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The Internet is a modern miracle: from providing all varieties of entertainment, to facilitating life-saving technologies, to keeping us connected with distant loved ones, the scope of the Internet’s contribution to our daily lives is hard to overstate. Moving forward there is undoubtedly much more that we can and will do with the Internet, and part of that innovation will, naturally, require a reconsideration of existing laws and how new Internet-enabled modalities fit into them.

But when undertaking such a reconsideration, the goal should not be simply to promote Internet-enabled goods above all else; rather, it should be to examine the law’s effect on the promotion of new technology within the context of other, competing social goods. In short, there are always trade-offs entailed in changing the legal order. As such, efforts to reform, clarify, or otherwise change the law that affects Internet platforms must be balanced against other desirable social goods, not automatically prioritized above them.

Unfortunately — and frequently with the best of intentions — efforts to promote one good thing (for instance, more online services) inadequately take account of the balance of the larger legal realities at stake. And one of the most important legal realities that is too often readily thrown aside in the rush to protect the Internet is that policy be established through public, (relatively) democratically accountable channels.

Trade deals and domestic policy

Recently a letter was sent by a coalition of civil society groups and law professors asking the NAFTA delegation to incorporate U.S.-style intermediary liability immunity into the trade deal. Such a request is notable for its timing in light of the ongoing policy struggles over SESTA —a bill currently working its way through Congress that seeks to curb human trafficking through online platforms — and the risk that domestic platform companies face of losing (at least in part) the immunity provided by Section 230 of the Communications Decency Act. But this NAFTA push is not merely about a tradeoff between less trafficking and more online services, but between promoting policies in a way that protects the rule of law and doing so in a way that undermines the rule of law.

Indeed, the NAFTA effort appears to be aimed at least as much at sidestepping the ongoing congressional fight over platform regulation as it is aimed at exporting U.S. law to our trading partners. Thus, according to EFF, for example, “[NAFTA renegotiation] comes at a time when Section 230 stands under threat in the United States, currently from the SESTA and FOSTA proposals… baking Section 230 into NAFTA may be the best opportunity we have to protect it domestically.”

It may well be that incorporating Section 230 into NAFTA is the “best opportunity” to protect the law as it currently stands from efforts to reform it to address conflicting priorities. But that doesn’t mean it’s a good idea. In fact, whatever one thinks of the merits of SESTA, it is not obviously a good idea to use a trade agreement as a vehicle to override domestic reforms to Section 230 that Congress might implement. Trade agreements can override domestic law, but that is not the reason we engage in trade negotiations.

In fact, other parts of NAFTA remain controversial precisely for their ability to undermine domestic legal norms, in this case in favor of guaranteeing the expectations of foreign investors. EFF itself is deeply skeptical of this “investor-state” dispute process (“ISDS”), noting that “[t]he latest provisions would enable multinational corporations to undermine public interest rules.” The irony here is that ISDS provides a mechanism for overriding domestic policy that is a close analogy for what EFF advocates for in the Section 230/SESTA context.

ISDS allows foreign investors to sue NAFTA signatories in a tribunal when domestic laws of that signatory have harmed investment expectations. The end result is that the signatory could be responsible for paying large sums to litigants, which in turn would serve as a deterrent for the signatory to continue to administer its laws in a similar fashion.

Stated differently, NAFTA currently contains a mechanism that favors one party (foreign investors) in a way that prevents signatory nations from enacting and enforcing laws approved of by democratically elected representatives. EFF and others disapprove of this.

Yet, at the same time, EFF also promotes the idea that NAFTA should contain a provision that favors one party (Internet platforms) in a way that would prevent signatory nations from enacting and enforcing laws like SESTA that (might be) approved of by democratically elected representatives.

A more principled stance would be skeptical of the domestic law override in both contexts.

Restating Copyright or creating copyright policy?

Take another example: Some have suggested that the American Law Institute (“ALI”) is being used to subvert Congressional will. Since 2013, ALI has taken upon itself the project to “restate” the law of copyright. ALI is well known and respected for its common law restatements, but it may be that something more than mere restatement is going on here. As the NY Bar Association recently observed:

The Restatement as currently drafted appears inconsistent with the ALI’s long-standing goal of promoting clarity in the law: indeed, rather than simply clarifying or restating that law, the draft offers commentary and interpretations beyond the current state of the law that appear intended to shape current and future copyright policy.  

It is certainly odd that ALI (or any other group) would seek to restate a body of law that is already stated in the form of an overarching federal statute. The point of a restatement is to gather together the decisions of disparate common law courts interpreting different laws and precedent in order to synthesize a single, coherent framework approximating an overall consensus. If done correctly, a restatement of a federal statute would, theoretically, end up with the exact statute itself along with some commentary about how judicial decisions have filled in the blanks differently — a state of affairs that already exists with the copious academic literature commenting on federal copyright law.

But it seems that merely restating judicial interpretations was not the only objective behind the copyright restatement effort. In a letter to ALI, one of the scholars responsible for the restatement project noted that:

While congressional efforts to improve the Copyright Act… may be a welcome and beneficial development, it will almost certainly be a long and contentious process… Register Pallante… [has] not[ed] generally that “Congress has moved slowly in the copyright space.”

Reform of copyright law, in other words, and not merely restatement of it, was an important impetus for the project. As an attorney for the Copyright Office observed, “[a]lthough presented as a “Restatement” of copyright law, the project would appear to be more accurately characterized as a rewriting of the law.” But “rewriting” is a job for the legislature. And even if Congress moves slowly, or the process is frustrating, the democratic processes that produce the law should still be respected.

Pyrrhic Policy Victories

Attempts to change copyright or entrench liability immunity through any means possible are rational actions at an individual level, but writ large they may undermine the legal fabric of our system and should be resisted.

It’s no surprise why some may be frustrated and concerned about intermediary liability and copyright issues: On the margin, it’s definitely harder to operate an Internet platform if it faces sweeping liability for the actions of third parties (whether for human trafficking or infringing copyrights). Maybe copyright law needs to be reformed and perhaps intermediary liability must be maintained exactly as it is (or expanded). But the right way to arrive at these policy outcomes is not through backdoors — and it is not to begin with the assertion that such outcomes are required.

