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Next week the FCC is slated to vote on the second iteration of Chairman Wheeler’s proposed broadband privacy rules. Of course, as has become all too common, none of us outside the Commission has actually seen the proposal. But earlier this month Chairman Wheeler released a Fact Sheet that suggests some of the ways it would update the rules he initially proposed.

According to the Fact Sheet, the new proposed rules are

designed to evolve with changing technologies and encourage innovation, and are in harmony with other key privacy frameworks and principles — including those outlined by the Federal Trade Commission and the Administration’s Consumer Privacy Bill of Rights.

Unfortunately, the Chairman’s proposal appears to fall short of the mark on both counts.

As I discuss in detail in a letter filed with the Commission yesterday, despite the Chairman’s rhetoric, the rules described in the Fact Sheet fail to align with the FTC’s approach to privacy regulation embodied in its 2012 Privacy Report in at least two key ways:

  • First, the Fact Sheet significantly expands the scope of information that would be considered “sensitive” beyond that contemplated by the FTC. That, in turn, would impose onerous and unnecessary consumer consent obligations on commonplace uses of data, undermining consumer welfare, depriving consumers of information and access to new products and services, and restricting competition.
  • Second, unlike the FTC’s framework, the proposal described by the Fact Sheet ignores the crucial role of “context” in determining the appropriate level of consumer choice before affected companies may use consumer data. Instead, the Fact Sheet takes a rigid, acontextual approach that would stifle innovation and harm consumers.

The Chairman’s proposal moves far beyond the FTC’s definition of “sensitive” information requiring “opt-in” consent

The FTC’s privacy guidance is, in its design at least, appropriately flexible, aimed at balancing the immense benefits of information flows with sensible consumer protections. Thus it eschews an “inflexible list of specific practices” that would automatically trigger onerous consent obligations and “risk[] undermining companies’ incentives to innovate and develop new products and services….”

Under the FTC’s regime, depending on the context in which it is used (on which see the next section, below), the sensitivity of data delineates the difference between data uses that require “express affirmative” (opt-in) consent and those that do not (requiring only “other protections” short of opt-in consent — e.g., opt-out).

Because the distinction is so important — because opt-in consent is much more likely to staunch data flows — the FTC endeavors to provide guidance as to what data should be considered sensitive, and to cabin the scope of activities requiring opt-in consent. Thus, the FTC explains that “information about children, financial and health information, Social Security numbers, and precise geolocation data [should be treated as] sensitive.” But beyond those instances, the FTC doesn’t consider any other type of data as inherently sensitive.

By contrast, and without explanation, Chairman Wheeler’s Fact Sheet significantly expands what constitutes “sensitive” information requiring “opt-in” consent by adding “web browsing history,” “app usage history,” and “the content of communications” to the list of categories of data deemed sensitive in all cases.

By treating some of the most common and important categories of data as always “sensitive,” and by making the sensitivity of data the sole determinant for opt-in consent, the Chairman’s proposal would make it almost impossible for ISPs to make routine (to say nothing of innovative), appropriate, and productive uses of data comparable to those undertaken by virtually every major Internet company.  This goes well beyond anything contemplated by the FTC — with no evidence of any corresponding benefit to consumers and with obvious harm to competition, innovation, and the overall economy online.

And because the Chairman’s proposal would impose these inappropriate and costly restrictions only on ISPs, it would create a barrier to competition by ISPs in other platform markets, without offering a defensible consumer protection rationale to justify either the disparate treatment or the restriction on competition.

As Fred Cate and Michael Staten have explained,

“Opt-in” offers no greater privacy protection than allowing consumers to “opt-out”…, yet it imposes significantly higher costs on consumers, businesses, and the economy.

Not surprisingly, these costs fall disproportionately on the relatively poor and the less technology-literate. In the former case, opt-in requirements may deter companies from offering services at all, even to people who would make a very different trade-off between privacy and monetary price. In the latter case, because an initial decision to opt-in must be taken in relative ignorance, users without much experience to guide their decisions will face effectively higher decision-making costs than more knowledgeable users.

