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Twitter v. Taamneh and the Law & Economics of Intermediary Liability

Geoff Manne, Kristian Stout & Ben Sperry —  8 March 2023 — Leave a comment

The Senate Judiciary Committee’s Subcommittee on Privacy, Technology, and the Law will host a hearing this afternoon on Gonzalez v. Google, one of two terrorism-related cases currently before the U.S. Supreme Court that implicate Section 230 of the Communications Decency Act of 1996.

We’ve written before about how the Court might and should rule in Gonzalez (see here and here), but less attention has been devoted to the other Section 230 case on the docket: Twitter v. Taamneh. That’s unfortunate, as a thoughtful reading of the dispute at issue in Taamneh could highlight some of the law’s underlying principles. At first blush, alas, it does not appear that the Court is primed to apply that reading.

During the recent oral arguments, the Court considered whether Twitter (and other social-media companies) can be held liable under the Antiterrorism Act for providing a general communications platform that may be used by terrorists. The question under review by the Court is whether Twitter “‘knowingly’ provided substantial assistance [to terrorist groups] under [the statute] merely because it allegedly could have taken more ‘meaningful’ or ‘aggressive’ action to prevent such use.” Plaintiffs’ (respondents before the Court) theory is, essentially, that Twitter aided and abetted terrorism through its inaction.

The oral argument found the justices grappling with where to draw the line between aiding and abetting, and otherwise legal activity that happens to make it somewhat easier for bad actors to engage in illegal conduct. The nearly three-hour discussion between the justices and the attorneys yielded little in the way of a viable test. But a more concrete focus on the law & economics of collateral liability (which we also describe as “intermediary liability”) would have significantly aided the conversation.   

Taamneh presents a complex question of intermediary liability generally that goes beyond the bounds of a (relatively) simpler Section 230 analysis. As we discussed in our amicus brief in Fleites v. Mindgeek (and as briefly described in this blog post), intermediary liability generally cannot be predicated on the mere existence of harmful or illegal content on an online platform that could, conceivably, have been prevented by some action by the platform or other intermediary.

The specific statute may impose other limits (like the “knowing” requirement in the Antiterrorism Act), but intermediary liability makes sense only when a particular intermediary defendant is positioned to control (and thus remedy) the bad conduct in question, and when imposing liability would cause the intermediary to act in such a way that the benefits of its conduct in deterring harm outweigh the costs of impeding its normal functioning as an intermediary.

Had the Court adopted such an approach in its questioning, it could have better honed in on the proper dividing line between parties whose normal conduct might reasonably give rise to liability (without some heightened effort to mitigate harm) and those whose conduct should not entail this sort of elevated responsibility.

Here, the plaintiffs have framed their case in a way that would essentially collapse this analysis into a strict liability standard by simply asking “did something bad happen on a platform that could have been prevented?” As we discuss below, the plaintiffs’ theory goes too far and would overextend intermediary liability to the point that the social costs would outweigh the benefits of deterrence.

The Law & Economics of Intermediary Liability: Who’s Best Positioned to Monitor and Control?

In our amicus brief in Fleites v. MindGeek (as well as our law review article on Section 230 and intermediary liability), we argued that, in limited circumstances, the law should (and does) place responsibility on intermediaries to monitor and control conduct. It is not always sufficient to aim legal sanctions solely at the parties who commit harms directly—e.g., where harms are committed by many pseudonymous individuals dispersed across large online services. In such cases, social costs may be minimized when legal responsibility is placed upon the least-cost avoider: the party in the best position to limit harm, even if it is not the party directly committing the harm.

Thus, in some circumstances, intermediaries (like Twitter) may be the least-cost avoider, such as when information costs are sufficiently low that effective monitoring and control of end users is possible, and when pseudonymity makes remedies against end users ineffective.

But there are costs to imposing such liability—including, importantly, “collateral censorship” of user-generated content by online social-media platforms. This manifests in platforms acting more defensively—taking down more speech, and generally moving in a direction that would make the Internet less amenable to open, public discussion—in an effort to avoid liability. Indeed, a core reason that Section 230 exists in the first place is to reduce these costs. (Whether Section 230 gets the balance correct is another matter, which we take up at length in our law review article linked above).

