Executive Summary

The Federal Trade Commission (“FTC”) has issued an Advanced Notice of Proposed Rulemaking (“ANPR”) on “Commercial Surveillance and Data Security,”[1] initiating a proceeding intended to result in binding rules regarding “the collection, aggregation, analysis, retention, transfer, or monetization of consumer data and the direct derivatives of that information.”[2]

There is reason to believe that streamlined and uniform federal data-security or privacy regulations could be both beneficial and within the FTC’s competence and authority. But the approach suggested by the ANPR—simultaneously sweeping and vague—appears very likely to do more harm than good. Most notably, the ANPR evinces an approach that barely acknowledges either the limits of the FTC’s authority or the tremendous consumer benefits produced by the information economy.

The FTC is uniquely positioned to understand the complexities entailed in regulating privacy and data security. It has expertise and experience in both consumer-protection and competition matters. With regard to privacy and data security, in particular, it has decades of experience bringing enforcement actions for violations of the FTC Act’s prohibition of deceptive and unfair practices. Its enforcement experience also has been bolstered by its statutory mission to conduct economic and policy research, which has, not incidentally, comprised numerous hearings, workshops, studies, and reports on issues pertinent to data policy.

The ANPR does not build on the Commission’s experience and expertise as it could, however, and its dearth of economic analysis is especially striking. Moreover, the Commission’s authority is not unbounded, and neither are its resources. Both limitations are salient when the Commission considers adopting substantive—or “legislative”— regulations under either Section 18 or Section 6 of the FTC Act. As we discuss below, the current proceeding is deficient on both substantive and procedural grounds. Absent an express grant of authority and the requisite resources from Congress, the Commission would be ill-advised to consider, much less to adopt, the kinds of sweeping data regulations that the Commercial Surveillance ANPR appears to contemplate.

A.      The FTC Must Provide More Detail Than Is Contained in the ANPR

The ANPR states that it was issued pursuant to the Commission’s Section 18 authority,[3] which both grants and restrains the FTC’s authority to adopt regulations with respect to “unfair or deceptive acts or practices in or affecting competition” (“UDAP”).[4] Rulemaking under Section 18 of the FTC Act[5] requires that the Commission follow a careful process. As a preliminary matter, it must identify for both Congress and the public an area of inquiry under the Commission’s jurisdiction; the Commission’s objectives in the rulemaking; and regulatory alternatives under consideration.[6] Unfortunately, the Commission has not met these obligations in this ANPR.

Under Section 18, the Commission may adopt “rules which define with specificity acts or practices which are unfair or deceptive acts or practices in or affecting commerce”[7] under Section 5 of the FTC Act. Section 18 imposes express procedural requirements, in addition to those set out for this ANPR. These include, but are not limited to, requirements for a Notice of Proposed Rulemaking (“NPRM”). Section 18 also incorporates by reference the procedures prescribed by the Administrative Procedure Act.[8]

As noted, Section 18’s requirements for an ANPR are brief and preliminary but they are nonetheless real. In contravention of the requirements of Section 18, this ANPR does not clearly describe any “objectives which the Commission seeks to achieve,” and it provides no indication of “possible regulatory alternatives under consideration by the Commission.”[9] Instead, it provides a laundry list of putative harms, and it fails to identify even the most basic benefits that may be associated with diverse commercial-data practices. It does not describe the Commission’s current assessment of, or position on, those practices. And it provides no sense of the direction the Commission intends to take regarding potential rules.

Failing to identify the Commission’s objectives or proposals under consideration, this ANPR fails in its basic purpose to “invite… suggestions or alternative methods for achieving [the] objectives.”[10]

B.       The Commission Must Undertake a Cost-Benefit Analysis that Defines Harms, Identifies Benefits, and Weights the Two

Any rules the Commission issues under a Section 18 proceeding must emerge from a cost-benefit analysis.[11] Both the potential harms and the benefits of challenged conduct must be well-defined, and they must be weighed against each other. Even at this early stage of the process, the FTC is obligated to provide more than a suggestion that some harm might be occurring, and to provide more than a hint of how it might handle those harms.

This is also good procedure for policymaking more generally, irrespective of the Commission’s statutory obligations under Section 18. Before engaging in a deeply interventionist regulatory experiment—such as imposing strict privacy regulations that contravene revealed consumer preferences—the Commission should publicly state empirically justified reasons to do so. In other words, there should be demonstrable market failures in the provision of “privacy” (however we define that term) before centralized regulation co-opts the voluntary choices of consumers and firms in the economy, and before it supplants the ability to redress any residual, cognizable harms through law enforcement with broad, economywide, ex ante rules.

Thus, a vital threshold question for any rules issued under this proceeding is whether and why markets operating without specific privacy regulation generate a suboptimal provision of privacy protection. Without this inquiry, it is unclear whether there are problems requiring regulatory intervention and, if so, what they are. Without knowing their purpose, any rules adopted are likely to be ineffective, at best, and harmful, at worst. They may increase costs for consumers and businesses alike, chill innovation, mandate harmful prescriptions for alleged privacy harms while failing to address the most serious and persistent harms, or exacerbate the risks of harm—or all of the above.

Particularly in the United States, where informational privacy is treated both legally and socially as more of a consumer preference (albeit, perhaps, a particularly important one) than a fundamental right,[12] it is difficult to determine whether our current regime produces the “right” amount of privacy protection. That cannot be determined by observing that some advocates and consumers who are particularly privacy-sensitive opine that there should be more, or more of a certain sort; nor is it enough that there have been some well-publicized violations of privacy and cases of demonstrable harm. Indeed, the fact that revealed preferences in the market tend toward relatively less privacy protection is evidence that advocates may be seeking to create a level and a type of privacy protection for which there is simply no broad-based demand. Absent a pervasive defect that suggests a broad disconnect between revealed and actual preferences, as well as a pattern of substantial net harm, the Commission should be extremely cautious before adopting preemptive and sweeping regulations.

At a minimum, the foregoing indicates that the Commission must undertake several steps before this ANPR is close to satisfying the requirements of Section 18, not to mention good government:

• First, the Commission must proffer an adequate definition of “commercial surveillance.” While the ANPR is framed around this ominous-sounding term,^[13] it is functionally defined in a way that is both sweeping and vague. It appears to encompass virtually all commercial uses of “consumer data,” albeit without providing a workable definition of “consumer data.”[14] If the Commission is contemplating a general data regulation, it should say so and enumerate the objectives such a regulation would serve. In the current ANPR, the Commission has done neither.
• Second, the Commission must do more than merely cite diverse potential harms arising from what it terms “commercial surveillance.” The Commission has a long history of pursuing privacy and data-security cases, and it should rely on this past practice to define with specificity the types of harms—cognizable as injuries under Section 5—that it intends to pursue.

The Commission must also adequately account for the potential harms to innovation and competition that can arise from the adoption of new privacy and data-security regulations. Resources that firms invest in compliance cannot be invested in product development, customer service, or any of a host of other ends. And compliance with overly broad constraints will often curtail or deter the sort of experimentation that is at the heart of innovation.

Moreover, there is a potential tension between privacy and data security, such that mandates to increase privacy can diminish firms’ ability to ensure data security. The EU’s experience with the General Data Protection Regulation (“GDPR”) has demonstrated some of this dynamic.^[15] These realities must be incorporated into the Commission’s assessment.

• Third, the Commission must do more than merely nod to potential benefits that the modern data-driven economy provides to consumers. The clear benefits that arise from information sharing must be considered. Since the dawn of the Internet, free digital services have created significant consumer surplus. This trend continues today: Research using both survey and experimental methods has consistently found substantial benefits for consumers from sharing information in exchange for free (or subsidized) digital products. Moreover, productive conduct and consumer benefits are not limited to free digital products and services. Myriad products and services—from health care to finance to education—are made more efficient, and more widely available, by the commercial use of various forms of consumer data.

C.      The ANPR Must Account for the Effect of Any ‘Commercial Surveillance’ Rules on Consumer Welfare and Competition

The Commission is obligated to consider the likely effects of data regulation on consumers and competition. That ought to be a requirement for regulation generally, but it is an express, statutory requirement for unfairness regulation under Section 18 of the FTC Act. The Commission is uniquely well-situated to meet that mandate by virtue of its distinctive, dual competition and consumer-protection missions. Indeed, the Commission’s antitrust-enforcement experience dates to the agency’s inception. In addition, the Commission can access the considerable expertise of its Bureau of Economics, which employs experts in both industrial organization and consumer-protection economics. Yet much of that expertise appears absent from the ANPR.

This ANPR does not specify, or even sketch, the data regulations being contemplated by the Commission. Neither does it specify the Commission’s goals in the rulemaking or alternative regulatory approaches under consideration, although both are required by statute. Consequently, one cannot assess the net effects of any proposed “commercial surveillance and data security” rule on competition or consumers, because there simply is no proposed rule to assess.

The economic literature, however, does suggest caution:

• First, as a general matter, regulations that impose substantial fixed costs on regulated firms tend to burden smaller firms and entrants more than they do large firms and incumbents.[16]
• Second, studies of specific domestic-privacy and data-security requirements underscore the potential for unintended consequences, including competitive costs.[17]
• Third, empirical studies of the effects of general data regulations in foreign jurisdictions, such as the EU’s GDPR, suggest that such regulations have indeed led to substantial competitive harms.[18]

The literature on the effects of GDPR and other data regulations is particularly instructive. Although it is neither definitive nor complete, it has thus far found slender (at best) benefits to competition or consumers from data regulations and considerable costs and harms from their imposition. Further experience with and study of data regulations could yield a more nuanced picture. And, again, the FTC is well-positioned to contribute to and foster a greater understanding of the competitive effects of various types of data regulation. Doing so could be greatly beneficial to policymaking, competition, and consumer welfare, precisely because specific data practices can produce substantial benefits, harms, or a complex admixture of the two. But documented harms and speculative benefits of regulation recommend caution, not blind intervention.

D.      Conclusion

The Commission should take account of a further reality: the rules it contemplates will be created in an environment filled with other privacy regulators. Although the United States does not have a single, omnibus, privacy regulation, this does not mean that the country does not have “privacy law.” Indeed, generally applicable laws providing a wide range of privacy and data-security protections already exist at both the federal and state level. These include consumer-protection laws that apply to companies’ data use and security practices,[19] as well as those that have been developed in common law (property, contract, and tort) and criminal codes.[20] In addition, there are sector-specific regulations pertaining to particular kinds of information, such as medical records, personal information collected online from children, and credit reporting, as well as regulations prohibiting the use of data in a manner that might lead to certain kinds of illegal discrimination.[21]

Despite the FTC’s noted experience in a certain slice of privacy regulation, Congress has not made the FTC the central privacy regulatory body. Neither has Congress granted the Commission the resources likely required for such a regulator. Congress has wrestled with complex tradeoffs in several areas and has allowed—through design and otherwise—various authorities to emerge. Where Congress has provided for privacy regulation, it has tailored the law to address specific concerns in specific sectors, or with respect to specific types of information. Moreover, in each case, it has balanced privacy and security concerns with other policy priorities. That balancing requires technical expertise, but it also entails essentially political judgements about the relative value of diverse policy goals; in that latter regard, it is a job for Congress.

There are, as well, questions of resource allocation that may attend an express statutory charge. We cannot gainsay the importance of the FTC’s privacy and data-security enforcement work under Section 5 of the FTC Act. At the same time, we cannot help but notice a misfit between the Commission’s congressionally allocated resources and the obligations that are entailed by data regulations of the scope contemplated in the ANPR. By way of contrast, we note that, since the compliance date of the Health Insurance Portability and Accountability Act (“HIPAA”) privacy rule, the U.S. Department of Health and Human Services (“HHS”) Office of Civil Rights (“OCR”) has investigated and resolved nearly 30,000 cases involving HIPAA-covered entities and their business associates; for appropriate cases of knowing disclosure or obtaining of protected health information, OCR has referred more than 1,500 cases to the U.S. Department of Justice (“DOJ”) for criminal prosecution.[22]

In his dissent from the issuance of this ANPR, former Commissioner Noah Phillips noted the massive and complicated undertaking it initiates:

Legislating comprehensive national rules for consumer data privacy and security is a complicated undertaking. Any law our nation adopts will have vast economic significance. It will impact many thousands of companies, millions of citizens, and billions upon billions of dollars in commerce. It will involve real trade-offs between, for example, innovation, jobs, and economic growth on the one hand and protection from privacy harms on the other. (It will also require some level of social consensus about which harms the law can and should address.) Like most regulations, comprehensive rules for data privacy and security will likely displace some amount of competition. Reducing the ability of companies to use data about consumers, which today facilitates the provision of free services, may result in higher prices—an effect that policymakers would be remiss not to consider in our current inflationary environment.^[23]

This is particularly true given the Commission’s long history of work in this area. The Commission has undertaken decades of investigations and a multitude of workshops and hearings on privacy and related topics. This ANPR nods to that history, but it does not appear to make much use of it, possibly because much of it contains lessons that pull in different directions. Overall, that impressive body of work does not remotely point to the need for a single, comprehensive privacy rule. Rather, it has demonstrated that privacy regulation is complicated. It is complicated not just as a technical matter, but also because of the immense variety of consumers’ attitudes, expectations, and preferences with respect to privacy and the use of data in the economy.

The Commercial Surveillance ANPR poses 95 questions, many of which will find some answers in this prior history if it is adequately consulted. The Commission has generally evidenced admirable restraint and assessed the relevant tradeoffs, recognizing that the authorized collection and use of consumer information by companies confers enormous benefits, even as it entails some risks. Indeed, the overwhelming conclusion of decades of intense scrutiny is that the application of ex ante privacy principles across industries is a fraught exercise, as each industry—indeed each firm within an industry—faces a different set of consumer expectations about its provision of innovative services and offering of privacy protections.

These considerations all militate in favor of regulatory restraint by the FTC as a matter of policy. They also require restraint, and an emphasis on established jurisdiction, given the Supreme Court’s recent “major questions” jurisprudence.[24] As noted in the statements of several commissioners, West Virginia v. EPA[25] clarifies the constitutional limits on an agency’s authority to extend the reach of its jurisdiction via regulation. In brief, the broader the economic and political sweep of data regulations the Commission might propose, the more likely it is that such regulations exceed the FTC’s authority. If the “major questions doctrine” is implicated, the burden is on the agency to establish the specific grant of authority that is claimed.[26] Moreover, the Court was clear that a merely colorable claim of statutory implementation is inadequate to establish the authority to issue sweeping regulations with major economic and political implications.[27]

Download the full comments here.

 

[1] Trade Regulation Rule on Commercial Surveillance and Data Security, 87 Fed. Reg. 51273 (Aug. 22, 2022) (to be codified at 16 C.F.R. Ch. 1) [hereinafter “ANPR” or “Commercial Surveillance ANPR”].

[2] Id. at 51277.

[3] Id. at 51276.

[4] That is, “unfair or deceptive acts or practices in or affecting commerce,” as they are prohibited under Section 5 of the FTC Act, 15 U.S.C. § 45(a)(1).

[5] 15 U.S.C. § 57a.

[6] 15 U.S.C. § 57a(b)(2)(A).

[7] 15 U.S.C. § 57a(a)(1)(B).

[8] 15 U.S.C. § 57a(b)(1) (“When prescribing a rule under subsection (a)(1)(B) of this section, the Commission shall proceed in accordance with section 553 of title 5.”)

[9] 15 U.S.C. § 57a(b)(2)(i).

[10] 15 U.S.C. § 57a(b)(2)(ii).

[11] See Section III, infra (regarding the role of cost-benefit analysis under Magnuson-Moss and the statutory requirements of Section 18).

[12] Except, of course, when it comes to government access to private information, i.e., under the Fourth Amendment.

[13] See, e.g., ANPR, supra note 1 at 51273-75.

[14] The purported definition of consumer data in the ANPR, and the scope of activities around consumer data, are so overbroad as to encompass virtually the entirety of modern economic activity: “the collection, aggregation, analysis, retention, transfer, or monetization of consumer data and the direct derivatives of that information. These data include both information that consumers actively provide—say, when they affirmatively register for a service or make a purchase—as well as personal identifiers and other information that companies collect, for example, when a consumer casually browses the web or opens an app. This latter category is far broader than the first.” Id. at 51277.

[15] See, e.g., Coline Boniface, et al., Security Analysis of Subject Access Request Procedures, in Privacy Technologies & Policy: 7^th Annual Privacy Forum (Maurizio Naldi, et al. eds., 2019).

[16] See, e.g., James Campbell, Avi Goldfarb & Catherine Tucker, Privacy Regulation and Market Structure, 24 J. Econ. & Mgmt. Strategy 47 (2015); Alex Marthews & Catherine Tucker, Privacy Policy and Competition, Econ. Stud. at Brookings (December 2019), available at https://www.brookings.edu/wp-content/uploads/2019/12/ES-12.04.19-Marthews-Tucker.pdf.

[17] See, e.g., Jin-Hyuk Kim & Liad Wagman, Screening Incentives and Privacy Protection in Financial Markets: A Theoretical and Empirical Analysis, 46 RAND J. Econ. 1 (2015).

[18] See, e.g., Jian Jia, Ginger Zhe Jin & Liad Wagman, The Short-run Effects of the General Data Protection Regulation on Technology Venture Investment, 40 Marketing Sci. 661 (2021).

[19] See, e.g., FTC Act, 15 U.S.C. § 45(a) et seq.

[20] See Privacy-Common Law, Law Library —American Law and Legal Information, http://law.jrank.org/pages/9409/Privacy-Common-Law.html (last visited Oct. 16, 2022).

[21] See, e.g., Comments of the Association of National Advertisers on the Competition and Consumer Protection in the 21^st Century Hearings, Project Number P181201, available at https://docplayer.net/93116976-Before-the-federal-trade-commission-washington-d-c-comments-of-the-association-of-national-advertisers-on-the.html: [T]he Health Information Portability and Accountability Act (“HIPAA”) regulates certain health data; the Fair Credit Reporting Act (“FCRA”) regulates the use of consumer data for eligibility purposes; the Children’s Online Privacy Protection Act (“COPPA”) addresses personal information collected online from children; and the Gramm–Leach–Bliley Act (“GLBA”) focuses on consumers’ financial privacy; the Equal Employment Opportunity Commission (“EEOC”) enforces a variety of anti-discrimination laws in the workplace including the Pregnancy Discrimination Act (“PDA”) and American with Disabilities Act (“ADA”); the Fair Housing Act (“FHA”) protects against discrimination in housing; and the Equal Credit Opportunity Act (“ECOA”) protects against discrimination in mortgage and other forms of lending. Id. at 6.

[22] Dep’t Health & Human Servs., Health Information Privacy, Enforcement Highlights, https://www.hhs.gov/hipaa/for-professionals/compliance-enforcement/data/enforcement-highlights/index.html (HHS Office of Civil Rights, last reviewed Sep. 14, 2022).

[23] ANPR at 51293 (Dissenting Statement of Comm’r Noah J. Phillips).

[24] See W. Virginia v. Env’t Prot. Agency, 142 S. Ct. 2587, 2595 (2022) (citing a line of cases including Utility Air Regulatory Group v. EPA, 573 U. S. 302 (2014); Gonzales v. Oregon, 546 U. S. 243 (2006); FDA v. Whitman v. American Trucking Assns., Inc., 531 U. S. 457, 468 (2001); and Brown & Williamson Tobacco Corp., 529 U. S. 120, 159 (2000)).

[25] Id.

[26] See id. at 2613 (citing William Eskridge, Interpreting Law: A Primer on How to Read Statutes and the Constitution 288 (2016)).

[27] Id. at 2608-09.

Executive Summary

For years, regulators and competition watchdogs have expressed concern about competition in the digital advertising business. They note that digital advertising appears to be dominated by a few dominant firms, such as Google, Facebook, and—to a lesser extent—Amazon. Some claim that this dominance allows these firms—and Google, in particular—to engage in anticompetitive conduct to extend their market power and to earn supercompetitive profit at the expense of advertisers, publishers, and consumers. This paper investigates the digital advertising market and assesses some of these claims. We conclude based on the information that is publicly available that many of the most significant claims made against Google’s advertising technology (ad tech) business are based on a misunderstanding of U.S. antitrust law, or of the details of the  ad tech market itself.

Digital advertising provides the economic underpinning for much of the Internet. Targeted digital advertising on independent websites is often facilitated by intermediaries that match advertisers and websites automatically, displaying ads to users for whom they are most relevant. This intermediation has advanced enormously over the past three decades. Some now allege, however, that the digital advertising market is monopolized by its largest participant: Google.

In particular, a lawsuit filed in December 2020 by the State of Texas and nine other U.S. states (later joined by five more states in March 2021) alleges anticompetitive conduct related to Google’s online display-advertising business. It has been reported that the U.S. Justice Department (DOJ) may bring a similar lawsuit before the end of 2022.

Moreover, a bipartisan group of U.S. senators introduced the Competition and Transparency in Digital Advertising Act in May 2022. If passed by Congress and signed into law, the bill would require some of the largest Internet firms—such as Google, Facebook, and Amazon—to break up their digital advertising businesses. A summary of the bill claims that Google is the “leading or dominant” firm in “every part” of the ad tech “stack” and that it uses this dominance to “extract monopoly rents” from advertisers and publishers.

Our paper focuses on the open-display digital advertising business. Display ads are designed to be visually engaging, combining text, images, and a hyperlink to a website. These are distinct from search ads, which are text ads displayed along with organic Internet search results. Most of today’s digital display advertising appears on heavily trafficked owned-and-operated sites such as TikTok, Instagram, YouTube, and Amazon, in which the company providing the advertising space is the same company that operates the platforms that place the ads. In contrast, open-display space is supplied by independent publishers—such as The New York Times (nytimes.com), MLB.com, or The Weather Channel (weather.com)—and is usually facilitated by intermediaries.

This paper begins with an overview of digital advertising. The market’s history is one of dynamic innovation, with many new developments arising to solve problems created by previous innovations, address new innovations, and respond to market developments. The market’s structure has changed dramatically as advertisers, publishers, and consumers have responded to new technologies. These changes and innovations all must balance the competing demands of advertisers, publishers, and consumers to maximize the total value of the advertising platform. Thus, any antitrust evaluation of digital advertising must consider whether the market’s structure and the conduct of its participants may be procompetitive responses to prior market changes, as well as the extent to which the overall market structure may mitigate superficially problematic elements within it.

Of particular importance, digital advertising intermediaries that are vertically integrated into some or all components of the digital advertising “stack” of services use the prices charged to each side of the market to optimize overall use of the platform. As a result, pricing in these markets operates differently than pricing in traditional markets: pricing on one side of the platform is often used to subsidize participation on another side of the market, increasing the value to all sides combined. Consequently, pricing (or other terms of exchange) on one side of the market may appear to diverge from the competitive level when viewed for that side alone. While one side of the market may pay superficially higher fees, this cost can be offset by the benefits from increased participation on the other side of the market. In this way, using subsidies to increase participation on another side of the market creates valuable network effects for the side of the market facing the higher fees.

In the second half of the paper, we address some of the specific allegations of anticompetitive structures and conduct made in the Texas Complaint and by critics of the digital advertising industry. We conclude that a flawed premise underlies many of these allegations. It is a version of the “big is bad” argument, in which conduct by dominant incumbent firms that makes competition more difficult for certain competitors is viewed as inherently anticompetitive—even if the conduct confers benefits on users. Under this approach, the largest firms are seen as acting anticompetitively if they do not share their innovations or reveal their business processes to competing firms. As a result, creating new and innovative products, lowering prices, reducing costs through vertical integration, and enhancing interoperability among existing products is miscast as anticompetitive conduct.

In contrast, we note that U.S. antitrust law is intended to foster innovation that creates benefits for consumers, including innovation by incumbents. The law does not proscribe efficiency-enhancing unilateral conduct on the grounds that it might also inconvenience competitors, or that there is some other arrangement that could be “even more” competitive.

Moreover, U.S. antitrust law does not second guess unilateral conduct simply because it may hinder rivals. Any such conduct would first have to be shown to be anticompetitive—that is, to harm consumers or competition, not merely certain competitors. In multisided markets, this means finding not simply that some firms on one side of the market are harmed, but that the combined net effect of challenged conduct across all sides of the market is harmful. The Texas Complaint, however, is built on the alleged harm of reduced revenue to publishers, without considering the corresponding benefit of lower prices to advertisers (and the consumers of advertised products and services).

Based on the information publicly available, we conclude that many of the most significant claims made against Google’s ad tech business are based on a misunderstanding of U.S. antitrust law, or of the details of the ad tech market itself. Although we cannot be sure how the Texas et al v. Google case will develop once its allegations are fleshed out into full arguments, many of its claims and assumptions appear wrongheaded. If the court rules in favor of these, the result will be to condemn procompetitive conduct and potentially to impose costly, inefficient remedies that function as a drag on innovation.

Legislators, too, who may be concerned about Google’s conduct and tempted to impose regulatory requirements on tech companies should bear in minds the risk of the “Nirvana fallacy,” in which real-life conduct is compared against a hypothetical “competition-maximizing” benchmark and anything that falls short is deemed worthy of intervention. That fanciful approach would pervert businesses’ incentives to innovate and compete and would make an unobtainable “perfect” that exists only in the minds of some economists and lawyers the enemy of a “good” that exists in the market.

Introduction

For years, regulators and competition watchdogs have expressed concern about competition in the digital advertising business. They note that digital advertising appears to be dominated by a few exceptionally large firms, such as Google, Facebook, and—to a lesser extent—Amazon. Some claim that this dominance allows these firms—and Google, in particular—to engage in anticompetitive conduct to extend their market power and to earn supercompetitive profits at the expense of advertisers, publishers, and consumers. This paper investigates the digital advertising market and assesses some of these claims. We conclude, based on the information that is publicly available, that many of the most significant claims made against Google’s advertising technology (ad tech) business are based on a misunderstanding of U.S. antitrust law, or of the details of the ad tech market itself.

Digital advertising provides the economic backbone for much of the Internet. By providing websites and apps a means to monetize their products without having to charge user fees, advertising enables access to entertaining and informative content without payment. Targeted advertising allows companies to inform potential customers of new products, giving new entrants a way to compete with popular incumbents, while effective targeting avoids wasting the time of those who aren’t likely to be interested. Advertising can endow products with new characteristics in customers’ minds and make consumers aware of product features they may not have known about.