The Chairman’s proposal ignores the central role of context in the FTC’s privacy framework

In part for these reasons, central to the FTC’s more flexible framework is the establishment of a sort of “safe harbor” for data uses where the benefits clearly exceed the costs and consumer consent may be inferred:

Companies do not need to provide choice before collecting and using consumer data for practices that are consistent with the context of the transaction or the company’s relationship with the consumer….

Thus for many straightforward uses of data, the “context of the transaction,” not the asserted “sensitivity” of the underlying data, is the threshold question in evaluating the need for consumer choice in the FTC’s framework.

Chairman Wheeler’s Fact Sheet, by contrast, ignores this central role of context in its analysis. Instead, it focuses solely on data sensitivity, claiming that doing so is “in line with customer expectations.”

But this is inconsistent with the FTC’s approach.

In fact, the FTC’s framework explicitly rejects a pure “consumer expectations” standard:

Rather than relying solely upon the inherently subjective test of consumer expectations, the… standard focuses on more objective factors related to the consumer’s relationship with a business.

And while everyone agrees that sensitivity is a key part of pegging privacy regulation to actual consumer and corporate relationships, the FTC also recognizes that the importance of the sensitivity of the underlying data varies with the context in which it is used. Or, in the words of the White House’s 2012 Consumer Data Privacy in a Networked World Report (introducing its Consumer Privacy Bill of Rights), “[c]ontext should shape the balance and relative emphasis of particular principles” guiding the regulation of privacy.

By contrast, Chairman Wheeler’s “sensitivity-determines-consumer-expectations” framing is a transparent attempt to claim fealty to the FTC’s (and the Administration’s) privacy standards while actually implementing a privacy regime that is flatly inconsistent with them.

The FTC’s approach isn’t perfect, but that’s no excuse to double down on its failings

The FTC’s privacy guidance, and even more so its privacy enforcement practices under Section 5, are far from perfect. The FTC should be commended for its acknowledgement that consumers’ privacy preferences and companies’ uses of data will change over time, and that there are trade-offs inherent in imposing any constraints on the flow of information. But even the FTC fails to actually assess the magnitude of the costs and benefits of, and the deep complexities involved in, the trade-off, and puts an unjustified thumb on the scale in favor of limiting data use.  

But that’s no excuse for Chairman Wheeler to ignore what the FTC gets right, and to double down on its failings. Based on the Fact Sheet (and the initial NPRM), it’s a virtual certainty that the Chairman’s proposal doesn’t heed the FTC’s refreshing call for humility and flexibility regarding the application of privacy rules to ISPs (and other Internet platforms):

These are complex and rapidly evolving areas, and more work should be done to learn about the practices of all large platform providers, their technical capabilities with respect to consumer data, and their current and expected uses of such data.

The rhetoric of the Chairman’s Fact Sheet is correct: the FCC should in fact conform its approach to privacy to the framework established by the FTC. Unfortunately, the reality of the Fact Sheet simply doesn’t comport with its rhetoric.

As the FCC’s vote on the Chairman’s proposal rapidly nears, and in light of its significant defects, we can only hope that the rest of the Commission refrains from reflexively adopting the proposed regime, and works to ensure that these problematic deviations from the FTC’s framework are addressed before moving forward.

On October 6, the Heritage Foundation released a legal memorandum (authored by me) that recounts the Federal Communications Commission’s (FCC) recent sad history of ignoring the rule of law in its enforcement and regulatory actions.  The memorandum calls for a legislative reform agenda to rectify this problem by reining in the agency.  Key points culled from the memorandum are highlighted below (footnotes omitted).

1.  Background: The Rule of Law

The American concept of the rule of law is embodied in the Due Process Clause of the Fifth Amendment to the U.S. Constitution and in the constitutional principles of separation of powers, an independent judiciary, a government under law, and equality of all before the law.  As the late Friedrich Hayek explained:

[The rule of law] means the government in all its actions is bound by rules fixed and announced beforehand—rules which make it possible to see with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.

