A Reader on Net Neutrality and Restoring Internet Freedom

The Free State Foundation is proud to announce our newest book: A Reader on Net Neutrality and Restoring Internet Freedom.

In the context of offering a convincing defense of the adoption of the FCC’s December 2017 Restoring Internet Freedom Order, this volume provides a wealth of information and key insights into the long-running debate surrounding “net neutrality” regulation. The selected writings in this Reader, most of which were previously published as Perspectives from FSF Scholars or FSF blogs, explore both legal and policy rationales that support the FCC’s action.

This book is a collection of papers put together by FSF President Randolph May and Senior Fellow Seth Cooper. The book explains why, in our view, the FCC’s pro-consumer, pro-investment, and pro-innovation approach to regulation of Internet service providers adopted in the Restoring Internet Freedom Order should be preserved. In addition to the contributions from the Free State Foundation's in-house scholars, there are contributions in the book from the following members of FSF's Board of Academic Advisors: Tim Brennan, Robert Crandall, Justin (Gus) Hurwitz, Daniel Lyons, James Prieger, Dennis Weisman, and Joshua Wright. And there is an easily digestible Introduction that puts the net neutrality debate in a proper historical context, provides the necessary background for understanding all sides of the controversy, and points to the way forward towards resolution.

A Reader on Net Neutrality and Restoring Internet Freedom is available from Amazon here in paperback for $9.95 or for your Kindle here for $2.99. And it is available here from Apple and other booksellers in various e-book formats for $2.99 or less.

The Last Great Read of Summer

A couple of weeks ago, in "Summer Reading for Wonks," I suggested that for your summer reading pleasure you might want to try the Free State Foundation's #CommActUpdate – A Communications Law Fit for the Digital Age or The Constitutional Foundations of Intellectual Property – A Natural Rights Perspective. This instead of Daniel Silva's latest or James Patterson's (even with Bill Clinton as co-author). Well, sadly, now there may be time for only one last great read of summer – and I have just the book for you, especially if you are a law and policy wonk. The Free State Foundation has just published A Reader on Net Neutrality and Restoring Internet Freedom.

In the context of offering a convincing defense of the adoption of the FCC’s December 2017 Restoring Internet Freedom Order, this volume provides a wealth of information and key insights into the long-running debate surrounding “net neutrality” regulation. The selected writings in this Reader, most of which were previously published as Perspectives from FSF Scholars or FSF blogs, explore both legal and policy rationales that support the FCC’s action. I understand that there are those with differing views, and I respect them. But this book, a collection of papers put together by my colleague Seth Cooper and me, explains why, in our view, the FCC’s pro-consumer, pro-investment, and pro-innovation approach to regulation of Internet service providers adopted in the Restoring Internet Freedom Ordershould be preserved. In addition to the contributions from the Free State Foundation's in-house scholars, there are contributions in the book from the following members of FSF's Board of Academic Advisors: Tim Brennan, Robert Crandall, Justin (Gus) Hurwitz, Daniel Lyons, James Prieger, Dennis Weisman, and Joshua Wright. And there is an easily digestible Introduction that puts the net neutrality debate in a proper historical context, provides the necessary background for understanding all sides of the controversy, and points to the way forward towards resolution. A Reader on Net Neutrality and Restoring Internet Freedom is available from Amazon here in paperback for $9.95 or for your Kindle here for $2.99. And it is available here from Apple and other booksellers in various e-book formats for $2.99 or less. You'll recall that the Erasmus of Rotterdam, the great scholar of the northern Renaissance, once said: “When I get a little money I buy books; if any is left over, I buy food or clothes.” I don't want to be accused of suggesting that anyone go hungry or unclothed...but hopefully at those low prices, you can buy the book and enjoy a good meal too. With summer rapidly slipping away, here's hoping you indulge in one last great summer read -- A Reader on Net Neutrality and Restoring Internet Freedom.  #NetNeutralityReader

Attempt to Turn Usage-Based Pricing into Net Neutrality Issue Is Non-Starter

Santa Clara County and its fire district are upset with slow speeds the fire district experienced after exceeding the monthly data allowance for a service plan with Verizon. The county is trying to make hay over the matter by wrongly trying to tie it to "net neutrality." 

