Friday, January 31, 2014

Strong IP Protection Leads to Economic Growth and Innovation, Just as Our Founding Fathers Said – Part I

On January 29, the Global Intellectual Property Center of the Chamber of Commerce held a conference to celebrate the launch of its Second Annual International IP Index, Charting the Course. The Index provides an in-depth look at the IP environments of 25 countries, and offers proposals for improvement. Panelists at the GIPC event presented responses to the findings, as well as additional evidence on the impact of IP protection systems. The resounding message of the Index and panelists, based on empirical evidence in the Index and independent research, was that strong IP systems foster economic growth and development.
Senator Orrin Hatch took this message further, advocating for strong IP protection, but also recognizing that before evidence supported the theory of strong IP rights, the Founding Fathers explicitly provided protection for authors’ works as a founding principle of our nation. He credited this constitutional basis of intellectual property for leading the U.S. toward the strong IP environment in place today. In Part II of this blog on the GIPC event, I will discuss Senator Hatch’s comments and the constitutional foundations of intellectual property in further detail.

The Index ranks the IP environments of 25 countries that vary in market size, income level, and development. The Index uses 30 key metrics, which indicate whether an environment fosters growth and development and which provide a dynamic view of the strengths and weaknesses of each country’s IP protection system. The Index also includes proposals for improving economies, creating jobs, promoting innovation, ensuring safety, and providing access to creations and inventions through enhanced IP protections and supporting mechanisms.
The Index reports that most high-income economies, with some exceptions, have “robust national IP environments in place,” while the “weakest total national IP environments are in the lower-middle-income countries.” The Index ranks the U.S. first in the world in overall IP strength, and first in most other categories including Patents, Related Rights and Limitations, Copyrights, Related Rights and Limitations, Trademarks, Related Rights, and Limitations, and Trade Secrets and Market Access. The U.S. led the UK and France in all of these categories. The U.S., the UK, and France were equal in the Membership and Ratification of International Treaties category. The UK and France only out-ranked the U.S. in the Enforcement category, one of the weakest categories for all countries examined in the Index due to high rates of piracy worldwide.
The country with the weakest IP environment is India. This ranking was based on India’s continued use of compulsory licenses, patent revocations, and weak legislative and enforcement mechanisms. Other countries, like China, received low rankings due to their practice of conditioning market access on the forced sharing of protectable content, trade secrets, and sensitive technologies, despite its otherwise strong economic environment. Other countries that were among the lowest ranked on the Index include Indonesia, Vietnam, and Thailand.
Based on the Index findings and independent studies, the speakers at GIPC’s launch event delivered a unified response: Strong IP protection systems lead to strong economies, growth, and innovation. Panelists included members of Congress, government employees, interest group representatives, economists, and private industry stakeholders. Each advocated the importance of an empirical, fact-based analysis of an IP system’s impact, and presented evidence showing the indisputable link between strong IP protection and increases in innovative output, foreign direct investment, job creation, and other metrics indicative of economic growth and development.
For instance, Douglas Lippoldt, Senior Economist and Trade Policy Analyst at the Organisation for Economic Co-operation and Development (OECD) presented evidence demonstrating the link between strong patent protection and economic development. He found countries that increased their legal frameworks for patent protection after the Agreement on Trade-related Aspects of Intellectual Property Rights (TRIPS) experienced a clear increase in expenditure on research and development as a share of national GDP, in-flows of foreign direct investment, and increased output in creation and invention. He also noted an increase in foreign patent application filings, which indicated that increased patent protection attracted market entry.
Additionally, Michael Schlesinger, Counsel at the International IP Alliance and Aaron Brickman, Deputy Executive Director of SelectUSA, provided statistics proving the merits of the strong IP protection system in the U.S. Mr. Schlesinger noted that copyright-intensive industries grew by 4.73% in 2012 – more than double the growth in the rest of the U.S. economy. Those industries added $1 trillion to the U.S. economy in 2012, and employed 5.4 million workers. Further, those workers earned an estimated $85,000 on average, which is 33% higher than the average U.S. annual wage. Mr. Brickman stated that 1/3 of U.S. GDP is impacted by IP-intensive industries, and those industries are responsible for 1/3 of U.S. employment. He found that the U.S. IP framework is the reason the U.S. is the most attractive market for foreign direct investment, with approximately 1/3 of global research and development taking place in the U.S.
These numbers seem to clearly demonstrate that the U.S. IP environment leads the world, and that strong IP protections do indeed contribute to economic growth and innovation. However, Senator Orrin Hatch, Ranking Member of the Senate Committee on Finance, recognized that many economic and strategic competitors to the U.S. fail to understand that strong IP protections in the U.S. are to thank for much of its economic success. And, that the basis for protection of IP in the U.S. is the constitution. In his keynote address, Senator Hatch focused on the importance of strong intellectual property protections like other panelists, but he was the only presenter to recognize the role of the Founding Fathers in building the the U.S. system of intellectual property protection.
I will discuss Senator Hatch’s comments and the fundamental influence of the Founding Fathers on the U.S. intellectual property rights system in Part II of this blog series.  

Tuesday, January 28, 2014

Good News for the Incentive Auction Process!