From an economic perspective, liability should be imposed on the party or parties best positioned to deter the harms in question, so long as the social costs incurred by, and as a result of, enforcement do not exceed the social gains realized. In other words, there is a delicate balance that must be struck to determine when intermediary liability makes sense in a given case. On the one hand, we want illicit content to be deterred, and on the other, we want to preserve the open nature of the Internet. The costs generated from the over-deterrence of legal, beneficial speech is why intermediary liability for user-generated content can’t be applied on a strict-liability basis, and why some bad content will always exist in the system.

The Spectrum of Properly Construed Intermediary Liability: Lessons from Fleites v. Mindgeek

Fleites v. Mindgeek illustrates well that proper application of liability to intermedium exists on a spectrum. Mindgeek—the owner/operator of the website Pornhub—was sued under Racketeer Influenced and Corrupt Organizations Act (RICO) and Victims of Trafficking and Violence Protection Act (TVPA) theories for promoting and profiting from nonconsensual pornography and human trafficking. But the plaintiffs also joined Visa as a defendant, claiming that Visa knowingly provided payment processing for some of Pornhub’s services, making it an aider/abettor.

The “best” defendants, obviously, would be the individuals actually producing the illicit content, but limiting enforcement to direct actors may be insufficient. The statute therefore contemplates bringing enforcement actions against certain intermediaries for aiding and abetting. But there are a host of intermediaries you could theoretically bring into a liability scheme. First, obviously, is Mindgeek, as the platform operator. Plaintiffs felt that Visa was also sufficiently connected to the harm by processing payments for MindGeek users and content posters, and that it should therefore bear liability, as well.

The problem, however, is that there is no limiting principle in the plaintiffs’ theory of the case against Visa. Theoretically, the group of intermediaries “facilitating” the illicit conduct is practically limitless. As we pointed out in our Fleites amicus:

In theory, any sufficiently large firm with a role in the commerce at issue could be deemed liable if all that is required is that its services “allow[]” the alleged principal actors to continue to do business. FedEx, for example, would be liable for continuing to deliver packages to MindGeek’s address. The local waste management company would be liable for continuing to service the building in which MindGeek’s offices are located. And every online search provider and Internet service provider would be liable for continuing to provide service to anyone searching for or viewing legal content on MindGeek’s sites.

Twitter’s attorney in Taamneh, Seth Waxman, made much the same point in responding to Justice Sonia Sotomayor:

…the rule that the 9th Circuit has posited and that the plaintiffs embrace… means that as a matter of course, every time somebody is injured by an act of international terrorism committed, planned, or supported by a foreign terrorist organization, each one of these platforms will be liable in treble damages and so will the telephone companies that provided telephone service, the bus company or the taxi company that allowed the terrorists to move about freely. [emphasis added]

In our Fleites amicus, we argued that a more practical approach is needed; one that tries to draw a sensible line on this liability spectrum. Most importantly, we argued that Visa was not in a position to monitor and control what happened on MindGeek’s platform, and thus was a poor candidate for extending intermediary liability. In that case, because of the complexities of the payment-processing network, Visa had no visibility into what specific content was being purchased, what content was being uploaded to Pornhub, and which individuals may have been uploading illicit content. Worse, the only evidence—if it can be called that—that Visa was aware that anything illicit was happening consisted of news reports in the mainstream media, which may or may not have been accurate, and on which Visa was unable to do any meaningful follow-up investigation.

Our Fleites brief didn’t explicitly consider MindGeek’s potential liability. But MindGeek obviously is in a much better position to monitor and control illicit content. With that said, merely having the ability to monitor and control is not sufficient. Given that content moderation is necessarily an imperfect activity, there will always be some bad content that slips through. Thus, the relevant question is, under the circumstances, did the intermediary act reasonably—e.g., did it comply with best practices—in attempting to identify, remove, and deter illicit content?

In Visa’s case, the answer is not difficult. Given that it had no way to know about or single out transactions as likely to be illegal, its only recourse to reduce harm (and its liability risk) would be to cut off all payment services for Mindgeek. The constraints on perfectly legal conduct that this would entail certainly far outweigh the benefits of reducing illegal activity.

Moreover, such a theory could require Visa to stop processing payments for an enormous swath of legal activity outside of PornHub. For example, purveyors of illegal content on PornHub use ISP services to post their content. A theory of liability that held Visa responsible simply because it plays some small part in facilitating the illegal activity’s existence would presumably also require Visa to shut off payments to ISPs—certainly, that would also curtail the amount of illegal content.

