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Over the weekend, Senator Al Franken and FCC Commissioner Mignon Clyburn issued an impassioned statement calling for the FCC to thwart the use of mandatory arbitration clauses in ISPs’ consumer service agreements — starting with a ban on mandatory arbitration of privacy claims in the Chairman’s proposed privacy rules. Unfortunately, their call to arms rests upon a number of inaccurate or weak claims. Before the Commissioners vote on the proposed privacy rules later this week, they should carefully consider whether consumers would actually be served by such a ban.

FCC regulations can’t override congressional policy favoring arbitration

To begin with, it is firmly cemented in Supreme Court precedent that the Federal Arbitration Act (FAA) “establishes ‘a liberal federal policy favoring arbitration agreements.’” As the Court recently held:

[The FAA] reflects the overarching principle that arbitration is a matter of contract…. [C]ourts must “rigorously enforce” arbitration agreements according to their terms…. That holds true for claims that allege a violation of a federal statute, unless the FAA’s mandate has been “overridden by a contrary congressional command.”

For better or for worse, that’s where the law stands, and it is the exclusive province of Congress — not the FCC — to change it. Yet nothing in the Communications Act (to say nothing of the privacy provisions in Section 222 of the Act) constitutes a “contrary congressional command.”

And perhaps that’s for good reason. In enacting the statute, Congress didn’t demonstrate the same pervasive hostility toward companies and their relationships with consumers that has characterized the way this FCC has chosen to enforce the Act. As Commissioner O’Rielly noted in dissenting from the privacy NPRM:

I was also alarmed to see the Commission acting on issues that should be completely outside the scope of this proceeding and its jurisdiction. For example, the Commission seeks comment on prohibiting carriers from including mandatory arbitration clauses in contracts with their customers. Here again, the Commission assumes that consumers don’t understand the choices they are making and is willing to impose needless costs on companies by mandating how they do business.

If the FCC were to adopt a provision prohibiting arbitration clauses in its privacy rules, it would conflict with the FAA — and the FAA would win. Along the way, however, it would create a thorny uncertainty for both companies and consumers seeking to enforce their contracts.  

The evidence suggests that arbitration is pro-consumer

But the lack of legal authority isn’t the only problem with the effort to shoehorn an anti-arbitration bias into the Commission’s privacy rules: It’s also bad policy.

In its initial broadband privacy NPRM, the Commission said this about mandatory arbitration:

In the 2015 Open Internet Order, we agreed with the observation that “mandatory arbitration, in particular, may more frequently benefit the party with more resources and more understanding of the dispute procedure, and therefore should not be adopted.” We further discussed how arbitration can create an asymmetrical relationship between large corporations that are repeat players in the arbitration system and individual customers who have fewer resources and less experience. Just as customers should not be forced to agree to binding arbitration and surrender their right to their day in court in order to obtain broadband Internet access service, they should not have to do so in order to protect their private information conveyed through that service.

The Commission may have “agreed with the cited observations about arbitration, but that doesn’t make those views accurate. As one legal scholar has noted, summarizing the empirical data on the effects of arbitration:

[M]ost of the methodologically sound empirical research does not validate the criticisms of arbitration. To give just one example, [employment] arbitration generally produces higher win rates and higher awards for employees than litigation.

* * *

In sum, by most measures — raw win rates, comparative win rates, some comparative recoveries and some comparative recoveries relative to amounts claimed — arbitration generally produces better results for claimants [than does litigation].

A comprehensive, empirical study by Northwestern Law’s Searle Center on AAA (American Arbitration Association) cases found much the same thing, noting in particular that

  • Consumer claimants in arbitration incur average arbitration fees of only about $100 to arbitrate small (under $10,000) claims, and $200 for larger claims (up to $75,000).
  • Consumer claimants also win attorneys’ fees in over 60% of the cases in which they seek them.
  • On average, consumer arbitrations are resolved in under 7 months.
  • Consumers win some relief in more than 50% of cases they arbitrate…
  • And they do almost exactly as well in cases brought against “repeat-player” business.

In short, it’s extremely difficult to sustain arguments suggesting that arbitration is tilted against consumers relative to litigation.

(Upper) class actions: Benefitting attorneys — and very few others

But it isn’t just any litigation that Clyburn and Franken seek to preserve; rather, they are focused on class actions:

If you believe that you’ve been wronged, you could take your service provider to court. But you’d have to find a lawyer willing to take on a multi-national telecom provider over a few hundred bucks. And even if you won the case, you’d likely pay more in legal fees than you’d recover in the verdict.

The only feasible way for you as a customer to hold that corporation accountable would be to band together with other customers who had been similarly wronged, building a case substantial enough to be worth the cost—and to dissuade that big corporation from continuing to rip its customers off.

While — of course — litigation plays an important role in redressing consumer wrongs, class actions frequently don’t confer upon class members anything close to the imagined benefits that plaintiffs’ lawyers and their congressional enablers claim. According to a 2013 report on recent class actions by the law firm, Mayer Brown LLP, for example:

  • “In [the] entire data set, not one of the class actions ended in a final judgment on the merits for the plaintiffs. And none of the class actions went to trial, either before a judge or a jury.” (Emphasis in original).
  • “The vast majority of cases produced no benefits to most members of the putative class.”
  • “For those cases that do settle, there is often little or no benefit for class members. What is more, few class members ever even see those paltry benefits — particularly in consumer class actions.”
  • “The bottom line: The hard evidence shows that class actions do not provide class members with anything close to the benefits claimed by their proponents, although they can (and do) enrich attorneys.”

Similarly, a CFPB study of consumer finance arbitration and litigation between 2008 and 2012 seems to indicate that the class action settlements and judgments it studied resulted in anemic relief to class members, at best. The CFPB tries to disguise the results with large, aggregated and heavily caveated numbers (never once actually indicating what the average payouts per person were) that seem impressive. But in the only hard numbers it provides (concerning four classes that ended up settling in 2013), promised relief amounted to under $23 each (comprising both cash and in-kind payment) if every class member claimed against the award. Back-of-the-envelope calculations based on the rest of the data in the report suggest that result was typical.

