Senators Ask FCC to Update Data in BDS Analysis

On Tuesday August 2, 2016, a group of nine U.S. Senators from rural states submitted a letter to FCC Chairman Tom Wheeler asking him to use the most up-to-date data when analyzing competition in the business data services (BDS) market. The Senators stated: “As you work toward a final rule, it is especially important for rural states like ours that the Commission use all the available data, including the data submitted earlier this year by the major cable operators, to both measure competitive markets accurately and ensure that the regulations for noncompetitive markets are based on the real cost to provide service.” They added that regulations adopted through the use of outdated or inaccurate data will harm robust investments in BDS and “rural constituents will face significant challenges in accessing the 21st century global economy.”

In June 2016, I wrote a Perspectives from FSF Scholars entitled “The FCC Cannot Proceed in the BDS Proceeding with a Flawed Analysis,” where I raised concerns about the inaccuracy of the FCC’s BDS data collection and its poor analysis in which it estimates how competition among BDS providers impacts BDS prices but fails to acknowledge the impact that consumer demand has on BDS prices.

Additionally, FSF scholars submitted comments regarding the FCC’s BDS proposal and President Randolph May and Senior Fellow Seth Cooper co-authored a Perspectives from FSF Scholars entitled “The FCC’s Special Access Proposal Is Infected With Special Pleading,” where they discuss how the FCC’s proposal is essentially regulatory-capture by a few BDS competitors pleading to obtain special rent-seeking treatment. 

Summer Reading: “Our Republican Constitution”

Regular readers know I don’t often do book reviews in this space, and, truth be told, this won’t be a full-fledged review either. But if you are looking for an important book to read during the summer reading season, I want to commend Randy Barnett’s just published “Our Republican Constitution – Securing the Liberty and Sovereignty of We the People.”

First, two “trigger warnings” of sorts. Our Republican Constitution is a serious, thought-provoking book, but not necessarily one you’d grab for a day at the beach if you usually look for the latest Dan Brown or James Patterson offering.

And please pay attention to the second warning. Mr. Barnett’s book is about two different visions concerning what our Constitution means. He calls these divergent visions the “Democratic Constitution” and the “Republican Constitution.” But, as he says, “I don’t intend these labels to be partisan.” If you read the book, you will see that this is true. Mr. Barnett is not referring to the current Democrat and Republican parties.

With those trigger warnings out of the way, what differentiates the two divergent constitutional visions? According to Mr. Barnett, those who favor the Republican Constitution view the “We the People” – the opening three words in the Constitution’s Preamble – as individuals, while those who favor the Democratic Constitution view “We the People” as a collective entity.

Those who favor a Democratic Constitution hold a conception of popular sovereignty that elevates majority will as the presumptive governing doctrine. So, in this view, “the only individual rights that are legally enforceable are a product of majoritarian will – whether the will of majorities in the legislature who create ordinary legal rights, or the will of majorities who ratified the Constitution and its amendments and created constitutional rights.” Therefore, Mr. Barnett concludes, “under a Democratic Constitution, first comes government and then come rights.” (Emphasis in the original.)

Under a Republican Constitution, the presumptive governing doctrine is reversed. Sovereignty resides in people as individuals. “We the People” is not a collective group but rather a collection of individuals. And, in the words of the Declaration of Independence, it is a “self-evident” truth that each individual is endowed “with certain unalienable Rights, that among these are Life, Liberty, and the Pursuit of Happiness.” As the Declaration goes on to say, “That to secure these Rights, Governments are instituted among Men, deriving their just Powers from the Consent of the Governed.”

I don’t want to make Mr. Barnett’s case here and, in any event, I can’t do it in light of space limitations. But I will say that he marshals considerable evidence to show that our Founders incorporated into the Constitution’s language and its structure, including the Ninth and Tenth Amendments, the Declaration’s claim that individuals possess certain inalienable natural rights. Thus, Mr. Barnett asserts: “A Republican Constitution views the natural and inalienable rights of these joint and equal sovereign individuals as preceding the formation of governments, so first come rights and then comes government.” (Emphasis in the original.)

So now consider the core of the difference between the two constitutional visions: 

The Democratic Constitution – “first comes government and then come rights”

The Republican Constitution – “first come rights and then comes government”

Or put another way, the Democratic Constitution’s vision places much more emphasis on majoritarian rule at the expense of protecting individual rights, while the Republican Constitution places more emphasis on securing individual rights at the expense of giving force to the majority’s will.

