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Popular Media Given how important digital connections are to Americans’ daily lives, it’s urgent that Congress move to renew the Federal Communications Commission’s authority to auction parts . . .
Given how important digital connections are to Americans’ daily lives, it’s urgent that Congress move to renew the Federal Communications Commission’s authority to auction parts of the public airwaves.
That authority lapsed a little over a year ago and efforts to reinstate it have been repeatedly stuck in partisan gridlock.
Read the full piece here.
Scholarship Abstract Agencies have imperfect information about conduct they regulate. This problem is particularly acute when identical conduct has differing effects in various markets. Determining the . . .
Agencies have imperfect information about conduct they regulate. This problem is particularly acute when identical conduct has differing effects in various markets. Determining the economy-wide impact of such conduct can be difficult or impossible.
The FTC faces such a challenge. The Commission has proposed a rule banning the nation’s 30 million employee noncompete agreements (“NCAs”) as unfair methods of competition under Section 5 of the FTC Act. The Commission determined that NCAs reduce aggregate wages, establishing a presumptive violation. The Commission also found that nearly all NCAs are both procedurally coercive — because employers use overwhelming bargaining power to impose them — and substantively coercive — because they restrict employees from starting new firms or accepting offers from rival employers. The Commission also implied that procedural coercion was a necessary condition for substantive coercion.
The Commission then assessed possible business justifications. Echoing Transaction Cost Economics (“TCE”), the Commission concluded that NCAs sometimes produce cognizable benefits, increasing productivity and product quality. The Commission framed the inquiry as assessing whether, “overall,” NCAs’ harms exceed benefits. The Commission subjected justifications to a “high bar,” given its finding that nearly all NCAs are doubly coercive.
Determining the overall impact of 30 million contracts is a daunting task. The Commission employed a creative proxy, however. The Commission hypothesized that employers would share benefits of NCAs by paying premium wages to employees with such agreements. However, most studies find a negative correlation between state-level enforceability of NCAs and wages, implying that harms exceed benefits. The Commission therefore rejected justifications and indiscriminately condemned all NCAs.
This proxy seems sound and consistent with TCE. Wages impound vast data generated by innumerable decisions. Resulting wages should reflect benefits employers expect from NCAs as well as the harms resulting from their restrictive impact. This proxy would seemingly generate an economical assessment of the net impact of NCAs.
This essay critiques this proxy and rejection of business justifications. The essay contends that the proxy may produce misleading results reflecting selective application of TCE’s model of contract formation. For instance, the proxy could produce false negatives. A positive correlation between enforceability and wages is consistent with two conclusions: (1) NCAs produce net benefits or (2) most raise rivals’ costs and injure consumers. Absent additional information, both hypotheses would be equally plausible. Immunizing conduct because of a positive correlation between enforceability and wages risks entrenching harmful agreements.
Invocation of a negative correlation between enforceability and wages risks false positives. Markets are not pre-legal entities that generate immutable results. Background rules impact transaction costs and resulting market activity. The Commission implied that transaction costs prevent employees from learning of NCAs before accepting offers and assumed that courts enforce NCAs regardless of precontractual knowledge. These two aspects of the institutional framework will prevent employees from receiving wage premia to compensate for NCAs. Wages will not impound the benefits of NCAs, and condemnation because of a negative correlation between enforceability and wages may produce a false positive.
The prediction that a wage-based proxy can produce false positives assumes that Section 5 is indifferent between whether employers or employees capture the benefits of NCAs. If, however, benefits must offset harms that NCAs impose on employees, the wage-based proxy will produce no false positives. Unfortunately, the Commission did not address whether Section 5 requires such sharing.
Even if business justifications fail, blunt condemnation of NCAs is not the only remedy that can enhance employee welfare. The Commission rejected an alternative derived from TCE, namely, banning NCAs not disclosed in advance. TCE teaches that this change to the institutional framework would reduce transaction costs and induce employers to pay premium wages to employees bound by NCAs, thereby sharing the benefits of such agreements. These higher wages would also force employers to internalize the impact of NCAs on employees. Some employers would abandon NCAs, and some others would narrow their scope. Both effects would reduce the restrictive impact of NCAs, mitigate NCAs’ negative impact on wages, weakening the Commission’s prima facie case against such agreements.