In other words, the rule of law involves a system of binding rules that have been adopted and applied by a valid government authority and that embody clarity, predictability, and equal applicability.   Practices employed by government agencies that undermine the rule of law ignore a fundamental duty that the government owes its citizens and thereby weaken America’s constitutional system.  It follows, therefore, that close scrutiny of federal administrative agencies’ activities is particularly important in helping to achieve public accountability for an agency’s failure to honor the rule of law standard.

2.  How the FCC Flouts the Rule of Law

Applying such scrutiny to the FCC reveals that it does a poor job in adhering to rule of law principles, both in its procedural practices and in various substantive actions that it has taken.

Opaque procedures that generate uncertainties regarding agency plans undermine the clarity and predictability of agency actions and thereby undermine the effectiveness of rule of law safeguards.  Process-based reforms designed to deal with these problems, to the extent that they succeed, strengthen the rule of law.  Procedural inadequacies at the FCC include inordinate delays and a lack of transparency, including the failure to promptly release the text of proposed and final rules.  The FCC itself has admitted that procedural improvements are needed, and legislative proposals have been advanced to make the Commission more transparent, efficient, and accountable.

Nevertheless, mere procedural reforms would not address the far more serious problem of FCC substantive actions that flout the rule of law.  Examples abound:

  • The FCC imposes a variety of “public interest” conditions on proposed mergers subject to its jurisdiction. Those conditions often are announced after inordinate delays, and typically have no bearing on the mergers’ actual effects.  The unpredictable nature and timing of such impositions generate a lack of certainty for businesses and thereby undermine the rule of law.
  • The FCC’s 2015 Municipal Broadband Order preempted state laws in Tennessee and North Carolina that prevented municipally owned broadband providers from providing broadband service beyond their geographic boundaries. Apart from its substantive inadequacies, this Order went beyond the FCC’s statutory authority and raised grave federalism problems (by interfering with a state’s sovereign right to oversee its municipalities), thereby ignoring the constitutional limitations placed on the exercise of governmental powers that lie at the heart of the rule of law.  The Order was struck down by the U.S. Court of Appeals for the Sixth Circuit in August 2016.
  • The FCC’s 2015 “net neutrality” rule (the Open Internet Order) subjects internet service providers (ISPs) to sweeping “reasonableness-based” FCC regulatory oversight. This “reasonableness” standard gives the FCC virtually unbounded discretion to impose sanctions on ISPs.  It does not provide, in advance, a knowable, predictable rule consistent with due process and rule of law norms.  In the dynamic and fast-changing “Internet ecosystem,” this lack of predictable guidance is a major drag on innovation.  Regrettably, in June 2014, a panel of the U.S. Court of Appeals for the District of Columbia, by a two-to-one vote, rejected a challenge to the order brought by ISPs and their trade association.
  • The FCC’s abrupt 2014 extension of its long-standing rules restricting common ownership of local television broadcast stations, to encompass Joint Sales Agreements (JSAs) likewise undermined the rule of law. JSAs, which allow one television station to sell advertising (but not programming) on another station, have long been used by stations that had no reason to believe that their actions in any way constituted illegal “ownership interests,” especially since many of them were originally approved by the FCC.  The U.S. Court of Appeals for the Third Circuit wisely vacated the television JSA rule in May 2016, stressing that the FCC had violated a statutory command by failing to carry out in a timely fashion the quadrennial review of the television ownership rules on which the JSA rule was based.
  • The FCC’s February 2016 proposed rules that are designed to “open” the market for video set-top boxes, appear to fly in the face of federal laws and treaty language protecting intellectual property rights, by arbitrarily denying protection to intellectual property based solely on a particular mode of information transmission. Such a denial is repugnant to rule of law principles.
  • FCC enforcement practices also show a lack of respect for rule of law principles, by seeking to obtain sanctions against behavior that has never been deemed contrary to law or regulatory edicts. Two examples illustrate this point.
    • In 2014, the FCC’s Enforcement Bureau proposed imposing a $10 million fine on TerraCom, Inc., and YourTelAmerica, Inc., two small telephone companies, for a data breach that exposed certain personally identifiable information to unauthorized access. In so doing, the FCC cited provisions of the Telecommunications Act of 1996 and accompanying regulations that had never been construed to authorize sanctions for failure to adopt “reasonable data security practices” to protect sensitive consumer information.
    • In November 2015, the FCC similarly imposed a $595,000 fine on Cox Communications for failure to prevent a data breach committed by a third-party hacker, although no statutory or regulatory language supported imposing any penalty on a firm that was itself victimized by a hack attack

