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

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

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

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

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

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

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

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

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

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

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

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

Look out! Lochner is coming!

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

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

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

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

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

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

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

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

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

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

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

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

You Have to Break the Law Before You Raise a Defense

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

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

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

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

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

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

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

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

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

As I noted before,

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

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

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

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

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

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

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

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

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

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

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

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

About a month ago, I was asked by some friends about the shift from the first-to-invent patent system to a first-to-file patent system in the America Invents Act of 2011 (AIA). I was involved briefly in the policy debates in the spring of 2011 leading up to the enactment of the AIA, and so this query prompted me to share a short essay I wrote in May 2011 on this issue. In this essay, I summarized my historical scholarship I had published up to that point in law journals on the legal definition and protection of patents in the Founding Era and in the early American Republic. I concluded that a shift to a first-to-file patent system contradicted both the constitutional text and the early judicial interpretations of the patent statutes that secured patent rights to first inventors.

This legal issue will likely reach the courts one day. A constitutional challenge a couple years ago was rightly dismissed as not being justiciable, but there may yet be an appropriate case in which an inventor is denied a patent given that he or she lost the race to file first in the Patent Office. So, after sharing my essay with my friends, I thought it valuable to post it again on the Internet, because the website on which it was first published (www.noonHR1249.com) slipped into digital oblivion long ago.

I was asked to write this essay in May 2011 by the U.S. Business & Industry Council (USBIC)[1] The USBIC requested my scholarly analysis of the first-to-file provision of the AIA, which was being debated as H.R. 1249 on Capitol Hill at the time, because I had been publishing articles in law journals on the legal definition and protection of patents as property rights in the Founding Era and in the early American Republic (see here and here for two examples). In my essay, I identified the relevant text in the Constitution, which authorizes Congress to secure an exclusive right to “Inventors” in their “Discoveries” (Article 1, Section 8, Clause 8). Based on my academic research, I summarized in my essay the historical Supreme Court and lower federal court decisions, which secured patents to inventors according to the same policy justifications used in common-law cases to justify property rights to first possessors of land. Thus, I concluded that the first-to-file provision in the American Invents Act was unconstitutional, based on well-recognized arguments concerning textual analysis of the Constitution and inferences from original public meaning as reflected in the historical judicial record.

There’s more to my essay, though, than just the substantive legal argument. It also provides an insight into the nature of the legal academic debates going back many years, because at the time Professor Mark Lemley of Stanford Law School compared me to an “Obama-birther” and he called this constitutional and legal argument “fringe science.” Given concerns expressed last year in an open letter co-authored by Professor Lemley and others about inappropriate rhetoric used by academics, among other issues (see here for a news report on this letter), it bears noting for the record that this is a concern that goes back many years.

Here’s the basic story: My essay was published by the USBIC in May 2011 and I was invited to speak in congressional staffer briefings and in other venues in Capitol Hill against the AIA on this issue. At this time, I was the only legal academic writing and speaking on Capitol Hill on this issue in the AIA. In late May, the 21st Century Coalition for Patent Reform, which supported enactment of the AIA, distributed on Capitol Hill a response that it had solicited from Professor Lemley. I no longer possess this response statement that was sent out via email by the 21st Century Coalition, but I do have the response I was asked to write on June 1, 2011 in which I explicitly refer to Professor Lemley’s argument against the first-to-invent position. In response to a law professors’ letter to Congress defending the first-to-file provision in the AIA that was circulated on an IP professors listserv (IPProfs), I sent out on IPProfs on June 11 a draft letter to Congress, calling for signatures from other law professors in support of my argument first presented in my essay (the final version is here). The next day, on June 12, Professor Lemley wrote on Facebook that my constitutional and legal argument made me the same as an “Obama-birther.”[2] Although he didn’t refer directly to me, it was clear that it was directed at me given that this posting by Lemley followed the day after my email to all IP professors asking them to join my letter to Congress, and I also was the only law professor actively writing on this issue and speaking on it on Capitol Hill up until then.

The following year, in a New York Times article on the court challenge to the first-to-file provision, Professor Lemley further characterized this constitutional argument as “the legal equivalent of fringe science.”

Before the spring of 2011, my writings on legal doctrine and policy were published only in law journals, and I had never participated in a policy debate over patent legislation. In my academic articles before this time, I had critiqued Professor Lemley’s incorrect historical claims about whether U.S. patents were considered monopolies or property rights, and they reflected a purely academic tone that one should expect in a law journal article (see here). Before spring 2011, I had never addressed Professor Lemley, nor had he addressed me, about the AIA, other legislation or court cases.

Professor Lemley’s “Obama-birther” attack on me was surprising, and when I replied in the comments to his Facebook post solely on the substantive merits of the issue of policy versus law, Professor Lemley defended his accusation against me. (This is evidenced in the screen shot.)[2] At the time, I was still a relatively junior academic, and this was an object lesson about what a senior academic at a top-five-ranked law school considers acceptable in addressing a much-more junior academic with whom he disagrees. This remark in 2011 was not an outlier either, as Professor Lemley has used similar rhetoric in the ensuing years in addressing academics with whom he disagrees; for instance, a couple years ago, Professor Lemley publicly referred to an academic conference that I and other patent scholars participated in as a “Tea Party convention.”

Of course, legal and constitutional disputes consist of opposing arguments. In court cases and legislative debates, there are colorable legal and policy arguments on both sides of a dispute. Few issues are so irrational that they are not even cognizable as having a supporting argument, such as astrology and conspiracy theories like the birthers or 9-11 truthers. So, I will simply let my essay speak for itself as to whether it makes me the same as an “Obama-birther” and if my argument represents “fringe science.”

More important, if or when a good case arises in which an inventor can rightly claim an identifiable and specific harm as a result of the statutory change created by the AIA, I hope my essay will be of some value.

[1] Full disclosure: The U.S. Business & Industry Council paid me for my time in writing the essay, which I disclosed in the essay itself. Unfortunately, as recently reported by IAM Magazine, other legal academics are not always so forthcoming about their financial and legal connections to companies when publicly commenting on court cases or advocating for enactment of legislation.

[2] This is a link to a screen shot I took last year only because the Facebook post by Professor Lemley recently disappeared after I only quoted the language from it about a month ago when I shared on Facebook my essay with my friends and colleagues.

UPDATE on June 7: I added some more supporting links and some additional information after this was initially published on June 6, 2016.

It is a bedrock principle underlying the First Amendment that the government may not penalize private speech merely because it disapproves of the message it conveys.

The Federal Circuit handed down a victory for free expression today — in the commercial context no less. At issue was the Lanham Act’s § 2(a) prohibition of trademark registrations that

[c]onsist[] of or comprise[] immoral, deceptive, or scandalous matter; or matter which may disparage or falsely suggest a connection with persons, living or dead, institutions, beliefs, or national symbols, or bring them into contempt, or disrepute.

The court, sitting en banc, held that the “disparaging” provision is an unconstitutional violation of free expression, and that trademarks will indeed be protected by the First Amendment. Although it declined to decide whether the other prohibitions actually violated the First Amendment, the opinion contained a very strong suggestion to future panels that this opinion likely applies in that context as well.

In many respects the opinion was not all that surprising (particularly if you’ve read my thoughts on the subject here and here ). However given that it was a predecessor Court of Customs and Patent Appeals decision, In Re McGinley, that once held that First Amendment concerns were not implicated at all by § 2(a) because “it is clear that the … refusal to register appellant’s mark does not affect his right to use it” — totally ignoring of course the chilling effects on speech — it was by no means certain that this decision would come out correctly decided.