Moreover, fully-disclosed NCAs that produce net benefits or raise rivals’ costs are voluntary. Thus, neither category of agreement is procedurally or substantively coercive. Mandatory disclosure would thus reduce the proportion of NCAs that are coercive in either sense, further weakening the Commission’s prima facie case.
Despite mandatory disclosure, NCAs’ harms may still exceed the benefits that employers share with employees. However, the Commission could no longer apply a “high bar” to efforts to justify all nonexecutive NCAs and would instead have to estimate how many such agreements are voluntary, lowering the bar for those that are. The combination of a weakened prima facie case, lower bar for some NCAs and increased sharing of benefits could well alter the outcome of a comparison of NCAs’ costs and benefits.
Indeed, the Commission need not guess about the impact of changing the institutional framework. Such a change could itself inform empirical tests that would determine whether the benefits of NCAs realized by employees exceed harms in well-functioning labor markets. In such markets, wages would be a more accurate proxy for the overall impact of NCAs. The result could be a conclusion that, “overall,” NCAs produce more benefits than harms and that employers share a sufficient portion of such benefits with employees such that NCAs improve employee welfare compared to a regime that indiscriminately bans such agreements.
Read at SSRN.
TOTM In a recent guest essay for The New York Times, Aaron Klein of the Brookings Institution claims that the merger between Capital One and Discover would “keep intact the . . .
In a recent guest essay for The New York Times, Aaron Klein of the Brookings Institution claims that the merger between Capital One and Discover would “keep intact the broken and predatory system in which credit card companies profit handsomely by rewarding our richest Americans and advantaging the biggest corporations.”
That’s quite an indictment! Fortunately, Klein also offers solutions. Phew!
Scholarship Abstract As bans on noncompete agreements (NCAs) become more frequent, commentators are increasingly concerned that costly trade secret litigation will rise. The logic underlying this . . .
As bans on noncompete agreements (NCAs) become more frequent, commentators are increasingly concerned that costly trade secret litigation will rise. The logic underlying this claim is that bans on NCAs will spur worker mobility, resulting in more secret sharing, and thus opportunities for trade secret litigation. We test this claim leveraging the many state-level NCA bans for high- and low-wage workers, alongside data from Westlaw and the Courthouse News Service on trade secret filings. We find that the number of trade secret claims filed falls in the long run after NCAs are banned, even as mobility rises. This long-term drop in the number of filed trade secret claims is not driven by a decline in dual NCA and trade secret filings. It is also not driven by a decline in reliance on trade secrecy by firms. Instead, it appears firms rely more on trade secrets after NCAs are banned. Finally, we find that endorsing the inevitable disclosure doctrine causes a rise in both NCA and trade secret claims. Taken in sum, this evidence suggests that NCA and trade secret litigation are complements, and not substitute approaches to protecting valuable firm knowledge.
TOTM The lawsuit filed yesterday by the U.S. Justice Department (DOJ) against Apple for monopolization of the U.S. smartphone market (joined by 15 states and the District of . . .
The lawsuit filed yesterday by the U.S. Justice Department (DOJ) against Apple for monopolization of the U.S. smartphone market (joined by 15 states and the District of Columbia) has big implications for American competition and innovation.
At the heart of the complaint is the DOJ’s assertion that…
Amicus Brief INTEREST OF AMICI CURIAE Amici Curiae are 24 former government officials, former judges, and intellectual property scholars who have developed copyright law and policy, researched . . .
