Thursday, May 29, 2014

Center for Copyright Information Releases Copyright Alert System Report

On May 28, the Center for Copyright Information (CCI) released a report on the recently launched Copyright Alert System (CAS). The CAS is a tiered notice and response system aimed at reducing copyright infringement over peer-to-peer (P2P) networks. The CAS is an innovative, comprehensive, voluntary collaboration between Internet service providers (ISPs) and copyright holders which aims to educate consumers and to empower content owners to protect their intellectual property by fighting online piracy.

Content companies including movie studios, television program producers, and the recording industry are constantly creating new ways to meet consumer demands by providing easy and affordable access to content online. In order for these new platforms and technologies to be successful, the firms must be confident that the works made available online will not be degraded in value by unauthorized online behaviors or outright stolen by pirates.

Content owners today have tools to combat online piracy, but infringing behavior is still rampant, particularly among P2P networks. The CAS is an online IP enforcement mechanism that empowers content owners to enforce their IP rights against unauthorized account holders in P2P networks. The CAS can be used as an alternative to the DMCA’s notice and take-down procedure. Reports received from certain content owners (or their authorized agents) regarding possible copyright infringement by file-sharing programs or P2P networks will go through the new Copyright Alert System. Reports from other owners (or their authorized agents) that do not involve file-sharing program copyright infringement allegations will continue to be sent through the standard DMCA (Digital Millennium Copyright Act) response system.
The CAS program allows content owners to generate notices of alleged copyright infringement by identifying the IP address associated with the potentially infringing behavior. The content owner then notifies his or her ISP of the IP address, which can be identified through use of publicly available IP address data. The ISP then delivers a “Copyright Alert” to the P2P account holder(s) that content owners have identified as engaging in unauthorized uses of content. ISPs do not share any personally identifiable information about their subscribers with content owners or CCI. Not all notices to ISPs result in alerts, because the system only allows content owners to send one Copyright Alert in a seven-day period. Alerts to consumers provide a grace period so that account holders and authorized users can investigate and correct their behavior to stop improper uses of an account. If an account holder does not believe its behavior is unauthorized, it can challenge the alert with the American Arbitration Association (AAA). The graphic below, included in CCI’s report, illustrates the alert generation and delivery process. 
The CAS was launched in February 2013, and it has already identified many potentially infringing behaviors online. The just-released CCI report reviews data collected from the first ten months of the CAS’ operation. CCI reports that 1.3 million Copyright Alerts were sent to over 700,000 customer accounts, and over 2 million notices of alleged infringement were sent to ISPs in only the first 10 months of the program. No invalid notice or false positives have been reported. More than 70% of those alerts generated were at the initial educational stages, and less than 3% of the alerts were sent during the final mitigation phase. Account holders who received alerts filed only 265 requests for review with the AAA—this amounts to requests for review of just 0.02% of all alerts sent to participating ISPs’ account holders.

Even though the CAS has only been running for a short time, it seems to be off to a good start.  The system already appears to be both accurate – yielding no false positives –and necessary –given the high number of unauthorized uses identified. Also, there is already evidence that account holders that receive an alert do not engage in further P2P infringement, as the chart from the CCI report below shows.

The CAS has also provided useful data on consumers’ understanding of online piracy and behaviors online. The majority of users surveyed reported that they would stop engaging in copyright infringement immediately upon receiving an alert and most (62%) reported that they believe it is never acceptable to engage in infringing activity. However, a majority of respondents expressed uncertainty of what constitutes infringing behavior: 65% of the respondents agreed that it would be helpful if more resources were available that make clear what content sources and online activities are and are not legal.

Over the next few months the Center for Copyright Information plans to analyze operational data to track the impact of the Copyright Alert System on user behavior and consumers’ attitudes towards copyright infringement. These efforts, in conjunction with the continued operation of the CAS, will help educate enforcement entities and consumers on the best ways to curb online piracy. Hopefully, the CAS and CCI’s educational efforts will encourage consumers to embrace authorized sources of legal and licensed content, decrease online piracy, and protect the rights of content owners online.

PS – Over the past year, the Free State Foundation has been engaged in an important educational effort of its own to enhance the public’s understanding of intellectual property rights. In a series of what presently constitutes six “Perspectives from FSF Scholars” papers, Free State Foundation President Randolph May and Adjunct Senior Fellow Seth Cooper have been addressing foundational principles of intellectual property. These scholarly papers further the public’s understanding of the nature of IP rights and they explain why our Founders thought it was important for the Constitution and our laws to protect IP.