Congress and the courts can be frustrating vehicles through which to enact public policy, but they have the virtue of being relatively open to public deliberation, and of having procedural constraints that can circumscribe excesses and idiosyncratic follies. We might get bad policy from Congress. We might get bad cases from the courts. But the theory of our system is that, on net, having a frustratingly long, circumscribed, and public process will tend to weed out most of the bad ideas and impulses that would otherwise result from unconstrained decision making, even if well-intentioned.

We should meet efforts like these to end-run Congress and the courts with significant skepticism. Short term policy “victories” are likely not worth the long-run consequences. These are important, complicated issues. If we surreptitiously adopt idiosyncratic solutions to them, we risk undermining the rule of law itself.

A panelist brought up an interesting tongue-in-cheek observation about the rising populist antitrust movement at a Heritage antitrust event this week. To the extent that the new populist antitrust movement is broadly concerned about effects on labor and wage depression, then, in principle, it should also be friendly to cartels. Although counterintuitive, employees have long supported and benefited from cartels, because cartels generally afford both job security and higher wages than competitive firms. And, of course, labor itself has long sought the protection of cartels – in the form of unions – to secure the same benefits.   

For instance, in the days before widespread foreign competition in domestic auto markets, native unionized workers of the big three producers enjoyed a relatively higher wage for relatively less output. Competition from abroad changed the economic landscape for both producers and workers with the end result being a reduction in union power and relatively lower overall wages for workers. The union model — a labor cartel — can guarantee higher wages to those workers.

The same story can be seen on other industries, as well, from telecommunications to service workers to public sector employees. Generally, market power on the labor demand side (employers) tends to facilitate market power on the labor supply side: firms with market power — with supracompetitive profits — can afford to pay more for labor and often are willing to do so in order to secure political support (and also to make it more expensive for potential competitors to hire skilled employees). Labor is a substantial cost for firms in competitive markets, however, so firms without market power are always looking to economize on labor (that is, have low wages, as few employees as needed, and to substitute capital for labor wherever efficient to do so).

Therefore, if broad labor effects should be a prime concern of antitrust, perhaps enforcers should use antitrust laws to encourage cartel formation when it might increase wages, regardless of the effects on productivity, prices, and other efficiencies that may arise (or perhaps, as a possible trump card to hold against traditional efficiencies justifications).

No one will make a serious case for promoting cartels (although Former FTC Chairman Pertshuk sounded similar notes in the late 70s), but the comment makes a deeper point about ongoing efforts to undermine the consumer welfare standard. Fundamental contradictions exist in antitrust rhetoric that is unmoored from economic analysis. Professor Hovenkamp highlighted this in a recent paper as well:

The coherence problem [in antitrust populism] shows up in goals that are unmeasurable and fundamentally inconsistent, although with their contradictions rarely exposed. Among the most problematic contradictions is the one between small business protection and consumer welfare. In a nutshell, consumers benefit from low prices, high output and high quality and variety of products and services. But when a firm or a technology is able to offer these things they invariably injure rivals, typically smaller or dedicated to older technologies, who are unable to match them. Although movement antitrust rhetoric is often opaque about specifics, its general effect is invariably to encourage higher prices or reduced output or innovation, mainly for the protection of small business. Indeed, that has been a predominant feature of movement antitrust ever since the Sherman Act was passed, and it is a prominent feature of movement antitrust today. Indeed, some spokespersons for movement antitrust write as if low prices are the evil that antitrust law should be combatting.

To be fair, even with careful economic analysis, it is not always perfectly clear how to resolve the tensions between antitrust and other policy preferences.  For instance, Jonathan Adler described the collision between antitrust and environmental protection in cases where collusion might lead to better environmental outcomes. But even in cases like that, he noted it was essentially a free-rider problem and, as with intrabrand price agreements where consumer goodwill was a “commons” that had to be suitably maintained against possible free-riding retailers, what might be an antitrust violation in one context was not necessarily a violation in a second context.  

Moreover, when the purpose of apparently “collusive” conduct is to actually ensure long term, sustainable production of a good or service (like fish), the behavior may not actually be anticompetitive. Thus, antitrust remains a plausible means of evaluating economic activity strictly on its own terms (and any alteration to the doctrine itself might actually be to prefer rule of reason analysis over per se analysis when examining these sorts of mitigating circumstances).

And before contorting antitrust into a policy cure-all, it is important to remember that the consumer welfare standard evolved out of sometimes good (price fixing bans) and sometimes questionable (prohibitions on output contracts) doctrines that were subject to legal trial and error. This was an evolution that was triggered by “increasing economic sophistication” and as “the enforcement agencies and courts [began] reaching for new ways in which to weigh competing and conflicting claims.”

The vector of that evolution was toward the use of  antitrust as a reliable, testable, and clear set of legal principles that are ultimately subject to economic analysis. When the populists ask us, for instance, to return to a time when judges could “prevent the conversion of concentrated economic power into concentrated political power” via antitrust law, they are asking for much more than just adding a new gloss to existing doctrine. They are asking for us to unlearn all of the lessons of the twentieth century that ultimately led toward the maturation of antitrust law.

It’s perfectly reasonable to care about political corruption, worker welfare, and income inequality. It’s not perfectly reasonable to try to shoehorn goals based on these political concerns into a body of legal doctrine that evolved a set of tools wholly inappropriate for achieving those ends.

Canada’s large merchants have called on the government to impose price controls on interchange fees, claiming this would benefit not only merchants but also consumers. But experience elsewhere contradicts this claim.

In a recently released Macdonald Laurier Institute report, Julian Morris, Geoffrey A. Manne, Ian Lee, and Todd J. Zywicki detail how price controls on credit card interchange fees would result in reduced reward earnings and higher annual fees on credit cards, with adverse effects on consumers, many merchants and the economy as a whole.