Amici Curiae are 24 former government officials, former judges, and intellectual property scholars who have developed copyright law and policy, researched and written about copyright law, or both. They are concerned about ensuring that copyright law continues to secure both the rights of authors and publishers in creating and disseminating their works and the rights of the public in accessing these works. It is vital for this Court to maintain this balance between creators and the public set forth in the constitutional authorization to Congress to create the copyright laws. Amici have no stake in the parties or in the outcome of the case. The names and affiliations of the members of the Amici are set forth in Addendum A below.[1]
Copyright fulfills its constitutional purpose to incentivize the creation and dissemination of new works by securing to creators the exclusive rights of reproduction and distribution. 17 U.S.C. § 106. Congress narrowly tailored the exceptions to these rights to avoid undermining the balanced system envisioned by the Framers. See 17 U.S.C. §§ 107–22. As James Madison recognized, the “public good fully coincides . . . with the claims of individuals” in the protection of copyright. The Federalist NO. 43, at 271–72 (James Madison) (Clinton Rossiter ed., 1961). Internet Archive (“IA”) and its amici wrongly frame copyright’s balance of interests as between the incentive to create, on the one hand, and the public good, on the other hand. That is not the balance that copyright envisions.
IA’s position also ignores the key role that publishers serve in the incentives copyright offers to authors and other creators. Few authors, no matter how intellectually driven, will continue to perfect their craft if the economic rewards are insufficient to meet their basic needs. As the Supreme Court observed, “copyright law celebrates the profit motive, recognizing that the incentive to profit from the exploitation of copyrights will redound to the public benefit by resulting in the proliferation of knowledge.” Eldred v. Ashcroft, 537 U.S. 186, 212 n.18 (2003) (quoting Am. Geophysical Union v. Texaco Inc., 802 F. Supp. 1, 27 (S.D.N.Y. 1992)). Accordingly, the Supreme Court and Congress have long recognized that copyright secures the fruits of intermediaries’ labors in their innovative development of distribution mechanisms of authors’ works. Copyright does not judge the value of a book by its cover price. Rather, core copyright policy recognizes that the profit motive drives the willingness ex ante to invest time and resources in creating both copyrighted works and the means to distribute them. In sum, commercialization is fundamental to a functioning copyright system that achieves its constitutional purpose.
IA’s unauthorized reproduction and duplication of complete works runs roughshod over this framework. Its concept of controlled digital lending (CDL) does not fall into any exception—certainly not any conception of fair use recognized by the courts or considered by Congress—and thus violates copyright owners’ exclusive rights. Expanding the fair use doctrine to immunize IA’s wholesale copying would upend Congress’s carefully-considered, repeated rejections of similar proposals.
Hoping to excuse its disregard for copyright law, IA and its amici attempt to turn the fair use analysis on its head. They acknowledge that the first sale exception does not permit CDL, as this Court made clear in Capitol Records, LLC v. ReDigi Inc., 910 F.3d 649 (2d Cir. 2018).[2] They also are aware that courts consistently have rejected variations on the argument that wholesale copying, despite a format shift, is permissible under fair use.[3] Nevertheless, IA and its amici ask this Court, for the first time in history, to create a first sale-style exemption within the fair use analysis. CDL is not the natural evolution of libraries in the digital age; rather, like Frankenstein’s monster, it is an abomination composed of disparate parts of copyright doctrine. If endorsed by this Court, it would undermine the constitutional foundation of copyright jurisprudence and the separation of powers.
The parties and other amici address the specific legal doctrines, as well as the technical and commercial context in which these doctrinal requirements apply in this case, and thus Amici provide additional information on the nature and function of copyright that should inform this Court’s analysis and decision.
First, although IA and its amici argue that there are public benefits to the copying in which IA has engaged that support a finding that CDL is fair use, their arguments ignore that copyright itself promotes the public good and the inevitable harms that would result if copyright owners were unable to enforce their rights against the wholesale, digital distribution of their works by IA.
Second, IA’s assertion of the existence of a so-called “digital first sale” doctrine—a principle that, unlike the actual first sale statute, would permit the reproduction, as well as the distribution, of copyrighted works—is in direct conflict with Congress and the Copyright Office’s repeated study (and rejection) of similar proposals. Physical and digital copies simply are different, and it is not an accident that first sale applies only to the distribution of physical copies. Ignoring decades of research and debate, IA pretends instead that Congress has somehow overlooked digital first sale, yet left it open to the courts to engage in policymaking by shoehorning it into the fair use doctrine. By doing so, IA seeks to thwart the democratic process to gain in the courts what CDL’s proponents have not been able to get from Congress.