The six papers, with links, are here:

Randolph J. May and Seth L. Cooper, "The Constitutional Foundations of Intellectual Property," Perspectives from FSF Scholars, Vol. 8, No. 13 (2013).

Randolph J. May and Seth L. Cooper, "Reasserting the Property Rights Source of IP," Perspectives from FSF Scholars, Vol. 8, No. 17 (2013).

Randolph J. May and Seth L. Cooper, "Literary Property: Copyright's Constitutional History and Its Meaning for Today," Perspectives from FSF Scholars, Vol. 8, No. 19 (2013).

Randolph J. May and Seth L. Cooper, "The Constitution’s Approach to Copyright: Anti- Monopoly, Pro-Intellectual Property Rights,” Perspectives from FSF Scholars, Vol. 8, No. 20 (2013).

Randolph J. May and Seth L. Cooper, "The 'Reason and Nature' of Intellectual Property: Copyright and Patent in The Federalist Papers," Perspectives from FSF Scholars, Vol. 9, No. 4 (2014).

Randolph J. May and Seth L. Cooper, “Constitutional Foundations of Copyright and Patent in the First Congress,” Vol. 9, No. 18 (2014).

Tuesday, May 27, 2014

Maryland Tax Climate and Interstate Migration: Issues to Watch

On May 9, the Center on Budget and Policy Priorities [CBPP] released a study by Michael Mazerov which concludes that state taxes have a small impact on Americans’ interstate moves. However, migration within the U.S. is much higher than in the EU, Mexico, or even Canada. There are many factors that contribute to the high rate of migration in the U.S. But one factor that has a significant impact on internal migration is a state’s tax climate. Policymakers and legislators at the state and local level would benefit from considering the effects of their tax policies on residents’ decisions concerning whether to keep their businesses and consumer activities in state.

The Tax Foundation’s Lyman Stone brought these and other figures to light in his two recent reports responding to the CBPP’s study. He found that state tax policies in fact do relate to migration in a material way despite what Mazerov’s report may imply.

CBPP report author Michael Mazerov asserts that interstate migration is small, so it is not very important to consider the economic impact of the issue. He finds that 69% of Americans live in their home states, which means that 31% of non-foreigners in the U.S. have migrated interstate. Although Mazerov characterizes this statistic as representing “relatively few Americans,” migration in the U.S. is much higher than in neighboring nations. In Mexico, only 20% migrate, and in the EU and Canada, the numbers are much lower: 3.2% of member state residents migrate in the EU, and only 1% of Canadians migrated.

Further, the 69% figure represents a national average, which is skewed by states with very high or low migration rates. It does not take full account of states that have populations predominantly born in-state, or states in which a majority of the population migrated into the state. Such states deserve closer attention than Mazerov’s report gives them. Particularly since many of the states that experienced low migration or migration into the state are considered low-tax.

Gallup polls conducted June – December 2013 did find that taxes in some states generally matter less than some of the other many factors that contribute to a decision to migrate. However, taxes are a major factor in states like New York, Illinois, Connecticut, and our own Maryland. These are some of the wealthiest states in the nation, and therefore they have much to lose, or gain, depending on migration of revenue-generating residents.

Maryland ranked third highest among states in migration, with 47% of residents reporting that they would leave if they could; Maryland trailed closely behind Illinois (50%) and Connecticut (49%). In these top three states, “roughly as many residents want to leave as want to stay” according to the poll.

Again, while there are many factors that contribute to migration, it is significant that residents of Illinois, Maryland, and other states with high migration rates stated the top reason for planning to move was work or business related.

The Tax Foundation’s State Business Tax Index annually assesses the impact of a state’s tax system on the local business environment. The Tax Foundation ranked Maryland and other high-migration states in the lower half of its Index last year, with Maryland ranking near last at 47, as a I noted in a blog last October. Maryland also ranked 41st in the Tax Foundation’s March 2014 Facts & Figures report, which compares state tax rates, collections, burdens, and more. Maryland, New York, and Connecticut all ranked in the top-ten (high tax states) when compared on their respective high state-local tax burdens for fiscal year 2011. So there is a trend here.

