Archives For copyright

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 Antitrust Division of the U.S. Department of Justice (DOJ) ignored sound law and economics principles in its August 4 decision announcing a new interpretation of seventy-five year-old music licensing consent decrees it had entered into separately with the two major American “performing rights organizations” (PROs)  —  the American Society of Composers, Authors, and Publishers (see ASCAP) and Broadcast Music, Inc. (see BMI).  It also acted in a matter at odds with international practice.  DOJ should promptly rescind its new interpretation and restore the welfare-enhancing licensing flexibility that ASCAP and BMI previously enjoyed.   If DOJ fails to do this, the court overseeing the decrees or Congress should be prepared to act.


ASCAP and BMI contract with music copyright holders to act as intermediaries that provide “blanket” licenses to music users (e.g., television and radio stations, bars, and internet music distributors) for use of their full copyrighted musical repertoires, without the need for song-specific licensing negotiations.  This greatly reduces the transactions costs of arranging for the playing of musical works, benefiting music users, the listening public, and copyright owners (all of whom are assured of at least some compensation for their endeavors).  ASCAP and BMI are big businesses, with each PRO holding licenses to over ten million works and accounting for roughly 45 percent of the domestic music licensing market (ninety percent combined).  Because both ASCAP and BMI pool copyrighted songs that could otherwise compete with each other, and both grant users a single-price “blanket license” conveying the rights to play their full set of copyrighted works, the two organizations could be seen as restricting competition among copyrighted works and fixing the prices of copyrighted substitutes – raising serious questions under section 1 of the Sherman Antitrust Act, which condemns contracts that unreasonably restrain trade.  This led the DOJ to bring antitrust suits against ASCAP and BMI over eighty years ago, which were settled by separate judicially-filed consent decrees in 1941.  The decrees imposed a variety of limitations on the two PROs’ licensing practices, aimed at preventing ASCAP and BMI from exercising anticompetitive market power (such as the setting of excessive licensing rates).  The decrees were amended twice over the years, most recently in 2001, to take account of changing market conditions.  The U.S. Supreme Court noted the constraining effect of the decrees in BMI v. CBS (1979), in ruling that the BMI and ASCAP blanket licenses did not constitute per se illegal price fixing.  The Court held, rather, that the licenses should be evaluated on a case-by-case basis under the antitrust “rule of reason,” since the licenses inherently generated great efficiency benefits (“the immediate use of covered compositions, without the delay of prior individual negotiations”) that had to be weighed against potential anticompetitive harms.

The August 4, 2016 DOJ Consent Decree Interpretation

Fast forward to 2014, when DOJ undertook a new review of the ASCAP and BMI decrees, and requested the submission of public comments to aid it in its deliberations.  This review came to an official conclusion two year laters, on August 4, 2016, when DOJ decided not to amend the decrees – but announced a decree interpretation that limits ASCAP’s and BMI’s flexibility.  Specifically, DOJ stated that the decrees needed to be “more consistently applied.”  By this, the DOJ meant that BMI and ASCAP should only grant blanket licenses that cover all of the rights to 100 percent of the works in the PROs’ respective catalogs, not licenses that cover only partial interests in those works.  DOJ stated:

Only full-work licensing can yield the substantial procompetitive benefits associated with blanket licenses that distinguish ASCAP’s and BMI’s activities from other agreements among competitors that present serious issues under the antitrust laws.

The New DOJ Interpretation is bad as a Matter of Policy

DOJ’s August 4 interpretation rejects industry practice.  Under it, ASCAP and BMI will only be able to offer a license covering all of the copyright interests in a musical competition, even if the license covers a joint work.  For example, consider a band of five composer-musicians, each of whom has a fractional interest in the copyright covering the band’s new album which is a joint work.  Previously, each musician was able to offer a partial interest in the joint work to a performance rights organization, reflecting the relative shares of the total copyright interest covering the work. The organization could offer a partial license, and a user could aggregate different partial licenses in order to cover the whole joint work.