3.  Legislative Reforms to Rein in the FCC

What is to be done?  One sure way to limit an agency’s ability to flout the rule of law is to restrict the scope of its legal authority.  As a matter of first principles, Congress should therefore examine the FCC’s activities with an eye to eliminating its jurisdiction over areas in which regulation is no longer needed:  For example, residual price regulation may be unnecessary in all markets where competition is effective. Regulation is called for only in the presence of serious market failure, coupled with strong evidence that government intervention will yield a better economic outcome than will a decision not to regulate.

Congress should craft legislation designed to sharply restrict the FCC’s ability to flout the rule of law.  At a minimum, no matter how it decides to pursue broad FCC reform, the following five proposals merit special congressional attention as a means of advancing rule of law principles:

  • Eliminate the FCC’s jurisdiction over all mergers. The federal antitrust agencies are best equipped to handle merger analysis, and this source of costly delay and uncertainty regarding ad hoc restrictive conditions should be eliminated.
  • Eliminate the FCC’s jurisdiction over broadband Internet service. Given the benefits associated with an open and unregulated Internet, Congress should provide clearly and unequivocally that the FCC has no jurisdiction, direct or indirect, in this area.
  • Shift FCC regulatory authority over broadband-related consumer protection (including, for example, deceptive advertising, privacy, and data protection) and competition to the Federal Trade Commission, which has longstanding experience and expertise in the area. This jurisdictional transfer would promote clarity and reduce uncertainty, thereby strengthening the rule of law.
  • Require that before taking regulatory action, the FCC carefully scrutinize regulatory language to seek to avoid the sorts of rule of law problems that have plagued prior commission rulemakings.
  • Require that the FCC not seek fines in an enforcement action unless the alleged infraction involves a violation of the precise language of a regulation or statutory provision.

4.  Conclusion

In recent years, the FCC too often has acted in a manner that undermines the rule of law. Internal agency reforms might be somewhat helpful in rectifying this situation, but they inevitably would be limited in scope and inherently malleable as FCC personnel changes. Accordingly, Congress should weigh major statutory reforms to rein in the FCC—reforms that will advance the rule of law and promote American economic well-being.

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

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

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

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

As Commissioner Pai noted before Congress in March:

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The resulting Open Government Directive calls on executive agencies to

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

We are living in a digital gold age and consumers… are the beneficiaries. Consumers have numerous choices for buying digital content and for buying devices on which to play that content. They have never had so much flexibility and so much opportunity.  

* * *

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

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

* * *

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

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

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

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

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

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

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

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

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

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

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

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

Plus ça change…

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

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

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

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

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

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

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

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

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

From ignoring copyright to obliterating copyright

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The American concept of “the rule of law” (see here) is embodied in the Due Process Clause of the Fifth Amendment to the U.S. Constitution, and in the constitutional principles of separation of powers, an independent judiciary, a government under law, and equality of all before the law (see here).  It holds that the executive must comply with the law because ours is “a government of laws, and not of men,” or, as Justice Anthony Kennedy put it in a 2006 address to the American Bar Association, “that the Law is superior to, and thus binds, the government and all its officials.”  (See here.)  More specifically, and consistent with these broader formulations, the late and great legal philosopher Friedrich Hayek wrote that the rule of law “means the government in all its actions is bound by rules fixed and announced beforehand – rules which make it possible to see with fair certainty how the authority will use its coercive powers in given circumstances and to plan one’s individual affairs on the basis of this knowledge.”  (See here.)  In other words, as former Boston University Law School Dean Ron Cass put it, the rule of law involves “a system of binding rules” adopted and applied by a valid government authority that embody “clarity, predictability, and equal applicability.”  (See here.)