Furthermore, the average time to settlement of the cases the CFPB looked at was almost 2 years. And somewhere between 24% and 37% involved a non-class settlement — meaning class members received absolutely nothing at all because the named plaintiff personally took a settlement.

By contrast, according to the Searle Center study, the average award in the consumer-initiated arbitrations it studied (admittedly, involving cases with a broader range of claims) was almost $20,000, and the average time to resolution was less than 7 months.

To be sure, class action litigation has been an important part of our system of justice. But, as Arthur Miller — a legal pioneer who helped author the rules that make class actions viable — himself acknowledged, they are hardly a panacea:

I believe that in the 50 years we have had this rule, that there are certain class actions that never should have been brought, admitted; that we have burdened our judiciary, yes. But we’ve had a lot of good stuff done. We really have.

The good that has been done, according to Professor Miller, relates in large part to the civil rights violations of the 50’s and 60’s, which the class action rules were designed to mitigate:

Dozens and dozens and dozens of communities were desegregated because of the class action. You even see desegregation decisions in my old town of Boston where they desegregated the school system. That was because of a class action.

It’s hard to see how Franken and Clyburn’s concern for redress of “a mysterious 99-cent fee… appearing on your broadband bill” really comes anywhere close to the civil rights violations that spawned the class action rules. Particularly given the increasingly pervasive role of the FCC, FTC, and other consumer protection agencies in addressing and deterring consumer harms (to say nothing of arbitration itself), it is manifestly unclear why costly, protracted litigation that infrequently benefits anyone other than trial attorneys should be deemed so essential.

“Empowering the 21st century [trial attorney]”

Nevertheless, Commissioner Clyburn and Senator Franken echo the privacy NPRM’s faulty concerns about arbitration clauses that restrict consumers’ ability to litigate in court:

If you’re prohibited from using our legal system to get justice when you’re wronged, what’s to protect you from being wronged in the first place?

Well, what do they think the FCC is — chopped liver?

Hardly. In fact, it’s a little surprising to see Commissioner Clyburn (who sits on a Commission that proudly proclaims that “[p]rotecting consumers is part of [its] DNA”) and Senator Franken (among Congress’ most vocal proponents of the FCC’s claimed consumer protection mission) asserting that the only protection for consumers from ISPs’ supposed depredations is the cumbersome litigation process.

In fact, of course, the FCC has claimed for itself the mantle of consumer protector, aimed at “Empowering the 21st Century Consumer.” But nowhere does the agency identify “promoting and preserving the rights of consumers to litigate” among its tools of consumer empowerment (nor should it). There is more than a bit of irony in a federal regulator — a commissioner of an agency charged with making sure, among other things, that corporations comply with the law — claiming that, without class actions, consumers are powerless in the face of bad corporate conduct.

Moreover, even if it were true (it’s not) that arbitration clauses tend to restrict redress of consumer complaints, effective consumer protection would still not necessarily be furthered by banning such clauses in the Commission’s new privacy rules.

The FCC’s contemplated privacy regulations are poised to introduce a wholly new and untested regulatory regime with (at best) uncertain consequences for consumers. Given the risk of consumer harm resulting from the imposition of this new regime, as well as the corollary risk of its excessive enforcement by complainants seeking to test or push the boundaries of new rules, an agency truly concerned with consumer protection would tread carefully. Perhaps, if the rules were enacted without an arbitration ban, it would turn out that companies would mandate arbitration (though this result is by no means certain, of course). And perhaps arbitration and agency enforcement alone would turn out to be insufficient to effectively enforce the rules. But given the very real costs to consumers of excessive, frivolous or potentially abusive litigation, cabining the litigation risk somewhat — even if at first it meant the regime were tilted slightly too much against enforcement — would be the sensible, cautious and pro-consumer place to start.

____

Whether rooted in a desire to “protect” consumers or not, the FCC’s adoption of a rule prohibiting mandatory arbitration clauses to address privacy complaints in ISP consumer service agreements would impermissibly contravene the FAA. As the Court has made clear, such a provision would “‘stand[] as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress’ embodied in the Federal Arbitration Act.” And not only would such a rule tend to clog the courts in contravention of the FAA’s objectives, it would do so without apparent benefit to consumers. Even if such a rule wouldn’t effectively be invalidated by the FAA, the Commission should firmly reject it anyway: A rule that operates primarily to enrich class action attorneys at the expense of their clients has no place in an agency charged with protecting the public interest.

There must have been a great gnashing of teeth in Chairman Wheeler’s office this morning as the FCC announced that it was pulling the Chairman’s latest modifications to the set-top box proposal from its voting agenda. This is surely but a bump in the road for the Chairman; he will undoubtedly press ever onward in his quest to “fix” a market that is flooded with competition and consumer choice. But, as we stop to take a breath for a moment while this latest FCC adventure is temporarily paused, there is a larger issue worth considering: the lack of transparency at the FCC.

Although the Commission has an unfortunate tradition of non-disclosure surrounding many of its regulatory proposals, the problem has seemingly been exacerbated by Chairman Wheeler’s aggressive agenda and his intransigence in the face of overwhelming and rigorous criticism.

Perhaps nowhere was this attitude more apparent than with his handling of the Open Internet Order, which was plagued with enough process problems to elicit a call for a delay of the Commission’s vote on the initial rules from Democratic Commissioner Rosenworcel, and a strong rebuke from the Chairman of the House Oversight Committee prior to the Commission’s vote on the final rules (which were not disclosed to the public until after the vote).

But the same cavalier dismissal of public and stakeholder input has plagued the Chairman’s beleaguered set-top box proposal, as well.

As Commissioner Pai noted before Congress in March:

The FCC continues to choose opacity over transparency. The decisions we make impact hundreds of millions of Americans and thousands of small businesses. And yet to the public, to Congress, and even to the Commissioners at the FCC, the agency’s work remains a black box.

Take this simple proposition: The public should be able to see what we’re voting on before we vote on it. That’s how Congress works, as you know. Anyone can look up any pending bill right now by going to congress.gov. And that’s how many state commissions work too. But not the FCC.