Now, however, under DOJ’s new interpretation, BMI and ASCAP will be prevented from offering partial licenses to that work to users. This may deny the band’s individual members the opportunity to deal profitably with BMI and ASCAP, thereby undermining their ability to receive fair compensation.  As the two PROs have noted, this approach “will cause unnecessary chaos in the marketplace and place unfair financial burdens and creative constraints on songwriters and composers.”  According to ASCAP President Paul Williams, “It is as if the DOJ saw songwriters struggling to stay afloat in a sea of outdated regulations and decided to hand us an anchor, in the form of 100 percent licensing, instead of a life preserver.”  Furthermore, the president and CEO of BMI, Mike O’Neill, stated:  “We believe the DOJ’s interpretation benefits no one – not BMI or ASCAP, not the music publishers, and not the music users – but we are most sensitive to the impact this could have on you, our songwriters and composers.”  These views are bolstered by a January 2016 U.S. Copyright Office report, which concluded that “an interpretation of the consent decrees that would require 100-percent licensing or removal of a work from the ASCAP or BMI repertoire would appear to be fraught with legal and logistical problems, and might well result in a sharp decrease in repertoire available through these [performance rights organizations’] blanket licenses.”  Regrettably, during the decree review period, DOJ ignored the expert opinion of the Copyright Office, as well as the public record comments of numerous publishers and artists (see here, for example) indicating that a 100 percent licensing requirement would depress returns to copyright owners and undermine the creative music industry.

Most fundamentally, DOJ’s new interpretation of the BMI and ASCAP consent decrees involves an abridgment of economic freedom.  It further limits the flexibility of copyright music holders and music users to contract with intermediaries to promote the efficient distribution of music performance rights, in a manner that benefits the listening public while allowing creative artists sufficient compensation for their efforts.  DOJ made no compelling showing that a new consent decree constraint is needed to promote competition (100 percent licensing only).  Far from promoting competition, DOJ’s new interpretation undermines it.  In short, DOJ micromanagement of copyright licensing by consent decree reinterpretation is a costly new regulatory initiative that reflects a lack of appreciation for intellectual property rights, which incentivize innovation.  In short, DOJ’s latest interpretation of the ASCAP and BMI decrees is terrible policy.

The New DOJ Interpretation is bad as a Matter of Law

DOJ’s new interpretation not only is bad policy, it is inconsistent with sound textual construction of the decrees themselves.  As counsel for BMI explained in an August 4 federal court filing (in the Southern District of New York, which oversees the decrees), the BMI decree (and therefore the analogous ASCAP decree as well) does not expressly require 100 percent licensing and does not unambiguously prohibit fractional licensing.  Accordingly, since a consent decree is an injunction, and any activity not expressly required or prohibited thereunder is permitted, fractional shares licensing should be authorized.  DOJ’s new interpretation ignores this principle.  It also is at odds with a report of the U.S. Copyright Office that concluded the BMI consent decree “must be understood to include partial interests in musical works.”  Furthermore, the new interpretation is belied by the fact that the PRO licensing market has developed and functioned efficiently for decades by pricing, colleting, and distributing fees for royalties on a fractional basis.  Courts view such evidence of trade practice and custom as relevant in determining the meaning of a consent decree.


The New DOJ Interpretation Runs Counter to International Norms

Finally, according to Gadi Oron, Director General of the International Confederation of Societies of Authors and Composers (CISAC), a Paris-based organization that regroups 239 rights societies from 123 countries, including ASCAP, BMI, and SESAC, adoption of the new interpretation would depart from international norms in the music licensing industry and have disruptive international effects:

It is clear that the DoJ’s decisions have been made without taking the interests of creators, neither American nor international, into account. It is also clear that they were made with total disregard for the international framework, where fractional licensing is practiced, even if it’s less of a factor because many countries only have one performance rights organization representing songwriters in their territory. International copyright laws grant songwriters exclusive rights, giving them the power to decide who will license their rights in each territory and it is these rights that underpin the landscape in which authors’ societies operate. The international system of collective management of rights, which is based on reciprocal representation agreements and founded on the freedom of choice of the rights holder, would be negatively affected by such level of government intervention, at a time when it needs support more than ever.


In sum, DOJ should take account of these concerns and retract its new interpretation of the ASCAP and BMI consent decrees, restoring the status quo ante.  If it fails to do so, a federal court should be prepared to act, and, if necessary, Congress should seriously consider appropriate corrective legislation.

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.