This study draws on the experience with fee caps imposed in other jurisdictions, highlighting in particular the effects in Australia, where interchange fees were capped in 2003. There, the caps resulted in a significant decrease in the rewards earned per dollar spent and an increase in annual card fees. If similar restrictions were imposed in Canada, resulting in a 40 percent reduction in interchange fees, the authors of the report anticipate that:

  1. On average, each adult Canadian would be worse off to the tune of between $89 and $250 per year due to a loss of rewards and increase in annual card fees:
    1. For an individual or household earning $40,000, the net loss would be $66 to $187; and
    2. for an individual or household earning $90,000, the net loss would be $199 to $562.
  2. Spending at merchants in aggregate would decline by between $1.6 billion and $4.7 billion, resulting in a net loss to merchants of between $1.6 billion and $2.8 billion.
  3. GDP would fall by between 0.12 percent and 0.19 percent per year.
  4. Federal government revenue would fall by between 0.14 percent and 0.40 percent.

Moreover, tighter fee caps would “have a more dramatic negative effect on middle class households and the economy as a whole.”

You can read the full report here.

This week, the International Center for Law & Economics filed an ex parte notice in the FCC’s Restoring Internet Freedom docket. In it, we reviewed two of the major items that were contained in our formal comments. First, we noted that

the process by which [the Commission] enacted the 2015 [Open Internet Order]… demonstrated scant attention to empirical evidence, and even less attention to a large body of empirical and theoretical work by academics. The 2015 OIO, in short, was not supported by reasoned analysis.

Further, on the issue of preemption, we stressed that

[F]ollowing the adoption of an Order in this proceeding, a number of states may enact their own laws or regulations aimed at regulating broadband service… The resulting threat of a patchwork of conflicting state regulations, many of which would be unlikely to further the public interest, is a serious one…

[T]he Commission should explicitly state that… broadband services may not be subject to certain forms of state regulations, including conduct regulations that prescribe how ISPs can use their networks. This position would also be consistent with the FCC’s treatment of interstate information services in the past.

Our full ex parte comments can be viewed here.

R Street’s Sasha Moss recently posted a piece on TechDirt describing the alleged shortcomings of the Register of Copyrights Selection and Accountability Act of 2017 (RCSAA) — proposed legislative adjustments to the Copyright Office, recently passed in the House and introduced in the Senate last month (with identical language).

Many of the article’s points are well taken. Nevertheless, they don’t support the article’s call for the Senate to “jettison [the bill] entirely,” nor the assertion that “[a]s currently written, the bill serves no purpose, and Congress shouldn’t waste its time on it.”

R Street’s main complaint with the legislation is that it doesn’t include other proposals in a House Judiciary Committee whitepaper on Copyright Office modernization. But condemning the RCSAA simply for failing to incorporate all conceivable Copyright Office improvements fails to adequately take account of the political realities confronting Congress — in other words, it lets the perfect be the enemy of the good. It also undermines R Street’s own stated preference for Copyright Office modernization effected through “targeted and immediately implementable solutions.”

Everyone — even R Street — acknowledges that we need to modernize the Copyright office. But none of the arguments in favor of a theoretical, “better” bill is undermined or impeded by passing this bill first. While there is certainly more that Congress can do on this front, the RCSAA is a sensible, targeted piece of legislation that begins to build the new foundation for a twenty-first century Copyright Office.

Process over politics

The proposed bill is simple: It would make the Register of Copyrights a nominated and confirmed position. For reasons almost forgotten over the last century and a half, the head of the Copyright Office is currently selected at the sole discretion of the Librarian of Congress. The Copyright Office was placed in the Library merely as a way to grow the Library’s collection with copies of copyrighted works.

More than 100 years later, most everyone acknowledges that the Copyright Office has lagged behind the times. And many think the problem lies with the Office’s placement within the Library, which is plagued with information technology and other problems, and has a distinctly different mission than the Copyright Office. The only real question is what to do about it.

Separating the the Copyright Office from the Library is a straightforward and seemingly apolitical step toward modernization. And yet, somewhat inexplicably, R Street claims that the bill

amounts largely to a partisan battle over who will have the power to select the next Register: [Current Librarian of Congress] Hayden, who was appointed by Barack Obama, or President Donald Trump.

But this is a pretty farfetched characterization.

First, the House passed the bill 378-48, with 145 Democrats joining 233 Republicans in support. That’s more than three-quarters of the Democratic caucus.

Moreover, legislation to make the Register a nominated and confirmed position has been under discussion for more than four years — long before either Dr. Hayden was nominated or anyone knew that Donald Trump (or any Republican at all, for that matter) would be president.

R Street also claims that the legislation

will make the register and the Copyright Office more politicized and vulnerable to capture by special interests, [and that] the nomination process could delay modernization efforts [because of Trump’s] confirmation backlog.

But precisely the opposite seems far more likely — as Sasha herself has previously recognized:

Clarifying the office’s lines of authority does have the benefit of making it more politically accountable…. The [House] bill takes a positive step forward in promoting accountability.

As far as I’m aware, no one claims that Dr. Hayden was “politicized” or that Librarians are vulnerable to capture because they are nominated and confirmed. And a Senate confirmation process will be more transparent than unilateral appointment by the Librarian, and will give the electorate a (nominal) voice in the Register’s selection. Surely unilateral selection of the Register by the Librarian is more susceptible to undue influence.

With respect to the modernization process, we should also not forget that the Copyright Office currently has an Acting Register in Karyn Temple Claggett, who is perfectly capable of moving the modernization process forward. And any limits on her ability to do so would arise from the very tenuousness of her position that the RCSAA is intended to address.

Modernizing the Copyright Office one piece at a time

It’s certainly true, as the article notes, that the legislation doesn’t include a number of other sensible proposals for Copyright Office modernization. In particular, it points to ideas like forming a stakeholder advisory board, creating new chief economist and technologist positions, upgrading the Office’s information technology systems, and creating a small claims court.

To be sure, these could be beneficial reforms, as ICLE (and many others) have noted. But I would take some advice from R Street’s own “pragmatic approach” to promoting efficient government “with the full realization that progress on the ground tends to be made one inch at a time.”

R Street acknowledges that the legislation’s authors have indicated that this is but a beginning step and that they plan to tackle the other issues in due course. At a time when passage of any legislation on any topic is a challenge, it seems appropriate to defer to those in Congress who affirmatively want more modernization about how big a bill to start with.

