Archives For technology

Last week, the UK Court of Appeal upheld the findings of the High Court in an important case regarding standard essential patents (SEPs). Of particular significance, the Court of Appeal upheld the finding that the defendant, an implementer of SEPs, could have the sale of its products enjoined in the UK unless it enters into a global licensing deal on terms deemed by the court to be fair, reasonable and non-discriminatory (FRAND). The case is noteworthy not least because the threat of an injunction of this sort has become increasingly rare in other jurisdictions, arguably resulting in an imbalance in bargaining power between patent holders and implementers.

The case concerned patents held by Unwired Planet (most of which had been purchased from Ericsson) that it had declared to be essential to the operation of various telecommunications standards. Chinese telecom giant Huawei had incorporated these patented technologies in its products but disputed the legitimacy of Unwired Planet’s (UP) patents and refused to license them on the terms that were offered.

By way of a background to the case, in March 2014, UP resorted to suing Huawei, Samsung and Google and claiming an injunction when it found it hard to secure licenses. After the commencement of proceedings, UP made licence offers to the defendants. It made offers in April and July 2014 respectively and during the proceedings, including a worldwide SEP portfolio licence, a UK SEP portfolio licence and per-patent licences for any of the SEPs in suit. The defendants argued that the offers were not FRAND. Huawei and Samsung also contended that the offers were in breach of European competition law. UP  settled with Google. Three technical trials of the patents began and UP was able to show that at least two of the patents sued upon were valid and essential and had been infringed. Subsequently, Samsung secured a settlement (at a rate below the market rate) and the FRAND trial went ahead with just Huawei.

Judge Birss delivered the High Court order on April 5, 2017. He held that UP’s patents were valid and infringed and it did not abuse its dominant position by requesting an injunction. He ordered a FRAND injunction that was stayed pending appeal against the two patents that had been infringed. The injunction was subject to a number of conditions which are applied because the case was dealing with patents subject to a FRAND undertaking. It will cease to have effect if Huawei enters into the FRAND license determined by the Court. He also observed that the parties can return for further determination when such license expires. Furthermore, it was held that there was one set of FRAND terms and that the scope of this FRAND was world wide.

The UK Court of Appeal (the bench consisting of Lord Justice Kitchin, Lord Justice Floyd, Lady Justice Asplin) in handing down a 291 paragraph, 66 page judgment dealing with Huawei’s appeal, upheld Birss’ findings. The centrality of Huawei’s appeal focused on the global nature of the FRAND license and the non-discrimination undertaking of UP’s FRAND commitments. Some significant findings of the Court of Appeal are briefly provided below.

The Court of Appeal in upholding Birss’ decision noted that it was unfair to say that UP is using the threat of an injunction to leverage Huawei into taking a global license, and that Huawei had the option to take the global license or submit to an injunction in the UK. Drawing attention to the potential complexities in a FRAND negotiation, the Court observed:

..The owner of a SEP may still use the threat of an injunction to try to secure the payment of excessive licence fees and so engage in hold-up activities. Conversely, the infringer may refuse to engage constructively or behave unreasonably in the negotiation process and so avoid paying the licence fees to which the SEP owner is properly entitled, a process known as “hold-out”.

Furthermore, Huawei argues that imposition of a global license on terms set by a national court based on a national finding of infringement is wrong in principle. It also states that there is currently an ongoing patent litigation in both Germany and China and that there are some countries where UP holds “no relevant” patents at all.

In response to these contentions, the Court of Appeal has held that it may be highly impractical for a SEP owner to seek to negotiate a license of its patent rights in each country and rejected the submission made by Huawei that the approach adopted by Birss in these proceedings is out of line with the territorial nature of patent litigations. It clarified that Birss did not adjudicate on issues of infringement or validity concerning foreign SEPs and did not usurp the rights of foreign courts. It further observed that such an approach of Birss  is consistent with the Council and the European Economic and Social Committee dated 29 November 2017 (COM (2017) 712 final) (“the November 2017 EU Communication”) which notes in section 2.4:

For products with a global circulation, SEP licences granted on a worldwide basis may contribute to a more efficient approach and therefore can be compatible with FRAND.

The Court of Appeal however disagreed with Birss on the issue that there was only one set of FRAND terms. This view of the bench certainly comes as a relief since it seems to appropriately reflect the practical realities of a FRAND negotiation. The Court held:

Patent licences are complex and, having regard to the commercial priorities of the participating undertakings and the experience and preferences of the individuals involved, may be structured in different ways in terms of, for example, the particular contracting parties, the rights to be included in the licence, the geographical scope of the licence, the products to be licensed, royalty rates and how they are to be assessed, and payment terms. Further, concepts such as fairness and reasonableness do not sit easily with such a rigid approach.

Similarly, on the non- discrimination prong of FRAND, the Court of Appeal agreed with Birss that it was not “hard-edged” and the test is whether such difference in rates distorts competition between the licensees. It also noted that the “hard-edged” interpretation would be “akin to the re-insertion of a “most favoured licensee” clause in the FRAND undertaking” which does not seem to be what the standards body, European Telecommunications Standards Institute (ETSI) had in mind when it formulated its policies. The Court also held :

We consider that a non-discrimination rule has the potential to harm the technological development of standards if it has the effect of compelling the SEP owner to accept a level of compensation for the use of its invention which does not reflect the value of the licensed technology.

Finally, the Court of Appeal held that UP did not abuse its dominant position just because it failed to strictly comply with the safe harbor framework laid down by Court of Justice of the European Union in Huawei v. ZTE. The only requirement that must be satisfied before proceedings are commenced by the SEP holder is that the SEP holder give sufficient notice to or consult with the implementer.

The Court of Appeal’s decision offers some significant guidance to the emerging policy debate on FRAND. As mentioned at the beginning of this post, the decision is significant particularly for the reason that UP is one of a total of two cases in the last two years, where an injunctive relief has been granted in instances involving standard essential patents. Such reliefs have been rarely granted in years in the first place. The second such instance of a grant of injunction pertains to Huawei v. Samsung where the Shenzhen Court in China held earlier this year that Huawei met the FRAND obligation while Samsung did not (negotiations were dragged on for 6 years). An injunction was granted against Samsung for infringing two of Huawei’s Chinese patents which are counterparts of two U.S. asserted patents (however Judge Orrick of the U.S. District Court for the Northern District of California enjoined Huawei from enforcing the injunction).