Please Join Us For A Conference On Intellectual Property Law


Keynote Speaker: Dean Kamen

October 6-7, 2016

Antonin Scalia Law School
George Mason University
Arlington, Virginia


**9 Hours CLE**

On Friday the the International Center for Law & Economics filed comments with the FCC in response to Chairman Wheeler’s NPRM (proposed rules) to “unlock” the MVPD (i.e., cable and satellite subscription video, essentially) set-top box market. Plenty has been written on the proposed rulemaking—for a few quick hits (among many others) see, e.g., Richard Bennett, Glenn Manishin, Larry Downes, Stuart Brotman, Scott Wallsten, and me—so I’ll dispense with the background and focus on the key points we make in our comments.

Our comments explain that the proposal’s assertion that the MVPD set-top box market isn’t competitive is a product of its failure to appreciate the dynamics of the market (and its disregard for economics). Similarly, the proposal fails to acknowledge the complexity of the markets it intends to regulate, and, in particular, it ignores the harmful effects on content production and distribution the rules would likely bring about.

“Competition, competition, competition!” — Tom Wheeler

“Well, uh… just because I don’t know what it is, it doesn’t mean I’m lying.” — Claude Elsinore

At root, the proposal is aimed at improving competition in a market that is already hyper-competitive. As even Chairman Wheeler has admitted,

American consumers enjoy unprecedented choice in how they view entertainment, news and sports programming. You can pretty much watch what you want, where you want, when you want.

Of course, much of this competition comes from outside the MVPD market, strictly speaking—most notably from OVDs like Netflix. It’s indisputable that the statute directs the FCC to address the MVPD market and the MVPD set-top box market. But addressing competition in those markets doesn’t mean you simply disregard the world outside those markets.

The competitiveness of a market isn’t solely a function of the number of competitors in the market. Even relatively constrained markets like these can be “fully competitive” with only a few competing firms—as is the case in every market in which MVPDs operate (all of which are presumed by the Commission to be subject to “effective competition”).

The truly troubling thing, however, is that the FCC knows that MVPDs compete with OVDs, and thus that the competitiveness of the “MVPD market” (and the “MVPD set-top box market”) isn’t solely a matter of direct, head-to-head MVPD competition.

How do we know that? As I’ve recounted before, in a recent speech FCC General Counsel Jonathan Sallet approvingly explained that Commission staff recommended rejecting the Comcast/Time Warner Cable merger precisely because of the alleged threat it posed to OVD competitors. In essence, Sallet argued that Comcast sought to undertake a $45 billion merger primarily—if not solely—in order to ameliorate the competitive threat to its subscription video services from OVDs:

Simply put, the core concern came down to whether the merged firm would have an increased incentive and ability to safeguard its integrated Pay TV business model and video revenues by limiting the ability of OVDs to compete effectively.…

Thus, at least when it suits it, the Chairman’s office appears not only to believe that this competitive threat is real, but also that Comcast, once the largest MVPD in the country, believes so strongly that the OVD competitive threat is real that it was willing to pay $45 billion for a mere “increased ability” to limit it.

UPDATE 4/26/2016

And now the FCC has approved the Charter/Time Warner Cable, imposing conditions that, according to Wheeler,

focus on removing unfair barriers to video competition. First, New Charter will not be permitted to charge usage-based prices or impose data caps. Second, New Charter will be prohibited from charging interconnection fees, including to online video providers, which deliver large volumes of internet traffic to broadband customers. Additionally, the Department of Justice’s settlement with Charter both outlaws video programming terms that could harm OVDs and protects OVDs from retaliation—an outcome fully supported by the order I have circulated today.

If MVPDs and OVDs don’t compete, why would such terms be necessary? And even if the threat is merely potential competition, as we note in our comments (citing to this, among other things),

particularly in markets characterized by the sorts of technological change present in video markets, potential competition can operate as effectively as—or even more effectively than—actual competition to generate competitive market conditions.


Moreover, the proposal asserts that the “market” for MVPD set-top boxes isn’t competitive because “consumers have few alternatives to leasing set-top boxes from their MVPDs, and the vast majority of MVPD subscribers lease boxes from their MVPD.”

But the MVPD set-top box market is an aftermarket—a secondary market; no one buys set-top boxes without first buying MVPD service—and always or almost always the two are purchased at the same time. As Ben Klein and many others have 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.

The competitiveness of the MVPD market in which the antecedent choice of provider is made incorporates consumers’ preferences regarding set-top boxes, and makes the secondary market competitive.