In truth, the matter between the fire district and Verizon has to do with usage-based plans that benefit cost-conscious customers who only want to pay for the data they use. Even the now-repealed 2015 net neutrality rules adopted by the Obama Administration FCC permitted these types of plans.

Charging consumers based on the volume of a service they use is a common practice across businesses and industries in our economy. Broadband Internet service providers routinely offer customers usage-based pricing options. Usage-based plans may, for example, include monthly allowances of high-speed data, whereby a customer pays for 25GB or 100GB of data. Although such plans sometimes are subsumed under the term "data caps," this is somewhat of a misnomer. They don't halt connectivity when allowances are exceeded. Rather, customers may experience reduced speeds or incur additional charges when they use more than their data allowances. Usage-based plans often allow lower-volume customers to keep their costs down.

The Santa Clara County Central Fire Protection District depends on a high-speed connection in providing fire and other emergency services. Near the end of July, the fire district experienced slow connection speeds and contacted its provider, Verizon. Verizon has a policy of making an exception to its allowances or so-called "data caps" in emergency situations. Unfortunately, the customer service personnel involved did not execute the request for an exception when contacted by the fire district. After some delay that effectively prevented data-intensive communications for a time, the fire district upgraded its service plan and again received high-speed connectivity. Verizon has apologized for its error. 

From the standpoint of an emergency services provider and customer, the fire district's frustration may be understandable. But the misplaced attempt to inject "net neutrality" into the mix may have its own explanation. Santa Clara County is a party to the pending lawsuit challenging the 2017 Restoring Internet Freedom Order that repealed the Obama-Wheeler FCC's Title II public utility regulation of broadband Internet access services. Pro-regulatory advocates have therefore tried to make the fire district's data allowance episode into net neutrality theater. They have even mentioned the matter in a legal brief challenging the Restoring Internet Freedom Order. But this is wrong.

Santa Clara County's issue with Verizon involves a customer paying for the amount of service they want to use and a service provider's regrettable, but mistaken, lack of accommodation in a particular circumstance. It's about usage-based plans and customer service. It's not about net neutrality because Verizon's service plan for a monthly allowance of high-speed data with reduced speeds for extra usage would not have been prohibited under the FCC's old net neutrality rules.

Usage-based pricing with data allowances was affirmed under the now-repealed 2015 Obama FCC Title II Order. According to paragraph 122: "Because our no-throttling rule addresses instances in which a broadband provider targets particular content, applications, services, or non-harmful devices, it does not address a practice of slowing down an end user's connection to the Internet based on a choice made by the end user. For instance, a broadband provider may offer a data plan in which a subscriber receives a set amount of data at one speed tier and any remaining data at a lower tier."

Buried in footnote 13 of the legal brief challenging the 2017 Restoring Internet Freedom Order, Santa Clara County and other pro-regulatory advocates admit they are not attempting to argue that Verizon's usage-based pricing plan with the fire district would have violated the 2015 Title II Order. This makes the net neutrality theater act pretty obvious.

Importantly, the 2017 Restoring Internet Freedom Order also recognizes the upshot to usage-based pricing plans. According to paragraph 153: "Usage allowances may benefit consumers by offering them more choices over a greater range of service options, and, for mobile broadband networks, such plans are the industry norm today, in part reflecting the different capacity issues on mobile networks." 

Equally important, the Restoring Internet Freedom Order provides protections for aggrieved customers. All major broadband service providers promise not to block or throttle access to Internet content of their customers' choosing, or to prioritize Internet traffic in ways that are anticompetitive. Broadband service providers that fail to follow their own terms of service are subject to enforcement actions by the Federal Trade Commission under its authority to prohibit unfair and deceptive trade practices. 

One more thing: Under the Restoring Internet Freedom Order, broadband service providers can give favorable access to emergency first responders through paid prioritization arrangements. By repealing the Title II Order's ban on paid prioritization arrangement, the Restoring Internet Freedom Order provided needed legal certainty to providers interested in offering such preferred access to emergency services. 

FSF Comments to FTC: The Intersection Between Privacy, Big Data, and Competition

On August 20, 2018, Free State Foundation President Randolph J. May and I submitted comments in connection with the FTC's "Hearings on Competition and Consumer Protection in the 21st Century." These particular comments are submitted on the topic of "The Intersection Between Privacy, Big Data, and Competition."

