FSF Seminar Remarks Delivered by Deborah Taylor Tate

Here are the remarks delivered by Deborah Taylor Tate, Distinguished Adjunct Senior Fellow at the Free State Foundation, at FSF’s November 14 policy seminar. Ms. Tate, a former Federal Communications Commissioner, was a panelist at the FSF event titled "Thinking the Unthinkable: Imposing the 'Utility Model' on Internet Providers," held at the National Press Club. Her remarks are well worth reviewing.

Yet Another Court Reinforces State Law Copyrights in Pre-72 Sound Recordings

For the third time in three months, a court has recognized a right of public performance to pre-1972 sound recordings under state copyright law. The latest is a November 14 ruling by Judge Colleen McMahon of the U.S. District Court from the Southern District of New York. The District Court’s opinion constitutes a strongly reasoned vindication of copyright protections according to state common law principles. And it adds more judicial weight to the conclusion that state copyright law protects exclusive public performance rights in pre-72 sound recordings.

As I’ve explained in a Perspective from FSF Scholars essay and in a prior blog post on this topic, the Copyright Act of 1976 largely preempted state copyright law. But Section 301(c) of the Act left state jurisdiction intact regarding rights in sound recordings fixed prior to February 15, 1972.

In Flo & Eddie, Inc. v. Sirius XM Radio, Inc. (2014), the District Court in New York acknowledged that “New York unquestionably provides holders of common law copyrights in sound recordings with an exclusive right to reproduce those recordings.” The question of first impression facing the court was “[w]hether New York provides holders of common law copyrights in sound recordings with an exclusive right to publicly perform those recordings.”

The court affirmed the exclusive right to public performance in pre-72 recordings based on a “look to the background principles and history of New York copyright common law.” Judge McMahon observed that New York jurisprudence affords public performance rights to holders of common law copyrights in plays and films. She similarly observed that “[n]o New York case recognizing common law copyright in sound recordings has so much as suggested that right was in some way circumscribed, or that the bundle of rights appurtenant to that copyright was less than the bundle of rights accorded to plays and musical compositions.”

In her decision, Judge McMahon concluded Sirius XM infringed Flo and Eddie’s common law copyright for public performance of pre-72 sound recordings. Sirius XM reproduced copies of those recordings for its databases and broadcast them through its nationwide satellite radio Internet digital radio services. Yet Sirius XM did not obtain Flo and Eddie’s consent or pay royalties. She flatly rejected Sirius XM’s fair use defense.

The court also concluded that Flo & Eddie established their claim against Sirius XM for the unfair competition tort of commercial misappropriation. As the court explained, “[a]n unfair competition claim involving misappropriation usually concerns the taking and use of the plaintiff’s property to compete against the plaintiff’s own use of the same property.” In its ruling, the court called it “a matter of economic common sense” that Sirius XM’s public performances of Flo and Eddie’s Pre-72 sound recordings harm the copyright holders’ sales and licensing fees.

Finally, the court rejected Sirius XM’s arguments that Flo and Eddie’s state common law copyright claims were barred by the Dormant Commerce Clause. It conceded that Section 301(c) of the Copyright Act of 1973’s exemption for state copyright law in pre-72 recordings “is framed as a limitation on preemption, not a relaxation of Commerce Clause limitations.” However, the court reasoned that “New York does not ‘regulate’ anything by recognizing common law copyright.” It found no basis for holding that “a state’s general property law and associated liability principles could, in and of themselves, violate the Dormant Commerce Clause.” Rather, “concluding that Sirius is liable under New York property law principles would not amount to a ‘regulation’ of interstate commerce by New York.”

As Judge McMahon aptly put it, “the common law, while a creature of the courts, exists to protect the property rights of the citizenry.” Property includes the products of an artist’s “intellectual labor,” such as sound recordings created through the time, effort, money and skill of the artist. Exclusive rights of public performance are appurtenant to that right of property.

In yet another important ruling concerning pre-1972 sound recordings, the District Court’s ruling rightly reasoned from the underlying principles of New York common law to protect rights in intellectual property.