The proposal’s superficial and erroneous claim that the set-top box market isn’t competitive thus reflects bad economics, not competitive reality.

But it gets worse. The NPRM doesn’t actually deny the importance of OVDs and app-based competitors wholesale — it only does so when convenient. As we note in our Comments:

The irony is that the NPRM seeks to give a leg up to non-MVPD distribution services in order to promote competition with MVPDs, while simultaneously denying that such competition exists… In order to avoid triggering [Section 629’s sunset provision,] the Commission is forced to pretend that we still live in the world of Blockbuster rentals and analog cable. It must ignore the Netflix behind the curtain—ignore the utter wealth of video choices available to consumers—and focus on the fact that a consumer might have a remote for an Apple TV sitting next to her Xfinity remote.

“Yes, but you’re aware that there’s an invention called television, and on that invention they show shows?” — Jules Winnfield

The NPRM proposes to create a world in which all of the content that MVPDs license from programmers, and all of their own additional services, must be provided to third-party device manufacturers under a zero-rate compulsory license. Apart from the complete absence of statutory authority to mandate such a thing (or, I should say, apart from statutory language specifically prohibiting such a thing), the proposed rules run roughshod over the copyrights and negotiated contract rights of content providers:

The current rulemaking represents an overt assault on the web of contracts that makes content generation and distribution possible… The rules would create a new class of intermediaries lacking contractual privity with content providers (or MVPDs), and would therefore force MVPDs to bear the unpredictable consequences of providing licensed content to third-parties without actual contracts to govern those licenses…

Because such nullification of license terms interferes with content owners’ right “to do and to authorize” their distribution and performance rights, the rules may facially violate copyright law… [Moreover,] the web of contracts that support the creation and distribution of content are complicated, extensively negotiated, and subject to destabilization. Abrogating the parties’ use of the various control points that support the financing, creation, and distribution of content would very likely reduce the incentive to invest in new and better content, thereby rolling back the golden age of television that consumers currently enjoy.

You’ll be hard-pressed to find any serious acknowledgement in the NPRM that its rules could have any effect on content providers, apart from this gem:

We do not currently have evidence that regulations are needed to address concerns raised by MVPDs and content providers that competitive navigation solutions will disrupt elements of service presentation (such as agreed-upon channel lineups and neighborhoods), replace or alter advertising, or improperly manipulate content…. We also seek comment on the extent to which copyright law may protect against these concerns, and note that nothing in our proposal will change or affect content creators’ rights or remedies under copyright law.

The Commission can’t rely on copyright to protect against these concerns, at least not without admitting that the rules require MVPDs to violate copyright law and to breach their contracts. And in fact, although it doesn’t acknowledge it, the NPRM does require the abrogation of content owners’ rights embedded in licenses negotiated with MVPD distributors to the extent that they conflict with the terms of the rule (which many of them must).   

“You keep using that word. I do not think it means what you think it means.” — Inigo Montoya

Finally, the NPRM derives its claimed authority for these rules from an interpretation of the relevant statute (Section 629 of the Communications Act) that is absurdly unreasonable. That provision requires the FCC to enact rules to assure the “commercial availability” of set-top boxes from MVPD-unaffiliated vendors. According to the NPRM,

we cannot assure a commercial market for devices… unless companies unaffiliated with an MVPD are able to offer innovative user interfaces and functionality to consumers wishing to access that multichannel video programming.

This baldly misconstrues a term plainly meant to refer to the manner in which consumers obtain their navigation devices, not how those devices should function. It also contradicts the Commission’s own, prior readings of the statute:

As structured, the rules will place a regulatory thumb on the scale in favor of third-parties and to the detriment of MVPDs and programmers…. [But] Congress explicitly rejected language that would have required unbundling of MVPDs’ content and services in order to promote other distribution services…. Where Congress rejected language that would have favored non-MVPD services, the Commission selectively interprets the language Congress did employ in order to accomplish exactly what Congress rejected.

And despite the above noted problems (and more), the Commission has failed to do even a cursory economic evaluation of the relative costs of the NPRM, instead focusing narrowly on one single benefit it believes might occur (wider distribution of set-top boxes from third-parties) despite the consistent failure of similar FCC efforts in the past.

