around this issue assumes that no one, apart from broadband companies, could possibly question the need for more regulation,” said Berin Szoka, President of TechFreedom. “In fact, increased regulation of the Internet will incite endless litigation, which will slow both investment and innovation, thus harming consumers and edge providers.”

Title II would be a disaster. The FCC has proposed re-interpreting the Communications Act to classify broadband ISPs under Title II as common carriers. But reinterpretation might unintentionally ensnare edge providers, weighing them down with onerous regulations. “So-called reclassification risks catching other Internet services in the crossfire,” explained Szoka. “The FCC can’t easily forbear from Title II’s most onerous rules because the agency has set a high bar for justifying forbearance. Rationalizing a changed approach would be legally and politically difficult. The FCC would have to simultaneously find the broadband market competitive enough to forbear, yet fragile enough to require net neutrality rules. It would take years to sort out this mess — essentially hitting the pause button on better broadband.”

Section 706 is not a viable option. In 2010, the FCC claimed Section 706 as an independent grant of authority to regulate any form of “communications” not directly barred by the Act, provided only that the Commission assert that regulation would somehow promote broadband. “This is an absurd interpretation,” said Szoka. “This could allow the FCC to essentially invent a new Communications Act as it goes, regulating not just broadband, but edge companies like Google and Facebook, too, and not just neutrality but copyright, cybersecurity and more. The courts will eventually strike down this theory.”

A better approach. “The best policy would be to maintain the ‘Hands off the Net’ approach that has otherwise prevailed for 20 years,” said Manne. “That means a general presumption that innovative business models and other forms of ‘prioritization’ are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears.” “If the FCC thinks it can justify regulating the Internet, it should ask Congress to grant such authority through legislation,” added Szoka. “A new communications act is long overdue anyway. The FCC could also convene a multistakeholder process to produce a code enforceable by the Federal Trade Commission,” he continued, noting that the White House has endorsed such processes for setting Internet policy in general.

Manne concluded: “The FCC should focus on doing what Section 706 actually commands: clearing barriers to broadband deployment. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.”

For some of our other work on net neutrality, see:

“Understanding Net(flix) Neutrality,” an op-ed by Geoffrey Manne in the Detroit News on Netflix’s strategy to confuse interconnection costs with neutrality issues.

“The Feds Lost on Net Neutrality, But Won Control of the Internet,” an op-ed by Berin Szoka and Geoffrey Manne in Wired.com.

“That startup investors’ letter on net neutrality is a revealing look at what the debate is really about,” a post by Geoffrey Manne in Truth on the Market.

Bipartisan Consensus: Rewrite of ‘96 Telecom Act is Long Overdue,” a post on TF’s blog highlighting the key points from TechFreedom and ICLE’s joint comments on updating the Communications Act.

The Net Neutrality Comments are available here:

ICLE/TF Net Neutrality Policy Comments

TF/ICLE Net Neutrality Legal Comments

With Berin Szoka.

TechFreedom and the International Center for Law & Economics will shortly file two joint comments with the FCC, explaining why the FCC has no sound legal basis for micromanaging the Internet—now called “net neutrality regulation”—and why such regulation would be counter-productive as a policy matter. The following summarizes some of the key points from both sets of comments.

No one’s against an open Internet. The notion that anyone can put up a virtual shingle—and that the good ideas will rise to the top—is a bedrock principle with broad support; it has made the Internet essential to modern life. Key to Internet openness is the freedom to innovate. An open Internet and the idea that companies can make special deals for faster access are not mutually exclusive. If the Internet really is “open,” shouldn’t all companies be free to experiment with new technologies, business models and partnerships? Shouldn’t the FCC allow companies to experiment in building the unknown—and unknowable—Internet of the future?

The best approach would be to maintain the “Hands off the Net” approach that has otherwise prevailed for 20 years. That means a general presumption that innovative business models and other forms of “prioritization” are legal. Innovation could thrive, and regulators could still keep a watchful eye, intervening only where there is clear evidence of actual harm, not just abstract fears. And they should start with existing legal tools—like antitrust and consumer protection laws—before imposing prior restraints on innovation.

