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

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

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

Who Balances the Benefits and Costs of Speech?

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

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

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

As Thomas Sowell wrote in Knowledge and Decisions:

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

Knowledge and Decisions, p. 240

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

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

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

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

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

Knowledge and Decisions, p. 244

Markets Produce the Best Moderation Policies

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

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

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

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

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

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

Conclusion

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

Amazingly enough, at a time when legislative proposals for new antitrust restrictions are rapidly multiplying—see the Competition and Antitrust Law Enforcement Reform Act (CALERA), for example—Congress simultaneously is seriously considering granting antitrust immunity to a price-fixing cartel among members of the newsmedia. This would thereby authorize what the late Justice Antonin Scalia termed “the supreme evil of antitrust: collusion.” What accounts for this bizarre development?

Discussion

The antitrust exemption in question, embodied in the Journalism Competition and Preservation Act of 2021, was introduced March 10 simultaneously in the U.S. House and Senate. The press release announcing the bill’s introduction portrayed it as a “good government” effort to help struggling newspapers in their negotiations with large digital platforms, and thereby strengthen American democracy:

We must enable news organizations to negotiate on a level playing field with the big tech companies if we want to preserve a strong and independent press[.] …

A strong, diverse, free press is critical for any successful democracy. …

Nearly 90 percent of Americans now get news while on a smartphone, computer, or tablet, according to a Pew Research Center survey conducted last year, dwarfing the number of Americans who get news via television, radio, or print media. Facebook and Google now account for the vast majority of online referrals to news sources, with the two companies also enjoying control of a majority of the online advertising market. This digital ad duopoly has directly contributed to layoffs and consolidation in the news industry, particularly for local news.

This legislation would address this imbalance by providing a safe harbor from antitrust laws so publishers can band together to negotiate with large platforms. It provides a 48-month window for companies to negotiate fair terms that would flow subscription and advertising dollars back to publishers, while protecting and preserving Americans’ right to access quality news. These negotiations would strictly benefit Americans and news publishers at-large; not just one or a few publishers.

The Journalism Competition and Preservation Act only allows coordination by news publishers if it (1) directly relates to the quality, accuracy, attribution or branding, and interoperability of news; (2) benefits the entire industry, rather than just a few publishers, and are non-discriminatory to other news publishers; and (3) is directly related to and reasonably necessary for these negotiations.

Lurking behind this public-spirited rhetoric, however, is the specter of special interest rent seeking by powerful media groups, as discussed in an insightful article by Thom Lambert. The newspaper industry is indeed struggling, but that is true overseas as well as in the United States. Competition from internet websites has greatly reduced revenues from classified and non-classified advertising. As Lambert notes, in “light of the challenges the internet has created for their advertising-focused funding model, newspapers have sought to employ the government’s coercive power to increase their revenues.”

In particular, media groups have successfully lobbied various foreign governments to impose rules requiring that Google and Facebook pay newspapers licensing fees to display content. The Australian government went even further by mandating that digital platforms share their advertising revenue with news publishers and give the publishers advance notice of any algorithm changes that could affect page rankings and displays. Media rent-seeking efforts took a different form in the United States, as Lambert explains (citations omitted):

In the United States, news publishers have sought to extract rents from digital platforms by lobbying for an exemption from the antitrust laws. Their efforts culminated in the introduction of the Journalism Competition and Preservation Act of 2018. According to a press release announcing the bill, it would allow “small publishers to band together to negotiate with dominant online platforms to improve the access to and the quality of news online.” In reality, the bill would create a four-year safe harbor for “any print or digital news organization” to jointly negotiate terms of trade with Google and Facebook. It would not apply merely to “small publishers” but would instead immunize collusive conduct by such major conglomerates as Murdoch’s News Corporation, the Walt Disney Corporation, the New York Times, Gannet Company, Bloomberg, Viacom, AT&T, and the Fox Corporation. The bill would permit news organizations to fix prices charged to digital platforms as long as negotiations with the platforms were not limited to price, were not discriminatory toward similarly situated news organizations, and somehow related to “the quality, accuracy, attribution or branding, and interoperability of news.” Given the ease of meeting that test—since news organizations could always claim that higher payments were necessary to ensure journalistic quality—the bill would enable news publishers in the United States to extract rents via collusion rather than via direct government coercion, as in Australia.

The 2021 version of the JCPA is nearly identical to the 2018 version discussed by Thom. The only substantive change is that the 2021 version strengthens the pro-cartel coalition by adding broadcasters (it applies to “any print, broadcast, or news organization”). While the JCPA plainly targets Facebook and Google (“online content distributors” with “not fewer than 1,000,000,000 monthly active users, in the aggregate, on its website”), Microsoft President Brad Smith noted in a March 12 House Antitrust Subcommittee Hearing on the bill that his company would also come under its collective-bargaining terms. Other online distributors could eventually become subject to the proposed law as well.

Purported justifications for the proposal were skillfully skewered by John Yun in a 2019 article on the substantively identical 2018 JCPA. Yun makes several salient points. First, the bill clearly shields price fixing. Second, the claim that all news organizations (in particular, small newspapers) would receive the same benefit from the bill rings hollow. The bill’s requirement that negotiations be “nondiscriminatory as to similarly situated news content creators” (emphasis added) would allow the cartel to negotiate different terms of trade for different “tiers” of organizations. Thus The New York Times and The Washington Post, say, might be part of a top tier getting the most favorable terms of trade. Third, the evidence does not support the assertion that Facebook and Google are monopolistic gateways for news outlets.