All of the foregoing leads to a final question: At what point do the costs of these rules finally outweigh the perceived benefits? On the one hand are legal questions of infringement, inducements to violate agreements, and disruptions of complex contractual ecosystems supporting content creation. On the other hand are the presence of more boxes and apps that allow users to choose who gets to draw the UI for their video content…. At some point the Commission needs to take seriously the costs of its actions, and determine whether the public interest is really served by the proposed rules.

Our full comments are available here.

Tomorrow, Geoffrey Manne, Executive Director of the International Center for Law & Economics, will be a panelist at the Cato Institute’s Policy Forum, “The ITC and Digital Trade: The ClearCorrect Decision.”  He will be joined by Sapna Kumar, Associate Professor, University of Houston Law Center and Shara Aranoff, Of Counsel, Covington and Burling LLP, and former Chairman of the U.S. International Trade Commission (“ITC”).

The forum is focused on a recent Federal Circuit decision, ClearCorrect v. ITC, in which a divided three judge panel overturned a 5-1 majority decision of the ITC holding that the Tariff Act granted it the power to prevent the importation of digital articles that infringe a valid U.S. patent. Key to the Federal Circuit’s decision was a hyper-textualist parsing of the term “article” as understood in 1929–a move that stands in stark contrast to the Federal Circuit’s recent en banc decision in Suprema, which was crucially based on a wider reading of the context of the Tariff Act in order to understand the the full meaning of the phrase “articles … that infringe” as contained therein.

Critics of the ITC’s interpretation in this matter contend that such jurisdiction would somehow grant the ITC the power to regulate the Internet. However, far from being an expansive power grab, the ITC’s decision was in fact well reasoned and completely consistent with the Tariff Act and Congressional intent. Nonetheless, this remains an important case because the cost of the Federal Circuit’s error could be very high given the importance of IP to the national economy.

Full details on the event:

“The ITC and Digital Trade: The ClearCorrect Decision”
Wednesday, December 9, 2015 at 12 PM EDT.
F. A. Hayek Auditorium (located on the lobby level of the Cato Institute)
1000 Massachusetts Ave., N.W.
Washington, D.C.

Registration begins at 11:30 a.m.


More from us on this and related topics:

False Teeth: Why An ITC Case Won’t Chew Up The Internet (Forbes)

Suprema v. ITC: The Case for Chevron Deference

The Federal Circuit Misapplies Chevron Deference (and Risks a Future “Supreme Scolding”) in Suprema Inc. v. ITC


The Ninth Circuit made waves recently with its decision in Lenz v. Universal Music Corp., in which it decided that a plaintiff in a copyright infringement case must first take potential fair use considerations into account before filing a takedown notice under the DMCA. Lenz, represented by the EFF, claimed that Universal had not formed a good faith belief that an infringement had occurred as required by § 512(c)(3)(A)(v). Consequently, Lenz sought damages under § 512(f), alleging that Universal made material misrepresentations in issuing a takedown notice without first considering a fair use defense.

In reaching its holding, the Ninth Circuit decided that fair use should not be considered an affirmative defense–which is to say that it is not properly considered after an allegation, but must be considered when determining whether a prima facie claim exists. It starts from the text of the Copyright Act itself. According to 17 U.S.C. § 107

Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work … is not an infringement of copyright.

In support of its contention, the Ninth Circuit goes on to cite a case in the Eleventh Circuit as well as legislative material suggesting that Congress intended that fair use no longer be considered as an affirmative defense. Thus, in the Ninth Circuit’s view, such fair use at best qualifies as a sort of quasi-defense, and most likely constitutes an element of an infringement claim. After all, if fair use is literally non-infringing, then establishing infringement requires ruling out fair use, as well.

Or so says the Ninth Circuit. But it takes little more than a Google search — let alone the legal research one should expect of federal judges and their clerks — to realize that the court is woefully, and utterly, incorrect.

Is Fair Use an Affirmative Defense ?

The Supreme Court has been perfectly clear that fair use is in fact an affirmative defense. In Campbell v. Acuff-Rose, the Supreme Court had occasion to consider the nature of fair use under § 107 in the context of determining whether 2 Live Crew’s parody of Roy Orbison’s “Pretty Woman” was a permissible use. In considering the fourth fair use factor, “the effect of the use upon the potential market for or value of the copyrighted work,” the Court held that “[s]ince fair use is an affirmative defense, its proponent would have difficulty carrying the burden of demonstrating fair use without favorable evidence about relevant markets.”

