The FCC and the Future of the Internet

When I selected a theme – “The Future of the Internet: Free Market Innovation or Government Control” – several months ago for this year’s Free State Foundation annual telecom conference, little did I know that it would now be even more apt than I then imagined.

If you don’t think the direction of the Internet’s future is implicated by the choice between two very different paths – free market innovation on the one hand or government control on the other – I invite you to read the Federal Communications Commission’s just-released “Open Internet” order. All 300+ pages and 1777 footnotes worth of it!

The 1777 footnotes caught my eye. Before turning the last page, to the “Ordering Clauses,” I thought there were only 1776 footnotes. This would have been fitting because, in my view, the Commission’s action represents the antithesis of the “spirit of ‘76.” I wonder what our Founders would think about an unelected body of government administrators reaching out to seize control, absent clear statutory direction, of the most vibrant, open communications medium the world has ever known – and absent evidence of a present market failure or consumer harm.

Two quotations from Thomas Jefferson, both pertinent to the FCC’s aggrandizing action, leave little doubt:

“Were we directed from Washington when to sow, and when to reap, we should soon want bread.”

“Laws are made for men of understanding and should, therefore, be construed by the ordinary rules of common sense. Their meaning is not to be sought in metaphysical subtleties which may make anything mean everything or nothing at pleasure.”

There are very many problematic aspects to the Commission’s action, but here I want to focus on only one – a crucial one nonetheless that goes to the very heart of the question concerning whether the future of the Internet is to be guided by free market innovation or government control.

The new regulations inevitably will lead to more government control at the expense of innovation because the FCC has arrogated unto itself such open-ended power to decide which Internet practices it will allow or disallow. In other words, the agency deliberately has created a large realm of uncertainty that gives it free rein, in its discretion, to shape the future of the Internet as it goes about deciding, far into the future, what is permissible or not.

I understand that the FCC is claiming that its new rules will create more certainty. Indeed, in a story in today’s Communications Daily [subscription required], an unnamed Commission spokesperson is quoted to this effect: “The Open Internet Order provides clear rules of the road that will enable the Enforcement Bureau to carry out the Commission’s policies ensuring that consumers and innovators have access to an open Internet.”

This “clear rules of the road” line from agency officials is belied at many turns in the Commission’s order. To take a notable example, the agency adopts a general conduct rule that prohibits Internet providers from 'unreasonably interfering' or 'unreasonably disadvantaging' others in the Internet ecosystem. You don’t need to be a lawyer –or a metaphysician – to understand that these terms don’t establish clear rules of the road. They are so standardless they necessarily will lead to an ongoing exercise of power akin to the 'dispensing power' that I wrote about in my essay, “Is the FCC Lawless,” published in The Hill.

In addition to other forms of administrative diktats likely to be utilized, the Commission is establishing a whole set of new regulations governing the issuance of “Advisory Opinions.” If the rules of the road were clear, it would not be necessary to “use advisory opinions to explain how it will evaluate certain types of behavior and the factors that will be considered in determining whether open Internet violations have occurred.” [Para. 229] Entities may request advisory opinions regarding prospective practices they fear may run afoul of the Commission’s enforcement officials, but only if they “certify that factual representations made to the Enforcement Bureau are truthful and accurate, and that they have not intentionally omitted any material information from the request.” The enforcement officials are not required to respond to such requests, but, if they do, the advisory opinions will expressly state “that they are premised on specific facts and representations in the request and any supplemental submissions.” [Para. 233]

The way the Commission’s new regulations will discourage innovation is obvious. Under a relatively light touch regulatory regime, the Internet continued to evolve in response to consumer demand without the need to seek a priori bureaucratic permission. Going forward this is most unlikely to be the case. When the engineers, marketers, businesswomen, and other innovators get together to discuss a new product and service, inevitably the question will be asked: “Before moving ahead, in order to protect ourselves and avoid trouble, shouldn’t we get an Advisory Opinion from the FCC’s enforcement folks.” The answer from the lawyers most often will be “yes.”

