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NetChoice, Net Neutrality, and the Future of the First Amendment Online

Ben Sperry —  1 June 2022

In an expected decision (but with a somewhat unexpected coalition), the U.S. Supreme Court has moved 5 to 4 to vacate an order issued early last month by the 5th U.S. Circuit Court of Appeals, which stayed an earlier December 2021 order from the U.S. District Court for the Western District of Texas enjoining Texas’ attorney general from enforcing the state’s recently enacted social-media law, H.B. 20. The law would bar social-media platforms with more than 50 million active users from engaging in “censorship” based on political viewpoint. 

The shadow-docket order serves to grant the preliminary injunction sought by NetChoice and the Computer & Communications Industry Association to block the law—which they argue is facially unconstitutional—from taking effect. The trade groups also are challenging a similar Florida law, which the 11th U.S. Circuit Court of Appeals last week ruled was “substantially likely” to violate the First Amendment. Both state laws will thus be stayed while challenges on the merits proceed. 

But the element of the Supreme Court’s order drawing the most initial interest is the “strange bedfellows” breakdown that produced it. Chief Justice John Roberts was joined by conservative Justices Brett Kavanaugh and Amy Coney Barrett and liberals Stephen Breyer and Sonia Sotomayor in moving to vacate the 5th Circuit’s stay. Meanwhile, Justice Samuel Alito wrote a dissent that was joined by fellow conservatives Clarence Thomas and Neil Gorsuch, and liberal Justice Elena Kagan also dissented without offering a written justification.

A glance at the recent history, however, reveals why it should not be all that surprising that the justices would not come down along predictable partisan lines. Indeed, when it comes to content moderation and the question of whether to designate platforms as “common carriers,” the one undeniably predictable outcome is that both liberals and conservatives have been remarkably inconsistent.

Both Sides Flip Flop on Common Carriage

Ever since Justice Thomas used his concurrence in 2021’s Biden v. Knight First Amendment Institute to lay out a blueprint for how states could regulate social-media companies as common carriers, states led by conservatives have been working to pass bills to restrict the ability of social media companies to “censor.” 

Forcing common carriage on the Internet was, not long ago, something conservatives opposed. It was progressives who called net neutrality the “21st Century First Amendment.” The actual First Amendment, however, protects the rights of both Internet service providers (ISPs) and social-media companies to decide the rules of the road on their own platforms.

Back in the heady days of 2014, when the Federal Communications Commission (FCC) was still planning its next moves on net neutrality after losing at the U.S. Court of Appeals for the D.C. Circuit the first time around, Geoffrey Manne and I at the International Center for Law & Economics teamed with Berin Szoka and Tom Struble of TechFreedom to write a piece for the First Amendment Law Review arguing that there was no exception that would render broadband ISPs “state actors” subject to the First Amendment. Further, we argued that the right to editorial discretion meant that net-neutrality regulations would be subject to (and likely fail) First Amendment scrutiny under Tornillo or Turner.

After the FCC moved to reclassify broadband as a Title II common carrier in 2015, then-Judge Kavanaugh of the D.C. Circuit dissented from the denial of en banc review, in part on First Amendment grounds. He argued that “the First Amendment bars the Government from restricting the editorial discretion of Internet service providers, absent a showing that an Internet service provider possesses market power in a relevant geographic market.” In fact, Kavanaugh went so far as to link the interests of ISPs and Big Tech (and even traditional media), stating:

If market power need not be shown, the Government could regulate the editorial decisions of Facebook and Google, of MSNBC and Fox, of NYTimes.com and WSJ.com, of YouTube and Twitter. Can the Government really force Facebook and Google and all of those other entities to operate as common carriers? Can the Government really impose forced-carriage or equal-access obligations on YouTube and Twitter? If the Government’s theory in this case were accepted, then the answers would be yes. After all, if the Government could force Internet service providers to carry unwanted content even absent a showing of market power, then it could do the same to all those other entities as well. There is no principled distinction between this case and those hypothetical cases.

This was not a controversial view among free-market, right-of-center types at the time.

An interesting shift started to occur during the presidency of Donald Trump, however, as tensions between social-media companies and many on the right came to a head. Instead of seeing these companies as private actors with strong First Amendment rights, some conservatives began looking either for ways to apply the First Amendment to them directly as “state actors” or to craft regulations that would essentially make social-media companies into common carriers with regard to speech.

But Kavanaugh’s opinion in USTelecom remains the best way forward to understand how the First Amendment applies online today, whether regarding net neutrality or social-media regulation. Given Justice Alito’s view, expressed in his dissent, that it “is not at all obvious how our existing precedents, which predate the age of the internet, should apply to large social media companies,” it is a fair bet that laws like those passed by Texas and Florida will get a hearing before the Court in the not-distant future. If Justice Kavanaugh’s opinion has sway among the conservative bloc of the Supreme Court, or is able to peel off justices from the liberal bloc, the Texas law and others like it (as well as net-neutrality regulations) will be struck down as First Amendment violations.

Kavanaugh’s USTelecom Dissent

In then-Judge Kavanaugh’s dissent, he highlighted two reasons he believed the FCC’s reclassification of broadband as Title II was unlawful. The first was that the reclassification decision was a “major question” that required clear authority delegated by Congress. The second, more important point was that the FCC’s reclassification decision was subject to the Turner standard. Under that standard, since the FCC did not engage—at the very least—in a market-power analysis, the rules could not stand, as they amounted to mandated speech.

The interesting part of this opinion is that it tracks very closely to the analysis of common-carriage requirements for social-media companies. Kavanaugh’s opinion offered important insights into:

  1. the applicability of the First Amendment right to editorial discretion to common carriers;
  2. the “use it or lose it” nature of this right;
  3. whether Turner’s protections depended on scarcity; and 
  4. what would be required to satisfy Turner scrutiny.

Common Carriage and First Amendment Protection

Kavanaugh found unequivocally that common carriers, such as ISPs classified under Title II, were subject to First Amendment protection under the Turner decisions:

The Court’s ultimate conclusion on that threshold First Amendment point was not obvious beforehand. One could have imagined the Court saying that cable operators merely operate the transmission pipes and are not traditional editors. One could have imagined the Court comparing cable operators to electricity providers, trucking companies, and railroads – all entities subject to traditional economic regulation. But that was not the analytical path charted by the Turner Broadcasting Court. Instead, the Court analogized the cable operators to the publishers, pamphleteers, and bookstore owners traditionally protected by the First Amendment. As Turner Broadcasting concluded, the First Amendment’s basic principles “do not vary when a new and different medium for communication appears” – although there of course can be some differences in how the ultimate First Amendment analysis plays out depending on the nature of (and competition in) a particular communications market. Brown v. Entertainment Merchants Association, 564 U.S. 786, 790 (2011) (internal quotation mark omitted).

Here, of course, we deal with Internet service providers, not cable television operators. But Internet service providers and cable operators perform the same kinds of functions in their respective networks. Just like cable operators, Internet service providers deliver content to consumers. Internet service providers may not necessarily generate much content of their own, but they may decide what content they will transmit, just as cable operators decide what content they will transmit. Deciding whether and how to transmit ESPN and deciding whether and how to transmit ESPN.com are not meaningfully different for First Amendment purposes.

Indeed, some of the same entities that provide cable television service – colloquially known as cable companies – provide Internet access over the very same wires. If those entities receive First Amendment protection when they transmit television stations and networks, they likewise receive First Amendment protection when they transmit Internet content. It would be entirely illogical to conclude otherwise. In short, Internet service providers enjoy First Amendment protection of their rights to speak and exercise editorial discretion, just as cable operators do.

‘Use It or Lose It’ Right to Editorial Discretion

Kavanaugh questioned whether the First Amendment right to editorial discretion depends, to some degree, on how much the entity used the right. Ultimately, he rejected the idea forwarded by the FCC that, since ISPs don’t restrict access to any sites, they were essentially holding themselves out to be common carriers:

I find that argument mystifying. The FCC’s “use it or lose it” theory of First Amendment rights finds no support in the Constitution or precedent. The FCC’s theory is circular, in essence saying: “They have no First Amendment rights because they have not been regularly exercising any First Amendment rights and therefore they have no First Amendment rights.” It may be true that some, many, or even most Internet service providers have chosen not to exercise much editorial discretion, and instead have decided to allow most or all Internet content to be transmitted on an equal basis. But that “carry all comers” decision itself is an exercise of editorial discretion. Moreover, the fact that the Internet service providers have not been aggressively exercising their editorial discretion does not mean that they have no right to exercise their editorial discretion. That would be akin to arguing that people lose the right to vote if they sit out a few elections. Or citizens lose the right to protest if they have not protested before. Or a bookstore loses the right to display its favored books if it has not done so recently. That is not how constitutional rights work. The FCC’s “use it or lose it” theory is wholly foreign to the First Amendment.

Employing a similar logic, Kavanaugh also rejected the notion that net-neutrality rules were essentially voluntary, given that ISPs held themselves out as carrying all content.

Relatedly, the FCC claims that, under the net neutrality rule, an Internet service provider supposedly may opt out of the rule by choosing to carry only some Internet content. But even under the FCC’s description of the rule, an Internet service provider that chooses to carry most or all content still is not allowed to favor some content over other content when it comes to price, speed, and availability. That half-baked regulatory approach is just as foreign to the First Amendment. If a bookstore (or Amazon) decides to carry all books, may the Government then force the bookstore (or Amazon) to feature and promote all books in the same manner? If a newsstand carries all newspapers, may the Government force the newsstand to display all newspapers in the same way? May the Government force the newsstand to price them all equally? Of course not. There is no such theory of the First Amendment. Here, either Internet service providers have a right to exercise editorial discretion, or they do not. If they have a right to exercise editorial discretion, the choice of whether and how to exercise that editorial discretion is up to them, not up to the Government.

Think about what the FCC is saying: Under the rule, you supposedly can exercise your editorial discretion to refuse to carry some Internet content. But if you choose to carry most or all Internet content, you cannot exercise your editorial discretion to favor some content over other content. What First Amendment case or principle supports that theory? Crickets.

In a footnote, Kavanugh continued to lambast the theory of “voluntary regulation” forwarded by the concurrence, stating:

The concurrence in the denial of rehearing en banc seems to suggest that the net neutrality rule is voluntary. According to the concurrence, Internet service providers may comply with the net neutrality rule if they want to comply, but can choose not to comply if they do not want to comply. To the concurring judges, net neutrality merely means “if you say it, do it.”…. If that description were really true, the net neutrality rule would be a simple prohibition against false advertising. But that does not appear to be an accurate description of the rule… It would be strange indeed if all of the controversy were over a “rule” that is in fact entirely voluntary and merely proscribes false advertising. In any event, I tend to doubt that Internet service providers can now simply say that they will choose not to comply with any aspects of the net neutrality rule and be done with it. But if that is what the concurrence means to say, that would of course avoid any First Amendment problem: To state the obvious, a supposed “rule” that actually imposes no mandates or prohibitions and need not be followed would not raise a First Amendment issue.

Scarcity and Capacity to Carry Content

The FCC had also argued that there was a difference between ISPs and the cable companies in Turner in that ISPs did not face decisions about scarcity in content carriage. But Kavanaugh rejected this theory as inconsistent with the First Amendment’s right not to be compelled to carry a message or speech.

That argument, too, makes little sense as a matter of basic First Amendment law. First Amendment protection does not go away simply because you have a large communications platform. A large bookstore has the same right to exercise editorial discretion as a small bookstore. Suppose Amazon has capacity to sell every book currently in publication and therefore does not face the scarcity of space that a bookstore does. Could the Government therefore force Amazon to sell, feature, and promote every book on an equal basis, and prohibit Amazon from promoting or recommending particular books or authors? Of course not. And there is no reason for a different result here. Put simply, the Internet’s technological architecture may mean that Internet service providers can provide unlimited content; it does not mean that they must.

Keep in mind, moreover, why that is so. The First Amendment affords editors and speakers the right not to speak and not to carry or favor unwanted speech of others, at least absent sufficient governmental justification for infringing on that right… That foundational principle packs at least as much punch when you have room on your platform to carry a lot of speakers as it does when you have room on your platform to carry only a few speakers.

Turner Scrutiny and Bottleneck Market Power

Finally, Kavanaugh applied Turner scrutiny and found that, at the very least, it requires a finding of “bottleneck market power” that would allow ISPs to harm consumers. 

At the time of the Turner Broadcasting decisions, cable operators exercised monopoly power in the local cable television markets. That monopoly power afforded cable operators the ability to unfairly disadvantage certain broadcast stations and networks. In the absence of a competitive market, a broadcast station had few places to turn when a cable operator declined to carry it. Without Government intervention, cable operators could have disfavored certain broadcasters and indeed forced some broadcasters out of the market altogether. That would diminish the content available to consumers. The Supreme Court concluded that the cable operators’ market-distorting monopoly power justified Government intervention. Because of the cable operators’ monopoly power, the Court ultimately upheld the must-carry statute…

The problem for the FCC in this case is that here, unlike in Turner Broadcasting, the FCC has not shown that Internet service providers possess market power in a relevant geographic market… 

Rather than addressing any problem of market power, the net neutrality rule instead compels private Internet service providers to supply an open platform for all would-be Internet speakers, and thereby diversify and increase the number of voices available on the Internet. The rule forcibly reduces the relative voices of some Internet service and content providers and enhances the relative voices of other Internet content providers.