2014 Global IP Summit - Senator Chris Dodd Spoke about Piracy and Motion Pictures

At Tuesday’s Global IP Summit former US Senator and current Chairman and CEO of the Motion Picture Association of America (MPAA) Chris Dodd gave an important speech on the positive impact strong IP rights have for the motion picture industry. Some of the key impacts Senator Dodd mentioned were:

• Online consumers legally accessed more than 5.7 billion films and 56 billion television episodes in 2013 alone. 
• Over 1.9 million people are employed by the American film and television industry. 
• There was $120 billion in sales and $16.2 billion in worldwide exports in 2012 alone.

Despite the billions of dollars in sales and exports, theft of IP, specifically online piracy, is a very serious problem for movie producers and distributors. (See this blog from the summer about “The Expendables 3.”) Senator Dodd cited a Digital Citizens Alliance report which concluded that ad-supported piracy generates $227 million annually. This astonishing number should reinforce the idea that even stronger IP rights and more effective enforcement regimes could benefit the motion picture industry as well as other segments of the American economy that produce creative content, such as musicians and recording companies. Senator Dodd then went on to say something powerful: 

Indeed, one of the Internet’s greatest strengths is that it is not a centralized network. No single entity, government, corporation or individuals controls it. But, conversely, no single entity can solve its problems. That is why it is vital for responsible actors, to work together to reach commercially reasonable and technically feasible solutions if we are going to reduce piracy, and stimulate innovation.

This is why Senator Dodd promoted MPAA’s new search engine for legal content, Wheretowatch.com. (See my blog from last week.) He called it a “one-stop shop, connecting users directly to [more than 100] legal content sites.” Although the serious problem of harmful online piracy may still remain and needs to be combatted, Wheretowatch.com should help reduce piracy by organizing legal content and placing it at the fingertips of Internet users.

MPAA is also exploring other voluntary initiatives that would warn Internet users when they have downloaded illegal content and then direct them towards legal content websites. MPAA is certainly doing its part in trying to diminish online piracy and help secure stronger IP rights. A robust system of IP rights is vital for encouraging more content, innovation, creativity, and economic growth because it allows entrepreneurs and artists to realize the returns from their labors.

2014 Global IP Summit

By Randolph May and Michael Horney

The US Chamber of Commerce’s Global Intellectual Property Center held its 2^nd Annual IP Summit yesterday with a prestigious list of speakers, and we were both pleased to attend the conference. Senator Chris Coons (D-DE) and Representative Bob Goodlatte (R-VA) were the two current members of Congress who spoke. There were also many Presidents and CEOs representing successful IP-related companies and organizations, as well as other speakers with heavy involvement in IP-intensive industries.

A principal, notable takeaway from the IP Summit is the message conveyed by the broad range of sponsors for the event. Just to name a few of the wide variety of businesses and organizations – The App Association, American Beverage Association, Biotechnology Industry Organization, CropLife America, Motion Picture Association of America, Pharma, and Software & Information Industry Association – their involvement in the IP Summit is a demonstration of the significant benefits from strong IP rights and effective enforcement regimes.

This broad range of sponsors is itself an indication that the protection of IP rights (whether copyrights, patents, trademarks, or trade secrets) is important to the success of many industries that span around the globe and benefit consumers worldwide. 

Thinking the Unthinkable - Part IV

I was gratified by the excellent attendance at the Free State Foundation’s program last Friday titled, “Thinking the Unthinkable: Imposing the ‘Utility Model’ on Internet Providers.” If you weren’t there, you missed what was a very important event – one that, in light of the substantive discussions that occurred, likely will play an important role going forward in the debate over the Federal Communications Commission’s consideration of the imposition of new net neutrality mandates. 