There are many implications of interstate migration for state-policymakers to consider. As Gallup polls summed up some of the negative impacts: 

State leaders have important reasons for wanting to see their state populations grow rather than shrink. A growing population usually means more commerce, more economic vitality, and a bigger tax base to pay for state services. A shrinking population not only hurts government coffers, but can weaken a state politically by virtue of the potential loss of U.S. House members through redistricting every 10 years. 

State policymakers have the ability to curb out-migration by reforming state tax policy. According to the Tax Foundation rankings, “the driving force behind a state’s long-term rise or fall in the tax burden rankings is usually internal and most often a result of deliberate policy choices regarding tax and spending levels or changes in state income levels.”

Meanwhile, states with tax systems that foster business competition also tend to attract new businesses, which generate economic and employment growth. Changes to the tax code can quickly improve a state’s business climate and likely curb interstate migration, keeping skilled employees, investment, and consumer spending in state. 

Friday, May 23, 2014

Memorial Day 2014

Since I founded the Free State Foundation in 2006, this is the seventh Memorial Day message I’ve written. You can find links to the others at the end. More than most others, this is a bit more personal.

I want to relate two different stories from two different times – but both in the spirit of honor and remembrance on Memorial Day.

First. From 1969 – 1975, I served in the U. S. Army Reserve as a medical corpsman. After completing basic training at Fort Polk and medical corpsman training at Fort Sam Houston, aside from two weeks on duty each summer, for five and a half years I spent one weekend a month on duty, first at Womack Army Hospital at Fort Bragg, North Carolina, and then at Walter Reed Army Hospital in D.C. About 75% of this hospital time, especially during the first three years, consisted of cleaning and dressing all manner of wounds suffered by soldiers returning from Vietnam.

I don’t want to suggest, of course, that you need to have had this personal experience to be very troubled by the reported doctored records and delays at the Veterans Administration hospitals. But having personally seen so many soldiers returning from battle maimed, I want to say here, on Memorial Day, that whatever problems exist in the VA hospital system – and they seem serious – need to be fixed, and as quickly as possible. This should not be a partisan issue. It is rather a matter of a nation respecting and honoring the service of its veterans.

Second. My father served in the Army in WWII as a warrant officer in the 68th Armored Infantry Battalion of the 14th Armored Division of the Seventh Army. He was in charge of a transportation unit responsible for trucking supplies and food from behind the lines up to the front – and then bringing back the dead and wounded.

On the side of each of the trucks in my father’s unit was painted: "Norma I," "Norma II," "Norma III," "Norma IV," and so forth. Norma was my mother. She was 19 when she and my father got married a few months before he shipped out for Europe.
There is something important about the trucks named "Norma," and the men who drove the trucks. In 1997, when my father was 80 years old, he told me this story, as I related in a 1998 piece published in the Potomac Review:

Dad retuned to his suitcase and pulled out three photographic prints of his entire company, seventy-nine men in all. He pointed to a soldier next to him, a warrant officer named Norman Wemple, and in a voice with an almost imperceptible quiver, stated, “he got blown up by a direct hit in March 1945 while driving Norma II. Norman was one of my best buddies in our company and a damn good mechanic too.”

There was a sudden stillness in the room. A moment later, Dad spoke up: “I still think about how that could’ve been me instead of Norman. I was driving Norma I about fifteen yards right in front of his truck on the day he got hit, but sometimes Norman drove first and I followed him, it just depended.”

“Depended on what?”

“Depended on who got his truck started first,” Dad said.

That was what happened one day in March 1945, but it was a day just like many others in a long war in which over 400,000 Americans gave their lives in the cause of fighting tyranny. Within a month, the war in Europe finally was over. My father arrived back in the States in July 1945.

For Norman Wemple, and for all the others like him who have sacrificed their lives throughout our history in the service of our country, and for all those who have returned wounded in body or spirit, please remember and honor them this Memorial Day.

PS. Now, last. June 6 marks the 70th anniversary of the D-Day invasion. I recently had the privilege of viewing a screening of the remarkable new movie, “D-Day Normandy 1944,” written and directed by Pascal Vuong and narrated by Tom Brokaw. You can view the trailer here. The number of surviving WWII vets is diminishing rapidly – they are dying at a rate of about 555 a day. So each new generation of Americans must be educated anew regarding the meaning of June 6, 1944, a day that Mr. Brokaw said could easily be called, “the day that saved the world.” I recommend viewing the film as one part of such education and for the sake of remembering those who died that day.

