Category Archives: Antitrust

“Fake Neutrality” or Government Takeover?: Reading the FCC’s Net Neutrality Report (Part III)

In Part I of this analysis of the FCC’s Report and Order on “Preserving the Open Internet,” I reviewed the Commission’s justification for regulating broadband providers.   In Part II, I looked at the likely costs of the order, in particular the hidden costs of enforcement.  In this part, I compare the text of the final rules with earlier versions.  Next, I’ll look at some of the exceptions and caveats to the rules—and what they say about the true purpose of the regulations.

In the end, the FCC voted to approve three new rules that apply to broadband Internet providers.  One (§8.3) requires broadband access providers to disclose their network management practices to consumers.  The second One (§8.4) prohibits blocking of content, applications, services, and non-harmful devices.  The third One (§8.5) forbids fixed broadband providers (cable and telephone, e.g.) from “unreasonable” discrimination in transmitting lawful network traffic to a consumer.

There has of course been a great deal of commentary and criticism of the final rules, much of it reaching fevered pitch before the text was even made public.  At one extreme, advocates for stronger rules have rejected the new rules as meaningless, as “fake net neutrality,” “non neutrality,” or the latest evidence that the FCC has been captured by the industries it regulates.  On the other end, critics decry the new rules as a government takeover of the Internet, censorship, and a dangerous and unnecessary interference with a healthy digital economy.  (I agree with that last one.)

One thing that has not been seriously discussed, however, is just how little the final text differs from the rules originally proposed by the FCC in October, 2009.  Indeed, many of those critical of the weakness of the final rules seem to forget their enthusiasm for the initial draft, which in key respects has not changed at all in the intervening year of comments, conferences, hearings, and litigation.

The differences—significant and trivial—that have been made can largely be traced to comments the FCC received on the original draft, as well as interim proposals made by industry and Congress, particularly the framework offered by Verizon and Google in August and a bill circulated by Rep. Henry Waxman just before the mid-term elections.

1.      Transparency

Compare, for example, the final text of the transparency rule with the version first proposed by the FCC.

Subject to reasonable network management, a provider of broadband Internet access service must disclose such information as is reasonably required for users and content, application and service providers to enjoy the protections specified in this part. (Proposed)

A person engaged in the provision of broadband Internet access service shall publicly disclose accurate information regarding the network management practices, performance and commercial terms of its broadband Internet access service sufficient for consumers to make informed choices regarding use of such services and for content, application, service and device providers to develop, market and maintain Internet offerings. (Final)

The final rule is much stronger, and makes clearer what it is that must be disclosed.  It is also not subject to the limits of reasonable network management,  Rather than the vague requirement of the draft for disclosures sufficient to “enjoy the protections” of the open Internet rules, the final rule requires disclosures sufficient for consumers to make “informed choices” about the services they pay for, a standard more easily enforced.

By comparison, the final rule comes close to the version that appeared in draft legislation circulated but never introduced by Rep. Henry Waxman in October of 2010. It likewise reflects the key concepts in the Verizon-Google Legislative Framework Proposal from earlier in the year.

As the Report makes clear (¶¶ 53-61), the transparency rule has teeth.  Though the agency declines for now from making specific decisions about the contents of the disclosure and how is must be posted, the Report lays out a non-exhaustive list of nine major categories of disclosure, including network practices, performance characteristics, and commercial terms, that must be included.  It’s hard to imagine a complying disclosure that will not run to several pages of very small text.

That generosity, of course, may be the rule’s undoing.  As anyone who has ever thrown away a required disclosure from a service provider (mortgage, bank, drug, electronic device, financial statement, privacy, etc.) knows full well, information “sufficient” to make an informed choice is far more information than any non-expert consumer could possibly absorb and evaluate, even if they wanted to.   The more information consumers are given, the less likely they’ll pay attention to any of it, including what may be important.

The FCC recognizes that risk, however, but believes it has an answer.  “A key purpose of the transparency rule,” the Commission notes (¶ 60), “is to enable third-party experts such as independent engineers and consumer watchdogs to monitor and evaluate network management practices, in order to surface concerns regarding potential open Internet violations.”

Perhaps the agency has in mind here organizations like BITAG, which has been established by a wide coalition of participants in the Internet ecosystem to develop “consensus on broadband network management practices or other related technical issues.”  Or by consumer watchdogs, perhaps the agency imagines that some of the public interest groups who have most strenuously rallied for the rules will become responsible stewards of their implementation, trading the acid pens of political rhetoric for responsible analysis and advocacy to their members and other consumers.

We’ll see.  I wish I shared the Commissions confidence that, “for a number of reasons” (none cited), “the costs of the disclosure rule we adopt today are outweighed by the benefits of empowering end users and edge providers to make informed choices….”  (¶ 59).  But I don’t. Onward.

2.       Blocking

The final version of the blocking rule (§8.5) consolidated the Content, Applications and Services and Devices rule of the original draft.  The final rule states:

A person engaged in the provision of fixed broadband Internet access services, insofar as such person is so engaged, shall not block lawful content, applications, services or non-harmful devices, subject to reasonable network management.

A more limited rule applies to mobile broadband providers, who

[S]hall not block consumers from accessing lawful websites, subject to reasonable network management, nor shall such person block applications that compete with the providers’ voice or video telephony services, subject to reasonable network management

Much of the anguish over the final rules that has been published so far relates to a few of the limitations built into the blocking rule.  First, copyright-reform activists object to the word “lawful” appearing in the rule.  “Lawful” content, applications, and services do not include activities that constitute copyright and trademark infringement.  Therefore, the rule allows broadband providers to use whatever mechanisms they want (or may be required to) to reduce or eliminate traffic that involves illegal fire-sharing, spam, viruses and other malware, and the like.

A provider who blocks access to a site selling unlicensed products, in other words, is not violating the rules.  And as the agency finds it is “generally preferable to neither require not encourage broadband providers to examine Internet traffic in order to discern which traffic is subject to the rules” (¶ 48), there will be considerable margin of error given to providers who block sites, services, or applications which may include some legal components.

On this view, though the FCC otherwise contradicts it—see footnote 245 and elsewhere—a complete ban on the BitTorrent protocol, for better or worse, might not be a violation of the blocking rule.  Academic studies have shown that over 99% of BitTorrent traffic constitutes unlicensed file sharing of protected content.  Other than inspecting individual torrents, which the agency disfavors, how else can an access provider determine what tiny minority of BitTorrent traffic is in fact lawful?

A second concern is the repeated caveat for “reasonable network management,” which gives access providers leeway to balance traffic during peak times, limit users whose activity may be harming other users, and other “legitimate network management” purposes.

Finally, disappointed advocates object to the special treatment for mobile broadband, which may, for example, block applications, services or devices without violating the rule.  There is an exception to the exception for applications, such as VoIP and web video, that compete with the provider’s own offerings, but that special treatment doesn’t keep mobile providers from using “app stores” to exclude services they don’t approve.  (See ¶ 102)

Of course even the original draft of the rules included the limitation for “reasonable network management,” and refused to apply any of the rules to unlawful activities.  The definition of “reasonable network management” in the original draft is different, but functionally equivalent, to the final version.