With the release of President Obama’s video on Monday, what he calls “President Obama’s Plan for a Free and Open Internet,” directly urging the FCC to classify Internet service providers as common carriers – that is, to impose the Title II public utility model of regulation – the FCC’s proceeding has now become even more highly politicized than before. More and more, in the absence of any present market failure or consumer harm, the proceeding is looking like a textbook case study in administrative agency overreach. Or put more bluntly, an administrative agency power grab. 

And with President Obama interjecting himself so directly into the net neutrality rulemaking, the proceeding is also providing a textbook example of the problematic nature of so-called independent agencies like the FCC, which in any event occupy an odd place in our tripartite constitutional system. After all, in the interests of accountability, the Constitution vests all powers in the legislative, executive, and judicial branches, not in agencies, commonly referred to as the “headless fourth branch” of government, that blend together quasi-executive, quasi-legislative, and quasi-judicial powers. 

Witnessing what is transpiring at the FCC calls to mind for me a famous statement by Roscoe Pound, the distinguished American legal scholar and long-time Dean of the Harvard Law School, concerning the rise of administrative agencies like the FCC. In 1920, he said: “[T]he whole genius of administrative action through commissions endangers the supremacy of law. Not the least task of the common-law lawyers of the future will be to impose a legal yoke on these commissions, as Coke and his fellows did upon the organs of executive justice in Tudor and Stuart England.” 

It is possible that, when all is said and done, the FCC’s actions in the net neutrality proceeding might lead to a fundamental rethinking by Congress of the proper institutional role in the Digital Age of an agency created in 1934 (or, in part, in 1927 if you wish to go back to the Federal Radio Commission). To its credit, the House Commerce Committee early this year began such a #CommActUpdate process in earnest, and when the new Congress convenes in January, the Senate should follow suit. 

In the meantime, it is at least somewhat encouraging that FCC Chairman Tom Wheeler appears to recognize the need to take a pause in the net neutrality rulemaking. This would be a good idea, especially if Mr. Wheeler and his Commission colleagues use such a pause as a time for some serious rethinking concerning the proper exercise of the agency’s putative authority with respect to Internet regulation. 

On the assumption that the willingness to engage in reflection and rethinking should always be in order, those at the FCC and elsewhere would do well to review the remarks delivered by Commissioners Ajit Pai and Michael O’Rielly at the Free State Foundation’s event on November 14th. Regardless of any predispositions regarding what actions – or not – you believe the FCC should take, their statements at the least warrant careful consideration. 

Commissioner Pai's remarks are here. 

Commissioner Michael O'Rielly's remarks are here. 

And the remarks of Rep. Bob Latta, the Vice Chairman of the House Communications and Technology Committee, are important as well. They are here. 

I’m going back and re-read each of these, and I hope you will read them too. 

PS – The video of the opening remarks and the lively panel discussion featuring Robert Crandall, Gerald Faulhaber, Deborah Taylor Tate, and Michael Weinberg will be posted shortly.

FCC Should Be Careful Steward of Scarce USF Funds

With all of this week's attention focused on the net neutrality issue, and especially President Obama's rather extraordinary video telling the FCC what he thinks the supposedly independent agency should do, I want to make sure that this noteworthy blog posted by my colleague, Seth Cooper, also receives attention.

Seth's commentary is entitled, "FCC Should Not Use Scarce Universal Service Funds to Subsidize Unproven Start-Ups."

I won't repeat Seth's blog here. I'll just note that it addresses a concern that the FCC, in the name of "experimentation," may be considering making available scarce funds allocated for advancing rural broadband deployment to rural electric co-ops with little or no experience in providing communications  services on a commercial basis. I am not against some forms of "experimentation" at the FCC, especially if it are in the direction of allowing more freedom to private sector communications service providers to experiment with innovative means of delivering services consumers demands. But it is another matter to "experiment" by giving away USF funds collected from consumers in the form of surcharges on their telephones bills.  

Here is a key part of Seth piece:

"Now it appears the FCC may want to grant to rural electric co-ops several million dollars in funds collected from consumers through universal service surcharges. The money would fund entry by rural electric co-ops into the broadband business. But in important respects, this constitutes another role-distorting proposal by the FCC. It is not the proper function of the FCC to create new competitors through subsidies or other artificial means. Capitalizing entities lacking any established operations or experience in the broadband market also risks wasting finite dollars collected from consumers."