Exhibit A in Commissioner Pai’s lament was the set-top box proceeding:

Instead, the public gets to see only what the Chairman’s Office deigns to release, so controversial policy proposals can be (and typically are) hidden in a wave of media adulation. That happened just last month when the agency proposed changes to its set-top-box rules but tried to mislead content producers and the public about whether set-top box manufacturers would be permitted to insert their own advertisements into programming streams.

Now, although the Chairman’s initial proposal was eventually released, we have only a fact sheet and an op-ed by Chairman Wheeler on which to judge the purportedly substantial changes embodied in his latest version.

Even Democrats in Congress have recognized the process problems that have plagued this proceeding. As Senator Feinstein (D-CA) urged in a recent letter to Chairman Wheeler:

Given the significance of this proceeding, I ask that you make public the new proposal under consideration by the Commission, so that all interested stakeholders, members of Congress, copyright experts, and others can comment on the potential copyright implications of the new proposal before the Commission votes on it.

And as Senator Heller (R-NV) wrote in a letter to Chairman Wheeler this week:

I believe it is unacceptable that the FCC has not released the text of this proposal before Thursday’s vote. A three-page fact sheet does not provide enough details for Congress to conduct proper oversight of this rulemaking that will significantly impact both consumers and industry…. I encourage you to release the text immediately so that the American public has a full understanding of what is being considered by the Commission….

Of course, this isn’t a new problem at the FCC. In fact, before he supported Chairman Wheeler’s efforts to impose Open Internet rules without sufficient public disclosure, then-Senator Obama decried then-Chairman Martin’s efforts to enact new media ownership rules with insufficient process in 2007:

Repealing the cross ownership rules and retaining the rest of our existing regulations is not a proposal that has been put out for public comment; the proper process for vetting it is not in closed door meetings with lobbyists or in selective leaks to the New York Times.

Although such a proposal may pass the muster of a federal court, Congress and the public have the right to review any specific proposal and decide whether or not it constitutes sound policy. And the Commission has the responsibility to defend any new proposal in public discourse and debate.

And although you won’t find them complaining this time (because this time they want the excessive intervention that the NPRM seems to contemplate), regulatory advocates lamented just exactly this sort of secrecy at the Commission when Chairman Genachowski proposed his media ownership rules in 2012. At that time Free Press angrily wrote:

[T]he Commission still has not made public its actual media ownership order…. Furthermore, it’s disingenuous for the FCC to suggest that its process now is more transparent than the one former Chairman Martin used to adopt similar rules. Genachowski’s FCC has yet to publish any details of its final proposal, offering only vague snippets in press releases… despite the president’s instruction to rulemaking agencies to conduct any significant business in open meetings with opportunities for members of the public to have their voices heard.

As Free Press noted, President Obama did indeed instruct “agencies to conduct any significant business in open meetings with opportunities for members of the public to have their voices heard.” In his Memorandum on Transparency and Open Government, his first executive action, the president urged that:

Public engagement enhances the Government’s effectiveness and improves the quality of its decisions. Knowledge is widely dispersed in society, and public officials benefit from having access to that dispersed knowledge. Executive departments and agencies should offer Americans increased opportunities to participate in policymaking and to provide their Government with the benefits of their collective expertise and information.

The resulting Open Government Directive calls on executive agencies to

take prompt steps to expand access to information by making it available online in open formats. With respect to information, the presumption shall be in favor of openness….

The FCC is not an “executive agency,” and so is not directly subject to the Directive. But the Chairman’s willingness to stray so far from basic principles of transparency is woefully inconsistent with the basic principles of good government and the ideals of heightened transparency claimed by this administration.

As Commissioner Wheeler moves forward with his revised set-top box proposal, and on the eve of tomorrow’s senate FCC oversight hearing, we would do well to reflect on some insightful testimony regarding another of the Commission’s rulemakings from ten years ago:

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. They have never had so much flexibility and so much opportunity.  

* * *

As the content industry has ramped up on-line delivery of content, it has been testing a variety of protection measures that provide both security for the industry and flexibility for consumers.

So to answer the question, can content protection and technological innovation coexist?  It is a resounding yes. Look at the robust market for on-line content distribution facilitated by the technologies and networks consumers love.

* * *

[T]he Federal Communications Commission should not become the Federal Computer Commission or the Federal Copyright Commission, and the marketplace, not the Government, is the best arbiter of what technologies succeed or fail.

That’s not the self-interested testimony of a studio or cable executive — that was Gigi Sohn, current counsel to Chairman Wheeler, speaking on behalf of Public Knowledge in 2006 before the House Energy and Commerce Committee against the FCC’s “broadcast flag” rules. Those rules, supported by a broad spectrum of rightsholders, required consumer electronics devices to respect programming conditions preventing the unauthorized transmission over the internet of digital broadcast television content.

Ms. Sohn and Public Knowledge won that fight in court, convincing the DC Circuit that Congress hadn’t given the FCC authority to impose the rules in the first place, and she successfully urged Congress not to give the FCC the authority to reinstate them.

Yet today, she and the Chairman seem to have forgotten her crucial insights from ten years ago. If the marketplace for video content was sufficiently innovative and competitive then, how can it possibly not be so now, with audiences having orders of magnitude more choices, both online and off? And if the FCC lacked authority to adopt copyright-related rules then, how does the FCC suddenly have that authority now, in the absence of any intervening congressional action?

With Section 106 of the Copyright Act, Congress granted copyright holders the exclusive rights to engage in or license the reproduction, distribution, and public performance of their works. The courts are the “backstop,” not the FCC (as Chairman Wheeler would have it), and section 629 of the Communications Act doesn’t say otherwise. All section 629 does is direct the FCC to promote a competitive market for devices to access pay-TV services from pay-TV providers. As we noted last week, it very simply doesn’t allow the FCC to interfere with the license arrangements that fill those devices, and, short of explicit congressional direction, the Commission is simply not empowered to interfere with the framework set forth in the Copyright Act.

Chairman Wheeler’s latest proposal has improved on his initial plan by, for example, moving toward an applications-based approach and away from the mandatory disaggregation of content. But it would still arrogate to the FCC the authority to stand up a licensing body for the distribution of content over pay-TV applications; set rules on the terms such licenses must, may, and may not include; and even allow the FCC itself to create terms or the entire license. Such rules would necessarily implicate the extent to which rightsholders are able to control the distribution of their content.