With MindGeek, the answer is a bit more difficult. The anonymous or pseudonymous posting of pornographic content makes it extremely difficult to go after end users. But knowing that human trafficking and nonconsensual pornography are endemic problems, and knowing (as it arguably did) that such content was regularly posted on Pornhub, Mindgeek could be deemed to have acted unreasonably for not having exercised very strict control over its users (at minimum, say, by verifying users’ real identities to facilitate law enforcement against bad actors and deter the posting of illegal content). Indeed, it is worth noting that MindGeek/Pornhub did implement exactly this control, among others, following the public attention arising from news reports of nonconsensual and trafficking-related content on the site. 

But liability for MindGeek is only even plausible given that it might be able to act in such a way that imposes greater burdens on illegal content providers without deterring excessive amounts of legal content. If its only reasonable means of acting would be, say, to shut down PornHub entirely, then just as with Visa, the cost of imposing liability in terms of this “collateral censorship” would surely outweigh the benefits.

Applying the Law & Economics of Collateral Liability to Twitter in Taamneh

Contrast the situation of MindGeek in Fleites with Twitter in Taamneh. Twitter may seem to be a good candidate for intermediary liability. It also has the ability to monitor and control what is posted on its platform. And it faces a similar problem of pseudonymous posting that may make it difficult to go after end users for terrorist activity. But this is not the end of the analysis.

Given that Twitter operates a platform that hosts the general—and overwhelmingly legal—discussions of hundreds of millions of users, posting billions of pieces of content, it would be reasonable to impose a heightened responsibility on Twitter only if it could exercise it without excessively deterring the copious legal content on its platform.

At the same time, Twitter does have active policies to police and remove terrorist content. The relevant question, then, is not whether it should do anything to police such content, but whether a failure to do some unspecified amount more was unreasonable, such that its conduct should constitute aiding and abetting terrorism.

Under the Antiterrorism Act, because the basis of liability is “knowingly providing substantial assistance” to a person who committed an act of international terrorism, “unreasonableness” here would have to mean that the failure to do more transforms its conduct from insubstantial to substantial assistance and/or that the failure to do more constitutes a sort of willful blindness. 

The problem is that doing more—policing its site better and removing more illegal content—would do nothing to alter the extent of assistance it provides to the illegal content that remains. And by the same token, almost by definition, Twitter does not “know” about illegal content it fails to remove. In theory, there is always “more” it could do. But given the inherent imperfections of content moderation at scale, this will always be true, right up to the point that the platform is effectively forced to shut down its service entirely.  

This doesn’t mean that reasonable content moderation couldn’t entail something more than Twitter was doing. But it does mean that the mere existence of illegal content that, in theory, Twitter could have stopped can’t be the basis of liability. And yet the Taamneh plaintiffs make no allegation that acts of terrorism were actually planned on Twitter’s platform, and offer no reasonable basis on which Twitter could have practical knowledge of such activity or practical opportunity to control it.

Nor did plaintiffs point out any examples where Twitter had actual knowledge of such content or users and failed to remove them. Most importantly, the plaintiffs did not demonstrate that any particular content-moderation activities (short of shutting down Twitter entirely) would have resulted in Twitter’s knowledge of or ability to control terrorist activity. Had they done so, it could conceivably constitute a basis for liability. But if the only practical action Twitter can take to avoid liability and prevent harm entails shutting down massive amounts of legal speech, the failure to do so cannot be deemed unreasonable or provide the basis for liability.   

And, again, such a theory of liability would contain no viable limiting principle if it does not consider the practical ability to control harmful conduct without imposing excessively costly collateral damage. Indeed, what in principle would separate a search engine from Twitter, if the search engine linked to an alleged terrorist’s account? Both entities would have access to news reports, and could thus be assumed to have a generalized knowledge that terrorist content might exist on Twitter. The implication of this case, if the plaintiff’s theory is accepted, is that Google would be forced to delist Twitter whenever a news article appears alleging terrorist activity on the service. Obviously, that is untenable for the same reason it’s not tenable to impose an effective obligation on Twitter to remove all terrorist content: the costs of lost legal speech and activity.   