But net neutrality regulation hurts more than it helps. Counterintuitively, a blanket rule that ISPs treat data equally could actually harm consumers. Consider the innovative business models ISPs are introducing. T-Mobile’s unRadio lets users listen to all the on-demand music and radio they want without taking a hit against their monthly data plan. Yet so-called consumer advocates insist that’s a bad thing because it favors some content providers over others. In fact, “prioritizing” one service when there is congestion frees up data for subscribers to consume even more content—from whatever source. You know regulation may be out of control when a company is demonized for offering its users a freebie.

Treating each bit of data neutrally ignores the reality of how the Internet is designed, and how consumers use it.  Net neutrality proponents insist that all Internet content must be available to consumers neutrally, whether those consumers (or content providers) want it or not. They also argue against usage-based pricing. Together, these restrictions force all users to bear the costs of access for other users’ requests, regardless of who actually consumes the content, as the FCC itself has recognized:

[P]rohibiting tiered or usage-based pricing and requiring all subscribers to pay the same amount for broadband service, regardless of the performance or usage of the service, would force lighter end users of the network to subsidize heavier end users. It would also foreclose practices that may appropriately align incentives to encourage efficient use of networks.

The rules that net neutrality advocates want would hurt startups as well as consumers. Imagine a new entrant, clamoring for market share. Without the budget for a major advertising blitz, the archetypical “next Netflix” might never get the exposure it needs to thrive. But for a relatively small fee, the startup could sign up to participate in a sponsored data program, with its content featured and its customers’ data usage exempted from their data plans. This common business strategy could mean the difference between success and failure for a startup. Yet it would be prohibited by net neutrality rules banning paid prioritization.

The FCC lacks sound legal authority. The FCC is essentially proposing to do what can only properly be done by Congress: invent a new legal regime for broadband. Each of the options the FCC proposes to justify this—Section 706 of the Telecommunications Act and common carrier classification—is deeply problematic.

First, Section 706 isn’t sustainable. Until 2010, the FCC understood Section 706 as a directive to use its other grants of authority to promote broadband deployment. But in its zeal to regulate net neutrality, the FCC reversed itself in 2010, claiming Section 706 as an independent grant of authority. This would allow the FCC to regulate any form of “communications” in any way not directly barred by the Act — not just broadband but “edge” companies like Google and Facebook. This might mean going beyond neutrality to regulate copyright, cybersecurity and more. The FCC need only assert that regulation would somehow promote broadband.

If Section 706 is a grant of authority, it’s almost certainly a power to deregulate. But even if its power is as broad as the FCC claims, the FCC still hasn’t made the case that, on balance, its proposed regulations would actually do what it asserts: promote broadband. The FCC has stubbornly refused to conduct serious economic analysis on the net effects of its neutrality rules.

And Title II would be a disaster. The FCC has asked whether Title II of the Act, which governs “common carriers” like the old monopoly telephone system, is a workable option. It isn’t.

In the first place, regulations that impose design limitations meant for single-function networks simply aren’t appropriate for the constantly evolving Internet. Moreover, if the FCC re-interprets the Communications Act to classify broadband ISPs as common carriers, it risks catching other Internet services in the cross-fire, inadvertently making them common carriers, too. Surely net neutrality proponents can appreciate the harmful effects of treating Skype as a common carrier.

Forbearance can’t clean up the Title II mess. In theory the FCC could “forbear” from Title II’s most onerous rules, promising not to apply them when it determines there’s enough competition in a market to make the rules unnecessary. But the agency has set a high bar for justifying forbearance.

Most recently, in 2012, the Commission refused to grant Qwest forbearance even in the highly competitive telephony market, disregarding competition from wireless providers, and concluding that a cable-telco “duopoly” is inadequate to protect consumers. It’s unclear how the FCC could justify reaching the opposite conclusion about the broadband market—simultaneously finding it competitive enough to forbear, yet fragile enough to require net neutrality rules. Such contradictions would be difficult to explain, even if the FCC generally gets discretion on changing its approach.

But there is another path forward. If the FCC can really make the case for regulation, it should go to Congress, armed with the kind of independent economic and technical expert studies Commissioner Pai has urged, and ask for new authority. A new Communications Act is long overdue anyway. In the meantime, the FCC could convene the kind of multistakeholder process generally endorsed by the White House to produce a code enforceable by the Federal Trade Commission. A consensus is possible — just not inside the FCC, where the policy questions can’t be separated from the intractable legal questions.