Yun concludes by summarizing the case against this legislation (citations omitted):

Put simply, the impact of the bill is to legalize a media cartel. The bill expressly allows the cartel to fix the price and set the terms of trade for all market participants. The clear goal is to transfer surplus from online platforms to news organizations, which will likely result in higher content costs for these platforms, as well as provisions that will stifle the ability to innovate. In turn, this could negatively impact quality for the users of these platforms.

Furthermore, a stated goal of the bill is to promote “quality” news and to “highlight trusted brands.” These are usually antitrust code words for favoring one group, e.g., those that are part of the News Media Alliance, while foreclosing others who are not “similarly situated.” What about the non-discrimination clause? Will it protect non-members from foreclosure? Again, a careful reading of the bill raises serious questions as to whether it will actually offer protection. The bill only ensures that the terms of the negotiations are available to all “similarly situated” news organizations. It is very easy to carve out provisions that would favor top tier members of the media cartel.

Additionally, an unintended consequence of antitrust exemptions can be that it makes the beneficiaries lax by insulating them from market competition and, ultimately, can harm the industry by delaying inevitable and difficult, but necessary, choices. There is evidence that this is what occurred with the Newspaper Preservation Act of 1970, which provided antitrust exemption to geographically proximate newspapers for joint operations.

There are very good reasons why antitrust jurisprudence reserves per se condemnation to the most egregious anticompetitive acts including the formation of cartels. Legislative attempts to circumvent the federal antitrust laws should be reserved solely for the most compelling justifications. There is little evidence that this level of justification has been met in this present circumstance.

Conclusion

Statutory exemptions to the antitrust laws have long been disfavored, and with good reason. As I explained in my 2005 testimony before the Antitrust Modernization Commission, such exemptions tend to foster welfare-reducing output restrictions. Also, empirical research suggests that industries sheltered from competition perform less well than those subject to competitive forces. In short, both economic theory and real-world data support a standard that requires proponents of an exemption to bear the burden of demonstrating that the exemption will benefit consumers.

This conclusion applies most strongly when an exemption would specifically authorize hard-core price fixing, as in the case with the JCPA. What’s more, the bill’s proponents have not borne the burden of justifying their pro-cartel proposal in economic welfare terms—quite the opposite. Lambert’s analysis exposes this legislation as the product of special interest rent seeking that has nothing to do with consumer welfare. And Yun’s evaluation of the bill clarifies that, not only would the JCPA foster harmful collusive pricing, but it would also harm its beneficiaries by allowing them to avoid taking steps to modernize and render themselves more efficient competitors.

In sum, though the JCPA claims to fly a “public interest” flag, it is just another private interest bill promoted by well-organized rent seekers would harm consumer welfare and undermine innovation.

[TOTM: The following is part of a digital symposium by TOTM guests and authors on the legal and regulatory issues that arose during Ajit Pai’s tenure as chairman of the Federal Communications Commission. The entire series of posts is available here.

Geoffrey A. Manne is the president and founder of the International Center for Law and Economics.]

I’m delighted to add my comments to the chorus of voices honoring Ajit Pai’s remarkable tenure at the Federal Communications Commission. I’ve known Ajit longer than most. We were classmates in law school … let’s just say “many” years ago. Among the other symposium contributors I know of only one—fellow classmate, Tom Nachbar—who can make a similar claim. I wish I could say this gives me special insight into his motivations, his actions, and the significance of his accomplishments, but really it means only that I have endured his dad jokes and interminable pop-culture references longer than most. 

But I can say this: Ajit has always stood out as a genuinely humble, unfailingly gregarious, relentlessly curious, and remarkably intelligent human being, and he deployed these characteristics to great success at the FCC.   

Ajit’s tenure at the FCC was marked by an abiding appreciation for the importance of competition, both as a guiding principle for new regulations and as a touchstone to determine when to challenge existing ones. As others have noted (and as we have written elsewhere), that approach was reflected significantly in the commission’s Restoring Internet Freedom Order, which made competition—and competition enforcement by the antitrust agencies—the centerpiece of the agency’s approach to net neutrality. But I would argue that perhaps Chairman Pai’s greatest contribution to bringing competition to the forefront of the FCC’s mandate came in his work on media modernization.

Fairly early in his tenure at the commission, Ajit raised concerns with the FCC’s failure to modernize its media-ownership rules. In response to the FCC’s belated effort to initiate the required 2010 and 2014 Quadrennial Reviews of those rules, then-Commissioner Pai noted that the commission had abdicated its responsibility under the statute to promote competition. Not only was the FCC proposing to maintain a host of outdated existing rules, but it was also moving to impose further constraints (through new limitations on the use of Joint Sales Agreements (JSAs)). As Ajit noted, such an approach was antithetical to competition:

In smaller markets, the choice is not between two stations entering into a JSA and those same two stations flourishing while operating completely independently. Rather, the choice is between two stations entering into a JSA and at least one of those stations’ viability being threatened. If stations in these smaller markets are to survive and provide many of the same services as television stations in larger markets, they must cut costs. And JSAs are a vital mechanism for doing that.