But except in rare circumstances, the First Amendment does not allow the Government to regulate the content choices of private editors just so that the Government may enhance certain voices and alter the content available to the citizenry… Turner Broadcasting did not allow the Government to satisfy intermediate scrutiny merely by asserting an interest in diversifying or increasing the number of speakers available on cable systems. After all, if that interest sufficed to uphold must-carry regulation without a showing of market power, the Turner Broadcasting litigation would have unfolded much differently. The Supreme Court would have had little or no need to determine whether the cable operators had market power. But the Supreme Court emphasized and relied on the Government’s market power showing when the Court upheld the must-carry requirements… To be sure, the interests in diversifying and increasing content are important governmental interests in the abstract, according to the Supreme Court… But absent some market dysfunction, Government regulation of the content carriage decisions of communications service providers is not essential to furthering those interests, as is required to satisfy intermediate scrutiny.

In other words, without a finding of bottleneck market power, there would be no basis for satisfying the government interest prong of Turner.

Applying Kavanaugh’s Dissent to NetChoice v. Paxton

Interestingly, each of these main points arises in the debate over regulating social-media companies as common carriers. Texas’ H.B. 20 attempts to do exactly that, which is at the heart of the litigation in NetChoice v. Paxton.

Common Carriage and First Amendment Protection

To the first point, Texas attempts to claim in its briefs that social-media companies are common carriers subject to lesser First Amendment protection: “Assuming the platforms’ refusals to serve certain customers implicated First Amendment rights, Texas has properly denominated the platforms common carriers. Imposing common-carriage requirements on a business does not offend the First Amendment.”

But much like the cable operators before them in Turner, social-media companies are not simply carriers of persons or things like the classic examples of railroads, telegraphs, and telephones. As TechFreedom put it in its brief: “As its name suggests… ‘common carriage’ is about offering, to the public at large  and on indiscriminate terms, to carry generic stuff from point A to point B. Social media websites fulfill none of these elements.”

In a sense, it’s even clearer that social-media companies are not common carriers than it was in the case of ISPs, because social-media platforms have always had terms of service that limit what can be said and that even allow the platforms to remove users for violations. All social-media platforms curate content for users in ways that ISPs normally do not.

‘Use It or Lose It’ Right to Editorial Discretion

Just as the FCC did in the Title II context, Texas also presses the idea that social-media companies gave up their right to editorial discretion by disclaiming the choice to exercise it, stating: “While the platforms compare their business policies to classic examples of First Amendment speech, such as a newspaper’s decision to include an article in its pages, the platforms have disclaimed any such status over many years and in countless cases. This Court should not accept the platforms’ good-for-this-case-only characterization of their businesses.” Pointing primarily to cases where social-media companies have invoked Section 230 immunity as a defense, Texas argues they have essentially lost the right to editorial discretion.

This, again, flies in the face of First Amendment jurisprudence, as Kavanaugh earlier explained. Moreover, the idea that social-media companies have disclaimed editorial discretion due to Section 230 is inconsistent with what that law actually does. Section 230 allows social-media companies to engage in as much or as little content moderation as they so choose by holding the third-party speakers accountable rather than the platform. Social-media companies do not relinquish their First Amendment rights to editorial discretion because they assert an applicable defense under the law. Moreover, social-media companies have long had rules delineating permissible speech, and they enforce those rules actively.

Interestingly, there has also been an analogue to the idea forwarded in USTelecom that the law’s First Amendment burdens are relatively limited. As noted above, then-Judge Kavanaugh rejected the idea forwarded by the concurrence that net-neutrality rules were essentially voluntary. In the case of H.B. 20, the bill’s original sponsor recently argued on Twitter that the Texas law essentially incorporates Section 230 by reference. If this is true, then the rules would be as pointless as the net-neutrality rules would have been, because social-media companies would be free under Section 230(c)(2) to remove “otherwise objectionable” material under the Texas law.

Scarcity and Capacity to Carry Content

In an earlier brief to the 5th Circuit, Texas attempted to differentiate social-media companies from the cable company in Turner by stating there was no necessary conflict between speakers, stating “[HB 20] does not, for example, pit one group of speakers against another.” But this is just a different way of saying that, since social-media companies don’t face scarcity in their technical capacity to carry speech, they can be required to carry all speech. This is inconsistent with the right Kavanaugh identified not to carry a message or speech, which is not subject to an exception that depends on the platform’s capacity to carry more speech.

Turner Scrutiny and Bottleneck Market Power

Finally, Judge Kavanaugh’s application of Turner to ISPs makes clear that a showing of bottleneck market power is necessary before common-carriage regulation may be applied to social-media companies. In fact, Kavanaugh used a comparison to social-media sites and broadcasters as a reductio ad absurdum for the idea that one could regulate ISPs without a showing of market power. As he put it there:

Consider the implications if the law were otherwise. If market power need not be shown, the Government could regulate the editorial decisions of Facebook and Google, of MSNBC and Fox, of NYTimes.com and WSJ.com, of YouTube and Twitter. Can the Government really force Facebook and Google and all of those other entities to operate as common carriers? Can the Government really impose forced-carriage or equal-access obligations on YouTube and Twitter? If the Government’s theory in this case were accepted, then the answers would be yes. After all, if the Government could force Internet service providers to carry unwanted content even absent a showing of market power, then it could do the same to all those other entities as well. There is no principled distinction between this case and those hypothetical cases.

Much like the FCC with its Open Internet Order, Texas did not make a finding of bottleneck market power in H.B. 20. Instead, Texas basically asked for the opportunity to get to discovery to develop the case that social-media platforms have market power, stating that “[b]ecause the District Court sharply limited discovery before issuing its preliminary injunction, the parties have not yet had the opportunity to develop many factual questions, including whether the platforms possess market power.” This simply won’t fly under Turner, which required a legislative finding of bottleneck market power that simply doesn’t exist in H.B. 20. 

Moreover, bottleneck market power means more than simply “market power” in an antitrust sense. As Judge Kavanaugh put it: “Turner Broadcasting seems to require even more from the Government. The Government apparently must also show that the market power would actually be used to disadvantage certain content providers, thereby diminishing the diversity and amount of content available.” Here, that would mean not only that social-media companies have market power, but they want to use it to disadvantage users in a way that makes less diverse content and less total content available.

The economics of multi-sided markets is probably the best explanation for why platforms have moderation rules. They are used to maximize a platform’s value by keeping as many users engaged and on those platforms as possible. In other words, the effect of moderation rules is to increase the amount of user speech by limiting harassing content that could repel users. This is a much better explanation for these rules than “anti-conservative bias” or a desire to censor for censorship’s sake (though there may be room for debate on the margin when it comes to the moderation of misinformation and hate speech).

In fact, social-media companies, unlike the cable operators in Turner, do not have the type of “physical connection between the television set and the cable network” that would grant them “bottleneck, or gatekeeper, control over” speech in ways that would allow platforms to “silence the voice of competing speakers with a mere flick of the switch.” Cf. Turner, 512 U.S. at 656. Even if they tried, social-media companies simply couldn’t prevent Internet users from accessing content they wish to see online; they inevitably will find such content by going to a different site or app.

Conclusion: The Future of the First Amendment Online

While many on both sides of the partisan aisle appear to see a stark divide between the interests of—and First Amendment protections afforded to—ISPs and social-media companies, Kavanaugh’s opinion in USTelecom shows clearly they are in the same boat. The two rise or fall together. If the government can impose common-carriage requirements on social-media companies in the name of free speech, then they most assuredly can when it comes to ISPs. If the First Amendment protects the editorial discretion of one, then it does for both.

The question then moves to relative market power, and whether the dominant firms in either sector can truly be said to have “bottleneck” market power, which implies the physical control of infrastructure that social-media companies certainly lack.

While it will be interesting to see what the 5th Circuit (and likely, the Supreme Court) ultimately do when reviewing H.B. 20 and similar laws, if now-Justice Kavanaugh’s dissent is any hint, there will be a strong contingent on the Court for finding the First Amendment applies online by protecting the right of private actors (ISPs and social-media companies) to set the rules of the road on their property. As Kavanaugh put it in Manhattan Community Access Corp. v. Halleck: “[t]he Free Speech Clause of the First Amendment constrains governmental actors and protects private actors.” Competition is the best way to protect consumers’ interests, not prophylactic government regulation.

With the 11th Circuit upholding the stay against Florida’s social-media law and the Supreme Court granting the emergency application to vacate the stay of the injunction in NetChoice v. Paxton, the future of the First Amendment appears to be on strong ground. There is no basis to conclude that simply calling private actors “common carriers” reduces their right to editorial discretion under the First Amendment.

In Constitutional Law, Federal Communications Commission, First Amendment, Net Neutrality, Platforms, Regulation, Supreme Court, Telecommunications, Truth on the Market , , , , , ,
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The Market for Speech Governance: Free Speech Strikes Back?

Ben Sperry —  4 May 2022

The tentatively pending sale of Twitter to Elon Musk has been greeted with celebration by many on the right, along with lamentation by some on the left, regarding what it portends for the platform’s moderation policies. Musk, for his part, has announced that he believes Twitter should be a free-speech haven and that it needs to dial back the (allegedly politically biased) moderation in which it has engaged.

The good news for everyone is that a differentiated product at Twitter could be exactly what the market―and the debate over Big Tech―needs.

The Market for Speech Governance

As I’ve written previously, the First Amendment (bolstered by Section 230 of the Communications Decency Act) protects not only speech itself, but also the private ordering of speech. “Congress shall make no law… abridging the freedom of speech” means that state actors can’t infringe speech, but it also (in most cases) protects private actors’ ability to make such rules free from government regulation. As the Supreme Court has repeatedly held, private actors can make their own rules about speech on their own property.

As Justice Brett Kavanaugh put it on behalf of the Court in Manhattan Community Access Corp. v. Halleck:

[W]hen a private entity provides a forum for speech, the private entity is not ordinarily constrained by the First Amendment because the private entity is not a state actor. The private entity may thus exercise editorial discretion over the speech and speakers in the forum…

In short, merely hosting speech by others is not a traditional, exclusive public function and does not alone transform private entities into state actors subject to First Amendment constraints.

If the rule were otherwise, all private property owners and private lessees who open their property for speech would be subject to First Amendment constraints and would lose the ability to exercise what they deem to be appropriate editorial discretion within that open forum. Private property owners and private lessees would face the unappetizing choice of allowing all comers or closing the platform altogether.

In other words, as much as it protects “the marketplace of ideas,” the First Amendment also protects “the market for speech governance.” Musk’s idea that Twitter should be subject to the First Amendment is simply incoherent, but his vision for Twitter to have less politically biased content moderation could work.

Musk’s Plan for Twitter

There has been much commentary on what Musk intends to do, and whether it is a realistic way to maximize the platform’s value. As a multi-sided platform, Twitter’s revenue is driven by advertisers, who want to reach a mass audience. This means Twitter, much like other social-media platforms, must consider the costs and benefits of speech to its users, and strike a balance that maximizes the value of the platform. The history of social-media content moderation suggests that these platforms have found that rules against harassment, abuse, spam, bots, pornography, and certain hate speech and misinformation are necessary.

For rules pertaining to harassment and abuse, in particular, it is easy to understand how they are necessary to prevent losing users. There seems to be a wide societal consensus that such speech is intolerable. Similarly, spam, bots, and pornographic content, even if legal speech, are largely not what social media users want to see.

But for hate speech and misinformation, however much one agrees in the abstract about their undesirableness, there is significant debate on the margins about what is acceptable or unacceptable discourse, just as there is over what is true or false when it comes to touchpoint social and political issues. It is one thing to ban Nazis due to hate speech; it is arguably quite another to remove a prominent feminist author due to “misgendering” people. It is also one thing to say crazy conspiracy theories like QAnon should be moderated, but quite another to fact-check good-faith questioning of the efficacy of masks or vaccines. It is likely in these areas that Musk will offer an alternative to what is largely seen as biased content moderation from Big Tech companies.

Musk appears to be making a bet that the market for speech governance is currently not well-served by the major competitors in the social-media space. If Twitter could thread the needle by offering a more politically neutral moderation policy that still manages to keep off the site enough of the types of content that repel users, then it could conceivably succeed and even influence the moderation policies of other social-media companies.

Let the Market Decide

The crux of the issue is this: Conservatives who have backed antitrust and regulatory action against Big Tech because of political bias concerns should be willing to back off and allow the market to work. And liberals who have defended the right of private companies to make rules for their platforms should continue to defend that principle. Let the market decide.