In any event, it seems perfectly sensible to address the Register selection process before tackling the other issues, which may require more detailed discussions of policy and cost. And with the Copyright Office currently lacking a permanent Register and discussions underway about finding a new one, addressing any changes Congress deems necessary in the selection process seems like the most pressing issue, if they are to be resolved prior to the next pick being made.

Further, because the Register would presumably be deeply involved in the selection and operation of any new advisory board, chief economist and technologist, IT system, or small claims process, Congress can also be forgiven for wanting to address the Register issue first. Moreover, a Register who can be summarily dismissed by the Librarian likely doesn’t have the needed autonomy to fully and effectively implement the other proposals from the whitepaper. Why build a house on a shaky foundation when you can fix the foundation first?

Process over substance

All of which leaves the question why R Street opposes a bill that was passed by a bipartisan supermajority in the House; that effects precisely the kind of targeted, incremental reform that R Street promotes; and that implements a specific reform that R Street favors.

The legislation has widespread support beyond Congress, although the TechDirt piece gives this support short shrift. Instead, it notes that “some” in the content industry support the legislation, but lists only the Motion Picture Association of America. There is a subtle undercurrent of the typical substantive copyright debate, in which “enlightened” thinking on copyright is set against the presumptively malicious overreach of the movie studios. But the piece neglects to mention the support of more than 70 large and small content creators, technology companies, labor unions, and free market and civil rights groups, among others.

Sensible process reforms should be implementable without the rancor that plagues most substantive copyright debates. But it’s difficult to escape. Copyright minimalists are skeptical of an effectual Copyright Office if it is more likely to promote policies that reinforce robust copyright, even if they support sensible process reforms and more-accountable government in the abstract. And, to be fair, copyright proponents are thrilled when their substantive positions might be bolstered by promotion of sensible process reforms.

But the truth is that no one really knows how an independent and accountable Copyright Office will act with respect to contentious, substantive issues. Perhaps most likely, increased accountability via nomination and confirmation will introduce more variance in its positions. In other words, on substance, the best guess is that greater Copyright Office accountability and modernization will be a wash — leaving only process itself as a sensible basis on which to assess reform. And on that basis, there is really no reason to oppose this widely supported, incremental step toward a modern US Copyright Office.

This week, the International Center for Law & Economics filed comments  on the proposed revision to the joint U.S. Federal Trade Commission (FTC) – U.S. Department of Justice (DOJ) Antitrust-IP Licensing Guidelines. Overall, the guidelines present a commendable framework for the IP-Antitrust intersection, in particular as they broadly recognize the value of IP and licensing in spurring both innovation and commercialization.

Although our assessment of the proposed guidelines is generally positive,  we do go on to offer some constructive criticism. In particular, we believe, first, that the proposed guidelines should more strongly recognize that a refusal to license does not deserve special scrutiny; and, second, that traditional antitrust analysis is largely inappropriate for the examination of innovation or R&D markets.

On refusals to license,

Many of the product innovation cases that have come before the courts rely upon what amounts to an implicit essential facilities argument. The theories that drive such cases, although not explicitly relying upon the essential facilities doctrine, encourage claims based on variants of arguments about interoperability and access to intellectual property (or products protected by intellectual property). But, the problem with such arguments is that they assume, incorrectly, that there is no opportunity for meaningful competition with a strong incumbent in the face of innovation, or that the absence of competitors in these markets indicates inefficiency … Thanks to the very elements of IP that help them to obtain market dominance, firms in New Economy technology markets are also vulnerable to smaller, more nimble new entrants that can quickly enter and supplant incumbents by leveraging their own technological innovation.

Further, since a right to exclude is a fundamental component of IP rights, a refusal to license IP should continue to be generally considered as outside the scope of antitrust inquiries.

And, with respect to conducting antitrust analysis of R&D or innovation “markets,” we note first that “it is the effects on consumer welfare against which antitrust analysis and remedies are measured” before going on to note that the nature of R&D makes it effects very difficult to measure on consumer welfare. Thus, we recommend that the the agencies continue to focus on actual goods and services markets:

[C]ompetition among research and development departments is not necessarily a reliable driver of innovation … R&D “markets” are inevitably driven by a desire to innovate with no way of knowing exactly what form or route such an effort will take. R&D is an inherently speculative endeavor, and standard antitrust analysis applied to R&D will be inherently flawed because “[a] challenge for any standard applied to innovation is that antitrust analysis is likely to occur after the innovation, but ex post outcomes reveal little about whether the innovation was a good decision ex ante, when the decision was made.”

The FCC’s blind, headlong drive to “unlock” the set-top box market is disconnected from both legal and market realities. Legally speaking, and as we’ve noted on this blog many times over the past few months (see here, here and here), the set-top box proposal is nothing short of an assault on contracts, property rights, and the basic freedom of consumers to shape their own video experience.

Although much of the impulse driving the Chairman to tilt at set-top box windmills involves a distrust that MVPDs could ever do anything procompetitive, Comcast’s recent decision (actually, long in the making) to include an app from Netflix — their alleged arch-rival — on the X1 platform highlights the FCC’s poor grasp of market realities as well. And it hardly seems that Comcast was dragged kicking and screaming to this point, as many of the features it includes have been long under development and include important customer-centered enhancements:

We built this experience on the core foundational elements of the X1 platform, taking advantage of key technical advances like universal search, natural language processing, IP stream processing and a cloud-based infrastructure.  We have expanded X1’s voice control to make watching Netflix content as simple as saying, “Continue watching Daredevil.”

Yet, on the topic of consumer video choice, Chairman Wheeler lives in two separate worlds. On the one hand, he recognizes that:

There’s never been a better time to watch television in America. We have more options than ever, and, with so much competition for eyeballs, studios and artists keep raising the bar for quality content.

But, on the other hand, he asserts that when it comes to set-top boxes, there is no such choice, and consumers have suffered accordingly.

Of course, this ignores the obvious fact that nearly all pay-TV content is already available from a large number of outlets, and that competition between devices and services that deliver this content is plentiful.