Further, in reaching this opinion the Court relied on its earlier precedent in Harper & Row, where, in discussing the “purpose of the use” prong of § 107, the Court said that “[t]he drafters [of § 107] resisted pressures from special interest groups to create presumptive categories of fair use, but structured the provision as an affirmative defense requiring a case-by-case analysis.”  Not surprisingly, other courts are inclined to follow the 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 Ninth Circuit Dissembles

As part of its appeal, Universal relied on the settled notion that fair use is an affirmative defense in building its case. Perhaps because this understanding of fair use is so well established, Universal failed to cite extensively why this was so. And so (apparently unable to perform its own legal research), the Ninth Circuit dismissed § 107 as an affirmative defense out of hand, claiming that

Universal’s sole textual argument is that fair use is not “authorized by the law” because it is an affirmative defense that excuses otherwise infringing conduct … Supreme Court precedent squarely supports the conclusion that fair use does not fall into the latter camp: “[A]nyone who . . . makes a fair use of the work is not an infringer of the copyright with respect to such use.” Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 433 (1984).”

It 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.

To shore up its argument, the Ninth Circuit then goes on to cite the Eleventh Circuit for the notion that the 1976 Act fundamentally changed the nature of fair use, moving it away from its affirmative defense roots. Quoting Bateman v. Mnemonics, Inc., the court claims that

Although the traditional approach is to view “fair use” as an affirmative defense, . . . it is better viewed as a right granted by the Copyright Act of 1976. Originally, as a judicial doctrine without any statutory basis, fair use was an infringement that was excused—this is presumably why it was treated as a defense. As a statutory doctrine, however, fair use is not an infringement. Thus, since the passage of the 1976 Act, fair use should no longer be considered an infringement to be excused; instead, it is logical to view fair use as a right. Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.

But wait — didn’t I list the Eleventh Circuit as one of the (many) courts that have held fair use to be an affirmative defense? Why yes I did. It turns out that, as Devlin Hartline pointed out last week, the Ninth Circuit actually ripped the Eleventh Circuit text completely out of context. The full Bateman quote (from a footnote, it should be noted) is as follows:

Fair use traditionally has been treated as an affirmative defense to a charge of copyright infringement …. In viewing fair use as an excused infringement, the court must, in addressing this mixed question of law and fact, determine whether the use made of the original components of a copyrighted work is “fair” under 17 U.S.C. § 107 … Although the traditional approach is to view “fair use” as an affirmative defense, this writer, speaking only for himself, is of the opinion that it is better viewed as a right granted by the Copyright Act of 1976. Originally, as a judicial doctrine without any statutory basis, fair use was an infringement that was excused—this is presumably why it was treated as a defense. As a statutory doctrine, however, fair use is not an infringement. Thus, since the passage of the 1976 Act, fair use should no longer be considered an infringement to be excused; instead, it is logical to view fair use as a right. Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.” (internal citations omitted, but emphasis added)

Better yet, in a subsequent opinion the Eleventh Circuit further clarified the position that the view of fair use as an affirmative defense is binding Supreme Court precedent, notwithstanding any judge’s personal preferences to the contrary.

But that’s not the worst of it. Not only did the court shamelessly misquote the Eleventh Circuit in stretching to find a justification for its prefered position, the court actually ignored its own precedent to the contrary. In Dr. Seuss Enterprises, L.P. v. Penguin Books USA, Inc., the Ninth Circuit held that

Since fair use is an affirmative defense, [the Defendant-Appellants] must bring forward favorable evidence about relevant markets. Given their failure to submit evidence on this point … we conclude that “it is impossible to deal with [fair use] except by recognizing that a silent record on an important factor bearing on fair use disentitle[s] the proponent of the defense[.]

Further, even if the Lenz court is correct that § 107 “unambiguously contemplates fair use as a use authorized by the law” — despite Supreme Court precedent — the authority the Ninth Circuit attempts to rely upon would still require defendants to raise a fair use defense after a prima facie claim was made, as “the burden of proving fair use is always on the putative infringer.”  