Unless, of course, the decision is made from the get-go not to seek an a priori opinion, but instead simply to reduce the extent to which the new product or service differs from the existing one – or to simply abandon the idea. And, make no mistake, we will never know – and this won’t trouble the Commission – how much innovation has been foregone and left on the drawing boards. Because you can’t really measure foregone innovation.

In the same Communications Daily story cited above, Christopher Yoo, University of Pennsylvania law professor and a member of FSF’s Board of Academic Advisors, put it this way: “The enforcement provisions conflict with the spirit of permissionless innovation that has long been the foundation of the Internet’s success. The Internet has long been based on the principle that innovators should not have to ask approval from anyone before deploying a new business model.”

In the next several weeks, Free State Foundation scholars will be addressing various other aspects of the FCC’s order. So stay tuned for that.

But, more immediately, I certainly hope you will attend FSF’s Seventh Annual Telecom Policy Conference this Thursday at the National Press Club. I’m sure the FCC’s Internet regulation order – and what comes next in Congress and the courts – will be a prime topic of discussion, along with other hot communications policy issues.We have an outstanding lineup of top-flight speakers. The agenda is here. Greg Walden, Chairman of the House Subcommittee on Communications and Technology, will deliver the Opening Keynote Address and the action will be non-stop from there until FCC Commissioner Clyburn offers some “Final Thoughts.”

In order to attend, register here.

A Response: Towards a Real Pro-Innovation, Pro-Creator, Pro-Consumer Copyright Agenda

A coalition of organizations has distributed a statement entitled “Supporting a Pro-Innovation, Pro-Creator, Pro-Consumer Copyright Agenda” to the members of the 114th Congress. While there are aspects of the statement with which I agree, in certain respects its fundamental emphasis is misplaced. This means that, as a matter of fact, the statement is not “pro-innovation, pro-creator, pro-consumer,” as its signatories proclaim.

First, although the coalition statement is about copyright and the Copyright Act, it studiously avoids mentioning “property,” “intellectual property,” or “property rights.” The Copyright Act secures the rights of artists, authors, songwriters, filmmakers, and other creators of copyrighted works to effectuate the Founders’ understanding that copyright is a property right that should be secured by the Constitution. In James Madison’s 1792 essay, “On Property,” he defines property as “everything to which a man may attach a value and have a right.” Madison then goes on to say that “a man has a property in his opinions and the free communication of them.” The point is that it is difficult to properly address copyright law, as the statement purports to do, if you don’t begin by acknowledging that the subject matter involves a property right.

The first paper in the series of Perspectives from FSF Scholars on foundational principles of Intellectual Property, “The Constitutional Foundation of Intellectual Property,” explains the Founders’ perspective on intellectual property rights:

Classical liberal political philosophy was a formative influence on the framers and ratifiers of the U.S. Constitution. According to this philosophy, especially the works of John Locke, government exists to protect natural rights to life, liberty, and property. This classical liberal philosophy defined ‘property’ broadly to include one's person, one's faculties, and the fruits of one's labor. Lockean natural rights philosophical premises, as understood and adopted by James Madison and other of our Founders, confirm the status of copyrights and patents as genuine forms of property, on par with real or personal property.

The coalition statement asserts that “[a] vibrant public domain is a core component of creativity and knowledge” and the “public domain is the reservoir that nourishes creativity.” It is not necessary to denigrate a properly delimited public domain to point out that this formulation misplaces where the emphasis should lie. A proper statement would declare, instead, that “securing intellectual property rights under the Constitution’s IP Clause is a core component of creativity and knowledge.” Protecting IP rights is at the core of providing authors and other creators of content with the necessary incentives and rewards to create works that the public will value.

The most important attribute of private property is the ability of property owners to exclude others. Of course, a “public domain” is just the opposite. While there is a place for a properly delimited public domain, in general, government-mandated “free” access will not encourage creative content, nor will it allow creators to allocate their works in the manner of their choosing or lead to economic benefits for society as a whole.