In fact, ten years ago — before Apple TV, Roku, Xfinity X1 and Hulu (among too many others to list) — Gigi Sohn, Chairman Wheeler’s chief legal counsel, argued before the House Energy and Commerce Committee that:

We are living in a digital gold age and consumers… are the beneficiaries.  Consumers have numerous choices for buying digital content and for buying devices on which to play that content. (emphasis added)

And, even on the FCC’s own terms, the multichannel video market is presumptively competitive nationwide with

direct broadcast satellite (DBS) providers’ market share of multi-channel video programming distributors (MVPDs) subscribers [rising] to 33.8%. “Telco” MVPDs increased their market share to 13% and their nationwide footprint grew by 5%. Broadband service providers such as Google Fiber also expanded their footprints. Meanwhile, cable operators’ market share fell to 52.8% of MVPD subscribers.

Online video distributor (OVD) services continue to grow in popularity with consumers. Netflix now has 47 million or more subscribers in the U.S., Amazon Prime has close to 60 million, and Hulu has close to 12 million. By contrast, cable MVPD subscriptions dropped to 53.7 million households in 2014.

The extent of competition has expanded dramatically over the years, and Comcast’s inclusion of Netflix in its ecosystem is only the latest indication of this market evolution.

And to further underscore the outdated notion of focusing on “boxes,” AT&T just announced that it would be offering a fully apps-based version of its Direct TV service. And what was one of the main drivers of AT&T being able to go in this direction? It was because the company realized the good economic sense of ditching boxes altogether:

The company will be able to give consumers a break [on price] because of the low cost of delivering the service. AT&T won’t have to send trucks to install cables or set-top boxes; customers just need to download an app. 

And lest you think that Comcast’s move was merely a cynical response meant to undermine the Commissioner (although, it is quite enjoyable on that score), the truth is that Comcast has no choice but to offer services like this on its platform — and it’s been making moves like this for quite some time (see here and here). Everyone knows, MVPDs included, that apps distributed on a range of video platforms are the future. If Comcast didn’t get on board the apps train, it would have been left behind at the station.

And there is other precedent for expecting just this convergence of video offerings on a platform. For instance, Amazon’s Fire TV gives consumers the Amazon video suite — available through the Prime Video subscription — but they also give you access to apps like Netflix, Hulu. (Of course Amazon is a so-called edge provider, so when it makes the exact same sort of moves that Comcast is now making, its easy for those who insist on old market definitions to miss the parallels.)

The point is, where Amazon and Comcast are going to make their money is in driving overall usage of their platform because, inevitably, no single service is going to have every piece of content a given user wants. Long term viability in the video market is necessarily going to be about offering consumers more choice, not less. And, in this world, the box that happens to be delivering the content is basically irrelevant; it’s the competition between platform providers that matters.

It’s not quite so simple to spur innovation. Just ask the EU as it resorts to levying punitive retroactive taxes on productive American companies in order to ostensibly level the playing field (among other things) for struggling European startups. Thus it’s truly confusing when groups go on a wholesale offensive against patent rights — one of the cornerstones of American law that has contributed a great deal toward our unparalleled success as an innovative economy.

Take EFF, for instance. The advocacy organization has recently been peddling sample state legislation it calls the “Reclaim Invention Act,” which it claims is targeted at reining in so-called “patent trolls.” Leaving aside potential ulterior motives (like making it impossible to get software patents at all), I am left wondering what EFF actually hopes to achieve.

“Troll” is a scary sounding word, but what exactly is wrapped up in EFF’s definition? According to EFF’s proposed legislation, a “patent assertion entity” (the polite term for “patent troll”) is any entity that primarily derives its income through the licensing of patents – as opposed to actually producing the invention for public consumption. But this is just wrong. As Zorina Khan has noted, the basic premise upon which patent law was constructed in the U.S. was never predicated upon whether an invention would actually be produced:

The primary concern was access to the new information, and the ability of other inventors to benefit from the discovery either through licensing, inventing around the idea, or at expiration of the patent grant. The emphasis was certainly not on the production of goods; in fact, anyone who had previously commercialized an invention lost the right of exclusion vested in patents. The decision about how or whether the patent should be exploited remained completely within the discretion of the patentee, in the same way that the owner of physical property is allowed to determine its use or nonuse.

Patents are property. As with other forms of property, patent holders are free to transfer them to whomever they wish, and are free to license them as they see fit. The mere act of exercising property rights simply cannot be the basis for punitive treatment by the state. And, like it or not, licensing inventions or selling the property rights to an invention is very often how inventors are compensated for their work. Whether one likes the Patent Act in particular or not is irrelevant; as long as we have patents, these are fundamental economic and legal facts.

Further, the view implicit in EFF’s legislative proposal completely ignores the fact that the people or companies that may excel at inventing things (the province of scientists, for example) may not be so skilled at commercializing things (the province of entrepreneurs). Moreover, inventions can be enormously expensive to commercialize. In such cases, it could very well be the most economically efficient result to allow some third party with the requisite expertise or the means to build it, to purchase and manage the rights to the patent, and to allow them to arrange for production of the invention through licensing agreements. Intermediaries are nothing new in society, and, despite popular epithets about “middlemen,” they actually provide a necessary function with respect to mobilizing capital and enabling production.

Granted, some companies will exhibit actual “troll” behavior, but the question is not whether some actors are bad, but whether the whole system overall optimizes innovation and otherwise contributes to greater social welfare. Licensing patents in itself is a benign practice, so long as the companies that manage the patents are not abusive. And, of course, among the entities that engage in patent licensing, one would assume that universities would be the most unobjectionable of all parties.

Thus, it’s extremely disappointing that EFF would choose to single out universities as aiders and abettors of “trolls” — and in so doing recommend punitive treatment. And what EFF recommends is shockingly draconian. It doesn’t suggest that there should be heightened review in IPR proceedings, or that there should be fee shifting or other case-by-case sanctions doled out for unwise partnership decisions. No, according to the model legislation, universities would be outright cut off from government financial aid or other state funding, and any technology transfers would be void, unless they:

determine whether a patent is the most effective way to bring a new invention to a broad user base before filing for a patent that covers that invention[;] … prioritize technology transfer that develops its inventions and scales their potential user base[;] … endeavor to nurture startups that will create new jobs, products, and services[;] … endeavor to assign and license patents only to entities that require such licenses for active commercialization efforts or further research and development[;] … foster agreements and relationships that include the sharing of know-how and practical experience to maximize the value of the assignment or license of the corresponding patents; and … prioritize the public interest in all patent transactions.