The efficiencies created by JSAs are not a luxury in today’s digital age. They are necessary, as local broadcasters face fierce competition for viewers and advertisers.

Under then-Chairman Tom Wheeler, the commission voted to adopt the Quadrennial Review in 2016, issuing rules that largely maintained the status quo and, at best, paid tepid lip service to the massive changes in the competitive landscape. As Ajit wrote in dissent:

The changes to the media marketplace since the FCC adopted the Newspaper-Broadcast Cross-Ownership Rule in 1975 have been revolutionary…. Yet, instead of repealing the Newspaper-Broadcast Cross-Ownership Rule to account for the massive changes in how Americans receive news and information, we cling to it.

And over the near-decade since the FCC last finished a “quadrennial” review, the video marketplace has transformed dramatically…. Yet, instead of loosening the Local Television Ownership Rule to account for the increasing competition to broadcast television stations, we actually tighten that regulation.

And instead of updating the Local Radio Ownership Rule, the Radio-Television Cross-Ownership Rule, and the Dual Network Rule, we merely rubber-stamp them.

The more the media marketplace changes, the more the FCC’s media regulations stay the same.

As Ajit also accurately noted at the time:

Soon, I expect outside parties to deliver us to the denouement: a decisive round of judicial review. I hope that the court that reviews this sad and total abdication of the administrative function finds, once and for all, that our media ownership rules can no longer stay stuck in the 1970s consistent with the Administrative Procedure Act, the Communications Act, and common sense. The regulations discussed above are as timely as “rabbit ears,” and it’s about time they go the way of those relics of the broadcast world. I am hopeful that the intervention of the judicial branch will bring us into the digital age.

And, indeed, just this week the case was argued before the Supreme Court.

In the interim, however, Ajit became Chairman of the FCC. And in his first year in that capacity, he took up a reconsideration of the 2016 Order. This 2017 Order on Reconsideration is the one that finally came before the Supreme Court. 

Consistent with his unwavering commitment to promote media competition—and no longer a minority commissioner shouting into the wind—Chairman Pai put forward a proposal substantially updating the media-ownership rules to reflect the dramatically changed market realities facing traditional broadcasters and newspapers:

Today we end the 2010/2014 Quadrennial Review proceeding. In doing so, the Commission not only acknowledges the dynamic nature of the media marketplace, but takes concrete steps to update its broadcast ownership rules to reflect reality…. In this Order on Reconsideration, we refuse to ignore the changed landscape and the mandates of Section 202(h), and we deliver on the Commission’s promise to adopt broadcast ownership rules that reflect the present, not the past. Because of our actions today to relax and eliminate outdated rules, broadcasters and local newspapers will at last be given a greater opportunity to compete and thrive in the vibrant and fast-changing media marketplace. And in the end, it is consumers that will benefit, as broadcast stations and newspapers—those media outlets most committed to serving their local communities—will be better able to invest in local news and public interest programming and improve their overall service to those communities.

Ajit’s approach was certainly deregulatory. But more importantly, it was realistic, well-reasoned, and responsive to changing economic circumstances. Unlike most of his predecessors, Ajit was unwilling to accede to the torpor of repeated judicial remands (on dubious legal grounds, as we noted in our amicus brief urging the Court to grant certiorari in the case), permitting facially and wildly outdated rules to persist in the face of massive and obvious economic change. 

Like Ajit, I am not one to advocate regulatory action lightly, especially in the (all-too-rare) face of judicial review that suggests an agency has exceeded its discretion. But in this case, the need for dramatic rule change—here, to deregulate—was undeniable. The only abuse of discretion was on the part of the court, not the agency. As we put it in our amicus brief:

[T]he panel vacated these vital reforms based on mere speculation that they would hinder minority and female ownership, rather than grounding its action on any record evidence of such an effect. In fact, the 2017 Reconsideration Order makes clear that the FCC found no evidence in the record supporting the court’s speculative concern.

…In rejecting the FCC’s stated reasons for repealing or modifying the rules, absent any evidence in the record to the contrary, the panel substituted its own speculative concerns for the judgment of the FCC, notwithstanding the FCC’s decades of experience regulating the broadcast and newspaper industries. By so doing, the panel exceeded the bounds of its judicial review powers under the APA.

Key to Ajit’s conclusion that competition in local media markets could be furthered by permitting more concentration was his awareness that the relevant market for analysis couldn’t be limited to traditional media outlets like broadcasters and newspapers; it must include the likes of cable networks, streaming video providers, and social-media platforms, as well. As Ajit put it in a recent speech:

The problem is a fundamental refusal to grapple with today’s marketplace: what the service market is, who the competitors are, and the like. When assessing competition, some in Washington are so obsessed with the numerator, so to speak—the size of a particular company, for instance—that they’ve completely ignored the explosion of the denominator—the full range of alternatives in media today, many of which didn’t exist a few years ago.

When determining a particular company’s market share, a candid assessment of the denominator should include far more than just broadcast networks or cable channels. From any perspective (economic, legal, or policy), it should include any kinds of media consumption that consumers consider to be substitutes. That could be TV. It could be radio. It could be cable. It could be streaming. It could be social media. It could be gaming. It could be still something else. The touchstone of that denominator should be “what content do people choose today?”, not “what content did people choose in 1975 or 1992, and how can we artificially constrict our inquiry today to match that?”