Justice Ketanji Brown Jackson seemingly had the same thought when she pointedly asked whether the plaintiffs’ theory would mean that Linda Hamilton in the Halberstram v. Welch case could have been held liable for aiding and abetting, merely for taking care of Bernard Welch’s kids at home while Welch went out committing burglaries and the murder of Michael Halberstram (instead of the real reason she was held liable, which was for doing Welch’s bookkeeping and helping sell stolen items). As Jackson put it:

…[I]n the Welch case… her taking care of his children [was] assisting him so that he doesn’t have to be at home at night? He’s actually out committing robberies. She would be assisting his… illegal activities, but I understood that what made her liable in this situation is that the assistance that she was providing was… assistance that was directly aimed at the criminal activity. It was not sort of this indirect supporting him so that he can actually engage in the criminal activity.

In sum, the theory propounded by the plaintiffs (and accepted by the 9th U.S. Circuit Court of Appeals) is just too far afield for holding Twitter liable. As Twitter put it in its reply brief, the plaintiffs’ theory (and the 9th Circuit’s holding) is that:

…providers of generally available, generic services can be held responsible for terrorist attacks anywhere in the world that had no specific connection to their offerings, so long as a plaintiff alleges (a) general awareness that terrorist supporters were among the billions who used the services, (b) such use aided the organization’s broader enterprise, though not the specific attack that injured the plaintiffs, and (c) the defendant’s attempts to preclude that use could have been more effective.

Conclusion

If Section 230 immunity isn’t found to apply in Gonzalez v. Google, and the complaint in Taamneh is allowed to go forward, the most likely response of social-media companies will be to reduce the potential for liability by further restricting access to their platforms. This could mean review by some moderator or algorithm of messages or videos before they are posted to ensure that there is no terrorist content. Or it could mean review of users’ profiles before they are able to join the platform to try to ascertain their political leanings or associations with known terrorist groups. Such restrictions would entail copious false negatives, along with considerable costs to users and to open Internet speech.

And in the end, some amount of terrorist content would still get through. If the plaintiffs’ theory leads to liability in Taamneh, it’s hard to see how the same principle wouldn’t entail liability even under these theoretical, heightened practices. Absent a focus on an intermediary defendant’s ability to control harmful content or conduct, without imposing excessive costs on legal content or conduct, the theory of liability has no viable limit.

In sum, to hold Twitter (or other social-media platforms) liable under the facts presented in Taamneh would stretch intermediary liability far beyond its sensible bounds. While Twitter may seem a good candidate for intermediary liability in theory, it should not be held liable for, in effect, simply providing its services.

Perhaps Section 230’s blanket immunity is excessive. Perhaps there is a proper standard that could impose liability on online intermediaries for user-generated content in limited circumstances properly tied to their ability to control harmful actors and the costs of doing so. But liability in the circumstances suggested by the Taamneh plaintiffs—effectively amounting to strict liability—would be an even bigger mistake in the opposite direction.

In First Amendment, Platforms, Supreme Court, Truth on the Market, Twitter , , ,
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The Return of (De Facto) Rate Regulation: Title II Will Slow Broadband Deployment and Access

Geoff Manne, Kristian Stout & Ben Sperry —  8 February 2022

President Joe Biden’s nomination of Gigi Sohn to serve on the Federal Communications Commission (FCC)—scheduled for a second hearing before the Senate Commerce Committee Feb. 9—has been met with speculation that it presages renewed efforts at the FCC to enforce net neutrality. A veteran of tech policy battles, Sohn served as counselor to former FCC Chairman Tom Wheeler at the time of the commission’s 2015 net-neutrality order.

The political prospects for Sohn’s confirmation remain uncertain, but it’s probably fair to assume a host of associated issues—such as whether to reclassify broadband as a Title II service; whether to ban paid prioritization; and whether the FCC ought to exercise forbearance in applying some provisions of Title II to broadband—are likely to be on the FCC’s agenda once the full complement of commissioners is seated. Among these is an issue that doesn’t get the attention it merits: rate regulation of broadband services. 

History has, by now, definitively demonstrated that the FCC’s January 2018 repeal of the Open Internet Order didn’t produce the parade of horribles that net-neutrality advocates predicted. Most notably, paid prioritization—creating so-called “fast lanes” and “slow lanes” on the Internet—has proven a non-issue. Prioritization is a longstanding and widespread practice and, as discussed at length in this piece from The Verge on Netflix’s Open Connect technology, the Internet can’t work without some form of it. 