Current jurisprudence on injunctive relief with respect to FRAND encumbered SEPs is that there is no per se ban on these reliefs. However, courts have been very reluctant to actually grant them. While injunctions are statutory remedies, and granted automatically in most cases when a patent is found to be infringed, administrative agencies and courts have held a position that shows that FRAND commitments certainly limit this premise.

Following the eBay decision in the U.S., defendants in infringement claims involving SEPs have argued that permanent injunctions should not be available for FRAND-encumbered SEPs and were upheld in cases such as Apple v. Motorola in 2014 (where Judge Randall Radar also makes a sound case for evidence of a hold out by Apple in his dissenting order). However, in an institutional bargaining framework of FRAND, which is based on a mutuality of considerations, such a recourse is misplaced and likely to inevitably disturb this balance. The current narrative on FRAND that dominates policymaking and jurisprudence is incomplete in its unilateral focus of avoiding the possible problem of a patent hold up in the absence of concrete evidence indicating its probability. In Ericsson v D-Links Judge Davis of the US Court of Appeals for the Federal Circuit underscored this point when he observed that “if an accused infringer wants an instruction on patent hold-up and royalty stacking [to be given to the jury], it must provide evidence on the record of patent hold-up and royalty stacking.”

Remedies emanating from a one sided perspective tilt the bargaining dynamic in favour of implementers and if the worst penalty a SEP infringer has to pay is the FRAND royalty it would have otherwise paid beforehand, then a hold out or a reverse hold up by implementers becomes a very profitable strategy. Remedies for patent infringement cannot be ignored because they are also core to the framework for licensing negotiations and ensuring compliance by licensees. A disproportionate reliance on liability rules over property rights is likely to exacerbate the countervailing problem of hold out and detrimentally impact incentives to innovate, ultimately undermining the welfare goals that such enforcement seeks to achieve.

The Court of Appeal has therefore given valuable guidance in its decision when it noted:

Just as implementers need protection, so too do the SEP owners. They are entitled to an appropriate reward for carrying out their research and development activities and for engaging with the standardization process, and they must be able to prevent technology users from free-riding on their innovations. It is therefore important that implementers engage constructively in any FRAND negotiation and, where necessary, agree to submit to the outcome of an appropriate FRAND determination.

Hopefully this order brings with it some balance in FRAND negotiations as well as a shift in the perspective of courts in how they adjudicate on these litigations. It underscores an oft forgotten principle that is core to the FRAND framework- that FRAND is a two-way street, as was observed in the celebrated case of Huawei v. ZTE in 2015.

Senator Mark Warner has proposed 20 policy prescriptions for bringing “big tech” to heel. The proposals — which run the gamut from policing foreign advertising on social networks to regulating feared competitive harms — provide much interesting material for Congress to consider.

On the positive side, Senator Warner introduces the idea that online platforms may be able to function as least-cost avoiders with respect to certain tortious behavior of their users. He advocates for platforms to implement technology that would help control the spread of content that courts have found violated certain rights of third-parties.

Yet, on other accounts — specifically the imposition of an “interoperability” mandate on platforms — his proposals risk doing more harm than good.

The interoperability mandate was included by Senator Warner in order to “blunt [tech platforms’] ability to leverage their dominance over one market or feature into complementary or adjacent markets or products.” According to Senator Warner, such a measure would enable startups to offset the advantages that arise from network effects on large tech platforms by building their services more easily on the backs of successful incumbents.

Whatever you think of the moats created by network effects, the example of “successful” previous regulation on this issue that Senator Warner relies upon is perplexing:

A prominent template for [imposing interoperability requirements] was in the AOL/Time Warner merger, where the FCC identified instant messaging as the ‘killer app’ – the app so popular and dominant that it would drive consumers to continue to pay for AOL service despite the existence of more innovative and efficient email and internet connectivity services. To address this, the FCC required AOL to make its instant messaging service (AIM, which also included a social graph) interoperable with at least one rival immediately and with two other rivals within 6 months.

But the AOL/Time Warner merger and the FCC’s conditions provide an example that demonstrates the exact opposite of what Senator Warner suggests. The much-feared 2001 megamerger prompted, as the Senator notes, fears that the new company would be able to leverage its dominance in the nascent instant messaging market to extend its influence into adjacent product markets.

Except, by 2003, despite it being unclear that AOL had developed interoperable systems, two large competitors had arisen that did not run interoperable IM networks (Yahoo! and Microsoft). In that same period, AOL’s previously 100% IM market share had declined by about half. By 2009, after eight years of heavy losses, Time Warner shed AOL, and by last year AIM was completely dead.

Not only was it not clear that AOL was able to make AIM interoperable, AIM was never able to catch up once better, rival services launched. What the conditions did do, however, was prevent AOL from launching competitive video chat services as it flailed about in the wake of the deal, thus forcing it to miss out on a market opportunity available to unencumbered competitors like Microsoft and Yahoo!

And all of this of course ignores the practical impossibility entailed in interfering in highly integrated technology platforms.

The AOL/Time Warner merger conditions are no template for successful tech regulation. Congress would be ill-advised to rely upon such templates for crafting policy around tech and innovation.

As the Federal Communications (FCC) prepares to revoke its economically harmful “net neutrality” order and replace it with a free market-oriented “Restoring Internet Freedom Order,” the FCC and the Federal Trade Commission (FTC) commendably have announced a joint policy for cooperation on online consumer protection.  According to a December 11 FTC press release:

The Federal Trade Commission and Federal Communications Commission (FCC) announced their intent to enter into a Memorandum of Understanding (MOU) under which the two agencies would coordinate online consumer protection efforts following the adoption of the Restoring Internet Freedom Order.