In essence, Mr. Barnett argues, convincingly in my view, that the Founders’ primary concern when they met in Philadelphia in the summer of 1787 was to adopt a governing charter that would guard against the excesses of “pure democracy,” especially against violations of property rights, then prevailing in the States under the Articles of Confederation. This concern regarding “pure democracy” – or unconstrained majoritarian rule – was expressed this way by James Madison to Thomas Jefferson in a famous October 1788 letter:

“Wherever the real power in a Government lies, there is the danger of oppression. In our Governments the real power lies in the majority of the Community, and the invasion of private rights is chiefly to be apprehended, not from acts of Government contrary to the sense of its constituents, but from acts in which the Government is the mere instrument of the major number of the constituents.”

Hence, the adoption of a Republican Constitution that created a representative government, with separation of powers and checks and balances, a republic intended to protect individual rights against the power of the majority.

In a portion of the book addressing how the progressive vision of the Democratic Constitution has facilitated the rise of today’s massive administrative state, Mr. Barnett says this about Chevron deference: “[I]t has profoundly weakened the separation of powers that is supposed to secure the sovereignty of the people and their servants in government.” Regular readers know that I have expressed a similar view, most recently here.

A significant portion of Mr. Barnett’s book is devoted to showing the extent to which the Republican Constitution vision has been lost, the adverse consequences of such loss, especially with respect to loss of individual freedom, and how “We the People” can redeem the Republican Constitution. On the latter score, I’ll just add that I agree with Mr. Barnett’s suggestion that the first thing we need to do is understand our constitutional heritage. I’m less enamored of some of the structural changes he suggests, such as establishing term limits for members of Congress or replacing the now-defunct power of state legislatures to select a state’s senators with a new provision giving a majority of state legislatures representing a majority of the population the power to repeal any federal law or regulation.

But read the book and draw your own conclusions!

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Finally, here’s another important book for a summer read, one you can proudly display either while sitting in a beach chair or in your own musty, book-lined study: “The Constitutional Foundations of Intellectual Property – A Natural Rights Perspective”, co-authored by me and Seth Cooper, my Free State Foundation colleague. Our book draws on many of the same historical, philosophical, and jurisprudential sources as Randy Barnett’s in arguing that, by including the Intellectual Property Clause in the Constitution of 1787, the Founders intended to secure the natural right of authors and inventors to reap the rewards from the fruits of their labors. Like Mr. Barnett, we look to John Locke, James Madison, and Abraham Lincoln, among others, in support of our project in support of the protection of intellectual property rights.

Right now, the Constitutional Foundations of Intellectual Property is available here from Amazon at a deeply discounted price. This steep discount may not last for long.

FSF Scholars Urge BEREC to Permit Zero-Rated Services

Yesterday, FSF President Randolph May and Senior Fellow Seth Cooper submitted a letter to the Body of European Regulators of Electronic Communications (BEREC) regarding BEREC's adoption of implementation guidelines for the European Union's network neutrality rules, urging BEREC to permit innovative and pro-consumer zero-rated services. Mr. May and Mr. Cooper stated that the adoption of a case-by-case analysis of zero-rated services as opposed to an across-the-board ban would benefit consumers, especially low-income consumers, with low-cost choices for access to broadband.

Maryland Has Relatively Low State and Local Sales Tax Rates, But…

On July 5, 2016, the Tax Foundation released a report entitled “State and Local Sales Tax Rates, Midyear 2016.” The authors, Jared Walczak and Scott Drenkard, ranked states (and the District of Columbia) by their combined state and local tax rates of the first half of 2016.

Five states do not impose statewide sales taxes: Alaska, Delaware, Montana, New Hampshire, and Oregon. Of those that do, Louisiana has highest combined sales tax rate at 9.98%. Maryland ranks towards the bottom at 38^th with a combined sales tax rate of 6.00%.

Maryland’s sales tax ranking should be applauded. FSF scholars have been critical of long-standing Maryland tax and regulatory policies for several years, so it’s good to be able to commend this particular element of Maryland policy. However, as the Tax Foundation’s report states, sales taxes are fairly transparent revenue collections because consumers can see their tax burden on the receipt of every purchase they make, while the real impact of income and corporate taxes can be much more complex and murky.

The Tax Foundation published a report earlier this year ranking Maryland with the 7^th highest overall state and local tax burden due to a combination of personal income tax rates, corporate tax rates, and “sin” tax rates. In other words, Maryland’s state and local sales tax rates are not the problem, although this does not mean that they could not be reduced. But in order to improve its general fiscal health and economic climate in a way that fosters growth, Maryland needs to reduce its personal income and corporate tax rates. If it did this, it would improve its ranking among the states with regard its overall tax burden – thereby incentivizing more entrepreneurial activity and economic growth within the state.