The carve-out for mobile broadband, however, is indeed a departure from the original rules.  Though the Oct. 2009 Notice of Proposed Rulemaking expressed concern about applying the same rule to fixed and mobile broadband (see  13, 154-174), the draft blocking rule did not distinguish between fixed and mobile Internet access.  The FCC did note, however, that different technologies “may require differences in how, to what extent, and when the principles apply.”  The agency sought comment on these differences (and asked for further comment in a later Notice of Inquiry).  Needless to say, they heard plenty.

Wireless broadband is, of course, a newer technology, and one still very much in development.  Spectrum is limited, and capacity cannot easily be added.  Those are not so much market failures as they are regulatory failures.  The FCC is itself responsible for managing the limited radio spectrum, and has struggled by its own admission to allocate spectrum for its most efficient and productive uses—indeed, even to develop a complete inventory of who has which frequencies of licensed spectrum today.

Adding additional capacity is another regulatory obstacle.  Though mobile users rail against their providers for inadequate or unreliable coverage, no one, it seems, wants to have cellular towers and other equipment near where they live.  Local regulators, who must approve new infrastructure investments, take such concerns very much to heart.  (There is also rampant corruption and waste in the application, franchising, and oversight processes at the state and local levels, a not-very-secret secret.)

The FCC, it seems, has taken these concerns into account in the final rule.  Its original open Internet policy statements—from which the rules derive—applied only to fixed broadband access, and the October, 2009 draft’s inclusion of mobile broadband came as a surprise to many.

The first indication that the agency was considering a return to the original open Internet policy came with the Verizon-Google proposal, where the former net neutrality adversaries jointly released a legislative framework (that is, something they hoped Congress, not the FCC, would take seriously) that gave different treatment to mobile.  As the V-G proposal noted, “Because of the unique technical and operational characteristics of wireless networks, and the competitive and still-developing nature of wireless broadband services, only the transparency principle would apply to wireless at this time.”

The Waxman proposal didn’t go as far as V-G, however, adding a provision that closely tracks with the final rule.  Under the Waxman bill, mobile providers would have been prohibited from blocking “lawful Internet websites”, and applications “that compete with the providers’ voice or video communications services.”

So the trajectory of the specialized treatment for mobile broadband is at least clear and, for those following the drama, entirely predictable.  Yet the strongest objections to the final rule and the loudest cries of betrayal from neutrality advocates came from the decision to burden mobile providers less than their fixed counterparts.  (Many providers offer both, of course, so will be subject to different rules for different parts of their service.)

At the very least, the advocates should have seen it coming.  Many did.  A number of “advocacy” groups demonized Google for its cooperation with Verizon, and refused to support Waxman’s bill.  (It should also be noted that none of the groups objecting to the final rules or any interim version ever actually proposed their own version—that is, what they actually wanted as opposed to what they didn’t want.)

3.      Unreasonable discrimination

The final rule, applicable only to fixed broadband providers, demands that a provider not “unreasonably discriminate in transmitting lawful network traffic over a consumer’s broadband Internet access service.”  (§ 8.7, and see ¶¶ 68-79 of the Report).

Though subtle, the difference in language between the NPRM and the final rule are significant, as the FCC acknowledges.  The NPRM draft rule noted plainly that “a provider of broadband Internet access service must treat lawful content, applications, and services in a nondiscriminatory manner.”

The difference here is between “nondiscrimination,” which prohibits all forms of differential network treatment, and “unreasonable discrimination,” which allows discrimination so long as it is reasonable.

The migration from a strict nondiscrimination rule (subject, however, to reasonable network management) to a rule against “unreasonable” discrimination can be seen in the interim documents.  The Verizon-Google proposal, which called for a “Non-Discrimination Requirement,” nonetheless worded the requirement to ban only “undue discrimination against lawful Internet content, application, or service in a manner that causes meaningful harm to competition or to users.” (emphasis added)

Rep. Waxman’s draft bill, likewise, would have applied a somewhat different standard for wireline providers, who “shall not unjustly or unreasonably discriminate in transmitting lawful traffic over a consumer’s wireline broadband Internet access service,” also subject to reasonable network management.

Over time, the FCC recognized the error of its original draft and now agrees “with the diverse group of commenters who argue that any nondiscrimination rule should prohibit only unreasonable discrimination.” (¶ 77)

As between the suggested limiting terms “undue,” “unjust” and “unreasonable,” the FCC chose the latter for the final rule.  Though many have complained that “unreasonable” is a nebulous, subjective term, it should be noted that of the three it is the only one with understood (if not entirely clear) legal meaning, particularly in the context of the FCC’s long history of rulemaking and adjudication.

The earliest railroad regulations, for example, which also provided the beginning of the FCC’s eventual creation and authority over communications industries, required reasonable rates of carriage, and empowered the Interstate Commerce Commission to intervene and eventually set the rates itself, much as the FCC later did with telephony.

One lesson of the railroad and telephone histories, however, is the danger of turning over to regulators decisions about what behaviors are reasonable. (Briefly, regulatory capture often ends up leaving the industry unable to respond to new forms of competition from disruptive technologies, with disastrous consequences.)

The V-G proposal gets to the heart of the problem in the text I italicized.  Despite the negative connotations of the word in common use, “discrimination” isn’t inherently bad. As the Report makes clear, in managing Internet access and network traffic, there are many forms of discrimination—which means, after all, affording different treatment to different things—that are entirely beneficial to overall network behavior and to the consumer’s experience with the Internet.

The draft rule, as the FCC now admits (see ¶ 77 of the Report), was dangerously rigid.  If any behavior should be regulated, it is the kind of discrimination whose principal purpose is to harm competition or users—though that kind of behavior is already illegal under various antitrust laws.

For one thing, users may want some kinds of traffic – e.g., voice and video – to receive a higher priority over text and graphics, which do not suffer from latency problems.  Companies operating Virtual Private Networks for their employees may likewise want to limit Web access to selected sites and activities for workers while on the job.

A strict nondiscrimination rule would have also discouraged or perhaps banned tiered pricing, harming consumers who do not need the fastest speeds and the highest volume of downloads to accomplish what the want to online.  (Without tiered pricing, such consumers effectively subsidize power users who, not surprisingly, are the most vociferous objectors to tiered pricing.)

Discrimination may also be necessary to manage congestion during peak usage periods or when failing nodes put pressure on the backbone.  Discrimination against spam, viruses and other malware, much of which is not “lawful,” is also permitted and indeed encouraged.  (See ¶ 90-92.)

By comparison, the Report notes three (¶ 75) types of provider discrimination that are of particular concern.  These are:  discrimination that harms competitors (e.g., VoIP providers of over-the-top telephone service, such as Skype or Vonage, that competes with the provider’s own telephone service), “inhibiting” end users from accessing content, services, and applications of their choice (but see the no-blocking rule, above, which already covers this), and discrimination that “impairs free expression,” including slowing or blocking access to a blog whose message the broadband provider does not approve.