Never mind the fact that recent cases like Alice Corp., Octane Fitness, and Highmark — as well as the new inter partes review process — seem to be putting effective downward pressure on frivolous suits (as well as, potentially, non-frivolous suits, for that matter); apparently EFF thinks that putting the screws to universities is what’s needed to finally overcome the (disputed) problems of excessive patent litigation.

Perhaps reflecting that even EFF itself knows that its model legislation is more of a publicity stunt than a serious proposal, most of what it recommends is either so ill-defined as to be useless (e.g., “prioritize public interest in all patent transactions?” What does that even mean?) or is completely mixed up.

For instance, the entire point of a university technology transfer office is that educational institutions and university researchers are not themselves in a position to adequately commercialize inventions. Questions of how large a user base a given invention can reach, or how best to scale products, grow markets, or create jobs are best left to entrepreneurs and business people. The very reason a technology transfer office would license or sell its patents to a third party is to discover these efficiencies.

And if a university engages in a transfer that, upon closer scrutiny, runs afoul of this rather fuzzy bit of legislation, any such transfers will be deemed void. Which means that universities will either have to expend enormous resources to find willing partners, or will spend millions on lawsuits and contract restitution damages. Enacting these feel-good  mandates into state law is at best useless, and most likely a tool for crusading plaintiff’s attorneys to use to harass universities.

Universities: Don’t you dare commercialize that invention!

As I noted above, it’s really surprising that groups like EFF are going after universities, as their educational mission and general devotion to improving social welfare should make them the darlings of social justice crusaders. However, as public institutions with budgets and tax statuses dependent on political will, universities are both unable to route around organizational challenges (like losing student aid or preferred tax status) and are probably unwilling to engage in wholesale PR defensive warfare for fear of offending a necessary political constituency. Thus, universities are very juicy targets — particularly when they engage in “dirty” commercial activities of any sort, no matter how attenuated.

And lest you think that universities wouldn’t actually be harassed (other than in the abstract by the likes of EFF) over patents, it turns out that it’s happening even now, even without EFF’s proposed law.

For the last five years Princeton University has been locked in a lawsuit with some residents of Princeton, New Jersey who have embarked upon a transparently self-interested play to divert university funds to their own pockets. Their weapon of choice? A challenge to Princeton’s tax-exempt status based on the fact that the school licenses and sells its patented inventions.

The plaintiffs’ core argument in Fields v. Princeton is that the University should be  a taxpaying entity because it occasionally generates patent licensing revenues from a small fraction of the research that its faculty conducts in University buildings.

The Princeton case is problematic for a variety of reasons, one of which deserves special attention because it runs squarely up against a laudable federal law that is intended to promote research, development, and patent commercialization.

In the early 1980s Congress passed the Bayh-Dole Act, which made it possible for universities to retain ownership over discoveries made in campus labs. The aim of the law was to encourage essential basic research that had historically been underdeveloped. Previously, the rights to any such federally-funded discoveries automatically became the property of the federal government, which, not surprisingly, put a damper on universities’ incentives to innovate.

When universities collaborate with industry — a major aim of Bayh-Dole — innovation is encouraged, breakthroughs occur, and society as a whole is better off. About a quarter of the top drugs approved since 1981 came from university research, as did many life-changing products we now take for granted, like Google, web browsers, email, cochlear implants and major components of cell phones. Since the passage of the Act, a boom in commercialized patents has yielded billions of dollars of economic activity.

Under the Act innovators are also rewarded: Qualifying institutions like Princeton are required to share royalties with the researchers who make these crucial discoveries. The University has no choice in the matter; to refuse to share the revenues would constitute a violation of the terms of federal research funding. But the Fields suit ignores this reality an,d in much the same way as EFF’s proposed legislation, will force a stark choice upon Princeton University: engage with industry, increase social utility and face lawsuits, or keep your head down and your inventions to yourself.

A Hobson’s Choice

Thus, things like the Fields suit and EFF’s proposed legislation are worse than costly distractions for universities; they are major disincentives to the commercialization of university inventions. This may not be the intended consequence of these actions, but it is an entirely predictable one.

Faced with legislation that punishes them for being insufficiently entrepreneurial and suits that attack them for bothering to commercialize at all, universities will have to make a hobson’s choice: commercialize the small fraction of research that might yield licensing revenues and potentially face massive legal liability, or simply decide to forego commercialization (and much basic research) altogether.

The risk here, obviously, is that research institutions will choose the latter in order to guard against the significant organizational costs that could result from a change in their tax status or a thicket of lawsuits that emerge from voided technology transfers (let alone the risk of losing student aid money).

But this is not what we want as a society. We want the optimal level of invention, innovation, and commercialization. What anti-patent extremists and short-sighted state governments may obtain for us instead, however, is a status quo much like Europe where the legal and regulatory systems perpetually keep innovation on a low simmer.

Copyright law, ever a sore point in some quarters, has found a new field of battle in the FCC’s recent set-top box proposal. At the request of members of Congress, the Copyright Office recently wrote a rather thorough letter outlining its view of the FCC’s proposal on rightsholders.

In sum, the CR’s letter was an even-handed look at the proposal which concluded:

As a threshold matter, it seems critical that any revised proposal respect the authority of creators to manage the exploitation of their copyrighted works through private licensing arrangements, because regulatory actions that undermine such arrangements would be inconsistent with the rights granted under the Copyright Act.

This fairly uncontroversial statement of basic legal principle was met with cries of alarm. And Stanford’s CIS had a post from Affiliated Scholar Annemarie Bridy that managed to trot out breathless comparisons to inapposite legal theories while simultaneously misconstruing the “fair use” doctrine (as well as how Copyright law works in the video market, for that matter).

Look out! Lochner is coming!

In its letter the Copyright Office warned the FCC that its proposed rules have the potential to disrupt the web of contracts that underlie cable programming, and by extension, risk infringing the rights of copyright holders to commercially exploit their property. This analysis actually tracks what Geoff Manne and I wrote in both our initial comment and our reply comment to the set-top box proposal.