Notes for NARUC

I have been privileged to speak at many previous NARUC meetings, and I am pleased I was invited to speak on two separate panels at the upcoming NARUC Summer Committee Meetings in Nashville. The two panels are “Internet Privacy: The Rules of Engagement” and “Perspectives on Chevron Deference.” The complete agenda is here.

The state regulatory commissions play an important role with regard to communications law and policy, so many of of the NARUC meeting attendees are “subject matter experts” on the topics discussed. That’s why I have found many of the NARUC panels on which I’ve participated, along with the audience’s comments and questions, useful in informing my own thinking.

What I want to do here is just offer a few thoughts – perhaps more in the nature of “thinking out loud” – as I prepare for the two panels. By no means do I intend what follows to be comprehensive in any way. Rather, it’s intended to help organize my own thinking, at least in a preliminary high-level “macro” way, and perhaps provoke your thinking too.

The FCC’s Privacy Proposal

Much has been written concerning how the FCC’s proposal, with more stringent restrictions on the collection and sharing of consumers’ data than those that apply to the so-called edge providers, would place the Internet service providers (ISPs) subject to the FCC’s jurisdiction at a competitive disadvantage. This is true, and it is not an outcome to be preferred when a sound rationale for such a disparate regulatory regime is lacking.

But I am not so much concerned about the ISPs’ competitive position as I am about overall consumer welfare. It is in this realm that I find the FCC’s proposal troubling. I think a close reading of the Commission’s Notice will leave you with the sense the agency insufficiently takes into account the value that consumers place on receiving relevant information made possible by targeted advertising which, itself, is made possible by the collection and use of consumer data.

Of course, it is true, as the Commission claims, that consumers value privacy. And they may have certain preferences regarding the privacy of certain personally identifiable information that may be collected by ISPs. But this is only one side of the two-sided equation. Consumers also value receiving targeted information that they want enabled by the collection and use of their personal data. And they value receiving such information without any payment of money or subscription fee. Stated differently, but to the same effect, consumers may prefer that the payment they make not be in the form of money, but in the exchange of information about themselves.

Here’s the nub of the matter: The reason the FCC’s proposal is so problematical is that it presumes, as the default position, that consumers prefer to broadly restrict the collection and use of their personal data, rather than to more narrowly restrict such use (sensitive information such as medical or financial information is subject to higher privacy expectations). To effect such a presumption, the FCC – flying in the face of the FTC’s substantial experience and expertise regarding consumer preferences and expectations – proposes an “opt-in” requirement for most consumer data, no matter the lack of sensitivity. This is why the FTC staff filed comments advising the FCC, politely, that its proposal may harm consumers.

Here’s what FTC Commissioner Maureen Ohlhausen, more straight-forwardly, had to say on this fundamental point in a June 8, 2016, address:

Consumers who wish to receive targeted advertising or to benefit from services funded by advertising are harmed by regulation that increases the difficulty of using information. As a result, if a regulation imposes defaults that do not match consumer preferences, it forces unnecessary costs on consumers without improving consumer outcomes. The burdens imposed by overly restrictive privacy regulation, such as broad opt-in requirements for non-sensitive data, may also slow innovation and growth, harming all consumers.

There is much more to discuss with regard to the FCC’s proposal. But what I’ve said here does seem to get to the core of one of its overarching defects.

Perspectives on Chevron Deference

As most readers know, the central holding of the landmark 1984 decision in Chevron U.S.A. v. Natural Res. Def. Council is this: When a statutory provision is ambiguous, if the agency's interpretation is "based on a permissible construction of the statute," the agency's interpretation is to be given "controlling weight." Chevron is one of the Supreme Court’s most widely cited cases and most widely discussed in law reviews. Given the Chevron doctrine’s importance to the administrative state, I’ve written a lot about Chevron myself. In other words, I’ve contributed my fair share to the diminishment of our forestry resources resulting from endless Chevron commentaries.

In one sense the doctrine is important because, as it is often argued, it facilitates the expansion of the administrative state by conferring considerable power on unelected agency officials. Remember: If a statutory provision is ambiguous, and the agency’s interpretation of the statute is “permissible” (or “reasonable” as stated elsewhere in Chevron,) then the agency’s interpretation is to be given “controlling weight” – not “due” weight, or “considerable” weight, or “lots of” weight, but controlling weight. Thus, when Chevron deference is applied, as it was throughout the D.C. Circuit’s recent Open Internet Order decision, it generally is outcome-determinative.