In Constitutional Law, First Amendment, Platforms, Supreme Court, Truth on the Market, Twitter , ,
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The FTC’s Privacy Report Fails to Justify Asymmetric Regulation of ISPs

Ben Sperry —  24 November 2021

Others already have noted that the Federal Trade Commission’s (FTC) recently released 6(b) report on the privacy practices of Internet service providers (ISPs) fails to comprehend that widespread adoption of privacy-enabling technology—in particular, Hypertext Transfer Protocol Secure (HTTPS) and DNS over HTTPS (DoH), but also the use of virtual private networks (VPNs)—largely precludes ISPs from seeing what their customers do online.

But a more fundamental problem with the report lies in its underlying assumption that targeted advertising is inherently nefarious. Indeed, much of the report highlights not actual violations of the law by the ISPs, but “concerns” that they could use customer data for targeted advertising much like Google and Facebook already do. The final subheading before the report’s conclusion declares: “Many ISPs in Our Study Can Be At Least As Privacy-Intrusive as Large Advertising Platforms.”

The report does not elaborate on why it would be bad for ISPs to enter the targeted advertising market, which is particularly strange given the public focus regulators have shone in recent months on the supposed dominance of Google, Facebook, and Amazon in online advertising. As the International Center for Law & Economics (ICLE) has argued in past filings on the issue, there simply is no justification to apply sector-specific regulations to ISPs for the mere possibility that they will use customer data for targeted advertising.

ISPs Could be Competition for the Digital Advertising Market

It is ironic to witness FTC warnings about ISPs engaging in targeted advertising even as there are open antitrust cases against Google for its alleged dominance of the digital advertising market. In fact, news reports suggest the U.S. Justice Department (DOJ) is preparing to join the antitrust suits against Google brought by state attorneys general. An obvious upshot of ISPs engaging in a larger amount of targeted advertising if that they could serve as a potential source of competition for Google, Facebook, and Amazon.

Despite the fears raised in the 6(b) report of rampant data collection for targeted ads, ISPs are, in fact, just a very small part of the $152.7 billion U.S. digital advertising market. As the report itself notes: “in 2020, the three largest players, Google, Facebook, and Amazon, received almost two-third of all U.S. digital advertising,” while Verizon pulled in just 3.4% of U.S. digital advertising revenues in 2018.

If the 6(b) report is correct that ISPs have access to troves of consumer data, it raises the question of why they don’t enjoy a bigger share of the digital advertising market. It could be that ISPs have other reasons not to engage in extensive advertising. Internet service provision is a two-sided market. ISPs could (and, over the years in various markets, some have) rely on advertising to subsidize Internet access. That they instead rely primarily on charging users directly for subscriptions may tell us something about prevailing demand on either side of the market.

Regardless of the reasons, the fact that ISPs have little presence in digital advertising suggests that it would be a misplaced focus for regulators to pursue industry-specific privacy regulation to crack down on ISP data collection for targeted advertising.

What’s the Harm in Targeted Advertising, Anyway?

At the heart of the FTC report is the commission’s contention that “advertising-driven surveillance of consumers’ online activity presents serious risks to the privacy of consumer data.” In Part V.B of the report, five of the six risks the FTC lists as associated with ISP data collection are related to advertising. But the only argument the report puts forth for why targeted advertising would be inherently pernicious is the assertion that it is contrary to user expectations and preferences.

As noted earlier, in a two-sided market, targeted ads could allow one side of the market to subsidize the other side. In other words, ISPs could engage in targeted advertising in order to reduce the price of access to consumers on the other side of the market. This is, indeed, one of the dominant models throughout the Internet ecosystem, so it wouldn’t be terribly unusual.

Taking away ISPs’ ability to engage in targeted advertising—particularly if it is paired with rumored net neutrality regulations from the Federal Communications Commission (FCC)—would necessarily put upward pricing pressure on the sector’s remaining revenue stream: subscriber fees. With bridging the so-called “digital divide” (i.e., building out broadband to rural and other unserved and underserved markets) a major focus of the recently enacted infrastructure spending package, it would be counterproductive to simultaneously take steps that would make Internet access more expensive and less accessible.

Even if the FTC were right that data collection for targeted advertising poses the risk of consumer harm, the report fails to justify why a regulatory scheme should apply solely to ISPs when they are such a small part of the digital advertising marketplace. Sector-specific regulation only makes sense if the FTC believes that ISPs are uniquely opaque among data collectors with respect to their collection practices.

Conclusion

The sector-specific approach implicitly endorsed by the 6(b) report would limit competition in the digital advertising market, even as there are already legal and regulatory inquiries into whether that market is sufficiently competitive. The report also fails to make the case the data collection for target advertising is inherently bad, or uniquely bad when done by an ISP.

There may or may not be cause for comprehensive federal privacy legislation, depending on whether it would pass cost-benefit analysis, but there is no reason to focus on ISPs alone. The FTC needs to go back to the drawing board.

In Amazon, Antitrust & Competition, Antitrust Division, Data Privacy & Security, Facebook, Federal Trade Commission, Google, International Center for Law & Economics, Justice Department, Market Definition, Monopolization, Platforms, Telecommunications, Truth on the Market , , , , ,
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An L&E Defense of the First Amendment’s Protection of Private Ordering

Ben Sperry —  23 April 2021

In his recent concurrence in Biden v. Knight, Justice Clarence Thomas sketched a roadmap for how to regulate social-media platforms. The animating factor for Thomas, much like for other conservatives, appears to be a sense that Big Tech has exhibited anti-conservative bias in its moderation decisions, most prominently by excluding former President Donald Trump from Twitter and Facebook. The opinion has predictably been greeted warmly by conservative champions of social-media regulation, who believe it shows how states and the federal government can proceed on this front.

While much of the commentary to date has been on whether Thomas got the legal analysis right, or on the uncomfortable fit of common-carriage law to social media, the deeper question of the First Amendment’s protection of private ordering has received relatively short shrift.

Conservatives’ main argument has been that Big Tech needs to be reined in because it is restricting the speech of private individuals. While conservatives traditionally have defended the state-action doctrine and the right to editorial discretion, they now readily find exceptions to both in order to justify regulating social-media companies. But those two First Amendment doctrines have long enshrined an important general principle: private actors can set the rules for speech on their own property. I intend to analyze this principle from a law & economics perspective and show how it benefits society.

Who Balances the Benefits and Costs of Speech?

Like virtually any other human activity, there are benefits and costs to speech and it is ultimately subjective individual preference that determines the value that speech has. The First Amendment protects speech from governmental regulation, with only limited exceptions, but that does not mean all speech is acceptable or must be tolerated. Under the state-action doctrine, the First Amendment only prevents the government from restricting speech.

Some purported defenders of the principle of free speech no longer appear to see a distinction between restraints on speech imposed by the government and those imposed by private actors. But this is surely mistaken, as no one truly believes all speech protected by the First Amendment should be without consequence. In truth, most regulation of speech has always come by informal means—social mores enforced by dirty looks or responsive speech from others.

Moreover, property rights have long played a crucial role in determining speech rules within any given space. If a man were to come into my house and start calling my wife racial epithets, I would not only ask that person to leave but would exercise my right as a property owner to eject the trespasser—if necessary, calling the police to assist me. I similarly could not expect to go to a restaurant and yell at the top of my lungs about political issues and expect them—even as “common carriers” or places of public accommodation—to allow me to continue.

As Thomas Sowell wrote in Knowledge and Decisions:

The fact that different costs and benefits must be balanced does not in itself imply who must balance them―or even that there must be a single balance for all, or a unitary viewpoint (one “we”) from which the issue is categorically resolved.

Knowledge and Decisions, p. 240

When it comes to speech, the balance that must be struck is between one individual’s desire for an audience and that prospective audience’s willingness to play the role. Asking government to use regulation to make categorical decisions for all of society is substituting centralized evaluation of the costs and benefits of access to communications for the individual decisions of many actors. Rather than incremental decisions regarding how and under what terms individuals may relate to one another—which can evolve over time in response to changes in what individuals find acceptable—government by its nature can only hand down categorical guidelines: “you must allow x, y, and z speech.”

This is particularly relevant in the sphere of social media. Social-media companies are multi-sided platforms. They are profit-seeking, to be sure, but the way they generate profits is by acting as intermediaries between users and advertisers. If they fail to serve their users well, those users could abandon the platform. Without users, advertisers would have no interest in buying ads. And without advertisers, there is no profit to be made. Social-media companies thus need to maximize the value of their platform by setting rules that keep users engaged.

In the cases of Facebook, Twitter, and YouTube, the platforms have set content-moderation standards that restrict many kinds of speech that are generally viewed negatively by users, even if the First Amendment would foreclose the government from regulating those same types of content. This is a good thing. Social-media companies balance the speech interests of different kinds of users to maximize the value of the platform and, in turn, to maximize benefits to all.

Herein lies the fundamental difference between private action and state action: one is voluntary, and the other based on coercion. If Facebook or Twitter suspends a user for violating community rules, it represents termination of a previously voluntary association. If the government kicks someone out of a public forum for expressing legal speech, that is coercion. The state-action doctrine recognizes this fundamental difference and creates a bright-line rule that courts may police when it comes to speech claims. As Sowell put it:

The courts’ role as watchdogs patrolling the boundaries of governmental power is essential in order that others may be secure and free on the other side of those boundaries. But what makes watchdogs valuable is precisely their ability to distinguish those people who are to be kept at bay and those who are to be left alone. A watchdog who could not make that distinction would not be a watchdog at all, but simply a general menace.

Knowledge and Decisions, p. 244

Markets Produce the Best Moderation Policies

The First Amendment also protects the right of editorial discretion, which means publishers, platforms, and other speakers are free from carrying or transmitting government-compelled speech. Even a newspaper with near-monopoly power cannot be compelled by a right-of-reply statute to carry responses by political candidates to editorials it has published. In other words, not only is private regulation of speech not state action, but in many cases, private regulation is protected by the First Amendment.

There is no reason to think that social-media companies today are in a different position than was the newspaper in Miami Herald v. Tornillo. These companies must determine what, how, and where content is presented within their platform. While this right of editorial discretion protects the moderation decisions of social-media companies, its benefits accrue to society at-large.

Social-media companies’ abilities to differentiate themselves based on functionality and moderation policies are important aspects of competition among them. How each platform is used may differ depending on those factors. In fact, many consumers use multiple social-media platforms throughout the day for different purposes. Market competition, not government power, has enabled internet users (including conservatives!) to have more avenues than ever to get their message out.

Many conservatives remain unpersuaded by the power of markets in this case. They see multiple platforms all engaging in very similar content-moderation policies when it comes to certain touchpoint issues, and thus allege widespread anti-conservative bias and collusion. Neither of those claims have much factual support, but more importantly, the similarity of content-moderation standards may simply be common responses to similar demand structures—not some nefarious and conspiratorial plot.

In other words, if social-media users demand less of the kinds of content commonly considered to be hate speech, or less misinformation on certain important issues, platforms will do their best to weed those things out. Platforms won’t always get these determinations right, but it is by no means clear that forcing them to carry all “legal” speech—which would include not just misinformation and hate speech, but pornographic material, as well—would better serve social-media users. There are always alternative means to debate contestable issues of the day, even if it may be more costly to access them.

Indeed, that content-moderation policies make it more difficult to communicate some messages is precisely the point of having them. There is a subset of protected speech to which many users do not wish to be subject. Moreover, there is no inherent right to have an audience on a social-media platform.

Conclusion

Much of the First Amendment’s economic value lies in how it defines roles in the market for speech. As a general matter, it is not the government’s place to determine what speech should be allowed in private spaces. Instead, the private ordering of speech emerges through the application of social mores and property rights. This benefits society, as it allows individuals to create voluntary relationships built on marginal decisions about what speech is acceptable when and where, rather than centralized decisions made by a governing few and that are difficult to change over time.

In Amazon, Constitutional Law, Facebook, First Amendment, Google, Law & Economics, Platforms, Supreme Court, Truth on the Market, Twitter , , , , , , , , , , , , , , , , ,
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Committee Prepares to Grill Tech CEOS, but It Is the First Amendment That Could Get Torched

Ben Sperry —  24 March 2021

In what has become regularly scheduled programming on Capitol Hill, Facebook CEO Mark Zuckerberg, Twitter CEO Jack Dorsey, and Google CEO Sundar Pichai will be subject to yet another round of congressional grilling—this time, about the platforms’ content-moderation policies—during a March 25 joint hearing of two subcommittees of the House Energy and Commerce Committee.

The stated purpose of this latest bit of political theatre is to explore, as made explicit in the hearing’s title, “social media’s role in promoting extremism and misinformation.” Specific topics are expected to include proposed changes to Section 230 of the Communications Decency Act, heightened scrutiny by the Federal Trade Commission, and misinformation about COVID-19—the subject of new legislation introduced by Rep. Jennifer Wexton (D-Va.) and Sen. Mazie Hirono (D-Hawaii).