Indeed, the Verge piece makes clear that even paid prioritization can be an essential tool for edge providers. As we’ve previously noted, paid prioritization offers an economically efficient means to distribute the costs of network optimization. As Greg Sidak and David Teece put it:

Superior QoS is a form of product differentiation, and it therefore increases welfare by increasing the production choices available to content and applications providers and the consumption choices available to end users…. [A]s in other two-sided platforms, optional business-to-business transactions for QoS will allow broadband network operators to reduce subscription prices for broadband end users, promoting broadband adoption by end users, which will increase the value of the platform for all users.

The Perennial Threat of Price Controls

Although only hinted at during Sohn’s initial confirmation hearing in December, the real action in the coming net-neutrality debate is likely to be over rate regulation. 

Pressed at that December hearing by Sen. Marsha Blackburn (R-Tenn.) to provide a yes or no answer as to whether she supports broadband rate regulation, Sohn said no, before adding “That was an easy one.” Current FCC Chair Jessica Rosenworcel has similarly testified that she wants to continue an approach that “expressly eschew[s] future use of prescriptive, industry-wide rate regulation.” 

But, of course, rate regulation is among the defining features of most Title II services. While then-Chairman Wheeler promised to forebear from rate regulation at the time of the FCC’s 2015 Open Internet Order (OIO), stating flatly that “we are not trying to regulate rates,” this was a small consolation. At the time, the agency decided to waive “the vast majority of rules adopted under Title II” (¶ 51), but it also made clear that the commission would “retain adequate authority to” rescind such forbearance (¶ 538) in the future. Indeed, one could argue that the reason the 2015 order needed to declare resolutely that “we do not and cannot envision adopting new ex ante rate regulation of broadband Internet access service in the future” (¶ 451)) is precisely because of how equally resolute it was that the Commission would retain basic Title II authority, including the authority to impose rate regulation (“we are not persuaded that application of sections 201 and 202 is not necessary to ensure just, reasonable, and nondiscriminatory conduct by broadband providers and for the protection of consumers” (¶ 446)). 

This was no mere parsing of words. The 2015 order takes pains to assert repeatedly that forbearance was conditional and temporary, including with respect to rate regulation (¶ 497). As then-Commissioner Ajit Pai pointed out in his dissent from the OIO:

The plan is quite clear about the limited duration of its forbearance decisions, stating that the FCC will revisit them in the future and proceed in an incremental manner with respect to additional regulation. In discussing additional rate regulation, tariffs, last-mile unbundling, burdensome administrative filing requirements, accounting standards, and entry and exit regulation, the plan repeatedly states that it is only forbearing “at this time.” For others, the FCC will not impose rules “for now.” (p. 325)

For broadband providers, the FCC having the ability even to threaten rate regulation could disrupt massive amounts of investment in network buildout. And there is good reason for the sector to be concerned about the prevailing political winds, given the growing (and misguided) focus on price controls and their potential to be used to stem inflation. 

Indeed, politicians’ interest in controls on broadband rates predates the recent supply-chain-driven inflation. For example, President Biden’s American Jobs Plan called on Congress to reduce broadband prices:

President Biden believes that building out broadband infrastructure isn’t enough. We also must ensure that every American who wants to can afford high-quality and reliable broadband internet. While the President recognizes that individual subsidies to cover internet costs may be needed in the short term, he believes continually providing subsidies to cover the cost of overpriced internet service is not the right long-term solution for consumers or taxpayers. Americans pay too much for the internet – much more than people in many other countries – and the President is committed to working with Congress to find a solution to reduce internet prices for all Americans. (emphasis added)

Senate Majority Leader Chuck Schumer (D-N.Y.) similarly suggested in a 2018 speech that broadband affordability should be ensured: 

[We] believe that the Internet should be kept free and open like our highways, accessible and affordable to every American, regardless of ability to pay. It’s not that you don’t pay, it’s that if you’re a little guy or gal, you shouldn’t pay a lot more than the bigshots. We don’t do that on highways, we don’t do that with utilities, and we shouldn’t do that on the Internet, another modern, 21st century highway that’s a necessity.

And even Sohn herself has a history of somewhat equivocal statements regarding broadband rate regulation. In a 2018 article referencing the Pai FCC’s repeal of the 2015 rules, Sohn lamented in particular that removing the rules from Title II’s purview meant losing the “power to constrain ‘unjust and unreasonable’ prices, terms, and practices by [broadband] providers” (p. 345).