Advertising on independent websites is often facilitated by intermediaries that match advertisers and websites automatically, targeting ads at the users to whom they are most relevant. This intermediation has advanced enormously over the past three decades. Some now allege, however, that the digital-advertising market is monopolized by its largest participant: Google. These allegations originate from various sources, including policy discussions, lawsuits, draft legislation, and academic reports.

In particular, a lawsuit filed in December 2020 by the State of Texas and nine other U.S. states (later joined by five more states in March 2021) alleges, among other things, anticompetitive conduct related to Google’s online display-advertising business.[1] This action is one of three currently pending lawsuits brought against Google by government antitrust enforcers in the United States; the other two relate to Google’s distribution agreements and search design.[2] It has been reported that the U.S. Department of Justice (DOJ) may bring a similar lawsuit before the end of 2022.[3] Along similar lines, the European Commission opened an investigation into Google’s display-advertising services in June 2021[4] and the German competition authority has published a report regarding its inquiry into non-search advertising.[5] Among other things, the European Commission is investigating whether Google “has made it harder for rival online advertising services to compete in the so-called ad tech stack.”[6]

These ongoing cases follow regulatory reports and hearings examining the market, including a year-long study by the United Kingdom’s Competition and Markets Authority (CMA). The CMA investigation of digital advertising (including search and social-media advertising) has thus far produced recommendations for a code of conduct and “pro-competitive interventions” into the market, as well as a new regulatory body to oversee these measures.[7] The Australian Competition and Consumer Commission is also conducting its own study of the digital advertising market,[8] and both houses of the U.S. Congress have held hearings on the market in recent years.[9] In October 2020, the Democratic majority staff of the U.S. House Judiciary Committee’s Subcommittee on Antitrust, Commercial, and Administrative Law issued a report that recommended, among other things, regulation for the display advertising market.[10]

The digital  advertising industry has also drawn the attention of legislators. In May 2022, a bipartisan group of U.S. senators introduced a bill that would require some of the largest Internet firms to break up their digital advertising businesses.[11] Dubbed the Competition and Transparency in Digital Advertising Act (CTDAA), the measure was introduced by Sen. Mike Lee (R-Utah) and co-sponsored by Sens. Amy Klobuchar (D-Minn.), Ted Cruz (R-Texas), and Richard Blumenthal (D-Conn.). Sen. Lee’s summary of the CTDAA identifies several allegations against the largest firms in the digital advertising business, with an emphasis on Google.[12] The summary claims that Google is the “leading or dominant” firm in “every part” of the “ad tech stack” and that it “exploits” conflicts of interest to “extract monopoly rents” from advertisers and publishers. Because of these monopoly rents, consumers are harmed in the form of higher prices for advertised goods and services and lower quality of online content, according to Lee’s press release.[13]

A 2020 paper published by the Omidyar Network—itself based on an interim CMA report produced during the authority’s then-pending investigation[14]—alleged anticompetitive practices within Google’s display advertising business and laid out a “roadmap” for a prospective antitrust case.[15] Other legal and economic consultants have also voiced concerns about Google’s role in the digital advertising industry.[16] These critiques were published before the Texas Complaint and provide more detail underlying the allegations and arguments described in the Texas Complaint. For that reason and because it may influence further lawsuits and regulatory interventions in the digital advertising market, including the DOJ’s, we also evaluate several of the Roadmap’s findings and conclusions.

This paper investigates the digital advertising market and assesses the aforementioned claims that it is uncompetitive. It explains some of the complex dynamics that underpin this market, thereby shedding light on the weaknesses and deficiencies in many of the arguments made about it, particularly those behind the Texas Complaint. This analysis is relevant to the entire Internet and to the wider economy, not just to Google and the display-advertising market. Many of the allegations made in the Texas Complaint would, if upheld by a court, have profound implications for antitrust law by establishing precedents that successful platforms effectively have a legal duty to act as essential facilities for their competitors; that efficiency-enhancing innovation by incumbent platforms is anticompetitive (particularly when it is not shared with competitors); and that courts or regulators can impose remedies that put these duties into effect without consideration of the harmful tradeoffs and unforeseen consequences that could themselves constrain competition and innovation. Such an approach would severely affect not only Google and the ad tech industry, but also businesses operating in unrelated markets and industries.

We begin with an overview and history of digital advertising. It is a history of dynamic innovation, with many new developments arising to solve problems created by previous innovations, address new innovations, and respond to market developments. These innovations must balance the competing demands of advertisers and publishers. The market’s structure has changed dramatically as advertisers, publishers, and consumers have responded to recent technologies. Because of this dynamism, we argue that it is a mistake to conclude that market structure and firm conduct at some specific point in time was ideal or better from a competition point of view, or that deviations from that paradigm represent a problem for competition enforcers to correct.

In the second half of the paper, we address some of the specific allegations of anticompetitive structures and conduct made in the Texas Complaint and by critics of the digital advertising industry. We conclude that a flawed premise underlies many of these allegations. Fundamentally, the allegations stem from an assertion that conduct engaged in by dominant, incumbent firms that makes competition more difficult for competitors is anticompetitive—even if the conduct confers benefits on users. This often amounts to a claim that the largest firms are acting anticompetitively by innovating and developing their business processes and products in ways that create benefits for one or more digital advertising constituents and for the advertising ecosystem more generally, including by creating new and innovative products, lowering prices, reducing costs through vertical integration, and enhancing interoperability between existing products.

I. Overview of the Digital Advertising Industry

For many people, digital ads are “just there.” They appear on one’s Facebook timeline, get inserted into one’s Twitter feed, or show up in the middle of an online news article. Unseen to most users is a complex stack of services that match advertisers with advertising space, using real-time auctions and other algorithms to deliver ads targeted to produce a user response, such as buying a product, supporting a cause, or visiting another website.

In this section we explain that digital advertising is just one small part of a much broader advertising and marketing industry. We provide a concise history of how the business evolved from simple banner ads to highly targeted display ads. Through this evolution, digital advertising has become a multisided market where intermediaries must balance the demands of advertisers, publishers, and users to maximize the total value of the advertising platform. Because of this balancing, it is a mistake for policymakers and regulators to focus only on a single set of users or a single segment of the stack of digital advertising services.

A.   Digital advertising is part of a broader advertising and marketing market

The Texas Complaint alleges that Google has market power in six distinct product markets, each of which the states claim to be nationwide in geographic scope. Four of these distinct product markets involve intermediation in the sale of “open” display ads on third-party websites and two involve intermediation in the sale of “in-app” display ads on mobile devices.[17] As we note in our earlier paper, it is likely that the states allege overly narrow product-market definitions.[18] In particular, structure and conduct viewed within a broader digital advertising market, overall advertising market, or marketing market indicates than no single firm has significant market power.

Digital advertising comprises about half of U.S. advertising revenues (Figure 1), while advertising itself accounts for about half of marketing activities. Marketing includes advertising, as well as events, sales promotion, direct marketing, telemarketing, product placement, and merchandising. Within digital advertising, advertisers have a broad set of options about where and how to run ads, including:

• Search ads, in which the ad is displayed as a search-engine result (e.g., Google, Bing, DuckDuckGo);
• Display ads on a site owned and operated by the firm that sells the ad space (e.g., Facebook, YouTube, Amazon Marketplace);
• “Open” display ads on a third party’s site (e.g., The New York Times, Dallas Morning News, Runner’s World); or
• “In-app” display ads served on mobile apps.

While total advertising spending in the United States has increased by about 15% since 2009, as a share of the economy spending has been relatively flat at slightly less than 1% of GDP.[19] As mentioned, about half of total U.S. advertising dollars go to digital channels, up from approximately 10% a decade ago. Approximately 30% of ad spending goes to TV and less than one-quarter goes to radio, newspapers, magazines, billboards, and other “offline” forms of media.[20]

Figure 1: U.S. Advertising Spending Over Time

Source: Benedict Evans, News by the Ton

It is well-understood that television broadcasters and cable networks compete with digital services.[21] And they do so on virtually all dimensions: for user attention, for labor, for content and other inputs—and for advertising. The same is true of competition for advertising among digital publications, newspapers, radio, magazines, video games, music streaming, and podcasts. The fact that offline and online advertising—to say nothing of marketing more broadly—employ distinct processes does not consign them to separate markets. Indeed, it is widely accepted that online advertising has drawn advertisers from offline markets, as previous technological innovations drew advertisers from other channels before them.[22] Moreover, while there is evidence that, in some cases, offline and online advertising may be complements as well as substitutes,[23] the distinction between these cases is becoming less and less meaningful as the revolution in measuring the effectiveness of advertising has changed how marketers approach different levels of what is known as the marketing “funnel.”[24] For example, economist David Evans’ review of the literature concludes that digital advertising is a segment of the broader advertising business in which different forms of advertising compete and complement each other:

Advertisers base decisions about the level and allocation of their budgets on formal or informal analyses of the rate of return on investment. For these ad campaigns, the different advertising methods can be substitutes to the extent they provide alternative ways of delivering messages to an audience, and complements to the extent they can reinforce each other.[25]

Economists Avi Goldfarb and Catherine Tucker demonstrate that display-advertising pricing is sensitive to the availability of offline alternatives.[26] Although advertising technology and both supplier and consumer preferences continue to evolve, the weight of evidence suggests a far more unified and integrated economically relevant market between offline and online advertising than their common semantic separation would suggest:

We believe our studies refute the hypothesis that online and offline advertising markets operate independently and suggest a default position of substitution. Online and offline advertising markets appear to be closely related. That said, it is important not to draw any firm conclusions based on historical behavior.[27]

In summary, there is evidence that open-display and in-app ads compete with search ads, while digital ads compete with offline advertising. Thus, courts and regulators should be skeptical of overly narrow market definitions focused on only small slices of a much larger relevant market for advertising.

B.   A simplified description of digital display advertising

The combination of software and processes that facilitate digital advertising transactions is known as the “ad tech stack.” The stack consists of several software components to match advertisers with publishers.

Advertiser ad servers are used by advertisers and media agencies to store ads, deliver them to publishers, track their activity, and assess their effectiveness (by, for example, tracking conversions). Demand-side platforms (DSPs) automate the purchase of advertising inventory by collecting bids in real-time auctions from multiple advertiser ad servers. DSP bids are based on the advertiser’s objectives, data about the final user, and data on impressions or conversions. Publisher ad servers manage publishers’ inventory and determine whether and where to serve a particular ad on a publisher’s site. Supply-side platforms (SSPs) automate the sale of publishers’ inventory, typically through real-time auctions involving multiple DSPs.

In general, the process of buying and selling digital ads through open-display auctions works as follows (Figure 2):

1. When a user opens a webpage (or uses an app), the publisher’s ad server sends a bid request to SSPs for the advertising impressions available on that page for that user.
2. The SSPs send bid requests to multiple DSPs for the ad impressions.
3. DSPs evaluate the advertising opportunity based on user data and the objectives of their advertisers’ campaigns and send bids to the SSPs.
4. SSPs rank the bids received based on price and other priorities set by the publisher. The SSPs send their winning bids to the publisher.
5. The publisher ad server compares bids received from SSPs, along with any pre-existing direct deals between the publisher and specific advertisers and decides which ad to serve on the page.

Figure 2: A Simplified View of the Digital Advertising Stack

Source: OECD, CMA

While this process applies to most programmatic transactions, there are many variations. For example, there are diverse ways in which SSPs are contacted and asked to submit their bids. To the extent that a publisher and advertiser have a pre-existing, direct agreement, there are differences in how these arrangements are handled and integrated with deals arranged through automated platforms. The specific approach used to match ads with ad inventory will reflect a balance among different sides of a multisided market. One approach might increase the prices received by sellers (publishers) but expose buyers (advertisers) to increased risk of overpayment. Other methods might reduce risks to advertisers, but also reduce the prices received by publishers.

C.   A brief history of digital advertising

This history of the digital advertising market is a history of iterative innovation, with new developments and services arising to solve problems created by previous innovations and to respond to changing market conditions. At the heart of these innovations is an attempt to balance the competing demands of advertisers, publishers, and consumers. Given that this is a dynamic market, it would be mistaken to conclude that the market structure at some specific point was the “correct” one from a competition point of view. Moreover, it would be a mistake to conclude that deviations from some previous “ideal” world present a problem that can be corrected by disruptive regulation.

Digital advertising originally worked similarly to conventional print and broadcast advertising. Online publishers would negotiate with advertisers (or their ad agencies) to sell ad space on their websites, giving relevant advertisers information about their readership gathered through market research. All users would see the same ads. The resulting system was poorly targeted, inefficient, and carried high fixed costs, including the cost of things like market research and the transaction costs of publishers hiring sales teams and advertisers hiring ad agencies to do business with one another. Inevitably, these fixed costs meant that only larger publishers and larger advertisers could engage in the online market profitably.

In 1993, O’Reilly & Associates Inc. introduced its Global Network Navigator (GNN) magazine and other ad-supported online publications, which first rolled out clickable ads. O’Reilly is credited with the first attempt to create an “advertising medium” on the Internet.[28] The price of ads ranged from $500 for a one-page business profile to $5,000 for up to 25 pages about the company placing the ad.[29] A year later, Wired magazine’s digital affiliate HotWired ran what later became known as the web’s first banner ads. The ad—for AT&T’s “You Will” campaign—cost $30,000 for a three-month dedicated placement in a section of HotWired’s site.[30]

The first step toward automating this process came with the introduction of ad-server software on both the publisher and advertiser sides, which allowed each side to automate parts of the ad-placement process. Ad servers allowed publishers to automatically describe the type of content on their pages, which in turn allowed advertisers to place ads tailored to that content. An article about hiking could automatically indicate to a department store to place ads selling walking boots, for instance. It also allowed the publisher to sell to many advertisers without having to transact directly with any of them. Ad servers also allowed advertisers to browse and manage campaigns across a large, aggregated number of publishing sites, instead of having to interact with sales teams one by one. This process was, however, still negotiated directly, and often left publishers with unused “remnant” advertising space that they had not been able to sell.

To solve this problem, ad networks entered the market. These functioned as intermediaries between advertisers’ and publishers’ ad servers, aggregating unsold remnant ad space and allowing advertisers to buy that space en masse without having to deal directly with each publisher. Ad networks did not replace direct sales, but they allowed for residual space to be bought and sold more easily, increasing the amount of ad inventory available and lowering the fixed costs to use it. This, in turn, made the market feasible for smaller publishers, who would otherwise be unable to attract direct deals to sell ad space, and for advertisers to conduct large-scale ad campaigns across many publishers (including small ones).

In 1995, GNN was acquired by AOL.[31] That same year, marketing-communications agency Poppe Tyson spun off its Internet advertising division as DoubleClick, with the objective of “responding to advertisers’ need to be able to buy millions of impressions on the Internet without having to buy from hundreds of different sites.”[32] The company created “subnets” of publishers to target specific categories of consumers.[33]

Also in 1995, ad agency WebConnect, the first ad network, began to collaborate with its clients to identify the websites that their ideal consumers visit. WebConnect then placed ads on the websites where they were more likely to be seen by the audience most relevant to their clients. The company also produced a tool to prevent “ad fatigue,” which occurs when users are repeatedly shown the same ad.[34]

In 1998, GoTo.com, which was renamed Overture in 2001, launched its ad-supported search engine.[35] Search result rankings were based on an open-market bidding process. Advertisers on GoTo were informed of the amounts other advertisers were bidding for a click-through within the results for a given search term, and any advertiser could increase its bid to obtain a higher ranking, a process GoTo described as “pay for performance.”[36] One of GoTo’s key innovations was linking advertising pricing to click-throughs, rather than to page views.[37]

To drive home just how efficient these ads could be, [GoTo.com’s founder Bill Gross] came up with an audacious pricing scheme. Instead of paying for page-views—an old-media model that had come to dominate the Web—advertisers would pay only when people actually clicked on their ads. And their placement on the GoTo.com results page would be determined through an auction, so that more desirable keywords would command higher prices, while less common keywords could be had for as little as a penny per click. As a search engine, GoTo.com had nothing on Google. But as a way of making money on searches, it was ingenious.[38]

During the dot-com boom of the late 1990s, banner ads spread throughout the Internet, though growth was tempered by user complaints that the ads slowed page loading.[39] The dotcom bust wiped out many of the firms that were the biggest buyers of digital banner ads. In response, Wired predicted that digital advertising would undergo a “facelift.”[40]

Old media revenues will wither as mainstream advertisers storm the Net. Instead of stuffing junk mail into the mailbox outside your house, they’ll send it directly to your inbox. And companies get smarter, choosing sites that take better aim at their quarry, er, potential customers.

“It’s very much a targeted medium,” Robin Neilfield, co-founder of NetPlus Marketing. “You have to analyze the content on a site, you can’t just buy based on demographics.”[41]

Because ad networks were not comprehensive—they did not carry the entire inventory of the Internet—publishers began to use yield managers (later known as SSPs) to compare bids for their ad space and to decide which to accept. SSPs effectively allowed publishers to aggregate demand from a larger number of ad networks, which themselves aggregated demand from advertisers. This process allowed ad space to be more easily commoditized, with an SSP helping to identify an ad space’s relevance to potential advertisers.

As indirect sales became possible, ad exchanges emerged to sell ad space using real-time auctions. Ad space could be tagged according to characteristics like audience type, relevance to the advertiser, and/or prominence and quality of the ad, with bids gauged accordingly.

Finally, DSPs on the advertiser side allowed advertisers to engage with many ad networks and ad exchanges at one time. These also allowed advertisers to track campaigns and measure performance of different ads with different publishers, and to adjust their campaigns accordingly. Most ad exchanges now have DSP functionality built in.

In 2000, Google introduced a new self-service advertising product called AdWords (now Google Ads) that allowed businesses to purchase text ads on search-results pages. At the time it was reported that AdWords was designed to attract small-to-midsize advertisers with budgets of $5,000 or less.[42] AdWords differed from GoTo/Overture in a major way. GoTo/Overture placed ads within search results, with results ranked by bid. In contrast, AdWords placed ads separate from search results with pricing based on pageviews.[43] In this way, Google could display ads without compromising the relevance of search results. In 2002, it launched AdWords Select, its pay-per-click, auction-based search-advertising product.[44]

In 2003, Google acquired Applied Semantics, whose AdSense display advertising product allowed it to sell targeted ads on third-party websites.[45] With AdSense, the display-ad server was able to read text on a publisher’s site and serve relevant ads, considering factors like the user’s geographic location, age, demographics, and the search made.[46] AdSense was the forerunner of programmatic display advertising, the process of automating the buying and selling of ad inventory in real time through an automated bidding system. In 2005, Google introduced the Quality Score model, which considers an ad’s click-through rate, as well as the bid price, in placing ads.[47]

YouTube was launched in 2005 and acquired by Google the following year, when the company also introduced video ads. In 2007, Google acquired DoubleClick.[48]

Around 2015, “header bidding” began to roll out, with publishers Meredith Corp. and Townhall Media as two of largest early adopters.[49] Before header bidding, it was difficult for every demand-side partner to submit a bid for every ad request. As a result, publishers relied on approaches such as “ad waterfalls”[50] to try to get the most from each partner. Because of the way ad waterfalls are configured (based on historical, not real-time, data), publishers believed ad waterfalling led to winning bids that were below what some bidders might be willing to pay.[51] Client-side[52] header bidding was adopted as a way to increase real-time price competition among multiple SSPs, leading to higher returns for publishers and a more efficient allocation of ad space to advertisers.

Despite the widespread adoption of header bidding—as of the second quarter of 2021, about two-thirds of publishers were using it[53]—the technology has its own challenges. For example, the addition of extra code on the webpage, which client-side header bidding requires, can slow down the publisher’s website, driving away users.[54]

As an alternative to client-side header bidding, server-side header bidding was introduced. Prebid launched in 2015 as an independent and open-source option. Google released Open Bidding in April 2016 and Amazon introduced Transparent Ad Marketplace (“TAM”) at the end of 2016. In these alternatives, the auction among SSPs takes place in a remote server controlled by a third party (the provider of the server-side header-bidding solution) instead of in the user’s browser. This helps to improve site-load speed. On the other hand, this solution leads to less revenue for publishers and reduces the availability of data to advertisers and publishers.[55]

Over the past decade, the price of digital advertising has fallen steadily, while output has risen. U.S. digital-ad spending grew from $26 billion in 2010 to $189 billion in 2021, an average annual increase of 20%.[56] Over the same period, the Producer Price Index for Internet-advertising sales declined by an annual average of 4%.[57] The rise in spending in the face of falling prices indicates that the number of ads bought and sold increased by approximately 25% annually. The combination of increasing quantity, decreasing cost, and increasing total revenues are consistent with a growing and increasingly competitive market, rather than one of rising concentration and reduced competition.

D.   Digital advertising is a multisided market

The digital advertising market can be thought of as a complex multi-step and multisided market that involves three key parties—advertisers, publishers, and intermediaries—and is aimed at a fourth: consumers. In contrast, critics of the current structure of and conduct in the digital advertising industry have characterized it as a “straightforward and traditional” market in which publishers supply an inventory of ad space and advertisers are buyers of the ad space.[58] In this simplistic account of the market, for a given supply of inventory, publishers would seek to maximize the price received per ad, while advertisers would seek to minimize the price paid per ad. Targeting of ads would be based on the demographics of a publisher’s readership or the content of the publication, rather than the individual characteristics of each reader. In general, this is how the market initially operated before the introduction of clickable ads. But even this simple formulation is quite complex. Advertisers expect to maximize the return on their investment in advertising. Even at a low price, advertising expenditures would be wasted if that investment were not converted to increased sales of the advertiser’s product or service.

The invention of clickable ads with which users could interact changed the objective function of digital advertising. Publisher revenues and advertising costs became linked to individual consumers acting on an ad by, for example, clicking on it. Rather than paying or receiving a price-per-ad based on the size of a publication’s user base, advertising expenditures became a function of a price-per-click (or other action) and the number of clicks. This meant that the rewards for relevance—as well as the complexities of determining relevance—were greater because some viewers might be persuaded to act there and then.

In this multisided market, ad intermediaries must balance the interests of at least three constituencies: (1) advertisers creating ads and placing them; (2) publishers defining inventory and displaying ads; and (3) users consuming published content who view and act on ads. Intermediaries in these markets often benefit from network effects, through which the value of the platform to each user depends in part on the number and quality of other users on the platform.[59]

The quality and relevance of users is assessed by collecting information on the users as they browse the web. This information can include which ads they have viewed and clicked in the past, their geographical location, as well as their demographics, financial situation, and topics of interest. Broadly speaking, a larger network with diverse users provides more information and is better able to target ads to relevant users, benefiting advertisers, publishers, and consumers.

Network effects are not always positive, however, nor are they always captured by the platform that facilitates them.[60] While access to consumer data can help to improve the quality of the ads displayed—and increase the value of those ads to advertisers and publishers—claims that such access provides increasing returns to scale are not borne out by the burgeoning empirical literature on the topic. Summarizing these empirical findings, economist Catherine Tucker concludes that “empirically there is little evidence of economies of scale and scope in digital data in the instances where one would expect to find them.”[61]

Intermediaries in multisided markets often face difficult optimization problems caused by the interrelated demands of participants on different sides of the market, each group of whom benefits from the existence and size of the other, but whose interests conflict across many margins.[62] This highlights the key distinction between “straightforward and traditional” markets and multisided markets.

Ad tech intermediaries that are vertically integrated into some or all components of the ad tech stack use prices charged to each side of the market to optimize overall use of the platform. As a result, pricing in these markets operates differently than pricing in traditional markets. Pricing on one side of the platform is often used to subsidize participation on another side of the market, increasing the value to all sides combined. Consequently, pricing (or other terms of exchange) may appear to one side of the market to diverge from the competitive level when viewed for that side alone. While one side of the market may pay higher fees, this cost can be offset by the benefits from increased participation on the other side of the market. Thus, using subsidies to increase participation on another side of the market creates valuable network benefits for the side of the market facing the higher fees.

For example, among the criticisms of digital advertising business practices is the use of “second-price auctions” rather than “first-price auctions.”[63] First-price auctions are those most familiar to people: multiple bidders offer prices, and the highest bidder wins the auction and pays an amount equal to her winning bid. In a second-price auction, the highest bidder wins the auction but pays an amount based on the next-highest bid. In markets with many bidders possessing the same information, first-price auctions and second-price auctions would be expected to produce the same amount of revenue under the well-known auction-theory concept of revenue equivalence.[64]

The choice of auction approach reflects the tensions between different sides of the market in a multisided market. On the one hand, under certain circumstances, a first-price auction tends to increase the prices received by sellers (here, publishers), but exposes buyers (here, advertisers) to an increased risk of overpayment.[65] On the other hand, under certain conditions, a second-price auction reduces risks to advertisers, but also reduces the prices received by publishers.[66] It would be expected that an ad tech intermediary would balance these competing interests to maximize total revenues flowing through the ad tech stack, to maximize its profitability. In such a multisided market, it would be a mistake to focus only on one side of the market and ignore the effects that decisions such as this have on the other participants.

The extent to which ad tech intermediaries—in particular, vertically integrated services like Google’s—act to optimize the overall value of the platform is critical to understanding how these markets work. It also highlights how misleading it can be to assume that these processes can be analyzed as “straightforward and traditional” markets.

II. Antitrust Primer: Effective Competition Is not an Antitrust Offense

A flawed premise underlies much of the Texas Complaint, the Omidyar Network’s Roadmap report, and the CTDAA legislation. Fundamentally, most of the charges that each of these level against Google and Facebook’s ad tech businesses derive from an assertion that conduct engaged in by dominant incumbent firms that makes competition more difficult for competitors is anticompetitive—even if the conduct confers benefits on users. This often amounts to a claim that the largest firms are acting anticompetitively by innovating and developing their business processes and products in ways that create benefits for one or more digital advertising constituents and for the advertising ecosystem more generally. These include creating new and innovative products, lowering prices, reducing costs through vertical integration, and enhancing interoperability between existing products, among other things.