But while many in the Democratic majority argue that social media companies have not done enough to moderate misinformation or hate speech, it is a problem with no realistic legal fix. Any attempt to mandate removal of speech on grounds that it is misinformation or hate speech, either directly or indirectly, would run afoul of the First Amendment.

Much of the recent focus has been on misinformation spread on social media about the 2020 election and the COVID-19 pandemic. The memorandum for the March 25 hearing sums it up:

Facebook, Google, and Twitter have long come under fire for their role in the dissemination and amplification of misinformation and extremist content. For instance, since the beginning of the coronavirus disease of 2019 (COVID-19) pandemic, all three platforms have spread substantial amounts of misinformation about COVID-19. At the outset of the COVID-19 pandemic, disinformation regarding the severity of the virus and the effectiveness of alleged cures for COVID-19 was widespread. More recently, COVID-19 disinformation has misrepresented the safety and efficacy of COVID-19 vaccines.

Facebook, Google, and Twitter have also been distributors for years of election disinformation that appeared to be intended either to improperly influence or undermine the outcomes of free and fair elections. During the November 2016 election, social media platforms were used by foreign governments to disseminate information to manipulate public opinion. This trend continued during and after the November 2020 election, often fomented by domestic actors, with rampant disinformation about voter fraud, defective voting machines, and premature declarations of victory.

It is true that, despite social media companies’ efforts to label and remove false content and bar some of the biggest purveyors, there remains a considerable volume of false information on social media. But U.S. Supreme Court precedent consistently has limited government regulation of false speech to distinct categories like defamation, perjury, and fraud.

The Case of Stolen Valor

The court’s 2011 decision in United States v. Alvarez struck down as unconstitutional the Stolen Valor Act of 2005, which made it a federal crime to falsely claim to have earned a military medal. A four-justice plurality opinion written by Justice Anthony Kennedy, along with a two-justice concurrence, both agreed that a statement being false did not, by itself, exclude it from First Amendment protection. 

Kennedy’s opinion noted that while the government may impose penalties for false speech connected with the legal process (perjury or impersonating a government official); with receiving a benefit (fraud); or with harming someone’s reputation (defamation); the First Amendment does not sanction penalties for false speech, in and of itself. The plurality exhibited particular skepticism toward the notion that government actors could be entrusted as a “Ministry of Truth,” empowered to determine what categories of false speech should be made illegal:

Permitting the government to decree this speech to be a criminal offense, whether shouted from the rooftops or made in a barely audible whisper, would endorse government authority to compile a list of subjects about which false statements are punishable. That governmental power has no clear limiting principle. Our constitutional tradition stands against the idea that we need Oceania’s Ministry of Truth… Were this law to be sustained, there could be an endless list of subjects the National Government or the States could single out… Were the Court to hold that the interest in truthful discourse alone is sufficient to sustain a ban on speech, absent any evidence that the speech was used to gain a material advantage, it would give government a broad censorial power unprecedented in this Court’s cases or in our constitutional tradition. The mere potential for the exercise of that power casts a chill, a chill the First Amendment cannot permit if free speech, thought, and discourse are to remain a foundation of our freedom. [EMPHASIS ADDED]

As noted in the opinion, declaring false speech illegal constitutes a content-based restriction subject to “exacting scrutiny.” Applying that standard, the court found “the link between the Government’s interest in protecting the integrity of the military honors system and the Act’s restriction on the false claims of liars like respondent has not been shown.” 

While finding that the government “has not shown, and cannot show, why counterspeech would not suffice to achieve its interest,” the plurality suggested a more narrowly tailored solution could be simply to publish Medal of Honor recipients in an online database. In other words, the government could overcome the problem of false speech by promoting true speech. 

In 2012, President Barack Obama signed an updated version of the Stolen Valor Act that limited its penalties to situations where a misrepresentation is shown to result in receipt of some kind of benefit. That places the false speech in the category of fraud, consistent with the Alvarez opinion.

A Social Media Ministry of Truth

Applying the Alvarez standard to social media, the government could (and already does) promote its interest in public health or election integrity by publishing true speech through official channels. But there is little reason to believe the government at any level could regulate access to misinformation. Anything approaching an outright ban on accessing speech deemed false by the government not only would not be the most narrowly tailored way to deal with such speech, but it is bound to have chilling effects even on true speech.

The analysis doesn’t change if the government instead places Big Tech itself in the position of Ministry of Truth. Some propose making changes to Section 230, which currently immunizes social media companies from liability for user speech (with limited exceptions), regardless what moderation policies the platform adopts. A hypothetical change might condition Section 230’s liability shield on platforms agreeing to moderate certain categories of misinformation. But that would still place the government in the position of coercing platforms to take down speech. 

Even the “fix” of making social media companies liable for user speech they amplify through promotions on the platform, as proposed by Sen. Mark Warner’s (D-Va.) SAFE TECH Act, runs into First Amendment concerns. The aim of the bill is to regard sponsored content as constituting speech made by the platform, thus opening the platform to liability for the underlying misinformation. But any such liability also would be limited to categories of speech that fall outside First Amendment protection, like fraud or defamation. This would not appear to include most of the types of misinformation on COVID-19 or election security that animate the current legislative push.

There is no way for the government to regulate misinformation, in and of itself, consistent with the First Amendment. Big Tech companies are free to develop their own policies against misinformation, but the government may not force them to do so. 

Extremely Limited Room to Regulate Extremism

The Big Tech CEOs are also almost certain to be grilled about the use of social media to spread “hate speech” or “extremist content.” The memorandum for the March 25 hearing sums it up like this:

Facebook executives were repeatedly warned that extremist content was thriving on their platform, and that Facebook’s own algorithms and recommendation tools were responsible for the appeal of extremist groups and divisive content. Similarly, since 2015, videos from extremists have proliferated on YouTube; and YouTube’s algorithm often guides users from more innocuous or alternative content to more fringe channels and videos. Twitter has been criticized for being slow to stop white nationalists from organizing, fundraising, recruiting and spreading propaganda on Twitter.

Social media has often played host to racist, sexist, and other types of vile speech. While social media companies have community standards and other policies that restrict “hate speech” in some circumstances, there is demand from some public officials that they do more. But under a First Amendment analysis, regulating hate speech on social media would fare no better than the regulation of misinformation.

The First Amendment doesn’t allow for the regulation of “hate speech” as its own distinct category. Hate speech is, in fact, as protected as any other type of speech. There are some limited exceptions, as the First Amendment does not protect incitement, true threats of violence, or “fighting words.” Some of these flatly do not apply in the online context. “Fighting words,” for instance, applies only in face-to-face situations to “those personally abusive epithets which, when addressed to the ordinary citizen, are, as a matter of common knowledge, inherently likely to provoke violent reaction.”

One relevant precedent is the court’s 1992 decision in R.A.V. v. St. Paul, which considered a local ordinance in St. Paul, Minnesota, prohibiting public expressions that served to cause “outrage, alarm, or anger with respect to racial, gender or religious intolerance.” A juvenile was charged with violating the ordinance when he created a makeshift cross and lit it on fire in front of a black family’s home. The court unanimously struck down the ordinance as a violation of the First Amendment, finding it an impermissible content-based restraint that was not limited to incitement or true threats.

By contrast, in 2003’s Virginia v. Black, the Supreme Court upheld a Virginia law outlawing cross burnings done with the intent to intimidate. The court’s opinion distinguished R.A.V. on grounds that the Virginia statute didn’t single out speech regarding disfavored topics. Instead, it was aimed at speech that had the intent to intimidate regardless of the victim’s race, gender, religion, or other characteristic. But the court was careful to limit government regulation of hate speech to instances that involve true threats or incitement.

When it comes to incitement, the legal standard was set by the court’s landmark Brandenberg v. Ohio decision in 1969, which laid out that:

the constitutional guarantees of free speech and free press do not permit a State to forbid or proscribe advocacy of the use of force or of law violation except where such advocacy is directed to inciting or producing imminent lawless action and is likely to incite or produce such action. [EMPHASIS ADDED]

In other words, while “hate speech” is protected by the First Amendment, specific types of speech that convey true threats or fit under the related doctrine of incitement are not. The government may regulate those types of speech. And they do. In fact, social media users can be, and often are, charged with crimes for threats made online. But the government can’t issue a per se ban on hate speech or “extremist content.”

Just as with misinformation, the government also can’t condition Section 230 immunity on platforms removing hate speech. Insofar as speech is protected under the First Amendment, the government can’t specifically condition a government benefit on its removal. Even the SAFE TECH Act’s model for holding platforms accountable for amplifying hate speech or extremist content would have to be limited to speech that amounts to true threats or incitement. This is a far narrower category of hateful speech than the examples that concern legislators. 

Social media companies do remain free under the law to moderate hateful content as they see fit under their terms of service. Section 230 immunity is not dependent on whether companies do or don’t moderate such content, or on how they define hate speech. But government efforts to step in and define hate speech would likely run into First Amendment problems unless they stay focused on unprotected threats and incitement.

What Can the Government Do?

One may fairly ask what it is that governments can do to combat misinformation and hate speech online. The answer may be a law that requires takedowns by court order of speech after it is declared illegal, as proposed by the PACT Act, sponsored in the last session by Sens. Brian Schatz (D-Hawaii) and John Thune (R-S.D.). Such speech may, in some circumstances, include misinformation or hate speech.

But as outlined above, the misinformation that the government can regulate is limited to situations like fraud or defamation, while the hate speech it can regulate is limited to true threats and incitement. A narrowly tailored law that looked to address those specific categories may or may not be a good idea, but it would likely survive First Amendment scrutiny, and may even prove a productive line of discussion with the tech CEOs.

In Constitutional Law, COVID-19, Facebook, Federal Trade Commission, First Amendment, Platforms, Truth on the Market, Twitter , , , , , , , , , , , , , , , ,
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The Forgotten Strand of the Anti-Monopoly Tradition in Anglo-American Law

Ben Sperry —  13 January 2021

Admirers of the late Supreme Court Justice Louis Brandeis and other antitrust populists often trace the history of American anti-monopoly sentiments from the Founding Era through the Progressive Era’s passage of laws to fight the scourge of 19th century monopolists. For example, Matt Stoller of the American Economic Liberties Project, both in his book Goliath and in other writings, frames the story of America essentially as a battle between monopolists and anti-monopolists.

According to this reading, it was in the late 20th century that powerful corporations and monied interests ultimately succeeded in winning the battle in favor of monopoly power against antitrust authorities, aided by the scholarship of the “ideological” Chicago school of economics and more moderate law & economics scholars like Herbert Hovenkamp of the University of Pennsylvania Law School.

It is a framing that leaves little room for disagreements about economic theory or evidence. One is either anti-monopoly or pro-monopoly, anti-corporate power or pro-corporate power.

What this story muddles is that the dominant anti-monopoly strain from English common law, which continued well into the late 19th century, was opposed specifically to government-granted monopoly. In contrast, today’s “anti-monopolists” focus myopically on alleged monopolies that often benefit consumers, while largely ignoring monopoly power granted by government. The real monopoly problem antitrust law fails to solve is its immunization of anticompetitive government policies. Recovering the older anti-monopoly tradition would better focus activists today.

Common Law Anti-Monopoly Tradition

Scholars like Timothy Sandefur of the Goldwater Institute have written about the right to earn a living that arose out of English common law and was inherited by the United States. This anti-monopoly stance was aimed at government-granted privileges, not at successful business ventures that gained significant size or scale.

For instance, 1602’s Darcy v. Allein, better known as the “Case of Monopolies,” dealt with a “patent” originally granted by Queen Elizabeth I in 1576 to Ralph Bowes, and later bought by Edward Darcy, to make and sell playing cards. Darcy did not innovate playing cards; he merely had permission to be the sole purveyor. Thomas Allein, who attempted to sell playing cards he created, was sued for violating Darcy’s exclusive rights. Darcy’s monopoly ultimately was held to be invalid by the court, which refused to convict Allein.

Edward Coke, who actually argued on behalf of the patent in Darcy v. Allen, wrote that the case stood for the proposition that:

All trades, as well mechanical as others, which prevent idleness (the bane of the commonwealth) and exercise men and youth in labour, for the maintenance of themselves and their families, and for the increase of their substance, to serve the Queen when occasion shall require, are profitable for the commonwealth, and therefore the grant to the plaintiff to have the sole making of them is against the common law, and the benefit and liberty of the subject. (emphasis added)

In essence, Coke’s argument was more closely linked to a “right to work” than to market structures, business efficiency, or firm conduct.