But Chevron is important in a more fundamental sense: It goes to the very core of the separation of powers embedded in the structure of the Constitution – in other words, the allocation of powers among the three branches, Congress, the Executive, and the Judiciary. As administrative law scholar Cynthia Farina stated in an early article, “recognizing that the choice of interpretative model is part of the large problem of reconciling agencies and regulatory power with the constitutional scheme, Chevron invoked the principles of separation of powers and legitimacy.”

Here’s the nub of what the Supreme Court said in justifying Chevron:

Judges are not experts in the field, and are not part of either political branch of the Government.…[A]n agency to which Congress has delegated policymaking responsibilities may, within the limits of that delegation, properly rely upon the incumbent administration's views of wise policy to inform its judgments. While agencies are not directly accountable to the people, the Chief Executive is, and it is entirely appropriate for this political branch of the Government to make such policy choices -- resolving the competing interests which Congress itself either inadvertently did not resolve, or intentionally left to be resolved by the agency charged with the administration of the statute in light of everyday realities.

In other words, the Court said, when Congress enacts an ambiguous statue, it implicitly delegates primary interpretive authority to the Executive Branch because the Chief Executive is politically accountable and judges are not. And, as the above quote from Chevron indicates, the Court gave a nod, as a secondary matter, to agency expertise.

Teaser Alert: At the NARUC panel, I am going to suggest why I think Chevron deference should be constrained, either by the Supreme Court revisiting the decision or by Congress adopting legislation regarding the review of agency decisions that alters the scope of the current doctrine. Perhaps, as an initial matter, to spur your thinking along lines receptive to what I intend to suggest, please consider the following points:

·      In Federalist No. 78, Alexander Hamilton said: “The interpretation of the laws is the proper and peculiar province of the courts.”

·      In Marbury v. Madison, Chief Justice John Marshall famously proclaimed: “It is emphatically the province and duty of the judicial department to say what the law is.”

·      The Administrative Procedure Act (APA), called the “constitution” of the modern regulatory state, provides that a reviewing court “shall decide all relevant questions of law, interpret . . . statutory provisions, and determine the meaning and applicability of the terms of agency action.” The APA also provides that the reviewing court shall hold unlawful agency action found to be “in excess of statutory jurisdiction, authority, or limitations, or short of statutory right.” Curiously, Chevron, a decision that has had a profound effect on the scope and operation of the modern regulatory state, did not cite or discuss the Administrative Procedure Act.

Consider how Chevron squares with the dictates of the Constitution’s separation of powers principles – at least as suggested by Hamilton and Marshall in the above quotes – and by Congress when it adopted the APA.

And, finally, because the Chevron doctrine is based primarily on a political accountability rationale, consider whether it makes sense for the deference doctrine to apply to multi-member bipartisan independent agencies like the FCC to the same extent as Executive Branch agencies like EPA – which, by the way, is the agency whose statutory interpretation was the subject of Chevron. I’ve suggested in two law review articles that Chevron should not apply, or apply with the same controlling force, to the independent agencies: “Defining Deference Down: Independent Agencies and Chevron Deference” and “Defining Deference Down, Again: Independent Agencies, Chevron Deference, and Fox.”

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Well, this “thinking out loud” exercise has helped me organize my thoughts for the upcoming NARUC Summer Committee Meetings. Perhaps it will provoke your thinking – either out loud or completely silently – as well.

If you’re headed to Nashville, I hope to see you there!

Copyright Updates Needed to Fix Music Market Distortions

When markets experience dramatic change, laws addressed to older business models and technologies can distort or inhibit free market-oriented activities that are dependent on newer models and technologies. The market distortion problem is increased when laws left on the books are based on industrial policies favoring certain market segments that no longer exist.

Copyright law suffers from such market-distorting effects because many of its provisions are based on late 20th century conceptions of a marketplace in which Internet use was far less common and relied largely on slow dial-up service. This poses significant difficulties to copyright holders seeking to protect their property rights from infringement.

Also, certain copyright provisions apply different types of protections or different royalty rates to different types of services without any rational basis – instead of equal standards. Such shortcomings in the law adversely impact copyright holders in sound recordings by unfairly harming their ability to bargain for financial returns in licensing their music to different music delivery services. Copyright law needs updating to fix these distortions of the music market.