The specifics of the regulations may be different from 2006, but the point is the same: What the FCC could not do in 2006, it cannot do today.

Imagine if you will… that a federal regulatory agency were to decide that the iPhone ecosystem was too constraining and too expensive; that consumers — who had otherwise voted for iPhones with their dollars — were being harmed by the fact that the platform was not “open” enough.

Such an agency might resolve (on the basis of a very generous reading of a statute), to force Apple to make its iOS software available to any hardware platform that wished to have it, in the process making all of the apps and user data accessible to the consumer via these new third parties, on terms set by the agency… for free.

Difficult as it may be to picture this ever happening, it is exactly the sort of Twilight Zone scenario that FCC Chairman Tom Wheeler is currently proposing with his new set-top box proposal.

Based on the limited information we have so far (a fact sheet and an op-ed), Chairman Wheeler’s new proposal does claw back some of the worst excesses of his initial draft (which we critiqued in our comments and reply comments to that proposal).

But it also appears to reinforce others — most notably the plan’s disregard for the right of content creators to control the distribution of their content. Wheeler continues to dismiss the complex business models, relationships, and licensing terms that have evolved over years of competition and innovation. Instead, he offers  a one-size-fits-all “solution” to a “problem” that market participants are already falling over themselves to provide.

Plus ça change…

To begin with, Chairman Wheeler’s new proposal is based on the same faulty premise: that consumers pay too much for set-top boxes, and that the FCC is somehow both prescient enough and Congressionally ordained to “fix” this problem. As we wrote in our initial comments, however,

[a]lthough the Commission asserts that set-top boxes are too expensive, the history of overall MVPD prices tells a remarkably different story. Since 1994, per-channel cable prices including set-top box fees have fallen by 2 percent, while overall consumer prices have increased by 54 percent. After adjusting for inflation, this represents an impressive overall price decrease.

And the fact is that no one buys set-top boxes in isolation; rather, the price consumers pay for cable service includes the ability to access that service. Whether the set-top box fee is broken out on subscribers’ bills or not, the total price consumers pay is unlikely to change as a result of the Commission’s intervention.

As we have previously noted, the MVPD set-top box market is an aftermarket; no one buys set-top boxes without first (or simultaneously) buying MVPD service. And as economist Ben Klein (among others) has shown, direct competition in the aftermarket need not be plentiful for the market to nevertheless be competitive:

Whether consumers are fully informed or uninformed, consumers will pay a competitive package price as long as sufficient competition exists among sellers in the [primary] market.

Engineering the set-top box aftermarket to bring more direct competition to bear may redistribute profits, but it’s unlikely to change what consumers pay.

Stripped of its questionable claims regarding consumer prices and placed in the proper context — in which consumers enjoy more ways to access more video content than ever before — Wheeler’s initial proposal ultimately rested on its promise to “pave the way for a competitive marketplace for alternate navigation devices, and… end the need for multiple remote controls.” Weak sauce, indeed.

He now adds a new promise: that “integrated search” will be seamlessly available for consumers across the new platforms. But just as universal remotes and channel-specific apps on platforms like Apple TV have already made his “multiple remotes” promise a hollow one, so, too, have competitive pressures already begun to deliver integrated search.

Meanwhile, such marginal benefits come with a host of substantial costs, as others have pointed out. Do we really need the FCC to grant itself more powers and create a substantial and coercive new regulatory regime to mandate what the market is already poised to provide?

From ignoring copyright to obliterating copyright

Chairman Wheeler’s first proposal engendered fervent criticism for the impossible position in which it placed MVPDs — of having to disregard, even outright violate, their contractual obligations to content creators.

Commendably, the new proposal acknowledges that contractual relationships between MVPDs and content providers should remain “intact.” Thus, the proposal purports to enable programmers and MVPDs to maintain “their channel position, advertising and contracts… in place.” MVPDs will retain “end-to-end” control of the display of content through their apps, and all contractually guaranteed content protection mechanisms will remain, because the “pay-TV’s software will manage the full suite of linear and on-demand programming licensed by the pay-TV provider.”

But, improved as it is, the new proposal continues to operate in an imagined world where the incredibly intricate and complex process by which content is created and distributed can be reduced to the simplest of terms, dictated by a regulator and applied uniformly across all content and all providers.

According to the fact sheet, the new proposal would “[p]rotect[] copyrights and… [h]onor[] the sanctity of contracts” through a “standard license”:

The proposed final rules require the development of a standard license governing the process for placing an app on a device or platform. A standard license will give device manufacturers the certainty required to bring innovative products to market… The license will not affect the underlying contracts between programmers and pay-TV providers. The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices.

But programming is distributed under a diverse range of contract terms. The only way a single, “standard license” could possibly honor these contracts is by forcing content providers to license all of their content under identical terms.

Leaving aside for a moment the fact that the FCC has no authority whatever to do this, for such a scheme to work, the agency would necessarily have to strip content holders of their right to govern the terms on which their content is accessed. After all, if MVPDs are legally bound to redistribute content on fixed terms, they have no room to permit content creators to freely exercise their rights to specify terms like windowing, online distribution restrictions, geographic restrictions, and the like.

In other words, the proposal simply cannot deliver on its promise that “[t]he license will not affect the underlying contracts between programmers and pay-TV providers.”

But fear not: According to the Fact Sheet, “[p]rogrammers will have a seat at the table to ensure that content remains protected.” Such largesse! One would be forgiven for assuming that the programmers’ (single?) seat will surrounded by those of other participants — regulatory advocates, technology companies, and others — whose sole objective will be to minimize content companies’ ability to restrict the terms on which their content is accessed.

And we cannot ignore the ominous final portion of the Fact Sheet’s “Standard License” description: “The FCC will serve as a backstop to ensure that nothing in the standard license will harm the marketplace for competitive devices.” Such an arrogation of ultimate authority by the FCC doesn’t bode well for that programmer’s “seat at the table” amounting to much.

Unfortunately, we can only imagine the contours of the final proposal that will describe the many ways by which distribution licenses can “harm the marketplace for competitive devices.” But an educated guess would venture that there will be precious little room for content creators and MVPDs to replicate a large swath of the contract terms they currently employ. “Any content owner can have its content painted any color that it wants, so long as it is black.”