CTIA and Los Angeles TV stations KLCS and KJLA just announced they are going to undertake a pilot spectrum sharing project to show that, "if implemented in markets across the country, as part of the upcoming auction of television broadcast spectrum, channel sharing would allow over-the-air broadcasters to continue providing -- and enhancing -- quality content without impacting their viewers while reducing infrastructure costs." In the pilot project, the two LA television stations are going to share a single over-the-air television channel, with their primary and multicast content shared in a single digital stream capable of carrying multiple HD and standard definition video services.

This initiation of this pilot project is very welcome news because, ultimately, the success of the spectrum incentive auction depends on having broadcasters decide to offer up some of their spectrum for auction, which spectrum then would be available to be auctioned for use by others -- presumably, wireless broadband providers -- in what's called a forward auction. If spectrum sharing along the lines contemplated in the pilot project proves feasible, then the chances for a "win-win-win" in the incentive auction increase substantially.

The broadcasters win because they receive the proceeds of the spectrum auctioned in the forward auction, the wireless operators win because they obtain additional spectrum needed to keep upgrading and expanding their networks, the public safety community wins because it receives some designated portion of the auction proceeds for building out a new first responder network -- and, if the auction is properly structured, there should be some left over for the U.S. Treasury [read: we taxpayers].

I don't know how the pilot project will work out, of course. But, in any event, it is likely to produce useful information. For that, CTIA, KLCS, and KJLA deserve our thanks.      

Monday, January 27, 2014

The FCC Should Remove Outdated Regulatory Roadblocks to an All-IP World

All-IP networks continue to overtake copper-based legacy voice services. The FCC has staked out a role for itself in furthering the IP transition. But having done so, the Commission must face the reality that transitioning to all-IP requires eliminating all monopoly-era regulations that stand in the way. 

Right now the FCC is taking public comments on a plan by CenturyLink whereby the Commission would relax but not eliminate certain legacy telephone regulations. CenturyLink seeks partial relief from certain monopoly-era network cost allocation rules – so-called Part 32 account rules, in particular.

Part 32 contains about 67 pages of complex accounting rules. It requires the maintenance of an entirely separate, detailed accounting system by incumbent voice carriers. That is, such carriers must maintain a Part 32 accounting system in addition to standard business accounting systems that follow generally accepted accounting principles. An AT&T estimate of Part 32 accounting rule compliance costs ran $15-20 million for systems and $3-4 million for personnel. This is on an annual basis.

Part 32 regulations are a relic of the monopoly-era legacy telephone regulatory system. The accounting rules were initially adopted to address potentially harmful capital and accounting cost practices incentivized by rate-of-return regulation. In a nutshell, Part 32 rules were intended to monitor rate-of-return incumbent voice carriers to prevent overbuilding capital facilities and incurring unnecessary costs. Otherwise, carriers could recover misallocated costs through rate-of-return regulated prices and use accounting tactics to hide profits. 

But incumbents such as CenturyLink have long since moved out from under rate-of-return regulation; they are now price cap carriers. Under price cap regulation, end-user charges are capped at a flat rate. That gives carriers incentive to lower overhead costs and provide more efficient services. Additional technical changes to FCC policy regarding legacy voice services – such as the FCC's 2001 freeze of separations cost allocation between interstate and intrastate jurisdictions as well as its 2011-to-present universal service and intercarrier compensation reforms – have also rendered Part 32 accounting rules unnecessary, if not irrelevant.

In the bigger picture of things, Part 32 rules are totally unnecessary because of the momentous changes in the communications marketplace over the last twenty years. Competitive and technological breakthroughs have dismantled the old monopolies and brought a bounty of choices to consumers.

According to the FCC's Local Telephone Competition Report, as of December 2013, wireless voice subscriptions number 305 million, whereas the number of switched access lines has dropped 96 million. Over the past four years 33.6 million Americans dropped their copper landlines. October 2012 data cited in the FCC's Sixteenth Wireless Competition Report indicates that 92.8% of the population is served by four or more mobile wireless voice carriers, and 80.4% is served by five or more. Interconnected VoIP service offered by cable operators offers consumers another major competitive alternative, with 42 million subscriptions nationwide.

On account of these market changes, through prior orders the FCC granted forbearance from aspects of Part 32 to various incumbent voice carriers. Such relief was conditioned on those carriers filing compliance plans outlining how they would still maintain accounting records consistent with Part 32. The Commission's USTelecom Forbearance Order (2013) likewise granted partial forbearance from Part 32 but requires carriers to continue to maintain Part 32 accounting and provide such data to the FCC upon request. But that partial relief is conditioned on filing a compliance plan. CenturyLink's compliance plan follows the conditions set out in the USTelecom Forbearance Order.

Recent data regarding voice competition and the unmistakably permanent decline in switched access lines reinforces the urgency for removing legacy telephone regulations. Incumbent voice carriers that are now migrating their own customers to VoIP services remain needlessly burdened by regulatory requirements to maintain increasingly expensive copper-based networks. The costs of keeping up duplicate networks – one copper-based network for switched access lines and the other IP-based – include the costs of duplicate accounting systems.

The FCC established a Technology Transitions Policy Task Force dedicated to facilitating the ongoing transition from copper-based legacy telephone networks to all-IP networks. When ultimately completed, the IP transition means the end of the public switched telephone network upon which legacy regulation was premised.