Rate Regulation by Any Other Name

Even if Title II regulation does not end up taking the form of explicit price setting by regulatory fiat, that doesn’t necessarily mean the threat of rate regulation will have been averted. Perhaps even more insidious is de facto rate regulation, in which agencies use their regulatory leverage to shape the pricing policies of providers. Indeed, Tim Wu—the progenitor of the term “net neutrality” and now an official in the Biden White House—has explicitly endorsed the use of threats by regulatory agencies in order to obtain policy outcomes: 

The use of threats instead of law can be a useful choice—not simply a procedural end run. My argument is that the merits of any regulative modality cannot be determined without reference to the state of the industry being regulated. Threat regimes, I suggest, are important and are best justified when the industry is undergoing rapid change—under conditions of “high uncertainty.” Highly informal regimes are most useful, that is, when the agency faces a problem in an environment in which facts are highly unclear and evolving. Examples include periods surrounding a newly invented technology or business model, or a practice about which little is known. Conversely, in mature, settled industries, use of informal procedures is much harder to justify.

The broadband industry is not new, but it is characterized by rapid technological change, shifting consumer demands, and experimental business models. Thus, under Wu’s reasoning, it appears ripe for regulation via threat.

What’s more, backdoor rate regulation is already practiced by the U.S. Department of Agriculture (USDA) in how it distributes emergency broadband funds to Internet service providers (ISPs) that commit to net-neutrality principles. The USDA prioritizes funding for applicants that operate “their networks pursuant to a ‘wholesale’ (in other words, ‘open access’) model and provid[e] a ‘low-cost option,’ both of which unnecessarily and detrimentally inject government rate regulation into the competitive broadband marketplace.”

States have also been experimenting with broadband rate regulation in the form of “affordable broadband” mandates. For example, New York State passed the Affordable Broadband Act (ABA) in 2021, which claimed authority to assist low-income consumers by capping the price of service and mandating provision of a low-cost service tier. As the federal district court noted in striking down the law:

In Defendant’s words, the ABA concerns “Plaintiffs’ pricing practices” by creating a “price regime” that “set[s] a price ceiling,” which flatly contradicts [New York Attorney General Letitia James’] simultaneous assertion that “the ABA does not ‘rate regulate’ broadband services.” “Price ceilings” regulate rates.

The 2015 Open Internet Order’s ban on paid prioritization, couched at the time in terms of “fairness,” was itself effectively a rate regulation that set wholesale prices at zero. The order even empowered the FCC to decide the rates ISPs could charge to edge providers for interconnection or peering agreements on an individual, case-by-case basis. As we wrote at the time:

[T]he first complaint under the new Open Internet rule was brought against Time Warner Cable by a small streaming video company called Commercial Network Services. According to several news stories, CNS “plans to file a peering complaint against Time Warner Cable under the Federal Communications Commission’s new network-neutrality rules unless the company strikes a free peering deal ASAP.” In other words, CNS is asking for rate regulation for interconnection. Under the Open Internet Order, the FCC can rule on such complaints, but it can only rule on a case-by-case basis. Either TWC assents to free peering, or the FCC intervenes and sets the rate for them, or the FCC dismisses the complaint altogether and pushes such decisions down the road…. While the FCC could reject this complaint, it is clear that they have the ability to impose de facto rate regulation through case-by-case adjudication. 

The FCC’s ability under the OIO to ensure that prices were “fair” contemplated an enormous degree of discretionary power:

Whether it is rate regulation according to Title II (which the FCC ostensibly didn’t do through forbearance) is beside the point. This will have the same practical economic effects and will be functionally indistinguishable if/when it occurs.

The Economics of Price Controls

Economists from across the political spectrum have long decried the use of price controls. In a recent (now partially deleted) tweet, Nobel laureate and liberal New York Times columnist Paul Krugman lambasted calls for price controls in response to inflation as “truly stupid.” In a recent survey of top economists on issues related to inflation, University of Chicago economist Austan Goolsbee, a former chair of the Council of Economic Advisors under President Barack Obama, strongly disagreed that 1970s-style price controls could successfully reduce U.S. inflation over the next 12 months, stating simply: “Just stop. Seriously.”

The reason for the bipartisan consensus is clear: both history and economics have demonstrated that price caps lead to shortages by artificially stimulating demand for a good, while also creating downward pressure on supply for that good.