Here is an excerpt from our comments:

The exchange of non-sensitive consumer information enables companies to sell targeted advertising, which covers the costs of offering “free” content and services to consumers. Substantial evidence shows that the overwhelming majority of consumers are willing to exchange personal information for “free” content and services. However, it is important that firms provide consumers with adequate disclosure regarding the collection and use of their personally identifiable data. This way, as part of the bargain, consumers are empowered to make informed choices that reflect their preferences.

Because the functioning of much of the Internet ecosystem involves the exchange of non-sensitive consumer information, as a default, "opt-out" rules, as opposed to "opt-in" rules, spur the development of additional Internet content and services. This enables the monetization of a greater pool of consumer information, while still empowering consumers with a choice about if they want their data collected and used. For certain clearly sensitive information, for example relating to health or financial services, the default should be opt-in rather than opt-out.

Consumers expect the application of consistent privacy rules throughout the entire United States. Therefore, privacy regulation in the U.S. should reflect those expectations, whether consumers are doing business with an Internet service provider (ISP) or an edge provider. Internet communications do not stop or change at state borders and neither should privacy laws. To the extent state-by-state privacy regulations differ, this creates a "patchwork problem" for service providers that, at a minimum, imposes additional costs but also is likely to stifle investment and innovation. The FTC should regulate the privacy practices of both edge providers and ISPs in a consistent manner, and to the extent that a "patchwork" of state laws and regulations develop that impose more stringent requirements on service providers than those imposed at the federal level, then those state laws and regulations that conflict with federal policy should be preempted.

It's Time for the Senate to Vote on the MMA

I just read a report in Communications Daily (@Comm_Daily) that there are now 51 co-sponsors in the Senate of the Music Modernization Act. This is good news. In the August 9 blog which I have pasted in below, my colleague Seth Cooper explains what the MMA would do to modernize the music licensing and compensation system and why it is so important.

Of course, 51 out of a 100 is a majority in the U.S. Senate -- and other places as well. But, as we all know, a Senator or two can prevent a vote from occurring, even for legislation like the Music Modernization Act, which is thoroughly bipartisan and has widespread support.  

As Seth said on August 9, "the Senate should act promptly to vote on the Music Modernization Act."

 Thursday, August 09, 2018

Senate Should Vote on the Bill to Modernize Music Copyright

Congress last overhauled the Copyright Act back in 1976, and provisions in the old law are often a poor fit for today’s digital music marketplace. Right now Congress has a stellar opportunity to make overdue updates to music copyright law. In April, the House of Representatives unanimously passed the Music Modernization Act. The Senate Judiciary Committee unanimously passed a similar bill in June. Rather than let this important legislation get sidetracked now, the Senate should act promptly to vote on the Music Modernization Act. 

The Music Modernization Act is an omnibus bill that would better secure copyright protections and royalty payments for recording artists, songwriters, and other music professionals. If passed by the Senate and signed into law, the bill would: (1) secure to copyright owners of sound recordings made before 1972 federal copyright protections for public performances of their recordings via digital audio transmission; (2) set up a streamlined process for producers, mixers, and sound engineers to receive direct royalty payments via SoundExchange; and (3) enable more timely and accurate payment of market-based “mechanical license” royalties to songwriters while providing blanket licenses for digital streaming services. 

Despite unanimous votes in the House of Representatives (H.R.5547) and in the Senate Judiciary Committee (S.2823), there are reports that the Music Modernization Act is being held up by just a few members of the Senate on account of the bill applying a uniform market-based “willing buyer/willing seller” royalty rate and providing full protection terms to pre-72 sound recordings. But these objections don’t hold up. They should not keep the Senate from taking a timely vote on the Music Modernization Act.

First, the “willing buyer/willing seller” royalty rate standard is the most sensible standard for achieving the purpose of music copyright law, and the Music Modernization Act’s expansion of that standard to pre-72 sound recordings and to music compositions is commendable. 

Under many circumstances, music copyright holders are subject to a compulsory licensing system in which licensees must pay royalties according to a rate formula set by Congress and applied by the Copyright Royalty Board. Although copyright holders are free to negotiate royalties with music service providers, those rates operate as backstops when negotiating is particularly burdensome or unsuccessful. Unfortunately, current law imposes different music copyright royalty rates depending on the delivery technology or service involved. Such a non-neutral approach is arbitrary and unjustifiable. Copyright law should not specially privilege one type of technology or service over others. Rather, it should apply the same standard across the board.  