Today’s holding vacated a decision from a three-judge panel that, earlier this year, upheld the ill-fated “disparaging” prohibition. From just a cursory reading of § 2(a), it should be a no-brainer that it clearly implicates the content of speech — if not a particular view point — and should get at least some First Amendment scrutiny. However, the earlier three-judge opinion  gave all of three paragraphs to this consideration — one of which was just a quotation from McGinley. There, the three-judge panel rather tersely concluded that the First Amendment argument was “foreclosed by our precedent.”

Thus it was with pleasure that I read the Federal Circuit as it today acknowledged that “[m]ore than thirty years have passed since the decision in McGinley, and in that time both the McGinley decision and our reliance on it have been widely criticized[.]” The core of the First Amendment analysis is fairly straightforward: barring “disparaging” marks from registration is neither content neutral nor viewpoint neutral, and is therefore subject to strict scrutiny (which it fails). The court notes that McGinley’s First Amendment analysis was “cursory” (to put it mildly), and was decided before a fully developed body of commercial speech doctrine had emerged. Overall, the opinion is a good example of subtle, probing First Amendment analysis, wherein the court really grasps that merely labeling speech as “commercial” does not somehow magically strip away any protected expressive content.

In fact, perhaps the most important and interesting material has to do with this commercial speech analysis. The court acknowledges that the government’s policy against “disparaging” marks is targeting the expressive aspects of trademarks and not the more easily regulable “transactional” aspects (such as product information, pricing, etc.)— to look at § 2(a) otherwise would not make sense as the government is rather explicitly trying to stop certain messages because of their noncommercial aspects. And the court importantly acknowledges the Supreme Court’s admonition that “[a] consumer’s concern for the free flow of commercial speech often may be far keener than his concern for urgent political dialogue” ( although I might go so far as to hazard a guess that commercial speech is more important that political speech, most of the time, to most people, but perhaps I am just cynical).

The upshot of the Federal Circuit’s new view of trademarks and “commercial speech” reinforces the notion that regulations and laws that are directed toward “commercial speech” need to be very narrowly focused on the actual “commercial” message — pricing, source, etc. — and cannot veer into controlling the “expressive” aspects without justification under strict scrutiny. Although there is nothing terrible new or shocking here, the opinion ties together a variety of the commercial speech doctrines, gives much needed clarity to trademark registration, and reaffirms a sensible view of commercial speech law.

And, although I may be reading too deeply based on my preferences, I think the opinion is quietly staking out a useful position for commercial speech cases going forward—at least to a speech maximalist like myself. In particular, it explicitly relies upon the “unconstitutional conditions” doctrine for the proposition that the benefits of government programs cannot be granted upon a condition that a party only engage in “good” or “approved” commercial speech.  As the world becomes increasingly interested in hate speech regulation,  and our college campuses more interested in preparing a generation of”safe spacers” than of critically thinking adults, this will undoubtedly become an important arrow in a speech defender’s quiver.

Last July, the Eastern District of Virginia upheld the cancellation of various trademarks of the Washington Redskins on the grounds that the marks were disparaging to Native Americans. I am neither a fan of football, nor of offensive names for sports teams–what I am is a fan of free speech. Although the Redskins may be well advised to change their team name, interfering with both the team’s right to free speech as well as its property right in the registered mark is the wrong way–both legally and in principle–to achieve socially desirable ends.

Various theories have been advanced, but the really interesting part of the dispute–a topic upon which I published a paper this year–is the likelihood that the Lanham Act’s prohibition of immoral, scandalous, or disparaging marks runs afoul of the First Amendment. I was cheered to see this week that the First Amendment Lawyers Association filed an amicus brief largely along the lines of my paper. However, there were a couple of points that I still feel deserve more attention when thinking about the § 2(a) (the Lanham Act’s so-called “morality clauses”).

Trademarks Are Not License Plates

The district court tried to sidestep the First Amendment issue by declaring that the trademarks themselves are not at issue, but merely the right to register the trademarks. To reach its result, the court relied on the recent Walker case wherein the Supreme Court declared that Texas was at liberty to prevent Confederate flags from appearing on its license plates, since license plates could be considered the speech of the government.

However, there is an important distinction between license plates and trademarks. License plates are a good totally of government manufacture. One cannot drive a car on a public road without applying to the government for permission and affixing a government registration tag on the vehicle. The plate is not a blank slate upon which one may express one’s self, but is a state-issued information placard used for law enforcement purposes.

Trademarks, arising as they do from actual use, preexist federal recognition. The Lanham Act merely provides a mechanism for registering trademarks that happen to be used in interstate commerce. The federal government then chooses to recognize that trademark when contested or offered for registration.

This is a major distinction: the social field of trademarks already exists – the federal government has chosen to regulate and provide an enforcement mechanism for these property rights and speech acts when used in interstate commerce. Thus it is the market for trademarks that constitutes the forum, and not the physically recorded government register. Given that the government has interfered in a preexisting market in a way in which it protects some state-created trademark property rights, but not others, is it proper to regulate speech by virtue of its content? I think not.

Further, license plates are obviously government property to anyone who looks at them. Plates bear the very name of the state directly on their face. The system of trademark registration is a largely invisible process that only becomes relevant during legal proceedings. When the public looks at a given trademark I would argue that the state’s imprimatur is certainly one of the last things of which they would think.

Thus, a restriction on “immoral” or “disparaging” trademarks constitutes viewpoint discrimination. Eugene Volokh echoed this sentiment when he wrote on the refusal to register “Stop the Islamisation of America”:

Trademark registration … is a government benefit program open to a wide array of speakers with little quality judgment. Like other such programs … it should be seen as a form of “limited public forum,” in which the government may impose content-based limits but not viewpoint-based ones. An exclusion of marks that disparage groups while allowing marks that praise those groups strikes me as viewpoint discrimination.

The Lanham Act endows registrants with government-guaranteed legal rights in connection with the words and symbols by which they are recognized in society. Particularly in a globalized, interconnected society, the brand of an entity is a significant component of how it speaks to society. Discriminating against marks as “immoral” or “disparaging” can be nothing short of viewpoint discrimination.

Commercial Speech Is Protected Speech

As everyone is well aware, the First Amendment provides broad protection for a wide spectrum of speech. The definition of speech itself is likewise broad, including not only words, but also non-verbal gestures and symbols. Any governmental curtailing of such speech will be “presumptively invalid,” with the burden of rebutting that presumption on the government.

When speech is undertaken as part of commerce it does not magically lose any political, social or religious dimension it had when in a noncommercial context. Cartoons issued bearing the image of the Prophet as part of a commercial magazine are surely a political statement deserving of protection. The situation is the same if an organization adopts a logo that is derisive to a particular political or religious ideology – that publication is making a protected, expressive statement through its branding.

At first glance, one might think that defenders of § 2(a) would attempt to qualify scandalous and immoral trademarks as “obscene” and thereby render them subject to censorship. But, in McGinley the Federal Circuit explicitly refused to apply the obscenity standards from the Supreme Court to §2(a) on the grounds that the Lanham Act does not itself use the word “obscenity.” Instead, the Federal Circuit, following the TTAB, was of the opinion that “[w]hat is denied are the benefits provided by the Lanham Act which enhance the value of a mark” and that the appellant still had legal recourse under state common law. Therefore, so the court in McGinley reasoned, since the right to use the mark is not actually abridged, no expression is abridged. And this is the primary basis upon which the district court in Pro-Football built its argument that no First Amendment concerns were implicated in canceling the Redskins trademark.