PPS. My past Memorial Day messages are here: 2013, 2012, 2011, 2010, 2009, 2008, and 2007.

Thursday, May 22, 2014

The Comcast/TWC Merger Proposal: An Antitrust-Based View

Representatives from Comcast and Time Warner Cable [TWC] testified at the House Judiciary Committee hearing on May 8 defending the proposed merger of the two companies. The proposed transaction occurs at an especially interesting time, with the FCC proposing new net neutrality rules at the May 15 Open Meeting and the recent announcement that AT&T and DIRECTV are proposing to merge.

Consumer groups, some members of the media, and members of Congress on both sides of the aisle have weighed in with differing visions of the future of the Internet and paid television service if their arguments do not win the day. But amidst all the hype and rhetoric, it is important to remember that any analysis of the proposed merger should be grounded in traditional antitrust principles, that the market affected by a transaction or regulation be clearly defined, and that consumer welfare be a top consideration of any proposal.

While the proposed merger between AT&T and DIRECTV may impact the competitive assessment relevant to the Comcast/TWC proposal, and vice versa, in this piece I want to focus primarily on the testimony presented at the May 8 House Judiciary Committee hearing. At that hearing, Professor C. Scott Hemphill explained why, in his view, the merger of Comcast/TWC would not pose anticompetitive concerns. In his written testimony, Professor Hemphill considered the application of antitrust law to Internet service providers (ISPs) and video distributors:

Antitrust law has a critical role to play in preserving competition. Competition benefits the economy through low prices, efficient production, and innovative new products and services. Antitrust law accomplishes this, in relevant part, by prohibiting mergers that may “substantially . . . lessen competition” or “tend to create monopoly.” Some of the concerns raised about this merger are best framed as antitrust objections.

Professor Hemphill found that most objections to the proposed merger were based on analogies in which foreclosure threats were high—threats that he contends are not applicable to the proposed merger due to differences in the nature and structure of video and broadband markets. Mr. Hemphill elaborated in his live testimony that “there is not so much a threat of foreclosure, but an ongoing fight among powerful firms that make possible the dramatic growth of online video” and other innovations.

Allen Grunes, partner at the law firm Gorey and Gorey LLP, also grounded his testimony in antitrust law. He advanced arguments that the merger would enable input foreclosure, customer foreclosure, and harm competition based on bargaining theory. Professor Hemphill addressed each of those arguments by analyzing the effect of a merged Comcast/TWC on individual markets.

First, Professor Hemphill addressed concerns about the merged company dominating content distribution. He explained that most mergers that receive antitrust scrutiny are combinations of rivals. But Comcast and TWC are not rivals because they do not overlap in any geographic territory. As such, output markets – or the markets for products and services sold by the parties – will not be negatively affected. Consumers will still have the same choice of multichannel video programming distribution service post-merger. 

Second, he explained that antitrust concerns are not present regarding the market for video programming. Post-merger, Comcast/TWC will not acquire increased “monopsony” power, which would theoretically incentivize Comcast/TWC to artificially decrease its demand for programming to drive down the costs the company would have to pay for programming. Unlike in certain markets, like the labor market for example, where competitors can drive down wages by reducing hiring, Comcast/TWC would not be able to manipulate demand for programming by purchasing less. This is because sales of video programming do not decrease the amount of programming available for sale; Comcast and TWC do not compete for rights to a scarce resource. Programmers would still have the power to bargain for and demand the same prices for their content post-merger.

Further, in negotiations for video programming, a merged Comcast/TWC likely would not have sufficiently greater bargaining power with programmers or the ability to cause anticompetitive harm due to its enlarged subscriber base. In order to cause such harm, the merged company would have to be so large that a programmer would be unable to effectively function without Comcast/TWC’s business. The post-merger company will lack the requisite scale to pose such harm.