This approach entails an argument—made explicit in the Texas Complaint and the Omidyar Roadmap—that Google harms competition by creating obstacles for rivals without offsetting “incremental efficiencies.”67F[67] According to the report, this means that, even if Google’s practices produce benefits for such constituents as advertisers, publishers, or consumers, they could possibly be reimagined to create even more competition or achieve the same benefits in ways that better prop up rivals. According to the Roadmap, the practices should therefore be condemned as anticompetitive.68F[68]

But that is not how the law—or the economics—works. Such an approach converts manifestly beneficial aspects of Google’s ad tech business into anticompetitive defects, essentially arguing that successful competition creates barriers to entry that merit correction through antitrust enforcement. The CTDAA takes this argument a step further by imposing “best interests,” “best execution,” and “transparency” obligations on large firms and mandating divesture of parts of the largest firms to facilitate more entry by competitors. This approach turns U.S. antitrust law (and basic economics) on its head. As some of the most famous words of U.S. antitrust jurisprudence have it:

A market may, for example, be so limited that it is impossible to produce at all and meet the cost of production except by a plant large enough to supply the whole demand. Or there may be changes in taste or in cost which drive out all but one purveyor. A single producer may be the survivor out of a group of active competitors, merely by virtue of his superior skill, foresight and industry. In such cases a strong argument can be made that, although, the result may expose the public to the evils of monopoly, the Act does not mean to condemn the resultant of those very forces which it is its prime object to foster: finis opus coronat. The successful competitor, having been urged to compete, must not be turned upon when he wins.69F[69]

U.S. antitrust law is intended to foster innovation that creates benefits for consumers, including innovation by incumbents. The law does not proscribe efficiency-enhancing unilateral conduct on the grounds that it might also inconvenience competitors, or that there is some other arrangement that could be “even more” competitive. Under U.S. antitrust law, firms are “under no duty to help [competitors] survive or expand.”70F[70]

To be sure, the arguments are couched in terms of anticompetitive effect rather than being described merely as commercial disagreements over the distribution of profits. But these effects are simply inferred, based on assumptions that Google and Facebook’s vertically integrated business models entail an inherent ability and incentive to harm rivals. For example, Google is alleged to be able to surreptitiously derive benefits from display advertisers by “leveraging” its search-advertising capabilities,71F[71] or by “withholding YouTube inventory,”72F[72] rather than altruistically opening it up to rival ad networks, or by using its access to data to improve its products without sharing that data with competitors.

All these charges may be true, but none is inherently anticompetitive. Under U.S. law, companies are not obligated to deal with rivals and certainly are not obligated to do so on rivals’ preferred terms.73F[73] In the Texas Complaint, for example, the court, citing Charych v. Siriusware, noted, “[D]efendants were under no obligation to develop an interface that was compatible with plaintiffs’ product.”74F[74] As long ago as 1919, the U.S. Supreme Court held that “[i]n the absence of any purpose to create or maintain a monopoly, the [Sherman Act] does not restrict the long recognized right of [a] trader or manufacturer engaged in an entirely private business, freely to exercise his own independent discretion as to parties with whom he will deal.”75F[75] More recently (in 2004) the Court held:

Firms may acquire monopoly power by establishing an infrastructure that renders them uniquely suited to serve their customers. Compelling such firms to share the source of their advantage is in some tension with the underlying purpose of antitrust law, since it may lessen the incentive for the monopolist, the rival, or both to invest in those economically beneficial facilities.76F[76]

Moreover, U.S. antitrust law does not second guess unilateral conduct simply because it may hinder rivals. Any such conduct would first have to be shown to be anticompetitive—that is, to harm consumers or competition, not merely certain competitors.77F[77] In two-sided markets, this means finding not simply that some firms on one side of the market were harmed, but rather that the combined net effect of challenged conduct across all sides of the market was harmful.78F[78]

In the platform context, understanding whether there is harm to competition at all requires an assessment of the effects of conduct on all sides of the platform. “[N]o economic basis exists for establishing a presumption that ‘harm’ on one side of a two-sided platform is sufficient to demonstrate that market output has been restricted, or that consumer welfare has otherwise been harmed.” In fact, “[s]eparating the two markets allows legitimate competitive activities in the market for general purposes to be penalized no matter how output-enhancing such activities may be.”79F[79]

The Texas Complaint, however, is built on the alleged harm of reduced revenue to publishers, without considering the corresponding benefit of lower prices to advertisers, or the net effect on consumers.80F[80]

Beyond that, antitrust law does not condemn conduct on the basis that an enforcer (or a court) is able to identify or hypothesize alternative conduct that might provide similar benefits at lower cost. In alleging that there are ostensibly “better” ways that Google could have pursued its product design, pricing, and terms of dealing, both the Texas Complaint and Omidyar Roadmap do just that—assert that, had the firm only selected a different path, an alternative could have produced even more benefits or an even more competitive structure. This line of thinking seems to be one motivation for the CTDAA’s remedies.

The reason that the possibility of “better” theoretical arrangements cannot serve as the basis for antitrust intervention is that there are limits to what can be achieved through intervention, not least because of limitations on legislators’ and enforcers’ knowledge about the competitive dynamics of the markets they seek to regulate.81F[81] A practice’s departure from a theoretical competitive benchmark may be inextricably linked to the social benefits it generates. When this is the case, enforcement that requires the practice or product to change in order to adhere to a theoretical standard may end up undermining the benefits of the practice in the first place. That is particularly true in the context of the sort of “vertical foreclosure” arguments leveled against Google in the advertising space, in which it is alleged that the combination of different levels of the ad-supply chain by Google limits the ability of competitors to enter and compete effectively.82F[82] It is surely conceivable that the product improvements conferred by the combination of different functions into a single platform—e.g., greater efficiency, realization of network effects, more effective targeting—could be replicated by a different means that might also facilitate “even more competition.” But such an approach is fraught with the risk of serious and costly error.83F[83]

The alleged cure of tinkering with benefit-producing unilateral conduct by applying an “even more competition” benchmark is worse than the supposed disease. The adjudicator is likely to misapply such a benchmark, deterring the very conduct the law seeks to promote. As then-Judge Stephen Breyer explained in the context of above-cost low pricing (another “defect” that both the Texas Complaint and the Roadmap claim constitutes anticompetitive conduct by Google84F[84]), “the consequence of a mistake” is “to penalize a procompetitive price cut,” conduct that, from an antitrust perspective, is “the most desirable activity.”85F[85] That commentators or enforcers may be able to imagine alternative, theoretically more desirable, conduct is beside the point.

Similarly, subjecting the kinds of product-design decisions at issue in the Google case to refined balancing of benefits and harms would deter innovation. “To weigh the benefits of an improved product design against the resulting injuries to competitors is not just unwise, it is unadministrable. There are no criteria that courts can use to calculate the ‘right’ amount of innovation, which would maximize social gains and minimize competitive injury.”86F[86] Put simply, “no one can determine with any reasonable assurance whether one product is ‘superior’ to another.”87F[87]

For these reasons, a “product improvement by itself does not violate Section 2, even if it is performed by a monopolist and harms competitors as a result.”88F[88] “Any other conclusion would unjustifiably deter the development and introduction of those new technologies so essential to the continued progress of our economy.”89F[89] A benefit-creating product design, even if it hinders rivals, is “necessarily tolerated by the antitrust laws.”90F[90]

Nor does U.S. law condemn a firm’s decision not to share a product improvement with rivals on terms rivals might prefer, even when such sharing might lead to greater competition in the short term. “Compelling” innovators “to share the source of their advantage” with rivals, among other evils, “may lessen the incentive for the monopolist, or rival, or both” to invest in innovation.91F[91] Except in extremely limited circumstances, firms can decide the terms on which they offer their products and services.

Directly rejecting the Roadmap’s suggestion—and the CTDAA’s mandate—of compelling dealings on terms that might produce greater competition, the Supreme Court has decreed that the “Sherman Act . . . does not give judges carte blanche to insist that a monopolist alter its way of doing business whenever some other approach might yield greater competition.”92F[92] Firms are not obliged to go into new lines of business or abandon existing lines to throw lifelines to rivals.93F[93]

The law similarly encourages vertical integration, because it tends to foster innovation-enhancing synergies and lower prices by eliminating double marginalization.94F[94] As the Roadmap elsewhere admits, it is “not in itself uncommon” to see vertical integration result in “fewer and fewer companies,” even “in competitive markets.”95F[95] Thus, vertical integration by internal expansion—even by a monopolist—is presumptively lawful.96F[96] The Roadmap and the CTDAA, however, simply disregard this, instead presumptively condemning vertical integration that hinders rivals by creating efficiencies.97F[97] Again, this is simply not a defensible interpretation of U.S. antitrust law, nor should it be.

III. Allegations Against Google in Digital Display Advertising

Critics of the digital advertising industry—and Google’s role in it—have leveled numerous allegations. These include claims that Google “leverages” its ownership of YouTube to obtain and exert market power in the buying and selling of other digital-display ads. Some claim that Google anticompetitively uses cross-subsidies, charging supercompetitive prices at one end of the ad tech stack to subsidize supra-competitive prices at another end of the stack. It is also alleged that Google has superior information about consumers that it will not provide to competitors, giving Google an anticompetitive advantage. It is claimed that steep entry barriers—some allegedly erected by Google—inhibit entry and allow the company to achieve a supercompetitive “take rate” from its intermediation services. While the lawsuits may provide additional information and data to support these claims, we argue that, with the limited public information available to us, it is not clear that any of them constitute anticompetitive conduct.

A.   ‘Leveraging’ market power in video streaming into the digital open-display market

The Omidyar Roadmap argues that Google, by virtue of its vertical integration throughout the intermediary stack and into the supply side (as the owner of YouTube), has the incentive and ability to derive unwarranted benefits from its display advertising business. It alleges, for example, that, by offering a single interface for placing both search and display ads, “Google leverages its monopoly position in search to coerce advertisers into using Google’s display products.”98F[98] In support it cites the CMA as saying:

Google may also be able to leverage its market power in search into the open display market. Smaller advertisers often choose to single-home to minimize transaction costs. Advertisers that wish to single-home have a strong incentive to use Google Ads as they can use it to access Google search advertising and YouTube inventory as well as the open display market.99F^[99]

An earlier version of the Texas Complaint echoed these claims:

Google’s practice of withholding YouTube video inventory from rival ad buying tools… effectively locks single-homing small advertisers into Google’s ad buying tool. In addition, other providers of ad buying tools indicate that it does not make economic sense to try to compete with Google Ads for small advertisers, because they cannot achieve sufficient scale with smaller advertisers who want to buy display, YouTube, and even search ads, through just one tool.100F[100]

And, similarly, the Roadmap also argues that most sources of demand for Google Ads purchase ad space through AdX because Google “designed its exchange in such a way that it operates more efficiently with requests from Google’s own ad server than it does when requests come from rival ad servers.”101F^[101]

All these assertions describe efficiency-enhancing behavior as anticompetitive. The report does not allege that Google preferences its own ad exchange in ways that harm advertisers; rather, the company’s products simply work better together (which is not unusual when different software products must interact) and it is thus in advertisers’ best interests for Google to act this way.

U.S. law, rightly, does not consider efficiencies obtained from vertical integration in this way to be anticompetitive. Nor do efficiencies that rivals cannot beat qualify as “barriers to entry.” The alternative—requiring Google to refrain from using the cheapest and/or fastest option available, because doing so makes its product better than all competitors—would mean reduced innovation, higher overall costs, and no benefit to either advertisers or publishers.

Later, the Roadmap makes another similar allegation: that Google “leverages” its ownership of YouTube, and the fact that only Google’s DSP can place ads on YouTube, to give itself an anticompetitive advantage in open-display advertising because rival DSPs are inherently limited by being unable to place ads on YouTube. An earlier version of the Texas Complaint echoed this claim.102F[102]

The Roadmap characterizes this conduct as “a contractual way to deny interoperability,”103F[103] but there is no contractual restraint here. How Google distributes YouTube’s ad inventory is a unilateral distribution decision permitted under U.S. law. And Google’s policy is not unusual in any way: many other websites that carry video advertising—including Hulu, Instagram, and Twitter—self-distribute their own inventory and do not make it available for resale by third parties.104F[104] Google does not have a duty to maximize its competitors’ profits by allowing them to resell YouTube inventory.

Access to YouTube is also not essential to a DSP’s success. Before Google stopped third-party platforms from buying YouTube ad inventory, it reported that only a “small amount” of buying was being done through Google’s AdX, which allowed third-party platforms to bid. At the time, AdExchanger reported that “[b]y ’small amount,’ that reportedly means 5%.”105F[105] A competing DSP, TubeMogul, said that this decision was an “unfortunate development” but “immaterial, since less than 5% of total ad spend through our software in Q2 was directed to YouTube.”106F[106]

This is consistent with the fact that there are several successful DSP competitors that compete with Google, despite not having access to YouTube’s ad inventory. The Trade Desk went public for $1 billion in 2016, processed more than $6.2 billion in transactions in 2021, and had a market cap of more than $25 billion in the first week of August 2022. 107F[107] Other DSPs, like Amazon’s and Xandr (formerly AppNexus), both continue to compete with Google vigorously without access to YouTube inventory, as the Omidyar Roadmap admits in the case of AppNexus.108F[108]

The Roadmap further -alleges that Google’s owned-and-operated properties—including Search, YouTube, Shopping, Flights, and News—confer an anticompetitive advantage because “Google pays no ‘traffic acquisition costs’” for the advertising space on its own sites: “When Google places ads on YouTube, just as when it places ads on its own search results pages, Google pays no ‘traffic acquisition costs’ because it needn’t pay any publisher for access to the ‘eyeballs’ that will see or interact with the ads it helps place.”109F^[109]

Google’s parent Alphabet reported that the company’s traffic-acquisition costs were approximately 20% of its revenues in 2021.110F^[110] Over the past few years, 40-50% of Alphabet’s expenditures have been on “cost of revenues,”111F[111] and of these, roughly half have involved traffic-acquisition costs.112F[112] Alphabet defines traffic-acquisition costs as (a) “the amounts paid to our distribution partners who make available our search access points and services” and (b) amounts paid for ads displayed on Google Network Members properties. It identifies “distribution partners” as browser providers, mobile carriers, original equipment manufacturers, and software developers.

Contrary to the Roadmap’s insinuations, there is nothing to suggest that these expenditures become less burdensome as a company increases in scale. Indeed, the opposite may be true, if it is more costly to gain access to marginal users than inframarginal ones, consistent with Google’s traffic-acquisition costs increasing over the years as it has grown.113F[113] While Google does not have to pay itself for the use of its own display inventory, there is clearly an opportunity cost to displaying its own inventory rather that of another firm. The claim that the company faces no traffic-acquisition costs for these properties is inaccurate.

The Roadmap’s focus on traffic-acquisition costs also overlooks content-acquisition costs—the payments to content providers from whom Google licenses video and other content for distribution on ad-driven and subscription services such as YouTube and Google Play. While Google does not pay a publisher for access to “eyeballs” on its owned-and-operated properties, it pays substantial and increasing amounts for content on those properties that attract the “eyeballs.”114F^[114] Alphabet CFO Ruth Porat indicates, for example, that YouTube pays content creators “a majority of our revenue.”115F[115] Leaving this expense out of the calculation is another example of the over-simplification that characterizes many of the claims that Google’s ad tech business is a simple (and simply anticompetitive) business.

B.   Excess pricing

Where Google’s critics diverge most significantly from the spirit of U.S. antitrust law is in their overriding concern for how advertising revenues are distributed among the recipients of advertisers’ payments: intermediaries (Google) and publishers. The Texas Complaint alleges that Google has a higher “take rate” than competing exchanges,116F[116] is able to increase its take rates without losing market share,117F[117] and “manipulates auctions to increase its take rate.”118F[118] This follows the Roadmap’s speculation—based on the CMA Interim Report—that Google may take a larger cut of advertising spending than its competitors.119F^[119] And these allegations echo claims made in another report that Google introduces “hidden” fees that increase the overall cut it takes from ad auctions.120F[120]

First, it should be noted that the basis for these claims in the Roadmap are drawn from the CMA investigation’s interim report, published in December 2019. In the final report, after further investigation, the CMA abandoned this claim. The final report describes the CMA’s analysis of all the billions of Google Ad Manager open auctions related to U.K. web traffic during the period between March 8 and March 14, 2020. This, according to the CMA, allowed it to observe any possible “hidden” fees, as well. The CMA concludes:

Our analysis found that, in transactions where both Google Ads and Ad Manager (AdX) are used, Google’s overall take rate is approximately 30% of advertisers’ spend. This is broadly in line with (or slightly lower than) our aggregate market-wide fee estimate outlined above. We also calculated the margin between the winning bid and the second highest bid in AdX for Google and non-Google DSPs…. We found that Google’s average winning margin was similar to that of non-Google DSPs. Overall, this evidence does not indicate that Google is currently extracting significant hidden fees. As noted below, however, it retains the ability and incentive to do so.121F^[121]

This is a crucial finding that severely undermines the allegations that Google extracts excessive or “hidden” fees. It also undermines the claim that there are “missing funds accruing to Google.” While these conclusions do not eliminate the possibility that the industrywide price could itself be above competitive levels (and it remains to be seen whether the plaintiffs states in the Texas case will produce different evidence), they do mean that the best evidence currently available calls into question the charge that Google exploits a lack of interoperability by prioritizing its own products or that it engages in opaque pricing to conceal hidden charges of which its customers are unaware.

More fundamentally, absent evidence of Google deceiving advertisers and publishers to extract above-competitive margins, claims that its prices are “too high” or its revenue sharing “too low” are at odds with established antitrust law. U.S. antitrust law does not attempt to derive “proper” prices and impose these obligations on companies to ensure a “fair” outcome. Absent anticompetitive defects in the process, even monopolists are free to charge monopoly prices. The alternative would be for some agency—a court or a regulator—to regulate pricing and second guess every business decision made by dominant firms.

C.   Cross-subsidies

At the same time, the Roadmap alleges that Google can “charge low prices at one end of the stack, to drive out competitors, while charging high prices at the other to counterbalance any losses.”122F[122] But even if true, this would not be anticompetitive. It is a widely understood feature of platforms that they can shift prices from one side of a multisided market to another to maximize the platform’s total value. For example, a marketplace may make sellers bear the burden of fraud or mis-selling to give assurance to customers, and grow the consumer side of the platform market, just as a ridesharing app may discount rides to attract customers to build a large enough base to induce drivers onto the app.

This is a normal part of platform economics, which has long recognized that offering one side a low, zero, or negative price can be efficient and procompetitive.123F[123] As the U.S. Supreme Court held in Ohio v. American Express, an integrated competitive-effects analysis should look at the overall effect on output, not the effect on one side of the market; the relevant market must include both sides of the platform or the market would not exist at all.124F[124] There is no reason to think that this kind of behavior would generally be classed as “predatory pricing” in the absence of other behavior, such as raising prices after driving out competitors.125F[125]

But neither the Texas Complaint nor the Roadmap allege that Google’s prices were predatory. On the contrary, their sole claim in this respect is that, after being acquired by Google, DoubleClick lowered its prices (by a factor of ten, according to the Roadmap126F[126]), which it then maintained at these lower levels. This price reduction is facially procompetitive, however. It is unusual, to say the least, to describe a price reduction, with no subsequent price rises, as anticompetitive. If less-efficient competitors were unable to compete with these lower prices, that is competition in action. The law does not preclude nonpredatory low prices, nor even predatory prices without recoupment.127F[127] Sustained price reductions are one of the primary goals of antitrust.

Moreover, the source of the Roadmap’s claim that these price reductions were done “to drive out competitors” was, notably, a company that was not actually driven out of business by these price reductions. The source was an ad server, Smart, which claimed that Google’s price reductions “made the provision of publisher ad server difficult to sustain as a standalone business. This was the main reason why Smart felt the need to expand into the provision of SSP services.”128F[128] A competitor of Google’s responding to price reductions by broadening its own offerings is, again, procompetitive, not anticompetitive.

D.   Data gathering and integration

The Texas Complaint and the Roadmap describe several pro-privacy measures Google has adopted or plans to adopt as being detrimental to its competitors, including the decision to disable third-party cookies (which allow digital advertising companies to track users across the web to serve them relevant targeted ads) on the Chrome browser.129F[129] The Complaint argues that this shift benefits Google to the detriment of other ad tech companies, because (it says) Google, but not its competitors, has other data sources it can use to target ads at users.130F[130] In the same vein, the Roadmap points to Google’s decision not to share with advertisers raw data that it compiles about users.131F[131]

The Complaint ignores regulatory causes of these changes altogether, and the Roadmap dismisses the suggestion that they may be driven by the European General Data Protection Regulation (GDPR), on the basis that “data sharing here in the U.S., where we have no privacy regulatory scheme akin to that which is in place in Europe” has also been curtailed.132F[132] Both forget data-privacy laws in U.S. states, such as the California Consumer Privacy Act (CCPA). And, even if that weren’t the case, the claim that GDPR would have no effect outside Europe ignores that companies may find it easier to comply with such laws by changing their practices globally, rather than on a country-by-country or state-by-state basis.133F[133] Many companies have done this: Microsoft, for example, announced in November 2019 that it would “honor California’s new privacy rights throughout the United States.”134F[134]

Both also ignore the possibility that these provisions may be a response to demand from users of Google Chrome. Google may have good reasons to maintain a reputation for protecting user privacy, particularly because of the wide range of services it provides where user privacy is often of paramount importance to many users: Search, Maps, Gmail, YouTube, and Chrome itself.

Apple and Mozilla, neither of which has a significant online display advertising arm (and thus, have no incentive to block cookies simply to disadvantage display advertisers, as the Complaint alleges Google has done) have taken similar steps to increase user privacy. These are direct competitors of Google Chrome’s, and when Apple made blocking third-party cookies the default in its Safari browser, it was reported by one major outlet as “beating Google by two years to the privacy feature.”135F[135] Indeed, one of the reasons that Google delayed its disabling of third-party cookies was reportedly to implement technologies to “make it easier for advertisers to target certain demographics without laser-sighting down to specific people, ensure that the infrastructure many sites use for logins don’t break, and help provide some level of anonymous tracking so advertisers can know if their ads actually converted into sales.”136F[136]

That Chrome’s competitors, neither of which has an incentive to hurt ad tech companies, have taken the same steps that the Complaint alleges Google is taking for anticompetitive reasons should be compelling evidence that Google, too, is responding to user demand and/or regulation. Under U.S. law, the fact that these are legitimate moves and benefit users interested in privacy—and, indeed, may be a response to competition in the browser market—undermines claims that Google has failed to maximize competition along other dimensions.

The Roadmap also presents a hypothetical circumstance that amounts to an allegation that Google “captures” data from ads served to publishers to “expropriate” publishers’ investments in content that attracts a particular audience:

Some publishers have invested in content that attracts and retains a specific type of consumer, for example, readers of the Wall Street Journal or Golf Digest; this in turn allows them to support their business by selling valuable ads to advertisers looking for exposure to those audiences. Google has two ways to expropriate that value. First, rather than serve an ad on the Wall Street Journal at a high price, it can track the user who visited the Wall Street Journal and wait until she visits a site that sells space at low prices, for example, a local recipe blogger. Google can then sell Wall Street Journal users to advertisers in a way that does not benefit the Wall Street Journal at all and costs advertisers much less. A second strategy used by Google is to take the data describing these differentiated audiences and use it to create an imitation portfolio of consumers that mimic the characteristics of the publisher’s audience. For example, Google could create an audience of consumers similar to the people who read Golf Digest. Then Google sells access to this group of consumers when they visit inexpensive websites. Advertisers are happy to buy these ads because the consumers likely belong to the specialized audience of interest but are available at a much lower price. In these ways the unique audience assembled by the publisher is copied and expropriated.137F[137]

It should be noted that the Roadmap does not conclude that Google engages in these practices, but merely describes strategies Google “can” undertake to “expropriate” publishers’ investments. The Roadmap concedes that advertisers would be “happy” under such hypotheticals, because they are buying effective ads at a “much lower price.” In the Roadmap’s example, the hypothetical recipe blogger is “happy” that it earned revenues from selling an impression and the advertiser is “happy” that it paid a lower price than it would have had the impression been sold to the Wall Street Journal. The Wall Street Journal may not be so “happy” that it did not serve that particular ad, but that display space did not sit empty; the hypothetical lost ad was replaced by another impression that was served. And it is neither Google’s nor antitrust law’s job to make specific publishers better off—nor to make publishers better off at the expense of advertisers—but to ensure that the market as a whole is competitive and acting in consumers’ interests.

These hypotheticals again highlight the tensions discussed above between the different sides of a multisided market. Actions that make advertisers “happy” may come at the expense of publishers’ advertising revenues and actions that increase publishers’ revenues may increase costs to advertisers. One of the goals of a multisided market intermediary such as Google is to balance these competing interests to maximize total revenues flowing through the ad tech stack.

The Roadmap concludes that, through its “entire family of products,” Google collects and analyzes substantial amounts of information about its users. It uses this information to maximize the “effectiveness,” “precision,” and “value” of the ads it intermediates.

First, Google offers an entire family of products—everything from Gmail and Google Maps to the Google Calendar, Google Chrome, Android mobile operating system and the search engine—that gather valuable personal data about its users. Second, the products across the ad stack further collect data on consumer activities that the company then integrates to maximize the effectiveness and precision of ad targeting and attribution and thereby the value of the ads.138F[138]

Rather than “expropriating” publishers’ data, it would be reasonable to conclude that Google is adding value to the data provided by publishers, advertisers, and consumers to better target ads. For example, the Wall Street Journal may not know that a consumer recently did a Google Search for “running shoes.” By adding valuable information from Search, the consumer might be served a relevant running shoe ad on the Wall Street Journal’s site. This benefits the publisher who is paid for serving a valuable impression, the advertiser who sells a pair of shoes, and the consumer who obtains useful information and purchases the product she was seeking.

E.   Accelerated Mobile Pages (AMP) and header bidding

The Texas Complaint, like the Roadmap, alleges that Google designed Accelerated Mobile Pages (AMP) “[t]o respond to the threat of header bidding… [by making it] essentially incompatible with JavaScript and header bidding. Google then used its power in the search market to effectively force publishers into using AMP.”139F[139] But this gets several key facts wrong. First, AMP is an open-source industry collaboration project and Google cannot unilaterally impose a design standard on it. 140F[140] Second, a version of header bidding can work with AMP.141F[141] Third, it is mistaken to assert that “non-AMP-formatted results often do not even show up on the first page of results, regardless of their relevance.”142F[142] AMP has been a prerequisite only for inclusion in the top news story carousel, while other listings are ranked by relevance and speed.