This of course willfully ignores once again the notion that in intervening in the field of trademarks, and in favoring certain speakers over others, courts effectively allows the Lanham Act to amplify preferred speech and burden disfavored speech. This is true whether or not we classify the trademark right as a bundle of procedural rights (which in turn make speech competitively possible) or as pure speech directly.

That said, it’s much more in keeping with the tradition of the First Amendment to understand trademarks as a protected category of commercial speech. The Supreme Court has noted that otherwise commercial information may at times be more urgent than even political dialog, and that information relating to a financial incentive was not necessarily commercial for First Amendment purposes. “[S]ignificant societal interests are served by such speech.” This is so because even entirely commercial speech “may often carry information of import to significant issues of the day.”

Even were commercial speech not fully protected–as I believe it to be–the Supreme Court has also recognized that commercial speech may be so intertwined with noncommercial speech so as to make them inseparable for First Amendment purposes. In particular, commercial messages do more than merely provide information about the characteristics of goods and services:

[S]olicitation is characteristically intertwined with informative and perhaps persuasive speech seeking support for particular causes or for particular views on economic, political, or social issues, and for the reality that without solicitation the flow of such information and advocacy would likely cease.

The analogy to trademarks is rather clear in this context. Although trademarks may refer to a particular product or service, that product or service is not of necessity a purely commercial object. Further, even if the product or service is a commercial object, the trademark itself can be, or can become, a symbolic referent and not a mere sales pitch. Consider, for instance, Mickey Mouse. The iconic mouse ears certainly represent a vast commercial empire generally, and specifically operate as a functional trademark for Mickey Mouse cartoons and merchandise. However, is there not much more of cultural significance to the mark than mere commercial value? The mouse ears represent something culturally – about childhood, about America, and about art – that is much more than merely a piece of pricing or quality information.

The Unconstitutional Conditions Doctrine Prevents Trading Rights for Privileges

The district court (and Federal Circuit, for that matter) have missed a very important dimension in summarily dismissing First Amendment concerns of trademark holders. These courts dismiss owners of “immoral” or “disparaging” trademarks on the belief that no actual harm is done – the mark holders still own the mark, and, as far as the court is concerned, no speech has been suppressed. However, trademark registration, in addition to providing a forum in which to speak, also provides real procedural benefits for the mark holder. For instance, businesses and individuals enjoy a nationwide recognition of their presence and can vindicate their interests in federal courts. Without the federal registration that is presumptively supplied to marks that are not “immoral” or “scandalous,” an individual can find himself attempting to protect his interests in a mark in the courts of every state in which he does business.

However, under the unconstitutional conditions doctrine even though the benefits of trademark registration are not constitutionally guaranteed rights, those benefits cannot be offered in exchange for a trademark owner’s loss of actually guaranteed rights. Thus, the tight link between trademark registration and First Amendment protections that the courts just keep ignoring.

Its also worth noting that this doctrine did not emerge in constitutional jurisprudence until after the period in which the Lanham Act was drafted. Instead, the Lanham Act era was characterized by the rights-privileges distinction–made famous by then Chief Justice of the Massachusetts Supreme Judicial Court Oliver Wendell Holmes. In McAuliffe, a police officer sued for reinstatement after he was dismissed for his participation in a political organization. In dismissing the case, Chief Justice Holmes held that “[t]he petitioner may have a constitutional right to talk politics, but he has no constitutional right to be a policeman.” This quote from Holmes captures precisely the sense in which the Federal Circuit dismisses the First Amendment concerns of mark holders. 

In contrast to this rather antiquated view, the Supreme Court has recently reaffirmed the proposition that “the government may not deny a benefit to a person because he exercises a constitutional right.” Although this principle contains exceptions, it has been applied to a wide variety of situations including refusal to renew teaching contracts over First Amendment-protected speech acts, and infringement of the right to travel by refusing to adequately extend healthcare benefits to sick persons who had not been residents of a county for at least a year.

Basically, the best defense one can offer for § 2(a) is rooted in an outmoded view of the First Amendment that is, to put it mildly, unconstitutional. We don’t shut down speakers who offend us (at least for the time being), and we should stop attacking trademarks that we find to be immoral.

On October 7, 2015, the Senate Judiciary Committee held a hearing on the “Standard Merger and Acquisition Reviews Through Equal Rules” (SMARTER) Act of 2015.  As former Antitrust Modernization Commission Chair (and former Acting Assistant Attorney General for Antitrust) Deborah Garza explained in her testimony, “t]he premise of the SMARTER Act is simple:  A merger should not be treated differently depending on which antitrust enforcement agency – DOJ or the FTC – happens to review it.  Regulatory outcomes should not be determined by a flip of the merger agency coin.”

Ms. Garza is clearly correct.  Both the U.S. Justice Department (DOJ) and the U.S. Federal Trade Commission (FTC) enforce the federal antitrust merger review provision, Section 7 of the Clayton Act, and employ a common set of substantive guidelines (last revised in 2010) to evaluate merger proposals.  Neutral “rule of law” principles indicate that private parties should expect to have their proposed mergers subject to the same methods of assessment and an identical standard of judicial review, regardless of which agency reviews a particular transaction.  (The two agencies decide by mutual agreement which agency will review any given merger proposal.)

Unfortunately, however, that is not the case today.  The FTC’s independent ability to challenge mergers administratively, combined with the difference in statutory injunctive standards that apply to FTC and DOJ merger reviews, mean that a particular merger application may face more formidable hurdles if reviewed by the FTC, rather than DOJ.  These two differences commendably would be eliminated by the SMARTER Act, which would subject the FTC to current DOJ standards.  The SMARTER Act would not deal with a third difference – the fact that DOJ merger consent decrees, but not FTC merger consent decrees, must be filed with a federal court for “public interest” review.  This commentary briefly addresses those three issues.  The first and second ones present significant “rule of law” problems, in that they involve differences in statutory language applied to the same conduct.  The third issue, the question of judicial review of settlements, is of a different nature, but nevertheless raises substantial policy concerns.

  1. FTC Administrative Authority

The first rule of law problem stems from the broader statutory authority the FTC possesses to challenge mergers.  In merger cases, while DOJ typically consolidates actions for a preliminary and permanent injunction in district court, the FTC merely seeks a preliminary injunction (which is easier to obtain than a permanent injunction) and “holds in its back pocket” the ability to challenge a merger in an FTC administrative proceeding – a power DOJ does not possess.  In short, the FTC subjects proposed mergers to a different and more onerous method of assessment than DOJ.  In Ms. Garza’s words (footnotes deleted):

“Despite the FTC’s legal ability to seek permanent relief from the district court, it prefers to seek a preliminary injunction only, to preserve the status quo while it proceeds with its administrative litigation.

This approach has great strategic significance. First, the standard for obtaining a preliminary injunction in government merger challenges is lower than the standard for obtaining a permanent injunction. That is, it is easier to get a preliminary injunction.

Second, as a practical matter, the grant of a preliminary injunction is typically sufficient to end the matter. In nearly every case, the parties will abandon their transaction rather than incur the heavy cost and uncertainty of trying to hold the merger together through further proceedings—which is why merging parties typically seek to consolidate proceedings for preliminary and permanent relief under Rule 65(a)(2). Time is of the essence. As one witness testified before the [Antitrust Modernization Commission], “it is a rare seller whose business can withstand the destabilizing effect of a year or more of uncertainty” after the issuance of a preliminary injunction.