“The Memorandum of Understanding will be a critical benefit for online consumers because it outlines the robust process by which the FCC and FTC will safeguard the public interest,” said FCC Chairman Ajit Pai. “Instead of saddling the Internet with heavy-handed regulations, we will work together to take targeted action against bad actors. This approach protected a free and open Internet for many years prior to the FCC’s 2015 Title II Order and it will once again following the adoption of the Restoring Internet Freedom Order.”

“The FTC is committed to ensuring that Internet service providers live up to the promises they make to consumers,” said Acting FTC Chairman Maureen K. Ohlhausen. “The MOU we are developing with the FCC, in addition to the decades of FTC law enforcement experience in this area, will help us carry out this important work.”

The draft MOU, which is being released today, outlines a number of ways in which the FCC and FTC will work together to protect consumers, including:

The FCC will review informal complaints concerning the compliance of Internet service providers (ISPs) with the disclosure obligations set forth in the new transparency rule. Those obligations include publicly providing information concerning an ISP’s practices with respect to blocking, throttling, paid prioritization, and congestion management. Should an ISP fail to make the required disclosures—either in whole or in part—the FCC will take enforcement action.

The FTC will investigate and take enforcement action as appropriate against ISPs concerning the accuracy of those disclosures, as well as other deceptive or unfair acts or practices involving their broadband services.

The FCC and the FTC will broadly share legal and technical expertise, including the secure sharing of informal complaints regarding the subject matter of the Restoring Internet Freedom Order. The two agencies also will collaborate on consumer and industry outreach and education.

The FCC’s proposed Restoring Internet Freedom Order, which the agency is expected to vote on at its December 14 meeting, would reverse a 2015 agency decision to reclassify broadband Internet access service as a Title II common carrier service. This previous decision stripped the FTC of its authority to protect consumers and promote competition with respect to Internet service providers because the FTC does not have jurisdiction over common carrier activities.

The FCC’s Restoring Internet Freedom Order would return jurisdiction to the FTC to police the conduct of ISPs, including with respect to their privacy practices. Once adopted, the order will also require broadband Internet access service providers to disclose their network management practices, performance, and commercial terms of service. As the nation’s top consumer protection agency, the FTC will be responsible for holding these providers to the promises they make to consumers.

Particularly noteworthy is the suggestion that the FCC and FTC will work to curb regulatory duplication and competitive empire building – a boon to Internet-related businesses that would be harmed by regulatory excess and uncertainty.  Stay tuned for future developments.

On November 27, the U.S. Supreme Court will turn once again to patent law, hearing cases addressing the constitutionality of Patent Trial and Appeal Board (PTAB) “inter partes” review (Oil States Energy v. Greene), and whether PTAB must issue a final written decision as to every claim challenged by the petitioner in an inter partes review (SAS Institute v. Matal).

As the Justices peruse the bench memos and amicus curiae briefs concerning these cases, their minds will, of course, be focused on legal questions of statutory and constitutional interpretation.  Lurking in the background of these and other patent cases, however, is an overarching economic policy issue – have recent statutory changes and case law interpretations weakened U.S. patent protection in a manner that seriously threatens future American economic growth and innovation?  In a recent Heritage Foundation Legal Memorandum, I responded in the affirmative to this question, and argued that significant statutory reforms are needed to restore the American patent system to a position of global leadership that is key to U.S. economic prosperity.  (Among other things, I noted severe constitutional problems raised by PTAB’s actions, and urged that Congress consider passing legislation to reform PTAB, if the Supreme Court upholds the constitutionality of inter partes review.)

A timely opinion article published yesterday in the Wall Street Journal emphasizes that the decline in American patent protection also has profound negative consequences for American international economic competitiveness.  Journalist David Kline, author of the commentary (“Fear American Complacency, Not China”), succinctly contrasts unfortunate U.S. patent policy developments with the recent strengthening of the Chinese patent system (a matter of high priority to the Chinese Government):

China’s entrepreneurs have been fueled by reforms in recent years that strengthened intellectual property rights—ironic for a country long accused of stealing trade secrets and ignoring IP protections. Today Chinese companies are filing for more patents than American ones. The patent application and examination process has been streamlined, and China has established specialized intellectual property courts and tribunals to adjudicate lawsuits and issue injunctions against infringers. “IP infringers will pay a heavy price,” President Xi Jinping warned this summer. . . .

In the U.S., by contrast, a series of legislative actions and Supreme Court rulings have weakened patent rights, especially for startups. A new way of challenging patents called “inter partes review” results in at least one patent claim being thrown out in roughly 80% of cases, according to an analysis by Adam Mossoff, a law professor at George Mason University. Unsurprisingly, many of these cases were brought by defendants facing patent infringement lawsuits in federal court.

This does not bode well for America’s global competitiveness. The U.S. used to rank first among nations in the strength of its intellectual property rights. But the 2017 edition of the Global IP Index places the U.S. 10th—tied with Hungary.

The Supreme Court may not be able to take judicial notice of this policy reality (although strong purely legal arguments would support a holding that PTAB inter partes review is unconstitutional), but Congress certainly can take legislative notice of it.  Let us hope that Congress acts decisively to strengthen the American patent system – in the interests of a strong, innovative, and internationally competitive American economy.

On November 10, at the University of Southern California Law School, Assistant Attorney General for Antitrust Makan Delrahim delivered an extremely important policy address on the antitrust treatment of standard setting organizations (SSOs).  Delrahim’s remarks outlined a dramatic shift in the Antitrust Division’s approach to controversies concerning the licensing of standard essential patents (SEPs, patents that “read on” SSO technical standards) that are often subject to “fair, reasonable, and non-discriminatory” (FRAND) licensing obligations imposed by SSOs.  In particular, while Delrahim noted the theoretical concerns of possible “holdups” by SEP holders (when SEP holders threaten to delay licensing until their royalty demands are met), he cogently explained why the problem of “holdouts” by implementers of SEP technologies (when implementers threaten to under-invest in the implementation of a standard, or threaten not to take a license at all, until their royalty demands are met) is a far more serious antitrust concern.  More generally, Delrahim stressed the centrality of patents as property rights, and the need for enforcers not to interfere with the legitimate unilateral exploitation of those rights (whether through licensing, refusals to license, or the filing of injunctive actions).  Underlying Delrahim’s commentary is the understanding that innovation is vitally important to the American economy, and the concern that antitrust enforcers’ efforts in recent years have threatened to undermine innovation by inappropriately interfering in free market licensing negotiations between patentees and licensees.