On that last point, however, it’s important to note that Congress has already given broadband providers (and others) broad freedom to filter and otherwise curate content they do not approve of or which they believe their customers don’t want to see.  Under Section 230 of the Communications Decency Act,

“No provider or user of an interactive computer service shall be held liable on account of . . . any action voluntarily taken in good faith to restrict access to or availability of material that the provider or user considers to be obscene, lewd, lascivious, filthy, excessively violent, harassing, or otherwise objectionable, whether or not such material is constitutionally protected.”

The goal of Section 230 was to immunize early Internet providers including CompuServe and Prodigy from efforts to exercise editorial control over message boards whose content was provided by customers themselves.  But it gives providers broad discretion in determining what kind of content it believes its customers don’t want to see.  So long as the filtering is undertaken in “good faith” (e.g., not with the intent of harming a competitor), there is no liability for the provider, who does not, for example, become a “publisher” for purposes of defamation law.

The FCC (¶ 89) acknowledges the limit that Section 230 puts on the discrimination rule.

On the harm to competitors prong, the FCC waffles (see ¶ 76) on whether “pay for priority”—the bugaboo that launched the neutrality offensive in the first place, actually constitutes a violation of the rules.  While a broadband provider’s offering to prioritize the traffic of a particular source for a premium fee “would raise significant cause for concern,” the agency acknowledges that such behavior has occurred and thrived for years in the form of third party Content Delivery Networks.  (See footnote 236)  CDNs are allowed.   (More on CDNs in the next post.)

So in the end the discrimination rule doesn’t appear to add much to the blocking rule or existing antitrust laws.  Discrimination against competing over-the-top providers would violate antitrust.  Blocking or slowing access to disfavored content is already subject to the blocking rule.  And interfering with “free expression” rights of users is already significantly allowed by Section 230.

What’s left?   “The rule rests on the general proposition,” the agency concludes (¶ 78), “that broadband providers should not pick winners and losers on the Internet,” even when doing so is independent of competitive interests.  What exactly this means—and how “reasonable” discrimination will be judged in the course of enforcing the rules—remains to be seen.

Next:  The exceptions and what they say about the real purpose of the rules

After the deluge, more deluge

If I ever had any hope of “keeping up” with developments in the regulation of information technology—or even the nine specific areas I explored in The Laws of Disruption—that hope was lost long ago.  The last few months I haven’t even been able to keep up just sorting the piles of printouts of stories I’ve “clipped” from just a few key sources, including The New York Times, The Wall Street Journal, CNET News.com and The Washington Post.

I’ve just gone through a big pile of clippings that cover April-July.  A few highlights:  In May, YouTube surpassed 2 billion daily hits.  Today, Facebook announced it has more than 500,000,000 members.   Researchers last week demonstrated technology that draws device power from radio waves.

If the size of my stacks are any indication of activity level, the most contentious areas of legal debate are, not surprisingly, privacy (Facebook, Google, Twitter et. al.), infrastructure (Net neutrality, Title II and the wireless spectrum crisis), copyright (the secret ACTA treaty, Limewire, Google v. Viacom), free speech (China, Facebook “hate speech”), and cyberterrorism (Sen. Lieberman’s proposed legislation expanding executive powers).

There was relatively little development in other key topics, notably antitrust (Intel and the Federal Trade Commission appear close to resolution of the pending investigation; Comcast/NBC merger plodding along).  Cyberbullying, identity theft, spam, e-personation and other Internet crimes have also gone eerily, or at least relatively, quiet.

Where are We?

There’s one thing that all of the high-volume topics have in common—they are all moving increasingly toward a single topic, and that is the appropriate balance between private and public control over the Internet ecosystem.  When I first started researching cyberlaw in the mid-1990’s, that was truly an academic question, one discussed by very few academics.

But in the interim, TCP/IP, with no central authority or corporate owner, has pursued a remarkable and relentless takeover of every other networking standard.  The Internet’s packet-switched architecture has grown from simple data file exchanges to email, the Web, voice, video, social network and the increasingly hybrid forms of information exchanges performed by consumers and businesses.

As its importance to both economic and personal growth has expanded, anxiety over how and by whom that architecture is managed has understandably developed in parallel.

(By the way, as Morgan Stanley analyst Mark Meeker pointed out this spring, consumer computing has overtaken business computing as the dominant use of information technology, with a trajectory certain to open a wider gap in the future.)

The locus of the infrastructure battle today, of course, is in the fundamental questions being asked about the very nature of digital life.  Is the network a piece of private property operated subject to the rules of the free market, the invisible hand, and a wondrous absence of transaction costs?  Or is it a fundamental element of modern citizenship, overseen by national governments following their most basic principles of governance and control?

At one level, that fight is visible in the machinations between governments (U.S. vs. E.U. vs. China, e.g.) over what rules apply to the digital lives of their citizens.  Is the First Amendment, as John Perry Barlow famously said, only a local ordinance in Cyberspace?  Do E.U. privacy rules, being the most expansive, become the default for global corporations?

At another level, the lines have been drawn even sharper between public and private parties, and in side-battles within those camps.  Who gets to set U.S. telecom policy—the FCC or Congress, federal or state governments, public sector or private sector, access providers or content providers?  What does it really mean to say the network should be “nondiscriminatory,” or to treat all packets anonymously and equally, following a “neutrality” principle?

As individuals, are we consumers or citizens, and in either case how do we voice our view of how these problems should be resolved?  Through our elected representatives?  Voting with our wallets?  Through the media and consumer advocates?

Not to sound too dramatic, but there’s really no other way to see these fights as anything less than a struggle for the soul of the Internet.  As its importance has grown, so have the stakes—and the immediacy—in establishing the first principles, the Constitution, and the scriptures that will define its governance structure, even as it continues its rapid evolution.

The Next Wave

Network architecture and regulation aside, the other big problems of the day are not as different as they seem.  Privacy, cybersecurity and copyright are all proxies in that larger struggle, and in some sense they are all looking at the same problem through a slightly different (but equally mis-focused) lens.  There’s a common thread and a common problem:  each of them represents a fight over information usage, access, storage, modification and removal.  And each of them is saddled with terminology and a legal framework developed during the Industrial Revolution.

As more activities of all possible varieties migrate online, for example, very different problems of information economics have converged under the unfortunate heading of “privacy,” a term loaded with 19th and 20th century baggage.

Security is just another view of the same problems.  And here too the debates (or worse) are rendered unintelligible by the application of frameworks developed for a physical world.  Cyberterror, digital warfare, online Pearl Harbor, viruses, Trojan Horses, attacks—the terminology of both sides assumes that information is a tangible asset, to be secured, protected, attacked, destroyed by adverse and identifiable combatants.