Third, even if the court denies the FTC its preliminary injunction and the parties close their merger, the FTC can still continue to pursue an administrative challenge with an eye to undoing or restructuring the transaction. This is the “heads I win, tails you lose” aspect of the situation today. It is very difficult for the parties to get to the point of a full hearing in court given the effect of time on transactions, even with the FTC’s expedited administrative procedures adopted in about 2008. . . . 

[Moreover,] [while] [u]nder its new procedures, parties can move to dismiss an administrative proceeding if the FTC has lost a motion for preliminary injunction and the FTC will consider whether to proceed on a case-by-case basis[,] . . . th[is] [FTC] policy could just as easily change again, unless Congress speaks.”

Typically time is of the essence in proposed mergers, so substantial delays occasioned by extended reviews of those transactions may prevent many transactions from being consummated, even if they eventually would have passed antitrust muster.  Ms. Garza’s testimony, plus testimony by former Assistant Deputy Assistant Attorney General for Antitrust Abbott (Tad) Lipsky, document cases of substantial delay in FTC administrative reviews of merger proposals.  (As Mr. Lipsky explained, “[a]ntitrust practitioners have long perceived that the possibility of continued administrative litigation by the FTC following a court decision constitutes a significant disincentive for parties to invest resources in transaction planning and execution.”)  Congress should weigh these delay-specific costs, as well as the direct costs of any additional burdens occasioned by FTC administrative procedures, in deciding whether to require the FTC (like DOJ) to rely solely on federal court proceedings.

  1. Differences Between FTC and DOJ Injunctive Standards

The second rule of law problem arises from the lighter burden the FTC must satisfy to obtain injunctive relief in federal court.  Under Section 13(b) of the FTC Act, an injunction shall be granted the FTC “[u]pon a proper showing that, weighing the equities and considering the Commission’s likelihood of success, such action would be in the public interest.”  The D.C. Circuit (in FTC v. H.J. Heinz Co. and in FTC v. Whole Foods Market, Inc.) has stated that, to meet this burden, the FTC need merely have raised questions “so serious, substantial, difficult and doubtful as to make them fair ground for further investigation.”  By contrast, as Ms. Garza’s testimony points out, “under Section 15 of the Clayton Act, courts generally apply a traditional equities test requiring DOJ to show a reasonable likelihood of success on the merits—not merely that there is ‘fair ground for further investigation.’”  In a similar vein, Mr. Lipsky’s testimony stated that “[t]he cumulative effect of several recent contested merger decisions has been to allow the FTC to argue that it needn’t show likelihood of success in order to win a preliminary injunction; specifically these decisions suggest that the Commission need only show ‘serious, substantial, difficult and doubtful’ questions regarding the merits.”  Although some commentators have contended that, in reality, the two standards generally will be interpreted in a similar fashion (“whatever theoretical difference might exist between the FTC and DOJ standards has no practical significance”), there is no doubt that the language of the two standards is different – and basic principles of statutory construction indicate that differences in statutory language should be given meaning and not ignored.  Accordingly, merging parties face the real prospect that they might fare worse under federal court review of an FTC challenge to their merger proposal than they would have fared had DOJ challenged the same transaction.  Such an outcome, even if it is rare, would be at odds with neutral application of the rule of law.

  1. The Tunney Act

Finally, helpful as it is, the SMARTER Act does not entirely eliminate the disparate treatment of proposed mergers by DOJ and the FTC.  The Tunney Act, 15 U.S.C. § 16, enacted in 1974, which applies to DOJ but not to the FTC, requires that DOJ submit all proposed consent judgments under the antitrust laws (including Section 7 of the Clayton Act) to a federal district court for 60 days of public comment prior to being entered.

a.  Economic Costs (and Potential Benefits) of the Tunney Act

The Tunney Act potentially interjects uncertainty into the nature of the “deal” struck between merging parties and DOJ in merger cases.  It does this by subjecting proposed DOJ merger settlements (and other DOJ non-merger civil antitrust settlements) to a 60 day public review period, requiring federal judges to determine whether a proposed settlement is “in the public interest” before entering it, and instructing the court to consider the impact of the entry of judgment “upon competition and upon the public generally.”  Leading antitrust practitioners have noted that this uncertainty “could affect shareholders, customers, or even employees. Moreover, the merged company must devote some measure of resources to dealing with the Tunney Act review—resources that instead could be devoted to further integration of the two companies or generation of any planned efficiencies or synergies.”  More specifically:

“[W]hile Tunney Act proceedings are pending, a merged company may have to consider how its post-close actions and integration could be perceived by the court, and may feel the need to compete somewhat less aggressively, lest its more muscular competitive actions be taken by the court, amici, or the public at large to be the actions of a merged company exercising enhanced market power. Such a distortion in conduct probably was not contemplated by the Tunney Act’s drafters, but merger partners will need to be cognizant of how their post-close actions may be perceived during Tunney Act review. . . .  [And, in addition,] while Tunney Act proceedings are pending, a merged company may have to consider how its post-close actions and integration could be perceived by the court, and may feel the need to compete somewhat less aggressively, lest its more muscular competitive actions be taken by the court, amici, or the public at large to be the actions of a merged company exercising enhanced market power.”

Although the Tunney Act has been justified on traditional “public interest” grounds, even its scholarly supporters (a DOJ antitrust attorney), in praising its purported benefits, have acknowledged its potential for abuse:

“Properly interpreted and applied, the Tunney Act serves a number of related, useful functions. The disclosure provisions and judicial approval requirement for decrees can help identify, and more importantly deter, “influence peddling” and other abuses. The notice-and-comment procedures force the DOJ to explain its rationale for the settlement and provide its answers to objections, thus providing transparency. They also provide a mechanism for third-party input, and, thus, a way to identify and correct potentially unnoticed problems in a decree. Finally, the court’s public interest review not only helps ensure that the decree benefits the public, it also allows the court to protect itself against ambiguous provisions and enforcement problems and against an objectionable or pointless employment of judicial power. Improperly applied, the Tunney Act does more harm than good. When a district court takes it upon itself to investigate allegations not contained in a complaint, or attempts to “re-settle” a case to provide what it views as stronger, better relief, or permits lengthy, unfocused proceedings, the Act is turned from a useful check to an unpredictable, costly burden.”

The justifications presented by the author are open to serious question.  Whether “influence peddling” can be detected merely from the filing of proposed decree terms is doubtful – corrupt deals to settle a matter presumably would be done “behind the scenes” in a manner not available to public scrutiny.  The economic expertise and detailed factual knowledge that informs a DOJ merger settlement cannot be fully absorbed by a judge (who may fall prey to his or her personal predilections as to what constitutes good policy) during a brief review period.  “Transparency” that facilitates “third-party input” can too easily be manipulated by rent-seeking competitors who will “trump up” justifications for blocking an efficient merger.  Moreover, third parties who are opposed to mergers in general may also be expected to file objections to efficient arrangements.  In short, the “sunshine” justification for Tunney Act filings is more likely to cloud the evaluation of DOJ policy calls than to provide clarity.

b.  Constitutional Issues Raised by the Tunney Act

In addition to potential economic inefficiencies, the judicial review feature of the Tunney Act raises serious separation of powers issues, as emphasized by the DOJ Office of Legal Counsel (OLC, which advises the Attorney General and the President on questions of constitutional interpretation) in a 1989 opinion regarding qui tam provisions of the False Claims Act:

“There are very serious doubts as to the constitutionality . . . of the Tunney Act:  it intrudes into the Executive power and requires the courts to decide upon the public interest – that is, to exercise a policy discretion normally reserved to the political branches.  Three Justices of the Supreme Court questioned the constitutionality of the Tunney Act in Maryland v. United States, 460 U.S. 1001 (1983) (Rehnquist, J., joined by Burger, C.J., and White, J., dissenting).”