Important “takeaways” from Delrahim’s speech (with key quotations) are set forth below.

  • Thumb on the scale in favor of implementers: “In particular, I worry that we as enforcers have strayed too far in the direction of accommodating the concerns of technology implementers who participate in standard setting bodies, and perhaps risk undermining incentives for IP creators, who are entitled to an appropriate reward for developing break-through technologies.”
  • Striking the right balance through market forces (as opposed to government-issued best practices): “The dueling interests of innovators and implementers always are in tension, and the tension is resolved through the free market, typically in the form of freely negotiated licensing agreements for royalties or reciprocal licenses.”
  • Holdup as theoretical concern with no evidence that it’s a systemic or widespread problem: He praises Professor Carl Shapiro for his theoretical model of holdup, but stresses that “many of the proposed [antitrust] ‘solutions’ to the hold-up problem are often anathema to the policies underlying the intellectual property system envisioned by our forefathers.”
  • Rejects prior position that antitrust is only concerned with the patent-holder side of the holdup equation, stating that he’s more concerned with holdout given the nature of investments: “Too often lost in the debate over the hold-up problem is recognition of a more serious risk:  the hold-out problem. . . . I view the collective hold-out problem as a more serious impediment to innovation.  Here is why: most importantly, the hold-up and hold-out problems are not symmetric.  What do I mean by that?  It is important to recognize that innovators make an investment before they know whether that investment will ever pay off.  If the implementers hold out, the innovator has no recourse, even if the innovation is successful.  In contrast, the implementer has some buffer against the risk of hold-up because at least some of its investments occur after royalty rates for new technology could have been determined.  Because this asymmetry exists, under-investment by the innovator should be of greater concern than under-investment by the implementer.”
  • What’s at stake: “Every incremental shift in bargaining leverage toward implementers of new technologies acting in concert can undermine incentives to innovate.  I therefore view policy proposals with a one-sided focus on the hold-up issue with great skepticism because they can pose a serious threat to the innovative process.”
  • Breach of FRAND as primarily a contract or fraud, not antitrust issue: “There is a growing trend supporting what I would view as a misuse of antitrust or competition law, purportedly motivated by the fear of so-called patent hold-up, to police private commitments that IP holders make in order to be considered for inclusion in a standard.  This trend is troublesome.  If a patent holder violates its commitments to an SSO, the first and best line of defense, I submit, is the SSO itself and its participants. . . . If a patent holder is alleged to have violated a commitment to a standard setting organization, that action may have some impact on competition.  But, I respectfully submit, that does not mean the heavy hand of antitrust necessarily is the appropriate remedy for the would-be licensee—or the enforcement agency.  There are perfectly adequate and more appropriate common law and statutory remedies available to the SSO or its members.”
  • Recommends that unilateral refusals to license should be per se lawful: “The enforcement of valid patent rights should not be a violation of antitrust law.  A patent holder cannot violate the antitrust laws by properly exercising the rights patents confer, such as seeking an injunction or refusing to license such a patent.  Set aside whether taking these actions might violate the common law.  Under the antitrust laws, I humbly submit that a unilateral refusal to license a valid patent should be per se legal.  Indeed, just this Monday, Chief Judge Diane Wood, a former Deputy Assistant Attorney General at the Antitrust Division, stated that “[e]ven monopolists are almost never required to assist their competitors.”
  • Intent to investigate buyers’ cartel behavior in SSOs: “The prospect of hold-out offers implementers a crucial bargaining chip.  Unlike the unilateral hold-up problem, implementers can impose this leverage before they make significant investments in new technology.  . . . The Antitrust Division will carefully scrutinize what appears to be cartel-like anticompetitive behavior among SSO participants, either on the innovator or implementer side.  The old notion that ‘openness’ alone is sufficient to guard against cartel-like behavior in SSOs may be outdated, given the evolution of SSOs beyond strictly objective technical endeavors. . . . I likewise urge SSOs to be proactive in evaluating their own rules, both at the inception of the organization, and routinely thereafter.  In fact, SSOs would be well advised to implement and maintain internal antitrust compliance programs and regularly assess whether their rules, or the application of those rules, are or may become anticompetitive.”
  • Basing royalties on the “smallest salable component” as a requirement by a concerted agreement of implementers is a possible antitrust violation: “If an SSO pegs its definition of “reasonable” royalties to a single Georgia-Pacific factor that heavily favors either implementers or innovators, then the process that led to such a rule deserves close antitrust scrutiny.  While the so-called ‘smallest salable component’ rule may be a useful tool among many in determining patent infringement damages for multi-component products, its use as a requirement by a concerted agreement of implementers as the exclusive determinant of patent royalties may very well warrant antitrust scrutiny.”
  • Right to Injunctive Relief and holdout incentives: “Patents are a form of property, and the right to exclude is one of the most fundamental bargaining rights a property owner possesses.  Rules that deprive a patent holder from exercising this right—whether imposed by an SSO or by a court—undermine the incentive to innovate and worsen the problem of hold-out.  After all, without the threat of an injunction, the implementer can proceed to infringe without a license, knowing that it is only on the hook only for reasonable royalties.”
  • Seeking or Enforcing Injunctive Relief Generally a Contract Not Antitrust Issue: “It is just as important to recognize that a violation by a patent holder of an SSO rule that restricts a patent-holder’s right to seek injunctive relief should be appropriately the subject of a contract or fraud action, and rarely if ever should be an antitrust violation.”
  • FRAND is Not a Compulsory Licensing Scheme: “We should not transform commitments to license on FRAND terms into a compulsory licensing scheme.  Indeed, we have had strong policies against compulsory licensing, which effectively devalues intellectual property rights, including in most of our trade agreements, such as the TRIPS agreement of the WTO.  If an SSO requires innovators to submit to such a scheme as a condition for inclusion in a standard, we should view the SSO’s rule and the process leading to it with suspicion, and certainly not condemn the use of such injunctive relief as an antitrust violation where a contract remedy is perfectly adequate.”