To encourage the completion of the IP transition process, the FCC should relieve carriers from regulations requiring them to run duplicate networks. Carriers should also be relieved from the unnecessary burden of having to run a separate set of books for outdated networks. Time and money spent by carriers to comply with the FCC's antiquated Part 32 accounting mandates are dead-weight losses. Ultimately, consumers would be better served by allowing carriers to rely on their knowledge of markets and technology by directing those freed-up resources to all-IP network deployment.  

Yes, by all means, the FCC should grant CenturyLink's compliance plan for partial relief from Part 32. But no compliance plan should have been required in the first place. Rather, the FCC already should have relieved carriers from having to maintain outdated, unnecessary, costly duplicate accounting systems. The FCC has the authority to act now and grant forbearance relief from Part 32 accounting rules in their entirety.

In dynamic markets, eliminating unnecessary regulations shouldn't be bogged down by half-measures. Granting partial relief from unnecessary and costly legacy regulations pursuant to compliance plans is a formula for needlessly dragging out the IP transition. Stacking one set of transition plans on top of another will not make for a smooth process. When it comes to advancing the IP transition, the FCC should remove monopoly-era regulations like Part 32 in full. 

Friday, January 24, 2014

What the Songwriting World Needs Now, According to Burt Bacharach and FSF

In a January 23, 2014 op-ed in the Wall Street Journal [subscription required], music legend Burt Bacharach, who is now 85, recognized the need for reform of the legal framework for music licensing to reflect the new music marketplace. He cleverly noted, “The law is not in tune with the digital revolution.” Namely, the current consent decree arrangement between ASCAP and BMI set when vinyl records were the newest technology and last revised before the introduction of the iPod, does not work properly in a world dominated by digital streaming and downloads. The consent decrees apply to online radio services like Pandora. Under this arrangement, for every 1,000 times Pandora plays their song, songwriters earn only about 8 cents. According to Bacharach, this can hardly meet the required "reasonable fees” the consent decrees promise.

Under the consent decree arrangement, ASCAP and BMI are required to grant licenses to the requestor. If the parties cannot agree upon a price for the license, federal judges set the price based on varying rate standards for different services. This system imposes a compulsory licensing and rate-setting scheme, instead of allowing the free market to determine the proper price rights holders should be paid.

As Free State Foundation scholar Seth Cooper wrote in his November 2012 piece, Putting Music Copyright Policy on a Free Market Footing, and in several posts on the Free State Foundation blog, the current copyright licensing royalty regime runs contrary to rule of law and free market principles. Today’s regime arbitrarily discriminates among market players and sets unsustainable, inefficient price controls. Informed by late economist F.A. Hayek’s The Constitution of Liberty, Mr. Cooper argued that a free market oriented approach is superior to a system where the government directly controls prices because it enables market players to set prices according to constantly changing conditions and technologies, account for differences between types of buyers and sellers, and would help ensure transaction efficiency. A free market approach is especially appropriate for today’s competitive music market, given the abundance of alternatives in access to and storage of music available to consumers today, and given the need to remove government mandates that slow and discourage innovation in new disruptive products and services.

Although there have been efforts to address the disconnect between the current music licensing framework and marketplace realities, bills like the Internet Radio Fairness Act of 2012 are a step in the wrong direction. Thankfully, this controversial bill is currently in a state of hibernation, after groups representing artists and sound-recording owners opposed the bill’s proposed changes to the standards by which Internet radio royalties would be set by a panel of Copyright Royalty Judges. 

Congress should not attempt to adjust the music-licensing framework to the new music marketplace by imposing new price controls and arbitrary standards for valuation. Instead, the goal of any reforms to existing music licensing laws and regulations should be to allow arms-length transactions between songwriters, artists, and music distribution platforms, labels, and licensing entities to be driven by free market principles.


Wednesday, January 22, 2014

Title II Reclassification of ISPs? Scott Cleland Says Would Flout Executive Order

Scott Cleland has a good post suggesting that any effort by the FCC to impose Title II common carrier regulation on the Internet providers would be inconsistent with President Obama's Executive Order on “Improving Regulation.”

Scott makes a persuasive case. I won't repeat his arguments here, but I do commend his piece to you. For that matter, if you want to delve more deeply into the Title II reclassification issue, at the end of his post Scott has a list with links to a series of pieces on this subject. 

New Year, New Approach: A Turn Towards Regulatory Modesty in the FCC’s Transaction Review Process