Third, given that there is no statutory support for CDL, most libraries offer their patrons access to digital works by entering into licensing agreements with authors and their publishers. Although a minority of libraries have participated in IA’s CDL practice, and a few have filed amicus briefs in support of IA in this Court, the vast majority of libraries steer clear because they recognize that wholesale copying and distribution deters the creation of new works. As author Sandra Cisneros understands: “Real libraries do not do what Internet Archive does.” A-250 (Cisneros Decl.) ¶12. There are innumerable ways of accessing books, none of which require authors and publishers to live in a world where their books are illegally distributed for free.
No court has ever found that reproducing and giving away entire works—en masse, without permission, and without additional comment, criticism, or justification—constitutes fair use. IA’s CDL theory is a fantasy divorced from the Constitution, the laws enacted by Congress, and the longstanding policies that have informed copyright jurisprudence. This Court should reject IA’s effort to erase authors and publishers from the copyright system.
[1] The parties have consented to the filing of this brief. Amici Curiae and their counsel authored this brief. Neither a party, its counsel, nor any person other than Amici and their counsel contributed money that was intended to fund preparing or submitting this brief.
[2] See SPA-38 (“IA accepts that ReDigi forecloses any argument it might have under Section 109(a).”); Dkt. 60, Brief for Defendant-Appellant Internet Archive (hereinafter “IA Br.”) (appealing only the district court’s decision on fair use).
[3] See, e.g., ReDigi, 910 F.3d at 662; UMG Recordings, Inc. v. MP3.com, Inc., 92 F. Supp. 2d 349, 352 (S.D.N.Y. 2000); see also Disney Enters., Inc. v. VidAngel, Inc., 869 F.3d 848, 861–62 (9th Cir. 2017).
TOTM The big news from the agencies may be the lawsuit filed today by the U.S. Justice Department (DOJ) and 16 states against Apple alleging monopoly . . .
The big news from the agencies may be the lawsuit filed today by the U.S. Justice Department (DOJ) and 16 states against Apple alleging monopoly maintenance in violation of Section 2 of the Sherman Act. It’s an 86-page complaint and it’s just out. I’ll write more about it next week.
Two quick observations: First, the complaint opens with an anecdote from 2010 that suggests lock-in (a hard case under antitrust law), but demonstrates nothing. Second, the anecdote is followed by a statement that “[o]ver many years, Apple has repeatedly responded to competitive threats… by making it harder or more expensive for its users and developers to leave than by making it more attractive for them to stay.”
TOTM With Monday’s oral arguments in Murthy v. Missouri, we now have more of a feel for how the U.S. Supreme Court appears to be considering . . .
With Monday’s oral arguments in Murthy v. Missouri, we now have more of a feel for how the U.S. Supreme Court appears to be considering the issues of social-media censorship—in this case, done allegedly at the behest of federal officials.
In the International Center for Law & Economics’ (ICLE) amicus brief in the case, we argued that the First Amendment protects a marketplace of ideas, and government agents can’t intervene in that marketplace by coercing social-media companies into removing disfavored speech. But if the oral arguments are any indication, there are reasons to be skeptical that the Court will uphold the preliminary injunction the district court issued against the government officials (later upheld in a more limited form by the 5th U.S. Circuit Court of Appeals).
Presentations & Interviews ICLE Editor-in-Chief R.J. Lehmann was a guest on Bloomberg’s Odd Lots podcast to discuss state insurance regulation and the role it has played in the . . .
ICLE Editor-in-Chief R.J. Lehmann was a guest on Bloomberg’s Odd Lots podcast to discuss state insurance regulation and the role it has played in the collapse of the homeowners insurance markets in California and Florida. The transcript is available here and the full episode is embedded below.