The courts largely resisted royal monopolies in 17th century England, finding such grants to violate the common law. For instance, in The Case of the Tailors of Ipswich, the court cited Darcy and found:

…at the common law, no man could be prohibited from working in any lawful trade, for the law abhors idleness, the mother of all evil… especially in young men, who ought in their youth, (which is their seed time) to learn lawful sciences and trades, which are profitable to the commonwealth, and whereof they might reap the fruit in their old age, for idle in youth, poor in age; and therefore the common law abhors all monopolies, which prohibit any from working in any lawful trade. (emphasis added)

The principles enunciated in these cases were eventually codified in the Statute of Monopolies, which prohibited the crown from granting monopolies in most circumstances. This was especially the case when the monopoly prevented the right to otherwise lawful work.

This common-law tradition also had disdain for private contracts that created monopoly by restraining the right to work. For instance, the famous Dyer’s case of 1414 held that a contract in which John Dyer promised not to practice his trade in the same town as the plaintiff was void for being an unreasonable restraint on trade.The judge is supposed to have said in response to the plaintiff’s complaint that he would have imprisoned anyone who had claimed such a monopoly on his own authority.

Over time, the common law developed analysis that looked at the reasonableness of restraints on trade, such as the extent to which they were limited in geographic reach and duration, as well as the consideration given in return. This part of the anti-monopoly tradition would later constitute the thread pulled on by the populists and progressives who created the earliest American antitrust laws.

Early American Anti-Monopoly Tradition

American law largely inherited the English common law system. It also inherited the anti-monopoly tradition the common law embodied. The founding generation of American lawyers were trained on Edward Coke’s commentary in “The Institutes of the Laws of England,” wherein he strongly opposed government-granted monopolies.

This sentiment can be found in the 1641 Massachusetts Body of Liberties, which stated: “No monopolies shall be granted or allowed amongst us, but of such new Inventions that are profitable to the Countrie, and that for a short time.” In fact, the Boston Tea Party itself was in part a protest of the monopoly granted to the East India Company, which included a special refund from duties by Parliament that no other tea importers enjoyed.

This anti-monopoly tradition also can be seen in the debates at the Constitutional Convention. A proposal to give the federal government power to grant “charters of incorporation” was voted down on fears it could lead to monopolies. Thomas Jefferson, George Mason, and several Antifederalists expressed concerns about the new national government’s ability to grant monopolies, arguing that an anti-monopoly clause should be added to the Constitution. Six states wanted to include provisions that would ban monopolies and the granting of special privileges in the Constitution.

The American anti-monopoly tradition remained largely an anti-government tradition throughout much of the 19th century, rearing its head in debates about the Bank of the United States, publicly-funded internal improvements, and government-granted monopolies over bridges and seas. Pamphleteer Lysander Spooner even tried to start a rival to the Post Office by appealing to the strong American impulse against monopoly.

Coinciding with the Industrial Revolution, liberalization of corporate law made it easier for private persons to organize firms that were not simply grants of exclusive monopoly. But discontent with industrialization and other social changes contributed to the birth of a populist movement, and later to progressives like Brandeis, who focused on private combinations and corporate power rather than government-granted privileges. This is the strand of anti-monopoly sentiment that continues to dominate the rhetoric today.

What This Means for Today

Modern anti-monopoly advocates have largely forgotten the lessons of the long Anglo-American tradition that found government is often the source of monopoly power. Indeed, American law privileges government’s ability to grant favors to businesses through licensing, the tax code, subsidies, and even regulation. The state action doctrine from Parker v. Brown exempts state and municipal authorities from antitrust lawsuits even where their policies have anticompetitive effects. And the Noerr-Pennington doctrine protects the rights of industry groups to lobby the government to pass anticompetitive laws.

As a result, government is often used to harm competition, with no remedy outside of the political process that created the monopoly. Antitrust law is used instead to target businesses built by serving consumers well in the marketplace.

Recovering this older anti-monopoly tradition would help focus the anti-monopoly movement on a serious problem modern antitrust misses. While the consumer-welfare standard that modern antitrust advocates often decry has helped to focus the law on actual harms to consumers, antitrust more broadly continues to encourage rent-seeking by immunizing state action and lobbying behavior.

In Amazon, Antitrust & Competition, Constitutional Law, Corporate & Securities Law, Economic Theory, Google, Intellectual Property, Law & Economics, Monopolization, Patent, Platforms, Truth on the Market , , , , , , , , , , , ,
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Conflict of Interest in Prosecuting Police Officers: Examining the Incentives Facing District Attorneys

Ben Sperry —  10 December 2020

High-profile cases like those of Michael Brown in Ferguson, Missouri, and Breonna Taylor in Louisville, Kentucky, have garnered attention from the media and the academy alike about decisions by grand juries not to charge police officers with homicide. 

While much of this focus centers on alleged racial bias on the part of police officers and the criminal justice system writ large, it’s also important to examine the perverse incentives faced by local district attorneys tasked with prosecuting police.

District attorneys rely on close professional relationships with police officers and law enforcement departments to prosecute criminal cases. Professional incentives require district attorneys to win cases. They can’t do that without cooperation from the police who investigate and bring criminal complaints. Moreover, police unions have disproportionate influence on district attorney elections.

Applying a law & economics lens to criminal justice offers a way forward that could better align incentives to prosecute police officers who break the law.

The legal profession is regulated largely by the rules of professional conduct developed by bar associations in each jurisdiction. The stated goal of these rules is to promote legal ethics among attorneys admitted to the bar. But these rules can also be understood economically. The organized bar can use legal ethics rules to increase its members’ profits in two main ways: by restricting entry to the practice of law and by adopting efficient rules that reduce the costs of contracting between lawyers and clients.

The bar’s rules can restrict competition in the market by requiring prospective lawyers to have graduated from an accredited law school and passed a bar exam, or to have substantial experience in another jurisdiction before they are allowed to waive in. The ability to practice law in a given jurisdiction without having taken the necessary steps to become a member of the bar is limited to pro hac vice rules that require working with a member of the bar. The result of the limitations allows lawyers to raise prices higher than they would without the restrictions on competition.

But the rules also can promote economically efficient outcomes. For instance, conflict-of-interest rules prevent lawyers from representing clients who have interests directly adverse to other clients, or where there would be significant risk that representation would be materially limited by responsibilities to other clients or former clients. (See, for example, Rule 1.7 of the American Bar Association’s Model Rules of Professional Conduct.) Many of these conflicts are waivable, but some are not. 

It is worth considering why these rules make sense economically. In a world devoid of transaction costs and strategic behavior, lawyers and clients could negotiate complete contracts for each representation, which would include compensation for those who would possibly be hurt by conflicts. But that’s not the real world. Conflict-of-interest rules are designed to overcome the principal-agent problems that arise from representing clients with adverse interests, including the potential use of information from representations to the detriment of those clients. Thus, conflict-of-interest rules supply efficient defaults that generally limit potentially harmful representation. 

Incentives in prosecuting police

Imagine the following scenario: a local district attorney works with a municipal police officer on a number of cases over the years, relying upon that officer’s evidence and testimony to prosecute criminal defendants. A video of the officer is later posted on YouTube showing him beating a non-resisting handcuffed citizen with his baton. The district attorney must now make the decision of whether to charge the officer with potential crimes. 

The bar’s usual conflict-of-interest rules, as described above, do not apply the same way to prosecutors. The prosecutor’s client is presumed to be the public, rather than the police officers with whom they work on a daily basis. Thus, the district attorney is not deemed to face an ethical problem in prosecuting the officer, despite their long-standing professional institutional relationship. The rules of professional conduct don’t require a district attorney to recuse herself from the case.

Following the incentives, it is no surprise that prosecutors often give benefit of the doubt to police officers in allegations of criminal conduct. One of a prosecutor’s primary jobs is to ensure judges and juries believe the testimony of police officers. Future relationships with officers may be impaired by police prosecutions that are perceived by law enforcement to be unfair.  

Elections are ineffective checks on prosecutorial power

While in theory (and sometimes in fact), public elections could serve as a check on district attorneys who fail to live up to their duty to prosecute unlawful behavior by police officers, there are reasons to be skeptical that they successfully do so consistently. Public choice economics helps explain why.

The public as a whole is dispersed and unorganized, especially when it comes to its interest as potential victims of the criminal justice system. On the other hand, police unions and associations are organized to forward the interest of law enforcement officers. Indeed, among the benefits police unions commonly provide to members are lawyers to defend against civil rights lawsuits and criminal prosecutions. Police unions and associations also can exert significant influence on  who is chosen to be district attorney in the first place. Such organized interests often are among the leaders in spending and campaigning for or against district attorney candidates. By contrast, the voting public tends to have far less information about and interest in those elections. 

Getting the incentives right

In pursuing institutional reform, it is important both to get the incentives right and to remain cognizant of trade-offs. The goal should be to align incentives so that there is no disincentive for prosecuting police officers criminally if the facts call for it. Some popular proposed reforms, however, could be both legally deficient or suffer from similar incentive problems.

For instance, a number of California district attorneys and candidates have called for an amendment to the state’s rules of professional conduct to define it as a conflict of interest for a district attorney candidate to receive campaign contributions from a police union. While this calls out the same problem identified here, the proposal would be subject to challenge on First Amendment grounds for targeting political speech, and on equal protection grounds for preferencing other groups over police unions. 

Other possibilities, such as escalating police prosecutions to the state attorney general’s office, face the same public choice and conflict-of-interest problems identified for local district attorneys. 

One way to avoid the conflict of interest inherent in police prosecutions might be to appoint special prosecutors when there are police defendants. Bar associations could create a panel of lawyers for appointment in such cases, much like some jurisdictions have for indigent defendants. The special prosecutor would need investigatory power and the ability to carry out the case on behalf of the public. 

Conclusion

The incentives faced by district attorneys contribute to the problem of insufficient prosecution of police officers who engage in criminal behavior. Prosecutors who generally rely upon close professional relationships with police officers have a conflict of interest when it comes to cases where police officers are the defendants. A new path is needed to get the incentives right.

In Constitutional Law, Facebook, First Amendment, Legal Profession, Platforms, Regulation, Truth on the Market , , ,
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The Dishonesty of Conservative Attacks on Section 230

Ben Sperry —  17 November 2020

President Donald Trump has repeatedly called for repeal of Section 230. But while Trump and fellow conservatives decry Big Tech companies for their alleged anti-conservative bias, including at yet more recent hearings, their issue is not actually with Section 230. It’s with the First Amendment. 

Conservatives can’t actually do anything directly about how social media platforms moderate content because it is the First Amendment that grants those platforms a right to editorial discretion. Even FCC Commissioner Brendan Carr, who strongly opposes “Big Tech censorship,” recognizes this. 

By the same token, even if one were to grant that conservatives are right about the bias of moderators at these large social media platforms, it does not follow that removal of Section 230 immunity would alter that bias. In fact, in a world without Section 230 immunity, there still would be no legal cause of action for political bias. 

The truth is that conservatives use Section 230 immunity for leverage over social media platforms. The hope is that, because social media platforms desire the protections of civil immunity for third-party content, they will follow whatever conditions the government puts on their editorial discretion. But the attempt to end-run the First Amendment’s protections is also unconstitutional.

There is no cause of action for political bias by online platforms if we repeal Section 230

Consider the counterfactual: if there were no Section 230 to immunize them from liability, under what law would platforms face a viable cause of action for political bias? Conservative critics never answer this question. Instead, they focus on the irrelevant distinction between publishers and platforms. Or they talk about how Section 230 is a giveaway to Big Tech. But none consider the actual relationship between Section 230 immunity and alleged political bias.

But let’s imagine we’ve done what President Trump has called for and repealed Section 230. Where does that leave conservatives?

Unfortunately, it leaves them without any cause of action. There is no law passed by Congress or any state legislature, no regulation promulgated by the Federal Communications Commission or the Federal Trade Commission, no common law tort action that can be asserted against online platforms to force them to carry speech they don’t wish to carry. 

The difficulties of pursuing a contract claim for political bias

The best argument for conservatives is that, without Section 230 immunity, online platforms could be more easily held to any contractual restraints in their terms of service. If a platform promises, for instance, that it will moderate speech in a politically neutral way, a user could make the case that the platform violated its terms of service if it acted with political bias in her particular case.

For the vast majority of users, it is unclear whether there are damages from having a post fact-checked or removed. But for users who share in advertising revenue, the concrete injury from a moderation decision is more obvious. PragerU, for example, has (unsuccessfully) sued Google for being put in Restricted Mode on YouTube, which reduces its reach and advertising revenue. 

Even where there is a concrete injury that gets a case into court, that doesn’t necessarily mean there is a valid contract claim. In PragerU’s case against Google, a California court dismissed contract claims because the YouTube terms of service contract was written to allow the platform to retain discretion over what is published. Specifically, the court found that there can be no implied covenant of good faith and fair dealing where “YouTube reserves the right to remove Content without prior notice” and to “discontinue any aspect of the Service at any time.”