For some reason, this simple and seemingly undeniable conception of the market escapes virtually all critics of Ajit’s media-modernization agenda. Indeed, even Justice Stephen Breyer in this week’s oral argument seemed baffled by the notion that more concentration could entail more competition:

JUSTICE BREYER: I’m thinking of it solely as a — the anti-merger part, in — in anti-merger law, merger law generally, I think, has a theory, and the theory is, beyond a certain point and other things being equal, you have fewer companies in a market, the harder it is to enter, and it’s particularly harder for smaller firms. And, here, smaller firms are heavily correlated or more likely to be correlated with women and minorities. All right?

The opposite view, which is what the FCC has now chosen, is — is they want to move or allow to be moved towards more concentration. So what’s the theory that that wouldn’t hurt the minorities and women or smaller businesses? What’s the theory the opposite way, in other words? I’m not asking for data. I’m asking for a theory.

Of course, as Justice Breyer should surely know—and as I know Ajit Pai knows—counting the number of firms in a market is a horrible way to determine its competitiveness. In this case, the competition from internet media platforms, particularly for advertising dollars, is immense. A regulatory regime that prohibits traditional local-media outlets from forging efficient joint ventures or from obtaining the scale necessary to compete with those platforms does not further competition. Even if such a rule might temporarily result in more media outlets, eventually it would result in no media outlets, other than the large online platforms. The basic theory behind the Reconsideration Order—to answer Justice Breyer—is that outdated government regulation imposes artificial constraints on the ability of local media to adopt the organizational structures necessary to compete. Removing those constraints may not prove a magic bullet that saves local broadcasters and newspapers, but allowing the rules to remain absolutely ensures their demise. 

Ajit’s commitment to furthering competition in telecommunications markets remained steadfast throughout his tenure at the FCC. From opposing restrictive revisions to the agency’s spectrum screen to dissenting from the effort to impose a poorly conceived and retrograde regulatory regime on set-top boxes, to challenging the agency’s abuse of its merger review authority to impose ultra vires regulations, to, of course, rolling back his predecessor’s unsupportable Title II approach to net neutrality—and on virtually every issue in between—Ajit sought at every turn to create a regulatory backdrop conducive to competition.

Tom Wheeler, Pai’s predecessor at the FCC, claimed that his personal mantra was “competition, competition, competition.” His greatest legacy, in that regard, was in turning over the agency to Ajit.

It’s almost impossible to read an article or blog posting today about patents that doesn’t complain that “the patent system is broken.”  It’s especially prevalent in reports on high-tech patents, software patents, or the “smart phone wars.”  (I’m not hyperlinking here, because there’s just too many examples to choose between.)  In fact, the din on the increasingly clichéd statement that “the patent system is broken” is really reaching histrionic proportions.  It’s even prompted Patent Commissioner David Kappos to appeal to “those reporting and commenting on the smartphone system patent wars” to “move beyond the flippant rhetoric and instead engage in thoughtful discussion.”

Although it’s tempting to think that Commissioner Kappos is engaging in his own bombastic exclamations in his criticism of “flippant rhetoric,” it’s unfortunately true.  Here’s just one relatively recent example from the venerable New York Times, called “Apple Now Owns the Page Turn,” by Nick Bilton.

In this brief article, Mr. Bilton decries that Apple “now owns the page turn” in ebook readers with its recently issued design patent (D670,713).  Proclaiming that this is proof of “how broken the patent system is,” Mr. Bilton informs his readers that this design patent “gives Apple the exclusive rights to the page turn in an e-reader application.”

No, Mr. Bilton, it does not, and the NY Times should be embarrassed that such ignorant proclamations continue to be published under its masthead, including the blatantly biased and equally ill-informed hit piece on software patents published by the Old Gray Lady last October.

When most people talk about patents, they usually are speaking about a utility patent, which do secure exclusive property rights in new technology and discoveries.  But there is an entirely different type of patent, called a design patent.  Despite legal requirements that superficially sound similar, such as requirements of novelty and nonobviousness, design patents are entirely different from utility patents.

If Mr. Bilton had bothered to do even the minimal amount of research that most college undergraduates do today, say by checking Wikipedia’s entry on design patents, he would have discovered that it is certainly not true that Apple has “exclusive rights to the page turn in an e-reader application.” Despite Wikipedia’s well-deserved reputation for ill-informed entries, it actually has a good, succinct summary of design patents, describing briefly the differences between design patents and utility patents, and it even cites some classic examples from 150 years ago, such as design patents on famous fonts, the design patent on the statue of liberty, etc.

So, if Mr. Bilton had bothered to take five minutes to check Wikipedia before writing his NY Times posting, he would have learned that design patents are not patents on functional technology, but rather secure only non-functional, ornamental designs. For the sake of this vaunted NY Times writer and the many people he has mislead, I’ll repeat the most important word here in the definition: non-functional. Thus, Apple does not own e-book page-turning technology nor does it own the function of turning pages in an e-book reader. What this design patent secures is the novel ornamental design Apple has developed for its particular e-book reader, and it’s limited to exactly this particular ornamental design — no more, no less. For anyone even semi-aware of Steve Jobs and Apple Computer — an innovative person and his company who recognized the fundamental role and value of artistic design in computer technology since 1984’s release of the famous Macintosh computer – it should hardly be surprising that it is protecting its IP rights in these innovative design features.