In their joint written testimony, Comcast CEO David Cohen and Time Warner Cable Chairman and CEO Robert Marcus confirmed that the merged company will only account for 30% percent of cable customers after it divests subscribers to Charter. As Christopher Yoo, a member of the Free State Foundation’s Board of Academic Advisors, explained, critics must overcome one “potentially insuperable obstacle” in order to argue that a company of this scale would create anticompetitive harms to video programmers:

On two occasions, the FCC attempted to institute rules prohibiting cable operators from controlling more than 30% of the nation’s multichannel video subscribers in order to protect the interests of video programmers. On both occasions, the courts invalidated the rules because the FCC’s rationale for imposing the 30% limit was arbitrary and capricious. In both cases, the court indicated that the available evidence suggested that cable operators could control much larger shares of the national market without harming video programmers, driven largely by the advent of competition from direct broadcast satellite (DBS) providers, such as DIRECTV and the Dish Network. Given that the merging parties have committed to reduce their holdings so that the resulting company will control no more than 30% of the national market, these court decisions essentially foreclose arguments that anticompetitive harms to video programmers would justify blocking the merger.

Third, Professor Hemphill found that the transaction is unlikely to lessen competition by enabling foreclosure in the market for programming or in the market for distribution. A company that is able to foreclose competition would aim to inhibit the “competitive prospects of rivals,” which would result in harm to competition, innovation, and ultimately to consumers. A merged Comcast/TWC would not have the incentive or the ability to undermine its rivals’ ability to compete.

Professor Hemphill explained that the merged company would not likely withhold programming from other distributors in order to drive up prices for other MVPDs. Programmers like ESPN will still possess strong bargaining power post-merger. And, new models have emerged in the video marketplace, which enable companies to compete with content producers in new ways. For example, distributors like Netflix that produce their own online-only programming are becoming major content providers and are thriving. Netflix has garnered a larger U.S. base of video customers than Comcast and TWC combined.

Parties that oppose the merger have raised concerns that Comcast/TWC would have the incentive to foreclose the growing online video distribution [OVD] market by taking aim at companies like Netflix. Merger critics fear that the merged company would choke off the broadband Internet access on which Netflix and other OVDs rely. For instance, in a May 7 letter to Chairman Goodlatte and Ranking Congressman Conyers, Consumers Union expressed concerns about the effect approval of the Comcast/Time Warner Cable merger would have on the merged company’s market power, ability to raise prices, and its incentives to act as a “gatekeeper” for video and broadband consumers. 

These concerns are unfounded. First, online video services contribute much value to broadband Internet and harming the OVD business would drive away broadband subscribers who love their Netflix and similar services. As David Cohen and Robert Marcus stated in their joint written testimony: “We have no interest in degrading our broadband services to disadvantage OVDs or providers of other content and services. That would only harm the attractiveness of our fastest-growing business – high-speed data – and simply makes no business sense.”

Next, Comcast’s regulatory commitments made as a condition of its NBC-Universal acquisition prevent it from blocking or discriminating against any content provider. Some witnesses at the May 8 House Judiciary hearing, particularly Dave Schaeffer CEO of Internet backbone provider Cogent Communications, decried the recent Comcast-Netflix interconnection agreement as evidence of Comcast’s intent to disadvantage OVDs and providers of other content and services. However, as Professor Hemphill explains, paid peering is “a new variant of an old business practice” – paying for interconnection – and peering agreements should instead be seen as “a sign that the market is working well. The proposed merger does not change that.” Indeed, paid peering is “a means to put a price on the additional capacity demands resulting from the increased popularity of online video. It is efficient for the distributor and its end-users, considered collectively, to pay for that capacity, rather than spreading the expense among all ISP customers. Doing so better aligns use with cost and incentivizes both investment and economical use.”

The proposed Comcast/TWC merger may create some uncertainty regarding the future form of the broadband marketplace, including the PayTV market segment. But this is not a reason in and of itself for regulators to be concerned; rather the proposed merger is mainly a function of the constantly evolving marketplace.

What is clear is that the broadband marketplace, and the video segment of that market, are both fiercely competitive today. And these markets have grown and developed without unnecessary and burdensome regulatory interference. Businesses are efficiently negotiating to reach agreements that enable companies to roll out innovative distribution platforms and business models to compete for and meet the needs of consumers.

The proposed merger of Comcast/TWC is a transaction that should allow the merged company to react to new consumer behaviors and demands. Based on well-established antitrust principles, the proposed merger of Comcast/TWC likely will not harm these vibrant marketplaces.