At least we can take solace in the fact that the FCC has no authority to do what Wheeler wants it to do

And, of course, this all presumes that the FCC will be able to plausibly muster the legal authority in the Communications Act to create what amounts to a de facto compulsory licensing scheme.

A single license imposed upon all MVPDs, along with the necessary restrictions this will place upon content creators, does just as much as an overt compulsory license to undermine content owners’ statutory property rights. For every license agreement that would be different than the standard agreement, the proposed standard license would amount to a compulsory imposition of terms that the rights holders and MVPDs would not otherwise have agreed to. And if this sounds tedious and confusing, just wait until the Commission starts designing its multistakeholder Standard Licensing Oversight Process (“SLOP”)….

Unfortunately for Chairman Wheeler (but fortunately for the rest of us), the FCC has neither the legal authority, nor the requisite expertise, to enact such a regime.

Last month, the Copyright Office was clear on this score in its letter to Congress commenting on the Chairman’s original proposal:  

[I]t is important to remember that only Congress, through the exercise of its power under the Copyright Clause, and not the FCC or any other agency, has the constitutional authority to create exceptions and limitations in copyright law. While Congress has enacted compulsory licensing schemes, they have done so in response to demonstrated market failures, and in a carefully circumscribed manner.

Assuming that Section 629 of the Communications Act — the provision that otherwise empowers the Commission to promote a competitive set-top box market — fails to empower the FCC to rewrite copyright law (which is assuredly the case), the Commission will be on shaky ground for the inevitable torrent of lawsuits that will follow the revised proposal.

In fact, this new proposal feels more like an emergency pivot by a panicked Chairman than an actual, well-grounded legal recommendation. While the new proposal improves upon the original, it retains at its core the same ill-informed, ill-advised and illegal assertion of authority that plagued its predecessor.

In the wake of the recent OIO decision, separation of powers issues should be at the forefront of everyone’s mind. In reaching its decision, the DC Circuit relied upon Chevron to justify its extreme deference to the FCC. The court held, for instance, that

Our job is to ensure that an agency has acted “within the limits of [Congress’s] delegation” of authority… and that its action is not “arbitrary, capricious, an abuse of discretion, or otherwise not in accordance with law.”… Critically, we do not “inquire as to whether the agency’s decision is wise as a policy matter; indeed, we are forbidden from substituting our judgment for that of the agency.”… Nor do we inquire whether “some or many economists would disapprove of the [agency’s] approach” because “we do not sit as a panel of referees on a professional economics journal, but as a panel of generalist judges obliged to defer to a reasonable judgment by an agency acting pursuant to congressionally delegated authority.

The DC Circuit’s decision takes a broad view of Chevron deference and, in so doing, ignores or dismisses some of the limits placed upon the doctrine by cases like Michigan v. EPA and UARG v. EPA (though Judge Williams does bring up UARG in dissent).

Whatever one thinks of the validity of the FCC’s approach to regulating the Internet, there is no question that it has, at best, a weak statutory foothold. Without prejudging the merits of the OIO, or the question of deference to agencies that find “[regulatory] elephants in [statutory] mouseholes,”  such broad claims of authority, based on such limited statutory language, should give one pause. That the court upheld the FCC’s interpretation of the Act without expressing reservations, suggesting any limits, or admitting of any concrete basis for challenging the agency’s authority beyond circular references to “abuse of discretion” is deeply troubling.

Separation of powers is a fundamental feature of our democracy, and one that has undoubtedly contributed to the longevity of our system of self-governance. Not least among the important features of separation of powers is the ability of courts to review the lawfulness of legislation and executive action.

The founders presciently realized the dangers of allowing one part of the government to centralize power in itself. In Federalist 47, James Madison observed that

The accumulation of all powers, legislative, executive, and judiciary, in the same hands, whether of one, a few, or many, and whether hereditary, selfappointed, or elective, may justly be pronounced the very definition of tyranny. Were the federal Constitution, therefore, really chargeable with the accumulation of power, or with a mixture of powers, having a dangerous tendency to such an accumulation, no further arguments would be necessary to inspire a universal reprobation of the system. (emphasis added)

The modern administrative apparatus has become the sort of governmental body that the founders feared and that we have somehow grown to accept. The FCC is not alone in this: any member of the alphabet soup that constitutes our administrative state, whether “independent” or otherwise, is typically vested with great, essentially unreviewable authority over the economy and our daily lives.

As Justice Thomas so aptly put it in his must-read concurrence in Michigan v. EPA:

Perhaps there is some unique historical justification for deferring to federal agencies, but these cases reveal how paltry an effort we have made to understand it or to confine ourselves to its boundaries. Although we hold today that EPA exceeded even the extremely permissive limits on agency power set by our precedents, we should be alarmed that it felt sufficiently emboldened by those precedents to make the bid for deference that it did here. As in other areas of our jurisprudence concerning administrative agencies, we seem to be straying further and further from the Constitution without so much as pausing to ask why. We should stop to consider that document before blithely giving the force of law to any other agency “interpretations” of federal statutes.

Administrative discretion is fantastic — until it isn’t. If your party is the one in power, unlimited discretion gives your side the ability to run down a wish list, checking off controversial items that could never make it past a deliberative body like Congress. That same discretion, however, becomes a nightmare under extreme deference as political opponents, newly in power, roll back preferred policies. In the end, regulation tends toward the extremes, on both sides, and ultimately consumers and companies pay the price in the form of excessive regulatory burdens and extreme uncertainty.

In theory, it is (or should be) left to the courts to rein in agency overreach. Unfortunately, courts have been relatively unwilling to push back on the administrative state, leaving the task up to Congress. And Congress, too, has, over the years, found too much it likes in agency power to seriously take on the structural problems that give agencies effectively free reign. At least, until recently.