Broadband rate regulation, whether implicit or explicit, will have similarly negative effects on investment and deployment. Limiting returns on investment reduces the incentive to make those investments. Broadband markets subject to price caps would see particularly large dislocations, given the massive upfront investment required, the extended period over which returns are realized, and the elevated risk of under-recoupment for quality improvements. Not only would existing broadband providers make fewer and less intensive investments to maintain their networks, they would invest less in improving quality:

When it faces a binding price ceiling, a regulated monopolist is unable to capture the full incremental surplus generated by an increase in service quality. Consequently, when the firm bears the full cost of the increased quality, it will deliver less than the surplus-maximizing level of quality. As Spence (1975, p. 420, note 5) observes, “where price is fixed… the firm always sets quality too low.” (p 9-10)

Quality suffers under price regulation not just because firms can’t capture the full value of their investments, but also because it is often difficult to account for quality improvements in regulatory pricing schemes:

The design and enforcement of service quality regulations is challenging for at least three reasons. First, it can be difficult to assess the benefits and the costs of improving service quality. Absent accurate knowledge of the value that consumers place on elevated levels of service quality and the associated costs, it is difficult to identify appropriate service quality standards. It can be particularly challenging to assess the benefits and costs of improved service quality in settings where new products and services are introduced frequently. Second, the level of service quality that is actually delivered sometimes can be difficult to measure. For example, consumers may value courteous service representatives, and yet the courtesy provided by any particular representative may be difficult to measure precisely. When relevant performance dimensions are difficult to monitor, enforcing desired levels of service quality can be problematic. Third, it can be difficult to identify the party or parties that bear primary responsibility for realized service quality problems. To illustrate, a customer may lose telephone service because an underground cable is accidentally sliced. This loss of service could be the fault of the telephone company if the company fails to bury the cable at an appropriate depth in the ground or fails to notify appropriate entities of the location of the cable. Alternatively, the loss of service might reflect a lack of due diligence by field workers from other companies who slice a telephone cable that is buried at an appropriate depth and whose location has been clearly identified. (p 10)

Firms are also less likely to enter new markets, where entry is risky and competition with a price-regulated monopolist can be a bleak prospect. Over time, price caps would degrade network quality and availability. Price caps in sectors characterized by large capital investment requirements also tend to exacerbate the need for an exclusive franchise, in order to provide some level of predictable returns for the regulated provider. Thus, “managed competition” of this sort may actually have the effect of reducing competition.

None of these concerns are dissipated where regulators use indirect, rather than direct, means to cap prices. Interconnection mandates and bans on paid prioritization both set wholesale prices at zero. Broadband is a classic multi-sided market. If the price on one side of the market is set at zero through rate regulation, then there will be upward pricing pressure on the other side of the market. This means higher prices for consumers (or else, it will require another layer of imprecise and complex regulation and even deeper constraints on investment). 

Similarly, implicit rate regulation under an amorphous “general conduct standard” like that included in the 2015 order would allow the FCC to effectively ban practices like zero rating on mobile data plans. At the time, the OIO restricted ISPs’ ability to “unreasonably interfere with or disadvantage”: 

  1. consumer access to lawful content, applications, and services; or
  2. content providers’ ability to distribute lawful content, applications or services.

The FCC thus signaled quite clearly that it would deem many zero-rating arrangements as manifestly “unreasonable.” Yet, for mobile customers who want to consume only a limited amount of data, zero rating of popular apps or other data uses is, in most cases, a net benefit for consumer welfare: 

These zero-rated services are not typically designed to direct users’ broad-based internet access to certain content providers ahead of others; rather, they are a means of moving users from a world of no access to one of access….

…This is a business model common throughout the internet (and the rest of the economy, for that matter). Service providers often offer a free or low-cost tier that is meant to facilitate access—not to constrain it.

Economics has long recognized the benefits of such pricing mechanisms, which is why competition authorities always scrutinize such practices under a rule of reason, requiring a showing of substantial exclusionary effect and lack of countervailing consumer benefit before condemning such practices. The OIO’s Internet conduct rule, however, encompassed no such analytical limits, instead authorizing the FCC to forbid such practices in the name of a nebulous neutrality principle and with no requirement to demonstrate net harm. Again, although marketed under a different moniker, banning zero rating outright is a de facto price regulation—and one that is particularly likely to harm consumers.

Conclusion

Ultimately, it’s important to understand that rate regulation, whatever the imagined benefits, is not a costless endeavor. Costs and risk do not disappear under rate regulation; they are simply shifted in one direction or another—typically with costs borne by consumers through some mix of reduced quality and innovation. 