Importantly, the argument ignores the main benefit of AMP to publishers and users: faster load times for mobile users who may be on slow connections. One of header bidding’s chief downsides is that it increases page-load latency. It is obvious why an HTML framework built to maximize load times would not be compatible with header bidding. Because AMP confers undisputed benefits on users and publishers, Google and the other companies involved in the AMP project have no obligation to re-engineer AMP to be compatible with header bidding. Any conclusion otherwise would involve a court deciding that users should be forced to use a slower Internet so that websites can use header bidding.

F.   Alleged barriers to entry in the open digital display ad market

Claims about Google’s alleged market power in display advertising rest on assumptions that the company enjoys the benefits of significant barriers to entry throughout the ad tech stack, thus enabling it to extract supercompetitive rents without fear of competition: “With these barriers in place,” it is claimed, “entry seems nearly futile.”143F[143]

A key element in establishing a company’s durable market power—and thus, its ability to impose anticompetitive costs on its users—is the presence of entry barriers. Even a market with only a single company—a true monopoly—cannot act like a monopoly if entry into its market is easy; if it did profitably raise prices, new competitors would enter the market and undercut it.144F[144]

As the Roadmap concedes, “[m]arket power is not permanent, of course. It can be undercut by, among other things, new entrants that offer better quality or lower prices.”145F[145] This notion of “contestability” is a fundamental part of assessing the competitiveness of markets under U.S. antitrust law.146F[146] In the absence of barriers to entry, it is well-established that assumptions of future competitive harm from ongoing conduct cannot be sustained.147F[147] Thus, the Roadmap bases much of its brief against Google on the presence of barriers to entry, “which heighten[] the prospect that Google can engage in conduct that harms competition without restraint from new entrants or potential new entrants.”148F[148] On the strength of these asserted barriers, the Roadmap’s authors interpret ambiguous conduct as anticompetitive.

According to the Roadmap, “the CMA’s findings reveal a number of significant barriers to entry into the digital advertising market.”149F[149] But most of its assertions in this regard are flawed, either because the CMA did not, in fact, make “findings” in the ways it suggests, or else because it reaches incorrect conclusions that certain conduct constitutes a barrier.150F[150] The Texas Complaint’s assertions of similar barriers to entry are likewise problematic.151F[151]

1.     Consumer location information

Although the Texas Complaint does not discuss it as an explicit barrier to entry,152F[152] one of the Omidyar Roadmap’s key assertions about barriers to entry relates to Google’s access to user-location data. It asserts that:

The CMA concluded that Google has nearly insurmountable advantages in access to location data, due to the location information it receives from the Android operating system, Google search, and other applications…. An entrant into the ad tech stack requires information about the consumer to target an ad effectively. Because Google accounts for nearly the entirety of the mobile search sector in the UK—97%—and controls many of the known sources of location data, such an entrant faces a large barrier to entry.153F[153]

But the CMA does not, in fact, “conclude[] that Google has nearly insurmountable advantages in access to location data,” either in the CMA Interim Report to which the Roadmap refers, nor in the CMA Final Report. The CMA never makes any claim of “insurmountable advantage.” Indeed, it does not use the word “insurmountable” at all, except to note that “rival platforms did not suggest that accessing consumer data was an insurmountable barrier to entry.”154F[154] Rather, to support this claim, the Roadmap cites to a portion of the CMA Interim Report recounting a suggestion made by Microsoft regarding the “critical” value of location data in providing relevant advertising.155F[155]

Moreover, that portion of the CMA Interim Report, as well as the suggestion made by Microsoft, is about search advertising, not display advertising. While the CMA does not characterize this data in the way the Roadmap claims, it does allege that “Google has exclusive access to a large amount of user data that can be used for targeted advertising and for measuring advertising outcomes, collected through its consumer-facing services. Data collected on its search platform is particularly valuable for targeting purposes in open display as it reveals users’ purchasing intent.”156F[156]

While location data may also be valuable for display advertising in a comparable way, it is not clear that the GPS-level data that is so valuable in providing mobile-search ad listings is particularly useful for display advertising, which may be just as well-targeted by less granular city- or county-level location data.

Consider the Roadmap’s illustrative example:

A digital ad for a brick-and-mortar running store in Des Moines is of little use to a runner looking to test out new shoes in Omaha, and, if shown to the Omaha runner, is unlikely to prompt a click, much less a purchase, from the Des Moines store.157F[157]

This is certainly correct. But GPS or even cell-tower location data is not necessary to determine in which city a user is located. Publicly available databases of IP address locations can provide this information, and they are readily and often freely available to all competitors. It is difficult to imagine that display advertising uses location data at any greater level of granularity except in unusual circumstances; it simply would not be particularly useful or effective.158F[158]

Furthermore, to the extent that location data (like other consumer data) may be useful for display advertising, the most significant issue affecting its availability to advertisers is not Google’s presence in the ad tech stack; it is privacy regulations that limit the collection, use, and sharing of such data.159F[159] These privacy regulations, such as the GDPR, limit the ability of digital firms to sell or otherwise pass user data to third-party advertisers. What seems like unequal treatment, in this regard, is really a case of privacy regulation in action.

These laws may have the indirect effect of favoring larger digital conglomerates that can collect user data through one service and use it to target ads in another. In this sense, it could be true that Google has informational advantages over rivals, though in a critically different way than that alleged by the Roadmap. But it can hardly be considered anticompetitive if the source of such advantage is legal constraints on information sharing. Indeed, an empirical study by economists Avi Goldfarb and Catherine Tucker found that (pre-GDPR) privacy regulation in the EU “restricted advertisers’ ability to collect data on Web users in order to target ad campaigns. We ?nd that, on average, display advertising became far less effective at changing stated purchase intent after the EU laws were enacted, relative to display advertising in other countries.”160F[160] Along similar lines, Nils Wernerfelt and his co-authors show that access to data from different sources significantly improves ad targeting.161F[161] In turn, this may give a competitive advantage to firms that operate several successful web services and applications.

As Israeli competition law scholars Michal Gal and Oshrit Aviv found with respect to the GDPR, privacy regulations can function as a barrier to entry in several further ways.162F[162] These include creating new economies of scale associated with regulatory compliance, increased litigation risk, and uncertainty around interpretation of the rules. Because they serve to make reputation more central, they also can lead users to become more likely to entrust their data to incumbents but not to unknown, new entrants.163F[163]

2.     Attribution measurement

“Attribution” refers to the method by which advertisers can see which ad led a user to an action, such as visiting a website or making a purchase.164F[164] The Roadmap alleges that Google can design attribution to mislead advertisers by, for example, favoring search ads over display ads.165F[165] This would lead to more of the advertiser’s money going to Google instead of (in part) to a publisher, and (assuming, as the Roadmap implies, that this makes ad campaigns less effective166F[166]) can harm advertisers by misleading them into choosing a less-effective advertising channel.

The Roadmap provides no evidence this is taking place. What it describes is more a complaint about the nature of search advertising in general: that companies will sometimes end up paying for ads in lieu of identical organic search results for their pages. That is an argument to be had elsewhere, but there are clear reasons why it may be in an advertiser’s interest to advertise even in these situations. Paid search ads may give them greater control over how a link is displayed to a user (for example, with text the advertiser has chosen, rather than text that the search engine has retrieved) or guarantee a prominent listing for searches where the advertiser’s URL listing is not always guaranteed to be on top.

Apart from the broader objection to the nature of search advertising, the Roadmap’s authors also object to Google setting an attribution default in its DSP. But advertisers can choose from several different attribution models, not just the default one that the Roadmap objects to, which attributes to search ads the “last click.” Other options include “last non-direct click,” which “ignores direct traffic and attributes 100% of the conversion value to the last channel that the customer clicked through from before buying or converting”; “last Google Ads click”; “First interaction”; and others that give attribution weights according to where and when the customer saw or used the ads during their purchase or conversion “journey.”167F[167] These are precisely the kinds of models that the Roadmap’s authors implicitly believe are more appropriate for campaigns heavy on display advertising. Advertisers can also create their own custom models, and Google has published guides for advertisers to help them choose among the different models.168F[168]

The Roadmap’s objection is thus reduced to being about the choice by Google to use the “last click” attribution model as the default. But some model has to be the default, and “last click” is also the default on, for example, Microsoft Advertising.169F[169] Indeed, according to digital-ad-intermediary company, Outbrain (one of Google’s competitors), it is the most common attribution default across the industry.170F[170] For the Roadmap’s objection to carry any weight, a case based on this claim would need to demonstrate that it was unusual for Google to use “last click” as the default attribution. Even then, given the ease with which advertisers can change the attribution model, the charge would be thin.

3.     ‘Opaque’ pricing

Both the Texas Complaint and the Roadmap allege that Google’s “opaque pricing” constitutes a barrier to entry by impeding “advertisers from switching to a lower-cost for higher-quality” buying tool.171F[171] As the Roadmap puts it, a “new or potential new PAS or DSP cannot credibly claim to be able to undercut the Google products on price if the publishers and advertisers cannot tell how much Google actually is charging.”172F[172] The Texas Complaint further alleges that “Google compounds its exclusionary auction manipulations by purposefully keeping its auction mechanics, terms, and pricing, opaque and ‘nontransparent.’ This makes it nearly impossible for publishers and advertisers to discover Google’s misrepresentations, and even harder for rivals to neutralize or offset.”173F[173] Both the Texas Complaint and the Roadmap also suggest that competition is undermined when publishers and advertisers do not know the fee structure of the intermediaries they are using.

But it is not unusual for businesses’ costs and prices to be private to their competitors, and it is not a barrier to competition. Grocery stores do not need to know how much it cost a farmer to grow an orange or how much their rivals are paying for transportation, unless they are attempting to anticompetitively coordinate their prices; they just need to work to make their own costs as low as possible and to reduce their prices to consumers by as much as possible. Similarly efficient firms are perfectly able to offer competitive prices simply by making the best offer based on their own fundamentals; only less-efficient firms will struggle (as they should).

Along these lines, for competition to work effectively in display advertising, Google’s competitors do not need to know what Google is charging; they need to offer a price and product that is more attractive overall to potential customers than Google’s is. Similarly, a publisher does not need to know how much an advertiser bid to place an ad, nor does the advertiser need to know how much the publisher received to serve the ad. The advertiser’s competition concern is whether an effective ad can be served at a lower price from a different intermediary and the publisher’s competition concern is whether it can earn greater revenues from a different intermediary. One should not be surprised that Google does not reveal information on which competing intermediaries can free ride. Indeed, this is widely considered to be one of the hallmarks of vigorous competition.

Conclusion

As we have argued, many of the most significant claims made against Google’s ad tech products are based on a misunderstanding of U.S. antitrust law, or of the details of the ad tech market itself. Although we cannot be sure how the Texas, et al. v. Google case will develop once the allegations in the Complaint are fleshed out into full arguments, many of its initial claims and assumptions are wrongheaded. Based on the information currently available, if the court rules in favor of these, the result will be to condemn procompetitive conduct and potentially to impose costly, inefficient remedies that function as a drag on innovation.

Legislators, too, who may be concerned about Google’s conduct and tempted to impose regulatory requirements on it and other tech companies should bear in minds the risk of the Nirvana fallacy, in which real-life conduct is compared against a hypothetical “competition maximizing” benchmark, and anything that falls short is deemed problematic and in need of intervention.174F[174] That approach would pervert the incentives of businesses to innovate and compete, and would make an unobtainable “perfect” that exists only in the minds of some economists and lawyers the enemy of a “good” that exists in the market right now.

 

[1] Third Amended Complaint, Texas v. Google, 21-md-3010-PKC (S.D.N.Y. Jan 14, 2022) at 105 (hereinafter, “Texas Complaint”).

[2] See Complaint, United States v. Google LLC, No. 1:20-CV-03010 (D.D.C. Oct. 20, 2020); see also, Complaint, State of Colorado, et al. v. Google LLC, 1:20-CV-03715 (D.D.C. Dec. 17, 2020).

[3] DoJ Expected to File Antitrust Lawsuit Against Google in Weeks—Bloomberg News, U.S. News (Jul. 14, 2022), https://money.usnews.com/investing/news/articles/2022-07-14/doj-expected-to-file-antitrust-lawsuit-against-google-in-weeks-bloomberg-news.

[4] Antitrust: Commission Opens Investigation into Possible Anticompetitive Conduct by Google in the Online Advertising Technology Sector, European Commission (Jun. 22, 2021), https://ec.europa.eu/commission/presscorner/detail/en/ip_21_3143.

[5] Bundeskartellamt Publishes Report on Non-Search Online Advertising for Public Discussion, Bundeskartellamt (Aug. 29, 2022), https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2022/29_08_2022_SU_Online_Werbung.html?nn=3599398.

[6] Id.

[7] Online Platforms and Digital Advertising Market Study, U.K. Competition and Markets Authority (Jul. 1, 2020), https://www.gov.uk/cma-cases/online-platforms-and-digital-advertising-market-study (hereinafter “CMA Market Study”); Online Platforms and Digital Advertising, Market Study Final Report, U.K. Competition and Markets Authority (Jul. 1, 2020), https://assets.publishing.service.gov.uk/media/5fa557668fa8f5788db46efc/Final_report_Digital_ALT_TEXT.pdf (hereinafter “CMA Final Report”), at 21 & 37.

[8] See Josh Frydenberg, Competition and Consumer (Price Inquiry—Digital Advertising Services) Direction 2020 (Feb. 10, 2020); Ad Tech Inquiry Issues Paper 5, Australian Competition & Consumer Commission (Mar. 10, 2020); Digital Advertising Services Inquiry, Australian Competition & Consumer Commission (Feb. 26, 2021), https://www.accc.gov.au/focus-areas/inquiries-finalised/digital-advertising-services-inquiry/submissions-to-interim-report.

[9] Investigation of Competition in Digital Markets, Majority Staff Report and Recommendations, Subcommittee on Antitrust, Commercial and Administrative Law of the Committee on the Judiciary (Oct. 4, 2020), available at https://templatelab.com/competition-in-digital-markets/4493-519; Hearing on Stacking the Tech: Has Google Harmed Competition in Online Advertising?, Committee of the Judiciary, Subcommittee on Antitrust, Competition Policy and Consumer Rights (Sep. 15, 2020), https://www.judiciary.senate.gov/meetings/stacking-the-tech-has-google-harmed-competition-in-online-advertising.

[10] Investigation of Competition in Digital Markets, Majority Staff Report and Recommendations, id., at 20.

[11] Competition and Transparency in Digital Advertising Act, S.4258, 117th Congress (2021-2022), https://www.congress.gov/bill/117th-congress/senate-bill/4258/text.

[12] Lee Introduces Digital Advertising Act, Mike Lee US Senator for Utah (May 19, 2022), https://www.lee.senate.gov/2022/5/lee-introduces-digital-advertising-act.

[13] Support Mounts for Lee’s Digital Advertising Act, Mike Lee US Senator for Utah (May 27, 2022), https://www.lee.senate.gov/2022/5/support-mounts-for-lee-s-digital-advertising-act.

[14] Online Platforms and Digital Advertising Market Study Interim Report, U.K. Competition and Markets Authority (Dec. 18, 2019), https://assets.publishing.service.gov.uk/media/5ed0f75bd3bf7f4602e98330/Interim_report_—_web.pdf (hereinafter, “CMA Interim Report”).

[15] Fiona M. Scott Morton & David C. Dinielli, Roadmap for a Digital Advertising Monopolization Case Against Google, Omidyar Network (May 2020), https://omidyar.com/wp-content/uploads/2020/09/Roadmap-for-a-Case-Against-Google.pdf (hereinafter, “Roadmap” or “Omidyar Roadmap”). One of the Roadmap’s authors testified at a Senate hearing on the display-advertising market, and the report has been widely cited. See, e.g., Gilad Edelman, Here’s What an Antitrust Case Against Google Might Look Like, Wired (May 18, 2020), https://www.wired.com/story/antitrust-case-against-google-roadmap-paper.

[16] Damien Geradin & Dimitrios Katsifis, An EU Competition Law Analysis of Online Display Advertising in the Programmatic Age, 15 Eur. Comp. J. 55 (2019); Damien Geradin & Dimitrios Katsifis, “Trust Me, I’m Fair”: Analysing Google’s Latest Practices in Ad Tech from the Perspective of EU Competition Law, 16 Eur. Comp. J. 11 (2020); Damien Geradin & Dimitrios Katsifis, Online Platforms and Digital Advertising Market Study: Observations on CMA’s Interim Report, TILEC Discussion Paper No. DP2020-044 (Feb. 13, 2020), https://ssrn.com/abstract=3537864; Damien Geradin & Dimitrios Katsifis, Competition in Ad Tech: A Response to Google, TILEC Discussion Paper No. DP2020-038 (Jun. 3, 2020), https://ssrn.com/abstract=3617839.

[17] The markets alleged in the Texas Complaint involve (1) publisher ad servers, (2) ad exchanges, (3) ad-buying tools for large advertisers, (4) ad-buying tools for small advertisers, (5) in-app mediation tools, and (6) in-app networks. The complaint does not relate to other forms of advertising on the Internet, such as targeted text-based ads sold by search engines, video ads that run before or during video content, or shareable ads on social media platforms.

[18] This section is distilled from our much longer discussion of the broader market surrounding digital advertising. See Eric Fruits, Geoffrey A. Manne & Lazar Radic, Relevant Market in the Google AdTech Case, ICLE Issue Brief 2022-06-01 (2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4125569.

[19] Benedict Evans, News by the Ton: 75 Years of US Advertising (Jun. 15, 2020), https://www.ben-evans.com/benedictevans/2020/6/14/75-years-of-us-advertising; Benedict Evans, TV, Merchant Media and the Unbundling of Advertising (Mar. 18, 2022), https://www.ben-evans.com/benedictevans/2022/3/18/unbundling-advertising.

[20] See Fruits, Manne & Radic, supra note 18.

[21] Michael Schneider & Kate Aurthur, R.I.P. Cable TV: Why Hollywood Is Slowly Killing Its Biggest Moneymaker, Variety (Jul. 21, 2020), https://variety.com/2020/tv/news/cable-tv-decline-streaming-cord-cutting-1234710007 (“[B]asic cable feasted on a dual revenue stream of subscriber fees and advertising revenue. But that gravy train started going off the rails when the streaming services arrived.”).

[22] At the same time, as Benedict Evans notes, not all digital advertising is drawn from offline sources: “[I]f you talk to people at both Google and Facebook and in the agency world, you’ll hear that a lot of the money spent on Google and Facebook is money that was never spent on traditional advertising—it’s coming from SMEs [small and medium enterprises] and local businesses that might have spent in classified at most but probably wouldn’t have done even that.” Evans, News by the Ton, supra note 19 (emphasis in original).

[23] See Xi He, Rigoberto Lopez & Yizao Liu, Are Online and Offline Advertising Substitutes or Complements? Evidence from U.S. Food Industries, 15 J. Agricultural & Food Indus. Org. 1 (2017).

[24] David Bardey, Jorge Tovar & Nicolas Santos, Characterization of the Relevant Market in the Media Industry: Some New Evidence, Toulouse School of Economics Working Paper 16-719 (2016), https://www.tse-fr.eu/publications/characterization-relevant-market-media-industry-some-new-evidence (“The results show substitution and complementary patterns across certain media outlets. An increase in price for advertising in radio, for instance, leads to higher demand for newspapers and outdoors. Similarly, complementarity relationships between media outlets are observed, suggesting that advertising across the various media platforms is, overall, interwoven.”).

[25] David S. Evans, The Online Advertising Industry: Economics, Evolution, and Privacy, 23 J. Econ. Persp. 37, 49 (2009).

[26] Avi Goldfarb & Catherine Tucker, Search Engine Advertising: Channel Substitution When Pricing Ads to Context, 57 Management Sci. 458 (2011) (The authors find that the price of “ambulance chaser” lawyer ads was significantly more expensive in states prohibiting direct-mail solicitation by attorneys. This leads them to conclude that “online advertising substitutes for online advertising”).

[27] Avi Goldfarb & Catherine Tucker, Substitution Between Offline and Online Advertising Markets, 7 J. Competition L. & Econ. 37, 43 (2011).

[28] Daniel S. Levine, Ad-Supported Cyber-Magazines to Launch on Internet, Adweek (Sep. 10, 1993).

[29] Id.

[30] Brian Morrissey, How the Banner Ad Was Born, Digiday (Apr. 12, 2013), https://digiday.com/marketing/how-the-banner-ad-was-born.

[31] Chris Lapham, AOL and GNN Partner to Build Launch Pad, CMC Magazine (Jul. 1, 1995), https://www.december.com/cmc/mag/1995/jul/cutting.html.

[32] Kim Cleland, Poppe Creates Web Net, Advertising Age (Oct. 30, 1995).

[33] Id.

[34] The History of Online Advertising, OKO Ad Management (Jul. 19, 2019), https://oko.uk/blog/the-history-of-online-advertising.

[35] The company changed its name to Overture, which was acquired by Yahoo! in 2003.

[36] GoTo.com Announces First Round of Financing, Totaling More Than $ 6 Million, Led by Draper Fisher Jurvetson, Business Wire (May 19, 1998), https://www.internetnews.com/marketing/goto-com-raises-6-million-in-first-round-of-financing.

[37] Will Oremus, Google’s Big Break, Slate (Oct. 13, 2013), https://slate.com/business/2013/10/googles-big-break-how-bill-gross-goto-com-inspired-the-adwords-business-model.html.

[38] Id.

[39] Dean Schmid, The History of Display Advertising: Everything You Need to Know, DisruptorDaily.com (Aug. 14, 2017), https://www.disruptordaily.com/the-history-of-display-advertising-everything-you-need-to-know.

[40] Julia Scheeres, Death of Banner Ads Exaggerated, Wired (Jan. 26, 2001), https://www.wired.com/2001/01/death-of-banner-ads-exaggerated.

[41] Id.

[42] Breaking News, AdAge (Oct. 23, 2000).

[43] Mark Evans, Investors Leap off Overture Roller Coaster: Rival Google Elbows In, National Post (Feb. 21, 2002).

[44] Oremus, supra note 37.

[45] Google Grabs Applied Semantics, EuropeMedia (Apr. 25, 2003); Google Expands Advertising Monetization Program for Websites, Google Press Release (Jun. 18, 2003), http://googlepress.blogspot.com/2003/06/google-expands-advertising-monetization.html.

[46] Dean Schmid, The History of Display Advertising: Everything You Need to Know, DisruptorDaily (Aug. 14, 2017), https://www.disruptordaily.com/the-history-of-display-advertising-everything-you-need-to-know.

[47] Kate Walsh, Search Marketing: Understanding the Basics, B2B Marketing Magazine (March 2006).

[48] Louise Story & Miguel Helft, Google Buys DoubleClick for $3.1 Billion, The New York Times (Apr. 14, 2007), https://www.nytimes.com/2007/04/14/technology/14DoubleClick.html.

[49] Sarah Sluis, The Year Header Bidding Went Mainstream, AdExchanger (Dec. 27, 2016); Townhall Media Selects OpenX for Patent-Pending Header Bidding Solution, BusinessWire (Sep. 18, 2015), https://www.businesswire.com/news/home/20150918005110/en/Townhall-Media-Selects-OpenX-for-Patent-Pending-Header-Bidding-Solution.

[50] As the name suggests, ad waterfalls enable publishers to sell their inventory seriatim, beginning with premium, direct sales and flowing through the most historically profitable ad servers in succession to unload unsold inventory before offering its remnant inventory in the open display channel. See, e.g., Maciej Zawadzinski, What Is Waterfalling and How Does it Work?, Clearcode (Aug. 20, 2021), https://clearcode.cc/blog/what-is-waterfalling.

[51] See, e.g., Header Bidding, OKO Ad Management, https://oko.uk/topic/header-bidding (retrieved July 27, 2022).

[52] Client-side header bidding is so-named because it operates via a small piece of java script embedded in the header of a publisher’s website and executed within the user’s browser (i.e., client). See, e.g., Maciej Zawadzinski, What Is Header Bidding and How Does it Work?, Clearcode (Aug. 20, 2021), https://clearcode.cc/blog/what-is-header-bidding.

[53] Header Bidding Facts and Statistics 2021, Automatad (Jun. 27, 2021), https://headerbidding.co/header-bidding-statistics. Today, 70% of the top 10,000 U.S. publishers use header bidding. See Header Bidding (HBIX) Tracker, kevel (retrieved Nov. 1, 2022), https://www.kevel.com/hbix.

[54] See, e.g., CMA Final Report, supra note 7, at Appendix M, ¶ 33.

[55] See, e.g., Vishveshwar Jatain, Header Bidding Integrations: Client Vs. Server-Side, Explained, Blockthrough (Apr. 15, 2021), https://blockthrough.com/blog/header-bidding-integrations-client-vs-server-side-explained.

[56] IAB and PwC, IAB Internet Advertising Revenue Report, 2010 Full Year Results (Apr. 2011), available at https://www.iab.com/wp-content/uploads/2015/05/IAB_Full_year_2010_0413_Final.pdf; Megan Graham, Digital Ad Revenue Jumped 35% in the U.S. Last Year, Biggest Gain Since 2006, Wall Street Journal (Apr. 12, 2022), https://www.wsj.com/articles/digital-ad-revenue-jumped-35-in-the-u-s-last-year-biggest-gain-since-2006-11649759401.

[57] Producer Price Index by Commodity: Advertising Space and Time Sales: Internet Advertising Sales, Excluding Internet Advertising Sold by Print Publishers, U.S. Bureau of Labor Statistics, https://fred.stlouisfed.org/series/WPU365; Producer Price Index, December 2009—February 2021, U.S. Bureau of Labor Statistics, https://fred.stlouisfed.org/graph/?g=vtTd.

[58] Scott Morton & Dinielli, supra note 15, at 9.

[59] Importantly, however, network effects are not monolithic; nor do they increase forever. For different types of networks at different points in their growth, adding more users might not increase the value of the platform and could even reduce the platform’s benefits. See, e.g., D’Arcy Coolican & Li Jin, The Dynamics of Network Effects, Andreesen Horowitz (Dec. 13, 2018), https://a16z.com/2018/12/13/network-effects-dynamics-in-practice.

[60] See Stan J. Liebowitz & Stephen E. Margolis, Network Externality: An Uncommon Tragedy, 8 J. Econ. Persp. 133 (1994).

[61] Catherine Tucker, Digital Data, Platforms and the Usual [Antitrust] Suspects: Network Effects, Switching Costs, Essential Facility, 54 Rev. Indus. Org. 683, 686 (2019).