The Music Marketplace Act sensibly follows the U.S. Copyright Office’s 2015 report recommendationthat “[a] single, market‐oriented ratesetting standard should apply to all music uses under statutory licenses.” Indeed, the “willing buyer/willing seller” standard is market-oriented in that it is intended to “most clearly represent the rates and terms that would have been negotiated in the marketplace” among willing parties. As mentioned above, the Music Modernization Act would apply the “willing buyer/willing seller” standard to public performances via digital audio transmission of pre-72 recordings and also make that standardthe basis for mechanical licensing royalties paid to songwriters and other copyright owners of musical compositions. Thus, the Music Modernization Act would more closely align music copyright policy with free market principles and more equitably secure the intellectual property rights in sound recordings and music compositions. 

Second, the Music Modernization Act is on principled ground in securing the same copyright protection terms for pre-72 sound recordings that apply to post-72 sound recordings. The Senate should not be deterred from voting on the Music Modernization Act because one or a few members may hold outlier opinions about how long copyright protections ought to last. 

In general, copyright protection terms for sound recordings made on or after 1972 run for the life of the author plus 70 years. This makes sense in the Digital Age, since copyrights in sound recordings are far easier to transfer and track than previously, and the economic value of such rights are potentially far greater than ever before. It is the copyright owners who have the foremost right to receive proceeds from their intellectual property. 

Recent decisions under state law indicate that pre-72 sound recordings are already protected under many or perhaps most state laws. But state litigation is complex, costly, and uncertain. An important upshot to the Music Modernization Act is that it offers a federal-level resolution to myriad state-level disputes over public performance royalties involving pre-72 recordings. Federal copyright protection terms for pre-72 sound recordings are a critical component of that resolution. 

The U.S. Constitution’s Article I, Section 8 Copyright Clause entrusts Congress with the power to secure exclusive rights in creative works so that the producers of such works can enjoy the fruits of their labors. Consistent with the purpose of the Constitution’s Copyright Clause, the Music Modernization Act would better secure music copyright protections in the Digital Age. The Senate should promptly give the Music Modernization Act a vote on its merits.

Robust Physical and Intellectual Property Rights Encourage Economic Activity

On August 8, 2018, the Property Rights Alliance published the 2018 International Property Rights Index (IPRI), ranking 125 countries around the world based on the strength of both physical and intellectual property rights. The countries included in the 2018 edition comprise over 98% of global gross domestic product (GDP) and over 93% of the world’s population. Most notably, the IPRI finds that property rights are a defining factor impacting a country’s investment, entrepreneurship, and economic activity.

The IPRI includes three core components (legal and political environment, physical property rights, and intellectual property rights) and ten corresponding categories. The legal and political environment component includes judicial independence, rule of law, political stability, and control of corruption. The physical property rights component includes the protection of such rights, the ability to register property, and the ease of access to loans. The intellectual property (IP) rights component includes the protection and enforcement of such rights, strength of patent protections, and the level of copyright piracy. Using data from other international indices, the IPRI compiles scores from each of these components into a 0-10 scale for each of the 125 countries.

Finland ranks highest with a score of 8.69, followed by New Zealand and Switzerland with scores of 8.63 and 8.62, respectively. The United States ranks 14^th with a score of 8.12, which is exactly where it ranked in 2017. But its 2018 score did improve slightly from 8.07. On the other end of the scale, the bottom three countries are Venezuela, Yemen, and Haiti, with scores of 2.96, 2.79, and 2.73, respectively.

Significantly, the Index provides insight into correlations between IPRI scores and many economic outcomes. Free State Foundation scholars often have stated that strong protection of property rights, specifically strong protections of IP rights, foster creativity, innovation, and economic growth. The strong positive correlations found in the IPRI are consistent with those statements. For example, IPRI scores have a correlation coefficient of 0.833 with GDP per capita, 0.756 with gross capital formation per capita, and 0.904 with global entrepreneurship. Other strong positive correlations include a 0.900 coefficient with networked readiness/connectivity, 0.807 with telecommunication infrastructure, 0.842 with civic activism, and 0.818 with overall economic freedom.