While more can be done to expand broadband access in the United States, the Internet has worked just fine without Title II regulation. It’s a bit trite to repeat, but it remains relevant to consider how well U.S. networks fared during the COVID-19 pandemic. That performance was thanks to ongoing investment from broadband companies over the last 20 years, suggesting the market for broadband is far more competitive than net-neutrality advocates often claim.

Government policy may well be able to help accelerate broadband deployment to the unserved portions of the country where it is most needed. But the way to get there is not by imposing price controls on broadband providers. Instead, we should be removing costly, government-erected barriers to buildout and subsidizing and educating consumers where necessary.

In Broadband, Federal Communications Commission, Net Neutrality, Telecommunications, Truth on the Market , , , , , , ,
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Fleites v. MindGeek Contemplates Significant Expansion of Collateral Liability

Geoff Manne, Kristian Stout & Ben Sperry —  4 February 2022

In Fleites v. MindGeek—currently before the U.S. District Court for the District of Central California, Southern Division—plaintiffs seek to hold MindGeek subsidiary PornHub liable for alleged instances of human trafficking under the Racketeer Influenced and Corrupt Organizations (RICO) and the Trafficking Victims Protection Reauthorization Act (TVPRA). Writing for the International Center for Law & Economics (ICLE), we have filed a motion for leave to submit an amicus brief regarding whether it is valid to treat co-defendant Visa Inc. as a proper party under principles of collateral liability.

The proposed brief draws on our previous work on the law & economics of collateral liability, and argues that holding Visa liable as a participant under RICO or TVPRA would amount to stretching collateral liability far beyond what is reasonable. Such a move, we posit, would “generate a massive amount of social cost that would outweigh the potential deterrent or compensatory gains sought.”

Collateral liability can make sense when intermediaries are in a position to effectively monitor and control potential harms. That is, it can be appropriate to apply collateral liability to parties who are what is often referred to as a “least cost avoider.” As we write:

In some circumstances it is indeed proper to hold third parties liable even though they are not primary actors directly implicated in wrongdoing. Most significantly, such liability may be appropriate when a collateral actor stands in a relationship to the wrongdoing (or wrongdoers or victims) such that the threat of liability can incentivize it to take action (or refrain from taking action) to prevent or mitigate the wrongdoing. That is to say, collateral liability may be appropriate when the third party has a significant enough degree of control over the primary actors such that its actions can cause them to reduce the risk of harm at reasonable cost. Importantly, however, such liability is appropriate only when direct deterrence is insufficient and/or the third party can prevent harm at lower cost or more effectively than direct enforcement… From an economic perspective, liability should be imposed upon the party or parties best positioned to deter the harms in question, such that the costs of enforcement do not exceed the social gains realized.

The law of negligence under the common law, as well as contributory infringement under copyright law, both help illustrate this principle. Under the common law, collateral actors have a duty in only limited circumstances, when the harms are “reasonably foreseeable” and the actor has special access to particularized information about the victims or the perpetrators, as well as a special ability to control harmful conditions. Under copyright law, collateral liability is similarly limited to circumstances where collateral actors are best positioned to prevent the harm, and the benefits of holding such actors liable exceed the harms. 

Neither of these conditions are true in Fleites v. MindGeek: Visa is not the type of collateral actor that has any access to specialized information or the ability to control actual bad actors. Visa, as a card-payment network, simply processes payments. The only tool at the disposal of Visa is a giant sledgehammer: it can foreclose all transactions to particular sites that run over its network. There is no dispute that the vast majority of content hosted on sites like MindGeek is lawful, however awful one may believe pornography to be. Holding card networks liable here would create incentives to avoid processing payments for such sites altogether in order to avoid legal consequences. 

The potential costs of the theory of liability asserted here stretch far beyond Visa or this particular case. The plaintiffs’ theory would hold anyone liable who provides services that “allow[] the alleged principal actors to continue to do business.” This would mean that Federal Express, for example, would be liable for continuing to deliver packages to MindGeek’s address or that a waste-management company could be liable for providing custodial services to the building where MindGeek has an office. 

According to the plaintiffs, even the mere existence of a newspaper article alleging a company is doing something illegal is sufficient to find that professionals who have provided services to that company “participate” in a conspiracy. This would have ripple effects for professionals from many other industries—from accountants to bankers to insurance—who all would see significantly increased risk of liability.

To read the rest of the brief, see here.

In Copyright, Credit Cards, Economic Theory, Platforms, Truth on the Market , , , , , ,
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