[62] See, e.g., David S. Evans, Economics of Vertical Restraints for Multi-Sided Platforms, University of Chicago Institute for Law & Economics Olin Research Paper No. 626 (Jan. 2, 2013), https://ssrn.com/abstract=2195778.

[63] See, e.g., Stylianos Despotakis, R. Ravi & Amin Sayedi, First-Price Auctions in Online Display Advertising, 58 J. Marketing Research 888 (2021). See also Display Advertising Switched to First-Price Auctions After Adoption of Header Bidding, New Study Finds, Tepper School of Business (Apr. 22, 2020), https://www.cmu.edu/tepper/news/stories/2020/april/display-advertisting-research-ravi.html.

[64]  Jonathan Levin, Auction Theory (Oct. 2004), available at https://web.stanford.edu/~jdlevin/Econ%20286/Auctions.pdf.

[65] Maciej Zawadzi?ski, How Do First-Price and Second-Price Auctions Work in Online Advertising?, Clearcode (Aug. 12, 2021), https://clearcode.cc/blog/first-price-second-price-auction.

[66] Id.

[67] Texas Complaint, supra note 1, at ¶ 351 (“Overall, the lack of transparency prevents more efficient competition that would drive greater innovation, increase the quality of intermediary services, increase output, and create downward pricing pressure on intermediary fees.”); Scott Morton & Dinielli, supra note 15, at 18 (“Based on the public facts known at the moment, however, it does not seem plausible that the incremental efficiencies created by the conduct described here could outweigh all the harms to competition resulting from this broad pattern of behaviors.”); Scott Morton & Dinielli, supra note 15, at 38 (“It also is true that Google has allowed some rivals to survive (although not necessarily to thrive). It is possible that Google adopted a strategy of incomplete foreclosure specifically so that it can paint an illusion of healthy competition when the reality is quite different. Indeed, to the extent Google has adopted ‘pro-competitive’ concessions, the narrative here demonstrates that they simply have not succeeded in addressing the harms or lowering the barriers to entry.”).

[68] Id. at 3 (“It is clear even to us as lay people that there are less anticompetitive ways of delivering effective digital advertising—and thereby preserving the substantial benefits from this technology—than those employed by Google.”).

[69] United States v. Aluminum Co. of America, 148 F.2d 416, 430 (2^nd Cir. 1945) (Learned Hand, J.) (emphasis added).

[70] Cal. Computer Prods., Inc. v. Int’l Bus. Machine Corp., 613 F.2d 727, 744 (9th Cir. 1979) (“IBM, assuming it was a monopolist, had the right to redesign its products to make them more attractive to buyers whether by reason of lower manufacturing cost and price or improved performance. It was under no duty to help [its competitors] survive or expand.”).

[71] Scott Morton & Dinielli, supra note 15 at 18.

[72] Texas Second Amended Complaint at ¶ 113.

[73] See Verizon Commc’ns Inc. v. Law Offices of Curtis V. Trinko, LLP, 540 U.S. 398, 408 (2004). The exception—”at or near the outer boundary of § 2 liability” (id. at 409)—is the extremely narrow case in which a monopolist (i) sacrifices profits, by (ii) terminating a prior course of dealing, (iii) for no purpose except to harm competition. See Novell v. Microsoft, 731 F.3d 1064, 1074-75 (10th Cir. 2013) (Gorsuch, J.) (holding that a refusal-to-deal claim requires terminating “a preexisting voluntary” course of dealing where the “monopolist decided to forsake short-term profits,” and “the monopolist’s conduct” is “irrational but for its anticompetitive effect”).

[74] Opinion and Order, Texas, et al. v. Google, 21-md-3010-PKC (S.D.N.Y, Sep. 13, 2022) (citing Charych v. Siriusware, Inc., 790 Fed. App’x 299, 302 (2^nd Cir. 2019)).

[75] United States v. Colgate & Co., 250 U.S. 300, 307 (1919).

[76] Trinko, 540 U.S. at 407-08

[77] See Brunswick Corp. v. Pueblo Bowl-O-Mat, Inc., 429 U.S. 477, 488 (1977) (“The antitrust laws, however, were enacted for ‘the protection of competition not competitors.’”) (quoting Brown Shoe Co. v. United States, 370 U.S. 294, 320 (1962)).

[78] See Ohio v. American Express, 138 U.S. 2274, 2285 (2018) (“Due to indirect network effects, two-sided platforms cannot raise prices on one side without risking a feedback loop of declining demand…. Price increases on one side of the platform [] do not suggest anticompetitive effects without some evidence that they have increased the overall cost of the platform’s services.”).

[79] Geoffrey A. Manne, In Defence of the Supreme Court’s ‘Single Market’ Definition in Ohio v American Express, 7 J. Antitrust Enforcement 104, 111 (2019) (quoting Brief for Amici Curiae Antitrust Law & Economics Scholars in Support of Respondents at 19, Ohio v. American Express, 138 U.S. 2274 (2018) (No. 16-1454) and United States, et al. v. American Express, 838 F.3d 179, 198 (2^nd Cir. 2016)).

[80] Among innumerable examples, see Texas Complaint, supra note 1, at ¶ 297 (“Google’s harm to the competitive process has harmed customers in this market, i.e., online publishers.”). Notably, the Texas Complaint does, in places, recognize that identifying the incidence of benefits and harms in multisided markets is complex—it just fails to carry its analysis to its logical conclusion. Thus, in ¶157 the Complaint notes that “[t]he higher advertising revenue publishers make from exchanges permits publishers to offer consumers better quality content and lower-priced or free access to their content.” (Emphasis added). Undoubtedly, this is true. But if it is correct, then it must also be correct that, at the same time, the correspondingly higher prices advertisers pay for advertising through exchanges limits their ability to provide marketing benefits directly to consumers and may increase the price to consumers of the advertised goods. It is an empirical question which effect is larger, but the mere possibility that one set of consumers could benefit from a different arrangement is insufficient on its own to identify harm when another set of consumers would be harmed by it.

[81] See Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J. L. & Econ. 1, 1-2 (1969) (“In practice, those who adopt the nirvana viewpoint seek to discover discrepancies between the ideal and the real and if discrepancies are found, they deduce that the real is inefficient…. The nirvana approach is… susceptible… to committing three logical fallacies—the grass is always greener fallacy, the fallacy of the free lunch, and the people could be different fallacy.”) (emphasis in original).

[82] See, generally, Thomas Nachbar, Less Restrictive Alternatives and the Ancillary Restraints Doctrine, Virginia Law and Economics Research Paper No. 2020-18 (2021) (forthcoming U. Seattle L. Rev.) at 57-8, available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3723807 (“The more general risk to tech markets comes from the intangible nature of the products and services they produce. Although many of the cases cited for less restrictive alternatives are horizontal cases, it is the vertical context (which normally receives more permissive antitrust review) in which less restrictive alternatives present the greatest likelihood of destabilizing current law because of the difficulty of specifying what is and is not less restrictive with regard to the intangible products produced by today’s ‘big tech’ economy. To the extent that less restrictive alternatives present problems of incrementalism, those problems will be exacerbated in the ‘big tech’ markets.”).

[83] See Geoffrey A. Manne, Error Costs in Digital Markets, Global Antitrust Institute Report on the Digital Economy (Joshua D. Wright & Douglas H. Ginsburg, eds., 2020) 33, 76, available at https://gaidigitalreport.com/wp-content/uploads/2020/11/Manne-Error-Costs-in-Digital-Markets.pdf (“The concern with error costs is especially high in dynamic markets in which it is difficult to discern the real competitive effects of a firm’s conduct from observation alone. And for several reasons, antitrust decision-making in the context of innovation tends much more readily toward distrust of novel behavior, thus exacerbating the risk and cost of over-enforcement.”).

[84] Among many other examples, see Texas Second Amended Complaint at ¶138 (“Then, through Dynamic Allocation, Google’s ad server passed inside information to Google’s exchange and permitted Google’s exchange to purchase valuable impressions at artificially depressed prices. Competing exchanges were deprived of the opportunity to compete for inventory and left with the low-value impressions passed over by Google’s exchange.”); Omidyar Roadmap, supra note 15, at 20 (“[A]fter purchasing DoubleClick, which became its publisher ad server, Google apparently lowered its prices to publishers by a factor of ten, at least according to one publisher’s account related to the CMA. Low prices for this service can force rivals to depart, thereby directly reducing competition.”).

[85] Barry Wright Corp. v. ITT Grinnell Corp., 724 F.2d. 227, 235 (1^st Cir. 1983) (Breyer, C.J.).

[86] Allied Orthopedic Appliances, Inc. v. Tyco Health Care Grp. LP, 592 F.3d 991, 1000 (9^th Cir. 2010).

[87] Berkey Photo, Inc. v. Eastman Kodak Co., 603 F.2d 263, 287 (2^nd Cir. 1979). See also, Manne & Wright, Innovation and the Limits of Antitrust, 6 J. Comp. L. & Econ. 153–202 (March 2010), https://doi.org/10.1093/joclec/nhp032.

[88] Allied Orthopedic, 592 F.3d at 999-1000; see also, California Computers Prods. v. IBM, 613 F.2d 727, 744 (9^th Cir. 1979); Foremost Pro Color, Inc. v. Eastman Kodak Co., 703 F.2d 534, 543-45 (9^th Cir. 1983).

[89] Foremost Pro Color, 703 F.2d at 543.

[90] Allied Orthopedic, 592 F.3d at 1000.

[91] Verizon Commc’ns, Inc. v. Law Offices of Curtis V. Trinko, 540 U.S. 398, 400-41 (2004).

[92] Trinko, 540 U.S. at 415-16.

[93] Id.; see also New York Merc. Exch., Inc. v. Intercontinental Exch. Inc., 323 F.Supp.2d 559 (S.D.N.Y. 2004) (dismissing Section 2 claim and reiterating limited exceptions in which forced sharing is appropriate).

[94] See, e.g., Jack Walters & Sons Corp. v. Morton Bldg., Inc., 737 F.2d 698, 710 (7^th Cir. 1984) (“We just said that vertical integration is not an improper objective. But this puts the matter too tepidly; vertical integration usually is procompetitive. If there are cost savings from bringing into the firm a function formerly performed outside it, the firm will be made a more effective competitor.”). There is a robust body of empirical research indicating that vertical integration is generally procompetitive or benign. For a summary of the leading meta-studies by DOJ and FTC economists and others, see Koren W. Wong-Ervin, Antitrust Analysis of Vertical Mergers: Recent Developments and Economic Teachings, The Antitrust Source (February 2019), https://www.americanbar.org/content/dam/aba/publishing/antitrust_source/2018-2019/atsource-february2019/feb19_wong_ervin_2_18f.pdf. See also, Francine Lafontaine & Margaret Slade, Vertical Integration and Firm Boundaries: The Evidence, 45 J. Econ. Lit. 677 (2007) (“In spite of the lack of unified theory, overall a fairly clear empirical picture emerges. The data appear to be telling us that efficiency considerations overwhelm anticompetitive motives in most contexts. Furthermore, even when we limit attention to natural monopolies or tight oligopolies, the evidence of anticompetitive harm is not strong.”). See also, generally, Geoffrey A. Manne, Kristian Stout & Eric Fruits, The Fatal Economic Flaws of the Contemporary Campaign Against Vertical Integration, 68 Kansas L. Rev. 923 (2020).

[95] Scott Morton & Dinielli, supra note 15, at 17.

[96] See, e.g., Port Dock & Stone Corp. v. Oldcastle Ne., Inc., 507 F.3d 117, 123-25 (2^nd Cir. 2007) (affirming dismissal of a Section 2 claim and finding that even a monopolist’s “vertical expansion into another level of the same product market will ordinarily be for the purpose of increasing its efficiency, which is a prototypical valid business purpose”). Moreover, single-firm conduct that supposedly projects power into another market, even through anticompetitive means, does not violate Sherman Act Section 2 unless the practices threaten monopoly power in that distinct second market. Harming competition is not enough. See Trinko, 540 U.S. at 415 n.4 (citing Spectrum Sports, Inc. v. McQuillan, 506 U.S. 447, 459 (1993)).

[97] Thus, the Omidyar Roadmap condemns Google’s supposed integration of data “to maximize the effectiveness and precision of ad targeting and attribution and thereby the value of an ad,” Scott Morton & Dinielli, supra note 15, at 20, even though the conduct makes Google’s offering to advertisers more attractive.

[98] Id. at 18-19.

[99] CMA Interim Report, supra note 14, at ¶ 5.89.

[100] Texas Second Amended Complaint at ¶ 113.

[101] Scott Morton & Dinielli, supra note 15, at 22.

[102] Texas Second Amended Complaint at ¶¶ 284-91 (“Cutting off access to YouTube foreclosed competition in the ad buying tool markets and protected Google’s market power in these markets. Many DSPs stopped growing, many others went out of business, and the market overall has been closed to entry.”).

[103] Scott Morton & Dinielli, supra note 15, at 22.

[104] See, e.g., Ryan Joe, The Big Story: Call of the Peacock, AdExchanger (Jan. 22, 2020) at 31:05-31:26, https://www.adexchanger.com/podcast/the-big-story/the-big-story-call-of-the-peacock (indicating that NBC’s Peacock streaming service will have only direct sales when it launches); Kevin Weiss, What Is the Amazon Demand Side Platform (DSP)?, Amplio (July 2019), https://www.ampliodigital.com/blog/what-is-the-amazon-demand-side-platform-dsp (“Amazon DSP is the only way to access advertising inventory exclusively available on Amazon’s collection of owned online properties and devices like: Kindle; Fire TV; IMDb; Amazon Owned & Operated properties”); Tim Cross, Xandr Launches New Demand-Side Platform ‘Xandr Invest’, VideoAdNews (Jun. 10, 2019) https://videoadnews.com/2019/06/10/xandr-launches-new-demand-side-platform-xandr-invest (“Xandr [AT&T-Time Warner’s ad tech division] has announced it will be the exclusive source of inventory from Community, its recently announced video marketplace which includes content from various WarnerMedia brands as well as Vice, Hearst Magazines, Newsy, Philo, Tubi and XUMO.”).

[105] Neal Mohan, Focusing Investments to Improve Buying on YouTube, Google (Aug. 6, 2015) https://doubleclick-advertisers.googleblog.com/2015 (“To continue improving the YouTube advertising experience for as many of our clients as possible, we’ll be focusing our future development efforts on the formats and channels used by most of our partners. To enable that, as of the end of the year, we’ll no longer support the small amount of YouTube buying happening on the DoubleClick Ad Exchange.”); see also, Kelly Liyakasa, Google to Yank YouTube Inventory out of AdX by Year’s End, AdExchanger (Aug. 6, 2015), https://www.adexchanger.com/ad-exchange-news/google-to-yank-youtube-inventory-out-of-adx-by-years-end.

[106] Liyakasa, id.

[107] See Lara O’Reilly, Ad Tech Company The Trade Desk Goes Public at $28.75 Per Share—A Huge Pop on its $18 Price Target, Business Insider (Sep. 21, 2016), https://www.businessinsider.com/the-trade-desk-ipo-2016-9; Trey Titone, The Bill That Could Break Up Google and Shake Up Ad Tech, Ad Tech Explained (May 23, 2022), https://adtechexplained.com/competition-and-transparency-in-digital-advertising-act-ctda; Trade Desk Market Cap, YCharts, https://ycharts.com/companies/TTD/market_cap.

[108] Scott Morton & Dinielli, supra note 15, at 16 n.70 (identifying AppNexus as a “vigorous competitor to Google”).

[109] Id. at 2, 28-29.

[110] Annual Report (Form 10-K) for Year Ending December 31, 2021, Alphabet Inc. (Feb. 02, 2022), https://www.sec.gov/ix?doc=/Archives/edgar/data/0001652044/000165204422000019/goog-20211231.htm.

[111] Id.

[112] Id.

[113] Id.

[114] Id.

[115] Rachel Kaser, YouTube Claims to Share Billions in Ad Money with Creators, Unlike Instagram, The Next Web (Feb. 5, 2020), https://thenextweb.com/facebook/2020/02/05/youtube-claims-share-billions-ad-money-creators-unlike-instagram.

[116] Texas Complaint, supra note 1, at ¶¶ 61, 156, 253, 288.

[117] Id. ¶ 157.

[118] Id. ¶ 21.

[119] Scott Morton & Dinielli, supra note 15, at 14 (“The CMA estimates Google’s take rate, or price, at 40%, which it deems a supra-competitive price for the services provided by the Google-controlled players in ad tech stack. A recent study by the Incorporated Society of British Advertisers (ISBA) found that publishers received 51% of the price, while the amount they could track going to intermediaries was 34%. The study could not find where the remaining 15% of the price went. As we will describe below, Google has such a dominant position across all elements of the ecosystem, it seems likely that these missing funds are accruing to Google at least in part, which would support the CMA’s findings.”).

[120] Geradin & Katsifis, “Trust Me, I’m Fair,” supra note 16 (“[L]ack of competition across the ad tech chain enables Google to exploit advertisers and publishers by charging hidden fees for ad intermediation on top of its disclosed commission…. Unfortunately, we conclude that Google’s latest switch does nothing to increase auction transparency. Worse, it seems to strengthen Google’s ability to extract hidden margins from its customers, while undermining the competitive pressure exercised by header bidding.”).

[121] CMA Final Report, supra note 7, at 275 (emphasis added).

[122] Scott Morton & Dinielli, supra note 15, at 20.

[123] See, e.g., Jean-Charles Rochet & Jean Tirole, Platform Competition in Two-Sided Markets, 1 J. Eur. Econ. Ass’n 990 (2003); Bruno Jullien, Price Skewness and Competition in Multi-Sided Markets, IDEI Working Paper 504 (March 2008), available at https://core.ac.uk/download/pdf/6375977.pdf.

[124] See Joshua. D. Wright & John. M. Yun, Burdens and Balancing in Multisided Markets: The First Principles Approach of Ohio v. American Express, 54 Rev. Industrial Organization 717 (2019); Manne, In Defence of the Supreme Court’s ‘Single Market’ Definition in Ohio v American Express, supra note 79.

[125] As described here, true pricing is theoretically possible but difficult in practice: “To successfully engage in predatory pricing means taking enormous and rising losses that grow for the ‘predatory’ firm as customers switch to it from its competitor. And once the rival firm has exited the market, if the predatory firm raises prices above average cost (i.e., to recoup its losses), there is no guarantee that a new competitor will not enter the market selling at the previously competitive price. And the competing firm can either shut down temporarily or, in some cases, just buy up the ‘predatory’ firm’s discounted goods to resell later.” Sam Bowman, Buck’s “Third Way”: A Different Road to the Same Destination, Truth on the Market (Oct. 27, 2020), https://truthonthemarket.com/2020/10/27/bucks-third-way-a-different-road-to-the-same-destination.

[126] Scott Morton & Dinielli, supra note 15, at 20.

[127] See, e.g., Barry Wright, 724 F.2d at 234-35.

[128] CMA Interim Report, supra note 14, at Appendix H, ¶ 194.

[129] Texas Complaint, supra note 1, at ¶ 477.

[130] Id. at ¶¶ 473-476.

[131] Scott Morton & Dinielli, supra note 15, at 28.

[132] Id. at 28.

[133] As one study on the effects of GDPR (in this case, on app development) notes, “While 42.1 percent of EU-developed apps exit in the year following GDPR, the analogous ?gure averages between 37.7 and 50 percent in the other six countries, con?rming the di?culty in ?nding an untreated part of the world.” Rebecca Janßen, Reinhold Kesler, Michael E. Kummer, & Joel Waldfogel, GDPR and the Lost Generation of Innovative Apps, NBER Working Paper 30028 (May 2022) at 19-20, available at https://www.nber.org/papers/w30028.

[134] Julie Brill, Microsoft Will Honor California’s New Privacy Rights Throughout the United States, Microsoft Blog (Nov. 11, 2019), https://blogs.microsoft.com/on-the-issues/2019/11/11/microsoft-california-privacy-rights.

[135] Nick Statt, Apple Updates Safari’s Anti-Tracking with Full Third-Party Cookie Blocking, The Verge (Mar. 24, 2020), https://www.theverge.com/2020/3/24/21192830/apple-safari-intelligent-tracking-privacy-full-third-party-cookie-blocking.

[136] Dieter Bohn, Google to “Phase Out” Third-Party Cookies in Chrome, but not for Two Years, The Verge (Jan. 24, 2020), https://www.theverge.com/2020/1/14/21064698/google-third-party-cookies-chrome-two-years-privacy-safari-firefox.

[137] Scott Morton & Dinielli, supra note 15, at 30.

[138] Id. at 20.

[139] Texas Complaint, supra note 1, at ¶¶ 407-408. See also, Scott Morton & Dinielli, supra note 15, at 26.

[140] See David Besbris, Introducing the Accelerated Mobile Pages Project, for a Faster, Open Mobile Web, Google (Oct. 7, 2015), https://blog.google/products/search/introducing-accelerated-mobile-pages/.

[141] See Automated Team, Header Bidding on AMP—A Complete Guide, Automated (Jan. 10, 2020), https://headerbidding.co/header-bidding-amp.

[142] Scott Morton & Dinielli, supra note 15, at 26.

[143] Id. at 17.

[144] See William J. Baumol, Contestable Markets: An Uprising in the Theory of Industry Structure, 72 Am. Econ. Rev. 1, 14 (1982) (“In the limit, when entry and exit are completely free, efficient incumbent monopolists and oligopolists may in fact be able to prevent entry. But they can do so only by behaving virtuously, that is, by offering to consumers the benefits which competition would otherwise bring. For every deviation from good behavior instantly makes them vulnerable to hit-and-run entry.”).

[145] Scott Morton & Dinielli, supra note 15, at 15.

[146] See, generally, William J. Baumol, John C. Panzar, & Robert D. Willig, Contestable Markets and the Theory of Industry Structure (1982).

[147] United States v. Microsoft Corp., 253 F.3d 34 (D.C. Cir. 2001) (“Because a firm cannot possess monopoly power in a market unless that market is also protected by significant barriers to entry… it follows that a firm cannot threaten to achieve monopoly power in a market unless that market is, or will be, similarly protected.”).

[148] Scott Morton & Dinielli, supra note 15, at 15.

[149] Id.

[150] See CMA Final Report, supra note 7, at 252–55 for a discussion of barriers to entry.

[151] See Texas Complaint, supra note 1, at ¶ 127: In addition to these barriers, Google’s own anticompetitive conduct imposes additional barriers to entry and expansion. As addressed below in Section VII.A, from 2010 to present, Google has tied its ad server to its ad exchange, requiring publishers to use Google’s ad server in order to receive live, competitive bids from Google’s ad exchange. This tie effectively forces almost every large publisher to use Google’s ad server. And because it is difficult-to-impossible for a publisher to use multiple ad servers simultaneously, requiring publishers to use Google’s ad server effectively prohibits them from using a competitor’s ad server. Google’s anticompetitive conduct creates an unnatural and nearly insurmountable barrier to entry.

[152] An earlier version of the Texas Complaint did make assertions regarding Google’s abuse of monopoly power through the “use [of] its data advantages to trade on inside information” (Texas Second Amended Complaint at ¶ 311), by which the state plaintiffs may mean (or have meant) to encompass location data, among other things.

[153] Scott Morton & Dinielli, supra note 15, at 15.

[154] CMA Interim Report, supra note 14, at 189 (emphasis added).

[155] Id., at ¶ 3.71 (“Microsoft suggested that accessing at-scale location data from user devices is a critical input to providing relevant, localized results. It indicated its belief that Google has unique advantages in this area, due to the location data that it receives from the Android operating system and the location data it receives when users access Google Search or other apps like Google Maps/Waze.”).

[156] CMA Final Report, supra note 7, at ¶ 5.268.

[157] Scott Morton & Dinielli, supra note 15, at 15.

[158] To be sure, location data can be helpful in assessing the efficacy of advertising by, for example, enabling an advertiser to better evaluate whether an advertisement led users to go to the advertiser’s physical location. But this function hardly seems necessary to a well-functioning market, and other sources of such information (e.g., questionnaires) are available.

[159] Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016 on the Protection of Natural Persons with Regard to the Processing of Personal Data and on the Free Movement of Such Data, and Repealing Directive 95/46/EC (General Data Protection Regulation), OJ L 119, 4.5, 2016; See, e.g., Bert Peeters, Processing of Location Data: Navigating the EU Data Protection Framework, CiTiP Blog (Feb. 4, 2021), https://www.law.kuleuven.be/citip/blog/processing-of-location-data-navigating-the-eu-data-protection-framework. (“The general understanding seems to be that, while European law does not qualify location data as a ‘special category’ of data under article 9 of the GDPR, location data should for all intents and purposes be treated with the utmost of care.”).

[160] Avi Goldfarb & Catherine Tucker, Privacy Regulation and Online Advertising, 57 Mgmt. Sci. 57, 57 (2011).

[161] Nils Wernerfelt, Anna Tuchman, Bradley Shapiro, & Robert Moakler, Estimating the Value of Offsite Data to Advertisers on Meta, University of Chicago, Becker Friedman Institute for Economics Working Paper No. 114 (August 22, 2022) at 1, available at https://ssrn.com/abstract=4198438 (“Taken together, our results suggest a substantial benefit of offsite data across a wide range of advertisers, an important input into policy in this space.”).

[162] Michal S. Gal & Oshrit Aviv, The Competitive Effects of the GDPR, 16 J. Competition & Econ. 349 (May 18, 2020). See also James Campbell, Avi Goldfarb, & Catherine Tucker, Privacy Regulation and Market Structure, 24 J. Econ. & Mgmt. Strategy 47, 68 (2015) (“[A] potential risk in privacy regulation is the entrenchment of the existing incumbent firms and a consequent reduction in the incentives to invest in quality. These incentives are stronger when firms have little consumer-facing price flexibility, as is the case in online media.”).

[163] Gal & Aviv, id. at 16.

[164] See, e.g., Cheok Lup, Explaining Marketing Attribution Models [Scenario Example], tinkerEdge (Nov. 12, 2015), https://www.tinkeredge.com/blog/web-analytics/explaining-marketing-attribution-models. (“On Day #1: User wants to purchase a coffee table for his new house, and perform a keyword search on Google. He clicks on one of the organic listings on Google Search Engine Result Page (SERP) to land onto Overstock.com. On Day # 2: He continues his search for his coffee table, and clicks on one of the PPC ads on Google SERP to land onto Overstock.com again. He subscribes to the email newsletter this time. On Day #3: He receives an eDM [electronic direct mail] from Overstock.com with a promotional offer of 30% discount sale, and clicks the “Buy Now” button from the eDM to enter the website. Unable to resist the discount offer, he decides to make a purchase of the furniture from the website.”). Attribution metrics determine which channel gets credit for the ultimate sale.