The New Year has just begun, and the FCC, like the rest of us, could stand to make some New Year’s resolutions. A key one could be reforming its transaction review process.
Already, there are a few potential mergers and acquisitions that may require Commission review in the coming months. Frontier Communications announced in December that it seeks to acquire AT&T’s wireline business and statewide fiber network assets in Connecticut, and Sprint is reportedly seeking to acquire T-Mobile, according to the Wall Street Journal. In perhaps a leap of anticipation, the American Antitrust Institute (AAI) has already urged the FCC and the Department of Justice to block any merger of Sprint and T-Mobile, arguing that it would stifle competition and harm consumers. And it is at least conceivable we could see a transaction involving Time Warner Cable and other parties.
The FCC’s transaction review process has drawn much attention and discussion over the last few years. In 2011, the House Subcommittee on Communications and Technology held several hearings on FCC process reform. On May 13, 2011, the Subcommittee heard testimony from Chairman Julius Genachowski, Commissioner Michael Copps, Commissioner Robert McDowell and Commissioner Mignon Clyburn on what was working at the FCC, recent improvements to the FCC’s processes, and what still needed attention.
Chairman Walden opened the hearing by proposing several reforms to FCC processes. Regarding the FCC’s transaction review process, Congressman Walden stated, “the FCC’s transaction review standards are vague and susceptible to abuse.” The Congressman also highlighted an observation by Chairman Emeritus Dingell, who stated in a hearing back in March 2000 that there is “great need to address and to reform the way the FCC handles its merger reviews. These are a remarkable exercise in arrogance, and the behavior of the Commission, oft-times by reason of delay and other matters, approaches what might well be defined as not just arrogance, but extortion.” Congressman Stearns, Congressman Christensen, and Commissioner McDowell particularly focused on the need for reform of the FCC’s transaction review process throughout the May 2011 hearing.
In July 2011, Congressman Walden circulated a Discussion Draft of the FCC Process Reform Act of 2011. Later that month, the Subcommittee held another hearing on “Reforming FCC Process,” and heard testimony from industry representatives, think tanks, consumer groups, academia, and the States. FSF President Randolph May testified and supported many of the proposed reforms in the Discussion Draft, particularly reform of the Commission’s transaction review process:
In my view, the provision reforming the Commission's transaction review process is as important as any other in the bill in light of the abuse of the process for many years now. The agency often imposes extraneous conditions -- that is, conditions not related to any alleged harms caused by the proposed transaction after they are "volunteered" at the last-minute by transaction applicants anxious to get their deal done. The bill's requirement that any condition imposed be narrowly tailored to remedy a transaction-specific harm, coupled with the provision that the Commission may not consider a voluntary commitment offered by a transaction applicant unless the agency could adopt a rule to the same effect, would go a long way to reforming the review process.
In November 2011, Congressman Walden introduced H.R. 3309, the FCC Process Reform Act of 2012. Among many reforms, the bill proposed changes to the Commission’s transaction review standards. That bill passed the House in March 2012, but died in the Senate. 
Another Discussion Draft was circulated during the summer of 2013. Now entitled the "FCC Process Reform Act of 2013," it retained two substantial reforms proposed for the Commission’s transaction review standards from the original 2012 bill: that the Commission could only condition its approval of a transfer of lines, licenses or other transaction if:
“(A) the imposed condition is narrowly tailored to remedy a harm that would likely arise as a direct result of the specific transfer or specific transaction,” and;
“(B) the Commission could impose a similar requirement under the authority of a specific provision of law other than a provision empowering the Commission to review a transfer of lines, a transfer of licenses, or other transaction.”
In addition, the 2013 Discussion Draft added a provision, which would require that the Commission could not impose conditions on approval of transactions unless “(C) the likely harm described in (A) is uniquely presented by the specific transfer of lines, transfer of licenses, or other transaction, such that the harm is not presented by persons not involved in the transfer or other transaction.” By adding this provision, the Discussion Draft proposed to further strengthen the transaction review standards contained in the original 2011 draft of the FCC Process Reform Act of 2012. 
In his July 2013 testimony on the Discussion Draft before the House Subcommittee on Communications and Technology hearing, “Improving FCC Process,” FSF President Randolph May specifically praised the proposed transaction review process reforms included in the most recent draft of the bill:
The provisions [proposed], especially the addition that would allow the Commission to condition approval of a proposed transaction only if the condition addresses a likely harm uniquely presented by the specific transaction, would go a long way toward combating abuse of the transaction review process.  
A few months after the Discussion Draft was circulated, a compromise version of the bill was reintroduced in December 2013 as H.R. 3675, the FCC Process Reform Act of 2013. The compromise version of the bill removes the provision in the FCC Process Reform Act of 2012 that would have required conditions to be “narrowly tailored” and that would have more narrowly defined the “harm” resulting from the transaction. Although it would have been preferable for these provisions to remain, the FCC Process Reform Act of 2013 nonetheless retains important improvements for the Commission’s transaction review process.
The current bill still provides that the Commission may only condition its approval of transactions if the condition remedies a harm likely to result from the specific transfer or transaction pending, the harm is unique to that transaction, and the imposition of the condition is within the Commission’s authority other than that granted by sections 214, 309, or 310. These provisions would make it more difficult for the Commission to impose conditions on transactions under review unless they are necessary and appropriate.
Even absent congressional action, the FCC itself could institutionally reform its transaction review process to reflect the changes proposed in the FCC Process Reform Act of 2013. The Commission could do so by approaching pending mergers and acquisitions with regulatory restraint.
The FCC currently reviews transactions under the broad public interest standard. As such, the Commission could undertake reforms absent passage of the FCC Process Reform Act of 2013 by issuing a formal policy statement expressing its intent to abide by the proposals included in the Act. Or, the Commission could simply act in accordance with the transaction review standards proposed in the Act when approaching pending transactions. Modifying its transaction review process by issuing a policy statement or by acting consistently with the reforms proposed in the FCC Process Reform Act is within the FCC’s discretion. Further, these institutional changes by the agency would remove unnecessary burdens, promote efficient marketplace transactions, and in turn, benefit consumers.
For a long time, FSF scholars have focused on the need to limit the Commission’s ability to manipulate the transaction review process. As far back as 2000, in Any Volunteers?, FSF President Randolph May discussed how the Commission regulates, in effect, by imposing “voluntary” conditions on transaction approvals rather than engaging in general rulemaking proceedings that would be applicable to all similarly situated parties. Mr. May stated, “Indeed, even when the ‘volunteered’ conditions relate more closely to the Commission's articulated competitive concerns … regulation by condition is unsound, because it imposes new burdens only on the merging parties.”
There are many other pieces on the FCC’s transaction review process on FSF’s blog. The point is, the FCC has imposed unnecessarily burdensome, “voluntary” conditions on many major transactions in the past, even when those conditions were not related to the unique issues or harms presented by the pending transaction.
The FCC Process Reform Act of 2013 would substantially improve the transaction review process. However, without awaiting the passage of new legislation, the Commission should begin the New Year by committing to take a new approach to this process by acting with regulatory restraint, and reviewing proposed transfers and transactions in conformity with the review standards proposed in the Act.
Perhaps under Chairman Wheeler, reform of the transaction review process could be a New Year’s resolution the Commission can keep. 