In some sense, those same problems are at the heart of struggles to apply or not the architecture of copyright created during the 17th Century Enlightenment, when information of necessity had to take physical form to be used widely.  Increasingly, governments and private parties with vested interests are looking to the ISPs and content hosts to act as the police force for so-called “intellectual property” such as copyrights, patents, and trademarks.  (Perhaps because it’s increasingly clear that national governments and their physical police forces are ineffectual or worse.)

Again, the issues are of information usage, access, storage, modification and removal, though the rhetoric adopts the unhelpful language of pirates and property.

So, in some weird and at the same time obvious way, net neutrality = privacy = security = copyright.  They’re all different and equally unhelpful names for the same (growing) set of governance issues.

At the heart of these problems—both of form and substance—is the inescapable fact that information is profoundly different than traditional property.  It is not like a bush or corn or a barrel of oil.  For one thing, it never has been tangible, though when it needed to be copied into media to be distributed it was easy enough to conflate the media for the message.

The information revolution’s revolutionary principle is that information in digital form is at last what it was always meant to be—an intangible good, which follows a very different (for starters, a non-linear) life-cycle.  The ways in which it is created, distributed, experienced, modified and valued don’t follow the same rules that apply to tangible goods, try as we do to force-fit those rules.

Which is not to say there are no rules, or that there can be no governance of information behavior.  And certainly not to say information, because it is intangible, has no value.  Only that for the most part, we have no real understanding of what its unique physics are.  We barely have vocabulary to begin the analysis.

Now What?

Terminology aside, I predict with the confidence of Moore’s Law that business and consumers alike will increasingly find themselves more involved than anyone wants to be in the creation of a new body of law better-suited to the realities of digital life.  That law may take the traditional forms of statutes, regulations, and treaties, or follow even older models of standards, creeds, ethics and morals.  Much of it will continue to be engineered, coded directly into the architecture.

Private enterprises in particular can expect to be drawn deeper (kicking and screaming perhaps) into fundamental questions of Internet governance and information rights.

Infrastructure and application providers, as they take on more of the duties historically thought to be the domain of sovereigns, are already being pressured to maintain the environmental conditions for a healthy Internet.  Increasingly, they will be called upon to define and enforce principles of privacy and human rights, to secure the information environment from threats both internal (crime) and external (war), and to protect “property” rights in information on behalf of “owners.”

These problems will continue to be different and the same, and will be joined by new problems as new frontiers of digital life are opened and settled.  Ultimately, we’ll grope our way toward the real question:  what is the true nature of information and how can we best harness its power?

Cynically, it’s lifetime employment for lawyers.  Optimistically, it’s a chance to be a virtual founding father.  Which way you look at it will largely determine the quality of the work you do in the next decade or so.

Viacom v. YouTube: The Principle of Least Cost Avoidance

I’m late to the party, but I wanted to say a few things about the District Court’s decision in the Viacom v. YouTube case this week and.  This will be a four-part post, covering:

1.  The holding

2.  The economic principle behind it

3.  The next steps in the case

4.  A review of the errors in legal analysis and procedure committed by reporters covering the case

I’ve written before (see “Two Smoking Guns and a Cold Case”, “Google v. Everyone” and “The Revolution will be Televised…on YouTube”) about this case, in which Viacom back in 2007 sued YouTube and Google (which owns YouTube) for $1 billion in damages, claiming massive copyright infringement of Viacom content posted by YouTube users.

There’s no question of the infringing activity or its scale.  The only question in the case is whether YouTube, as the provider of a platform for uploading and hosting video content, shares any of the liability of those among its users who uploaded Viacom content (including clips from Comedy Central and other television programming) without permission.

The more interesting questions raised by the ascent of new video sites aren’t addressed in the opinion.  Whether the users understood copyright law or not and whether their intent in uploading their favorite clips from Viacom programming was to promote Viacom rather than to harm it, were not considered.   Indeed, whether on balance Viacom was helped more than harmed by the illegal activity, and how either should be calculated under current copyright law, is not relevant to this decision, and are saved for another day and perhaps another case.

That’s because Google moved for summary judgment on the basis of the Digital Millennium Copyright Act’s “safe harbor” provisions, which immunize service providers from any kind of attributed or “secondary” liability for user behavior when certain conditions are met.  Most important, a service provider can dock safe from liability only if it can show that it :

– did not have “actual knowledge that the material…is infringing,” or is “not aware of facts or circumstances from which infringing activity is apparent” and

– upon obtaining such knowledge or awareness “acts expeditiously to remove…the material” and

– does not “receive a financial benefit directly attributable to the infringing activity, “in a case in which the service provider has the right ability to control such activity,” and

– upon notification of the claimed infringement, “responds expeditiously to remove…the material that is claimed to be infringing….”

Note that all four of these elements must be satisfied to benefit from the safe harbor

The question for Judge Stanton to decide on YouTube’s motion for summary judgment was whether YouTube met all the conditions, and he has ruled that they did so.

1.  The Slam-Dunk for Google

The decision largely comes down to an interpretation of what phrases like “the material” and “such activity” means in the above-quoted sections of the DMCA.

Indeed, the entire opinion can be boiled down to one sentence on page 15.  After reviewing the legislative history of the DMCA at length, Judge Stanton concludes that the “tenor” of the safe harbor provisions leads him to interpret infringing “material” and “activity” to mean “specific and identifiable infringements of particular individual items.”

General knowledge, which YouTube certainly had, that some of its users were (and still are) uploading content protected by copyright law without permission, is not enough to defeat the safe harbor and move the case to a determination of whether or not secondary liability can be shown.  “Mere knowledge of prevalence of such activity in general,” Judge Stanton writes, “is not enough.”

To defeat a safe harbor defense at the summary judgment stage, in other words, a content owner must show that the service provider knew or should have known about specific instances of infringement.  Such knowledge could come from a service provider hosting subsites with names like “Pirated Content” or other “red flags.”  But in most cases, as here, the service provider would not be held to know about specific instances of infringement until informed of them, most often from takedown notices sent by copyright holders themselves.

Whether ad revenue constitutes “direct financial benefit” was not tested, because, again, that provision only applies to “activity” the service provider has the right to control.  “Activity,” as Judge Stanton reads it, also refers to specific instances of illegal content distribution.

As Judge Stanton notes, YouTube users currently post 24 hours of video content every minute, making it difficult if not impossible, as a practical matter, for YouTube to have any idea which ones are not authorized by rights holders.  And when Viacom informed the site of some 100,000 potentially-infringing clips, YouTube removed nearly all of them within a day.  That is how the DMCA was intended to work, according to Judge Stanton, and indeed demonstrates that it is working just fine.

Viacom, of course, is free to pursue the individuals who posted its content without permission, but everyone should know by now that for many reasons that’s a losing strategy.

2.  The Least-Cost Avoider Principle

On balance, Judge Stanton is reading what is clearly an ambiguous statute with a great deal of common sense.  To what extent the drafters of the DMCA intended the safe harbor to apply to general vs. specific knowledge is certainly not clear from the plain language, nor, really, from the legislative history.  (Some members of the U.S. Supreme Court believe strongly that legislative history, in any case, is irrelevant in interpreting a statute, even if ambiguous.)

