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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.

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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.

Today comes news that Senator Kohl has sent a letter to the DOJ urging “careful review” of the proposed Google/ITA merger.  Underlying his concerns (or rather the “concerns raised by a number of industry participants and consumer advocates that I believe warrant careful review”) is this:

Many of ITA’s customers believe that access to ITA’s technology is critical to competition in online air travel search because it cannot be matched by other players in the travel search industry.  They claim that ITA’s superior access to information and superior technology enables it to provide faster and better results to consumers.  As a result, some of these industry participants and independent experts fear that the current high level of competition among online travel agents and metasearch providers could be undermined if Google were to acquire ITA and start its own OTA or metasearch service.  If this were to happen, they argue, consumers would lose the benefits of a robustly competitive online air travel market.

For several reasons, these complaints are without merit and a challenge to the Google/ITA merger would be premature at best—and a costly mistake at worst.

The high-tech market is innovative and dynamic. Goods and services that were once inconceivable are now indispensable, and competition has improved the quality of technology while driving down its costs. But as the market continues to change, antitrust interventions are stuck using a static regulatory framework. As the government develops a strategy for regulating competition in the digital marketplace, it must tread carefully—excessive intervention will stifle innovation, harm consumers, and prevent growth.  And given the link between innovation and economic growth, the stakes of “getting it right” are high. The individual nature of every decision, however, makes errors in antitrust enforcement inevitable. Some conduct that is bad for competition will be allowed to go on while some conduct that is good for competition will be blocked by intervention.

But prosecuting pro-competitive conduct is almost certainly more costly than mistakenly allowing anticompetitive conduct because mechanisms are in place to mitigate the latter but not the former. The cost of erroneous intervention is the loss to consumers directly and a deterrent effect on innovation—for fear of intervention, companies may not take large risks. Meanwhile, allowing conduct to persist amidst uncertainty allows the potential benefits of conduct to materialize while maintaining checks against practices that are bad for consumers: both the competitive marketplace and future enforcers have the power to mitigate specific anticompetitive outcomes that may arise. Unfortunately, current antitrust enforcement—abetted by influential congressmen like Senator Kohl—is more, rather than less, aggressive against innovative companies in high-tech industries. This aggression threatens to stifle growth and deter future innovation in a market with incredible potential.

Google has become a primary target of this scrutiny, and the company’s proposed acquisition of ITA, a software company that compiles and processes travel data, is a good example of aggressive scrutiny threatening to stifle growth.

Google’s acquisition of ITA is a straightforward merger where one company has decided to purchase another outright (instead of merely purchasing its services through contract). There are good reasons for integration. Most notably, Google gets to exercise direct control over ITA’s talented engineers if it owns ITA—influence that it would not have if the company simply signed a contract with ITA. If Google is correct that it can manage ITA’s resources better than ITA’s current management, then integration makes sense and is valuable for consumers.

The primary concern raised over Google’s proposed acquisition of ITA is that acquisition would “leverage” Google’s alleged dominance into another market—the online travel search market—and permit Google to prevent its competitors from accessing ITA’s high-quality analysis of flights and fares.

There are a few problems with this.