Tuesday, January 21, 2014

Copyright Reform for the Digital Age

Amid the excitement of the D.C. Circuit releasing its decision on whether and how the FCC may regulate the Internet, and Chairman Walden’s call for a Communications Act update, the House Subcommittee on Courts, Intellectual Property, and the Internet held an important hearing on the appropriate scope of Copyright law for the digital age. In some circles, the Net Neutrality debate or discussions regarding whether the Communications Act should be reformed may be more central. But similar issues stemming from technological convergence, the Internet, and fundamental changes in content distribution also pose significant challenges to copyright law as it currently stands.
The hearing, "The Scope of Copyright Protection," examined whether the Copyright Act is in need of reform to respond to new developments presented by digital technologies, and other issues. The last major revision to the Copyright Act of 1976 was the Digital Millennium Copyright Act, (DMCA), which was signed in 1998. The Register of Copyrights called for legislative reform in 2013, citing the rapid development of digital content exchange platforms and the accompanying growth of digital piracy and infringement since the DMCA was passed. She stated, “I think it is time for Congress to think about the next great Copyright Act, which will need to be more forward thinking and flexible than before. Because the dissemination of content is so pervasive to life in the 21st century, the law also should be less technical and more helpful to those who need to navigate it.”
The January 14th hearing examined whether the current Copyright Act provides an adequate framework regarding three specific issue areas: How the current Copyright Act defines infringement under the making available or distribution right; whether the protections for broadcasters under the current Act should be revised; and whether codes, standards, and state laws should be subject to copyright protection. The hearing featured five witnesses: David Nimmer of counsel, Irell & Manella LLP and author of leading treatise in Copyright, “Nimmer on Copyright;” Glynn Lunney Jr., professor of law at the Tulane University School of Law; Mark Schultz, associate professor of law and director of faculty development at the Southern Illinois University School of Law; James Love, director of Knowledge Ecology International; Patricia Griffin, vice president and general counsel for the American National Standards Institute; and Carl Malamud, president of
The debate regarding the scope of copyright protection in the digital exchange context was most illustrative of some of the central issues challenging copyright law today. Namely, how to balance the values of access to information and content, and authors’ rights in the fruits of their labors. Professors Nimmer and Lunney primarily focused on this issue in the context of the scope of the distribution right. They examined whether the act of placing or uploading a digital file containing a copyrighted work into an Internet-accessible resource violates copyright law. That is, whether a copyright holder must prove that the uploaded file was subsequently downloaded in order to prove infringement. Professor Nimmer testified that the exclusive right granted to authors under the Copyright Act by the distribution right renders the act of making an unauthorized upload an infringing act, even though courts are currently split on the issue. As such, he recommended that Congress provide clarification on the scope of the "making available" right. In contrast, Professor Lunney stated that any action by Congress would lead to more confusion rather than clarity.  
Professor Nimmer’s view properly looks to the history of copyright law, under which the U.S. Copyright Office found in 1961 that the “twofold right to make and to publish copies” constituted the “historic basis of copyright,” and merely making a copyrighted work available to the public without the author’s permission was infringement. The drafting of the current Copyright Act recast the historic right “to publish” as the right “to distribute.” Some courts have interpreted infringement of the distribution right as requiring both the offer and acceptance of an unauthorized copy, despite legislative history indicating the opposite. In the digital context, this interpretation requires a plaintiff to prove that an unauthorized download was subsequently uploaded. This view does not properly weigh the author’s property right in the fruits of his labor, and tips the balance in favor of infringing parties.
Article 1, Section 8, Clause 8 of the U.S. Constitution states that the goal of Copyright law is to “promote the progress of science and useful arts by securing for limited times to authors and inventors the exclusive right to their respective writings and discoveries.” Among the exclusive rights granted to owners of Copyright is the right to distribute. Professor Nimmer explained in his testimony, “deterring unauthorized distribution (properly defined) promotes progress in the creative arts by empowering creators to determine when and how to commercialize their works,” and “increase[es] the ability of creators to appropriate a return to their efforts.” This view properly recognizes the foremost importance of protecting the property right of authors in their works.
 As Free State Foundation scholars Randolph May and Seth Cooper explained in “The Constitutional Foundations of Intellectual Property,” property protection, whether the property is tangible or intangible, is essential to enabling and maintaining a vibrant, healthy overall economy.  Even as innovation and value increasingly take intangible form, and protected content becomes more easily disseminated and shared, securing intellectual property rights becomes ever more critical to fostering the creation and marketing of goods and services to consumers. While intellectual property protections must be forward-looking in order to reflect new innovations in technology and the marketplace, the foundational principles guiding IP policy are grounded in the past:
The foundations for intellectual property predate the Constitution. Classical liberal political philosophy was a formative influence on the framers and ratifiers of the U.S. Constitution. According to this philosophy, especially the works of John Locke, government exists to protect natural rights to life, liberty, and property. This classical liberal philosophy defined "property" broadly to include one's person, one's faculties, and the fruits of one's labor. Lockean natural rights philosophical premises, as understood and adopted by James Madison and other of our Founders, confirm the status of copyrights and patents as genuine forms of property, on par with real or personal property….
A Lockean approach grounds intellectual property in natural right, adjusted in a social context to account for the public welfare.
Other witnesses and representatives at the recent hearing also recognized the importance of protecting authors’ property rights in their creations. Professor Mark Schultz stated in his testimony, “While Congress and the courts have often revisited and adjusted the margins and peripheries of copyright, the heart of copyright has remained consistent: Copyright protects the productive intellectual labor of authors, provided that those labors result in an original expressive work…. Like other property rights, intellectual property rights are essential to the individual liberty and free-market system that drive our dynamic economy.” Professor Schultz also observed, as did Free State Foundation scholars in the most recent Perspectives on IP, that the Founders’ concept of a person's property right was informed by James Madison’s statement in Federalist No. 43 that “the public good fully coincides ... with the claims of individuals.” This reflects the notion that while the public’s demand for information, shared content, and enabling technologies may become increasingly prevalent in the digital age, copyright can and should remain grounded in authors’ rights while also benefiting the public good.
In order to respond to the challenges of the changing landscape of digital technologies and Internet communications, copyright law may need to be adjusted or even substantially reformed. However, any reforms to the Copyright Act should reflect and be consistent with the government’s primary purpose to protect property rights, as intended by the Founders. In the context of digital file sharing, Professor Nimmer’s view that an author need only provide proof of an unauthorized upload seems to be more consistent with the historical conception of authors rights, grounded in the Constitution and in our country’s copyright jurisprudence.
As James Madison observed, a well-defined system of intellectual property rights, which respects the proper scope of authors’ rights can serve both individual interests and the public good. This is true even in the face of challenges posed by the digital age.