To bolster his interpretation that the safe harbor protects all but specific knowledge of infringement, interestingly, Judge Stanton points out that this case is similar to one decided a few months ago in the Second Circuit.  In that case, the court refused to apply vicarious liability for trademark infringement to eBay for customer listings of fake Tiffany’s products.

Though trademark and copyright law are quite different, the analogy is sensible.  In both cases, the question comes down to one of economic efficiency.  Which party, that is, is in the best position to police the rights being violated?

Here’s how the economic analysis might go.  Given the existence of new online marketplaces and video sharing services, and given the likelihood and ease with which individuals can use those services to violate information rights (intentionally or otherwise, for profit or not), the question for legislators and courts is how to minimize the damage to the information rights of some while still preserving the new value to information in general that such services create.

For there is also no doubt that the vast majority of eBay listings and YouTube clips are posted without infringing the rights of any third party, and that the value of such services, though perhaps not easily quantifiable, is immense.  EBay has created liquidity in markets that were too small and too disjointed to work efficiently offline.  YouTube has enabled a new generation of users with increasingly low-cost video production tools to distribute their creations, get valuable feedback and, increasingly, make money.

That these sites (and others, including Craigslist) are often Trojan Horses for illegal activities could lead legislators to ban them outright, but that clearly gets the cost-benefit equation wrong.  A ban would generate too much protection.

At the same time, throwing up one’s hands and saying that a certain class of rights-holders must accept all the costs of damage without any means of reducing or eliminating those costs, would be overly generous in the other direction.  Neither users, service providers, nor rights holders would have any incentives to police user behavior.  The basic goals of copyright and trademark might be seriously damaged as a result.

The goal of good legislation in situations like this—where overall benefit outweighs individual harm and where technology is changing the equation rapidly–is to produce rules that are most likely to get the balance right and do so with the least amount of expensive litigation.  The DMCA provisions described above are one attempt at creating such rules.

But those rules, given the uncertainties of emerging technologies and the changing behaviors of users, can’t possibly give judges the tools to decide every case with precision.  Such rules must be a least a little ambiguous (if not a lot).  Judges, as they have done for centuries, must apply other, objective interpretive tools to help decide individual cases even as the targets keep moving.

Judge Stanton’s interpretation of the safe harbor provisions follows, albeit implicitly, one of those neutral tools, the same one applied by the Second Circuit in the eBay case.  And that is the principle of the least-cost avoider.

This principle encourages judges to interpret the law, where possible, such that the burden of reducing harmful behavior falls to the party in the best position, economically, to avoid it.  That way, as parties in similar situations in the future evaluate the risk of liability, they will be more likely to choose a priori behaviors that not only reduce the risk of damages but also the cost of more litigation.

In the future, if Judge Stanton’s ruling stands, rights holders will be encouraged to police video sites more carefully.  Service providers such as YouTube will be encouraged to respond quickly to legitimate demands to remove infringing content.

Given the fact that activities harmful to rights holders are certain to occur, in other words, the least cost avoider principles says that a judge should rule in a way that puts the burden of minimizing the damage on the party who can most efficiently avoid it.  In this case, the choice would be between YouTube (preview all content before posting and ensure legal rights have been cleared), Viacom (monitor sites carefully and quickly demand takedown of infringing content) or the users themselves (don’t post unauthorized content without expecting to pay damages or possible criminal sanctions).

Here, the right answer economically is Viacom, the rights holder who is directly harmed by the infringing behavior.

That may seem unfair from a moral standpoint.  For, after all, Viacom is the direct victim of the users’ clearly unlawful behavior and the failure of YouTube, the enabler of the users, to stop it.  Why should the victim be held responsible for making sure they are not caused further damage in the future?

But there’s a certain economic logic to that decision, though one difficult to quantify (Judge Stanton made no effort to do so; indeed he did not invoke the least cost avoider principle explicitly.)  The grant of a copyright or a trademark is the grant of a monopoly on a certain class of information, a grant that itself comes with inherent economic inefficiencies in the service of encouraging overall social value–encouraging investment in creative works.

Part of the cost of having such a valuable monopoly is the cost of policing it, even in new media and new services that the rights holder may not have any particular interest in using itself.

By interpreting the DMCA as protecting service providers from mere general knowledge of infringing behavior, Judge Stanton has signaled that Viacom can police YouTube more efficiently than YouTube can.  Why?  For one thing, Viacom has the stronger incentive to ensure unauthorized content stays off the site.  It alone also has the knowledge both of what content it has rights to and when that content appears without authorization.  (Several examples arose in the course of discovery of content Viacom ordered YouTube to remove that, it turned out, had been posted by Viacom or its agents masquerading as users in order to build buzz.)

The cost of monitoring and stopping unauthorized posting is not negligible, of course.  But YouTube, eBay and other service providers increasingly provide tools to make the process easier, faster, and cheaper for rights holders.  They may or may not be obligated to do so as a matter of law; for now, their decision to do so represents an organic and efficient form of extra-legal rulemaking that Judge Stanton is eager to encourage.

No matter what, someone has to bear the bulk of the cost of monitoring and reporting violations.  Viacom can do it cheaper, and can more easily build that cost into the price it charges for authorized copies of its content.

And where it cannot easily issue takedown orders to large, highly-visible service providers like YouTube, it retains the option, admittedly very expensive, to sue the individuals who actually infringed.  It can also try to invoke the criminal aspect of copyright law, and get the FBI (that is, the taxpayer) to absorb the cost.

To rule the other way–to deny YouTube its safe harbor–would encourage service providers to overspend on deterrence of infringing behavior.  In response, perhaps YouTube and other sites would require, before posting videos, that users provide legally-binding and notarized documentation that the user either owns the video or has a license to post it.  Obtaining such agreements, not to mention evaluating them for accuracy, would effectively mean the end of video sites.  Denying the safe harbor based on general knowledge, to put it another way, would effectively interpret the DMCA as a ban on video sites.

That would be cheaper for Viacom, of course, but would lead to overall social loss.  Right and wrong, innocence and guilt, are largely excluded from this kind of analysis, though certainly not from the rhetoric of the parties.  And remember that actual knowledge or general awareness of specific acts of infringement would, according to Judge Stanton’s rule, defeat the safe harbor.  In that case, to return to the economic terminology, the cost of damages—or, if you prefer, assigning some of the blame—would shift back on YouTube.

3.  What’s Next?

Did Judge Stanton get it right as a matter of information economics?  It appears that the answer is yes.  But did he get it right as a matter of law—in this case, of the DMCA?

That remains to be seen.

Whether one likes the results or not, as I’ve written before, summary judgment rulings by district courts are never the last word in complex litigation between large, well-funded parties.  That is especially so here, where the lower court’s interpretation of a federal law is largely untested in the circuit and indeed, as here, in any circuit.