It’s fitting that FCC Chairman Ajit Pai recently compared his predecessor’s jettisoning of the FCC’s light touch framework for Internet access regulation without hard evidence to the Oklahoma City Thunder’s James Harden trade. That infamous deal broke up a young nucleus of three of the best players in the NBA in 2012 because keeping all three might someday create salary cap concerns. What few saw coming was a new TV deal in 2015 that sent the salary cap soaring.

If it’s hard to predict how the market will evolve in the closed world of professional basketball, predictions about the path of Internet innovation are an order of magnitude harder — especially for those making crucial decisions with a lot of money at stake.

The FCC’s answer for what it considered to be the dangerous unpredictability of Internet innovation was to write itself a blank check of authority to regulate ISPs in the 2015 Open Internet Order (OIO), embodied in what is referred to as the “Internet conduct standard.” This standard expanded the scope of Internet access regulation well beyond the core principle of preserving openness (i.e., ensuring that any legal content can be accessed by all users) by granting the FCC the unbounded, discretionary authority to define and address “new and novel threats to the Internet.”

When asked about what the standard meant (not long after writing it), former Chairman Tom Wheeler replied,

We don’t really know. We don’t know where things will go next. We have created a playing field where there are known rules, and the FCC will sit there as a referee and will throw the flag.

Somehow, former Chairman Wheeler would have us believe that an amorphous standard that means whatever the agency (or its Enforcement Bureau) says it means created a playing field with “known rules.” But claiming such broad authority is hardly the light-touch approach marketed to the public. Instead, this ill-conceived standard allows the FCC to wade as deeply as it chooses into how an ISP organizes its business and how it manages its network traffic.

Such an approach is destined to undermine, rather than further, the objectives of Internet openness, as embodied in Chairman Powell’s 2005 Internet Policy Statement:

To foster creation, adoption and use of Internet broadband content, applications, services and attachments, and to ensure consumers benefit from the innovation that comes from competition.

Instead, the Internet conduct standard is emblematic of how an off-the-rails quest to heavily regulate one specific component of the complex Internet ecosystem results in arbitrary regulatory imbalances — e.g., between ISPs and over-the-top (OTT) or edge providers that offer similar services such as video streaming or voice calling.

As Boston College Law Professor, Dan Lyons, puts it:

While many might assume that, in theory, what’s good for Netflix is good for consumers, the reality is more complex. To protect innovation at the edge of the Internet ecosystem, the Commission’s sweeping rules reduce the opportunity for consumer-friendly innovation elsewhere, namely by facilities-based broadband providers.

This is no recipe for innovation, nor does it coherently distinguish between practices that might impede competition and innovation on the Internet and those that are merely politically disfavored, for any reason or no reason at all.

Free data madness

The Internet conduct standard’s unholy combination of unfettered discretion and the impulse to micromanage can (and will) be deployed without credible justification to the detriment of consumers and innovation. Nowhere has this been more evident than in the confusion surrounding the regulation of “free data.”

Free data, like T-Mobile’s Binge On program, is data consumed by a user that has been subsidized by a mobile operator or a content provider. The vertical arrangements between operators and content providers creating the free data offerings provide many benefits to consumers, including enabling subscribers to consume more data (or, for low-income users, to consume data in the first place), facilitating product differentiation by mobile operators that offer a variety of free data plans (including allowing smaller operators the chance to get a leg up on competitors by assembling a market-share-winning plan), increasing the overall consumption of content, and reducing users’ cost of obtaining information. It’s also fundamentally about experimentation. As the International Center for Law & Economics (ICLE) recently explained:

Offering some services at subsidized or zero prices frees up resources (and, where applicable, data under a user’s data cap) enabling users to experiment with new, less-familiar alternatives. Where a user might not find it worthwhile to spend his marginal dollar on an unfamiliar or less-preferred service, differentiated pricing loosens the user’s budget constraint, and may make him more, not less, likely to use alternative services.

In December 2015 then-Chairman Tom Wheeler used his newfound discretion to launch a 13-month “inquiry” into free data practices before preliminarily finding some to be in violation of the standard. Without identifying any actual harm, Wheeler concluded that free data plans “may raise” economic and public policy issues that “may harm consumers and competition.”

After assuming the reins at the FCC, Chairman Pai swiftly put an end to that nonsense, saying that the Commission had better things to do (like removing barriers to broadband deployment) than denying free data plans that expand Internet access and are immensely popular, especially among low-income Americans.

The global morass of free data regulation

But as long as the Internet conduct standard remains on the books, it implicitly grants the US’s imprimatur to harmful policies and regulatory capriciousness in other countries that look to the US for persuasive authority. While Chairman Pai’s decisive intervention resolved the free data debate in the US (at least for now), other countries are still grappling with whether to prohibit the practice, allow it, or allow it with various restrictions.

In Europe, the 2016 EC guidelines left the decision of whether to allow the practice in the hands of national regulators. Consequently, some regulators — in Hungary, Sweden, and the Netherlands (although there the ban was recently overturned in court) — have banned free data practices  while others — in Denmark, Germany, Spain, Poland, the United Kingdom, and Ukraine — have not. And whether or not they allow the practice, regulators (e.g., Norway’s Nkom and the UK’s Ofcom) have lamented the lack of regulatory certainty surrounding free data programs, a state of affairs that is compounded by a lack of data on the consequences of various approaches to their regulation.

In Canada this year, the CRTC issued a decision adopting restrictive criteria under which to evaluate free data plans. The criteria include assessing the degree to which the treatment of data is agnostic, whether the free data offer is exclusive to certain customers or certain content providers, the impact on Internet openness and innovation, and whether there is financial compensation involved. The standard is open-ended, and free data plans as they are offered in the US would “likely raise concerns.”