Meanwhile, the FCC should focus on doing what Section 706 actually demands: clearing barriers to broadband deployment and competition. The 2010 National Broadband Plan laid out an ambitious pro-deployment agenda. It’s just too bad the FCC was so obsessed with net neutrality that it didn’t focus on the plan. Unleashing more investment and competition, not writing more regulation, is the best way to keep the Internet open, innovative and free.

[Cross-posted at TechFreedom.]

Today the FTC filed its complaint in federal district court in Washington against Amazon, alleging that the company’s in-app purchasing system permits children to make in-app purchases without parental “informed consent” constituting an “unfair practice” under Section 5 of the FTC Act.

As I noted in my previous post on the case, in bringing this case the Commission is doubling down on the rule it introduced in Apple that effectively converts the balancing of harms and benefits required under Section 5 of the FTC Act to a per se rule that deems certain practices to be unfair regardless of countervailing benefits. Similarly, it is attempting to extend the informed consent standard it created in Apple that essentially maintains that only specific, identified practices (essentially, distinct notification at the time of purchase or opening of purchase window, requiring entry of a password to proceed) are permissible under the Act.

Such a standard is inconsistent with the statute, however. The FTC’s approach forecloses the ability of companies like Amazon to engage in meaningful design decisions and disregards their judgment about which user interface designs will, on balance, benefit consumers. The FTC Act does not empower the Commission to disregard the consumer benefits of practices that simply fail to mimic the FTC’s preconceived design preferences. While that sort of approach might be defensible in the face of manifestly harmful practices like cramming, it is wholly inappropriate in the context of app stores like Amazon’s that spend considerable resources to design every aspect of their interaction with consumers—and that seek to attract, not to defraud, consumers.

Today’s complaint occasions a few more observations:

  1. Amazon has a very strong case. Under Section 5 of the FTC Act, the Commission will have to prevail on all three elements required to prove unfairness under Section 5: that there is substantial injury, that consumers can’t reasonably avoid the injury and that any countervailing benefits don’t outweigh the injury. But, consistent with its complaint and consent order in Apple, the Amazon complaint focuses almost entirely on only the first of these. While that may have been enough to induce Apple to settle out of court, the FTC will actually have to make out a case on reasonable avoidance and countervailing benefits at trial. It’s not at all clear that the agency will be able to do so on the facts alleged here.
  2. On reasonable avoidance, over and above Amazon’s general procedures that limit unwanted in-app purchases, the FTC will have a tough time showing that Amazon’s Kindle Free Time doesn’t provide parents with more than enough ability to avoid injury. In fact, the complaint doesn’t mention Free Time at all.
  3. Among other things, the complaint asserts that Amazon knew about issues with in-app purchasing by December of 2011 and claims that “[n]ot until June 2014 did Amazon change its in-app charge framework to obtain account holders’ informed consent for in-app charges on its newer mobile devices.” But Kindle Free Time was introduced in September of 2012. While four FTC Commissioners may believe that Free Time isn’t a sufficient response to the alleged problem, it is clearly a readily available, free and effective (read: reasonable) mechanism for parents to avoid the alleged harms. It may not be what the design mavens at the FTC would have chosen to do, but it seems certain that avoiding unauthorized in-app purchases by children was part of what motivated Amazon’s decision to create and offer Free Time.
  4. On countervailing benefits, as Commissioner Wright discussed in detail in his dissent from the Apple consent order, the Commission seems to think that it can simply assert that there are no countervailing benefits to Amazon’s design choices around in-app purchases. Here the complaint doesn’t mention 1-Click at all, which is core to Amazon’s user interface design and essential to evaluating the balance of harms and benefits required by the statute.
  5. Even if it can show that Amazon’s in-app purchase practices caused harm, the Commission will still have to demonstrate that Amazon’s conscious efforts to minimize the steps required to make purchases doesn’t benefit consumers on balance. In Apple, the FTC majority essentially (and improperly) valued these sorts of user-interface benefits at zero. It implicitly does so again here, but a court will require more than such an assertion.
  6. Given these lapses, there is even a chance that the complaint will be thrown out on a motion to dismiss. It’s a high bar, but if the court agrees that there are insufficient facts in the complaint to make out a plausible case on all three elements, Amazon could well prevail on a motion to dismiss. The FTC’s approach in the Apple consent order effectively maintains that the agency can disregard reasonable avoidance and countervailing benefits in contravention of the statute. By following the same approach here in actual litigation, the FTC may well meet resistance from the courts, which have not yet so cavalierly dispensed with the statute’s requirements.