Breach-of-contract claims for moderation practices are highly dependent on what is actually promised in the terms of service. For instance, under Facebook’s TOS the company retains the right “to remove or restrict access to content that is in violation” of its community standards. Facebook does provide a process for users to request further review, but retains the right to remove content. The community standards also give Facebook broad discretion to determine, among other things, what counts as hate speech or false news. It is exceedingly unlikely that a court would ever have a basis to find a contract violation by Facebook if the company can reasonably point to a user’s violation of its terms of service. 

For example, in Ebeid v. Facebook, the U.S. Northern District of California dismissed fraud and breach of contract claims, finding the plaintiff failed to allege what contractual provision Facebook breached, that Facebook retained discretion over what ads would be posted, and that the plaintiff suffered no damages because no money was taken to be spent on the ads. The court also dismissed an implied covenant of good faith and fair dealing claim because Facebook retained the right to “remove or disapprove any post or ad at Facebook’s sole discretion.”

While the conservative critique has been that social media platforms do too much moderation—in the form of politically biased removals, fact-checking, and demonetization—others believe platforms do far too little to restrain bad conduct by users. But as long as social media platforms retain editorial discretion in their terms of service and make no other promises that can be relied upon by their users, there is little basis for a contract claim. 

The First Amendment protects the moderation policies of social media platforms, and there is no way around this

With no reasonable cause of action for political bias under the law, conservatives dangle the threat of making changes to Section 230 immunity that could prove costly to the social media platforms in order to extract concessions from the platforms to alter their practices.

This is why there are no serious efforts to actually repeal Section 230, as President Trump has asked for repeatedly. Instead, several bills propose to amend Section 230, while a rulemaking by the FCC seeks to clarify its meaning. 

But none of these proposed bills would directly affect platforms’ ability to make “biased” moderation decisions. Put simply: the First Amendment protects social media platforms’ editorial discretion. They may set rules to use their platforms, just as any private person may set rules for their own property. If I kick someone off my property for saying racist things, the First Amendment (as well as regular property law) protects my right to do so. Only under extremely limited circumstances can the government change this baseline rule and survive constitutional scrutiny.

Social media platforms’ right to editorial discretion is the same as that enjoyed by newspapers. In Miami Herald Publishing Co. v. Tornillo, the Supreme Court found:

The choice of material to go into a newspaper, and the decisions made as to limitations on the size and content of the paper, and treatment of public issues and public officials—whether fair or unfair—constitute the exercise of editorial control and judgment. It has yet to be demonstrated how governmental regulation of this crucial process can be exercised consistent with First Amendment guarantees of a free press as they have evolved to this time. 

Social media platforms, just like any other property owner, have the right to determine what they want displayed on their property. In other words, Facebook, Google, and Twitter have the right to moderate content on news feeds, search results, and timelines. The attempted constitutional end-run—threatening to remove immunity for third-party content unrelated to political bias, like defamation and other tortious acts, unless social media platforms give up their right to editorial discretion over political speech—is just as unconstitutional as directly imposing “fairness” requirements on social media platforms.

The Supreme Court has held that Congress may not leverage a government benefit to regulate a speech interest outside of the benefit’s scope. This is called the unconstitutional conditions doctrine. It basically delineates the level of regulation the government can undertake through subsidizing behavior. The government can’t condition a government benefit on giving up editorial discretion over political speech.

The point of Section 230 immunity is to remedy the moderator’s dilemma set up by Stratton Oakmont v. Prodigy, which held that if a platform chose to moderate third-party speech at all, they would be liable for what was not removed. Section 230 is not about compelling political neutrality on platforms, because it can’t be consistent with the First Amendment. Civil immunity for third-party speech online is an important benefit for social media platforms because it holds they are not liable for the acts of third-parties, with limited exceptions. Without it, platforms would restrict opportunities for third-parties to post out of fear of liability. 

In sum, the government may not condition enjoyment of a government benefit upon giving up a constitutionally protected right. Section 230 immunity is a clear government benefit. The right to editorial discretion is clearly protected by the First Amendment. Because the entire point of conservative Section 230 reform efforts is to compel social media platforms to carry speech they otherwise desire to remove, it fails this basic test.

Conclusion

Fundamentally, the conservative push to reform Section 230 in response to the alleged anti-conservative bias of major social media platforms is not about policy. Really, it’s about waging a culture war against the perceived “liberal elites” from Silicon Valley, just as there is an ongoing culture war against perceived “liberal elites” in the mainstream media, Hollywood, and academia. But fighting this culture war is not worth giving up conservative principles of free speech, limited government, and free markets.

In Constitutional Law, Facebook, Federal Communications Commission, Federal Trade Commission, First Amendment, Google, Platforms, Regulation, Telecommunications, Truth on the Market, Twitter , , , , , , ,
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The Dangerous Implications of Changing Antitrust Presumptions

Ben Sperry —  27 October 2020

One of the key recommendations of the House Judiciary Committee’s antitrust report which seems to have bipartisan support (see Rep. Buck’s report) is shifting evidentiary burdens of proof to defendants with “monopoly power.” These recommended changes are aimed at helping antitrust enforcers and private plaintiffs “win” more. The result may well be more convictions, more jury verdicts, more consent decrees, and more settlements, but there is a cost. 

Presumption of illegality for certain classes of defendants unless they can prove otherwise is inconsistent with the American traditions of the presumption of innocence and allowing persons to dispose of their property as they wish. Forcing antitrust defendants to defend themselves from what is effectively a presumption of guilt will create an enormous burden upon them. But this will be felt far beyond just antitrust defendants. Consumers who would have benefited from mergers that are deterred or business conduct that is prevented will have those benefits foregone.

The Presumption of Liberty in American Law

The Presumption of Innocence

There is nothing wrong with presumptions in law as a general matter. For instance, one of the most important presumptions in American law is that criminal defendants are presumed innocent until proven guilty. Prosecutors bear the burden of proof, and must prove guilt beyond a reasonable doubt. Even in the civil context, plaintiffs, whether public or private, have the burden of proving a violation of the law, by the preponderance of the evidence. In either case, the defendant is not required to prove they didn’t violate the law.

Fundamentally, the presumption of innocence is about liberty. As William Blackstone put it in his Commentaries on the Law of England centuries ago: “the law holds that it is better that ten guilty persons escape than that one innocent suffer.” 

In economic terms, society must balance the need to deter bad conduct, however defined, with not deterring good conduct. In a world of uncertainty, this includes the possibility that decision-makers will get it wrong. For instance, if a mere allegation of wrongdoing places the burden upon a defendant to prove his or her innocence, much good conduct would be deterred out of fear of false allegations. In this sense, the presumption of innocence is important: it protects the innocent from allegations of wrongdoing, even if that means in some cases the guilty escape judgment.

Presumptions in Property, Contract, and Corporate Law

Similarly, presumptions in other areas of law protect liberty and are against deterring the good in the name of preventing the bad. For instance, the presumption when it comes to how people dispose of their property is that unless a law says otherwise, they may do as they wish. In other words, there is no presumption that a person may not use their property in a manner they wish to do so. The presumption is liberty, unless a valid law proscribes behavior. The exceptions to this rule typically deal with situations where a use of property could harm someone else. 

In contracts, the right of persons to come to a mutual agreement is the general rule, with rare exceptions. The presumption is in favor of enforcing voluntary agreements. Default rules in the absence of complete contracting supplement these agreements, but even the default rules can be contracted around in most cases.

Bringing the two together, corporate law—essentially the nexus of contract law and property law— allows persons to come together to dispose of property and make contracts, supplying default rules which can be contracted around. The presumption again is that people are free to do as they choose with their own property. The default is never that people can’t create firms to buy or sell or make agreements.

A corollary right of the above is that people may start businesses and deal with others on whatever basis they choose, unless a generally applicable law says otherwise. In fact, they can even buy other businesses. Mergers and acquisitions are generally allowed by the law. 

Presumptions in Antitrust Law

Antitrust is a generally applicable set of laws which proscribe how people can use their property. But even there, the presumption is not that every merger or act by a large company is harmful. 

On the contrary, antitrust laws allow groups of people to dispose of property as they wish unless it can be shown that a firm has “market power” that is likely to be exercised to the detriment of competition or consumers. Plaintiffs, whether public or private, bear the burden of proving all the elements of the antitrust violation alleged.

In particular, antitrust law has incorporated the error cost framework. This framework considers the cost of getting decisions wrong. Much like the presumption of innocence is based on the tradeoff of allowing some guilty persons to go unpunished in order to protect the innocent, the error cost framework notes there is tradeoff between allowing some anticompetitive conduct to go unpunished in order to protect procompetitive conduct. American antitrust law seeks to avoid the condemnation of procompetitive conduct more than it avoids allowing the guilty to escape condemnation. 

For instance, to prove a merger or acquisition would violate the antitrust laws, a plaintiff must show the transaction will substantially lessen competition. This involves defining the market, that the defendant has power over that market, and that the transaction would lessen competition. While concentration of the market is an important part of the analysis, antitrust law must consider the effect on consumer welfare as a whole. The law doesn’t simply condemn mergers or acquisitions by large companies just because they are large.

Similarly, to prove a monopolization claim, a plaintiff must establish the defendant has “monopoly power” in the relevant market. But monopoly power isn’t enough. As stated by the Supreme Court in Trinko:

The mere possession of monopoly power, and the concomitant charging of monopoly prices, is not only not unlawful; it is an important element of the free-market system. The opportunity to charge monopoly prices—at least for a short period— is what attracts “business acumen” in the first place; it induces risk taking that produces innovation and economic growth. To safeguard the incentive to innovate, the possession of monopoly power will not be found unlawful unless it is accompanied by an element of anticompetitive conduct.

The plaintiff must also prove the defendant has engaged in the “willful acquisition or maintenance of [market] power, as distinguished from growth or development as a consequence of a superior product, business acumen, or historical accident.” Antitrust law is careful to avoid mistaken inferences and false condemnations, which are especially costly because they “chill the very conduct antitrust laws are designed to protect.”

The presumption isn’t against mergers or business conduct even when those businesses are large. Antitrust law only condemns mergers or business conduct when it is likely to harm consumers.

How Changing Antitrust Presumptions will Harm Society

In light of all of this, the House Judiciary Committee’s Investigation of Competition in Digital Markets proposes some pretty radical departures from the law’s normal presumption in favor of people disposing property how they choose. Unfortunately, the minority report issued by Representative Buck agrees with the recommendations to shift burdens onto antitrust defendants in certain cases.

One of the recommendations from the Subcommittee is that Congress:

“codify[] bright-line rules for merger enforcement, including structural presumptions. Under a structural presumption, mergers resulting in a single firm controlling an outsized market share, or resulting in a significant increase in concentration, would be presumptively prohibited under Section 7 of the Clayton Act. This structural presumption would place the burden of proof upon the merging parties to show that the merger would not reduce competition. A showing that the merger would result in efficiencies should not be sufficient to overcome the presumption that it is anticompetitive. It is the view of Subcommittee staff that the 30% threshold established by the Supreme Court in Philadelphia National Bank is appropriate, although a lower standard for monopsony or buyer power claims may deserve consideration by the Subcommittee. By shifting the burden of proof to the merging parties in cases involving concentrated markets and high market shares, codifying the structural presumption would help promote the efficient allocation of agency resources and increase the likelihood that anticompetitive mergers are blocked. (emphasis added)

Under this proposal, in cases where concentration meets an arbitrary benchmark based upon the market definition, the presumption will be that the merger is illegal. Defendants will now bear the burden of proof to show the merger won’t reduce competition, without even getting to refer to efficiencies that could benefit consumers. 

Changing the burden of proof to be against criminal defendants would lead to more convictions of guilty people, but it would also lead to a lot more false convictions of innocent defendants. Similarly, changing the burden of proof to be against antitrust defendants would certainly lead to more condemnations of anticompetitive mergers, but it would also lead to the deterrence of a significant portion of procompetitive mergers.

So yes, if adopted, plaintiffs would likely win more as a result of these proposed changes, including in cases where mergers are anticompetitive. But this does not necessarily mean it would be to the benefit of larger society. 

Antitrust has evolved over time to recognize that concentration alone is not predictive of likely competitive harm in merger analysis. Both the horizontal merger guidelines and the vertical merger guidelines issued by the FTC and DOJ emphasize the importance of fact-specific inquiries into competitive effects, and not just a reliance on concentration statistics. This reflected a long-standing bipartisan consensus. The HJC’s majority report overturns this consensus by suggesting a return to the structural presumptions which have largely been rejected in antitrust law.

The HJC majority report also calls for changes in presumptions when it comes to monopolization claims. For instance, the report calls on Congress to consider creating a statutory presumption of dominance by a seller with a market share of 30% or more and a presumption of dominance by a buyer with a market share of 25% or more. The report then goes on to suggest overturning a number of precedents dealing with monopolization claims which in their view restricted claims of tying, predatory pricing, refusals to deal, leveraging, and self-preferencing. In particular, they call on Congress to “[c]larify[] that ‘false positives’ (or erroneous enforcement) are not more costly than ‘false negatives’ (erroneous non-enforcement), and that, when relating to conduct or mergers involving dominant firms, ‘false negatives’ are costlier.”