Regrettably, by engaging in regulatory overreach and ignoring statutory limitations on the scope of their authority, federal administrative agencies have shown scant appreciation for rule of law restraints under the current administration (see here and here for commentaries on this problem by Heritage Foundation scholars).  Although many agencies could be singled out, the Federal Communications Commission’s (FCC) actions in recent years have been especially egregious (see here).

A prime example of regulatory overreach by the FCC that flouted the rule of law was its promulgation in 2015 of an order preempting state laws in Tennessee and North Carolina that prevented municipally-owned broadband providers from providing broadband service beyond their geographic boundaries (Municipal Broadband Order, see here).   As a matter of substance, this decision ignored powerful economic evidence that municipally-provided broadband services often involve wasteful subsidies for financially–troubled government-owned providers that interfere with effective private sector competition and are economically harmful (my analysis is here).   As a legal matter, the Municipal Broadband Order went beyond the FCC’s statutory authority and raises grave constitutional problems, thereby ignoring the constitutional limitations placed on the exercise of governmental powers that lie at the heart of the rule of law (see here).  The Order lacked a sound legal footing in basing its authority on Section 706 of the Telecommunications Act of 1996, which merely authorizes the FCC to promote local broadband competition and investment (a goal which the Order did not advance) and says nothing about preemption.   In addition, the FCC’s invocation of preemption authority trenched upon the power of the states to control their subordinate governmental entities, guaranteed to them by the Constitution as an essential element of their sovereignty in our federal system (see here).   What’s more, the Chattanooga, Tennessee and Wilson, North Carolina municipal broadband systems that had requested FCC preemption imposed content-based restrictions on users of their network that raised serious First Amendment issues (see here).   Specifically, those systems’ bans on the transmittal of various sorts of “abusive” language appeared to be too broad to withstand First Amendment “strict scrutiny.”  Moreover, by requiring prospective broadband enrollees to agree not to sue their provider as an initial condition of service, two of the municipal systems arguably unconstitutionally coerced users to forgo exercise of their First Amendment rights.

Fortunately, on August 10, 2016, in Tennessee v. FCC, the U.S. Court of Appeals for the Sixth Circuit struck down the Municipal Broadband Order, pithily stating:

The FCC order essentially serves to re-allocate decision-making power between the states and their municipalities. This is shown by the fact that no federal statute or FCC regulation requires the municipalities to expand or otherwise to act in contravention of the preempted state statutory provisions. This preemption by the FCC of the allocation of power between a state and its subdivisions requires at least a clear statement in the authorizing federal legislation. The FCC relies upon § 706 of the Telecommunications Act of 1996 for the authority to preempt in this case, but that statute falls far short of such a clear statement. The preemption order must accordingly be reversed.

The Sixth Circuit’s decision has important policy ramifications that extend beyond the immediate controversy, as Free State Foundation Scholars Randolph May and Seth Cooper explain:

The FCC’s Municipal Broadband Preemption Order would have turned constitutional federalism inside out by severing local political subdivisions’ accountability from the states governments that created them. Had the agency’s order been upheld, the FCC surely would have preempted several other state laws restricting municipalities’ ownership and operation of broadband networks. Several state governments would have been locked into an unwise policy of favoring municipal broadband business ventures with a track record of legal and proprietary conflicts of interest, expensive financial failures, and burdensome debts for local taxpayers.

The avoidance of a series of bad side effects in a corner of the regulatory world is not, however, sufficient grounds for breaking out the champagne.  From a global perspective, the Sixth Circuit’s Tennessee v. FCC decision, while helpful, does not address the broader problem of agency disregard for the limitations of constitutional federalism and the rule of law.  Administrative overreach, like a chronic debilitating virus, saps the initiative of the private sector (and, more generally, the body politic) and undermines its vitality.  In addition, not all federal judges can be counted on to rein in legally unjustified rules (which in any event impose costly delay and uncertainty, even if they are eventually overturned).  What is needed is an administration that emphasizes by word and deed that it is committed to constitutionalist rule of law principles – and insists that its appointees (including commissioners of independent agencies) share that philosophy.  Let us hope that we do not have to wait too long for such an administration.