Instead, Mr. Bilton negligently suggests that Apple could sue other e-book readers for their page turning technology because it now has “exclusive rights to the page turn in an e-reader application,” but this is patently false (pun intended).  And Mr. Bilton is clearly negligent here and his mistake is entirely his fault, because in the second paragraph of his NY Times report, he explicitly identifies Apple’s patent as a “design patent.”  This is significant, because everything he writes in his report after saying “design patent” is 100% wrong by mere dint of this term, because everything he writes after this wrongly assumes that Apple’s patent is a “utility patent.”

(As an aside, this design patent might be invalid, but Mr. Bilton provides no information or facts to make this judgment, because all of his high-handed rhetoric is based on the assumption that it is a utility patent.  Of course, if this was a utility patent, it would be invalid, as ebook readers that change pages have been around for many years, but what of the particular ornamental design of this ebook reader? One will search in vain in Mr. Bilton’s report for any information on this all-important question.)

Admittedly, there is much confusion today about the patent system, and much of this confusion is caused by misleading reports like those written by Mr. Bilton.  Of course, there are some good reporters and bloggers, who are commenting sensibly on the “smart phone wars” and other issues in the public policy debates over patents today.  But, unfortunately, Mr. Bilton represents a far larger cadre of reporters and bloggers who spread confusion and misinformation about the patent system and about the “smart phone war” in particular.

The real problem with this “broken reporting” by Mr. Bilton and his ilk is that it is feeding a growing anti-patent frenzy among commentators, academics, and the public, who seem to think that your smart phones, tablets and other technological marvels just don’t exist because of a so-called “broken patent system” that has stymied software and other high-tech innovation at every turn. I’m glad to see that some people, like Commissioner Kappos, the Honorable Paul Michel, and the Honorable Randall Rader, are starting to push back against this “broken reporting” on the patent system.

The New York Times set hearts aflutter in the IP world yesterday with its hit piece on patents in the high-tech industry– I’m shocked, shocked to find the New York Times publishing biased articles on hot topics in politics and law — but Bloomberg also published an important article yesterday on the smart phone war, software patents and other topics raised by today’s so-called patent litigation crisis: Apple Phone Patent War Like Sewing Machine Minus Violence.

The Bloomberg article provides some much-needed perspective on the smart phone war, software patents, and other topics in what conventional wisdom today is painting in broad strokes as “Patents Gone Wild! (Special Geek Version!)”

Here’s a great snippet from the Bloomberg article:

In recent years, there have been fights over diapers, air fresheners, oil drilling equipment, and one over heart devices that has lasted more than a decade. None of those got the attention that’s being given to the smartphone wars, which have become fodder for late-night comedians or magazine covers. Still, the public interest isn’t unprecedented: patent battles were front-page news a century ago.

As bloggers are wont to say: Read the whole thing.

Even better from my self-promoting perspective, the Bloomberg reporter tracked me down and asked me about my research into the Sewing Machine War of the 1850s, and she has some nice quotes from me about the lessons we can learn from this first patent war.

In fact, I have another small contribution to make to the Bloomberg article’s important historical perspective on the current hue and cry over the patent system.  In my article on the Sewing Machine War, I quote a lot from old articles in Scientific American that I found in my historical research.  Some of the observations in these ancient Scientific American articles could very well have been published yesterday, which belies the tread-worn cliche (repeated in the New York Times article) that the patent system is experiencing all of these allegedly new problems today. In 1854, for instance, when Scientific American sensed the imminent explosion of the Sewing Machine War, it bemoaned that it is “to be regretted, namely, that whenever a patent becomes valuable, there seems to be no end, at least, for some time, to the troubles of the real benefactor—the one who has rendered it a public benefit.”

Scientific American had reason to complain, because the year before it covered Walter Hunt’s much-publicized challenge to Elias Howe’s patent on the lockstitch, a challenge that was exposed a few years later as being completely supported and bankrolled by the Singer Sewing Machine Co.  So, in 1853, when Hunt published lengthy newspaper advertisements, such as in the New York Daily Tribune, accusing Howe of being a pretender to the throne in first inventing the lockstitch, Scientific American leapt to Howe’s defense, “in order that the ear of the public may not be used as a kettle drum on which to beat the loudest tones for personal purposes.”

We may continue to hope that “the public may not be used as a kettle drum on which to be beat the loudest tones for personal purposes,” but, as the New York Times made clear yesterday, some things never change — in 1853 or in 2012.

The NYT on law teaching

Larry Ribstein —  20 November 2011

The NYT brings another David Segal story on legal education.  Today’s sermon: law schools don’t teach “lawyering.”

Boiling away the overheated journalism, here’s the indictment:  Law profs are richly paid for writing mostly useless law review articles rather than “the essential how-tos of daily practice.” Students study cases about contract law but not contracts.  Clinics get second-class status.  New lawyers need law firm training to figure out how to “draft a certificate of merger and file it with the secretary of state.” A law graduate isn’t “ready to be a provider of services.” Clients won’t pay for work by untrained associates.  Legal education is not worth its high price.