In March of this year, Representative Ratcliffe (R-TX) proposed HR 4768: the Separation of Powers Restoration Act (“SOPRA”). Arguably this is first real effort to fix the underlying problem since the 1995 “Comprehensive Regulatory Reform Act” (although, it should be noted, SOPRA is far more targeted than was the CRRA). Under SOPRA, 5 U.S.C. § 706 — the enacted portion of the APA that deals with judicial review of agency actions —  would be amended to read as follows (with the new language highlighted):

(a) To the extent necessary to decision and when presented, the reviewing court shall determine the meaning or applicability of the terms of an agency action and decide de novo all relevant questions of law, including the interpretation of constitutional and statutory provisions, and rules made by agencies. Notwithstanding any other provision of law, this subsection shall apply in any action for judicial review of agency action authorized under any provision of law. No law may exempt any such civil action from the application of this section except by specific reference to this section.

These changes to the scope of review would operate as a much-needed check on the unlimited discretion that agencies currently enjoy. They give courts the ability to review “de novo all relevant questions of law,” which includes agencies’ interpretations of their own rules.

The status quo has created a negative feedback cycle. The Chevron doctrine, as it has played out, gives outsized incentives to both the federal agencies, as well as courts, to essentially disregard Congress’s intended meaning for particular statutes. Today an agency can write rules and make decisions safe in the knowledge that Chevron will likely insulate it from any truly serious probing by a district court with regards to how well the agency’s action actually matches up with congressional intent or with even rudimentary cost-benefit analysis.

Defenders of the administrative state may balk at changing this state of affairs, of course. But defending an institution that is almost entirely immune from judicial and legal review seems to be a particularly hard row to hoe.

Public Knowledge, for instance, claims that

Judicial deference to agency decision-making is critical in instances where Congress’ intent is unclear because it balances each branch of government’s appropriate role and acknowledges the realities of the modern regulatory state.

To quote Justice Scalia, an unfortunate champion of the Chevron doctrine, this is “pure applesauce.”

The very core of the problem that SOPRA addresses is that the administrative state is not a proper branch of government — it’s a shadow system of quasi-legislation and quasi-legal review. Congress can be chastened by popular vote. Judges who abuse discretion can be overturned (or impeached). The administrative agencies, on the other hand, are insulated through doctrines like Chevron and Auer, and their personnel subject more or less to the political whims of the executive branch.

Even agencies directly under the control of the executive branch  — let alone independent agencies — become petrified caricatures of their original design as layers of bureaucratic rule and custom accrue over years, eventually turning the organization into an entity that serves, more or less, to perpetuate its own existence.

Other supporters of the status quo actually identify the unreviewable see-saw of agency discretion as a feature, not a bug:

Even people who agree with the anti-government premises of the sponsors [of SOPRA] should recognize that a change in the APA standard of review is an inapt tool for advancing that agenda. It is shortsighted, because it ignores the fact that, over time, political administrations change. Sometimes the administration in office will generally be in favor of deregulation, and in these circumstances a more intrusive standard of judicial review would tend to undercut that administration’s policies just as surely as it may tend to undercut a more progressive administration’s policies when the latter holds power. The APA applies equally to affirmative regulation and to deregulation.

But presidential elections — far from justifying this extreme administrative deference — actually make the case for trimming the sails of the administrative state. Presidential elections have become an important part about how candidates will wield the immense regulatory power vested in the executive branch.

Thus, for example, as part of his presidential bid, Jeb Bush indicated he would use the EPA to roll back every policy that Obama had put into place. One of Donald Trump’s allies suggested that Trump “should turn off [CNN’s] FCC license” in order to punish the news agency. And VP hopeful Elizabeth Warren has suggested using the FDIC to limit the growth of financial institutions, and using the FCC and FTC to tilt the markets to make it easier for the small companies to get an advantage over the “big guys.”

Far from being neutral, technocratic administrators of complex social and economic matters, administrative agencies have become one more political weapon of majority parties as they make the case for how their candidates will use all the power at their disposal — and more — to work their will.

As Justice Thomas, again, noted in Michigan v. EPA:

In reality…, agencies “interpreting” ambiguous statutes typically are not engaged in acts of interpretation at all. Instead, as Chevron itself acknowledged, they are engaged in the “formulation of policy.” Statutory ambiguity thus becomes an implicit delegation of rulemaking authority, and that authority is used not to find the best meaning of the text, but to formulate legally binding rules to fill in gaps based on policy judgments made by the agency rather than Congress.

And this is just the thing: SOPRA would bring far-more-valuable predictability and longevity to our legal system by imposing a system of accountability on the agencies. Currently, commissions often believe they can act with impunity (until the next election at least), and even the intended constraints of the APA frequently won’t do much to tether their whims to statute or law if they’re intent on deviating. Having a known constraint (or, at least, a reliable process by which judicial constraint may be imposed) on their behavior will make them think twice about exactly how legally and economically sound proposed rules and other actions are.

The administrative state isn’t going away, even if SOPRA were passed; it will continue to be the source of the majority of the rules under which our economy operates. We have long believed that a benefit of our judicial system is its consistency and relative lack of politicization. If this is a benefit for interpreting laws when agencies aren’t involved, it should also be a benefit when they are involved. Particularly as more and more law emanates from agencies rather than Congress, the oversight of largely neutral judicial arbiters is an essential check on the administrative apparatus’ “accumulation of all powers.”

The interest of judges tends to include a respect for the development of precedent that yields consistent and transparent rules for all future litigants and, more broadly, for economic actors and consumers making decisions in the shadow of the law. This is markedly distinct from agencies which, more often than not, promote the particular, shifting, and often-narrow political sentiments of the day.

Whether a Republican- or a Democrat— appointed district judge reviews an agency action, that judge will be bound (more or less) by the precedent that came before, regardless of the judge’s individual political preferences. Contrast this with the FCC’s decision to reclassify broadband as a Title II service, for example, where previously it had been committed to the idea that broadband was an information service, subject to an entirely different — and far less onerous — regulatory regime.  Of course, the next FCC Chairman may feel differently, and nothing would stop another regulatory shift back to the pre-OIO status quo. Perhaps more troublingly, the enormous discretion afforded by courts under current standards of review would permit the agency to endlessly tweak its rules — forbearing from some regulations but not others, un-forbearing, re-interpreting, etc., with precious few judicial standards available to bring certainty to the rules or to ensure their fealty to the statute or the sound economics that is supposed to undergird administrative decisionmaking.