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

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

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

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

Look out! Lochner is coming!

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

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

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

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

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

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

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

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

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

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

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

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

You Have to Break the Law Before You Raise a Defense

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

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

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

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

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

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

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

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

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

As I noted before,

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

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

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

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

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

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

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

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

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

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

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

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

Last week the International Center for Law & Economics and I filed an amicus brief in the DC Circuit in support of en banc review of the court’s decision to uphold the FCC’s 2015 Open Internet Order.

In our previous amicus brief before the panel that initially reviewed the OIO, we argued, among other things, that

In order to justify its Order, the Commission makes questionable use of important facts. For instance, the Order’s ban on paid prioritization ignores and mischaracterizes relevant record evidence and relies on irrelevant evidence. The Order also omits any substantial consideration of costs. The apparent necessity of the Commission’s aggressive treatment of the Order’s factual basis demonstrates the lengths to which the Commission must go in its attempt to fit the Order within its statutory authority.

Our brief supporting en banc review builds on these points to argue that

By reflexively affording substantial deference to the FCC in affirming the Open Internet Order (“OIO”), the panel majority’s opinion is in tension with recent Supreme Court precedent….

The panel majority need not have, and arguably should not have, afforded the FCC the level of deference that it did. The Supreme Court’s decisions in State Farm, Fox, and Encino all require a more thorough vetting of the reasons underlying an agency change in policy than is otherwise required under the familiar Chevron framework. Similarly, Brown and Williamson, Utility Air Regulatory Group, and King all indicate circumstances in which an agency construction of an otherwise ambiguous statute is not due deference, including when the agency interpretation is a departure from longstanding agency understandings of a statute or when the agency is not acting in an expert capacity (e.g., its decision is based on changing policy preferences, not changing factual or technical considerations).

In effect, the panel majority based its decision whether to afford the FCC deference upon deference to the agency’s poorly supported assertions that it was due deference. We argue that this is wholly inappropriate in light of recent Supreme Court cases.


The panel majority failed to appreciate the importance of granting Chevron deference to the FCC. That importance is most clearly seen at an aggregate level. In a large-scale study of every Court of Appeals decision between 2003 and 2013, Professors Kent Barnett and Christopher Walker found that a court’s decision to defer to agency action is uniquely determinative in cases where, as here, an agency is changing established policy.

Kent Barnett & Christopher J. Walker, Chevron In the Circuit Courts 61, Figure 14 (2016), available at

Figure 14 from Barnett & Walker, as reproduced in our brief.

As  that study demonstrates,

agency decisions to change established policy tend to present serious, systematic defects — and [thus that] it is incumbent upon this court to review the panel majority’s decision to reflexively grant Chevron deference. Further, the data underscore the importance of the Supreme Court’s command in Fox and Encino that agencies show good reason for a change in policy; its recognition in Brown & Williamson and UARG that departures from existing policy may fall outside of the Chevron regime; and its command in King that policies not made by agencies acting in their capacity as technical experts may fall outside of the Chevron regime. In such cases, the Court essentially holds that reflexive application of Chevron deference may not be appropriate because these circumstances may tend toward agency action that is arbitrary, capricious, in excess of statutory authority, or otherwise not in accordance with law.

As we conclude:

The present case is a clear example where greater scrutiny of an agency’s decision-making process is both warranted and necessary. The panel majority all too readily afforded the FCC great deference, despite the clear and unaddressed evidence of serious flaws in the agency’s decision-making process. As we argued in our brief before the panel, and as Judge Williams recognized in his partial dissent, the OIO was based on factually inaccurate, contradicted, and irrelevant record evidence.

Read our full — and very short — amicus brief here.