With these robust positive correlations, it should not be a surprise that the top 20% of countries in the IPRI have an average GDP per capita of over $56,000, while the bottom 20% of countries have an average GDP per capita under $3,000.

 

Notably, China ranks 52^nd overall with a score of 5.91. As I stated in a blog last week, although China does not have the weakest IP system in the world, the size of its economy in conjunction with its lack of strong IP rights protections and enforcement means it is a major threat to U.S. creators and innovators. While the IPRI does not give specific policy proposals about how each country should improve its intellectual and physical property rights, it provides an aggregate view of how countries compare to each other and how strong property rights incentivize economic activity around the globe. The IPRI, along with the Global Innovation Policy Center’s (GIPC) International IP Index, provide policymakers useful tools for assessing ways to improve their country’s property rights systems.

From the correlations cited above, it is clear that robust physical and IP rights foster innovation and economic prosperity. As undeveloped and developing countries (like China, Mexico, and Haiti) continue to strengthen their property rights protections, U.S. companies will be more inclined to expand international trade with those countries, creating economic opportunities in impoverished parts of the world. Robust property rights reduce poverty by incentivizing economic activity because entrepreneurs understand that their innovations and earnings will be protected.

Finally, the U.S. must continue to strive to be a leader throughout the world by participating in free trade agreements that contain effective provisions that support the protection of property rights. The U.S. ranks first overall in GIPC’s International IP Index, but only 14^th in the IPRI. The United States’ lowest score was in the component of political stability, followed by judicial independence and ease of access to loans. While it may be difficult to create a stable political environment overnight, political instability often is the product of unemployment and a stagnant economy. Economic indicators suggest that unemployment is very low and the economy is growing. Expanding international trade and promoting innovation policy through the protection of property rights should stimulate the economy even further.

The United States should strive to improve its IPRI score even further. If it does, the effort should encourage additional entrepreneurship and economic activity.

Comcast's Internet Essentials Plays an Essential Role

Encouraging ubiquitous broadband deployment is an essential part of any strategy to get more and more Americans connected to the Internet. And, of course, Free State Foundation scholars over the years have always had much to say regarding the public policies that encourage deployment.

But encouraging broadband adoption, especially among those segments of the population that lag behind regarding adoption, is an essential part of the "connecting up" strategy. It's fair to say that Comcast's Internet Essentials program has played -- and continues to play --an essential role here.

And today Comcast announced it has now connected more than six million low-income Americans to the Internet through its Internet Essentials program, which is the largest and most comprehensive broadband adoption program for low-income families in the U.S. It said it has connected more than two million people in the last year alone, the largest annual increase in the program’s history.

And Comcast also announced it will significantly expand eligibility – for the eleventh time in seven years – to low-income veterans, nearly one million of whom live within the Comcast footprint. According to the United States Census Bureau’s 2016 American Community Survey, less than 70 percent of low-income veterans have Internet access, and about 60 percent own a computer.

Private efforts like the Comcast program -- and others offered by other companies -- are often overlooked. But they shouldn't be. These private companies have invested billions of dollars in efforts to help close remaining "digital divides." This is worthy for acknowledgment -- and thanks.

A 3 Minute Read Gone Bad

Jared Whitley has a piece titled "Facebook Is Not the Bad Guy" which The Weekly Standard ran on July 30. The piece advertises itself, right at the top, as a "3 min read."

Thankfully, it wasn't any longer. Because, say, if it were a "6 minute read," it might have been twice as flawed as it already is.

The premise of the piece is that, when it comes to data privacy and security concerns, the focus on Facebook, and presumably Google, Amazon, and other web giants, is misplaced. Mr. Whitley suggests "the media have been quite gleeful in their cheering of Facebook's recent bad news." Then, he claims "we're picking on the wrong bad guys." According to Mr. Whitley: "Telecom companies – AT&T, Verizon, Comcast – have access to more of our data and treat it with nowhere near the scruples that Silicon Valley does."

Even a cursory read of Mr. Whitley's piece will demonstrate he produces no evidence to support the claim that the "telecom companies" [he means: Internet service providers or ISPs] lack the "scruples" of Facebook, Google, and the other web giants. Mr. Whitley tosses out character-bashing bombs based on nothing more than his assertion "that they're eager to get into the digital advertising space that Google and Facebook dominate."