Judge Stanton cites as authority for his view of the DMCA a number of other lower court cases, many of them in the Ninth Circuit.  But as a matter of federal appellate law, Ninth Circuit cases are not binding precedent on the Second Circuit, where Judge Stanton sits.  And other district (that is, lower) court opinions cannot be cited by the parties as precedent even within a circuit.  They are merely advisory.  (A Ninth Circuit case involving Veoh is currently on appeal; the service provider won on a “safe harbor” argument similar to Google’s in the lower court.)

So this case will certainly head for appeal to the Second Circuit, and perhaps from there to the U.S. Supreme Court.  But a Supreme Court review of the case is far from certain.  Appeals to the circuit court are the right of the losing party.  A petition to the Supreme Court, on the other hand, is accepted at the Court’s discretion, and the Court turns down the vast majority of cases that it is asked to hear, often without regard to the economic importance or newsworthiness of the case.  (The Court refused to hear an appeal in the Microsoft antitrust case, for example, because the lower courts largely applied existing antitrust precedents.)

A circuit court reviewing summary judgment will make a fresh inquiry into the law, accepting the facts alleged by Viacom (the losing party below) as if they were all proven.  If the Second Circuit follows Judge Stanton’s analogy to the eBay case, Google is likely to prevail.

If the appellate court rejects Judge Stanton’s view of specificity, the case will return to the lower court and move on, perhaps to more summary judgment attempts by both parties and, failing that, a trial.  More likely, at that point, the parties will reach a settlement, or an overall licensing agreement, which may have been the point of bringing this litigation in the first place.  (A win for Viacom, as in most patent cases, would have given the company better negotiating leverage.)

4.  Getting it Right or Wrong in the Press

That brief review of federal appellate practice is entirely standard—it has nothing to do with the facts of this case, the parties, the importance of the decision, or the federal law in question.

Which makes it all the more surprising when journalists who regularly cover the legal news of particular companies continually get it wrong when describing what has happened and/or what happens next.

Last and perhaps least, here are a few examples from some of the best-read sources:

The New York Times – Miguel Helft, who covers Google on a regular basis, commits some legal hyperbole in saying that Judge Stanton “threw out” Viacom’s case, and that “the ruling” (that is, this opinion) could have “major implications for …scores of Internet sites.”  The appellate court decision will be the important one, but technically it will apply only to cases brought in the Second Circuit.  The lower court’s decision, even if upheld, will have no implications for future litigation.  Helft also quotes from counsel at both Viacom and Google which are filled with legal errors, though perhaps understandably so.

The Wall Street Journal –Sam Schechner and Jessica E. Vasellaro make no mistakes in their report of the decision.  They correctly explain what summary judgment means, and summarize the ruling without distorting it.  Full marks.

The Washington Post – Cecilia Kang, who covers technology policy for the Post, incorrectly characterizes Judge Stanton’s ruling as a “dismissal” of Viacom’s lawsuit.  A dismissal, as opposed to the granting of a motion for summary judgment, generally happens earlier in litigation, and signals a much weaker case, often one for which the court finds it has no jurisdiction or which, even if all the alleged facts are true, doesn’t amount to behavior for which a legal remedy exists.  Kang repeats the companies’ statements, but also adds a helpful quote from Public Knowledge’s Sherwin Siy about the balance of avoiding harms.

The National Journal – At the website of this legal news publication, Juliana Gruenwald commits no fouls in this short piece, with an even better quote from PK’s Siy.

CNET News.com – Tech news site CNET’s media reporter Greg Sandoval suggests that “While the case could continue to drag on in the appeals process, the summary judgment handed down in the Southern District of New York is a major victory for Google . . . .”  This is odd wording, as the case will certainly “drag on” to an appeal to the Second Circuit.  (A decision by the Second Circuit is perhaps a year or more away.)  Again, a district court decision, no matter how strongly worded, does not constitute a “major victory” for the prevailing party.

Sandoval (who, it must be said, posted his story quite quickly), also exaggerates the sweep of Google’s argument and the judge’s holding.  He writes, “Google held that the DMCA’s safe harbor provision protected it and other Internet service providers from being held responsible for copyright infringements committed by users.  The judge agreed.”  But Google argued only that it (not other providers) was protected, and protected only from user infringements it didn’t know about specifically.  That is the argument with which Judge Stanton agreed

Perhaps these are minor infractions.  You be the judge.

Updates to the "Media" Page

I’ve added almost twenty new posts to the Media Page from April and May. These were busy months for those interested in the dangerous intersection of technology and policy, the theme of The Laws of Disruption.

A major court decision upended the Federal Communications Commissions efforts to pass new net neutrality regulations, leading the Commission to begin execution of its “nuclear option”–the reclassification of Internet access under ancient rules written for the old telephone monopoly.  While I support the principles of net neutrality, I am increasingly concerned about efforts by the FCC to appoint itself the “smart cop” on the Internet beat, as Chairman Julius Genachowski put it last fall.

As consumer computing outstripped business computing for the first time, privacy has emerged as a leading concern of both users and mainstream media sources.  Not surprisingly, legal developments in information security go hand-in-hand with conversations about privacy policy and regulation, and I have been speaking and commenting to the press extensively on these topics.

The new entries run the full range of topics, including copyright, identity theft, e-commerce, new criminal laws for social networking behaviors, as well as privacy, security, and communications policy.

In the last few months, I have continued writing not only for this blog but for the Technology Liberation Front, the Stanford Law School Center for Internet & Society, and for CNET.  I’ve also written op-eds for The Orange County Register, The Des Moines Register, and Info Tech & Telecom News.

I’ve appeared on CNN, Fox News, and National Public Radio, and have been interviewed by print media sources as varied as El Pais, The Christian Science Monitor, TechCrunch and Techdirt.

My work has also been quoted by a variety of business and mainstream publications, including The Atlantic, Reason, Fortune and Fast Company.

As they say, may you live in interesting times!

EBay Wins Important Victory Against Tiffany

As the Wall Street Journal is already reporting, today eBay sustained an important win in its long-running dispute with Tiffany over counterfeit goods sold through its marketplace.  (The full opinion is available here.)

I wrote about this case as my leading example of the legal problems that appear at the border between physical life and digital life, both in “The Laws of Disruption” and a 2008 article for CIO Insight.

To avoid burying the lede, here’s the key point:  for an online marketplace to operate, the burden has to be on manufacturers to police their brands, not the market operator.  Any other decision, regardless of what the law says or does not say, would effectively mean the end of eBay and sites like it.

Back to the beginning.  Tiffany sued eBay over counterfeit Tiffany goods being sold by some eBay merchants.  The luxury goods manufacturer claimed eBay was “contributorily” liable for trademark infringement—that is, for confusing consumers into thinking that non-Tiffany goods were in fact made by Tiffany.

The problem of counterfeit items has been a long-standing problem for electronic commerce, and as one of the largest and first online marketplaces it’s little surprise that eBay has found itself so often in the cross-hairs of unhappy manufacturers.  While the company has generally won these lawsuits, it lost an important case in France at about the same time the trial court in the Tiffany case ruled it its favor in 2008.