Further Free State Foundation Readings on the Constitutional Foundations of Intellectual Property:

No. 1: The Constitutional Foundations of Intellectual Property, by Free State Foundation President Randolph J. May and Research Fellow Seth L. Cooper

No. 2: Reasserting the Property Rights Source of IP, by Free State Foundation President Randolph J. May and Research Fellow Seth L. Cooper

No. 3: Literary Property: Copyright's Constitutional History and Its Meaning for Today, by Free State Foundation President Randolph J. May and Research Fellow Seth L. Cooper

No. 5: The "Reason and Nature" of Intellectual Property: Copyright and Patent in The Federalist Papers, by Randolph J. May and Seth L. Cooper

Wednesday, January 15, 2014

FSF Scholars React to DC Circuit's Net Neutrality Decision

Below are quick reactions from three members of the Free State Foundation's distinguished Board of Academic Advisors – Christopher Yoo, Justin (Gus) Hurwitz, and Daniel Lyons – to yesterday's D.C. Circuit decision in Verizon v. FCC. Each of these members of FSF's Board of Academic Advisors is acknowledged expert in the field of communications law and policy.

While upholding the FCC's authority under Section 706 to take certain actions regarding the oversight of broadband providers, the court held unlawful the anti-discrimination and the anti-blocking prongs of the FCC's net neutrality regulations. The court found the FCC lacked the authority to promulgate these regulations.

Here are the reactions:

FSF's Justin (Gus) Hurwitz – University of Nebraska College of Law

Yesterday’s network neutrality decision was in line with most expectations. The DC Circuit found that the Communications Act gives the FCC broad power to regulate networks that the Commission classifies as “information services” (such as the Internet), but that it imposes clear restrictions on treating such networks as “telecommunications” networks (e.g., the traditional telephone system). In so finding, the judges got things right on the law. The Commission’s ability to construe its power broadly is in line with modern administrative jurisprudence, as most recently affirmed by the Supreme Court last May in its City of Arlington opinion; the prohibition on imposing common carriage requirements on information services follows from the DC Circuit’s recent CellCo decision.

Of course, getting things right on the law doesn’t mean that the judges have left everyone – or even anyone – happy as a matter of policy. Both Net Neutrality proponents and opponents are expressing concerns about the implications of yesterday’s decision. Proponents are decrying the death of network neutrality, and even of the Internet itself – they say that the FCC must reclassify the Internet as a telecommunications service – or, at a minimum, must use its broad power (just affirmed by the DC Circuit) to issue new rules that will fit within the constraints indicated by the DC Circuit’s decision. Opponents are expressing alarm at the broad construction of the Commission’s power allowed by the judges, saying that that power must be constrained.