The reality, whether Mr. Whitley wants to admit it or not, is that Facebook has been in the news because its conduct and practices regarding privacy and data security have been problematic, even if not necessarily unlawful. Facebook's senior executives, including Mark Zuckerberg and Sheryl Sandberg, have acknowledged the company's privacy and data security shortcomings surrounding the Cambridge Analytica matters and other incidents.

My purpose here is not to pile on to Facebook to build a case that it is a "bad guy" – to use Mr. Whitley's terminology. Or to assert that a case has been made for heavy-handed government intervention of Facebook or Google. Rather my purpose is to show that if Mr. Whitley, or anyone else, is concerned about online privacy, it's unwise to ignore the web giants because, to paraphrase Willie Sutton, that's where the market power – and hence money – is.

It may be true, as Mr. Whitley claims, that the Internet service providers like Comcast and Verizon are eager to get into the digital advertising space. Sure enough. But it is also true, as he concedes, that in this space "Google and Facebook dominate."

As of December 2017, Google and Facebook accounted for 73% of the U.S. digital advertising market. And as of July 2018, Google had access to over 86% of all Internet searches in the United States and controlled almost 50% of the web browsing market. Despite its recent troubles, in July 2018, Facebook still controlled 54% of the social media market. The market shares of these web giants indisputably are significantly larger than that of any single Internet service provider.

In a February 2016 paper, “Online Privacy and ISPs: ISP Access to Consumer Data is Limited and Often Less than Access by Others,” Peter Swire and his colleagues stated that 70% of Internet service provider traffic would be encrypted by the end of 2016. Under that scenario, ISPs, at best, only have access to 30% of consumer data. Encryption keeps getting ever more prevalent so, in 2018, ISPs likely have access to even less consumer data. In other words, the Googles and Facebooks of the world, not the ISPs, have far greater access to consumers’ personal information than ISPs.

In the face of this reality regarding market power dominance in the digital advertising space, I'm baffled as to why Mr. Whitley felt the need to portray Internet service providers as the "bad guys" in order to defend Facebook, Google, Amazon, or other web companies. In a two-sided market, ISPs connect consumers to Internet access and web companies like Facebook to deliver content. Both sides have an incentive to collect consumer data to deliver targeted advertising and to respond to evolving consumer demand with innovative, pro-consumer offerings. Done right, this enhances overall consumer welfare.

What we don't want to do (per Mr. Whitley) is to engage in unfounded sweeping generalizations. Instead, we want to have a regulatory regime that emphasizes consumer disclosure and consumer choice. And we want to target bad actors – "bad guys" if you will – for appropriate sanctions if they are found, after proper procedure, to have committed unfair or deceptive practices or other abuses.

And we want to make even a "3 min read," or perhaps especially a "3 min read," accurate, not rife with unfounded accusations.

Senate Should Vote on the Bill to Modernize Music Copyright

Congress last overhauled the Copyright Act back in 1976, and provisions in the old law are often a poor fit for today’s digital music marketplace. Right now Congress has a stellar opportunity to make overdue updates to music copyright law. In April, the House of Representatives unanimously passed the Music Modernization Act. The Senate Judiciary Committee unanimously passed a similar bill in June. Rather than let this important legislation get sidetracked now, the Senate should act promptly to vote on the Music Modernization Act. 

The Music Modernization Act is an omnibus bill that would better secure copyright protections and royalty payments for recording artists, songwriters, and other music professionals. If passed by the Senate and signed into law, the bill would: (1) secure to copyright owners of sound recordings made before 1972 federal copyright protections for public performances of their recordings via digital audio transmission; (2) set up a streamlined process for producers, mixers, and sound engineers to receive direct royalty payments via SoundExchange; and (3) enable more timely and accurate payment of market-based “mechanical license” royalties to songwriters while providing blanket licenses for digital streaming services. 

Despite unanimous votes in the House of Representatives (H.R.5547) and in the Senate Judiciary Committee (S.2823), there are reports that the Music Modernization Act is being held up by just a few members of the Senate on account of the bill applying a uniform market-based “willing buyer/willing seller” royalty rate and providing full protection terms to pre-72 sound recordings. But these objections don’t hold up. They should not keep the Senate from taking a timely vote on the Music Modernization Act.