Highlighting one particular problem, a number of high-profile music artists – ranging from Taylor Swift to Paul McCartney to Trent Reznor – recently have leveled harsh criticisms against YouTube for hosting copyright infringing content and for lackluster anti-piracy efforts. Complaints have also been voiced about low revenues received from the site.

A report titled "How Google Fights Piracy" appears as a partial response to those criticisms. The report touts YouTube proprietary systems for digital rights management and for combating infringing uploads of copyrighted video and music content by its users. It also points to a claimed $3 billion in multi-year aggregate payments made to copyrighted content owners by YouTube for on-demand ad-supported streaming.

By itself, perhaps $3 billion may seem to be an impressive figure. But the shine wears off when one considers the larger context of annual music consumption and revenues. In 2015, on-demand ad-supported music streams generated only $385 million in sales revenues. More than 150 billion song streams generated only $227 million. These numbers fall short of the $416 million in revenues generated that very same year by 17 million vinyl record sales.

It is true that copyright owners in the sound recording and motion picture markets bargained with YouTube, granting permission for streaming of copyright content in exchange for revenues. However, copyright holders have pointed to the prevalence of infringement on user-upload sites such as YouTube and the inadequacy of existing copyright enforcement mechanisms. It's out of apparent necessity to secure returns, however meager, for their creative work – rather than no returns at all – that copyright holders consent to low rate deals with ad-based streaming services.

Meanwhile, copyright holders face constraints on financial returns from other music delivery platforms. Under copyright law's compulsory licensing system, subscription satellite and Internet radio services can transmit copyrighted sound recordings at an artificially low rate under Copyright Act Section 801(b). And broadcast radio stations are exempt from having to pay any royalties to copyright holders when they air copyrighted sound recordings.

Ultimately, assessments of fair financial returns to copyright holders in sound recordings relative to economic values offered by online streaming platforms should be determined through the free market. But the rules of the market have long since become outdated. Copyright law needs updating in a free market-oriented direction to reflect digital age realities.

Much of copyright law predates the rise of high-speed broadband, emergence of user-upload streaming sites, and the eclipse of CDs by digital downloads. Last-century copyright law supplies a backdrop in which copyright protection is uneven and in some cases inadequate to protect against online piracy and infringement. Copyright law must be updated to ensure that marketplace negotiations between copyright holders and music delivery services are not so weighed down by the threat of piracy and infringement. That also means copyright law must treat different music and media platforms equally unless there is a rational basis for treating them disparately. 

A needed update to copyright law should include at least three important reforms:

First, the notice and takedown system for combating infringing Internet postings of copyrighted content needs to be revamped. The system was established back in 1998, a time when user-uploading on streaming sites was nil. The proliferation of those sites as well as Internet users and web addresses generally has made the system increasingly time-consuming and costly for copyright holders to use in obtaining prompt takedowns of infringing content. Judicial rulings have also restricted the scope of available protections, thereby requiring copyright holders to file numerous, repeated, webpage-specific takedown requests with online service providers when infringement of specific copyrighted works are clearly known to be widespread on a given online platform or website. The burdens are especially pronounced for individual copyright holders. The notice and takedown system should include simpler, more streamlined options for addressing such widespread and repeat infringement.  

Second, satellite and Internet radio subscription services should receive equal treatment – not preferred treatment – under the copyright law’s compulsory licensing system. Compulsory licensing may be a less-than-ideal alternative to a truly free market system. But mandating special low rates under the Section 801(b) standard for satellite radio subscription services is unjustifiable. At the very least, the licensing rates should seek to approximate free market values. Thus, satellite radio subscription services should be subject to the same "willing buyer/willing seller standard" that governs other music delivery services.

Third, the copyright royalty exemption for broadcast radio should be eliminated. Broadcast radio should be treated like other music delivery services instead of given a free pass to play copyrighted sound recordings. Like other services, if broadcast radio stations wish to air copyrighted sound recordings, they should bargain for performance rights to do so – or short of that, pay royalties according to the "willing buyer/willing seller" rate standard.

One doesn't have to side with YouTube, satellite and Internet radio, broadcast radio stations, recording companies, music artists or other copyright holders to recognize that existing copyright law is distorting free market negotiations for delivering music content. Copyright law must be modernized to match the 21st century world of high-speed broadband and ubiquitous Internet user-upload services. Equal treatment of music delivery platforms and more effective tools to combat infringement are essential to putting copyright on a firmer free market-oriented footing.