[165] Scott Morton & Dinielli, supra note 15, at 29

[166] “Furthermore, the default makes the advertiser believe that search ads are very effective relative to display ads, so the advertiser has no reason to change the default.” Id.

[167] See About the Default MCF Attribution Models: Learn How Each MCF Model Assigns Conversion Credit, Google Analytics Help (last visited Nov. 1, 2022), Attribution Models, Google, https://support.google.com/analytics/answer/1665189?hl=en. For the Google Analytics 4 version of these attribution models currently being implemented, see [GA4] About Attribution and Attribution Modeling, Google Analytics Help (last visited Nov. 1, 2022), https://support.google.com/analytics/answer/10596866. Google even created a guide called “Beyond Last Click Attribution” to help advertisers select the most appropriate model. See Beyond Last Click Attribution: Official Guide to Attribution Modeling in Google Ads, Google Ads Help (last visited Nov. 1, 2022), https://support.google.com/google-ads/answer/7003286.

[168] See Joan Arensman & Wilfred Yeung, Move Beyond Last Click Attribution in AdWords, Google Blog (May 10, 2016), https://adwords.googleblog.com/2016/05/move-beyond-last-click-attribution.html.

[169] How Does Conversion Tracking Work?, Microsoft Advertising (n.d.) https://help.ads.microsoft.com/#apex/ads/en/56710/2.

[170] Nir Elharar, How to Choose the Right Marketing Attribution Model for Your Content, Outbrain (Apr. 8, 2019), https://www.outbrain.com/blog/marketing-attribution-model-content.

[171] Texas Complaint, supra note 1, at ¶ 195.

[172] Scott Morton & Dinielli, supra note 15, at 17

[173] Texas Complaint, supra note 1, at ¶ 351.

[174] See Demsetz, supra note 81.

Abstract

Markets are imperfect, and the suboptimal results are frequently used to justify government regulation. Government regulation, however, is also imperfect, and the suboptimal results are, less-frequently, used to justify deregulatory efforts. Located between those poles is industry self-regulation, in which the industry is tasked with effectuating regulatory goals. Unfortunately, but perhaps not surprisingly, industry self-regulation is also imperfect. Industry members, when called on to engage in self-regulation, will face what Austrian economists call the knowledge problem, but at lesser severity than full government regulation. Industry members will also face a variety of public choice pressures, and those pressures may be more disruptive than under full government regulation. There are, therefore, no perfect solutions, and policy makers seeking solutions must weigh the relative tradeoffs on a case-specific basis, if they wish to obtain optimal outcomes.

Executive Summary

Section 512 of the Copyright Act, passed as part of the Digital Millennium Copyright Act of 1998, was created to preserve “strong incentives for service providers and copyright owners to cooperate to detect and deal with copyright infringements that take place in the digital networked environment,” while also providing “greater certainty to service providers concerning their legal exposure for infringements that may occur in the course of their activities.” The idea was to provide a safe harbor to online service providers (OSPs) that would also help to fight piracy.

In practice, Section 512 has reduced OSPs’ liability risk and thereby promoted the growth of distribution services. Piracy, however, has grown exponentially. Among the factors driving this growth is that the courts’ interpretation of Section 512 has pushed OSPs toward a reactive “file-containment” approach, rather than encouraging them to seek proactive solutions to piracy on their services. Indeed, citing both technological change in the intervening years and the judicial construction of Section 512, the U.S. Copyright Office has concluded that “Congress’ original intended balance has been tilted askew.” It would therefore be appropriate for Congress to revisit the law, applying lessons learned over the more than two decades since its enactment.

Much of the challenge in combating online piracy stems from the “volume problem.” The amount of content that traverses online services makes it unreasonable to expect OSPs to catch every intentional or inadvertent infringement by their users. But the amount of infringement that slips through and harms copyright holders is nonetheless substantial, accelerated by technological innovations like more comprehensive search engines, faster upload and download speeds, and the emergence of peer-to-peer file-sharing services.

One solution would be for OSPs to license content directly from rightsholders. As intermediaries, OSPs can potentially license content more efficiently and cost-effectively than individual copyright holders and users of Internet services could negotiate licenses among themselves. Licensing by OSPs could also remove litigation risk, enable their service’s users to benefit from the content, and ensure copyright holders’ rights are respected. TikTok, Facebook, Snapchat, Instagram, and YouTube, for example, are increasingly licensing at least some content, so that their users have an authorized way to incorporate that content into posts and streams.

Unfortunately, the current safe-harbor regime gives OSPs little incentive to license content or otherwise proactively deter pirated content on their services, insofar as they can presumptively monetize infringing content until rightsholders issue takedown notices. Under Section 512, to be protected by the safe harbors, OSPs must have neither “actual knowledge” of infringement, nor “red-flag knowledge”—i.e., awareness of facts that make infringement apparent. Judicial interpretations of Section 512, however, have essentially collapsed the red-flag standard into the actual-knowledge standard, while progressively narrowing the scope of the actual-knowledge standard; the bar for legally relevant knowledge of infringing activity is now quite high.

To address this, the standard for when an OSP is considered to have “knowledge” of infringement ought to be changed from what an “ordinary” person might infer from the circumstances to what a reasonable person in the user-generated content business would infer, even absent notification by a rightsholder. This broader knowledge standard would then be used to condition the safe harbors offered by Section 512 on OSPs taking reasonable steps both to prevent infringement and to remove that infringing content that does slip through.

Even where OSPs do not host or display infringing content, they may sometimes facilitate its dissemination by others. To be eligible for the safe harbors, OSPs should be obligated to provide the identity of infringing parties and to prevent further access to the infringing content, even when the OSPs are not at fault for the underlying infringement. Around the world, these sorts of “no-fault injunctions” have been used effectively to combat piracy with no interference with OSPs’ normal operations. Indeed, in some cases, private companies have voluntarily partnered with rightsholders to restrict access to content that a court has declared infringing.

Congress originally expected OSPs to collaborate with rightsholders in the development of standard technical anti-piracy measures, such as filtering. In the nearly quarter century since Section 512’s enactment, however, no standard technical measures have emerged. Recently proposed legislation—the SMART Copyright Act—endeavors to fix this problem. It would empower the Office of the Librarian of Congress to engage in rulemaking proceedings to develop standard technical measures with the relevant multistakeholder community. Despite some ambiguities and shortcomings in the bill’s text, it offers a promising framework to address one of Section 512’s longstanding deficiencies.

Finally, Section 512 requires OSPs to have policies to terminate service to repeat infringers and to reasonably implement those policies. Courts, however, have interpreted these requirements loosely. The purpose of the safe harbors is to provide platforms greater certainty regarding litigation risk when they act responsibly and to assure copyright holders that their rights will be reasonably protected in exchange for the liability limitations the platforms receive. That bargain is not achieved unless the platforms and their users know that costly repeat infringement will not be tolerated. To better address this goal, the Copyright Office should be authorized to provide guidance on the minimum requirements necessary to meet the repeat-infringer policy obligation, including by creating a model repeat-infringer policy that will be presumed to comply.

Introduction

The birth of the commercial Internet was among the most important technological developments of the past century and crucial to its success have been the rules governing the Internet’s use. These include architectural rules to address such issues as management of the Domain Name System (DNS) and the resolution of disputes over domain names. Other important rules concern the relationships between and among commercial entities and individuals operating online. They include such familiar legal rules as torts, copyright, and antitrust.

In certain respects, these rules of general applicability apply differently on the Internet than they do in other contexts, typically to address the scale, scope, and speed with which information can be shared online via intermediaries (i.e., digital platforms). This leads to the general legal presumption that intermediary liability should be specially tailored online to ensure that business models that rely on user-generated content can thrive, while also suitably protecting broader social interests.  Section 230 is one of the most well-known U.S. laws dealing with this subject, and it has received significant attention, aimed at understanding how best to frame policy around intermediary liability online. As we have noted in previous work on that subject, intermediary-liability laws should be focused on balancing the benefits that platforms can provide with the negative externalities they can generate.[1] Any legal policy that requires intermediaries to moderate more than they currently do will remove some harmless content; the relevant question, however, is whether the marginal reduction in harmless speech is justified by the marginal increase in the deterrence of illegal content. In essence, crafting intermediary-liability policy is about conducting a cost-benefit analysis that implicitly assumes that the goal is optimally to minimize both the loss of user-generated content and the harms of illegal activity facilitated by platforms.[2]

Given the uncertainties and complexity in locating that middle ground between costs and benefits, erring on the side of granting full immunity from third-party liability­­ to platforms—as Section 230 largely does—may conceivably be the best possible outcome. Without strong evidence to support this position, however, it is highly improbable that a legal regime that results in complete immunity for platform operators for the harmful activity that can occur on their services is socially optimal. This is particularly true, given the long history of common-law attempts to parse exactly this kind of liability for offline intermediaries, which suggests that courts and lawmakers can indeed shape regimes to allow both liability and room for firms to operate their services.[3]

In other words, simply claiming that costs would rise if intermediaries were held liable, or that liability itself is a harm to the platforms, is insufficient. Liability has some harmful consequences everywhere. The relevant question is whether those harms outweigh the ones avoided by not imposing legal accountability.

It is notable that copyright protection was specifically exempted from the liability shield created by Section 230.[4] It is also notable that the subject of this paper—Section 512 of the Copyright Act (“Section 512”)—adopted, at least in theory, a different approach than Section 230. But as we discuss below, while Section 512 did not create a complete liability shield, its practical effect, largely through judicial interpretation, has come closer to that end than its drafters likely envisioned.

Section 512 altered key elements of how secondary-liability rules for copyright are applied online. Most notably, Section 512 created a safe harbor for online service providers (“OSPs”) for potentially infringing content generated by users of their platforms.[5]

Nearly a quarter-century after its passage, Section 512 is due for reform. When Congress added Section 512 to the Copyright Act, it had two things in mind. First, that copyrighted content merited protection online, just as it did offline. Second, that the then-nascent OSPs would struggle to bear the full weight of direct or secondary liability for all the copyrighted content their users might disseminate without authorization. Thus, Congress intended Section 512 to preserve “strong incentives for service providers and copyright owners to cooperate to detect and deal with copyright infringements that take place in the digital networked environment,” while providing “greater certainty to service providers concerning their legal exposure for infringements that may occur in the course of their activities.”[6]

Given the monumental challenges that OSPs would face in trying to prevent any unauthorized dissemination of copyrighted content by their users, they particularly feared the precedent set by 1993’s Frena decision, which imposed direct copyright liability on a bulletin-board operator for storing infringing images uploaded by users.[7] To address the perceived threat to OSP viability if Frena were broadly followed, Section 512 contains safe harbors that essentially codify the precedent in 1995’s Netcom case, which instead countenanced only secondary liability for OSPs that host infringing content.[8] Broadly speaking, the law grants OSPs conditional immunity for unwittingly disseminating unlicensed copyrighted material without authorization.^[9] Importantly, Section 512’s immunity is conditioned on OSPs acting to curb infringement once they have actual knowledge of its existence, such as when notified by the copyright owner, or when the infringement is apparent. This latter category of apparent infringement is sometimes referred to as “red flag” knowledge.[10]

The regime Section 512 established has produced mixed results in practice. By enabling OSPs to transmit content across the Internet at greatly reduced risk of liability, Section 512 has, without question, facilitated the rapid growth of distribution services that also benefit content producers and consumers. At the same time, however, the proliferation of pirated content has grown exponentially. The law imposes little obligation on OSPs to mitigate the dissemination of infringing content other than to react ex post—at which point, the damage has already been done.

It is therefore not surprising that there have been growing calls for stronger copyright and other forms of content protection, both in the United States and around the world. Australia’s Competition and Consumer Commission (ACCC) has moved to impose “neutrality” requirements on tech platforms,[11] as well as to curtail platforms’ ability to monetize news content without licensing it at what news organizations believe are fair rates.[12] The European Union passed reforms to its Copyright Directive intended to provide greater protection for rightsholders.[13] And following years of public meetings and stakeholder input, the U.S. Copyright Office published its long-anticipated Section 512 report, which concluded that the safe harbors should be adjusted to better address online piracy, as “Congress’ original intended balance has been tilted askew.”[14]

In this paper, we examine whether Section 512 set the right balance between, on the one hand, mitigating unreasonable copyright-litigation risks that may arise from user-generated content, and on the other, holding online platforms accountable when they unreasonably fail to curb foreseeable infringement risks. We ultimately conclude, as the Copyright Office did, that the law’s proper balance has been tilted askew. We therefore recommend adjustments to Section 512.

I. The Development of Section 512

When Congress passed the Digital Millennium Copyright Act (“DMCA”) in 1998, only about 30% of the U.S. population used the Internet in any fashion,^[15] and only 12% of American adults reported daily online use.^[16] Indeed, while the Internet’s potential to dramatically alter the way consumers access information and buy all manner of goods and services had become clear by the mid-1990s, much of the technology that would come to shape the Internet as we know it remained either still in its infancy or did not exist at all. Amazon didn’t start selling books until 1995,[17] MP3.com wasn’t launched until 1997,[18] and Google wasn’t founded until 1998.[19] Napster, one of the earliest drivers of massive-scale digital piracy, didn’t exist until 1999.[20] Facebook wasn’t launched until 2004.[21] YouTube started in 2005 and was bought by Google in 2006.[22] Twitter became a company in 2007.[23]

By contrast, recent estimates find that, today, 81% of Americans have mobile Internet access, while 28% of Americans say they are online “almost constantly.”[24] Global Internet access has jumped from 3.14% in 1998 to more than 50% in 2020.[25] This explosion of online access has benefitted consumers and businesses in ways that weren’t necessarily obvious in 1998. Amazon’s e-commerce revolution, for example, benefitted not just Amazon, but a host of firms that wished to exploit the Internet as a distribution channel. At the same time, service has offered consumers a fast, convenient, and affordable way to shop for nearly every conceivable product. Similar revolutions have been seen in media and the arts, where digital distribution has provided users an outlet for their own creativity, while creating another channel for traditional media entities to reach audiences.

But Internet distribution reduces friction not just for legitimate transactions, but also for unlawful ones.[26] The question becomes how to combat that unlawful activity without hindering the development of legitimate content and the online platforms that distribute it—either through excessive regulation or unending litigation risk stemming from user-generated content.

It was this question that Congress sought to address in the mid-1990s when it attempted to balance two competing interests regarding copyright policy online. On the one hand, it recognized that the incipient Internet platforms of the day would have great difficulty if they were subject to direct or secondary copyright liability for all their users’ posts. On the other hand, rightsholders had a valuable interest in protecting their works. The balance Congress struck is embodied in Section 512, which was added to the Copyright Act through passage of the Digital Millennium Copyright Act of 1998.^[27]

Importantly, Section 512 did not create an absolute shield for OSPs against copyright-infringement claims. Rather, Section 512 created a set of “safe harbors” that would grant various types of OSPs protection from copyright claims arising from user-generated content, provided the service providers promptly took down instances of infringement.[28] The safe harbors cover four specific categories of activity. Section 512(a) covers OSPs that merely serve as conduits for material directed at third parties;[29] Section 512(b) covers OSPs that temporarily cache content as it is being transmitted;[30] Section 512(c) covers OSPs that host material for third-party users;[31] and Section 512(d) covers OSPs that “link” to content—for example, search engines or directories.[32] Each of Section 512’s safe harbors imposes certain obligations on OSPs before they will merit protection from liability. For example, service providers are required to comply with a notice-and-takedown procedure,[33] as well as to act on both “apparent” and “actual” knowledge of infringement.[34]

As noted above, Section 512 was passed at a relatively immature stage in the development of online technologies. At the time, the web existed largely as a collection of static, primarily text-based pages. Usenet also existed and was then a major conduit for pirated content, although its relative importance has since declined.[35] By today’s standards, search technologies were crude^[36] and, while there undoubtedly were private servers dedicated to content-sharing, it would have been difficult to find such servers in the relatively disorganized web of the day. High-speed Internet service was also rare and, outside of universities and large corporations, most users connected to the Internet via analog modems and telephone lines.^[37] Moreover, the peer-to-peer services that would make file-sharing more efficient effectively did not exist.^[38] And yet, even at the time Section 512 was enacted, it was understood that “[d]ue to the ease with which digital works can be copied and distributed worldwide virtually instantaneously, copyright owners will hesitate to make their works readily available on the Internet without reasonable assurance that they will be protected against massive piracy.”^[39]

Thus, even in the Internet’s infancy, when broadband speeds were a tiny fraction of today’s and with only rudimentary file-sharing services available, Congress believed that “[w]ith this… evolution in technology, the law must adapt in order to make digital networks safe places to disseminate and exploit copyrighted materials.”^[40]

A.   The evolving legal backdrop

Section 512 emerged in response to federal case law regarding online copyright infringement. Two cases in particular—Playboy Enterprises Inc. v. Frena and Religious Technology Center v. Netcom On-Line Communication Services Inc.—represented the dominant poles of jurisprudence.

In Frena, Playboy Enterprises sued George Frena, the operator of an online bulletin-board system.[41] The complaint concerned copyrighted photos that were stored on Frena’s servers and had been uploaded by users of the bulletin board without Frena’s knowledge.[42] As soon as he became aware of the infringing material, Frena removed it.[43] The court, however, framed Frena’s activity as one of direct infringement, rather than contributory infringement.[44] After walking through a fairly routine copyright analysis, it found Frena liable.[45]

By contrast, the Netcom decision two years later framed the relevant copyright analysis differently. In Netcom, an affiliate organization of the Church of Scientology sued the operator of a bulletin board, Thomas Klemesrud, and his Internet-service provider (ISP), Netcom, for hosting portions of copyrighted works that it owned.[46] The works were not posted by either Klemesrud or Netcom, but by a user of Klemesrud’s bulletin board named Dennis Erlich.[47] The court dismissed the direct infringement claims, characterizing storage by a bulletin-board operator and transmission by an ISP as “incidentally making temporary copies,” and thus insufficiently tangible to support a direct infringement claim.[48]

The court, however, went on to examine the plaintiffs’ other claims of contributory infringement, as well as vicarious liability.[49] In this regard, it found that the plaintiffs had raised genuine issues of fact: whether Netcom and Klemesrud had sufficient knowledge that an infringement was occurring, and whether they were in positions to stop such infringement.[50] Consequently, the court denied the motion for summary judgment, and allowed the case to proceed on the secondary-liability theories.[51]

Thus, under either dominant approach to examining the infringing acts of users of an online service, there was a distinct possibility that providers could be found liable. At the same time, some rightsholders objected that basing service providers’ liability on their having sufficient knowledge of infringing activities (however that term would come to be defined) would encourage OSPs to choose to be willfully blind.[52]

In response to these cases, Congress drafted and passed Title II of the Digital Millennium Copyright Act, which was subsequently codified as Section 512 of the Copyright Act:

There have been several cases relevant to service provider liability for copyright infringement.  Most have approached the issue from the standpoint of contributory and vicarious liability. Rather than embarking upon a wholesale clarification of these doctrines, the Committee decided to leave current law in its evolving state and, instead, to create a series of “safe harbors,” for certain common activities of service providers. A service provider which qualifies for a safe harbor, receives the benefit of limited liability.[53]

Section 512’s explicit goal was to balance the competing interests of rightsholders and service providers in a way that preserved strong incentives for service providers and copyright owners to cooperate in detecting and resolving copyright infringements in the digital networked environment.[54] At the same time, it provided greater certainty to service providers concerning their legal exposure for infringements that may occur in the course of their activities.[55]

II. The Costs and Benefits of Section 512

It is to be expected that a legal regime constructed before the commercial Internet had truly taken shape would require updates as new harms and user behaviors emerged. With the benefit of hindsight that the drafters of Section 512 lacked, this section offers an overview of the positive and negative effects that the law has produced.

A.   The positive effects of Section 512

Section 512 has delivered on at least some of its promise. Online-distribution services have grown dramatically: transforming entire industries; significantly altering how we consume books, music, and videos; and increasing the availability of creative works, including user-generated works. Without a doubt, OSPs have generated enormous benefits to society,[56] and a substantial proportion of those benefits have come from legitimate dissemination of high-quality content (e.g., Apple Music, Spotify, Netflix, Amazon Prime Video, etc.).

It would be difficult to quantify the full value that online services carrying user-generated content have offered society, but it is surely quite large. Just seven years after Section 512’s passage, YouTube was founded as a platform for individuals to store and stream everything from their own amateur films and home movies to grassroots outreach on important civic and political issues.[57] It now draws 2 billion monthly users.^[58] Facebook has 1.9 billion daily users.^[59] Google processes at least 2 trillion searches annually.^[60] And all of these services are nominally free to users, thanks to the platforms’ ability to monetize their services successfully with ad revenue. In the process of hosting and serving ads, the platforms also generate value for advertisers, who are better able to match their offerings to targeted users, and for users, who receive more relevant offers for products and services.

The rise of closed systems like iTunes (now Apple Music) and Spotify also demonstrates the benefits that can flow, in part, from predictable legal liability around digital content. Numerous third-party services allow content creators to feed their music into Apple’s and Spotify’s ecosystems.[61] It would be virtually impossible to vet rights claims at scale for every piece of content that these services host. Platforms like Bandcamp and Soundcloud provide services analogous to YouTube, but for independent musicians. Those sites allow millions of individual artists to release and market their music to a broad array of consumers. And social media like Reddit, Facebook, Instagram, and SnapChat would similarly be unable to offer multimedia-sharing services to millions or billions of users without something like the liability-limiting provisions of Section 512.

Research published in the Proceedings of the National Academy of Sciences (PNAS), using willingness-to-accept choice experiments, finds that users assign relatively high values to Internet services.[62] For example, survey respondents in 2017 indicated they would require the following payments to give up each of the following services for one year (95% confidence interval):

Search engines:	$14,000-22,000
Email:	$6,900-10,200
Maps:	$2,700-5,100
Video streaming:	$940-1,490
E-commerce:	$700-1,000
Social media:	$240-430
Messaging:	$115-210
Music:	$130-215

 

Authors Erik Brynjolfsson, et al., believe that one explanation for the high valuations that users place on Internet services is that many see them as essential to their jobs and would thus be reluctant to give them up, even for significant compensation. Moreover, the authors argue, because most consumers do not pay for these services directly, nearly all of their willingness-to-accept represents consumer surplus.

There are also intangible benefits that flow from Internet platforms and user-generated content.  For example, experiments comparing Internet versus non-Internet research have found that searchers are more likely to find an answer to a question using Internet search; that an Internet search takes significantly less time to complete; and that searchers will consult significantly more sources on the Internet.[63] When searching factual questions for which there is a clear correct answer, Internet searches are significantly more likely to find the correct answer.

B.   The negative effects of Section 512

Along with the value created by online platforms, however, has also come the widespread, unauthorized dissemination of copyrighted content. This has almost certainly diminished some of the investment-backed expectations of content creators and rightsholders; raised costs for producers, and, thus, consumers; and reduced the quantity, breadth, and quality of content available to audiences. Early on, for example, YouTube quickly became a major venue for users to upload copyrighted content illegally,[64] while other legitimate social-media platforms similarly have hosted large quantities of unauthorized content.[65] The past quarter-century has, of course, also seen the development of myriad other sites specifically dedicated to the mass, unlawful dissemination of copyrighted content.[66]

At the same time, direct piracy is not the only negative effect suffered by rightsholders. The broad dissemination of pirated content as an alternative to legitimate content, coupled with Section 512, has placed downward pressure on the value of licenses for content. The Phoenix Center’s T. Randolph Beard, George S. Ford, and Michael L. Stern conducted an economic analysis examining the distortions that online platforms have had on the market for licensing by examining the relationship between market rates and the rates that YouTube paid for digital music.[67] They concluded that YouTube’s use of Section 512, given the widespread piracy on its service, “reduces revenues to artists and labels in the U.S. by at least hundreds of millions and by perhaps more than one billion dollars each year.”[68] If YouTube were to pay rates closer to the market level, it would generate between $650 million and $1 billion in additional revenue for content creators.[69]

This is not to suggest that OSPs like YouTube do not attempt to control piracy on their services. Soon after acquiring YouTube, Google developed its innovative ContentID “fingerprint” filtering system.[70] Such systems detect attempts to upload unauthorized content, allowing copyright holders to determine whether to permit dissemination and whether to monetize it.[71] While this is the sort of technological innovation that Congress hoped to encourage with Section 512, filtering systems are available on only a few platforms and they extend primarily to the largest copyright holders, often to the exclusion of smaller content creators.[72] Moreover, such systems do nothing to stem access to infringement on dedicated piracy sites, whose unlawful offerings can be found relatively easily, whether through word of mouth, linking sites, or search services.[73]

Compounding matters, there have been significant changes in the legal and technological landscape over the last two decades that undermine some of the assumptions underlying Section 512. As we discuss at length in the remainder of this paper, judicial interpretations have systematically diminished the effectiveness of many of the provisions of Section 512 that were meant to aid rightsholders in combatting piracy. Although red-flag knowledge of suspicious activity that could be infringement was supposed to constitute grounds on which OSPs were expected to act, judicial interpretation of Section 512’s relevant provisions has so narrowed the scope of those grounds as to render them a nullity.[74] Rightsholders have, moreover, largely been unable to seek adequate redress in U.S. courts by seeking the sorts of no-fault injunctions that have been widely successful in other jurisdictions.[75] And the original standard technical measures envisioned by Section 512’s drafters, which would have enabled collaborative approaches between platforms and rights holders to control piracy, have not adequately materialized.