  • First, ITA does not provide or own the underlying data (this comes from the airlines themselves); rather it works only to analyze and process it—processing that other companies can and do undertake.  It may have developed superior technology to engage in this processing, but that is precisely why it (and consumers) should not be penalized by its competitors’ efforts to hamstring it.  Remember—although most of the hand-wringing surrounding this deal concerns Google, it is first and foremost the innovative entrepreneurs at ITA who would be prevented from capitalizing on their success if the deal is stopped.
  • Second, it is hard to see why, under the facts as alleged by the deal’s naysayers, consumers would be worse off if Google owns ITA than if ITA stands on its own.  The claims seem to turn on ITA’s indispensability to the online travel industry.  But if ITA is so indispensable—if it possesses such market power, in other words—it’s hard to see how its incentives to capitalize on that market power would change simply by virtue of a change in its management.  Either ITA possesses market power and is already taking advantage of it (or else its managers are leaving money on the table and it most certainly should be taken over by another set of managers) or else it does not actually possess this market power and its combination with Google, even if Google were to keep all of ITA’s technology for itself, will do little to harm the rest of the industry as its competitors step up and step in to take its place.
  • Third and related to these is the simple repugnance of hamstringing successful entrepreneurs because of the exhortations of their competitors, and the implication that a successful company’s work product (like ITA’s “superior technology”) must be rendered widely-available, by government force if necessary.
  • Meanwhile, Google does not seem to have any interest in selling airline tickets or making airline reservations (just as it doesn’t sell the retail goods one can search for using its site). Instead, its interest is in providing its users easy access to airline flight and pricing data and giving online travel agencies the ability to bid on the sale of tickets to Google users looking to buy. The availability of this information via Google search will lower search costs for consumers and the expected bidding should increase competition and drive down travel costs for consumers.  It is easy to see why companies like Kayak and Bing Travel and Expedia and Travelocity might be unhappy about this, but far more difficult to see how their woes should be a problem for the antitrust enforcers (or Congress, for that matter).

The point is not that we know that Google—or any other high-tech company’s—conduct is pro-competitive, but rather that the very uncertainty surrounding it counsels caution, not aggression. As the technology, usage and market structure change, so do the strategies of the various businesses that build up around them. These new strategies present unknown and unprecedented challenges to regulators, and these new challenges call for a deferential approach. New conduct is not necessarily anticompetitive conduct, and if our antitrust regulation does not accept this, we all lose.

On November 9, the en banc US Court of Appeals for the Federal Circuit heard oral arguments in an extremely important patent infringement case (mp3 of oral argument here). Hanging in the balance are the very incentives for technological innovation and the seeds of economic progress. The arguments made in the case by the infringer, EchoStar, would have the effect of reducing the certainty and thus the efficacy of patent rights by weakening the ability of the courts to define and enforce patents clearly, quickly and efficiently. While for some commentators this is probably a feature, and not a bug, of EchoStar’s position, I find its stance and its claims to be extremely troublesome.

The litigation, TiVo v. EchoStar, has been raging for more than six years, in which time TiVo has, in fact, prevailed at every turn. In brief, the substantive and procedural history of the case is as follows: The case revolves around TiVo’s valuable patent for digital video recorder (DVR) technology. In April 2006, a jury found that EchoStar had infringed TiVo’s patents and awarded TiVo close to $74 million in damages. The jury also found that EchoStar had acted willfully in infringing the patent. The District Court granted TiVo’s motion for an injunction, which required EchoStar to disable all DVR units for which it had not paid compensatory damages. In the ongoing litigation, EchoStar does not challenge the initial finding of infringement, the initial damage award, or the initial order for injunctive relief. Instead, it seeks to avoid a contempt citation issued by the District Court, in exercise of its continuing jurisdiction over the case, after EchoStar introduced a second device which purported to “design around” the original TiVo patent. After noting the similarity between EchoStar’s original and modified devices, the court conducted a short trial on the question of infringement, after which the court held that EchoStar’s modified device still infringed TiVo’s patent.

Upon examining the technology, the District Court found that EchoStar’s purported design workaround did not embody a new and independent device. Instead EchoStar consciously modified its original infringing device in small ways that it may have believed would preserve its desired functionality without violating TiVo’s ‘389 patent, but failed instead to remove itself from the reach of either TiVo’s patent or the court’s earlier order.

At no point prior to its deployment of its altered technology did EchoStar ask the District Court, which had continuing jurisdiction over the case, to review the new design for patent infringement. EchoStar announced the re-design in a January 2008 press release and in the following months, two years after the original jury verdict of infringement, the District Court learned of the use of the modified EchoStar device.