Other regulators are contributing to the confusion through ambiguously framed rules, such as that of the Chilean regulator, Subtel. In a 2014 decision, it found that a free data offer of specific social network apps was in breach of Chile’s Internet rules. In contrast to what is commonly reported, however, Subtel did not ban free data. Instead, it required mobile operators to change how they promote such services, requiring them to state that access to Facebook, Twitter and WhatsApp were offered “without discounting the user’s balance” instead of “at no cost.” It also required them to disclose the amount of time the offer would be available, but imposed no mandatory limit.

In addition to this confusing regulatory make-work governing how operators market free data plans, the Chilean measures also require that mobile operators offer free data to subscribers who pay for a data plan, in order to ensure free data isn’t the only option users have to access the Internet.

The result is that in Chile today free data plans are widely offered by Movistar, Claro, and Entel and include access to apps such as Facebook, WhatsApp, Twitter, Instagram, Pokemon Go, Waze, Snapchat, Apple Music, Spotify, Netflix or YouTube — even though Subtel has nominally declared such plans to be in violation of Chile’s net neutrality rules.

Other regulators are searching for palatable alternatives to both flex their regulatory muscle to govern Internet access, while simultaneously making free data work. The Indian regulator, TRAI, famously banned free data in February 2016. But the story doesn’t end there. After seeing the potential value of free data in unserved and underserved, low-income areas, TRAI proposed implementing government-sanctioned free data. The proposed scheme would provide rural subscribers with 100 MB of free data per month, funded through the country’s universal service fund. To ensure that there would be no vertical agreements between content providers and mobile operators, TRAI recommended introducing third parties, referred to as “aggregators,” that would facilitate mobile-operator-agnostic arrangements.

The result is a nonsensical, if vaguely well-intentioned, threading of the needle between the perceived need to (over-)regulate access providers and the determination to expand access. Notwithstanding the Indian government’s awareness that free data will help to close the digital divide and enhance Internet access, in other words, it nonetheless banned private markets from employing private capital to achieve that very result, preferring instead non-market processes which are unlikely to be nearly as nimble or as effective — and yet still ultimately offer “non-neutral” options for consumers.

Thinking globally, acting locally (by ditching the Internet conduct standard)

Where it is permitted, free data is undergoing explosive adoption among mobile operators. Currently in the US, for example, all major mobile operators offer some form of free data or unlimited plan to subscribers. And, as a result, free data is proving itself as a business model for users’ early stage experimentation and adoption of augmented reality, virtual reality and other cutting-edge technologies that represent the Internet’s next wave — but that also use vast amounts of data. Were the US to cut off free data at the legs under the OIO absent hard evidence of harm, it would substantially undermine this innovation.

The application of the nebulous Internet conduct standard to free data is a microcosm of the current incoherence: It is a rule rife with a parade of uncertainties and only theoretical problems, needlessly saddling companies with enforcement risk, all in the name of preserving and promoting innovation and openness. As even some of the staunchest proponents of net neutrality have recognized, only companies that can afford years of litigation can be expected to thrive in such an environment.

In the face of confusion and uncertainty globally, the US is now poised to provide leadership grounded in sound policy that promotes innovation. As ICLE noted last month, Chairman Pai took a crucial step toward re-imposing economic rigor and the rule of law at the FCC by questioning the unprecedented and ill-supported expansion of FCC authority that undergirds the OIO in general and the Internet conduct standard in particular. Today the agency will take the next step by voting on Chairman Pai’s proposed rulemaking. Wherever the new proceeding leads, it’s a welcome opportunity to analyze the issues with a degree of rigor that has thus far been appallingly absent.

And we should not forget that there’s a direct solution to these ambiguities that would avoid the undulations of subsequent FCC policy fights: Congress could (and should) pass legislation implementing a regulatory framework grounded in sound economics and empirical evidence that allows for consumers to benefit from the vast number of procompetitive vertical agreements (such as free data plans), while still facilitating a means for policing conduct that may actually harm consumers.

The Golden State Warriors are the heavy odds-on favorite to win another NBA Championship this summer, led by former OKC player Kevin Durant. And James Harden is a contender for league MVP. We can’t always turn back the clock on a terrible decision, hastily made before enough evidence has been gathered, but Chairman Pai’s efforts present a rare opportunity to do so.

Allen Gibby is a Senior Fellow at the International Center for Law & Economics

Modern agriculture companies like Monsanto, DuPont, and Syngenta, develop cutting-edge seeds containing genetic traits that make them resistant to insecticides and herbicides. They also  develop crop protection chemicals to use throughout the life of the crop to further safeguard from pests, weeds and grasses, and disease. No single company has a monopoly on all the high-demand seeds and traits or crop protection products. Thus, in order for Company A to produce a variety of corn that is resistant to Company B’s herbicide, it may have to license a trait patented by Company B in order to even begin researching its product, and it may need further licenses (and other inputs) from Company B as its research progresses in unpredictable directions.

While the agriculture industry has a long history of successful cross-licensing arrangements between agricultural input providers, licensing talks can break down (and do so for any number of reasons), potentially thwarting a nascent product before research has even begun — or, possibly worse, well into its development. The cost of such a breakdown isn’t merely the loss of the intended product; it’s also the loss of the other products Company A could have been developing, as well as the costs of negotiation.

To eschew this outcome, as well as avoid other challenges such as waiting years for Company B to fully develop and make available a chemical before it engages in in arm’s length negotiations with Company A, one solution is for Company A and Company B to merge and combine their expertise to design novel seeds and traits and complementary crop protection products.

The potential for this type of integration seems evident in the proposed Dow-DuPont and Bayer-Monsanto deals where, of the companies merging, one earns most of its revenue from seeds and traits (DuPont and Monsanto) and the other from crop protection (Dow and Bayer).

Do the complementary aspects inherent in these deals increase the likelihood that the merged entities will gain the ability and the incentive to prevent entry, foreclose competitors, and thereby harm consumers?  