Yet Professor Bridy seems to believe that, notwithstanding the guarantees of both the Constitution and Section 106 of the Copyright Act, the FCC should have the power to abrogate licensing contracts between rightsholders and third parties.  She believes that

[t]he Office’s view is essentially that the Copyright Act gives right holders not only the limited range of rights enumerated in Section 106 (i.e., reproduction, preparation of derivative works, distribution, public display, and public performance), but also a much broader and more amorphous right to “manage the commercial exploitation” of copyrighted works in whatever ways they see fit and can accomplish in the marketplace, without any regulatory interference from the government.

What in the world does this even mean? A necessary logical corollary of the Section 106 rights includes the right to exploit works commercially as rightsholders see fit. Otherwise, what could it possibly mean to have the right to control the reproduction or distribution of a work? The truth is that Section 106 sets out a general set of rights that inhere in rightsholders with respect to their protected works, and that commercial exploitation is merely a subset of this total bundle of rights.

The ability to contract with other parties over these rights is also a necessary corollary of the property rights recognized in Section 106. After all, the right to exclude implies by necessity the right to include. Which is exactly what a licensing arrangement is.

But wait, there’s more — she actually managed to pull out the Lochner bogeyman to validate her argument!

The Office’s absolutist logic concerning freedom of contract in the copyright licensing domain is reminiscent of the Supreme Court’s now-infamous reasoning in Lochner v. New York, a 1905 case that invalidated a state law limiting maximum working hours for bakers on the ground that it violated employer-employee freedom of contract. The Court in Lochner deprived the government of the ability to provide basic protections for workers in a labor environment that subjected them to unhealthful and unsafe conditions. As Julie Cohen describes it, “‘Lochner’ has become an epithet used to characterize an outmoded, over-narrow way of thinking about state and federal economic regulation; it goes without saying that hardly anybody takes the doctrine it represents seriously.”

This is quite a leap of logic, as there is precious little in common between the letter from the Copyright Office and the Lochner opinion aside from the fact that both contain the word “contracts” in their pages.  Perhaps the most critical problem with Professor Bridy’s analogy is the fact that Lochner was about a legislature interacting with the common law system of contract, whereas the FCC is a body subordinate to Congress, and IP is both constitutionally and statutorily guaranteed. A sovereign may be entitled to interfere with the operation of common law, but an administrative agency does not have the same sort of legal status as a legislature when redefining general legal rights.

The key argument that Professor Bridy offered in support of her belief that the FCC should be free to abrogate contracts at will is that “[r]egulatory limits on private bargains may come in the form of antitrust laws or telecommunications laws or, as here, telecommunications regulations that further antitrust ends.”  However, this completely misunderstand U.S. constitutional doctrine.

In particular, as Geoff Manne and I discussed in our set-top box comments to the FCC, using one constitutional clause to end-run another constitutional clause is generally a no-no:

Regardless of whether or how well the rules effect the purpose of Sec. 629, copyright violations cannot be justified by recourse to the Communications Act. Provisions of the Communications Act — enacted under Congress’s Commerce Clause power — cannot be used to create an end run around limitations imposed by the Copyright Act under the Constitution’s Copyright Clause. “Congress cannot evade the limits of one clause of the Constitution by resort to another,” and thus neither can an agency acting within the scope of power delegated to it by Congress. Establishing a regulatory scheme under the Communications Act whereby compliance by regulated parties forces them to violate content creators’ copyrights is plainly unconstitutional.

Congress is of course free to establish the implementation of the Copyright Act as it sees fit. However, unless Congress itself acts to change that implementation, the FCC — or any other party — is not at liberty to interfere with rightsholders’ constitutionally guaranteed rights.

You Have to Break the Law Before You Raise a Defense

Another bone of contention upon which Professor Bridy gnaws is a concern that licensing contracts will abrogate an alleged right to “fair use” by making the defense harder to muster:  

One of the more troubling aspects of the Copyright Office’s letter is the length to which it goes to assert that right holders must be free in their licensing agreements with MVPDs to bargain away the public’s fair use rights… Of course, the right of consumers to time-shift video programming for personal use has been enshrined in law since Sony v. Universal in 1984. There’s no uncertainty about that particular fair use question—none at all.

The major problem with this reasoning (notwithstanding the somewhat misleading drafting of Section 107) is that “fair use” is not an affirmative right, it is an affirmative defense. Despite claims that “fair use” is a right, the Supreme Court has noted on at least two separate occasions (1, 2) that Section 107 was “structured… [as]… an affirmative defense requiring a case-by-case analysis.”

Moreover, important as the Sony case is, it does not not establish that “[t]here’s no uncertainty about [time-shifting as a] fair use question—none at all.” What it actually establishes is that, given the facts of that case, time-shifting was a fair use. Not for nothing the Sony Court notes at the outset of its opinion that

An explanation of our rejection of respondents’ unprecedented attempt to impose copyright liability upon the distributors of copying equipment requires a quite detailed recitation of the findings of the District Court.

But more generally, the Sony doctrine stands for the proposition that:

“The limited scope of the copyright holder’s statutory monopoly, like the limited copyright duration required by the Constitution, reflects a balance of competing claims upon the public interest: creative work is to be encouraged and rewarded, but private motivation must ultimately serve the cause of promoting broad public availability of literature, music, and the other arts. The immediate effect of our copyright law is to secure a fair return for an ‘author’s’ creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good. ‘The sole interest of the United States and the primary object in conferring the monopoly,’ this Court has said, ‘lie in the general benefits derived by the public from the labors of authors.’ Fox Film Corp. v. Doyal, 286 U. S. 123, 286 U. S. 127. See Kendall v. Winsor, 21 How. 322, 62 U. S. 327-328; Grant v. Raymond, 6 Pet. 218, 31 U. S. 241-242. When technological change has rendered its literal terms ambiguous, the Copyright Act must be construed in light of this basic purpose.” Twentieth Century Music Corp. v. Aiken, 422 U. S. 151, 422 U. S. 156 (1975) (footnotes omitted).

In other words, courts must balance competing interests to maximize “the general benefits derived by the public,” subject to technological change and other criteria that might shift that balance in any particular case.  

Thus, even as an affirmative defense, nothing is guaranteed. The court will have to walk through a balancing test, and only after that point, and if the accused party’s behavior has not tipped the scales against herself, will the court find the use a “fair use.”  