Well, yes, law schools should pay more attention to the market for lawyers and offer more value.  But as I’ve written in my article Practicing Theory, this doesn’t mean teaching what lawyers traditionally do.  Lawyers now don’t draft agreements from scratch.  There’s an app for that — software templates modified by user input.  A technological tsunami is sweeping over legal services.

Practicing Theory suggests that law schools should teach law students how to be architects and designers rather than mechanics.  The lawyers of the future will focus, more than today’s lawyers, on the building blocks of law. Computers and non-lawyers will handle the mechanical tasks. Training lawyers demands the sort of theoretical perspective that Segal disdains. 

Law students also will need business skills that law schools don’t traditionally teach.  Indeed, Segal himself notes that “graduates will need entrepreneurial skills, management ability and some expertise in landing clients” without considering the implications of this observation for legal education.

The real problem, as discussed in Practicing Theory, is not that law professors are teaching theory rather than the way to the courthouse, but that their choices of which theories to teach pay insufficient attention to the skills and knowledge today’s and tomorrow’s market demands. Segal’s article, like others in this series, ignores such nuance, preferring to string together well-worn criticisms and to eschew coherent analysis in favor of attention-getting quotes.

But, then, this is what journalists learn in journalism school.  Just as law professors swing for the law reviews, so journalists swing for the Pulitzers.  No wonder blogs are replacing the mainstream media as the source of cutting-edge information.  If you want to know what is actually ailing the legal profession and the law professoriate, you would do much better to read, e.g., Bill Henderson, Dan Katz, Brian Leiter, Brian Tamanaha, Steve Bainbridge and me.  It will save time and trees.

Yesterday at the Illinois Corporate Colloquium Steve Choi presented his paper (with Pritchard and Weichman), Scandal Enforcement at the SEC: Salience and the Arc of the Option Backdating Investigations.  Here’s the abstract:

We study the impact of scandal-driven media scrutiny on the SEC’s allocation of enforcement resources. We focus on the SEC’s investigations of option backdating in the wake of numerous media articles on the practice of backdating. We find that as the level of media scrutiny of option backdating increased, the SEC shifted its mix of investigations significantly toward backdating investigations and away from investigations involving other accounting issues. We test the hypothesis that SEC pursued more marginal investigations into backdating as the media frenzy surrounding the practice persisted at the expense of pursuing more egregious accounting issues that did not involve backdating. Our event study of stock market reactions to the initial disclosure of backdating investigations shows that those reactions declined over our sample period. We also find that later backdating investigations are less likely to target individuals and less likely to accompanied by a parallel criminal investigation. Looking at the consequences of the SEC’s backdating investigations, later investigations were more likely to be terminated or produce no monetary penalties. We find that the magnitude of the option backdating accounting errors diminished over time relative to other accounting errors that attracted SEC investigations.

As readers of this blog, and Ideoblog before it, will appreciate, this paper particularly resonated with me.  As I wrote in a large number of posts (e.g.) backdating was a molehill the media blew up into a mountain.  Now come Choi et al with evidence that while the SEC was spending its scarce resources on this overblown molehill it was ignoring real mountains (e.g., Madoff).

I found the paper overall quite persuasive.  I wasn’t entirely convinced by the evidence that the backdating cases were getting weaker.  In particular, stock price reactions may just indicate the market was learning about the which companies were involved before the investigations were brought, and was gradually figuring out that backdating was not such a big deal.  But I was convinced of the evidence of the opportunity costs of the SEC’s backdating obsession — the otherwise inexplicable decline in investigations of serious non-backdating accounting problems.

As we discussed in the Colloquium, the paper reveals that there are agency costs not just in the backdating companies that were investigated but also in the agency that was doing the investigating.  Although it’s not clear exactly what moved the SEC to follow the media, there is at least some doubt about whether the SEC’s resource allocation decisions were in the public interest.

This calls attention to another set of agents — the ones in the media.  Why did the media love backdating so much?  As discussed in my Public Face of Scholarship, there are “demand” and “supply” explanations:  the public demands stories about cheating executives and/or journalists like to supply these stories.  David Baron, Persistent Media Bias, presents a supply theory emphasizing journalists’ anti-market bias.

Whatever the cause of media bias, when the media is influential its bias can result in bad public policy. SEC enforcement isn’t the only example. As I discuss in my article (at 1210-11, footnotes omitted):

Where interest groups are closely divided, the outcome of political battles may depend on how much voter support each side can enlist. This may depend on how journalists have portrayed the issue to the public. For example, the press is an important influence on corporate governance. One factor in the rapid passage of the Sarbanes-Oxley Act, the strongest federal financial regulation in seventy years, may have been the overwhelmingly negative coverage of business in the first half of 2002: seventy-seven percent of the 613 major network evening news stories on business concerned corporate scandals.

It’s not clear what can be done to better align SEC enforcement policy with the public interest.  Incentive compensation for SEC investigators?  Perhaps the only thing we can do (as with corporate crime) is to try to keep in mind when creating regulation that even if corporate agents may sometimes do the wrong thing, people don’t stop being people when they go to work for the government.