In light of its finding of near identity between EchoStar’s original and modified DVRs, the District Court relied on KSM Fastening Systems, Inc. v. H.A. Jones Co., Inc., 776 F.2d 1522 (Fed. Cir. 1985), to enter a contempt order against EchoStar for its violation of the original injunctive decree (first finding the two devices to be substantially similar and then assessing in a contempt hearing whether EchoStar’s unilateral deployment of the second device violated the Court’s injunction). EchoStar then sought a stay of the injunction pending appeal. The Federal Circuit granted a stay, but earlier this year it upheld the district court’s contempt finding. The matter was then rescheduled for an en banc hearing. During this entire time, EchoStar has continued to market and use its infringing devices to its immense profit. The question before the en banc Court is whether the District Court’s contempt decree was proper under the controlling precedent.

In essence, every federal judge who has heard this case (save the lone dissenter in the appeal from which the Federal Circuit rehearing was brought) has determined that TiVo was wronged and is owed significant monetary and equitable compensation from EchoStar, as well as the disablement of the adjudicated DVR devices. However, EchoStar has yet to curtail its infringing activity. EchoStar now argues that it should be allowed to continue to evade the judgments against it by forcing TiVo and the courts to endure yet another full trial—to start anew down an almost identical path assessing the propriety of EchoStar’s slightly-modified technology—rather than enforce the existing injunction.

EchoStar is seemingly within the reasonable bounds of due process to suggest that such an outcome might be required if its new technology is sufficiently different than its old. But the question is really one of process: who gets to decide if the technology is sufficiently similar—the District Court that heard the original case and issued the original injunction, or EchoStar? Seen this way, it is evident that the costly, strategic behavior lurking just under the surface of this case and that pervades EchoStar’s conduct belies the innocence of its arguments and points out the enormous cost that establishing such precedent could impose on innovation and the economy more broadly.

At root, this case tests whether courts can realistically enforce their judgments, including, as in this case, the judgment that a patentee has been denied the right to control the use of its patent. The central legal question presented is when a court may enforce its own injunction against an infringer who makes small tweaks to its infringing technology in an effort to avoid the reach of the injunction. Certainly, we want to encourage so-called “work-arounds” that add to the stock of innovation in our economy. But proponents of EchoStar’s view ignore or underweigh the effect on the original innovation itself, as well as the courts. If, by virtue of small tweaks, an infringer can tie up a patent in court for so long that it has the potential to run out the patent’s term, render its exclusivity period worthless, and all the while steal business from the patent-holder in violation of the patentee’s Constitutionally-empowered protection, then initial innovation will be sharply discouraged, to the public’s detriment. The courts should not (and the KSM case seems to me to make clear that they need not) abet this process.

And EchoStar is indeed stealing business from TiVo. The trial judge issued an injunction in this case precisely because EchoStar cannot compensate TiVo for the harm done once EchoStar had built its customer base on the back of TiVo’s unlicensed technology. Since the injunction was issued more than four years ago, EchoStar has continued to build and service its customer base, and has even gone so far as to argue that the lower court’s decision should not be upheld because doing so would harm EchoStar’s customers. These are the very customers who, if EchoStar had not violated TiVo’s intellectual property rights or if the injunction had been enforced, would never have been EchoStar’s customers at all!

Meanwhile, the uncertainty engendered by delayed enforcement and the curtailment of injunctive relief further erodes the value of patents and complicates, rather than eases, the process of economic development. In this case as in others, a potential licensee has chosen to misappropriate patented technology (and take its chances in court) rather than pay for it or forebear from its use. If EchoStar prevails, similarly-situated companies will have even less incentive to seek out deals with patent-holders, instead relying on the courts to carve out for them an extended period of unlicensed use with a bill that comes due years later—assuming the patent holder can afford to litigate for years—and in an amount almost certainly far below the actual benefit conferred.

It is difficult to see how either due process or economic efficiency is furthered by EchoStar’s position. This case demonstrates that a determined infringer can make minor changes, drag out judicial proceedings, and seek to run out the clock on a patent, thereby squandering both judicial resources as well as incentives for innovation. This is particularly true for devices that involve software or other complex products where inconsequential changes can be exaggerated. An EchoStar victory in this case will dim technological progress and diminish the role of the courts in enforcing the property rights that facilitate that progress.