First, the “willing buyer/willing seller” royalty rate standard is the most sensible standard for achieving the purpose of music copyright law, and the Music Modernization Act’s expansion of that standard to pre-72 sound recordings and to music compositions is commendable. 

Under many circumstances, music copyright holders are subject to a compulsory licensing system in which licensees must pay royalties according to a rate formula set by Congress and applied by the Copyright Royalty Board. Although copyright holders are free to negotiate royalties with music service providers, those rates operate as backstops when negotiating is particularly burdensome or unsuccessful. Unfortunately, current law imposes different music copyright royalty rates depending on the delivery technology or service involved. Such a non-neutral approach is arbitrary and unjustifiable. Copyright law should not specially privilege one type of technology or service over others. Rather, it should apply the same standard across the board.  

The Music Marketplace Act sensibly follows the U.S. Copyright Office’s 2015 report recommendationthat “[a] single, market‐oriented ratesetting standard should apply to all music uses under statutory licenses.” Indeed, the “willing buyer/willing seller” standard is market-oriented in that it is intended to “most clearly represent the rates and terms that would have been negotiated in the marketplace” among willing parties. As mentioned above, the Music Modernization Act would apply the “willing buyer/willing seller” standard to public performances via digital audio transmission of pre-72 recordings and also make that standardthe basis for mechanical licensing royalties paid to songwriters and other copyright owners of musical compositions. Thus, the Music Modernization Act would more closely align music copyright policy with free market principles and more equitably secure the intellectual property rights in sound recordings and music compositions. 

Second, the Music Modernization Act is on principled ground in securing the same copyright protection terms for pre-72 sound recordings that apply to post-72 sound recordings. The Senate should not be deterred from voting on the Music Modernization Act because one or a few members may hold outlier opinions about how long copyright protections ought to last. 

In general, copyright protection terms for sound recordings made on or after 1972 run for the life of the author plus 70 years. This makes sense in the Digital Age, since copyrights in sound recordings are far easier to transfer and track than previously, and the economic value of such rights are potentially far greater than ever before. It is the copyright owners who have the foremost right to receive proceeds from their intellectual property. 

Recent decisions under state law indicate that pre-72 sound recordings are already protected under many or perhaps most state laws. But state litigation is complex, costly, and uncertain. An important upshot to the Music Modernization Act is that it offers a federal-level resolution to myriad state-level disputes over public performance royalties involving pre-72 recordings. Federal copyright protection terms for pre-72 sound recordings are a critical component of that resolution. 

The U.S. Constitution’s Article I, Section 8 Copyright Clause entrusts Congress with the power to secure exclusive rights in creative works so that the producers of such works can enjoy the fruits of their labors. Consistent with the purpose of the Constitution’s Copyright Clause, the Music Modernization Act would better secure music copyright protections in the Digital Age. The Senate should promptly give the Music Modernization Act a vote on its merits.

A Trade War May Not Fix China's Weak IP Protections

Earlier this month, President Donald Trump threatened to impose tariffs on $500 billion of Chinese imports, the value of all U.S. imports from China in 2017, because he claims China has taken advantage of the United States. President Trump already imposed 25% tariffs on $34 billion of Chinese goods. He said his action was taken “in light of China's theft of intellectual property and technology and its other unfair trade practices.” China immediately retaliated with equivalent tariffs, 25% on $34 billion of imported U.S. goods.

President Trump’s concerns about China’s weak protections of intellectual property (IP) rights are justified, but imposing tariffs and igniting a trade war may not be the best way to fix the problem.

In 2013, international trade of counterfeit and pirated goods represented up to 2.5% of world trade, or as much as $461 billion. Of that, China alone is estimated to account for more than 70% of global physical trade-related counterfeiting, amounting to more than $285 billion. Physical counterfeiting accounts for the equivalent of 12.5% of China’s exports of goods and over 1.5% of its GDP. China and Hong Kong together are estimated to account for 86% of global physical counterfeiting, which translates into $396.5 billion of counterfeit goods each year.