Coding legal arguments

Larry Ribstein —  11 September 2011

The NYT writes about computerized journalism:

The company’s (Narrative Science) software takes data, like that from sports statistics, company financial reports and housing starts and sales, and turns it into articles. * * *

The Big Ten Network, a joint venture of the Big Ten Conference and Fox Networks, began using the technology in the spring of 2010 for short recaps of baseball and softball games. * * *

The Narrative Science software can make inferences based on the historical data it collects and the sequence and outcomes of past games. To generate story “angles,” explains Mr. Hammond of Narrative Science, the software learns concepts for articles like “individual effort,” “team effort,” “come from behind,” “back and forth,” “season high,” “player’s streak” and “rankings for team.” Then the software decides what element is most important for that game, and it becomes the lead of the article, he said. The data also determines vocabulary selection. A lopsided score may well be termed a “rout” rather than a “win.” * * *

The article says the company plans to move “further up the ladder of quality” and “open new horizons for computer journalism.”  Hammond, a co-director of the Northwestern lab that produced the software, predicts somebody will win a Pulitzer within five years for writing the code for a news story.

The NYT’s reporter asks (fearfully?) whether ”robot journalists’ [will] replace flesh-and-blood journalists in newsrooms?”  Clearly my close study of Gretchen Morgenson has equipped me to write the code for her weekly screed.

Which of course leads me to law. Yesterday I wrote about computers predicting future court decisions.  I concluded, however, that lawyers will still have to create the law that is being predicted “by making arguments and human judgments.”

But if computers can write journalism, why shouldn’t they be able to write briefs?  Both types of writing have the sort of predictability that enables production by even primitive artificial intelligence.   You could even say this type of predictability is what makes for a “profession” that can be taught and learned in schools and through apprenticeship.  (Which suggests that computers won’t replace bloggers.)

So now defending lawyers from computers requires retreating further uphill to someplace computers can’t climb.  Computers can write briefs, but they can’t decide what issues need to be briefed or legal strategy.

Even so, as I concluded yesterday, “future lawyers will have to learn to work alongside computers.”  I speculate in my article, Practicing Theory, on the implications of this new world for legal education.  It certainly won’t involve training for the sort of “real life law practice” that present-day lawyers think is so important but that computers will soon render obsolete.

The NYT story noted that Narrative Science resulted from a collaboration between the journalism and computer science schools at Northwestern. It would be nice if law schools explored similar collaborations.  Unfortunately, as I discuss in my article, they are saddled by regulation that doesn’t inhibit experimentation in other professions.

So while we may yet see productive partnerships between journalists and computer scientists, I wonder whether lawyers, stubbornly resisting the future, will simply find themselves on the cutting room floor (to borrow from another industry’s old technology).

I have blogged extensively about the waste and injustice of the overblown backdating scandal.  (The posts are collected in Ideoblog’s executive compensation archive).  Now we have an accounting of the opportunity costs of the SEC’s pursuit of this so-called scandal.  Here’s the abstract of Choi, Pritchard and Wiechman, Scandal Enforcement at the SEC: Salience and the Arc of the Option Backdating Investigations:

We study the impact of scandal-driven media scrutiny on the SEC’s allocation of enforcement resources. We focus on the SEC’s investigations of option backdating in the wake of numerous media articles on the practice of backdating. We find that as the level of media scrutiny of option backdating increased, the SEC shifted its mix of investigations significantly toward backdating investigations and away from investigations involving other accounting issues. We test the hypothesis that SEC pursued more marginal investigations into backdating as the media frenzy surrounding the practice persisted at the expense of pursuing more egregious accounting issues that did not involve backdating. Our event study of stock market reactions to the initial disclosure of backdating investigations shows that those reactions declined over our sample period. We also find that later backdating investigations are less likely to target individuals and less likely to accompanied by a parallel criminal investigation. Looking at the consequences of the SEC’s backdating investigations, later investigations were more likely to be terminated or produce no monetary penalties. We find that the magnitude of the option backdating accounting errors diminished over time relative to other accounting errors that attracted SEC investigations.

And the conclusion:

Our study shows that the backdating investigations crowded out alternative investigative possibilities. Moreover, it is reasonable to conclude that the investigations foregone were likely to have more substantial impact than the backdating investigations that were pursued. We find that the stock market reaction to backdating investigations declined over time as the scandal progressed. The SEC was less likely to include individuals in its investigations, and federal prosecutors were less inclined to pursue criminal investigations. We also find that the consequences of the SEC’s backdating investigations declined as the scandal wore on. The SEC was more likely to terminate later investigations, and the SEC was more likely to come away with no monetary penalty.

The most plausible explanation for this decline in the consequences of the SEC’s backdating investigations is case selection. We find that the SEC‘s backdating investigations focused on smaller accounting errors later in the cycle of investigations. Smaller cases produced smaller consequences. Our conclusions hold whether we focus on just accounting investigations as our baseline of comparison, which we argue is the most similar comparator, or the expanded set of all SEC investigations of public companies. The SEC is an independent agency, but its independence from the executive branch does not mean that it is independent from political currents. The SEC’s response to the option backdating shows that it is not immune to the political imperative to “do something” in response to newspaper headlines. We cannot know which accounting investigations were not pursued because the SEC was occupied with backdating, but our analysis makes clear that the opportunity cost of the backdating scandal investigations.

And the SEC’s opportunity costs are only part of the opportunity-cost story. Consider what the WSJ missed as it pursued its Pulitzer for backdating.