This again completely turns the ordinary presumptions about innocence and allowing people to dispose of the property as they see fit on their head. If adopted, defendants would largely have to prove their innocence in monopolization cases if their shares of the market are above a certain threshold. 

Moreover, the report calls for Congress to consider making conduct illegal even if it “can be justified as an improvement for consumers.” It is highly likely that the changes proposed will harm consumer welfare in many cases, as the focus changes from economic efficiency to concentration. 

Conclusion

The HJC report’s recommendations on changing antitrust presumptions should be rejected. The harms will be felt not only by antitrust defendants, who will be much more likely to lose regardless of whether they have violated the law, but by consumers whose welfare is no longer the focus. The result is inconsistent with the American tradition that presumes innocence and the ability of people to dispose of their property as they see fit. 

In Antitrust & Competition, Google, Justice Department, Market Definition, Merger Guidelines, Mergers & Acquisitions, Platforms, Truth on the Market, Tying , , , , , , , , ,
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Conservatism and the Section 230 Debate: Applying First Principles

Ben Sperry —  30 September 2020

Over at the Federalist Society’s blog, there has been an ongoing debate about what to do about Section 230. While there has long-been variety in what we call conservatism in the United States, the most prominent strains have agreed on at least the following: Constitutionally limited government, free markets, and prudence in policy-making. You would think all of these values would be important in the Section 230 debate. It seems, however, that some are willing to throw these principles away in pursuit of a temporary political victory over perceived “Big Tech censorship.” 

Constitutionally Limited Government: Congress Shall Make No Law

The First Amendment of the United States Constitution states: “Congress shall make no law… abridging the freedom of speech.” Originalists on the Supreme Court have noted that this makes clear that the Constitution protects against state action, not private action. In other words, the Constitution protects a negative conception of free speech, not a positive conception.

Despite this, some conservatives believe that Section 230 should be about promoting First Amendment values by mandating private entities are held to the same standards as the government. 

For instance, in his Big Tech and the Whole First Amendment, Craig Parshall of the American Center for Law and Justice (ACLJ) stated:

What better example of objective free speech standards could we have than those First Amendment principles decided by justices appointed by an elected president and confirmed by elected members of the Senate, applying the ideals laid down by our Founders? I will take those over the preferences of brilliant computer engineers any day.

In other words, he thinks Section 230 should be amended to only give Big Tech the “subsidy” of immunity if it commits to a First Amendment-like editorial regime. To defend the constitutionality of such “restrictions on Big Tech”, he points to the Turner intermediate scrutiny standard, in which the Supreme Court upheld must-carry provisions against cable networks. In particular, Parshall latches on to the “bottleneck monopoly” language from the case to argue that Big Tech is similarly situated to cable providers at the time of the case.

Turner, however, turned more on the “special characteristics of the cable medium” that gave it the bottleneck power than the market power itself. As stated by the Supreme Court:

When an individual subscribes to cable, the physical connection between the television set and the cable network gives the cable operator bottleneck, or gatekeeper, control over most (if not all) of the television programming that is channeled into the subscriber’s home. Hence, simply by virtue of its ownership of the essential pathway for cable speech, a cable operator can prevent its subscribers from obtaining access to programming it chooses to exclude. A cable operator, unlike speakers in other media, can thus silence the voice of competing speakers with a mere flick of the switch.

Turner v. FCC, 512 U.S. 622, 656 (1994).

None of the Big Tech companies has the comparable ability to silence competing speakers with a flick of the switch. In fact, the relationship goes the other way on the Internet. Users can (and do) use multiple Big Tech companies’ services, as well as those of competitors which are not quite as big. Users are the ones who can switch with a click or a swipe. There is no basis for treating Big Tech companies any differently than other First Amendment speakers.

Like newspapers, Big Tech companies must use their editorial discretion to determine what is displayed and where. Just like those newspapers, Big Tech has the First Amendment right to editorial discretion. This, not Section 230, is the bedrock law that gives Big Tech companies the right to remove content.

Thus, when Rachel Bovard of the Internet Accountability Project argues that the FCC should remove the ability of tech platforms to engage in viewpoint discrimination, she makes a serious error in arguing it is Section 230 that gives them the right to remove content.

Immediately upon noting that the NTIA petition seeks clarification on the relationship between (c)(1) and (c)(2), Bovard moves right to concern over the removal of content. “Unfortunately, embedded in that section [(c)(2)] is a catch-all phrase, ‘otherwise objectionable,’ that gives tech platforms discretion to censor anything that they deem ‘otherwise objectionable.’ Such broad language lends itself in practice to arbitrariness.” 

In order for CDA 230 to “give[] tech platforms discretion to censor,” they would have to not have that discretion absent CDA 230. Bovard totally misses the point of the First Amendment argument, stating:

Yet DC’s tech establishment frequently rejects this argument, choosing instead to focus on the First Amendment right of corporations to suppress whatever content they so choose, never acknowledging that these choices, when made at scale, have enormous ramifications. . . . 

But this argument intentionally sidesteps the fact that Sec. 230 is not required by the First Amendment, and that its application to tech platforms privileges their First Amendment behavior in a unique way among other kinds of media corporations. Newspapers also have a First Amendment right to publish what they choose—but they are subject to defamation and libel laws for content they write, or merely publish. Media companies also make First Amendment decisions subject to a thicket of laws and regulations that do not similarly encumber tech platforms.

There is the merest kernel of truth in the lines quoted above. Newspapers are indeed subject to defamation and libel laws for what they publish. But, as should be obvious, liability for publication entails actually publishing something. And what some conservatives are concerned about is platforms’ ability to not publish something: to take down conservative content.

It might be simpler if the First Amendment treated published speech and unpublished speech the same way. But it doesn’t. One can be liable for what one speaks, writes, or publishes on behalf of others. Indeed, even with the full protection of the First Amendment, there is no question that newspapers can be held responsible for delicts caused by content they publish. But no newspaper has ever been held responsible for anything they didn’t publish.

Free Markets: Competition as the Bulwark Against Abuses, not Regulation

Conservatives have long believed in the importance of property rights, exchange, and the power of the free market to promote economic growth. Competition is seen as the protector of the consumer, not big government regulators. In the latter half of the twentieth century into the twenty-first century, conservatives have fought for capitalism over socialism, free markets over regulation, and competition over cronyism. But in the name of combating anti-conservative bias online, they are willing to throw these principles away.

The bedrock belief in the right of property owners to decide the terms of how they want to engage with others is fundamental to American conservatism. As stated by none other than Bovard (along with co-author Jim Demint in their book Conservative: Knowing What to Keep):

Capitalism is nothing more or less than the extension of individual freedom from the political and cultural realms to the economy. Just as government isn’t supposed to tell you how to pray, or what to think, or what sports teams to follow or books to read, it’s not supposed to tell you what to do with your own money and property.

Conservatives normally believe that it is the free choices of consumers and producers in the marketplace that maximize consumer welfare, rather than the choices of politicians and bureaucrats. Competition, in other words, is what protects us from abuses in the marketplace. Again as Bovard and Demint rightly put it:

Under the free enterprise system, money is not redistributed by a central government bureau. It goes wherever people see value. Those who create value are rewarded which then signals to the rest of the economy to up their game. It’s continuous democracy.

To get around this, both Parshall and Bovard make much of the “market dominance” of tech platforms. The essays take the position that tech platforms have nearly unassailable monopoly power which makes them unaccountable. Bovard claims that “mega-corporations have as much power as the government itself—and in some ways, more power, because theirs is unchecked and unaccountable.” Parshall even connects this to antitrust law, stating:  

This brings us to another kind of innovation, one that’s hidden from the public view. It has to do with how Big Tech companies use both algorithms plus human review during content moderation. This review process has resulted in the targeting, suppression, or down-ranking of primarily conservative content. As such, this process, should it continue, should be considered a kind of suppressive “innovation” in a quasi-antitrust analysis.

How the process harms “consumer welfare” is obvious. A more competitive market could produce social media platforms designing more innovational content moderation systems that honor traditional free speech and First Amendment norms while still offering features and connectivity akin to the huge players.

Antitrust law, in theory, would be a good way to handle issues of market power and consumer harm that results from non-price effects. But it is difficult to see how antitrust could handle the issue of political bias well:

Just as with privacy and other product qualities, the analysis becomes increasingly complex first when tradeoffs between price and quality are introduced, and then even more so when tradeoffs between what different consumer groups perceive as quality is added. In fact, it is more complex than privacy. All but the most exhibitionistic would prefer more to less privacy, all other things being equal. But with political media consumption, most would prefer to have more of what they want to read available, even if it comes at the expense of what others may want. There is no easy way to understand what consumer welfare means in a situation where one group’s preferences need to come at the expense of another’s in moderation decisions.

Neither antitrust nor quasi-antitrust regimes are well-suited to dealing with the perceived harm of anti-conservative bias. However unfulfilling this is to some conservatives, competition and choice are better answers to perceived political bias than the heavy hand of government. 

Prudence: Awareness of Unintended Consequences

Another bedrock principle of conservatism is to be aware of unintended consequences when making changes to long-standing laws and policies. In regulatory matters, cost-benefit analysis is employed to evaluate whether policies are improving societal outcomes. Using economic thinking to understand the likely responses to changes in regulation is fundamental to American conservatism. Or as Bovard and Demint’s book title suggests, conservatism is about knowing what to keep. 

Bovard has argued that since conservatism is a set of principles, not a dogmatic ideology, it can be in favor of fighting against the collectivism of Big Tech companies imposing their political vision upon the world. Conservatism, in this Kirkian sense, doesn’t require particular policy solutions. But this analysis misses what has worked about Section 230 and how the very tech platforms she decries have greatly benefited society. Prudence means understanding what has worked and only changing what has worked in a way that will improve upon it.

The benefits of Section 230 immunity in promoting platforms for third-party speech are clear. It is not an overstatement to say that Section 230 contains “The Twenty-Six Words that Created the Internet.” It is important to note that Section 230 is not only available to Big Tech companies. It is available to all online platforms who host third-party speech. Any reform efforts at Section 230 must know what to keep.In a sense, Section (c)(1) of Section 230 does, indeed, provide greater protection for published content online than the First Amendment on its own would offer: it extends the First Amendment’s permissible scope of published content for which an online service cannot be held liable to include otherwise actionable third-party content.

But let’s be clear about the extent of this protection. It doesn’t protect anything a platform itself publishes, or even anything in which it has a significant hand in producing. Why don’t offline newspapers enjoy this “handout” (though the online versions clearly do for comments)? Because they don’t need it, and because — yes, it’s true — it comes at a cost. How much third-party content would newspapers publish without significant input from the paper itself if only they were freed from the risk of liability for such content? None? Not much? The New York Times didn’t build and sustain its reputation on the slapdash publication of unedited ramblings by random commentators. But what about classifieds? Sure. There would be more classified ads, presumably. More to the point, newspapers would exert far less oversight over the classified ads, saving themselves the expense of moderating this one, small corner of their output.

There is a cost to traditional newspapers from being denied the extended protections of Section 230. But the effect is less third-party content in parts of the paper that they didn’t wish to have the same level of editorial control. If Section 230 is a “subsidy” as critics put it, then what it is subsidizing is the hosting of third-party speech. 

The Internet would look vastly different if it was just the online reproduction of the offline world. If tech platforms were responsible for all third-party speech to the degree that newspapers are for op-eds, then they would likely moderate it to the same degree, making sure there is nothing which could expose them to liability before publishing. This means there would be far less third-party speech on the Internet.

In fact, it could be argued that it is smaller platforms who would be most affected by the repeal of Section 230 immunity. Without it, it is likely that only the biggest tech platforms would have the necessary resources to dedicate to content moderation in order to avoid liability.

Proposed Section 230 reforms will likely have unintended consequences in reducing third-party speech altogether, including conservative speech. For instance, a few bills have proposed only allowing moderation for reasons defined by statute if the platform has an “objectively reasonable belief” that the speech fits under such categories. This would likely open up tech platforms to lawsuits over the meaning of “objectively reasonable belief” that could deter them from wanting to host third-party speech altogether. Similarly, lawsuits for “selective enforcement” of a tech platform’s terms of service could lead them to either host less speech or change their terms of service.

This could actually exacerbate the issue of political bias. Allegedly anti-conservative tech platforms could respond to a “good faith” requirement in enforcing its terms of service by becoming explicitly biased. If the terms of service of a tech platform state grounds which would exclude conservative speech, a requirement of “good faith” enforcement of those terms of service will do nothing to prevent the bias. 

Conclusion

Conservatives would do well to return to their first principles in the Section 230 debate. The Constitution’s First Amendment, respect for free markets and property rights, and appreciation for unintended consequences in changing tech platform incentives all caution against the current proposals to condition Section 230 immunity on platforms giving up editorial discretion. Whether or not tech platforms engage in anti-conservative bias, there’s nothing conservative about abdicating these principles for the sake of political expediency.