SOPRA, or a bill like it, would have required the Commission to actually be accountable for its historical regulations, and would force it to undergo at least rudimentary economic analysis to justify its actions. This form of accountability can only be to the good.

The genius of our system is its (potential) respect for the rule of law. This is an issue that both sides of the aisle should be able to get behind: minority status is always just one election cycle away. We should all hope to see SOPRA — or some bill like it — gain traction, rooted in long-overdue reflection on just how comfortable we are as a polity with a bureaucratic system increasingly driven by unaccountable discretion.

Recently, the en banc Federal Circuit decided in Suprema, Inc. v. ITC that the International Trade Commission could properly prevent the importation of articles that infringe under an indirect liability theory. The core of the dispute in Suprema was whether § 337 of the Tariff Act’s prohibition against “importing articles that . . . infringe a valid and enforceable United States patent” could be used to prevent the importation of articles that at the moment of importation were not (yet) directly infringing. In essence, is the ITC limited to acting only when there is a direct infringement, or can it also prohibit articles involved in an indirect infringement scheme — in this case under an inducement theory?

TOTM’s own Alden Abbott posted his view of the decision, and there are a couple of points we’d like to respond to, both embodied in this quote:

[The ITC’s Suprema decision] would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference … Furthermore, the en banc majority’s willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of [Limelight v.] Akamai.

In truth, we are of two minds (four minds?) regarding this view. We’re deeply sympathetic with arguments that the Supreme Court has become — and should become — increasingly skeptical of blind Chevron deference. Recently, we filed a brief on the 2015 Open Internet Order that, in large part, argued that the FCC does not deserve Chevron deference under King v. Burwell, UARG v. EPA and Michigan v. EPA (among other important cases) along a very similar line of reasoning. However, much as we’d like to generally scale back Chevron deference, in this case we happen to think that the Federal Circuit got it right.

Put simply, “infringe” as used in § 337 plainly includes indirect infringement. Section 271 of the Patent Act makes it clear that indirect infringers are guilty of “infringement.” The legislative history of the section, as well as Supreme Court case law, makes it very clear that § 271 was a codification of both direct and indirect liability.

In taxonomic terms, § 271 codifies “infringement” as a top-level category, with “direct infringement” and “indirect infringement” as two distinct subcategories of infringement. The law further subdivides “indirect infringement” into sub-subcategories, “inducement” and “contributory infringement.” But all of these are “infringement.”

For instance, § 271(b) says that “[w]hoever actively induces infringement of a patent shall be liable as an infringer” (emphasis added). Thus, in terms of § 271, to induce infringement is to commit infringement within the meaning of the patent laws. And in § 337, assuming it follows § 271 (which seems appropriate given Congress’ stated purpose to “make it a more effective remedy for the protection of United States intellectual property rights” (emphasis added)), it must follow that when one imports “articles… that infringe” she can be liable for either (or both) § 271(a) direct infringement or § 271(b) inducement.

Frankly, we think this should end the analysis: There is no Chevron question here because the Tariff Act isn’t ambiguous.

But although it seems clear on the face of § 337 that “infringe” must include indirect infringement, at the very least § 337 is ambiguous and cannot clearly mean only “direct infringement.” Moreover, the history of patent law as well as the structure of the ITC’s powers both cut in favor of the ITC enforcing the Tariff Act against indirect infringers. The ITC’s interpretation of any ambiguity in the term “articles… that infringe” is surely reasonable.

The Ambiguity and History of § 337 Allows for Inducement Liability

Assuming for argument’s sake that § 337’s lack of specificity leaves room for debate as to what “infringe” means, there is nothing that militates definitively against indirect liability being included in § 337. The majority handles any ambiguity of this sort well:

[T]he shorthand phrase “articles that infringe” does not unambiguously exclude inducement of post-importation infringement… By using the word “infringe,” § 337 refers to 35 U.S.C. § 271, the statutory provision defining patent infringement. The word “infringe” does not narrow § 337’s scope to any particular subsections of § 271. As reflected in § 271 and the case law from before and after 1952, “infringement” is a term that encompasses both direct and indirect infringement, including infringement by importation that induces direct infringement of a method claim… Section 337 refers not just to infringement, but to “articles that infringe.” That phrase does not narrow the provision to exclude inducement of post-importation infringement. Rather, the phrase introduces textual uncertainty.

Further, the court notes that it has consistently held that inducement is a valid theory of liability on which to base § 337 cases.

And lest you think that this interpretation would give some new, expansive powers to the ITC (perhaps meriting something like a Brown & Williamson exception to Chevron deference), the ITC is still bound by all the defenses and limitations on indirect liability under § 271. Saying it has authority to police indirect infringement doesn’t give it carte blanche, nor any more power than US district courts currently have in adjudicating indirect infringement. In this case, the court went nowhere near the limits of Chevron in giving deference to the ITC’s decision that “articles… that infringe” emcompasses the well-established (and statutorily defined) law of indirect infringement.

Inducement Liability Isn’t Precluded by Limelight

Nor does the Supreme Court’s Limelight v. Akamai decision present any problem. Limelight is often quoted for the proposition that there can be no inducement liability without direct infringement. And it does stand for that, as do many other cases; that point is not really in any doubt. But what Alden and others (including the dissenters in Suprema) have cited it for is the proposition that inducement liability cannot attach unless all of the elements of inducement have already been practiced at the time of importation. Limelight does not support that contention, however.

Inducement liability contemplates direct infringement, but the direct infringement need not have been practiced by the same entity liable for inducement, nor at the same time as inducement (see, e.g., Standard Oil. v. Nippon). Instead, the direct infringement may come at a later time — and there is no dispute in Suprema regarding whether there was direct infringement (there was, as Suprema notes: “the Commission found that record evidence demonstrated that Mentalix had already directly infringed claim 19 within the United States prior to the initiation of the investigation.”).

Limelight, on the other hand, is about what constitutes the direct infringement element in an inducement case. The sole issue in Limelight was whether this “direct infringement element” required that all of the steps of a method patent be carried out by a single entity or entities acting in concert. In Limelight’s network there was a division of labor, so to speak, between the company and its customers, such that each carried out some of the steps of the method patent at issue. In effect, plaintiffs argued that Limelight should be liable for inducement because it practised some of the steps of the patented method, with the requisite intent that others would carry out the rest of the steps necessary for direct infringement. But neither Limelight nor its customers separately carried out all of the steps necessary for direct infringement.