In recent years much ink has been spilled on the problem of online privacy breaches, involving the unauthorized use of personal information transmitted over the Internet.  Internet privacy concerns are warranted.  According to a 2016 National Telecommunications and Information Administration survey of Internet-using households, 19 percent of such households (representing nearly 19 million households) reported that they had been affected by an online security breach, identity theft, or similar malicious activity during the 12 months prior to the July 2015 survey.  Security breaches appear to be more common among the most intensive Internet-using households – 31 percent of those using at least five different types of online devices suffered such breaches.  Security breach statistics, of course, do not directly measure the consumer welfare losses attributable to the unauthorized use of personal data that consumers supply to Internet service providers and to the websites which they visit.

What is the correct overall approach government should take in dealing with Internet privacy problems?  In addressing this question, it is important to focus substantial attention on the effects of online privacy regulation on economic welfare.  In particular, policies should aim at addressing Internet privacy problems in a manner that does not unduly harm the private sector or deny opportunities to consumers who are not being harmed.  The U.S. Federal Trade Commission (FTC), the federal government’s primary consumer protection agency, has been the principal federal regulator of online privacy practices.  Very recently, however, the U.S. Federal Communications Commission (FCC) has asserted the authority to regulate the privacy practices of broadband Internet service providers, and is proposing an extremely burdensome approach to such regulation that would, if implemented, have harmful economic consequences.

In March 2016, FTC Commissioner Maureen Ohlhausen succinctly summarized the FTC’s general approach to online privacy-related enforcement under Section 5 of the FTC Act, which proscribes unfair or deceptive acts or practices:

[U]nfairness establishes a baseline prohibition on practices that the overwhelming majority of consumers would never knowingly approve. Above that baseline, consumers remain free to find providers that match their preferences, and our deception authority governs those arrangements. . . .  The FTC’s case-by-case enforcement of our unfairness authority shapes our baseline privacy practices.  Like the common law, this incremental approach has proven both relatively predictable and adaptable as new technologies and business models emerge.

In November 2015, Professor (and former FTC Commissioner) Joshua Wright argued the FTC’s approach is insufficiently attuned to economic analysis, in particular, the “tradeoffs between the value to consumers and society of the free flow and exchange of data and the creation of new products and services on the one hand, against the value lost by consumers from any associated reduction in privacy.”  Nevertheless, on balance, FTC enforcement in this area generally is restrained and somewhat attentive to cost-benefit considerations.  (This undoubtedly reflects the fact (see my Heritage Legal Memorandum, here) that the statutory definition of “unfairness” in Section 5(n) of the FTC Act embodies cost-benefit analysis, and that the FTC’s Policy Statement on Deception requires detriment to consumers acting reasonably in the circumstances.)  In other words, federal enforcement policy with respect to online privacy, although it could be improved, is in generally good shape.

Or it was in good shape.  Unfortunately, on April 1, 2016, the Federal Communications Commission (FCC) decided to inject itself into “privacy space” by issuing a Notice of Proposed Rulemaking entitled “Protecting the Privacy of Customers of Broadband and Other Telecommunications Services.”  This “Privacy NPRM” sets forth detailed rules that, if adopted, would impose onerous privacy obligations on “Broadband Internet Access Service” (BIAS) Providers, the firms that provide the cables, wires, and telecommunications equipment through which Internet traffic flows – primarily cable (Comcast, for example) and telephone (Verizon, for example) companies.   The Privacy NPRM reclassifies BIAS provision as a “common carrier” service, thereby totally precluding the FTC from regulating BIAS Providers’ privacy practices (since the FTC is barred by law from regulating common carriers, under 15 U.S. Code § 45(a)(2)).  Put simply, the NPRM required BIAS Providers “to obtain express consent in advance of practically every use of a customer[s] data”, without regard to the effects of such a requirement on economic welfare.  All other purveyors of Internet services, however – in particular, the large numbers of “edge providers” that generate Internet content and services (Google, Amazon, and Facebook, for example) – are exempt from the new FCC regulatory requirements.  In short, the Privacy NPRM establishes a two-tier privacy regulatory system, with BIAS Providers subject to tight FCC privacy rules, while all other Internet service firms are subject to more nuanced, case-by-case, effects-based evaluation of their privacy practices by the FTC.  This disparate regulatory approach is peculiar (if not wholly illogical), since edge providers in general have greater access than BIAS Providers to consumers’ non-public information, and thus may appear to pose a greater threat to consumers’ interest in privacy.