Although the coalition statement declares support for free expression, it is simply not true that “copyright laws stifle free speech.” Protection of copyright is fully consistent with the First Amendment’s protection of freedom of speech. In the sixth paper in the IP series of Perspectives from FSF Scholars, “Constitutional Foundation of Copyright and Patent in the First Congress,” the proper relationship between the First Amendment and copyright is explained:

That the First Congress saw fit to include copyright and patent in its ambitious, historic legislative agenda suggests its members found intellectual property especially important to furthering the new nation’s economic, artistic, and technological progress. Passage of the separate Copyright and Patent Acts also indicates a consensus regarding the legitimacy and efficacy of pro-IP policy – a consensus conspicuously absent when it came to Congressional deliberation on other matters. Even more important, the First Congress’s securing of copyrights and patents amidst all its other constitution-implementing business is indicative of IP’s consistency with the logic of American constitutionalism. In particular, the legislative record of the First Congress creates a powerful inference that its distinguished members believed that the First Amendment and IP are, at their conceptual foundations, in harmony.

The coalition statement makes a valid point that “a heavy-handed regulatory approach will only stifle” innovation and creative content. But it is a mistake to equate ensuring protection of copyrighted works with a heavy-handed regulatory framework.

The statement’s intimation that protecting copyright somehow is the same as protecting a monopoly is off-base. The Perspectives from FSF Scholars, “The Constitution’s Approach to Copyright: Anti-Monopoly and Pro-Intellectual Property Rights,” addresses the difference between protecting copyright and government-conferred monopolies:

Above all else, the U.S. Constitution recognizes the uniqueness of copyright and patent. At the time of the nation's founding, basic differences between government-conferred monopolies and individual IP rights were well known. The Founders were familiar with Britain's sorry history of Crown-chartered monopolies. They were likewise familiar with attempts by English common law courts and by Parliament to restrict such monopolies and to protect IP rights for authors and inventors.

While the Founders held an anti-monopolistic outlook, at the same time they supported limited protections for copyright and patent, placing the power to establish those protections in the fundamental law of the land. Article I, Section 8, Clause 8 of the U.S. Constitution grants Congress power "To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries." In other words, it is clear that the framers and ratifiers of the Constitution made a conscious choice to protect individual IP rights and, at the same time, to rely on certain constitutional safeguards against monopolies.

In sum, although there are parts of the coalition statement that, taken alone, provoke little disagreement, by downplaying the crucial role played by intellectual property rights in incentivizing creative works, the statement’s emphasis is misplaced. Without doubt, IP rights protections incentivize artistic, commercial, and scientific advances for the benefit of society and the public at large.

If you are interested in learning more about foundational principles of intellectual property within the context of American constitutionalism, please delve into the Free State Foundation's series of papers exploring these principles.

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 inThe 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," Perspectives from FSF Scholars, Vol. 9, No. 18 (2014).

Randolph J. May and Seth L. Cooper, "Life, Liberty, and the Protection of Intellectual Property: Understanding IP in Light of Jeffersonian Principles," Perspectives from FSF Scholars, Vol. 9, No. 25 (2014).

Randolph J. May and Seth L. Cooper, "Intellectual Property Rights Under the Constitution's Rule of Law," Perspectives from FSF Scholars, Vol. 9, No. 31 (2014).

Randolph J. May and Seth L. Cooper, "Reaffirming the Foundation if IP Rights: Copyright and Patent in the Antebellum Era," Perspectives from FSF Scholars, Vol. 9, No. 38 (2014).

Randolph J. May and Seth L. Cooper, "Adding Fuel to the Fire of Genius: Abraham Lincoln, Free Labor, and the Logic of Intellectual Property, " Perspectives from FSF Scholars, Vol. 10, No. 2 (2015).

Congress Reintroduces a Market-Based Reform for Songwriter Copyright

Free markets are characterized by exchanges between willing buyers and willing sellers. But certain aspects of the market for copyrighted music are subject to restrictions making it less than free. Legislation recently introduced in Congress keys in one realistic reform that, if applied broadly, would move music copyright policy more in line with free market principles.