Notably, this DOJ critique of the Tunney Act was written before the 2004 amendments to that statute that specifically empower courts to consider the impact of proposed settlements “upon competition and upon the public generally” – language that significantly trenches upon Executive Branch prerogatives.  Admittedly, the Tunney Act has withstood judicial scrutiny – no court has ruled it unconstitutional.   Moreover, a federal judge can only accept or reject a Tunney Act settlement, not rewrite it, somewhat ameliorating its affront to the separation of powers.  In short, even though it may not be subject to serious constitutional challenge in the courts, the Tunney Act is problematic as a matter of sound constitutional policy.

c.  Congressional Reexamination of the Tunney Act

These economic and constitutional policy concerns suggest that Congress may wish to carefully reexamine the merits of the Tunney Act.  Any such reexamination, however, should be independent of, and not delay expedited consideration of, the SMARTER Act.  The Tunney Act, although of undoubted significance, is only a tangential aspect of the divergent legal standards that apply to FTC and DOJ merger reviews.  It is beyond the scope of current legislative proposals but it merits being taken up at an appropriate time – perhaps in the next Congress.  When Congress turns to the Tunney Act, it may wish to consider four options:  (1) repealing the Act in its entirety; (2) retaining the Act as is; (3) partially repealing it only with respect to merger reviews; or, (4) applying it in full force to the FTC.  A detailed evaluation of those options is beyond the scope of this commentary.

Conclusion

In sum, in order to eliminate inconsistencies between FTC and DOJ standards for reviewing proposed mergers, Congress should give serious consideration to enacting the SMARTER Act, which would both eliminate FTC administrative review of merger proposals and subject the FTC to the same injunctive standard as the DOJ in judicial review of those proposals.  Moreover, if the SMARTER Act is enacted, Congress should also consider going further and amending the Tunney Act to make it apply to FTC as well as to DOJ merger settlements – or, alternatively, to have it not apply at all to any merger settlements (a result which would better respect the constitutional separation of powers and reduce a potential source of economic inefficiency).

Once again, my constitutional law professor has embarrassed me with his gross misunderstanding of the U.S. Constitution.  First, he insisted that it would be “unprecedented” for the U.S. Supreme Court to overturn a statute enacted by a “democratically elected Congress.”  Seventh-grade Civics students know that’s not right, but Mr. Obama’s misstatement did have its intended effect:  It sent a clear signal that the President and his lackeys would call into question the legitimacy of the Supreme Court should it invalidate the Affordable Care Act (ACA).  Duly warned, Chief Justice Roberts changed his vote in NFIB v. Sebelius to save the Court from whatever institutional damage Mr. Obama would have inflicted.

Now President Obama – who chastised his predecessor for offending the constitutional order and insisted that he, a former constitutional law professor, would never stoop so low – has both violated his oath of office and flouted a key constitutional feature, the separation of powers.  I’m speaking of the President’s “administrative fix” to the ACA.  That “fix” consists of a presidential order not to enforce the Act’s minimum coverage provisions, a move that President Obama says will allow insurance companies to continue offering ACA non-compliant policies to those previously enrolled in them if the companies wish to do so and are able to obtain permission at the state level.

This is, of course, nothing more than a transparent attempt to shift blame for the millions of recently canceled policies.  Having priced their more generous ACA-compliant policies on the assumption that there would be an influx of healthy customers now covered by high-deductible, non-compliant policies, insurance companies would shoot themselves in the foot by accepting Mr. Obama’s generous “offer.”  Moreover, state insurance commissioners, aware of the adverse selection likely to result from this last-minute rule change, are unlikely to give their blessing.  (Indeed, several have balked – including the D.C. insurance commissioner, who was promptly fired.)

But putting aside the fact that the administrative fix won’t work, the main problem with it is that it is blatantly unconstitutional.  The Constitution divides power between the three branches of government.  Article I grants to the Congress “all legislative Powers,” including “Power to lay and collect Taxes.”  Article II then directs the President to “take Care that the laws be faithfully executed.” With his administrative fix, President Obama has essentially said, “I promise not to execute the law Congress passed.”

Moreover, the President went further to say, “I promise not to collect a tax the Congress imposed.”  Remember that the penalty for failure to carry ACA-compliant insurance is, for constitutional purposes, a tax.  That was the central holding of last summer’s Obamacare decision, NFIB v. Sebelius.  When the President assured victims of insurance cancellations that he would turn a blind eye to the law and allow their insurers to continue to offer canceled policies, he also implied that he would order his administration not to collect the taxes owed by those in ACA-noncompliant policies.  Indeed, this matter was clarified in the letter the Department of Health and Human Services sent to state insurance commissioners notifying them of the Obama Administration’s decision not to enforce the law as written.  That letter stated that the Department of the Treasury, which is charged (through the IRS) with collecting the ACA’s penalties/taxes, “concur[red] with the transitional relief afforded in this document.”  That means the IRS, pursuant to the President’s order, is promising not to collect a tax the Congress has imposed.

This, my friends, is a major disruption of the constitutional order.  If the President of the United States may simply decide not to collect taxes imposed by the branch of government that has been given exclusive “Power to lay and collect Taxes,” the whole Constitution is thrown off-kilter.  Any time a president wanted to favor some individuals, firms, or industries, he wouldn’t need to go to Congress for approval.  No, he could just order his IRS not to collect taxes from those folks.  Can’t get Congress to approve subsidies for green technologies?  No worries.  Just order your IRS not to collect taxes from firms in that sector.  Or maybe even order a refundable tax credit.  You think Congress has enacted job-killing regulations on an industry?  Just invoke your enforcement discretion and ignore those rules.  Whew!  This sure makes things easier.

President Obama twice promised, under oath, to “take Care that the Laws be faithfully executed.”  Unfortunately, he also rammed through a terrible law.  Our Constitution now gives him the option to enforce the enacted law and pay the political price, or seek Congress’s assistance to change the law.  On the particular matter at issue here, Congress is willing to help the President out.  On Friday, the House of Representatives voted to amend the law to allow insurance companies to continue to offer ACA non-compliant policies.  Mr. Obama doesn’t like some details of the legislative fix he’s been offered.  Unfortunately for him, though, he’s not a king.  He has to work within the constitutional order.

At least, that’s what I thought I learned in constitutional law.

William Buckley once described a conservative as “someone who stands athwart history, yelling Stop.” Ironically, this definition applies to Professor Tim Wu’s stance against the Supreme Court applying the Constitution’s protections to the information age.

Wu admits he is going against the grain by fighting what he describes as leading liberals from the civil rights era, conservatives and economic libertarians bent on deregulation, and corporations practicing “First Amendment opportunism.” Wu wants to reorient our thinking on the First Amendment, limiting its domain to what he believes are its rightful boundaries.

But in his relatively recent piece in The New Republic and journal article in U Penn Law Review, Wu bites off more than he can chew. First, Wu does not recognize that the First Amendment is used “opportunistically” only because the New Deal revolution and subsequent jurisprudence has foreclosed all other Constitutional avenues to challenge economic regulations. Second, his positive formulation for differentiating protected speech from non-speech will lead to results counter to his stated preferences. Third, contra both conservatives like Bork and liberals like Wu, the Constitution’s protections can and should be adapted to new technologies, consistent with the original meaning.