As I noted before,

Not surprisingly, other courts are inclined to follow the Supreme Court. Thus the Eleventh Circuit, the Southern District of New York, and the Central District of California (here and here), to name but a few, all explicitly refer to fair use as an affirmative defense. Oh, and the Ninth Circuit did too, at least until Lenz.

The Lenz case was an interesting one because, despite the above noted Supreme Court precedent treating “fair use” as a defense, it is one of the very few cases that has held “fair use” to be an affirmative right (in that case, the court decided that Section 1201 of the DMCA required consideration of “fair use” as a part of filling out a take-down notice). And in doing so, it too tried to rely on Sony to restructure the nature of “fair use.” But as I have previously written, “[i]t bears noting that the Court in Sony Corp. did not discuss whether or not fair use is an affirmative defense, whereas Acuff Rose (decided 10 years after Sony Corp.) and Harper & Row decisions do.”

Further, even the Eleventh Circuit, which the Ninth relied upon in Lenz, later clarified its position that the above-noted Supreme Court precedent definitely binds lower courts, and that “fair use” is in fact an affirmative defense.

Thus, to say that rightsholders’ licensing contracts somehow impinge a “right” of fair use completely puts the cart before the horse. Remember, as an affirmative defense, “fair use” is an excuse for otherwise infringing behavior, and rightsholders are well within their constitutional and statutory rights to avoid potential infringing uses.

Think about it this way. When you commit a crime you can raise a defense: for instance, an insanity defense. But just because you might be excused for committing a crime if a court finds you were not operating with full faculties, this does not entitle every insane person to go out and commit that crime. The insanity defense can be raised only after a crime is committed, and at that point it will be examined by a judge and jury to determine if applying the defense furthers the overall criminal law scheme.

“Fair use” works in exactly the same manner. And even though Sony described how time- and space-shifting were potentially permissible, it did so only by determining on those facts that the balancing test came out to allow it. So, maybe a particular time-shifting use would be “fair use.” But maybe not. More likely, in this case, even the allegedly well-established “fair use” of time-shifting in the context of today’s digital media, on-demand programing, Netflix and the like may not meet that burden.

And what this means is that a rightsholder does not have an ex ante obligation to consider whether a particular contractual clause might in some fashion or other give rise to a “fair use” defense.

The contrary point of view makes no sense. Because “fair use” is a defense, forcing parties to build “fair use” considerations into their contractual negotiations essentially requires them to build in an allowance for infringement — and one that a court might or might not ever find appropriate in light of the requisite balancing of interests. That just can’t be right.

Instead, I think this article is just a piece of the larger IP-skeptic movement. I suspect that when “fair use” was in its initial stages of development, it was intended as a fairly gentle softening on the limits of intellectual property — something like the “public necessity” doctrine in common law with respect to real property and trespass. However, that is just not how “fair use” advocates see it today. As Geoff Manne has noted, the idea of “permissionless innovation” has wrongly come to mean “no contracts required (or permitted)”:  

[Permissionless innovation] is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright…, which otherwise requires those pernicious licenses (i.e., permission) from others.

But this position is nonsense — intangible property is still property. And at root, property is just a set of legal relations between persons that defines their rights and obligations with respect to some “thing.” It doesn’t matter if you can hold that thing in your hand or not. As property, IP can be subject to transfer and control through voluntarily created contracts.

Even if “fair use” were some sort of as-yet unknown fundamental right, it would still be subject to limitations upon it by other rights and obligations. To claim that “fair use” should somehow trump the right of a property holder to dispose of the property as she wishes is completely at odds with our legal system.

As we noted in our issue brief on the impending ICANN transition, given the vast scope of the problem, voluntary relationships between registries, registrars and private industry will be a critical aspect of controlling online piracy. Last week the MPAA and registry operator Radix announced a new “trusted notifier” program under which the MPAA will be permitted to submit evidence of large-scale piracy occurring in Radix-managed top-level domains.

In many respects, this resembles the program that the MPAA and Donuts established in February— however as the first non-U.S. based program, this is a major step forward. As in the Donuts agreement, the new program will contain a number of procedural safeguards, including a requirement that clear evidence of pervasive infringement is occurring, along with a document attesting to the fact that the MPAA first attempted to resolve the situation with the name registrar directly. If, after attempting to work with its associated registrars to contact the website owner, Radix determines that the website is engaged illegal conduct it will either place the domain name on hold or else suspend it entirely.

These sorts of self-help agreements are really crucial to the future of Internet governance, and not merely for their facilitation of removing infringing content. Once ICANN becomes an independent organization that is completely untethered from the U.S. Government, it will be up to the community at large to maintain the credibility of DNS management.

And the importance of these self-help agreements is particularly acute in light of ICANN’s long standing refusal to enforce its own contractual restrictions in place with registries and registrars. As we noted in our brief:

Very likely, [ICANN’s governance structure] will be found through voluntary, private arrangements between registries, registrars, and third parties. An overarching commitment to enforcing legitimate contracts, therefore, even ones that espouse particular policy objectives, will be a core attribute of a well-organized ICANN.

In fact, far and away ICANN’s most significant failing has been the abdication of its responsibility to enforce the terms of its own contracts, particularly the Registrar Accreditation Agreement. The effect of this obstinance is that ICANN has failed to exercise its obligation to maintain a “secure, stable, [and] resilient… Internet” free of costly “pollutants” like piracy, illegal prescription drugs, and phishing sites that impose significant costs on others with relative impunity.

In March, ICANN submitted its stewardship proposal to Congress — a document that outlines how ICANN proposes to operate as an independent organization. Much criticism of the transition has focused on the possibility of authoritarian regimes co-opting the root zone file and related DNS activities. It’s in everyone’s interest to prevent clearly illegal conduct from occurring online. Otherwise, without a minimal standard of governance, the arguments for a multi-lateral government run Internet become much easier to advance.

And certainly a big part of Congress’s consideration of the transition will be whether ICANN can plausibly continue to operate as a legitimate steward of the DNS. When registries step forward and agree to maintain at least a minimal baseline of pro-social conduct, it goes a long way toward moving the transition forward and guaranteeing a free and open Internet for the future.