 The federal Copyright Act recognizes copyrights for songwriters and for owners of recordings. Under most circumstances, music copyright holders are subject to a compulsory licensing system in which licensees pay copyright holders royalties based on government-set rates. Copyright holders are often free to negotiate royalties with music service providers, but royalty rates provide the backstop when negotiating is especially burdensome or unsuccessful. In many instances, federal copyright policy sets rates using a standard that emphasizes protectionist concerns rather than consumer welfare and the rights of sound recording owners or songwriters.

On prior occasions, we have called attention to aspects of copyright law regarding public performances of sound recordings that need free market reform. Particularly troublesome is the Section 801(b) standard by which the Copyright Royalty Board is charged with setting royalty rates in several contexts, including cable and satellite video service providers. Section 801(b) includes a protectionist proviso that rates should “minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.”

This standard has it completely backwards. Disruption is a sign of market dynamism and ongoing transition to new generations of products and services. Consumers are much more likely to benefit from ongoing supplies of new types of products and services than from static markets lacking innovative impact. For those reasons and more, I previously warned against expanding the scope of Section 801(b) to webcasting services for digital music. As I argued: “Congress Should Make Way for a Free and Disruptive Digital Market.”

On the positive side, digital music webcasting services are currently subject to the more market-oriented “willing buyer/willing seller” standard. Under that standard, the Copyright Royalty Board determines what royalty rates “most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller.” If copyrighted music is to remain under rate regulation, the “willing buyer/willing seller” standard should always be preferred over the anti-disruptive Section 801(b) standard.

In fact, Congress should seriously consider making “willing buyer/willing seller” the uniform standard for all copyright royalty rates. Congress should likewise apply the “willing buyer/willing seller” rate to radio broadcasting. Under existing law, broadcast radio can play copyrighted music pursuant to the compulsory licensing system but enjoys a special exemption from having to pay any royalties.

On March 4, the “Songwriter Equity Act of 2015” was introduced in both the Senate and House of Representatives. For its part, the Songwriter Equity Act addresses regulatory constraints and inequities in the law’s treatment of songwriters.

Under existing law, when a copyrighted song is reproduced and distributed – via digital download, CD, or vinyl record, for instance – the songwriter is entitled to royalties via a “mechanical license.” The mechanical license royalty rate for songwriters is set by the Copyright Royalty Board. The current rate is 9.1 cents per song or 1.75 cents per composition minute – whichever is greater. Songwriters insisted this rate is far below market value.

Of course, Section 115 of the Copyright Act incorporates the Section 801(b) standard. That means the mechanical license is subject to protectionist proviso that royalty rates should “minimize any disruptive impact on the structure of the industries involved and on generally prevailing industry practices.”

The most praiseworthy part of the Songwriter Equity Act is its proposed replacement of the current protectionist standard for royalty rates with a “willing buyer/willing seller” standard that seeks to approximate the “fair market value” of the rights. By this standard:

“The Copyright Royalty Judges shall establish rates and terms that most clearly represent the rates and terms that would have been negotiated in the marketplace between a willing buyer and a willing seller. In establishing such rates and terms, the Copyright Royalty Judges shall base their decision on marketplace, economic, and use information presented by the participants. In establishing such rates and terms, the Copyright Royalty Judges may consider the rates and terms for comparable uses and comparable circumstances under voluntary license agreements.”

The point deserves to be reiterated: So long as copyrighted music remains subject to compulsory licensing and rate regulation, the “willing buyer/willing seller” standard should be preferred over the Section 801(b) standard. If rate regulation of copyright royalties is a fact of life, it should at least be governed by a standard that seeks to emulate market outcomes instead of one that seeks to produce protectionist outcomes.

The Songwriter Equity Act comprises one piece of a much larger music copyright reform project. By rolling back the Section 801(b) standard and expanding the “willing buyer/willing seller” standard for copyright royalty rates, Congress can bring music copyright policy closer to free market principles while protecting the rights of both sound recording owners and songwriters.