Taking the latter concern first, the simple fact is that Communications Act gives the FCC very broad power. One could almost say that the way in which courts interpret laws such as Section 706, which speaks to the Commission’s authority over “advanced telecommunications capabilities,” is generative in nature, giving the Commission power to do almost anything it deems appropriate to promote competition and remove barriers to investment (short of that which is expressly prohibited by the statute, viz., treating information services as common carriers). This is an alarmingly broad scope of authority – and it is almost certainly beyond the scope intended by either the 1934 or 1996 Congresses. But any change to constrain this broad power needs to come, and should come, from Congress, not the courts. Importantly, while the Commission’s power may be broad, we should remember that there are important procedural safeguards in place governing how it uses that authority. Let us not forget the Commission’s high-profile losses in Comcast, the original network neutrality case, and more recently in Fox, a case unrelated to network neutrality but that reminds us that the Commission’s enforcement actions are subject to basic Due Process and Fair Notice requirements.

On the other side, demands for another round of rulemaking or reclassification are premature. Here the simple fact is that the concerns animating network neutrality proponents have never substantiated a need for broad regulation. The few cases that have raised net neutrality concerns haven’t required new rules to address these concerns – the resources expended by the FCC to date in creating the Open Internet Order almost certainly exceed any harm they have kept from befalling consumers. And there is substantial evidence that “non-neutrality” (an Orwellian term if ever there was one) can be beneficial for consumers. Unfortunately, these benefits have never been given the opportunity to develop because of the Commission’s prophylactic rules. Rather than adopt ex ante rules that forego likely benefits to avoid speculative harms, the Commission should adopt an ex post adjudicative approach that takes action to remedy actual harms that may develop while allowing firms to experiment with new, pro-consumer, business models.

Fortunately, this appears to be the approach that Chairman Wheeler has advocated. In a posting to the Commission’s blog late yesterday, he expressed his “strong preference [to develop the Commission’s power] in a common law fashion, taking account of and learning from the particular facts that have given rise to concern. The preference is based on a desire to avoid both Type I (false positives) and Type II (false negatives) errors. ... If something appears to go wrong in a material, not a trivial, way, the FCC will be available to use the totality of its authority for adjudication and enforcement. ... I am not advocating intervention unless there is an unmistakable warrant for it."

This is exactly the right approach for the Commission to take. It allows firms to develop new business models, to demonstrate whether they are, in fact, beneficial to consumers. It doesn’t forego the Commission’s ability to take action against such conduct if it is, in fact, harmful to consumers. And it provides all of us – not least Congress – with information needed to make informed decisions as we move forward.

FSF's Christopher Yoo – University of Pennsylvania Law School


            On January 14, 2014, the U.S. Court of Appeals for the D.C. Circuit handed down its eagerly anticipated decision in Verizon v. FCC, in which the court assessed the legality of the Federal Communications Commission’s (FCC’s) 2010 Open Internet Order.  The result is that the FCC’s order was struck down with respect to the nondiscrimination and nonblocking rules, although the transparency rule was left in place.  The fact that the D.C. Circuit deviated from its usual practice of simply remanding noncompliant agency actions and instead vacated portions of the FCC’s order arguably reflects skepticism that the agency could find an alternative justification for those rules.

            That said, the opinion contains language likely to serve as sources of both encouragement and anxiety to the Order’s proponents and opponents alike.  On the one hand, Part II of the opinion upheld the FCC’s conclusion that both section 706 of the Telecommunications Act of 1996 represents an affirmative grant to the FCC of authority to regulate broadband providers. On the other hand, Part III of the opinion imposed strict limits on the ways in which the FCC may exercise that authority. Most notably for the network neutrality debate, the prohibition of common carriage obligations appears to leave little room for the FCC to impose a nondiscrimination mandate.  Speculation about the opinion’s implications for the future has only just begun.

            Much can (and surely will) be said about the implications of the D.C. Circuit’s decision.  For the time being, I thought I would offer a few quick observations about the statutory source of the FCC’s authority over broadband providers, which may well prove to be the most important aspect of the D.C. Circuit’s decision.

The Missing Argument

            The D.C. Circuit first concluded that section 706(a) represents an affirmative grant of authority to the FCC.  The FCC ruled in 1998 that section 706(a) did not represent an affirmative grant of authority, and the D.C. Circuit relied on that determination in 2010 when holding that section 706(a) did not give the FCC the statutory authority to sanction Comcast for using TCP resets to rate-limit BitTorrent, widely regarded as the most high-profile violation of network neutrality principles to date.  The D.C. Circuit revisited that determination in Verizon v. FCC, observing quite properly that agencies are allowed to change their minds so long as they acknowledge that they are changing their positions and set forth their reasons for doing so.  So long as the agency properly explains its change of heart, courts will defer to any reasonable interpretation that is not precluded by the language of the statute.

            The threshold question is whether Congress has directly spoken to the precise question at issue. This inquiry naturally requires an examination of the statutory text.  Section 706(a) provides:

The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment.
The D.C. Circuit focused on the last phrase, holding that ordering the FCC to utilize “regulating methods” represented an affirmative grant of authority.

            This last phrase, “other regulating methods that remove barriers to infrastructure investment,” is a classic “catchall” clause.  As a result, the traditional canon of statutory construction known as ejusdem generis “limits general terms [that] follow specific ones to matters similar to those specified.” In other words, the scope of the catchall phrase is limited by the terms that precede it.  The joint brief submitted by Verizon and MetroPCS raised precisely this argument. A related canon known as noscitur a sociis “counsels that a word is given more precise content by the neighboring words with which it is associated.” In other words, if an ambiguous statutory term is embedded in a list, courts should construe it in light of the other terms in the list.