More competition in providing broadband services is a good thing, and, of course, achieving more ubiquitous broadband deployment is a worthy goal. But the means to an end matter in striving to achieve worthy goals. Regarding proper means, I am not in favor of the FCC preempting state restrictions on municipal broadband systems. And I am not in favor of the Commission conducting experiments with funds from a Universal Service program that already extracts from consumers surcharges that are too high (16.1%) on the theory that the agency wants to experiment with new unproven broadband provider ventures like rural electric co-ops or similar organizations.

MPAA Releases New Search Engine Full of Legal Content

Today, the Motion Picture Association of America (MPAA) introduced a new search engine called Wheretowatch.com. Users of the search engine can find legal copies of their favorite movies and television shows across the Internet. Also, by enabling their location, consumers can find movies in nearby stores as well as local television and movie theatre times. Wheretowatch.com users can also watch trailers or set alerts for when specific television and movie content becomes available.

Wheretowatch.com is a very important and innovative tool that should help reduce piracy and theft of intellectual property (IP). Although the serious problem of harmful online piracy may still remain, Wheretowatch.com should help reduce piracy by organizing legal content and placing it at fingertips of Internet users.

This new tool will help strengthen IP rights by reducing the cost of consuming legal content for Internet users. Strong IP rights are vital for encouraging more content, innovation, and economic growth because they allow entrepreneurs and artists to realize the returns from their labors. 

Title II Classification an "Unmitigated Disaster"

This is a clever, but, more importantly, informative piece by Scott Cleland.

As Scott concludes, after working his way through ten adjectives beginning with "un," classification of Internet providers as Title II common carriers would be an "UNMITIGATED DISASTER."

He's got that right!

FCC Should Not Use Scarce Universal Service Funds to Subsidize Unproven Start-Ups

The Federal Communications Commission is charged with promoting widespread broadband deployment across America. But it’s not the FCC’s job to create new competitors in the space for the sake of creating new competitors. It would be a distortion of agency authority to grant special favors to would-be entrants or to give them start-up money to move into the broadband business.

 
Right now the FCC is weighing whether to effectively grant local governments authority to become broadband Internet service providers by eliminating state laws that restrict such operations by local governments. In addition to promoting government-owned communications networks, the FCC is considering whether to grant funds to non-profit electric cooperatives through rural broadband experiments it will be conducting. The funds for such experiments are collected from consumers as Universal Service Fund surcharges imposed on their existing communications services. These surcharges already result in an additional 16% in fees added to the long-distance portion of consumers’ phone bills.

Differences aside, both proposals are problematic from the standpoint of government artificially inducing the creation of new marketplace competitors by virtue of regulatory favoritism or subsidies. It’s difficult to conceive of private investment and innovation thriving in any marketplace where governments either assume roles as competitors or finance new competitors. We shouldn’t expect it to be any different when it comes to the broadband services market. The FCC should instead keep sustainable marketplace investment and innovation as the focus of broadband policy.

In late July, the FCC launched a process for preempting state laws restricting local governments from owning and operating broadband Internet networks. Federalism principles establish states’ broad authority to define the powers of their political subdivisions. Yet FCC Chairman Tom Wheeler has insisted the FCC should eliminate approximately twenty states’ restrictions on government-owned networks. FCC preemption would effectively grant local governments a right to take on a new line of business as Internet providers.

FSF President Randolph May and I have firmly opposed FCC preemption of state law restrictions on government-owned networks. Through public comments to the FCC, op-eds, essays, and blog posts we have explained the constitutionally problematic aspects of FCC preemption. Moreover, undesirable inherent conflicts-of-interests and local taxpayer risks are also posed by federal agency encouragement of government-owned networks.   