Tuesday, May 20, 2014

American Consumers Are Leading the IP-Transition Parade

By Deborah Taylor Tate

We are indeed already in the midst of the IP transition, as Free State Foundation Legal Fellow Sarah Leggin recently discussed in a May 5 Perspectives from FSF Scholars. Consumers have been increasingly abandoning traditional wireline telecommunications services in favor of next-generation alternatives. So far, the Federal Communications Commission has allowed the transition to occur organically and has refrained from imposing unnecessary conditions or regulations on the process. But now there is a role for the Commission to play in promoting the technological transition to IP-based services. The FCC should support the IP-transition by removing outdated rules, promoting universal service and network reliability through Lifeline and the Lifeline Broadband Pilot Program, responding quickly to issues that arise, and curbing unnecessary spending in programs that help achieve core Commission values. 

Incredible investment and innovation is already moving the communications sector toward an all-IP world. As Ms. Leggin noted in a September 25 Perspectives, AT&T and Verizon ranked in the top five “U.S. Investment Heroes of 2013,” together investing $34.5 billion in 2012. Further, the telecommunications and cable sector was responsible for $50.5 billion of investment, comprising more than one-third of total capital investments in the U.S. economy for 2012. These and other investments have allowed companies to deploy new technologies, upgrade and build-out new networks, and move the IP transition forward.  And consumers are rapidly adopting new services and innovations.

I remember introducing the concept of VoIP—voice over Internet protocol—to policymakers and legislators in 2000. Incredibly, here we are in 2014 with most of us already utilizing IP for most every type of communication possible, whether connecting across town or around the globe. At the end of June 2013, there were 158.7 million VoIP subscribers globally according to Point Topic’s latest quarterly report. The U.S. accounted for 35 million of those subscribers, making the U.S. a VoIP leader in the international community. Additionally, nearly two-thirds (65.6%) of adults ages 25-29 in the U.S. lived in households with only wireless phones, as did three-in-five (59.9%) 30- to 34-year-olds and a majority (54.3%) of adults ages 18-24, according to a 2013 Centers for Disease Control Wireless Substitution Survey.

While this incredible investment, innovation, and adoption of new services is exciting, it is important to pause and make a few observations.

As Commissioner Pai recently stated, consumers, engineers, technological innovations, and corporate investment have been moving the transition along at a steady pace, but it is important that the FCC now take steps that further encourage the IP transition. These include "the repeal of many outdated rules on our books based on the principles of 19th century railroad regulation." I agree with Commissioner Pai that the FCC should continue to apply a light regulatory touch, while also removing any regulatory roadblocks that threaten to slow the pace of the IP transition. This approach will allow the free market to continue to drive technology toward an all-IP ecosystem.

Second, our poorest citizens who are most in need of assistance in emergency response, healthcare, or access to information regarding jobs, are those who have cut the cord most quickly. These low-income individuals and households depend on a smooth and seamless transition to a wireless or all-IP world. Ensuring that communications service remains available and reliable for these low-income consumers is perhaps the most important role for the FCC throughout the IP transition. Although the competitive broadband marketplace and the steady transition to all-IP services, for the most part, does not require regulatory intervention by the Commission, the Lifeline program can provide subsidized service to eligible low-income consumers to provide a universal service backstop in the IP-world.

I am very pleased that the FCC took the forward-thinking position of expanding Lifeline to include mobile broadband through its recently launched Lifeline Broadband Pilot Program. The voluntary experiments authorized under this program will help bring mobile broadband to low-income consumers, and will also provide information that the Commission can use to improve and modernize the Lifeline program to better serve those in need. The test results will be used to determine pricing and service offerings for Lifeline broadband plans that meet the needs of citizens living in poverty and struggling with unemployment. The tests will also help chart a course for how to deliver public safety information and connect first responders with non-English speakers and consumers with disabilities. The Lifeline program can play an important role in ensuring that positive new developments in mobile health care delivery are available to low-income persons. In other words, use of the Lifeline program provides a positive example of how to determine and meet consumer demands in a changing communications landscape, especially the demands of those who may need a lifeline most.

Third, the FCC must be vigilant in order to detect specific problems that occur during the transition away from legacy networks. The Commission must be ready to shine a light on issues and demand a swift response and corrective action. Commissioner Pai did just this when he brought to light the death of a child due to a lack of understanding regarding 911 calls from inside a hotel. He called for the Commission to immediately address 911 indoor location accuracy issues, which have arisen as consumers increasingly rely on wireless service to reach emergency responders. As these and other issues associated with the transition from traditional landline to wireless or VoIP services arise, the FCC and service providers need to be ready to resolve these problems swiftly.