In Amazon, Constitutional Law, Facebook, First Amendment, Platforms, Telecommunications, Truth on the Market , , , , , , , , ,
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How does antitrust measure nonprice effects like political bias?

Ben Sperry —  17 September 2020

In the latest congressional hearing, purportedly analyzing Google’s “stacking the deck” in the online advertising marketplace, much of the opening statement and questioning by Senator Mike Lee and later questioning by Senator Josh Hawley focused on an episode of alleged anti-conservative bias by Google in threatening to demonetize The Federalist, a conservative publisher, unless they exercised a greater degree of control over its comments section. The senators connected this to Google’s “dominance,” arguing that it is only because Google’s ad services are essential that Google can dictate terms to a conservative website. A similar impulse motivates Section 230 reform efforts as well: allegedly anti-conservative online platforms wield their dominance to censor conservative speech, either through deplatforming or demonetization.

Before even getting into the analysis of how to incorporate political bias into antitrust analysis, though, it should be noted that there likely is no viable antitrust remedy. Even aside from the Section 230 debate, online platforms like Google are First Amendment speakers who have editorial discretion over their sites and apps, much like newspapers. An antitrust remedy compelling these companies to carry speech they disagree with would almost certainly violate the First Amendment.

But even aside from the First Amendment aspect of this debate, there is no easy way to incorporate concerns about political bias into antitrust. Perhaps the best way to understand this argument in the antitrust sense is as a non-price effects analysis. 

Political bias could be seen by end consumers as an important aspect of product quality. Conservatives have made the case that not only Google, but also Facebook and Twitter, have discriminated against conservative voices. The argument would then follow that consumer welfare is harmed when these dominant platforms leverage their control of the social media marketplace into the marketplace of ideas by censoring voices with whom they disagree. 

While this has theoretical plausibility, there are real practical difficulties. As Geoffrey Manne and I have written previously, in the context of incorporating privacy into antitrust analysis:

The Horizontal Merger Guidelines have long recognized that anticompetitive effects may “be manifested in non-price terms and conditions that adversely affect customers.” But this notion, while largely unobjectionable in the abstract, still presents significant problems in actual application. 

First, product quality effects can be extremely difficult to distinguish from price effects. Quality-adjusted price is usually the touchstone by which antitrust regulators assess prices for competitive effects analysis. Disentangling (allegedly) anticompetitive quality effects from simultaneous (neutral or pro-competitive) price effects is an imprecise exercise, at best. For this reason, proving a product-quality case alone is very difficult and requires connecting the degradation of a particular element of product quality to a net gain in advantage for the monopolist. 

Second, invariably product quality can be measured on more than one dimension. For instance, product quality could include both function and aesthetics: A watch’s quality lies in both its ability to tell time as well as how nice it looks on your wrist. A non-price effects analysis involving product quality across multiple dimensions becomes exceedingly difficult if there is a tradeoff in consumer welfare between the dimensions. Thus, for example, a smaller watch battery may improve its aesthetics, but also reduce its reliability. Any such analysis would necessarily involve a complex and imprecise comparison of the relative magnitudes of harm/benefit to consumers who prefer one type of quality to another.

Just as with privacy and other product qualities, the analysis becomes increasingly complex first when tradeoffs between price and quality are introduced, and then even more so when tradeoffs between what different consumer groups perceive as quality is added. In fact, it is more complex than privacy. All but the most exhibitionistic would prefer more to less privacy, all other things being equal. But with political media consumption, most would prefer to have more of what they want to read available, even if it comes at the expense of what others may want. There is no easy way to understand what consumer welfare means in a situation where one group’s preferences need to come at the expense of another’s in moderation decisions.

Consider the case of The Federalist again. The allegation is that Google is imposing their anticonservative bias by “forcing” the website to clean up its comments section. The argument is that since The Federalist needs Google’s advertising money, it must play by Google’s rules. And since it did so, there is now one less avenue for conservative speech.

What this argument misses is the balance Google and other online services must strike as multi-sided platforms. The goal is to connect advertisers on one side of the platform, to the users on the other. If a site wants to take advantage of the ad network, it seems inevitable that intermediaries like Google will need to create rules about what can and can’t be shown or they run the risk of losing advertisers who don’t want to be associated with certain speech or conduct. For instance, most companies don’t want to be associated with racist commentary. Thus, they will take great pains to make sure they don’t sponsor or place ads in venues associated with racism. Online platforms connecting advertisers to potential consumers must take that into consideration.

Users, like those who frequent The Federalist, have unpriced access to content across those sites and apps which are part of ad networks like Google’s. Other models, like paid subscriptions (which The Federalist also has available), are also possible. But it isn’t clear that conservative voices or conservative consumers have been harmed overall by the option of unpriced access on one side of the platform, with advertisers paying on the other side. If anything, it seems the opposite is the case since conservatives long complained about legacy media having a bias and lauded the Internet as an opportunity to gain a foothold in the marketplace of ideas.

Online platforms like Google must balance the interests of users from across the political spectrum. If their moderation practices are too politically biased in one direction or another, users could switch to another online platform with one click or swipe. Assuming online platforms wish to maximize revenue, they will have a strong incentive to limit political bias from its moderation practices. The ease of switching to another platform which markets itself as more free speech-friendly, like Parler, shows entrepreneurs can take advantage of market opportunities if Google and other online platforms go too far with political bias. 

While one could perhaps argue that the major online platforms are colluding to keep out conservative voices, this is difficult to square with the different moderation practices each employs, as well as the data that suggests conservative voices are consistently among the most shared on Facebook. 

Antitrust is not a cure-all law. Conservatives who normally understand this need to reconsider whether antitrust is really well-suited for litigating concerns about anti-conservative bias online. 

In Antitrust & Competition, Constitutional Law, Facebook, First Amendment, Google, Merger Guidelines, Platforms, Truth on the Market, Twitter , , , , , , , , , , ,
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Islands of Chaos: The Economic Calculation Problem Inherent in Municipal Broadband

Ben Sperry —  3 September 2020

Municipal broadband has been heavily promoted by its advocates as a potential source of competition against Internet service providers (“ISPs”) with market power. Jonathan Sallet argued in Broadband for America’s Future: A Vision for the 2020s, for instance, that municipal broadband has a huge role to play in boosting broadband competition, with attendant lower prices, faster speeds, and economic development. 

Municipal broadband, of course, can mean more than one thing: From “direct consumer” government-run systems, to “open access” where government builds the back-end, but leaves it up to private firms to bring the connections to consumers, to “middle mile” where the government network reaches only some parts of the community but allows private firms to connect to serve other consumers. The focus of this blog post is on the “direct consumer” model.

There have been many economic studies on municipal broadband, both theoretical and empirical. The literature largely finds that municipal broadband poses serious risks to taxpayers, often relies heavily on cross-subsidies from government-owned electric utilities, crowds out private ISP investment in areas it operates, and largely fails the cost-benefit analysis. While advocates have defended municipal broadband on the grounds of its speed, price, and resulting attractiveness to consumers and businesses, others have noted that many of those benefits come at the expense of other parts of the country from which businesses move. 

What this literature has not touched upon is a more fundamental problem: municipal broadband lacks the price signals necessary for economic calculation.. The insights of the Austrian school of economics helps explain why this model is incapable of providing efficient outcomes for society. Rather than creating a valuable source of competition, municipal broadband creates “islands of chaos” undisciplined by the market test of profit-and-loss. As a result, municipal broadband is a poor model for promoting competition and innovation in broadband markets. 

The importance of profit-and-loss to economic calculation

One of the things often assumed away in economic analysis is the very thing the market process depends upon: the discovery of knowledge. Knowledge, in this context, is not the technical knowledge of how to build or maintain a broadband network, but the more fundamental knowledge which is discovered by those exercising entrepreneurial judgment in the marketplace. 

This type of knowledge is dependent on prices throughout the market. In the market process, prices coordinate exchange between market participants without each knowing the full plan of anyone else. For consumers, prices allow for the incremental choices between different options. For producers, prices in capital markets similarly allow for choices between different ways of producing their goods for the next stage of production. Prices in interest rates help coordinate present consumption, investment, and saving. And, the price signal of profit-and-loss allows producers to know whether they have cost-effectively served consumer needs. 

The broadband marketplace can’t be considered in isolation from the greater marketplace in which it is situated. But it can be analyzed under the framework of prices and the knowledge they convey.

For broadband consumers, prices are important for determining the relative importance of Internet access compared to other felt needs. The quality of broadband connection demanded by consumers is dependent on the price. All other things being equal, consumers demand faster connections with less latency issues. But many consumers may prefer slower speeds and connections with more latency if it is cheaper. Even choices between the importance of upload speeds versus download speeds may be highly asymmetrical if determined by consumers.  

While “High Performance Broadband for All” may be a great goal from a social planner’s perspective, individuals acting in the marketplace may prioritize other needs with his or her scarce resources. Even if consumers do need Internet access of some kind, the benefits of 100 Mbps download speeds over 25 Mbps, or upload speeds of 100 Mbps versus 3 Mbps may not be worth the costs. 

For broadband ISPs, prices for capital goods are important for building out the network. The relative prices of fiber, copper, wireless, and all the other factors of production in building out a network help them choose in light of anticipated profit. 

All the decisions of broadband ISPs are made through the lens of pursuing profit. If they are successful, it is because the revenues generated are greater than the costs of production, including the cost of money represented in interest rates. Just as importantly, loss shows the ISPs were unsuccessful in cost-effectively serving consumers. While broadband companies may be able to have losses over some period of time, they ultimately must turn a profit at some point, or there will be exit from the marketplace. Profit-and-loss both serve important functions.

Sallet misses the point when he states the“full value of broadband lies not just in the number of jobs it directly creates or the profits it delivers to broadband providers but also in its importance as a mechanism that others use across the economy and society.” From an economic point of view, profits aren’t important because economists love it when broadband ISPs get rich. Profits are important as an incentive to build the networks we all benefit from, and a signal for greater competition and innovation.

Municipal broadband as islands of chaos

Sallet believes the lack of high-speed broadband (as he defines it) is due to the monopoly power of broadband ISPs. He sees the entry of municipal broadband as pro-competitive. But the entry of a government-run broadband company actually creates “islands of chaos” within the market economy, reducing the ability of prices to coordinate disparate plans of action among participants. This, ultimately, makes society poorer.

The case against municipal broadband doesn’t rely on greater knowledge of how to build or maintain a network being in the hands of private engineers. It relies instead on the different institutional frameworks within which the manager of the government-run broadband network works as compared to the private broadband ISP. The type of knowledge gained in the market process comes from prices, including profit-and-loss. The manager of the municipal broadband network simply doesn’t have access to this knowledge and can’t calculate the best course of action as a result.

This is because the government-run municipal broadband network is not reliant upon revenues generated by free choices of consumers alone. Rather than needing to ultimately demonstrate positive revenue in order to remain a going concern, government-run providers can instead base their ongoing operation on access to below-market loans backed by government power, cross-subsidies when it is run by a government electric utility, and/or public money in the form of public borrowing (i.e. bonds) or taxes. 

Municipal broadband, in fact, does rely heavily on subsidies from the government. As a result, municipal broadband is not subject to the discipline of the market’s profit-and-loss test. This frees the enterprise to focus on other goals, including higher speeds—especially upload speeds—and lower prices than private ISPs often offer in the same market. This is why municipal broadband networks build symmetrical high-speed fiber networks at higher rates than the private sector.

But far from representing a superior source of “competition,” municipal broadband is actually an example of “predatory entry.” In areas where there is already private provision of broadband, municipal broadband can “out-compete” those providers due to subsidies from the rest of society. Eventually, this could lead to exit by the private ISPs, starting with the least cost-efficient to the most. In areas where there is limited provision of Internet access, the entry of municipal broadband could reduce incentives for private entry altogether. In either case, there is little reason to believe municipal broadband actually increases consumer welfarein the long run.

Moreover, there are serious concerns in relying upon municipal broadband for the buildout of ISP networks. While Sallet describes fiber as “future-proof,” there is little reason to think that it is. The profit motive induces broadband ISPs to constantly innovate and improve their networks. Contrary to what you would expect from an alleged monopoly industry, broadband companies are consistently among the highest investors in the American economy. Similar incentives would not apply to municipal broadband, which lacks the profit motive to innovate. 

Conclusion

There is a definite need to improve public policy to promote more competition in broadband markets. But municipal broadband is not the answer. The lack of profit-and-loss prevents the public manager of municipal broadband from having the price signal necessary to know it is serving the public cost-effectively. No amount of bureaucratic management can replace the institutional incentives of the marketplace.

In Broadband, Google, Platforms, Taxes, Telecommunications, Truth on the Market, Wireless , , , , , , , , , ,
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