Wu’s Irrational Lochner-Baiting

Wu makes the case that the First Amendment has been interpreted to protect things that aren’t really within the First Amendment’s purview. He starts his New Republic essay with Sorrell v. IMS (cf. TechFreedom’s Amicus Brief), describing the data mining process as something undeserving of any judicial protection. He deems the application of the First Amendment to economic regulation a revival of Lochner, evincing a misunderstanding of the case that appeals to undefended academic prejudice and popular ignorance. This is important because the economic liberty which was long protected by the Constitution, either as matter of federalism or substantive rights, no longer has any protection from government power aside from the First Amendment jurisprudence Wu decries.

Lochner v. New York is a 1905 Supreme Court case that has received more scorn, left and right, than just about any case that isn’t dealing with slavery or segregation. This has led to the phenomenon (my former Constitutional Law) Professor David Bernstein calls “Lochner-baiting,” where a commentator describes any Supreme Court decision with which he or she disagrees as Lochnerism. Wu does this throughout his New Republic piece, somehow seeing parallels between application of the First Amendment to the Internet and a Liberty of Contract case under substantive Due Process.

The idea that economic regulation should receive little judicial scrutiny is not new. In fact, it has been the operating law since at least the famous Carolene Products footnote four. However, the idea that only insular and discrete minorities should receive First Amendment protection is a novel application of law. Wu implicitly argues exactly this when he says “corporations are not the Jehovah’s Witnesses, unpopular outsiders needing a safeguard that legislators and law enforcement could not be moved to provide.” On the contrary, the application of First Amendment protections to Jehovah’s Witnesses and student protesters is part and parcel of the application of the First Amendment to advertising and data that drives the Internet. Just because Wu does not believe businesspersons need the Constitution’s protections does not mean they do not apply.

Finally, while Wu may be correct that the First Amendment should not apply to everything for which it is being asserted today, he does not seem to recognize why there is “First Amendment opportunism.” In theory, those trying to limit the power of government over economic regulation could use any number of provisions in the text of the Constitution: enumerated powers of Congress and the Tenth Amendment, the Ninth Amendment, the Contracts Clause, the Privileges or Immunities Clause of the Fourteenth Amendment, the Due Process Clause of the Fifth and Fourteenth Amendments, the Equal Protection Clause, etc. For much of the Constitution’s history, the combination of these clauses generally restricted the growth of government over economic affairs. Lochner was just one example of courts generally putting the burden on governments to show the restrictions placed upon economic liberty are outweighed by public interest considerations.

The Lochner court actually protected a small bakery run by immigrants from special interest legislation aimed at putting them out of business on behalf of bigger, established competitors. Shifting this burden away from government and towards the individual is not clearly the good thing Wu assumes. Applying the same Liberty of Contract doctrine, the Supreme Court struck down legislation enforcing housing segregation in Buchanan v. Warley and legislation outlawing the teaching of the German language in Meyer v. Nebraska. After the New Deal revolution, courts chose to apply only rational basis review to economic regulation, and would need to find a new way to protect fundamental rights that were once classified as economic in nature. The burden shifted to individuals to prove an economic regulation is not loosely related to any conceivable legitimate governmental purpose.

Now, the only Constitutional avenue left for a winnable challenge of economic regulation is the First Amendment. Under the rational basis test, the Tenth Circuit in Powers v. Harris actually found that protecting businesses from competition is a legitimate state interest. This is why the cat owner Wu references in his essay and describes in more detail in his law review article brought a First Amendment claim against a regime requiring licensing of his talking cat show: there is basically no other Constitutional protection against burdensome economic regulation.

The More You Edit, the More Your <sic> Protected?

In his law review piece, Machine Speech, Wu explains that the First Amendment has a functionality requirement. He points out that the First Amendment has never been interpreted to mean, and should not mean, that all communication is protected. Wu believes the dividing lines between protected and unprotected speech should be whether the communicator is a person attempting to communicate a specific message in a non-mechanical way to another, and whether the communication at issue is more speech than conduct. The first test excludes carriers and conduits that handle or process information but have an ultimately functional relationship with it–like Federal Express or a telephone company. The second excludes tools, those works that are purely functional like navigational charts, court filings, or contracts.

Of course, Wu admits the actual application of his test online can be difficult. In his law review article he deals with some easy cases, like the obvious application of the First Amendment to blog posts, tweets, and video games, and non-application to Google Maps. Of course, harder cases are the main target of his article: search engines, automated concierges, and other algorithm-based services. At the very end of his law review article, Wu finally states how to differentiate between protected speech and non-speech in such cases:

The rule of thumb is this: the more the concierge merely tells the user about himself, the more like a tool and less like protected speech the program is. The more the programmer puts in place his opinion, and tries to influence the user, the more likely there will be First Amendment coverage. These are the kinds of considerations that ultimately should drive every algorithmic output case that courts could encounter.

Unfortunately for Wu, this test would lead to results counterproductive to his goals.

Applying this rationale to Google, for instance, would lead to the perverse conclusion that the more the allegations against the company about tinkering with its algorithm to disadvantage competitors are true, the more likely Google would receive First Amendment protection. And if Net Neutrality advocates are right that ISPs are restricting consumer access to content, then the analogy to the newspaper in Tornillo becomes a good one–ISPs have a right to exercise editorial discretion and mandating speech would be unconstitutional. The application of Wu’s test to search engines and ISPs effectively puts them in a “use it or lose it” position with their First Amendment rights that courts have rejected. The idea that antitrust and FCC regulations can apply without First Amendment scrutiny only if search engines and ISPs are not doing anything requiring antitrust or FCC scrutiny is counterproductive to sound public policy–and presumably, the regulatory goals Wu holds.

First Amendment Dynamism

The application of the First Amendment to the Internet Age does not involve large leaps of logic from current jurisprudence. As Stuart Minor Benjamin shows in his article in the same issue of the U Penn Law Review, the bigger leap would be to follow Wu’s recommendations. We do not need a 21st Century First Amendment that some on the left have called for—the original one will do just fine.

This is because the Constitution’s protections can be dynamically applied, consistent with original meaning. Wu’s complaint is that he does not like how the First Amendment has evolved. Even his points that have merit, though, seem to indicate a stasis mentality. In her book, The Future and Its Enemies, Virginia Postrel described this mentality as a preference for a “controlled, uniform society that changes only with permission from some central authority.” But the First Amendment’s text is not a grant of power to the central authority to control or permit anything. It actually restricts government from intervening into the open-ended society where creativity and enterprise, operating under predictable rules, generate progress in unpredictable ways.

The application of current First Amendment jurisprudence to search engines, ISPs, and data mining will not necessarily create a world where machines have rights. Wu is right that the line must be drawn somewhere, but his technocratic attempt to empower government officials to control innovation is short-sighted. Ultimately, the First Amendment is as much about protecting the individuals who innovate and create online as those in the offline world. Such protection embraces the future instead of fearing it.

Geoffrey Manne is Lecturer in Law at Lewis & Clark Law School and Executive Director of the International Center for Law & Economics

Josh and Maureen are to be commended for their important contributions to the discussion over the proper scope of the FTC’s Section 5 enforcement authority. I have commented extensively on UMC and Section 5, Josh’s statement, and particularly the problems if UMC enforcement against the use of injunctions to enforce FRAND-encumbered SEPs before (see, for example, here, here and here). I’d like to highlight here a couple of the most important issues from among these comments along with a couple of additional ones.