China and Hong Kong account for 87% of counterfeit goods seized coming into the United States. The annual cost to the U.S. economy of counterfeit goods, pirated software, and theft of trade secrets exceeds $225 billion and could be as high as $600 billion. According to the Global Innovation Policy Center’s (GIPC) 2018 International IP Index, China ranks 25^th out of 50 countries in the study with regard to strong IP systems. So while China’s IP system may not be the weakest in the world, the size of its economy in conjunction with its lack of strong IP protections and enforcement means it is a major threat to U.S. creators and innovators.

IP-intensive industries comprised over 38% of the entire U.S. economy in 2014, equating to $6.6 trillion. And IP-intensive industries directly accounted for 27.9 million jobs and indirectly accounted for 17.6 million jobs, totaling 45.5 million jobs or about 30% of all U.S. employment in 2014. Therefore, when IP rights are violated in the U.S. or abroad, it stifles innovation and job-growth throughout the economy.

As FSF Senior Fellow Ted Bolema discussed in a Perspectives from FSF Scholars, “Why Economists Consistently Support Free Trade Policies,” free trade policies lead to higher paying jobs and lower prices. Protectionist policies, like tariffs and trade wars, ultimately harm consumers and entrepreneurs in both China and the United States and likely harm other countries because investment and innovation are hindered.

The best way to address violations of IP rights in China is through diplomatic efforts, like the adoption of a new free trade agreement creating robust IP protections in China. Hopefully, China will adopt IP protections that are similar to those in the United States, the global leader according to GIPC’s 2018 International IP Index. Then, consumers and entrepreneurs in both countries will benefit from mutual gains from trade and legitimate economic activity.

The U.S.-China Joint Commission on Commerce and Trade (JCCT) is a high-level dialogue on bilateral trade issues between the United States and China, dealing extensively with strengthening IP rights protections in both countries and fostering innovation. Also, the U.S.-China IP Cooperation Dialogue is a group of professionals from both countries who meet to discuss how IP systems can be improved to spur innovation and economic activity between the two countries. The common theme of both of these groups is that China’s IP rights protections can be improved in three main areas: reducing the amount of bad-faith trademarks, combatting online piracy, and decreasing theft of trade secrets.

Bad-faith trademarks are trademarks that are meant to look similar to popular brands and confuse consumers into buying seemingly familiar products. According to GIPC’s Index, China’s trademark law “provides limited criteria for obtaining design protection and no substantive review takes place, leading to many low-value patents and a high rate of invalidations.” China should combat the pervasive problem of bad-faith trademarks by strictly filtering trademark applications. On a positive note, the establishment of China’s IP courts in 2014 has already created a strong precedent on bad-faith trademarks when it found that the Chinese retail sports chain Qiaodan had violated Michael Jordan’s naming rights. Hopefully, this precedent will deter bad-faith trademarks from emerging in the future.

With regard to online piracy, China should adopt e-commerce-related legislation to strengthen the supervision and enforcement of online piracy and counterfeiting. China must continue to provide more licensing opportunities for Internet companies in the music and movie industries, which should discourage piracy by increasing access to legal content. Also, improving the patentability of software by allowing applicants to file partial design claims and extending the grace period that precedes the patent application should reduce rampant software piracy in China by encouraging competition and ultimately lowering prices.

Theft of trade secrets is defined as stealing, misappropriating, or receiving such secrets with intent to convert the trade secret into an economic benefit for anyone other than the rights holder. Although China recently amended its Anti-Unfair Competition Law to shift the burden of proof to the accused infringer for many trade secrets cases, this action does not address the issue sufficiently. The amended law likely will lead to a “one-size-fits-all” enforcement approach that may not be suitable for all types of trade secrets. Instead, China must adopt trade secret legislation which should include steps to assist rights holders in seeking preliminary injunctions and include evidence and asset preservation measures under China’s Civil Procedure Law. Also, China can do more to engage the public about trade secrets protection and streamline its processes for providing trade secrets licensing.

Instead of igniting a trade war, President Trump should welcome free trade with China. With the adoption of a new bilateral free trade agreement (or multilateral if other countries choose to participate), the United States could address the concerns regarding bad-faith trademarks, online piracy, and theft of trade secrets by establishing an IP chapter that creates strong IP rights protections in China. This would spur trade between the two countries even more because a strong IP system in China would encourage additional innovation and economic activity.