Finally, the FCC must remain focused on ensuring that universal service programs are executed efficiently and effectively, and without waste, fraud, or abuse. Although technology may change, the FCC should still base its approach to the changing communications landscape on the same core values upon which the Commission was founded. The Commission should continue to promote values like consumer protection, universal service, and network reliability in the mobile wireless and new IP-based communications era and beyond.

I have always been a strong supporter of the concept of universal service. However, universal service programs must be constantly reviewed in order to determine what support is truly necessary, modernized so that programs keep up with constantly evolving technologies, and monitored to ensure that programs are actually helping to achieve core goals as efficiently as possible. As Commissioner O'Rielly stated while approving the initiation of the proceeding to conduct service-based trials, "the order makes clear that the experiments will not delay universal service reforms established in the 2011 order. Indeed, the item commits to implementing key parts of Connect America Phase II and to addressing the challenges of providing service to remote areas by the end of this year." Yet he properly cautioned: “I support universal service and want to ensure that all Americans have access to modern communications networks. But, as contemplated, I am concerned that these new experiments have the potential to divert universal service funding and distract the Commission from completing universal service reforms already adopted.”

Detractors of universal service programs have always been concerned about the "telephone tax" that consumers see every month on their phone bills. Those concerns and other criticism will heighten if the FCC does not also remain focused on the fiscally responsible execution of universal services programs. The Commission still needs to reform the USF program by capping the high-cost fund, reducing available subsidies, establishing a sunset period for ending high-cost fund subsidies, and curbing waste, fraud, and abuse of the Lifeline program. And I agree with Commissioner O'Rielly that the technology transition trials and other pilot programs have the potential to unnecessarily divert Commission resources away from existing programs that need support. The FCC must continue to appropriately fund the programs that are truly necessary, like Lifeline, and should continue reform efforts so that the so-called "telephone tax" doesn't become an "IP-transition tax." I hope Commissioner O'Rielly continues to be the cop on the beat on these cost issues so that both providers and customers can reap the benefits of a modern communications ecosystem while paying only what is necessary.

Americans at every income level are leading the way toward an all-IP world. By cutting the cord, choosing wireless over wireline, and adopting broadband services, citizens are moving markets and marketplaces. The FCC should keep its eyes – and its regulatory tools – focused on ensuring services to our neediest citizens during the ongoing IP-transition, promoting core values such as universal service and public safety, and supporting the transition with "light touch" oversight. Doing so will allow rapid innovation to continue, competition to flourish, and consumers to propel the IP-transition forward. 

Tuesday, May 13, 2014

The Legally Problematic Nature of Title II Reclassification of Internet Services

I confess that I am more than a bit mystified at the way FCC Chairman Tom Wheeler and his Democrat colleagues, seemingly, are moving ever closer in the direction of embracing a Title II reclassification of Internet access services. No matter how loud the banging of pots and pans outside the FCC’s headquarters, it would be terribly unsound as a matter of policy to subject Internet services to the same Title II public utility regulatory regime that applied to last century’s POTS (“plain old telephone”) service.

The irony of the Free Press organization urging protesters to bring pots to the FCC to make noise in the cause of imposing on today’s Internet providers the same public utility regulation that applied to Ma Bell’s POTS-era service seems to have escaped the protesters.

If you are old enough to recall the ubiquitous rotary dial telephone of the Ma Bell era, then you know you don’t want to put the Internet into the public utility straightjacket. Even Tim Wu, the claimed coiner of the term “net neutrality,” freely admits that Title II regulation is the same regime applied to railroads and electric utilities.

But put aside my mystification as to why Chairman Wheeler and his Democrat colleagues would want to align themselves with such a backwards-looking policy.

What also mystifies me is how little discussion there has been concerning the likelihood of success, or not, that a Title II reclassification would be sustained. As a said in my May 9 blog, “Pots and Pans and the Neutrality Mess,” the “FCC’s legal case would be fairly problematic.”

Here is the way I explained why this is so:

“While it is true enough that, under established administrative law principles, an agency may change its mind, it nevertheless must provide a well-reasoned explanation for such a change. Pointing to the number of protesters banging on pots and pans outside the FCC's doors is not likely to suffice. Neither is pointing to the agency's disappointment at already having been twice rebuffed by the DC Circuit under alternative theories.