The Court held (actually, it simply reiterated established law) that the method patent could never be violated unless a single party (or parties acting in concert) carried out all of the steps of the method necessary for direct infringement. Thus it also held that Limelight could not be liable for inducement because, on the facts of that case, none of its customers could ever be liable for the necessary, underlying direct infringement. Again — what was really at issue in Limelight were the requirements to establish the direct infringement necessary to prove inducement.

On remand, the Federal Circuit reinforced the point that Limelight was really about direct infringement and, by extension, who must be involved in the direct infringement element of an inducement claim. According to the court:

We conclude that the facts Akamai presented at trial constitute substantial evidence from which a jury could find that Limelight directed or controlled its customers’ performance of each remaining method step. As such, substantial evidence supports the jury’s verdict that all steps of the claimed methods were performed by or attributable to Limelight. Therefore, Limelight is liable for direct infringement.

The holding of Limelight is simply inapposite to the facts of Suprema. The crux of Suprema is whether the appropriate mens rea existed to support a claim of inducement — not whether the requisite direct infringement occurred or not.

The Structure of § 337 Supports The ITC’s Ability to Block Inducement

Further, as the majority in Suprema notes, the very idea of inducement liability necessarily contemplates that there will be a temporal separation between the event that gives rise to indirect liability and the future direct infringement (required to prove inducement). As the Suprema court briefly noted “Section 337(a)(1)(B)’s ‘sale . . . after importation’ language confirms that the Commission is permitted to focus on post-importation activity to identify the completion of infringement.”

In particular, each of the enforcement powers in § 337(a) contains a clause that, in addition to a prohibition against, e.g., infringing articles at the time of importation, also prohibits “the sale within the United States after importation by the owner, importer, or consignee, of articles[.]” Thus, Congress explicitly contemplated that the ITC would have the power to act upon articles at various points in time, not limiting it to a power effective only at the moment of importation.

Although the particular power to reach into the domestic market has to do with preventing the importer or its agent from making sales, this doesn’t undermine the larger point here: the ITC’s power to prevent infringing articles extends over a range of time. Given that “articles that … infringe” is at the very least ambiguous, and, as per the Federal Circuit (and our own position), this ambiguity allows for indirect infringement, it isn’t a stretch to infer that that Congress intended the ITC to have authority under § 337 to ban the import of articles that induce infringement that occurs only after the time of importation..

To interpret § 337 otherwise would be to render it absurd and to create a giant loophole that would enable infringers to easily circumvent the ITC’s enforcement powers.

A Dissent from the Dissent

The dissent also takes a curious approach to § 271 by mixing inducement and contributory infringement, and generally making a confusing mess of the two. For instance, Judge Dyk says

At the time of importation, the scanners neither directly infringe nor induce infringement… Instead, these staple articles may or may not ultimately be used to infringe… depending upon whether and how they are combined with domestically developed software after importation into the United States (emphasis added).

Whether or not the goods were “staples articles” (and thus potentially capable of substantial noninfringing uses) has nothing to do with whether or not there was inducement. Section 271 makes a very clear delineation between inducement in § 271(b) and contributory infringement in § 271(c). While a staple article of commerce capable of substantial noninfringing uses will not serve as the basis for a contributory infringement claim, it is irrelevant whether or not goods are such “staples” for purposes of establishing inducement.

The boundaries of inducement liability, by contrast, are focused on the intent of the actors: If there is an intent to induce, whether or not there is a substantial noninfringing use, there can be a violation of § 271. Contributory infringement and inducement receive treatment in separate paragraphs of § 271 and are separate doctrines comprising separate elements. This separation is so evident on the face of the law as well as in its history that the Supreme Court read the doctrine into copyright in Grokster — where, despite a potentially large number of non-infringing uses, the intent to induce infringement was sufficient to find liability.

Parting Thoughts on Chevron

We have some final thoughts on the Chevron question, because this is rightly a sore point in administrative law. In this case we think that the analysis should have ended at step one. Although the Federal Circuit began with an assumption of ambiguity, it was being generous to the appellants. Did Congress speak with clear intent? We think so. Section 271 very clearly includes direct infringement as well as indirect infringement within its definition of what constitutes infringement of a patent. When § 337 references “articles … that infringe” it seems fairly obvious that Congress intended the ITC to be able to enforce the prohibitions in § 271 in the context of imported goods.

But even if we advance to step two of the Chevron analysis, the ITC’s construction of § 337 is plainly permissible — and far from expansive. By asserting its authority here the ITC is simply policing the importation of infringing goods (which it clearly has the power to do), and doing so in the case of goods that indirectly infringe (a concept that has been part of US law for a very long time). If “infringe” as used in the Tariff Act is ambiguous, the ITC’s interpretation of it to include both indirect as well as direct infringement seems self-evidently reasonable.

Under the dissent’s (and Alden’s) interpretation of § 337, all that would be required to evade the ITC would be to import only the basic components of an article such that at the moment of importation there was no infringement. Once reassembled within the United States, the ITC’s power to prevent the sale of infringing goods would be nullified. Section 337 would thus be read to simply write out the entire “indirect infringement” subdivision of § 271 — an inference that seems like a much bigger stretch than that “infringement” under § 337 means all infringement under § 271. Congress was more than capable of referring only to “direct infringement” in § 337 if that’s what it intended.

Much as we would like to see Chevron limited, not every agency case is the place to fight this battle. If we are to have agencies, and we are to have a Chevron doctrine, there will be instances of valid deference to agency interpretations — regardless of how broadly or narrowly Chevron is interpreted. The ITC wasn’t making a power grab in Suprema, nor was its reading of the statute unexpected, inconsistent with its past practice, or expansive.

In short, Suprema doesn’t break any new statutory interpretation ground, nor present a novel question of “deep economic or political significance” akin to the question at issue in King v. Burwell. Like it or not, there will be no roots of an anti-Chevron-deference revolution growing out of Suprema.

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

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

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

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

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

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

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

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

As Hartline states,

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

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

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

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

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

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

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

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

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

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

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