(A related problem that was explicit in the French case is that luxury goods manufacturers are unhappy in general with secondary markets given the tight—sometimes illegal—control they exert over primary channels.  Electronic commerce doesn’t respect local territories, fixed pricing and regulating discounting, perhaps the bigger headache for companies such as Tiffany’s.)

The struggle for courts is to apply traditional law to new forms of behavior.  Many of the opinions in these cases tie themselves in knots trying to figure out just what eBay actually is—is it a department store, where a variety of goods from different manufacturers are sold?  Is it a flea market, where merchants pay for space to sell whatever they want?  Or is it a bulletin board at a local grocery store, where individuals offer products and services?

Of course eBay is none of these things.  But courts must apply the law they have, and the case law for trademark infringement is based on these kinds of outdated classifications.  In the “common law” tradition, judges decide cases by analogy to existing case laws.  That means when there isn’t a good analogy to be found, the law is often thrown into confusion for a long period of time while new analogies get worked out.  Disruptive technologies create such discontinuities in the law, particularly for common law.

At the heart of these decisions is a question of control.  The more the marketplace operator controls the goods that are sold, the more likely they will be found liable for all manner of commercial misconduct.  (Tiffany also sued for false advertising, for example, claiming that eBay ads placed on Google searches promising Tiffany goods at low prices on its site were false, given that some of the goods were counterfeit.  Of course some of the goods were NOT counterfeit.)

A department store operator has complete control over the source of merchandise, and so would be held liable for selling counterfeits.  A bulletin board host has no control, and so would not be held liable.  Flea market operators sit somewhere in between, and depending on the extent and obviousness of the counterfeiting that takes place, operators are sometimes held liable along with the counterfeiters themselves.

The eBay marketplace sits somewhere between the two extremes.  On the one hand, eBay can and does have the ability to review the text of listings prior to their posting, and provides extensive service to merchants including listing services, postage and packaging, and payment management through PayPal.  It can and does respond to complaints by buyers of misrepresented goods (condition and source, e.g.) and by trademark holders who are given extensive tools to review listings to check for counterfeits.  And it charges the sellers for these services—indeed, that is the source of its revenue.

On the other hand, eBay never has physical possession of the goods that are sold through its marketplace—indeed, it never sees them.  That’s an essential feature of the company’s success—eBay couldn’t handle millions of listings in a limitless range of categories if merchants actually sent the goods to eBay during the course of an auction, the way high-end auctioneers such as Sotheby’s and Christie’s would do.

EBay (or buyers for that matter) can’t inspect the goods (other than through photos and text descriptions) prior to purchase, and even if it could the company doesn’t have the expertise to evaluate authenticity and condition of everything from buttons to Rolex watches to cars.  That’s why eBay’s buyer feedback system is so important to the efficient operation of the marketplace.

In today’s decision, the Second Circuit Court of Appeals in New York mostly affirmed the trial court’s holdings.  It agreed that for eBay to be liable for the trademark infringements of its misbehaving sellers, the company had to have actual knowledge of their activities and still continue doing business with them.

There was substantial evidence to the contrary—including direct policing by eBay as well as the tools provided to manufacturers to review and flag suspicious listings.  As the court noted, eBay has plenty of incentives to ensure counterfeit goods stay off the site—for unhappy buyers mean the loss of liquidity and the loss of any competitive advantage.

Tiffany objected to the fact that the eBay tools put the burden on trademark holders rather than marketplace operators to ensure the authenticity of the goods.  But the court agreed with eBay that such is indeed the burden of a trademark, a valuable and exclusive right given to manufacturers to encourage the creation of consistent and quality goods and services.  Since eBay acted on actual knowledge of infringement and could not be said to have willfully ignored the illegal behavior of some merchants, the company had fulfilled its legal obligation to trademark holders.

The opinion is, as to be expected, largely a discussion of legal precedent and the law of trademark.  That, after all, is the role of an appellate court—not to retry the case, but to review the trial judge’s findings in search of legal error.  The decision by the appellate court will serve as a powerful precedent for eBay and other e-commerce sites in the future.  (Tiffany says it may appeal to the U.S. Supreme Court, but it’s unlikely for many reasons that the Court would take the case.)

One important feature of the case that is not discussed directly in the appellate decision, however, is worth highlighting.  Though courts rarely say so explicitly, an important factor in deciding cases has to do with the practical limits of the remedy requested by a plaintiff, in this case Tiffany’s.  Given what eBay already does to police counterfeit goods, it’s hard to see what Tiffany’s actually wanted the company to do—that is, what it wanted the courts to order eBay to do had it won the lawsuit.

For aside from money damages, the purpose of a lawsuit and the reason the taxpayers fund the legal system is that court decisions let everyone know what behaviors are acceptable and which are not–and how to correct those that are not.  Had eBay lost, they would have had to pay damages, but more to the point the loss would have sent a message to them and others to change their behavior to avoid future damage claims.

So would would a loss have signaled?  In essence, eBay would have had either to agree not to sell any Tiffany goods (a limit other brands would have demanded as well) or to verify and authenticate all items before allowing them to be listed on the site.  That would have been the only way to satisfy Tiffany’s that their view of the law was being followed.

That remedy, though theoretically possible, would have meant the end of eBay and sites like it (including Amazon Marketplace).  It would in essence have said that any auction or other third-party sales model other than the high-end Sotheby’s or Christie’s approach is inherently illegal.  For there would have been nothing left to distinguish eBay’s low-cost approach to buying and selling—all of the efficiencies would have been eaten up by the need to authenticate before the auction began.

Such a remedy would have been economically inefficient—it would, to use Ronald Coase’s terminology, have introduced a great deal of unnecessary transaction costs.  For most of the items on eBay are accurately described, and for them the cost of authentication would be a waste.  eBay practices in essence a post-auction model of authentication.  If the buyer doesn’t agree with the description of the item once they receive it, eBay will correct the problem after the fact.

That’s much more efficient, but it does introduce cost to brand holders such as Tiffany’s.  A buyer who gets a counterfeit good may think less not only of the seller and of eBay but also of Tiffany’s.  Worse, the buyer who doesn’t realize they’ve received a counterfeit good may attribute its poorer quality to Tiffany’s, another form of damage to the mark.

The court’s decision implicitly weighs these costs and concludes that eBay’s model is, overall, the more efficient use of resources.  The brand owner can always sue the eBay sellers directly, of course, and can use the tools provided by eBay to reduce the number of bad listings that get posted in the first place.  Those enforcement costs, the court implies, are less than the authentication costs of Tiffany’s proposed remedy.  Faced with two possible outcomes, the court chose the more economically efficient.

Under the “law and economics” approach to legal decision-making, that finding would have been made explicit.  Some appellate judges, including Richard Posner and Frank Easterbrook, would have actually done the math as best they could from the record.

In any case, the finding seems economically sound.  Meanwhile, the law is still struggling mightily to catch up to reality.

Net Neutrality Tail Wags Broadband Dog

I published an opinion piece today for CNET arguing against recent calls to reclassify broadband Internet as a “telecommunications service” under Title II of the Communications Act.