The FCC’s proposal to regulate BIAS Providers’ privacy practices represents bad law and horrible economic policy.  First, it undermines the rule of law by extending the FCC’s authority beyond its congressional mandate.  It does this by basing its regulation of a huge universe of information exchanges on Section 222 of the Telecommunications Act of 1996, a narrow provision aimed at a very limited type of customer-related data obtained in connection with old-style voice telephony transmissions.  This is egregious regulatory overreach.  Second, if implemented, it will harm consumers, producers, and the overall economic by imposing a set of sweeping opt-in consent requirements on BIAS Providers, without regard to private sector burdens or actual consumer welfare (see here); by reducing BIAS Provider revenues and thereby dampening investment that is vital to the continued growth of and innovation in Internet-related industries (see here); by reducing the ability of BIAS Providers to provide welfare-enhancing competitive pressure on providers on Internet edge providers (see here); and by raising consumer prices for Internet services and deny discount programs desired by consumers (see here).

What’s worse, the FCC’s proposed involvement in online privacy oversight comes at a time of increased Internet privacy regulation by foreign countries, much of it highly intrusive and lacking in economic sophistication.  A particularly noteworthy effort to clarify cross-national legal standards is the Privacy Shield, a 2016 United States – European Union agreement that establishes regulatory online privacy protection norms, backed by FTC enforcement, that U.S. companies transmitting data into Europe may choose to accept on a voluntary basis.  (If they do not accede to the Shield, they may be subject to uncertain and heavy-handed European sanctions.)  The Privacy NPRM, if implemented, will create an additional concern for BIAS Providers, since they will have to evaluate the implications of new FCC regulation (rather than simply rely on FTC oversight) in deciding whether to opt in to the Shield’s standards and obligations.

In sum, the FCC’s Privacy NPRM would, if implemented, harm consumers and producers, slow innovation, and offend the rule of law.  This prompts four recommendations.

  • The FCC should withdraw the NPRM and leave it to the FTC to oversee all online privacy practices, under its Section 5 unfairness and deception authority. The adoption of the Privacy Shield, which designates the FTC as the responsible American privacy oversight agency, further strengthens the case against FCC regulation in this area. 
  • In overseeing online privacy practices, the FTC should employ a very light touch that stresses economic analysis and cost-benefit considerations. Moreover, it should avoid requiring that rigid privacy policy conditions be kept in place for long periods of time through consent decree conditions, in order to allow changing market conditions to shape and improve business privacy policies. 
  • Moreover, the FTC should borrow a page from former FTC Commissioner Joshua Wright by implementing an “economic approach” to privacy. Under such an approach:  

o             FTC economists would help make the Commission a privacy “thought leader” by developing a rigorous academic research agenda on the economics of privacy, featuring the economic evaluation of industry sectors and practices; 

o             the FTC would bear the burden of proof of showing that violations of a company’s privacy policy are material to consumer decision-making;

o             FTC economists would report independently to the FTC about proposed privacy-related enforcement initiatives; and

o             the FTC would publish the views of its Bureau of Economics in all privacy-related consent decrees that are placed on the public record.   

  • The FTC should encourage the European Commission and other foreign regulators to take into account the economics of privacy in developing their privacy regulatory policies. In so doing, it should emphasize that innovation is harmed, the beneficial development of the Internet is slowed, and consumer welfare and rights are undermined through highly prescriptive regulation in this area (well-intentioned though it may be).  Relatedly, the FTC and other U.S. Government negotiators should argue against adoption of a “one-size-fits-all” global privacy regulation framework.   Such a global framework could harmfully freeze into place over-regulatory policies and preclude beneficial experimentation in alternative forms of “lighter-touch” regulation and enforcement. 

While no panacea, these recommendations would help deter (or, at least, constrain) the economically harmful government micromanagement of businesses’ privacy practices, in the United States and abroad.