Diana Moss, who will surely have more to say on this in her post, believes the answer is yes. She recently voiced concerns during a Senate hearing that the Dow-DuPont and Bayer-Monsanto mergers would have negative conglomerate effects. According to Moss’s testimony, the mergers would create:

substantial vertical integration between traits, seeds, and chemicals. The resulting “platforms” will likely be engineered for the purpose of creating exclusive packages of traits, seeds and chemicals for farmers that do not “interoperate” with rival products. This will likely raise barriers for smaller innovators and increase the risk that they are foreclosed from access to technology and other resources to compete effectively.

Decades of antitrust policy and practice present a different perspective, however. While it’s true that the combined entities certainly might offer combined stacks of products to farmers, doing so would enable Dow-DuPont and Bayer-Monsanto to vigorously innovate and compete with each other, a combined ChemChina-Syngenta, and an increasing number of agriculture and biotechnology startups (per AgFunder, investments in such startups totaled $719 million in 2016, representing a 150% increase from 2015’s figure).

More importantly, the complaint assumes that the only, or predominant, effect of such integration would be to erect barriers to entry, rather than to improve product quality, offer expanded choices to consumers, and enhance competition.

Concerns about conglomerate effects making life harder for small businesses are not new. From 1965 to 1975, the United States experienced numerous conglomerate mergers. Among the theories of competitive harm advanced by the courts and antitrust authorities to address their envisioned negative effects was entrenchment. Under this theory, mergers could be blocked if they strengthened an incumbent firm through increased efficiencies not available to other firms, access to a broader line of products, or increased financial muscle to discourage entry.

While a nice theory, for over a decade the DoJ could not identify any conditions under which conglomerate effects would give the merged firm the ability and incentive to raise price and restrict output. The DoJ determined that the harms of foreclosure and barriers to smaller businesses were remote and easily outweighed by the potential benefits, which include

providing infusions of capital, improving management efficiency either through replacement of mediocre executives or reinforcement of good ones with superior financial control and management information systems, transfer of technical and marketing know-how and best practices across traditional industry lines; meshing of research and distribution; increasing ability to ride out economic fluctuations through diversification; and providing owners-managers a market for selling the enterprises they created, thus encouraging entrepreneurship and risk-taking.

Consequently, the DoJ concluded that it should rarely, if ever, interfere to mitigate conglomerate effects in the 1982 Merger Guidelines.

In the Dow-DuPont and Bayer-Monsanto deals, there are no overwhelming factors that would contradict the presumption that the conglomerate effects of improved product quality and expanded choices for farmers outweigh the potential harms.

To find such harms, the DoJ reasoned, would require satisfying a highly attenuated chain of causation that “invites competition authorities to speculate about what the future is likely to bring.” Such speculation — which includes but is not limited to: weighing whether rivals can match the merged firm’s costs, whether rivals will exit, whether firms will not re-enter the market in response to price increases above pre-merger levels, and whether what buyers gain through prices set below pre-merger levels is less than what they later lose through paying higher than pre-merger prices — does not inspire confidence that even the most clairvoyant regulator would properly make trade-offs that would ultimately benefit consumers.

Moss’s argument also presumes that the merger would compel farmers to purchase the potentially “exclusive packages of traits, seeds and chemicals… that do not ‘interoperate’ with rival products.” But while there aren’t a large number of “platform” competitors in agribusiness, there are still enough to provide viable alternatives to any “exclusive packages” and cross-licensed combinations of seeds, traits, and chemicals that Dow-DuPont and Bayer-Monsanto may attempt to sell.

First, even if a rival fails to offer an equally “good deal” or suffers a loss of sales or market share, it would be illogical, the DoJ concluded, to condemn mergers that promote benefits such as resource savings, more efficient production modes, and efficient bundling (i.e., bundling that benefits customers by offering them improved products, lower prices or lower transactions costs due to the purchase of a combined stack through a “one-stop shop”). As Robert Bork put it, far from “frightening smaller companies into semi-paralysis,” conglomerate mergers that generate greater efficiencies will force smaller competitors to compete more effectively, making consumers better off.

Second, it is highly unlikely these deals will adversely affect the long-standing prevalence of cross-licensing arrangements between agricultural input providers. Agriculture companies have a long history of supplying competitors with products while simultaneously competing with them. For decades, antitrust scholars have been skeptical of claims that firms have incentives to deal unreasonably with providers of complementary products, and the ag-biotech industry seems to bear this out. This is because discriminating anticompetitively against complements often devalues the firm’s own platform. For example, Apple’s App Store is more valuable to iPhone users because it includes messaging apps like WeChat, WhatsApp, and Facebook Messenger, even though they compete directly with iMessage and FaceTime. By excluding these apps, Apple would devalue the iPhone to hundreds of millions of its users who also use these apps.

In the case of the pending mergers, not only would a combined Dow-DuPont and Bayer-Monsanto offer their own combined stacks, their platforms increase in value by providing a broad suite of alternative cross-licensed product combinations. And, of course, the combined stack (independent of whether it’s entirely produced by a Dow-DuPont or Bayer-Monsanto) that offers sufficiently increased value to farmers over other packages or non-packaged alternatives, will — and should — win in the end.

The Dow-DuPont and Bayer-Monsanto mergers are an opportunity to remember why, decades ago, the DoJ concluded that it should rarely, if ever, interfere to mitigate conglomerate effects and an occasion to highlight the incentives that providers of complementary products have to deal reasonably with one another.

 

The TCPA is an Antiquated Law

The TCPA is an Antiquated Law

The Telephone Consumer Protection Act (“TCPA”) is back in the news following a letter sent to PayPal from the Enforcement Bureau of the FCC.  At issue are amendments that PayPal intends to introduce into its end user agreement. Specifically, PayPal is planning on including an automated call and text message system with which it would reach out to its users to inform them of account updates, perform quality assurance checks, and provide promotional offers.