The push to do so comes as supporters of the FCC’s proposed Net Neutrality rules fear that the agency’s authority to adopt them under its so-called “ancillary jurisdiction” won’t fly in the courts. In January, the U.S. Court of Appeals for the D.C. Circuit heard arguments in Comcast’s appeal of sanctions levied against the cable company for violations of the neutrality principles (not yet adopted under a formal rulemaking). The three-judge panel expressed considerable doubt about the FCC’s jurisdiction in issuing the sanctions during oral arguments. Only the published opinion (forthcoming) will matter, of course, but anxiety is growing.

Solving the Net Neutrality jurisdiction problem with a return to Title II regulation is a staggeringly bad idea, and a counter-productive one at that. My article describes the parallel developments in “telecommunications services” and the largely unregulated “information services” (aka Title I) since the 1996 Communications Act, making the point that life for consumers has been far more exciting—and has generated far more wealth–under the latter than the former.

Under Title I, in short, we’ve had the Internet revolution. Under Title II, we’ve had the decline and fall of basic wireline phone service, boom and bust in the arbitraging competitive local exchange market, massive fraud in the bloated e-Rate program, and the continued corruption of local licensing authorities holding applications hostage for legal and illegal bribes.

But the FCC has not ruled out the idea of reclassification. Indeed, just as the piece was being published, FCC Chairman Julius Genachowski was testifying before a Senate committee considering Comcast’s proposed merger with NBC Universal. When asked whether the agency was considering reclassification, the Chairman responded: “We are defending the position that Title I gives us the authority we need. We’ll continue to assert that position and hope we will get a favorable decision. If the court does something that requires us to reassess, we’ll do that.”

I leave for another day a detailed discussion of whether the FCC could in fact reclassify broadband Internet as a telecommunications service without explicit authority to do so from Congress. It was the Commission, after all, who argued successfully in the Brand X case that broadband Internet clearly fit the definition of information service. (I criticized the Brand X case when it was decided as not going far enough, see “Cure for the Common Carrier,” CIO Insight, April 2005)

Under the Chevron Doctrine, the U.S. Supreme Court gives great deference to agencies in the interpretation of their governing statutes. Brand X held that the two definitions were ambiguous and that the FCC’s resolution of that ambiguity was reasonable. Under Chevron, that ends the involvement of the courts. To reclassify broadband, the FCC would have to argue that its interpretation was not in fact reasonable.

Left out for reasons of length was a discussion of the history of the two terms and the source of the definitions given for them in the 1996 Act. That history demonstrates even more clearly, I think, that regulation of the Internet cannot and should not be governed by Title II.

Title II telecommunications services are subject to the “common carrier” provisions—including unbundling, rate oversight, and the Universal Service Fund—that were created over the years to manage the legal monopoly held by AT&T. Under the 1913 Kingsbury Agreement, AT&T was able to maintain its control over most aspects of U.S. telecommunications in exchange for accepting government oversight. In 1934 Congress created the Federal Communications Commission, which addressed itself to regulating AT&T’s interstate business. State and local authorities handled the intrastate business.

Over the last thirty years, the AT&T monopoly has been largely broken up by a combination of disruptive technologies (alternate transport including cable, satellite, and cellular, and new architectures including the Internet) and government interventions. The equipment monopoly of AT&T’s Western Electric subsidiary went first, followed by the separation of local and long distance in 1984. Competition in long distance was followed in 1996 by the forced opening of local services. What was left of the original AT&T was acquired by some of its former subsidiaries in 2005.

Meanwhile, since the 1950’s the computer revolution has been busily transforming business and life. In the early days of standalone computers, there was no overlap between computing and telephony, but with the advent of time-sharing and later interactive and distributed computing, private data communications began to develop using much of the infrastructure invented for voice. A simple—and I think, entirely reasonable—way to distinguish between “information services” and “telecommunications services” is to understand that historically “information services” meant private data communications and “telecommunications services” meant voice.

For the most part, information services have remained outside of the FCC’s regulatory clutches for the simple reason that AT&T, until 1980, was banned from offering data communications. (It’s a long story, but that ban is the reason Linux—derived from AT&T’s UNIX operating system—is open source.) Since the regulated monopoly wasn’t involved in the computer or data communications business, there was no basis for subjecting it to common carrier rules. That’s a fortunate accident of history, of course, because leaving computing unregulated has meant all the difference in its dramatic growth.

The legal border between Title I and Title II goes back at least to 1956 and an earlier attempt to break up AT&T. The effort failed, but a Faustian bargain was struck. AT&T and its subsidiaries (including Western Electric and Bell Labs) agreed to stay out of the computer business (“information” or “enhanced services” as it was called at the time) and remained under the regulatory control of the FCC for traditional telephony (“telecommunications services”). In exchange, the government let AT&T stay together.

At the time, commercial computing was in its infancy. There was no data communications and certainly no Internet.

In 1980, AT&T was released from its pledge not to offer data services. But four years later, before they could really do very much with their freedom, the company was broken up by Judge Harold Greene, who then ran the communications industry from his chambers until Congress finally passed the 1996 Act.

In any case, by the 1980’s the computer industry had evolved dramatically. The provisioning of private data services was a fast-growing business. IBM, DEC, and other providers had developed proprietary networks and proprietary standards, and used them to lock customers into their hardware and software products.

All of that had changed by 1996. For the first time, it was not only businesses but consumers who were using information services. Public data networks operated by America On-Line, CompuServe and Prodigy had millions of subscribers and were growing rapidly. Netscape Navigator unleashed the full potential of the World Wide Web as a non-proprietary networking standard, creating new industries and services which continue to evolve at a staggering pace. The protocols that made up the Internet had shifted from a government and university use to public use.

Given this history and the great uncertainty in 1996 as to where commercial and consumer computing was headed, Congress decided that the fast-growing provision of data communications should remain outside the control of the FCC. Hence “information services” remained unregulated and “telecommunications services” remained regulated. The terms and their definitions in the 1996 Act were lifted, for better and for worse, straight out of the 1984 decree in the AT&T antitrust case.

(Much of this history is recounted in detail by Prof. Susan Crawford in a 2009 article in the Boston University Law Review, “Transporting Communications.” Though I don’t share Prof. Crawford’s conclusions, the story is told quite well.)

One could argue (I have) that the need for Title II regulations even as applied to wireline voice communications (what’s known in the industry as POTS – Plain Old Telephone Service) makes little sense now that nearly everything has converged under the Internet—including voice. Or put another way, the continued application of common carrier rules are introducing more costs to consumers than any inefficiencies that might exist in an unregulated world.

But it’s much harder to make the case that we should actually move data communications over to Title II in addition to POTS, especially if the only reason behind doing so is to salvage the Net Neutrality rulemaking. To mix some metaphors, that’s both the tail wagging the dog and killing goose that lays the golden eggs. It also flies in the face of the history of the two titles, the consumer experience of life under Title I, and common sense.