First, there is really no sensible disagreement over Josh’s harm to competition prong. And to the extent there is disagreement over the proper role for efficiencies, given the existence of compelling arguments that we don’t need Section 5 at all (see, e.g., Joe Sims and James Cooper), what might have seemed like a radical position in Josh’s statement that the FTC enforce UMC only where no efficiencies exist, Josh’s position is actually something of a middle ground. In any case, the first prong of Josh’s statement (the harm to competition requirement) really should attract unanimity, as it essentially has here today, and all of the FTC’s commissioners should come out and say so, even if debate persists over the second prong. This alone would provide an enormous amount of certainty and sense to the FTC’s UMC enforcement decisions.

Second, sensible, predictable guidance is essential. In her recent speech, echoing the fundamental issue laid out so well in Josh’s statement and elaborated on in his accompanying speech, Maureen notes that:

For many decades, the Commission’s exercise of its UMC authority has launched the agency into a sea of uncertainty, much like the agency weathered when using its unfairness authority in the consumer protection area in the 1970s. In issuing our 1980 statement on the concept of “unfair acts or practices” under our consumer protection authority, the Commission acknowledged the uncertainty that had surrounded the concept of unfairness, admitting that “this uncertainty has been honestly troublesome for some businesses and some members of the legal profession.” This characterization just as aptly describes the state of our UMC authority today.

It seems uncontroversial that some guidance is required, and a pseudo-common law of un-adjudicated settlements lacking any doctrinal analysis simply doesn’t provide sufficient grounds to separate the fair from the unfair. (What follows is drawn from our amicus brief in the Wyndham case).

The FTC’s current approach to UMC enforcement denies companies “a reasonable opportunity to know what is prohibited” and thus follow the law. The FTC has previously suggested that its settlements and Congressional testimony offers all the guidance a company would need—see, e.g., here and here, where Chairwoman Ramirez noted that

Section 5 of the FTC Act has been developed over time, case-by-case, in the manner of common law. These precedents provide the Commission and the business community with important guidance regarding the appropriate scope and use of the FTC’s Section 5 authority.

But settlements (and testimony summarizing them) do not in any way constrain the FTC’s subsequent enforcement decisions; they cannot alone be the basis by which the FTC provides guidance on its UMC authority because, unlike published guidelines, they do not purport to lay out general enforcement principles and are not recognized as doing so by courts and the business community. It is impossible to imagine a court faulting the FTC for failure to adhere to a previous settlement, particularly because settlements are not readily generalizable and bind only the parties who agree to them. As we put it in our Wyndham amicus brief:

Even setting aside this basic legal principle, the gradual accretion of these unadjudicated settlements does not solve the vagueness problem: Where guidelines provide cumulative analysis of previous enforcement decisions to establish general principles, these settlements are devoid of doctrinal analysis and offer little more than an infinite regress of unadjudicated assertions.

Rulemaking is generally preferable to case-by-case adjudication as a way to develop agency-enforced law because rulemaking both reduces vagueness and constrains the mischief that unconstrained agency actions may cause. As the Court noted in SEC v. Chenery Corp.,

The function of filling in the interstices of [a statute] should be performed, as much as possible, through this quasi-legislative promulgation of rules to be applied in the future.

Without Article III court decisions developing binding legal principles ,and with no other meaningful form of guidance from the FTC, the law will remain unconstitutionally vague. And the FTC’s approach to enforcement also allows the FTC to act both arbitrarily and discriminatorily—backed by the costly threat of the CID process and Part III adjudication. This means the company faces two practically certain defeats—before the administrative law judge and then the full Commission, each a public relations disaster. The FTC appears to be perfectly willing to use negative media to encourage settlements: The House Oversight Committee is currently investigating whether a series of leaks by FTC staff to media last year were intended to pressure Google to settle the FTC’s antitrust investigation into the company’s business practices.

Third, if the FTC doesn’t act to constrain itself, the courts or Congress will do so, and may do more damage to the FTC’s authority than any self-imposed constraints would.

The power to determine whether the practices of almost any American business are “unfair” methods of competition (particularly if UMC retains the broad reach Tim Wu outlines in his post) makes the FTC uniquely powerful. This power, if it is to be used sensibly, allows the FTC to protect consumers from truly harmful business practices not covered by the FTC’s general consumer protection authority. But without effective enforcement of clear limiting principles, this power may be stretched beyond what Congress intended.

In 1964, the Commission began using its unfairness power to ban business practices that it determined offended “public policy.” Emboldened by vague Supreme Court dicta from Sperry & Hutchinson comparing the agency to a “court of equity,” the Commission set upon a series of rulemakings and enforcement actions so sweeping that the Washington Post dubbed the agency the “National Nanny.” The FTC’s actions eventually prompted Congress to briefly shut down the agency to reinforce the point that it had not intended the agency to operate with such expansive authority. The FTC survived as an institution only because, in 1980, it (unanimously) issued a Policy Statement on Unfairness laying out basic limiting principles to constrain its power and assuring Congress that these principles would be further developed over time—principles that Congress then codified in Section 5(n) of the FTC Act.

And for a time, the Commission used its unfairness power sparingly and carefully, largely out of fear of reawakening Congressional furor. Back in 1980, the FTC itself declared that

The task of identifying unfair trade practices was therefore assigned to the Commission, subject to judicial review, in the expectation that the underlying criteria would evolve and develop over time.

Yet we know little more today than we did in 1980 about how the FTC analyzes each prong of Section 5.

Moreover, courts may not support enforcement given this ambiguity, and in our Wyndham brief we supported Wyndham’s motion to dismiss for exactly this reason (and that was brought under the Commission’s unfairness authority where it even has some guidelines). As we wrote:

Since the problem is a lack of judicial adjudication, it might seem counter-intuitive that the court should dismiss the FTC’s suit on the pleadings. But this is precisely the form of adjudication required: The FTC needs to be told that its complaints do not meet the minimum standards required to establish a violation of Section 5 because otherwise there is little reason to think that the FTC’s complaints will not continue to be the Commission’s primary means of building law (what amounts to “non-law law”). But even if the FTC re-files its unadjudicated complaint to explain its analysis of the prongs of the Unfairness Doctrine, it will not have solved yet another fundamental problem: its failure to provide Wyndham with sufficient guidance ex ante as to what “reasonable” data security practices would be.

The same could be said of the FTC’s UMC enforcement. Section 5(n) applies to UMC, and states that:

The Commission shall have no authority under this section or section 57a of this title to declare unlawful an act or practice on the grounds that such act or practice is unfair unless the act or practice causes or is likely to cause substantial injury to consumers which is not reasonably avoidable by consumers themselves and not outweighed by countervailing benefits to consumers or to competition. In determining whether an act or practice is unfair, the Commission may consider established public policies as evidence to be considered with all other evidence. Such public policy considerations may not serve as a primary basis for such determination.

Finally, applying this to FRAND-encumbered SEPs, as I have previously discussed, is problematic. As Kobayashi and Wright note in discussing the N-Data case,

[T]he truth is that there was little chance the FTC could have prevailed under the more rigorous Section 2 standard that anchors the liability rule to a demanding standard requiring proof of both exclusionary conduct and competitive harm. One must either accept the proposition that the FTC sought Section 5 liability precisely because there was no evidence of consumer harm or that the FTC believed there was evidence of consumer harm but elected to file the Complaint based only upon the Section 5 theory to encourage an expansive application of that Section, a position several Commissioners joining the Majority Statement have taken in recent years. Neither of these interpretations offers much evidence that N-Data is sound as a matter of prosecutorial discretion or antitrust policy.