DSK and media bias

Larry Ribstein —  5 July 2011

Bret Stephens wonders why he and fellow journalists ignored the fact that “[a]lmost from the beginning, there was something amiss in the case of People v. Dominique Strauss-Kahn.” He speculates:

I did enjoy the thought of this mandarin of the tax-exemptocracy being pulled from the comfort of his first-class Air France seat and dispatched to Riker’s Island without regard to status or dignity. And I admired the humble immigrant who would risk so much for the sake of justice. And I smiled at the spectacle of France’s Socialists finding their would-be savior exposed by American prosecutors when they had been hypocritically observing a code of silence about his habits. And I liked seeing the IMF red-faced for whitewashing DSK’s previous escapades.

* * *

He adds that

this is as good an opportunity as any to ask where else we might be committing similar blunders. The climate change obsession, with its Manichean concept of polluting corporations versus noble eco-warriors? The Wall Street obsession, with its belief the boardroom boys were criminally guilty of the financial crisis? The China obsession, with its view that the Middle Kingdom is destined to overtake the U.S. in global economic and political clout? The Israel obsession, with its notion that if only Jewish settlements were removed from the West Bank peace would break out throughout the Middle East?

In each of these cases, the media (broadly speaking) has too often been guilty of looking only for the evidence that fits a pre-existing story line. * * *

But anecdotes are not data—which happens to be the world’s most easily neglected truism. Also true is that sloppy moral categories like the powerful and the powerless, or the selfish and the altruistic, are often misleading and susceptible to manipulation. And the journalists who most deserve to earn their keep are those who understand that the line of any story is likely to be crooked.

I discussed these issues five years ago in my Public Face of Scholarship. I found a rich economics literature analyzing media bias:

  • Michael Jensen observed that people “want sensationalist stories that present choices between good and evil and simple solutions rather than complex explanations.”
  • Core, Guay and Larcker studied the journalist coverage of executive compensation, noting that the press emphasizes sensationalism rather than realistic analysis of the extent of excessive compensation.
  • Gregory S. Miller, The Press as a Watchdog for Accounting Fraud, 44 J. ACCT. RES. 1001 (2006) found that the press emphasized sensationalist elements in stories about accounting fraud.
  • Gentzkow & Shapiro, Media Bias and Reputation, 114 J. POL. ECON. 280 (2006) argue that the news media seek to confirm what the audience thinks it already knows rather than risk being rejected. 
  • Mullainathan & Shleifer conclude that journalists feed audience biases.
  • David Baron reverses causation, arguing that media bias originates with left-leaning anti-market journalists rather than with an effort to serve the audience.

I discussed these theories by way of arguing that bloggers can help correct these tendencies.  That may have happened in this case, but being biased in favor of the accepted wisdom here I didn’t follow any bloggers who might have caught on. 

All of this shows that media and audience bias can be very sticky, and we need a lot of different information sources to combat it.  In other words, free speech is important.  This includes not only bloggers, but for-profit corporate speech, which can cut against some of the biases Stephens referred to.

Did you know that shareholders in US corporations are like oppressed citizens of corrupt governments?  Or that “say on pay” is their Arab Spring?

If not, you haven’t been reading Gretchen Morgenson.  Better that you read Christine Hurt’s excellent critique of Morgenson’s latest screed.

Gretchen Morgenson (with Louise Story), in today’s front-page NYT “newsatorial” reports on and complains about the fact that the SEC’s civil case against Goldman’s Fabrice Tourre (“Fabulous Fab”) in connection with the Abacus deal has not been accompanied by other civil and criminal prosecutions. 

The story notes that Tourre worked closely with others at Goldman and hints that Goldman is forcing Tourre to use its lawyers so that he alone and not one of his more prominent colleagues will take the fall. Morgenson/Story don’t explain why the SEC is collaborating with Goldman in this fall-guy strategy, and indeed provide a more innocent explanation:  that the SEC had incriminating emails on Tourre that it didn’t have for any others.  Nevertheless, Morgenson/Story imply that the fire of more prosecutions should in justice follow the smoke of the Tourre case. That, of course, assumes Tourre was doing something wrong, which is far from clear in the Morgenson/Story article.

I’m also disturbed by the Tourre case, but for entirely different reasons.  I discussed the suit’s weakness when it was filed and observed that its real motivation was to help push through Dodd-Frank’s regulation of derivatives trading.  I noted that “this could be the deal that saves financial regulation and brings down the derivatives business.”  I’ve also criticized here and here the use of these allegations to gin up a new broker-dealer fiduciary duty.

Oddly enough, Morgenson & Story end their article with a discussion of allegations that Goldman employees “tried to manipulate prices of securities used to bet against mortgages.”  This differs from the allegation against Tourre that he failed to disclose John Paulson’s involvement in constructing the reference portfolio of the security he was selling.  In other words, whether others should be sued or prosecuted for what Tourre did has nothing to do with whether somebody should be sued or prosecuted for different manipulation regarding other securities, or for any other financial misdealings in the last couple of years. 

By somehow gluing all this together into a big ball of wax, Morgenson is following her common practice of “leveraging” a story to make it look bigger than it is.  For more examples of these and other Morgensonian journalistic practices, see my extensive criticism of many of her weekly columns.

Cutting through Morgenson’s typical blustering and rhetorical flourishes, there’s a lot less to this story than meets the eye.  Fortunately for Morgenson and her co-author, there are no prosecutors or government agencies scrutinizing whether they are over-selling their product.