The Wall Street Journal reports this morning that Amazon is getting — and fighting — the “Apple treatment” from the FTC for its design of its in-app purchases:

Amazon.com Inc. is bucking a request from the Federal Trade Commission that it tighten its policies for purchases made by children while using mobile applications.

In a letter to the FTC Tuesday, Amazon said it was prepared to “defend our approach in court,” rather than agree to fines and additional record keeping and disclosure requirements over the next 20 years, according to documents reviewed by The Wall Street Journal.

According to the documents, Amazon is facing a potential lawsuit by the FTC, which wants the Seattle retailer to accept terms similar to those that Apple Inc. agreed to earlier this year regarding so-called in-app purchases.

From what I can tell, the Commission has voted to issue a complaint, and Amazon has informed the Commission that it will not accept its proposed settlement.

I am thrilled that Amazon seems to have decided to fight the latest effort by a majority of the FTC to bring every large tech company under 20-year consent decree. I should say: I’m disappointed in the FTC, sorry for Amazon, but thrilled for consumers and the free marketplace that Amazon is choosing to fight rather than acquiesce.

As I wrote earlier this year about the FTC’s case against Apple in testimony before the House Commerce Committee:

What’s particularly notable about the Apple case – and presumably will be in future technology enforcement actions predicated on unfairness – is the unique relevance of the attributes of the conduct at issue to its product. Unlike past, allegedly similar, cases, Apple’s conduct was not aimed at deceiving consumers, nor was it incidental to its product offering. But by challenging the practice, particularly without the balancing of harms required by Section 5, the FTC majority failed to act with restraint and substituted its own judgment, not about some manifestly despicable conduct, but about the very design of Apple’s products. This is the sort of area where regulatory humility is more — not less — important.

In failing to observe common sense limits in Apple, the FTC set a dangerous precedent that, given the agency’s enormous regulatory scope and the nature of technologically advanced products, could cause significant harm to consumers.

Here that failure is even more egregious. Amazon has built its entire business around the “1-click” concept — which consumers love — and implemented a host of notification and security processes hewing as much as possible to that design choice, but nevertheless taking account of the sorts of issues raised by in-app purchases. Moreover — and perhaps most significantly — it has implemented an innovative and comprehensive parental control regime (including the ability to turn off all in-app purchases) — Kindle Free Time — that arguably goes well beyond anything the FTC required in its Apple consent order. I use Kindle Free Time with my kids and have repeatedly claimed to anyone who will listen that it is the greatest thing since sliced bread. Other consumers must feel similarly. Finally, regardless of all of that, Amazon has nevertheless voluntarily implemented additional notification procedures intended to comply with the Apple settlement, even though it didn’t apply to Amazon.

If the FTC asserts, in the face of all of that, that it’s own vision of what “appropriate” in-app purchase protections must look like is the only one that suffices to meet the standard required by Section 5’s Unfairness language, it is either being egregiously disingenuous, horrifically vain, just plain obtuse, or some combination of the three.

As I wrote in my testimony:

The application of Section 5’s “unfair acts and practices” prong (the statute at issue in Apple) is circumscribed by Section 45(n) of the FTC Act, which, among other things, proscribes enforcement where injury is “not outweighed by countervailing benefits to consumers or to competition.”

And as Commissioner Wright noted in his dissent in the Apple case,

[T]he Commission effectively rejects an analysis of tradeoffs between the benefits of additional guidance and potential harm to some consumers or to competition from mandating guidance…. I respectfully disagree. These assumptions adopt too cramped a view of consumer benefits under the Unfairness Statement and, without more rigorous analysis to justify their application, are insufficient to establish the Commission’s burden.

We won’t know until we see the complaint whether the FTC has failed to undertake the balancing it neglected to perform in Apple and that it is required to perform under the statute. But it’s hard to believe that it could mount a case against Amazon in light of the facts if it did perform such a balancing. There’s no question that Amazon has implemented conscious and consumer-welfare-enhancing design choices here. The FTC’s effort to nevertheless mandate a different design (and put Amazon under a 20 year consent decree) based on a claim that Amazon’s choices impose greater harms than benefits on consumers seems manifestly unsupportable.

Such a claim almost certainly represents an abuse of the agency’s discretion, and I expect Amazon to trounce the FTC if this case goes to trial.

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.