            The first two items in the list contained in section 706(a), “price cap regulation” and “regulatory forbearance,” are deregulatory in focus.  The third item, “measures that promote competition in the local telecommunications market,” also does not at first blush lend itself to a reading that would impose heavier regulatory obligations on broadband providers.  The FCC concluded that promoting competition in access and content would ultimately stimulate demand for greater investments in infrastructure. The FCC based this conclusion on a single empirical study, and one that focused on the cable television industry (not broadband) and was unable to find clear evidence of discrimination. Against this is arrayed the growing corpus of empirical studies showing that access requirements deter investment and competition in local telecommunications services. Even more importantly, this construction would be significantly out of steps with the other terms contained in the list.

            Whether the catchall can support the regulation of broadband providers thus depends on whether a court is willing to accept a fairly indirect argument that is considerable tension with the empirical findings of the majority of the peer-reviewed literature and with the text and structure of section 706(a).  The D.C. Circuit was willing to do so. Should the FCC decide to appeal the decision, it remains to be seen whether the Supreme Court will agree.

The Missing Section 706 Report

            The D.C. Circuit held that section 706(b) also gave the FCC statutory authority to regulate broadband providers.  If the FCC concluded that “advanced telecommunications capability is [not] being deployed to all Americans in a reasonable and timely fashion,” it “shall take immediate action to accelerate deployment of such capability by removing barriers to infrastructure investment and by promoting competition in the telecommunications market.” Again, the specified means of “removing barriers to infrastructure investment and by promoting competition in the telecommunications market” mirror the language of the third and fourth clauses of section 706(a).  Thus, the same arguments advanced above apply.

            More importantly, the FCC is only authorized to act under section 706(b) if it finds that advanced telecommunications capability, defined by the statute to include broadband, is not being deployed to all Americans in a reasonable and timely fashion.  The first five of the annual reports issued pursuant to section 706 had concluded that broadband deployment did meet this standard.  Only in the sixth report, the last one issued prior to the Open Internet Order, did the FCC find broadband deployment to be inadequate.

            Under the previous Administration, the FCC was criticized for its tardiness in issuing annual reports.  As a general matter, the current Administration has better adhered to the statutory deadlines, consistently issuing its annual section 706 reports somewhere between May and August and with the last report being issued in August 2012.  If the FCC had held to its current pattern, it should have issued its most recent section 706 report no later than August 2013.  Five months have passed since that date with no sign of the report.

            One can only speculate as to why.  Interestingly, the primary basis for the FCC’s finding in its last report that broadband deployments was not reasonable and timely was the fact that as of June 2011, 19 million Americans (or 6% of the population) lacked access to broadband, which the FCC defined as service providing download speeds of 4 Mbps. Commissioner Pai pointed out, however, that if wireless broadband were included, the number of unserved Americans dropped to 5.5 million or 1.7% of the population. Moreover, the last section 706 report was based on data reflecting the earliest stages of the deployment of the fourth-generation wireless technology known as LTE.  Since that time, Verizon has completed its LTE buildout.  AT&T’s LTE network now reaches 80% of the U.S. population and is scheduled for completion by the end of 2014.  Sprint and T-Mobile are racing to catch up, each reaching 200 million by the end of 2013. In addition, recent studies indicate that Verizon’s, AT&T’s, and T-Mobile’s LTE offerings provide an average download speed of 12 to 19 Mbps and peak download speeds of 49 to 66 Mbps. The near ubiquity of LTE suggests that the number of people who cannot access broadband that meets or exceeds the FCC’s 4 Mbps standard is now likely to be considerably less than the 1.7% reported as of June 2011.  And if broadband deployment is reasonable and timely, section 706(b) provides the FCC no authority to act.


            These are a few initial thoughts about the D.C. Circuit’s opinion itself.  There are doubtlessly some important responses to the concerns I have raised, and I look forward to exploring the nuances of the various arguments.  In the meantime, one of the few clear implications is that the lull that had settled over Capitol Hill, the FCC, the public interest community, and the industry while waiting for the D.C. Circuit to render its opinion is now over.  The next round of the debate over network neutrality has only just begun.

FSF's Daniel Lyons – Boston College Law School

The Court’s decision is good news for innovation and ultimately for consumers. The Commission’s conception of one-size-fits-all Internet access is increasingly at odds with the diverse demands of broadband customers. Broadband providers are increasingly offering innovative, non-traditional pricing structures to differentiate themselves from their competition. This is particularly true in the wireless space—witness, for example, AT&T’s “sponsored data” initiative and T-Mobile’s successful campaign to decouple handset subsidies from service contracts. Today’s court decision allows broadband providers to innovate further by developing the other half of broadband’s two-sided market.

But it is worth noting that this decision is unlikely to be the final word on the issue. The Commission may try to re-impose net neutrality by reclassifying broadband service as a Title II telecommunications service. And even if it does not do so, the court’s decision appears to leave the Commission with some wiggle room to regulate commercially reasonable agreements, especially when considered in light of last year’s data roaming order. For example, while the Commission can no longer prohibit priority access agreements with content providers, it may be able to require broadband providers to offer any priority deal on a commercially reasonable basis and prohibit exclusive agreements that would deny priority access to content providers willing and able to pay for such service.

It will be interesting to see what develops in this space. But one thing is certain: the Court’s decision has both identified the need for Chairmen Walden and Upton’s proposed Communications Act update to proceed, and has helped clear some of the underbrush that may otherwise have impeded their efforts to do so.