None of the FTC’s SEP cases has offered anything approaching proof of consumer harm, and this is where any sensible limiting principles must begin—as just about everyone here today seems to agree. Moreover, even if they did adduce evidence of harm, the often-ignored problem of reverse holdup raises precisely the concern about over-enforcement that Josh’s “no efficiencies” prong is meant to address. Holdup may raise consumer prices (although the FTC has not presented evidence of this), but reverse holdup may do as much or more damage.

The use of injunctions to enforce SEPs increases innovation, the willingness to license generally and the willingness to enter into FRAND commitments in particular–all to the likely benefit of consumer welfare. If the FTC interprets its UMC authority in a way that constrains the ability of patent holders to effectively police their patent rights, then less innovation would be expected–to the detriment of consumers as well as businesses. An unfettered UMC authority will systematically curtail these benefits, quite possibly without countervailing positive effects.

And as I noted in a post yesterday, these costs are real. Innovative technology companies are responding to the current SEP enforcement environment exactly as we would expect them to: by avoiding the otherwise-consumer-welfare enhancing standardization process entirely—as statements made at a recent event demonstrate:

Because of the current atmosphere, Lukander said, Nokia has stepped back from the standardisation process, electing either not to join certain standard-setting organisations (SSOs) or not to contribute certain technologies to these organisations.

Section 5 is a particularly problematic piece of this, and sensible limits like those Josh proposes would go a long way toward mitigating the problem—without removing enforcement authority in the face of real competitive harm, which remains available under the Sherman Act.

Douglas Holtz-Eakin and my former George Mason colleague and Nobel Laureate Vernon Smith are in the WSJ today discussing the economic wisdom and constitutionality of ObamaCare.  From the WSJ:

The Obama administration defends the mandate on the ground that a person’s decision to not buy health insurance affects commerce by materially increasing the costs of others’ health insurance. The government adds that health care is unique and therefore can be regulated constitutionally in ways other markets cannot.

In reality, the mandate has almost nothing to do with cost-shifting. The targeted population—the young, healthy and not poor who choose to forgo coverage—has a minimal role in the $43 billion of uncompensated health-care costs. In 2008, for example (the latest figures available), the Department of Health and Human Service’s Medical Expenditure Panel Survey showed that the uncompensated care of the mandate’s targeted population was no more than $12.8 billion—a tiny one-half of 1% of the nation’s $2.4 trillion in overall health-care costs. The insurance mandate cannot reasonably be justified on the ground that it remedies costs imposed on the system by the voluntarily uninsured.

The government’s other defense is that the health-care market does not exhibit textbook competition. No market does. The economic features relied upon by the government—externalities, imperfect information, geographically distinct markets, etc.—are characteristic of many markets.  The presence of externalities and other market imperfections does not justify a departure from the normal rules of the constitutional road. Health care is typically consumed locally, and health-insurance markets themselves primarily operate within the states. The administration’s attempt to fashion a singular, universal solution is not necessary to deal with the variegated issues arising in these markets. States have taken the lead in past reform efforts. They should be an integral part of improving the functioning of health-care and health-insurance markets.

Holtz-Eakin and Smith conclude:

Without the individual mandate, ObamaCare imposes total net costs of $360 billion on health-insurance companies from 2012 through 2021. With the mandate, the law would provide a net $6 billion benefit—i.e., revenues in excess of costs—over that same time period. In other words, the benefits of the individual mandate to health-insurance companies, along with their additional revenues provided by ObamaCare’s Medicaid expansion, are projected to balance, nearly perfectly, the costs that the law’s various regulatory mandates impose on insurers.

The individual mandate and Medicaid expansions appear to many to be unconstitutional. They are certainly bad economic policy. When they go, the entire law must fall. The administration built an intricate, balanced policy on a flawed economic foundation. It is up to the Supreme Court to pull it down.

Go read the whole thing.

Taxicabs in Milwaukee

Larry Ribstein —  28 September 2011

I’ve often discussed the wonderful world of professional licensing beyond lawyers and its perverse effects on entrepreneurship.  The posts have covered licensing of witches, horse teeth floaters, cat groomers, and tour guides.  Here’s a story about taxicabs.

Milwaukee allows 321 taxicabs. Almost half the licenses are owned by one person.  The Institute for Justice has sued, alleging that the limitation is unconstitutional on due process and equal protection grounds.  The suit notes, among other things, that the ratio in Milwaukee is one for every 1,850 residents, compared to one per 935 residents in Seattle, one per 550 in Minneapolis and one per 480 residents in Denver.  It argues that “the artificial scarcity of cabs harms Milwaukee citizens and visitors through limiting competition in the taxicab industry and creating inferior customer service – including longer wait times for cabs and a lack of available cabs in modest and minority neighborhoods.” The Milwaukee Journal Sentinel has the story, and IJ has a video.

In Part I of this post, I identified a jurisprudential thread of cases that suggest corporations have a First Amendment right to own and invest in law practices for the delivery legal services.  These decisions include NAACP v. Button, the union trilogy, and Bates v. State Bar of Arizona.  Two recent cases shed light on how the Supreme Court might view my collective reading of NAACP v. Button and its progeny: Citizens United v. Federal Election Commission and Sorrell v. IMS Health.

Citizens United accomplished at least two tasks related to understanding the free speech interests bound up in access to the law and the delivery of legal services via a corporation:  (1) the majority made clear that for-profit and nonprofit corporations alike enjoy the same protections as individuals under the First Amendment and (2) the holding broadened prior decisions related to the need for speech to further economic competition.  Writing for the majority, Justice Kennedy observed: “The identity of the speaker is not decisive in determining whether speech is protected.  Corporations and other associations, like individuals, contribute to the discussion, debate, and the dissemination of information and ideas that the First Amendment seeks to foster.”   If the majority’s opinion means what it says, Rule 5.4’s blanket ban against outside investment and ownership of law practices unconstitutionally interferes with the corporation’s ability to disseminate legal services.

In Sorrell, the Court struck down a Vermont statute restricting the sale and use of pharmacy records to so-called data miners.  Writing the 6-3 majority opinion, Justice Kennedy quoted from the Bates case, observing that the “consumer’s concern for the free flow of commercial speech often may be far keener than his concern for urgent political dialogue.”  The Sorrell decision recognizes that dissemination of information is essential to the First Amendment. The corporation is uniquely situated to engage in wide-scale distribution of legal services in a way that currently does not occur largely due to cost restraints associated with economies of scale.  It simply isn’t economically feasible for a traditional law firm to market and deliver en masse representation to the general public for routine wills, child custody, divorce, mortgage foreclosure, standard contracts, small business needs, immigration, bankruptcy, housing disputes, and other basic matters.

Let me return for a moment to the NYT editorial on America’s justice gap that I mentioned in Part I of this post.  The remedies proposed in that piece have not succeeded to date and are unlikely to come to fruition.  Funding for the Legal Services Corporation is on the decline, as it has been since established in 1974.  It is unclear how required pro bono reporting would make any meaningful difference in offering legal services to the untapped market of consumers that could be reached by corporations like Wal-Mart or Google.  As law schools struggle to control tuition and manage their budgets, expanding loan forgiveness programs seems unrealistic.  At best, permitting nonlawyers to engage in limited categories of simple legal representation might offer some relief but that, alone, is not enough.  Missing from this list of solutions, as I noted in my previous post, is the reform most likely to result in the dissemination of legal representation for those in need and to create jobs for unemployed lawyers:  corporate ownership of law practices.

We need a novel resource to facilitate competition, fuel innovation, and increase access to quality legal services.  Corporations have the potential to provide this resource.  Not only do economic realties and global competition demand this, but it is a matter of First Amendment concern as well.