Enter the TCPA, which, as the Enforcement Bureau noted in its letter, has been used for over twenty years by the FCC to “protect consumers from harassing, intrusive, and unwanted calls and text messages.” The FCC has two primary concerns in its warning to PayPal. First, there was no formal agreement between PayPal and its users that would satisfy the FCC’s rules and allow PayPal to use an automated call system. And, perhaps most importantly, PayPal is not entitled to simply attach an “automated calls” clause to its user agreement as a condition of providing the PayPal service (as it clearly intends to do with its amendments).

There are a number of things wrong with the TCPA and the FCC’s decision to enforce its provisions against PayPal in the current instance. The FCC has the power to provide for some limited exemptions to the TCPA’s prohibition on automated dialing systems. Most applicable here, the FCC has the discretion to provide exemptions where calls to cell phone users won’t result in those users being billed for the calls. Although most consumers still buy plans that allot minutes for their monthly use, the practical reality for most cell phone users is that they no longer need to count minutes for every call. Users typically have a large number of minutes on their plans, and certainly many of those minutes can go unused. It seems that the progression of technology and the economics of cellphones over the last twenty-five years should warrant a Congressional revisit to the underlying justifications of at least this prohibition in the TCPA.

However, exceptions aside, there remains a much larger issue with the TCPA, one that is also rooted in the outdated technological assumptions underlying the law. The TCPA was meant to prevent dedicated telemarketing companies from using the latest in “automated dialing” technology circa 1991 from harassing people. It was not intended to stymie legitimate businesses from experimenting with more efficient methods of contacting their own customers.

The text of the law underscores its technological antiquity:  according to the TCPA, an “automatic telephone dialing system” means equipment which “has the capacity” to sequentially dial random numbers. This is to say, the equipment that was contemplated when the law was written was software-enabled phones that were purpose built to enable telemarketing firms to make blanket cold calls to every number in a given area code. The language clearly doesn’t contemplate phones connected to general purpose computing resources, as most phone systems are today.

The modern phone systems, connected to intelligent computer backends, are designed to flexibly reach out to hundreds or thousands of existing customers at a time, and in a way that efficiently enhances the customer’s experience with the company. Technically, yes, these systems are capable of auto-dialing a large number of random recipients; however, when a company like PayPal uses this technology, its purpose is clearly different than that employed by the equivalent of spammers on the phone system. Not having a nexus between an intent to random-dial and a particular harm experienced by an end user is a major hole in the TCPA. Particularly in this case, it seems fairly absurd that the TCPA could be used to prevent PayPal from interacting with its own customers.

Further, there is a lot at stake for those accused of violating the TCPA. In the PayPal warning letter, the FCC noted that it is empowered to levy a $16,000 fine per call or text message that it finds violates the terms of the TCPA. That’s bad, but it’s nowhere near as bad as it could get. The TCPA also contains a private right of action that was meant to encourage individual consumers to take telemarketers to small claims court in their local state.  Each individual consumer is entitled to receive provable damages or statutory damages of $500.00, whichever is greater. If willfulness can be proven, the damages are trebled, which in effect means that most individual plaintiffs in the know will plead willfulness, and wait for either a settlement conference or trial to sort the particulars out.

However, over the years a cottage industry has built up around class action lawyers aggregating “harmed” plaintiffs who had received unwanted automatic calls or texts, and forcing settlements in the tens of millions of dollars. The math is pretty simple. A large company with lots of customers may be tempted to use an automatic system to send out account information and offer alerts. If it sends out five hundred thousand auto calls or texts, that could result in “damages” in the amount of $250M in a class action suit. A settlement for five or ten million dollars is a deal by comparison. For instance, in 2013 Bank of America entered into a $32M settlement for texts and calls made between 2007 and 2013 to 7.7 million people.  If they had gone to trial and lost, the damages could have been as much as $3.8B!

The purpose of the TCPA was to prevent abusive telemarketers from harassing people, not to defeat the use of an entire technology that can be employed to increase efficiency for businesses and lower costs for consumers. The per call penalties associated with violating the TCPA, along with imprecise and antiquated language in the law, provide a major incentive to use the legal system to punish well-meaning companies that are just operating their non-telemarketing businesses in a reasonable manner. It’s time to seriously revise this law in light of the changes in technology over the past twenty-five years.

image

Please join us at the Willard Hotel in Washington, DC on December 16th for a conference launching the year-long project, “FTC: Technology and Reform.” With complex technological issues increasingly on the FTC’s docket, we will consider what it means that the FTC is fast becoming the Federal Technology Commission.

The FTC: Technology & Reform Project brings together a unique collection of experts on the law, economics, and technology of competition and consumer protection to consider challenges facing the FTC in general, and especially regarding its regulation of technology.

For many, new technologies represent “challenges” to the agency, a continuous stream of complex threats to consumers that can be mitigated only by ongoing regulatory vigilance. We view technology differently, as an overwhelmingly positive force for consumers. To us, the FTC’s role is to promote the consumer benefits of new technology — not to “tame the beast” but to intervene only with caution, when the likely consumer benefits of regulation outweigh the risk of regulatory error. This conference is the start of a year-long project that will recommend concrete reforms to ensure that the FTC’s treatment of technology works to make consumers better off. Continue Reading…

Larry Downes (who, like me, is a senior fellow at TechFreedom and a contributor to the excellent book, The Next Digital Decade: Essays on the Future of the Internet) and I taped an episode of Jim Glassman’s talking head show, Ideas in Action, a couple months ago, and it is airing this week on PBS stations around the country.  Except in Portland, where I live.  But have no fear–because the Internet remains sufficiently unregulated, you can get it right here.  The topic is “The Next Digital Decade: How Will the Internet Change by 2020?”  It’s a narrow topic.  In the 27 minutes allotted, we manage to cover telecom regulation, antitrust, net neutrality, privacy, IP, standards, public choice theory, culture, political repression, technological innovation and a few more topics for good measure.  Not to spoil the ending, but asked at the end what we thought the biggest danger to the Internet is in the coming decade, I answered errant antitrust enforcement (when the only tool you have is a hammer . . .); Larry answered privacy.  Enjoy.