It Also Violates a Common Sense Reading of the DMCA

As with all other affirmative defenses, a plaintiff must first make out a prima facie case before the defense can be raised. So how do we make sense of the language in § 107 that determines fair use to not be infringement? In essence, it appears to be a case of inartful drafting.  Particularly in light of the stated aims of the DMCA — a law that was enacted after the Supreme Court established that fair use was an affirmative defense — the nature of fair use as an affirmative defense that can only be properly raised by an accused infringer is as close to black letter law as it gets.

The DMCA was enacted to strike a balance between the interests of rightsholders in protecting their property, and the interests of society in having an efficient mechanism for distributing content. Currently, rightsholders send out tens of millions of takedown notices every year to deal with the flood of piracy and other infringing uses. If rightsholders were required to consider fair use in advance of each of these, the system would be utterly unworkable — for instance, in Google’s search engine alone, over 54 million removal requests were made in just the month of August 2015 owing to potential copyright violations. While the evisceration of the DMCA is, of course, exactly what the plaintiffs (or more accurately, EFF, which represented the plaintiffs) in Lenz wanted, it’s not remotely what the hard-wrought compromise of the statute contemplates.

And the reason it would be unworkable is not just because of the volume of the complaints, but because fair use is such an amorphous concept that ultimately requires adjudication.

Not only are there four factors to consider in a fair use analysis, but there are no bright line rules to guide the application of the factors. The open ended nature of the defense essentially leaves it up to a defendant to explain just why his situation should not constitute infringement. Until a judge or a jury says otherwise, how is one to know whether a particular course of conduct qualifies for a fair use defense?

The Lenz court even acknowledges as much when it says

If, however, a copyright holder forms a subjective good faith belief the allegedly infringing material does not constitute fair use, we are in no position to dispute the copyright holder’s belief even if we would have reached the opposite conclusion. (emphasis added)

Thus, it is the slightest of fig leaves that is necessary to satisfy the Lenz court’s new requirement that fair use be considered before issuing a takedown notice.

What’s more, this statement from the court also demonstrates the near worthlessness of reading a prima facie fair use requirement into the takedown requirements. Short of a litigant explicitly disclaiming any efforts to consider fair use, the standard could be met with a bare assertion. It does, of course, remain an open question whether the computer algorithms the rightsholders employ in scanning for infringing content are actually capable of making fair use determinations — but perhaps throwing a monkey wrench — any monkey wrench — into the rightsholders’ automated notice-and-takedown systems was all the court was really after. I think we can at least be sure that that was EFF’s aim, anyway, as they apparently think that § 512 tends to be a tool of censorship in the hands of rightsholders.

The structure of the takedown and put-back provisions of the DMCA also cut against the Lenz court’s view. The put-back requirements of Section 512(g) suggest that affirmative defenses and other justifications for accused infringement would be brought up after a takedown notice was submitted. What would be the purpose of put-back response, if not to offer the accused infringers justifications and defenses to an allegation of infringement? Along with excuses such as having a license, or a work’s copyright being expired, an alleged infringer can bring up the fair use grounds under which he believed he was entitled to use the work in question.

In short, to require a rightsholder to analyze fair use in advance of a takedown request effectively requires her to read the mind of an infringer and figure out what excuse that party plans to raise as part of her defense. This surely can’t have been what Congress intended with the takedown provisions of the DMCA — enacted as they were years after the Supreme Court had created the widely recognized rule that fair use is an affirmative defense.

Well, widely recognized, that is, except in the Ninth Circuit. This month, anyway.

Update: I received some feedback on this piece which pointed out an assumption I was making with respect to the Ninth Circuit’s opinion, and which deserves a clarifying note. Essentially, the Lenz court splits the concept of affirmative defenses into two categories: (1) an affirmative defense that is merely a label owing to the procedural posture of a case and (2) an affirmative defense, as it is traditionally understood and that always puts the burden of production on a defendant.  By characterizing affirmative defenses in this way, the Lenz court gets to have its cake and eat it too:  when an actual proceeding is filed, a defendant will procedurally have the burden of production on the issue, but since fair use is at most a quasi-affirmative defense, the court felt it was fair to shift that same burden onto rightsholders when issuing a takedown letter.  So technically the court says that fair use is an affirmative defense (as a labeling matter), but it does not practically treat is as such for the purposes of takedown notices.

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

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

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

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

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

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

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

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

As Hartline states,

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

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

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

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

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

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

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

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

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

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

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