III. The Costs and Extent of Piracy

From some perspectives, the balance embodied by Section 512 has largely worked well.[76] As Jennifer Urban, et al., characterized the current enforcement around Section 512:

Overall, the fundamental compromise in section 512—to manage liability and enforcement costs for OSPs and rightsholders—holds in essence. The basic compromise still underpins negotiations between OSPs and rightsholders over responsibility as Internet services and distribution channels evolve.[77]

For those who take this perspective, where the basic compromise has failed, it has done so in the direction of over-enforcement, suggesting that the protections Section 512 offers to rightsholders should be limited further still.[78] More directly, the primary concern of many who support the status quo is the extent to which Section 512 could be used as a tool to stifle free expression, not to facilitate piracy.[79]

Nonetheless, stakeholders on both sides of the Section 512 bargain generally acknowledge that the sheer scale of online piracy has tended to overwhelm the law’s notice-and-takedown provisions.[80]

Developed in a world that operated at dial-up speeds, Section 512 was targeted at isolating infringing content and preventing its spread. When an infringing file appeared, the relatively slow speeds of dial-up Internet access were a natural barrier that tended to prevent rapid dissemination, giving platforms and rightsholders time to issue a series of notices and counter-notices to stop further infringement. But the underlying assumptions of that bargain have been undermined by the advance of technology. Today, a file-containment approach leads to the well-known game of copyright “Whac-A-Mole” that does little, if anything, to control the spread of massive online piracy.[81]

A core defect of the current Section 512 regime is that it places little onus on platforms to prevent either the initial unlawful dissemination or the repeat posting of files that are known (or easily knowable) to be infringing. While Google faces a gargantuan task in processing millions of takedown notices, rightsholders face an even larger collective challenge in searching across all platforms to discover, investigate, and report on cases of infringement.^[82] Many do not have the resources of major movie studios or record labels and must make tough decisions about how to adequately police infringement of their property.

U.S. consumers logged 725 million visits to pirate sites for movies and television programming in April 2020 alone.[83] Close to 90% of those visits were attributable to illegal streaming services.[84] In the United States, there are more than 9 million subscribers to Internet protocol television (IPTV) services specializing in pirated content, which reap more than $1 billion annually in ill-gotten gains.[85] Globally, there are more than 26.6 billion illicit viewings of U.S.-produced movies and 126.7 billion illicit viewings of U.S.-produced television episodes each year, annually costing U.S. rightsholders between $30 and $70 billion, costing the sector between 230,000 and 560,000 jobs, and costing the overall economy between $45 and $115 billion in GDP.[86]

For larger rightsholders, policing this infringement represents a significant cost (albeit one that addresses only a fraction of the online infringement that affects them). For smaller rightsholders, it can be a prohibitive barrier that prevents them from effectively policing unlicensed use of their property and existentially threatens their livelihood.[87] The Copyright Office took note of the explosion of piracy since the mid-1990s in its Section 512 report:

[B]etween 1998 and 2010, Google received notices for less than three million URLs containing content that allegedly infringed a copyrighted work. The scale of notices grew with time, and in 2013, Google received notices for approximately three million URLs—more than the total received by Google during the previous twelve years. Since then, the volume of infringement notices has rocketed up. In 2017, Google received notices identifying about 882 million URLs, and has processed requests to delist more than 4.6 billion URLs for copyright violations to date.[88]

From January to June 2021, Microsoft reported receiving more than 11 million takedown requests involving 103 million URLs.[89] The company rejected only about 0.33% of these requests.[90]

Because takedowns occur after illicit dissemination, by the time the takedown process is initiated, copyright holders by definition have already suffered significant harm to their exclusive rights to determine whether, how, and under what terms their content may be disseminated. Moreover, the future market for the works likely has been impeded, as at least some portion of the future audience will probably be able to access the content at no cost. Recognizing the smaller addressable market, distributors (whether online or traditional media) will offer copyright holders less to license the content than they would have if the illicit dissemination had never occurred. The volume of takedown notices offers evidence of the massive scope of online piracy, which in turn can have a huge effect on a copyright’s value to the rightsholder.

The status quo is also not without cost to the OSPs. Complying with the volume of requests generated pursuant to Section 512’s safe-harbor requirements entails significant investment of resources.[91] Just as smaller rightsholders face disproportionately large challenges in policing infringement of their copyrights, it is smaller platforms and new market entrants that are least able to bear the costs of safe-harbor compliance.

There is, moreover, the potential problem of takedown notices that were filed fraudulently. Estimating real costs in this regard is difficult, as the costs of compliance depend on several factors, including internal technology and compliance staff. Some sense of the scale is available, however, from public data. For example, Automattic—the makers of a host of popular web-publishing software, including WordPress and WooCommerce—reports that, generally, between 5% and 10% of the takedown requests they receive are “abusive.”[92] In 2021, this accounted for about 530 notices.[93] A larger provider like Google faces substantially more abusive takedown demands. In one study of a single fraudulent effort to force takedowns by misrepresenting ownership of content, a researcher discovered 33,988 illegitimate takedown efforts.[94] Even beyond fraud, erroneous takedowns can be a problem, with another study estimating that up to 30% of the takedown notices in its sample were potentially in error.[95]

IV. Legal Developments in the Section 512 Regime

There are two general trends that can be observed in the evolution of Section 512’s legal standards: toward relatively less participation on the part of platforms to deter illegal content on their services and toward greater burdens on rightsholders to police piracy of their content.[96] While the platforms have enjoyed exponential growth and the accompanying financial rewards, the law has not always kept pace with that growth by ensuring that platforms more properly internalize the social costs of their activity.^[97]

For example, courts have consistently interpreted Section 512’s grant of immunity as being almost completely undisturbed by red-flag knowledge.^[98] Courts have also interpreted a key rightsholder’s ability to seek subpoenas and injunctions against actual infringers in so restrictive a manner as to effectively neuter that section of the law.[99] Further, in practice, the ways that OSPs process takedown notices essentially requires copyright holders to proceed URL-by-URL—a linear process doomed to failure and frustration in the face of logarithmic piracy.

A.   Knowledge, red-flag knowledge, and the duty to monitor

To receive the benefit of a Section 512 safe harbor, OSPs engaged in hosting or search services must act to address copyright infringement by users of their services when they have either: 1) actual knowledge of infringement, or 2) awareness of facts that make it apparent that infringement is occurring—i.e., red-flag knowledge.[100]

Despite some suggestions to the contrary from the U.S. Supreme Court,[101] courts have not generally imposed a legal obligation on OSPs to proactively mitigate infringement by their users to qualify for the safe harbor; rather, courts have instead only required service providers to curtail infringement after the fact. In this regard, courts have relied upon Section 512(m), which explicitly declines to condition application of a safe harbor on an OSP “monitoring its service or affirmatively seeking facts indicating infringing activity, except to the extent consistent with a standard technical measure complying with the provisions of subsection (i).”[102] There is room, however, between actively monitoring to discover evidence of actual or impending infringement and taking preventative measures to avoid infringement where such evidence presents itself—either because it has been affirmatively called to the OSP’s attention or has otherwise become apparent.

Indeed, the legislative history of Section 512 describes actual and red-flag knowledge as two distinct ways through which OSPs may become aware of infringing material that requires action on their part.

[A] service provider need not monitor its service or affirmatively seek facts indicating infringing activity… in order to claim this limitation on liability (or, indeed any other limitation provided by the legislation). However, if the service provider becomes aware of a ‘‘red flag’’ from which infringing activity is apparent, it will lose the limitation of liability if it takes no action. The ‘‘red flag’’ test has both a subjective and an objective element. In determining whether the service provider was aware of a ‘‘red flag,’’ the subjective awareness of the service provider of the facts or circumstances in question must be determined. However, in deciding whether those facts or circumstances constitute a ‘‘red flag’’—in other words, whether infringing activity would have been apparent to a reasonable person operating under the same or similar circumstances—an objective standard should be used.[103]

To be sure, this can be a complicated standard to adjudicate. A court was expected, first, to determine whether an OSP had subjective red-flag knowledge of infringement. Next, if a court found that the OSP did not have subjective knowledge, it would have to determine if the lack of such knowledge was objectively reasonable. If the OSP’s lack of knowledge was objectively unreasonable, the OSP would be required to remove the infringing material or lose the safe harbor. Thus, in the original formulation of Section 512, actual or red-flag knowledge of infringement could theoretically arise from a range of potential situations: rightsholders pointing out a violation, an employee discovering (either through automated functions or plain observation) such material, or from evidence that would lead a reasonable person to recognize that infringement might be occurring.

A series of court decisions, however, have significantly enhanced the requirements to meet these knowledge standards. In the Viacom case, the 2^nd U.S. Circuit Court of Appeals described actual knowledge as whether the OSP “‘subjectively’ knew of specific infringement.”[104] Other circuits and district courts have largely followed this view of actual knowledge.[105]

As for red-flag knowledge, the Viacom court described it as turning “on whether the provider was subjectively aware of facts that would have made the specific infringement ‘objectively’ obvious to a reasonable person.”[106] Along these lines, the 9th U.S. Circuit Court of Appeals ruled that “general knowledge” that an entire category of hosted content was likely to contain copyrighted material was insufficient to create red flag awareness in an OSP.[107] Curiously, the 9th Circuit held that red-flag knowledge didn’t exist even when a suspected infringer went so far as to label its files “stolen” or “illegal,” as such labels merely increased the “salacious appeal” of the content.[108]

In effect, courts have collapsed the distinction between red-flag knowledge and actual knowledge by disallowing “red flags” to arise from general awareness of infringement on a service. The 9th Circuit’s Veoh opinion is emblematic:

Although the parties agree, in retrospect, that at times there was infringing material available on Veoh’s services, the DMCA recognizes that service providers who do not locate and remove infringing materials they do not specifically know of should not suffer the loss of safe harbor protection.[109]

As noted above, the 2nd Circuit’s Viacom decision essentially agreed with the requirement that subjective knowledge of infringement be “objectively reasonable” to avoid constituting red-flag knowledge.[110] Yet it also followed the 9th Circuit’s approach of pinning the knowledge requirement to “specific” acts of infringement. This substantially narrows the circumstances under which an OSP could theoretically be said to form a reasonably subjective view of potential infringement.[111]

It is helpful to unpack the 2nd Circuit’s 2016 Vimeo decision to understand the scope of the problem. Vimeo is a website that allows users to post videos. Several record labels and music publishers sued Vimeo for direct, contributory, and vicarious copyright infringement, documenting at trial a variety of Vimeo employee messages about incorporating copyrighted songs in uploads. Examples included three members of the Vimeo content-moderation team individually:

• telling a user that Vimeo allowed uploading “lip-synch” videos containing copyrighted music, but would take them down if and when asked by a rightsholder;
• telling a user, “don’t ask, don’t tell,” in response to a question about including copyrighted music in original videos the user created;
• saying to a user “[w]e can’t officially tell you that using copyright music is okay. But…” in response to a question about using a song by the band Radiohead;
• telling fellow employees that she was “[i]gnoring, but sharing” internally a user message that included a link to a video and asked what Vimeo did about people using copyrighted music on Vimeo; and
• responding to a user question about including Bobby McFerrin’s “Don’t Worry, Be Happy” in a home video that “[t]he Official answer I must give you is: While we cannot opine specifically on the situation you are referring to, adding a third party’s copyrighted content to a video generally (but not always) constitutes copyright infringement under applicable laws… Off the record answer… Go ahead and post it….”[112]

The company’s vice president of product and development also sent a message to two members of the content-moderation team and every employee in the “[email protected]” email group asking: “Who wants to start the felons group, where we just film shitty covers of these [EMI] songs and write ‘FUCK EMI’ at the end?”[113]

The 2nd Circuit nonetheless ruled that the messages in this case did not constitute red-flag knowledge because they did not relate to the specific infringement claims at issue and because the mere viewing by employees of videos containing recognizable songs would not be sufficient.[114] Citing its prior decision in Viacom, the court said that, to possess red-flag knowledge, the service provider must be subjectively aware of facts that would make the specific infringements at issue objectively obvious to a reasonable person.[115] Moreover, that “reasonable person” is “an ordinary person” without any expertise regarding music or copyright law, and without any obligation to investigate whether the content is copyrighted or the poster is engaged in a licensed or fair use.[116]

According to the court, it would not be sufficient to establish red-flag knowledge that there were facts that would lead a reasonable person to infer that infringement occurred. Rather, the service provider must have actual knowledge of the significance of those facts, and those facts would need to lead an ordinary, reasonable person to infer infringement was occurring.[117]

This appears to be both a poor interpretation of the statute and bad policy. Indeed, the Copyright Office does not appear to believe that Congress intended to erect so high a bar as the Vimeo court and others have suggested:

The Office believes a standard that requires an OSP to have knowledge of a specific infringement in order to be charged with red flag knowledge has created outcomes that Congress likely did not anticipate. The Copyright Office reads the current interpretations of red flag knowledge as effectively removing the standard from the statute in some cases, while carving an exceptionally narrow path in others that almost requires a user to “fess up” before the OSP will have a duty to act. OSPs are correct that Congress likely did not intend to adopt a general awareness standard for red flag knowledge, since such a standard would consume many OSPs Congress otherwise sought to protect. Yet courts have set too high a bar for red flag knowledge, leaving an exceptionally narrow space for facts or circumstances that do not qualify as actual knowledge but will still spur an OSP to act expeditiously to remove infringing content.[118]

B.   Subpoenas and injunctions

Another notable trend in the law, both in the United States and abroad, has been the growing challenges rightsholders’ face in seeking to identify suspected infringers. Under the EU’s General Data Protection Regulation, for example, it has become significantly more difficult to obtain valid WHOIS contact information for the owners of domains that host infringing content.[119] In a similar vein, the European Commission has been wrestling with so-called “structural infringement”—infringement that occurs as a core component of a provider’s business model and is aided by online anonymity.[120] According to a recent report prepared for the Commission, rightsholders in the EU find that such structural infringement is compounded by the paucity of requirements that intermediaries be identifiable to hosting providers.[121] There is little recourse under current EU law to identify anonymous parties, leading to calls to impose “know your customer” requirements on intermediaries.[122]

In the United States, Section 512 theoretically grants rightsholders some ability to unmask anonymous infringers through subpoenas.[123] Although it is not explicit on this point, Section 512(h) has been narrowly interpreted by courts to apply only to hosting providers, and not to Internet service providers (ISPs).[124] Technically, there are other means to potentially identify infringers, including relying on FRCP (26)(d)(1) motions to seek the identity of infringers.[125] This process, however, requires additional pleading and litigation expense as compared to Section 512(h), which allows rightsholders to apply for an unmasking order as of right once a takedown request has been filed. Limiting subpoenas solely to storage providers often ignores “the most relevant OSPs for uncovering the identity of individuals using BitTorrent and similar file-sharing protocols.”[126]

Another area where Section 512 has failed to evolve is in the use of injunctions. On its face, Section 512(j) appears to provide a broad remedy to rightsholders. It allows courts to grant injunctions: 1) to disable access to infringing content, 2) to limit service to the subscriber who is infringing, or 3) to provide other relief the court deems necessary to limit infringement of copyrighted content at a specific online location.[127] The first two forms of relief, however, only address access to a specific unauthorized copy of the copyrighted content or continued service access by a specific subscriber, rather than preventing unauthorized access more broadly to the copyrighted work. This perpetuates the Whac-A-Mole problem.

The third form of injunctive order might prove more useful, but it is rarely issued. Before granting any injunction under Section 512(j), a court must perform a balancing test to determine whether the burden placed on the OSP outweighs the harm to rightsholders.[128] The Copyright Office has observed that courts have generally found that the burden on OSPs from broader orders would outweigh the benefit to rightsholders.[129] Short of a major reconsideration of how injunctive remedies should work, Section 512(j)’s injunctive remedy is unlikely to be of much use to rightsholders in the foreseeable future:

The cost and expense of seeking an injunction in federal court against an OSP, particularly one that has previously demonstrated a willingness to litigate subpoenas and other matters relating to claims of online infringement, likely has some deterrent effect on rightsholders’ willingness to test the outer boundaries of section 512(j). Thus, while there may be some untapped “potential” in section 512(j) for combating online infringement, it is unlikely that changes to section 512(j) would play a significant role in restoring the balance under section 512. Nonetheless, the Office notes that, even in the absence of legislative change, courts have been overly narrow in their consideration of available injunctive relief under section 512(j).[130]

C.   Failure of voluntary, industrywide solutions

One final aspect of the legal development of Section 512 is worth addressing. As noted previously, Section 512 was enacted to create a set of tools for rightsholders and OSPs to work collaboratively to mitigate piracy, while also facilitating the growth of the commercial Internet. Ostensibly, part of this collaboration was to be the voluntary development of standard technical measures (“STMs”) that could effectively prevent infringement.[131] Yet, after more than 20 years, no STMs have been adopted.[132] The most effective preventive measures produced to date have been the filtering solutions adopted by YouTube,[133] Facebook,[134] and Audible Magic,[135] but neither filtering nor other solutions have been adopted industrywide. As the Copyright Office has observed:

While consensus-based fixes would be the ideal approach to improving the U.S. notice- and-takedown system, it has become clear that this is one instance where the perfect should not become the enemy of the good. Throughout the Study, the Office heard from participants that Congress’ intent to have multi-stakeholder consensus drive improvements to the system has not been borne out in practice. By way of example, more than twenty years after passage of the DMCA, although some individual OSPs have deployed DMCA+ systems that are primarily open to larger content owners, not a single technology has been designated a “standard technical measure” under section 512(i). While numerous potential reasons were cited for this failure— from a lack of incentives for ISPs to participate in standards to the inappropriateness of one-size-fits-all technologies—the end result is that few widely-available tools have been created and consistently implemented across the internet ecosystem. Similarly, while various voluntary initiatives have been undertaken by different market participants to address the volume of true piracy within the system, these initiatives, although initially promising, likewise have suffered from various shortcomings, from limited participation to ultimate ineffectiveness.[136]

The Copyright Office sounds a somewhat pessimistic note on this situation, seeing proposed STMs as “likely to encounter opposition from one or several groups of stakeholders.”[137] This concern is well-taken. For example, in their analysis of Section 512, Urban, et al., regard YouTube’s use of Content ID as a negative for the Internet ecosystem, fearing that it may become a standard for effective rights enforcement:

From the perspective of some other [online service providers], Google’s size, its prominence in the politics of notice and takedown, and its role in litigation, combined with its early adoption of DMCA Plus measures like content filtering on YouTube, trusted sender programs, autocomplete restrictions, and search result demotion, make it a dangerous elephant in the room. It is capable of adopting practices that could move collective perceptions of what is required for good practice, or even for safe harbor protection. When Google adopts DMCA Plus measures, these OSPs see their own practices under threat, as they fear the norm-setting potential of these moves.^[138]

The ideal solution to control widespread piracy would likely be a set of standards that evolve naturally and that work for both rightsholders and platform operators. In lieu of that, unfortunately, Section 512 likely needs to be reevaluated to discover where incentives can be better aligned.

In that vein, Sens. Patrick Leahy (D-Vt.) and Thom Tillis (R-N.C.)—the chair and ranking member, respectively, of the U.S. Senate Judiciary Committee’s Subcommittee on Intellectual Property—recently introduced S. 3880, the SMART Copyright Act. The bill would amend Section 512 to require OSPs to comply with a slightly heightened set of obligations to deter copyright piracy on their platforms.[139] Among other changes, the Leahy-Tillis bill would empower the Office of the Librarian of Congress (“LOC”) with broad latitude to recommend STMs for everything from off-the-shelf software to open-source software to general technical strategies that can be applied to a wide variety of systems. This would include the power to initiate public rulemakings in which the LOC could either propose new STMs or revise or rescind existing STMs. The STMs could be as broad or as narrow as the LOC deems appropriate, including being tailored to specific types of content and specific types of providers.

Critically, the SMART Copyright Act would not hold OSPs liable for the infringing content itself, but only for failure to make reasonable efforts to accommodate the STM (or for interference with the STM). Courts finding an OSP to have violated their obligation for good-faith compliance could award an injunction, damages, and costs.

Indeed, this approach comports with general principles of intermediary liability. The common law has deployed these principles in analogous situations, where the incentives of private actors are not aligned with the socially optimal outcome. As Doug Lichtman and Eric Posner have observed:

[R]ules that hold one party liable for wrongs committed by another are the standard legal response in situations where . . . liability will be predictably ineffective if directly applied to a class of bad actors and yet there exists a class of related parties capable of either controlling those bad actors or mitigating the damage they cause. . . . [W]hile indirect liability comes in a wide variety of flavors and forms . . . , it is the norm.^[140]

And as we have detailed in work examining nearly this exact concept in the context of Section 230:

Generally speaking, the law of negligence has evolved a number of theories of liability that apply to situations in which one party obtains a duty of care with respect to the actions of a third party. One legal obligation of every business is to take reasonable steps to curb harm from the use of its goods and services…. If the business has created a situation or environment that puts people at risk, it has an obligation to mitigate the risk it has created.[141]

Services that depend on user-generated content have been a boon to free expression, commerce, and likely much more. With that said, these services are inherently likely to surface illicit content if they are not adequately maintained. It is widely debated today what sort of changes are needed to reform Section 230 in order to prevent some of the harms that have emerged in the last quarter century.[142] Section 512 is due no less for this sort of reform, where OSPs should be obligated to take reasonable steps to ensure that their services are not vulnerable to piracy. Section 512 originally contemplated that voluntary standards would emerge to achieve this end. History has demonstrated that a more positive obligation may be necessary.

V. Potential Solutions

A range of possible reforms to Section 512 could better mitigate piracy and offer incentives for OSPs and rightsholders to engage in licensing negotiations. Properly applied safe harbors should encourage OSPs to help prevent unlawful dissemination of copyrighted content—as the obligation to act in the face of red-flag knowledge would largely do, absent its amelioration by the courts.[143] Ideally, such rules would also encourage OSPs to license content, enabling them and their users to benefit from such content without litigation risk. Indeed, in theory, it should be significantly more efficient for OSPs to negotiate license agreements with rightsholders than for rightsholders to do so with each of the service providers’ many users.[144]

But, as noted above, the current safe-harbor regime offers few incentives for OSPs either to curb piracy or to license content at market rates; indeed, they can obtain de facto unlicensed access to the content at no cost and with effectively no risk of liability.[145] To help address these misaligned incentives, Section 512’s safe harbor should be conditioned on OSPs taking reasonable steps: 1) to prevent infringement proactively, and 2) to stop infringement either a) when they have actual knowledge, such as when notified by a rightsholder, or b) when infringement would be apparent to a reasonable person.[146]

Below, we discuss potential adjustments to the legal standards that lead to application of safe harbors, as well as the practical steps that OSPs would need to take to qualify. We also examine some relatively less dramatic changes that could nonetheless contribute to a healthier online ecosystem that deters piracy and preserves the freedom of OSPs to innovate.

A.   Clarification of the knowledge standards

As noted above, judicial interpretations of Section 512 have essentially collapsed the red-flag standard into the actual-knowledge standard, while progressively narrowing the scope of the actual-knowledge standard; the bar for legally relevant knowledge of infringing activity is now quite high.[147]

To remedy this, the statute should be revised to effectively overturn the subjective element of red-flag knowledge applied in Vimeo. OSPs that host user-generated content should be attributed more knowledge than an “ordinary” person. Thus, red-flag knowledge would be present when information exists that would objectively lead a reasonable person in the business of facilitating dissemination of user-generated content (i.e., running a website that hosts such content) to infer infringement is taking place, even if a rightsholder has not alerted the site to a specific instance of infringement.

OSPs that host user-generated content seek to monetize that content. The DMCA presumes a significant likelihood that much of that content includes copyrighted material. Just as Congress wanted to ensure that platforms had room to grow and operate, so too did it intend to provide opportunity for rightsholders and platforms to work together to meaningfully control piracy. A service in the business of distributing content, where there is an elevated risk of infringing content, should be expected to act according to a higher standard than that to which we would hold an uninformed lay person.

This obligation to behave reasonably should exist even if that requires some degree of investigation and remediation on the part of the OSP once they have information that would objectively lead a reasonable platform to infer infringement is taking place. The obligation should obtain even if that information did not come from the rightsholder and was not related to a specific instance of infringement.

Such a standard would still offer reasonably responsive OSPs a safe harbor, which is appropriate, given that it would be impossible for platforms to catch all instances of infringement. The standard is not and should not be one of perfect content moderation, but one of reasonable content moderation. So long as a platform takes objectively reasonable steps to prevent and remediate infringement, the fact that other infringement slips through should not result in loss of the Section 512 safe harbor.

B.   Authentication, anonymous users, and subpoena authority

The Internet has long facilitated anonymous or pseudonymous communications. Fully anonymous communication systems obviously make it more difficult for rightsholders to pursue the parties responsible for infringement. Further, they can create a sense of safety (real or imagined) for would-be infringers, who may believe they can infringe with impunity.

Thus, another beneficial reform would require OSPs that host content likely to contain infringing material to reasonably ensure that they know their users’ identities. This would both discourage users from engaging in piracy and make it harder for those users to evade enforcement (and to continue infringing) simply by changing account names once caught. It would also help rightsholders to seek redress, including in cases where all they want is to ask users who are infringing unintentionally to cease doing so. Identities could remain confidential, disclosed to third parties only when needed to resolve a case of infringement.

Such disclosure might be provided voluntarily by the service provider, subject to any applicable requirements regarding the user’s privacy. The disclosures might also be provided pursuant to subpoenas issued under Section 512(h), which provides that “[a] copyright owner or a person authorized to act on the owner’s behalf may request the clerk of any United States district court to issue a subpoena to a service provider for identification of an alleged infringer in accordance with this subsection.”[148]

Relatedly, as the Copyright Office has explained, “this provision has proven to be little-used by rightsholders, in part because of how restrictively courts have interpreted it and in part because the information gleaned from such subpoenas is often of little use.”[149] Such subpoenas can be costly to obtain and are frequently ineffective; the data are often inaccurate or useless, and the OSPs may have already deleted it.[150] Moreover, courts have held that only OSPs that host material that can be removed pursuant to section 512(c)(3)(A) may be the subject of a Section 512(h) subpoena. In practice, this means such subpoenas cannot be used to obtain information from “mere conduit” ISPs.[151]

The Copyright Office is not convinced that Congress intended to exclude ISPs from section 512(h). Only an ISP is likely to be able to determine the identity of a user behind an IP address, information essential to filing an infringement claim.[152] The Copyright Office has therefore recommended clarifying that Section 512(h) applies to conduit ISPs.[153] OSPs are supposed to help rightsholders combat infringement in exchange for safe-harbor protection. Section 512 should be amended to require all OSPs seeking safe-harbor protection to provide whatever identifying information their service collects pursuant to a Section 512(h) subpoena.

C.   Filtering, takedown, and staydown

Section 512 does not require OSPs to proactively filter infringing content.[154] It was, however, expected that private industry would collaborate to develop and implement widespread standards for proactive technological controls to deter piracy. Section 512(i), for example, requires OSPs to accommodate STMs that would deter piracy and that have been developed through a voluntary, consensus process. While there have been piecemeal developments toward that end, the imagined innovations have thus far failed to materialize industrywide.