Now it appears the FCC may want to grant to rural electric co-ops several million dollars in funds collected from consumers through universal service surcharges. The money would fund entry by rural electric co-ops into the broadband business. But in important respects, this constitutes another role-distorting proposal by the FCC. It is not the proper function of the FCC to create new competitors through subsidies or other artificial means. Capitalizing entities lacking any established operations or experience in the broadband market also risks wasting finite dollars collected from consumers.

As part of its universal service reform, the FCC has set aside $100 million for rural broadband experiments. The FCC is preparing trial auctions for prospective service providers to rural areas where incumbent local exchange carriers opt out of upgrading their systems to provide broadband services. Those trials will also inform future operations of the FCC’s new Connect American Fund (CAF).

The FCC’s Rural Broadband Experiments Order (2014) indicates that many rural electric co-ops have expressed interest in receiving funding in order to take on new lines of business as broadband providers. And in a speech posted in October, FCC Office of Strategic Planning Chief Jonathan Chambers appears to voice support for future FCC funding of broadband start-ups by electric co-ops.  

Rural electric co-ops are private, non-profit entities incorporated under state laws. They are owned by the electricity customers they serve. The National Electric Rural Cooperative Association indicates that its 905 co-ops serve some 42 million customers across 47 states. Apparently, many co-ops have middle mile fiber assets that are used to monitor their electric networks. It has been suggested by some that special funding could enable rural electric co-ops to build out new broadband networks, leverage their existing fiber assets, and thereby offer retail broadband services to rural consumers.

 
Rural electric co-ops aren’t government entities. However, as a structural matter, rural electric co-ops are rate-of-return monopoly providers of electricity. They are non-profit entities that typically receive subsidized loans from the federal government. And they typically have limited geographic footprints. The point here isn’t to criticize rural electric co-ops with respect to their electric service operations. Rather, the point is that rural electric co-ops operate for a specific purpose in a unique context. Competitive and regulatory dynamics facing the typically staid rural electric co-ops are materially different from those they would face in the dynamic broadband Internet services marketplace. They lack of business and operational experience in providing broadband Internet services. Extensive build-out would be needed to reach rural consumers with last-mile broadband service. These considerations should lead the FCC to think twice before capitalizing new and untried broadband ventures by rural electric co-ops.

For customers of rural electric co-ops, entry into the broadband services market involves significant investment and corresponding financial risk. If a subsidized rural electric co-op broadband venture fails, profound questions exist as to whether electric utility operations would be adversely impacted. Could a failed rural broadband experiment put a rural electric co-op on the ropes? Could electricity customers be saddled with higher charges to make up for shortfalls? Such has already happened in several high-profile government-owned broadband debacles.

For the FCC, the bigger fundamental question is about how best to ensure that finite dollars taken from consumers through USF surcharges – essentially taxes – are effectively allocated to help meet the goal of achieving universal broadband service. That money should be expended wisely to ensure cost-effective, sustainable broadband service. It stands to reason that a bigger bang for the buck would be achieved by directing CAF funds to existing providers of broadband who have both business knowledge and demonstrated competency in delivering broadband services in rural areas.

In sum, FCC policy should remain focused on fostering conditions for sustainable entrepreneurial investment and innovation in the broadband services marketplace. That means the agency should refrain from preempting state restrictions on municipal government provision of broadband services. And it also means the FCC should ensure that limited universal service funds are distributed only in a cost-effective manner to entities with demonstrated knowledge and ability to provide broadband services.  

FSF Board of Academic Advisor Don Boudreaux Wins 2014 Coolidge Prize for Journalism

Congratulations to FSF Board of Academic Advisor Don Boudreaux for winning the 2014 Coolidge Prize for Journalism. Professor Boudreaux of George Mason University has published in the Wall Street Journal, Investor’s Business Daily, Regulation, Reason, Ideas on Liberty, the Washington Times, the Journal of Commerce, the Cato Journal, and several scholarly journals such as the Supreme Court Economic Review, Southern Economic Journal, Antitrust Bulletin, and Journal of Money, Credit, and Banking.