The main reason the FCC's case for sustaining a Title II challenge would be problematic is this: In defending its decision to classify Internet service providers as information service providers - thereby removing them from the ambit of Title II regulation - the Commission argued that, from a consumer's perspective, the transmission component of an information service is integral to, and inseparable from, the overall service offering. This functional analysis of ISPs' service offerings was the principal basis upon which the Supreme Court upheld the FCC classification determination in 2005 in its landmark Brand X decision.

I don't think the integrated, inseparable nature of ISPs' service offerings, from a functional standpoint, and from a consumer's perspective, has changed since the Brand X decision, so it won't be easy for the Commission to argue that it is changing its mind about the proper classification based on changed consumer perceptions of the service offerings' functionality. And to the extent that the Brand X Court cited favorably to the FCC's claims concerning the then-emerging marketplace competition and the dynamism in the broadband marketplace, those factors, if anything, today argue even more strongly for a non-Title II common carrier classification.

I understand the role that so-called Chevron deference can play in upholding agency decisions. Indeed, it played an important role in the Court's decision in Brand X. But invoking Chevron deference won't relieve the FCC of the need to provide persuasive reasoning in support of an abrupt about-face on a point the agency litigated - successfully - all the way up to the Supreme Court.”

As I’ve been puzzling over the lack of comment concerning the lawfulness of a potential FCC switcheroo regarding Title II, I reviewed once again the FCC General Counsel’s Memorandum dated May 6, 2010, in which Austin Schlick, the then-GC, set out to bolster the case for a Title II reclassification of Internet services should the Commission choose to adopt that course. Of course, the then-commissioners did not choose the Title II route.

Nevertheless, given its clear intent to bolster the legal justification for a Title II reclassification, the General Counsel’s memorandum is instructive. As I acknowledged in my blog last Friday, Mr. Schlick rightly observes that the FCC may well receive substantial Chevron deference for a reclassification determination and that an agency is entitled to change its mind if it offers persuasive reasoning for doing so.

I agree with these points of administrative law. But I think if Mr. Schlick’s memo is read closely, it indicates that it will not be so easy for the Commission to supply such persuasive reasoning. This is because, as Mr. Schlick readily acknowledges, in his opinion for the Supreme Court in Brand X, Justice Thomas declared: “The entire question is whether the products here are functionally integrated (like the components of a car) or functionally separate (like pets and leashes).  That question turns not on the language of the Act, but on the factual particulars of how Internet technology works and how it is provided, questions Chevron leaves to the Commission to resolve in the first instance....”

Having already resolved in the first instance the question of “the factual particulars of how Internet technology works and how it is provided,” it won’t necessarily be so easy for the Commission now to do an about-face. For as Mr. Schlick went on to say, an agency reassessment of the classification issue would have to include:

“[A] fresh look at the technical characteristics and market factors that led Justice Scalia to believe there is a divisible telecommunications service within broadband Internet access.  The factual inquiry would include, for instance, examination of how broadband access providers market their services, how consumers perceive those services, and whether component features of broadband Internet access such as email and security functions are today inextricably intertwined with the transmission component.  If, after studying such issues, the Commission reasonably identified a separate transmission component within broadband Internet access service, which is (or should be) offered to the public, then the consensus policy framework for broadband access would rest on both the Commission’s direct authority under Title II and its ancillary authority arising from the newly recognized direct authority.”

In other words, as Mr. Schlick understood, it won’t suffice for the Commission simply to bemoan the fact that the D.C. Circuit twice has held that the agency lacked authority for its earlier forays into net neutrality regulation. Instead, the Commission will need to show, as a factual matter, from a functional standpoint and from the consumer’s perspective, why its earlier technical analysis concerning the integrated nature of Internet service  – that is, the inseparability of the transmission and information services components – is no longer “operative.”

Mr. Schlick quotes heavily from Justice Scalia’s dissenting analysis to bolster his case. But Justice Scalia’s analysis was accepted by only two other Justices. He was on the losing side of a 6-3 decision.

I am not saying that the Commission could not prevail if it ever decides to go the Title II route – as unwise as such a decision would be. But I am not aware that the functional nature of Internet access services has changed since the Commission initially classified Internet access as an information services. Nor am I aware that consumers perceive the way these services are offered, from a functional standpoint, any differently today than they did at the time of the agency’s initial classification determination.

That being so, I remain mystified at how little discussion there has been concerning the lawfulness, or not, of a potential Title II reclassification.