Congress must consider ways to prevent the initial sharing of pirated works, rather than the prevailing outdated file-containment approach. The latter presumes that post-hoc notice-and-takedown will be sufficient to control the spread of infringing material, which has not proven to be the case. New filtering solutions could empower OSPs to contribute significantly toward fighting piracy.[155]

Were OSPs to adopt reasonably effective filtering technologies, infringing files that are flagged and removed could more reliably be prevented from being reposted in the future. Indeed, as far back as 2007, several media and platform companies developed a set of best practices to control the proliferation of piracy. The proposed principles for user-generated content called on “websites to implement filtering technology that can recognize copyrighted works and notify rightsholders of any matches; rightsholders may then determine how the match should be treated.”[156]

Such filtering technologies already exist. Google employs proprietary filtering systems, for example.[157] DropBox has also implemented filtering in the past.[158] Audible Magic makes its filtering technology available for use by others,[159] and even small websites have found ways to employ filtering.[160] Indeed, even more prosaic technologies that have existed for decades—like web crawlers and digital fingerprinting accessible through basic APIs—could be adopted as effective STMs.

As the Copyright Office has noted, however, private firms could do more to advance broader access to these technologies for a wider range of firms.[161] A legal requirement to filter content for copyright infringement would help to foster a market for additional filtering solutions. This, in turn, could drive down costs and help to address the concern that smaller entities lack the resources to either create or obtain filtering solutions.[162]

The Copyright Office could help facilitate this process. Congress could empower the office to work with industry on specifications for STMs and to establish guidelines that ease their implementation. This could include determining minimum levels of functionality that such filters must include, which in turn should take a given platform’s size into account.

Indeed, this idea is central to the proposed SMART Copyright Act, discussed at the end of Part IV.[163] In this regard, the bill is directionally correct legislation, with two important caveats: it all depends on the kinds of STMs the LOC recommends and on how a “violation” is determined for the purposes of awarding damages.

The law would magnify the incentive for private firms to work together with rightsholders to develop STMs that more reasonably recruit OSPs into the fight against online piracy. In this sense, the LOC would be best situated as a convener, encouraging STMs to emerge from the broad group of OSPs and rightsholders. The fact that the LOC would be able to adopt STMs with or without stakeholders’ participation should provide more incentive for collaboration among the relevant parties.

Short of a voluntary set of STMs, the LOC could nonetheless rely on the technical suggestions and concerns of the multistakeholder community to discern a minimum viable set of practices that constitute best efforts to control piracy. The least desirable outcome—and the one most susceptible to failure—would be for the LOC to examine and select specific technologies.[164]

Among the concerns that surround promulgating new STMs are that they could potentially create cybersecurity vulnerabilities or sources for privacy leaks, or that they could accidentally chill speech.[165] In light of the potential unforeseen harms that can arise from implementation of an STM, the SMART Copyright Act’s requirements should be modified. If a firm does, indeed, discover that a particular STM, in practice, leads to unacceptable security or privacy risks, or is systematically biased against lawful content, there should be a legal mechanism that would allow for good-faith compliance, while also mitigating the STM’s unforeseen flaws. Ideally, this would involve working with the LOC in an iterative process to refine relevant compliance obligations.

While adopting filtering solutions would represent a new cost for many OSPs, complying with the existing notice-and-takedown system has costs, as well.[166] Using filtering solutions to prevent the unauthorized dissemination of copyrighted material would reduce the number of takedown notices that rightsholders would need to send and that OSPs would need to process. All parties would save time, hassle, and money—very possibly reducing the overall cost of Section 512 compliance.

1.     Fears of illegitimate blocking are overstated

Some critics have raised concerns that flaws in filtering technology could lead to mistakenly blocking legitimately disseminated content.[167] Among the faults commonly attributed to filtering solutions are failures to recognize licensed content or content disseminated pursuant to the Fair Use doctrine, or instances in which a rightsholder is mistaken as to the scope of its copyright.[168] The extent to which such faults are common is difficult to assess empirically. The experience of companies that offer content filters is proprietary information, and there are any number of reasons a platform might choose not to contest a takedown request that it or its users believe to be illegitimate. But some inferences may be drawn from available data, which generally suggest that harms stemming from this concern do not outweigh the known costs of piracy.

Actual false positives—instances where a user has an unambiguous right to use a file (e.g., they are the actual creator or have a license)—are likely to be exceedingly rare. A party who is the unambiguous creator of a work understandably has strong incentives to ensure that she can use her work as she sees fit.

What remains are false positives that fall somewhere on the spectrum of fair use—that is to say, they are somewhere between probably authorized under the fair-use factors and probably not authorized. If this reasoning is correct, then looking at the known instances of objections to takedown requests offers some sense of the possible scope of any false-positives problem. Some of the testimony offered during a December 2020 hearing of the U.S. Senate Judiciary Committee is illustrative in this regard.

According to Katherine Oyama, global director of business public policy for Google, uploaders disputed less than 1% of the Content ID claims made from January through June 2020.[169] Thus, in the set of all takedowns, 99% of the uploaders did not feel sufficiently entitled to use as to lodge an objection, or lodging an objection was otherwise not worth their time due to a variety of costs.[170] The remaining 1% captures some significant portion of those who are both definitely entitled (i.e., the original creator or a licensee who was misidentified) and those legitimately entitled to use under the fair-use affirmative defense.[171]

Among that 1% of uploaders, slightly more than half of the disputes were resolved in the uploader’s favor.[172] Even if all the remaining disputed uploads were kept down in error—which is unlikely—that would represent an error rate of less than 0.5% of all content flagged by Content ID. It is likely that most, if not all, of the errors were remedied in the slightly more than 0.5% of material flagged by Content ID that was allowed to proceed onto YouTube. Further, according to Noah Becker—president and co-founder of Adrev, a digital-rights-management company that administers Content ID claims for rightsholders—70% of Content ID disputes are “false claims of fair use, false claims of having procured a license, or false claims that the content is in the public domain. Most of these illegitimate disputes contain perjurious information from the user.”[173]

Using a similar set of numbers as those offered by Katherine Oyama, economist Stan Liebowitz estimated the differential between the number of infringing files uploaded to YouTube annually and the number of files taken down as infringing but later restored.[174] By his analysis of publicly available data, in 2016, roughly 2 million takedown disputes were resolved in favor of the uploader, while 600 million files were taken down and stayed down.[175] That is to say, 0.3% of takedowns were in error, which he characterized as a conservative estimate.[176]

It is, of course, possible that the percentage of false takedowns is greater than 1%, given that we can extrapolate only from known takedowns and putbacks. But if some unaccounted-for number of false takedowns are never challenged, it would appear that those users have deemed it not worth the trouble. Given the relative simplicity of the platforms’ takedown-challenge process,[177] a reluctance to engage would suggest the uploader does not place much value in the upload (i.e., there is not much benefit to be had and, by implication, limited social value). In such cases, the social cost of the false positive (erroneous takedown) is presumably not very significant compared to the value of enforcing IP rights.

By contrast, a false negative (erroneously leaving content up), even on a small site, can create significant harms to a rightsholder. Even a single unauthorized version of copyrighted content can quickly become available to the world, due to the global nature of the Internet and the availability of search, linking sites, and Internet-protocol-enabled piracy devices. Moreover, a single unauthorized version can multiply quickly. Thus, without more evidence, there is currently no reason to assume that content-filtering solutions like Content ID result in such widespread removal of legitimate uses of copyrighted material as to justify failing to enforce rightsholders’ claims rigorously.

While an industry standard for proactive filtering would help, the incredible scale of the takedown problem highlights deeper flaws in Section 512. The law should also be extended to place affirmative obligations on OSPs to employ filtering to prevent the recurrence of known infringing material once it has been discovered—a so-called “staydown” obligation, similar to recent experiments in the EU.[178] Expecting a rightsholder to repeatedly notify an OSP each time an infringing file reappears on the service makes little sense: it places rightsholders—especially small rightsholders—at a constant disadvantage.

Indeed, the Copyright Act does not currently require a copyright holder to scour a site for every instance of infringement of a specific work and to itemize every URL. Section 512(c)(3)(A)(ii) specifies that a takedown notice must identify the “copyrighted work claimed to be infringed, or, if multiple copyrighted works at a single online site are covered by a single notification, a representative list of such works at that site.”[179] Section 512(c)(3)(A)(iii) makes clear that the copyright holder need provide only “information reasonably sufficient to permit the service provider to locate” the infringing material.[180] Even if a copyright holder fails to “substantially comply” with the notice information requirements, the OSP must take “reasonable steps” to work with the copyright holder to gather the missing information.[181] If reasonably sufficient information remains unavailable, the copyright holder’s notice would not be considered the source of actual or red-flag knowledge.[182] The OSP may, however, obtain such knowledge from other sources.

Despite the broad obligations placed on OSPs by the Copyright Act’s statutory language, courts have rendered decisions that suggest rightsholders must provide near-exhaustive information, including URLs, for each and every specific infringement before OSPs have essentially any obligation to act.[183] The legislative history makes clear that such detailed information, while certainly helpful, is not required:

Where multiple works at a single on-line site are covered by a single notification, a representative list of such works at that site is sufficient. Thus, for example, where a party is operating an unauthorized Internet jukebox from a particular site, it is not necessary that the notification list every musical composition or sound recording that has been, may have been, or could be infringed at that site. Instead, it is sufficient for the copyright owner to provide the service provider with a representative list of those compositions or recordings in order that the service provider can understand the nature and scope of the infringement being claimed.

New subsection (c)(3)(A)(iii) requires that the copyright owner or its authorized agent provide the service provider with information reasonably sufficient to permit the service provider to identify and locate the allegedly infringing material. An example of such sufficient information would be a copy or description of the allegedly infringing material and the so-called ‘‘uniform resource locator’’ (URL) (i.e., web site address) which allegedly contains the infringing material. The goal of this provision is to provide the service provider with adequate information to find and examine the allegedly infringing material expeditiously.[184]

Some OSPs impose additional technical requirements for notices, such as creating an account or using an online form, instead of emailing the designated agent registered with the Copyright Office.[185] To mitigate this problem, the Copyright Office should be authorized to create model forms deemed to provide adequate notice, as well as to specify what kind of information is necessary and sufficient to require takedown. This information could be revised in a periodic process to give the office and stakeholders opportunities to properly shape the contours of this set of requirements.

D.   Repeat-infringer policies

Section 512 already requires that OSPs have policies to terminate service to repeat infringers, and to reasonably implement those policies. Indeed, Section 512(i) requires that, to be eligible for safe harbor, an OSP must have “adopted and reasonably implemented, and inform[ed] subscribers and account holders of the service provider’s system or network of, a policy that provides for the termination in appropriate circumstances of subscribers and account holders of the service provider’s system or network who are repeat infringers.”[186] As the Copyright Office has observed:

Both the House Commerce and Senate Judiciary Committee Reports explained that “those who repeatedly or flagrantly abuse their access to the Internet through disrespect for the intellectual property rights of others should know that there is a realistic threat of losing that access.”[187]

Courts, however, have historically interpreted the repeat-infringer policy requirement rather loosely. In Ventura Content v. Motherless, Inc.,[188] a site that allowed users to upload pornographic images and videos was found not to be in violation of the repeat-infringer policy requirement, even though the operator did not have a formal, detailed policy or keep a list of the number of times a user infringed.[189] The operator testified that he instead relied on his memory and terminated some repeat infringers but not others based on his own “gut” judgment, after considering a variety of unwritten factors that were not publicly available.[190] The court nonetheless concluded that this met the obligation to have a policy and to reasonably implement it.[191]

Where violations have been found, such cases have typically involved such egregious fact patterns as to provide little generalizable guidance. In Capitol Records v. Escape Media Group, an online-music service was found in violation where it failed to keep adequate records of infringement, prevented copyright owners from collecting information necessary to issue takedown notices, and did not terminate repeat infringers.[192] In UMG Recordings v. Grande Communications Networks, an ISP was found in violation where it had “utter[ly] fail[ed] to terminate any customers at all over a six-and-a-half-year period despite receiving over a million infringement notices and tracking thousands of customers as repeat infringers.”[193] And in BMG Rights Management v. Cox Communications, an ISP was found in violation where it capped the total number of notices a copyright holder could provide in a day; only counted one copyright-holder notice per subscriber per day; only considered terminating users after 13 strikes; and, if it did terminate them, reinstated the users after a break and restarted the strike counter so that, as an employee email indicated, the company could “collect a few extra weeks of payments for their account.”[194]

The point of the DMCA safe harbor is to provide platforms greater certainty regarding litigation risk when they act responsibly and to assure copyright holders that their rights will be reasonably protected in exchange for the liability limitations the platforms receive. That bargain is not achieved unless the platforms (and their users) know that costly repeat infringement will not be tolerated. To better address this goal, the Copyright Office should be authorized to provide guidance on the minimum requirements necessary to meet the repeat-infringer policy obligation, including by creating a model repeat-infringer policy that will be presumed to comply. This would offer platforms, their users, rightsholders, and courts more clarity on what behavior will be sanctioned.

E.   No-fault injunctions

Even where U.S. courts have ruled that websites have willfully engaged in infringement, stopping the infringement can be difficult, especially when the parties and their facilities are located outside the United States. One solution would be for a court to direct a non-party to the case, such as a U.S. -based ISP, to cut off access to a website held to be infringing.

Although Section 512 does allow courts to issue injunctions, there is ambiguity as to whether it allows courts to issue injunctions that obligate OSPs not directly party to a case to remove infringing material. Section 512(j) provides for the issuance of injunctions “against a service provider that is not subject to monetary remedies under this section.”[195] The “not subject to monetary remedies under this section” language could be construed to mean that such injunctions may be obtained even against OSPs that have not been found at fault for the underlying infringement.[196] But, “[i]n more than twenty years … these provisions of the DMCA have never been deployed, presumably because of uncertainty about whether it is necessary to find fault against the service provider before an injunction could issue, unlike the clear no-fault injunctive remedies available in other countries.”[197]

Indeed, more than 40 countries—including Denmark, Finland, France, India, England, and Wales—have enacted or are under some obligation to enact no-fault-injunction provisions directing ISPs to disable access to websites that predominantly promote copyright infringement.[198]

[L]egally and factually, these remedies turn on the infringing conduct of the pirate site at issue; they do not entail any finding of fault on the part of the intermediaries. No-fault injunctive remedies have been applied against a wide range of intermediaries, after first giving the intermediary notice of the infringing conduct taking place through its platform, all without entailing any inquiry into whether the intermediary may or may not have behaved in a manner that would incur primary or secondary liability. That question simply is not relevant to this form of relief, which turns on the simple finding that “such intermediaries are best placed to bring such infringing activities to an end.”[199]

Relatedly, Google has been working with rightsholders to delist pirate sites in response to “‘no fault’ orders directed at ISPs.”[200] To date, they have delisted nearly 10,000 sites in this manner.[201] The Motion Picture Association claims that its partnership with Google to delist pirate sites results in a “1.5 times larger traffic decline,” when compared with no-fault injunctions applied strictly at the ISP level.[202]

Thus, Section 512 should be amended to similarly grant U.S. courts authority to issue no-fault injunctions that require OSPs to block access to sites that courts have ruled are willfully engaged in mass infringement. Comparable authority was included in the Stop Online Piracy Act that was defeated in 2012, amid hyperbolic claims that allowing such orders would “break the Internet.” Notably, however, such sky-is-falling predictions have not materialized in the other nations that have authorized no-fault injunctions.[203] In fact, there is evidence that such orders can be quite useful in curbing piracy,[204] with one study demonstrating that no fault injunctions led to a more than 90% decrease in piracy.[205]

F.   Preservation of rights-management information

Digital copyrighted files often have embedded rights-management information, which indicates who holds the copyright and how the content may be used. OSPs and others who use the work sometimes strip out such information,[206] which is unlawful under Section 1202 of the Copyright Act. But to obtain redress, a rightsholder must demonstrate both that the OSP or other entity: 1) intentionally removed the rights-management information or disseminated the copyrighted work with knowledge that the rights-management information had been removed, and 2) did so with knowledge that its actions would facilitate infringement.[207] In practice, this section has been difficult to enforce, because the second requirement has proven a very high bar.

For example, in Stevens v. CoreLogic, Inc.,[208] CoreLogic’s software removed rights-management information from the photographs of two professional real-estate photographers when it compressed them for uploading to the Multiple Listing Service database.[209] The photographers, alleging that this might have led to unauthorized use of their photographs, sued under Section 1202.[210] The court upheld summary judgment for CoreLogic, on grounds that there was no evidence CoreLogic knew or had reason to know its actions would “induce, enable, facilitate, or conceal” infringement.[211] Similarly, in Philpot v. AlterNet Media Inc.,[212] photographer Larry Philpot alleged that AlterNet posted on its Facebook page a copyrighted photograph he took of Willie Nelson, and that it did not include the associated rights-management information.[213] The court granted AlterNet’s motion to dismiss on grounds that Philpot failed to plead facts showing that AlterNet knew or had reason to know that removal of the rights-management information would induce, enable, facilitate, or conceal an infringement.[214]

The lack of accurate rights-management information makes it harder for copyright holders to enforce their rights, as well as for individuals willing to license content to determine whom to approach to do so. Consequently, anyone disseminating the copyrighted work, including OSPs that may monetize the content through advertising or other means, should have an obligation to ensure that rights-management information included by a copyright holder remains intact and accurate. The concern here is not that the entity may be infringing the copyright or that there has been some intent to cause harm (although both may be true in some cases), but that the entity’s carelessness increases the likelihood that someone else will use the work without the copyright holder’s authorization. Consequently, Congress should consider amending Section 1202 to make it unlawful to negligently, recklessly, or knowingly remove rights-management information, or to negligently, recklessly, or knowingly disseminate a copyrighted work without that rights-management information, regardless of whether there was an intent to facilitate infringement.

Conclusion

Revising the Copyright Act as described above would encourage OSPs both to prevent initial infringement and to more effectively curtail ongoing or repeat infringement. OSPs could decline to implement these content-protection requirements, but the consequence would be losing the safe harbors and becoming subject to the ordinary standards of copyright liability. OSPs also might more widely choose to license copyrighted works that are likely to appear on their platforms. That would benefit copyright holders and Internet consumers alike. The providers themselves might even find it leads to increased use of their service—as well as increased profits.

Ultimately, however, it is important to advance copyright reforms that take seriously both the constraints on OSPs as well as the real harms that the failures of Section 512 have caused rightsholders for more than two decades. Real reform can be accomplished in a way that preserves both the benefits of a free and open Internet, as well as healthy legal protection for intellectual-property rights.

At the same time, it is important to be cognizant that effective reforms must move through a political process that can be challenging. What is set forth in this paper is a vision of what comprehensive reform would look like. But, short of a full reform, there are select measures proposed above that we believe could, even standing on their own, provide significant benefit. Foremost among these would be the expanded use of no-fault injunctions in the United States. As we note above in Section V(e), no-fault injunctions have been successfully employed around the world in a way that protects both the interests of copyright holders, as well as the interests of OSPs and private citizens. Moreover, we believe that a reform that facilitates a no-fault injunctive regime would go very far in controlling the most egregious forms of organized piracy.

[1] Geoffrey A. Manne, Kristian Stout, & Ben Sperry, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet, at 38-39, International Center for Law & Economics, ICLE (2021), available at https://laweconcenter.org/resource/who-moderates-the-moderators-a-law-economics-approach-to-holding-online-platforms-accountable-without-destroying-the-internet.

[2] Id. at 27 (“The relevant questions [when considering intermediary liability rules] are: To what degree would shifting the legal rules governing platform liability increase litigation costs, increase moderation costs, constrain the provision of products and services, increase ‘collateral censorship,’ and impede startup formation and competition, all relative to the status quo, not to some imaginary ideal state? Assessing the marginal changes in all these aspects entails, first, determining how they are affected by the current regime. It then requires identifying both the direction and magnitude of change that would result from reform. Next, it requires evaluating the corresponding benefits that legal change would bring in increasing accountability for tortious or criminal conduct online. And finally, it necessitates hazarding a best guess of the net effect.”).

[3] Id. at 139-95 and accompanying text.

[4] 47 U.S.C. § 230(c)(1)-(2).

[5] Congress added Section 512 to the Copyright Act through amendments adopted in Section 202 of the Digital Millennium Copyright Act of 1998. See Pub. L. No. 105-304, sec. 202, 112 Stat. 2860, 2877.

[6] Digital Millennium Copyright Act, H.R. Rep. No. 105-796, at 72 (1998) (Conf. Rep.).

[7] Playboy Enterprises, Inc. v. Frena, 839 F. Supp. 1552, 1554 (M.D. Fla. 1993). Frena is discussed, infra, at notes 37-41 and accompanying text.

[8] Religious Tech. Ctr. v. Netcom On-Line Commc’n Servs., Inc., 907 F. Supp. 1361, 1365–66 (N.D. Cal. 1995). Netcom is discussed, infra, at notes 42- 47, and accompanying text.

[9] 17 U.S.C. § 512.

[10] See, e.g., 17 U.S.C. § 512(c)(1) (providing safe harbor on the condition that the online service provider “(A)(i) does not have actual knowledge that the material or an activity using the material on the system or network is infringing; (ii) in the absence of such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent; or (iii) upon obtaining such knowledge or awareness, acts expeditiously to remove, or disable access to, the material; (B) does not receive a financial benefit directly attributable to the infringing activity, in a case in which the service provider has the right and ability to control such activity; and (C) upon notification of claimed infringement as described in paragraph (3), responds expeditiously to remove, or disable access to, the material that is claimed to be infringing or to be the subject of infringing activity.”).

[11] See, e.g., Dirk Auer et al., Submission on the Final Report of the Australian Competition and Consumer Commission’s Digital Platform Inquiry, International Center for Law & Economics (Sep. 12, 2019), https://laweconcenter.org/resource/submission-on-the-final-report-of-the-australian-competition-and-consumer-commissions-digital-platforms-inquiry.

[12] Australian News Media to Negotiate Payment with Major Digital Platforms, Australian Competition and Consumer Commission (Jul. 31, 2020), https://www.accc.gov.au/media-release/australian-news-media-to-negotiate-payment-with-major-digital-platforms; see also Journalism Competition and Preservation Act, S. 673, 117^th Congress (2021); Dean Miller, France and Australia to Google and Facebook: Pay for News, The Seattle Times (Apr. 24, 2020), https://www.seattletimes.com/opinion/france-and-australia-to-google-and-facebook-pay-for-news, (France suing Google under the new EU copyright directive for harm to news producers); Inti Landauro & Emma Pinedo, Alphabet to Reopen Google News in Spain After Govt Amends Rules, Reuters (Nov. 3, 2021), https://www.reuters.com/technology/alphabet-reopen-google-news-spain-soon-after-govt-changed-regulation-2021-11-03, (Google required to negotiate with Spanish news producers under EU copyright updates).

[13] Copyright Reform Clears Final Hurdle: Commission Welcomes Approval of Modernised Rules Fit for Digital Age, European Commission (Apr. 15, 2019), https://ec.europa.eu/digital-single-market/en/news/copyright-reform-clears-final-hurdle-commission-welcomes-approval-modernised-rules-fit-digital.

[14] U.S. Copyright Office, Section 512 of Title 17: A Report of the Register of Copyrights 1 (May 2020), available at https://www.copyright.gov/policy/section512/section-512-full-report.pdf [hereinafter “Section 512 Report”].

[15] Data Bank: World Development Indicators, The World Bank,  http://databank.worldbank.org/data/reports.aspx?source=world-development-indicators (last visited Oct. 11, 2022).

[16] See, e.g., The Internet News Audience Goes Ordinary, Pew Research Center for The People & The Press (January 1999), http://www.people-press.org/1999/01/14/the-internet-news-audience-goes-ordinary.

[17] Amazon Opens for Business, History.com: This Day in History (Jul. 27, 2019), https://www.history.com/this-day-in-history/amazon-opens-for-business.

[18] Hope Hamashige, MP3.com Founder Michael Robertson Discusses His Revolutionary Company, CNNMoney (Feb. 20, 2000), https://money.cnn.com/2000/02/28/electronic/q_mp3.

[19] From the Garage to the Googleplex, Google (last visited Oct. 11, 2022), https://about.google/our-story.

[20] Tom Lamont, Napster: The Day the Music Was Set Free, The Guardian (Feb. 23, 2013), https://www.theguardian.com/music/2013/feb/24/napster-music-free-file-sharing.

[21] Anne Sraders, History of Facebook: Facts and What’s Happening, TheStreet (Feb. 18, 2020), https://www.thestreet.com/technology/history-of-facebook-14740346.

[22] Paige Leskin, Youtube Is 15 Years Old, BusinessInsider (Oct. 11, 2022), https://www.businessinsider.com/history-of-youtube-in-photos-2015-10.

[23] Jack Meyer, History of Twitter, TheStreet (Jan. 2, 2020), https://www.thestreet.com/technology/history-of-twitter-facts-what-s-happening-in-2019-14995056.

[24] Monica Anderson, Mobile Technology and Home Broadband 2019, Pew Research Ctr. (2019), https://www.pewresearch.org/internet/2019/06/13/mobile-technology-andhome-broadband-2019, (reporting that 81% of American adults owned a smartphone in 2016, up from 35% in 2011); Andrew Perrin & Madhu Kumar, About Three-in-Ten U.S. Adults Say They Are ‘Almost Constantly’ Online, Pew Research Ctr.: FactTank (Jul. 25, 2019), https://www.pewresearch.org/fact-tank/2019/07/25/americans-going-onlinealmost-constantly.

[25] See ITU Telecomm. Dev. Bureau, Measuring Digital Development Facts and Figures 2019, 1 (2019), available at https://www.itu.int/en/ITU-D/Statistics/Documents/facts/FactsFigures2019.pdf; Internet Usage Statistics: World Internet Users and 2020 Population Stats, Internet World Stats (last visited Oct. 11, 2022), http://www.internetworldstats.com/stats.htm; Internet Growth Statistics, Internet World Stats (last visited Oct. 11, 2022), https://www.internetworldstats.com/emarketing.htm.

[26] See Geoffrey A. Manne & Julian Morris, Dangerous Exceptions: The Detrimental Effects of Including ‘Fair Use’ Copyright Exceptions in Free trade Agreements, International Center for Law & Economics, ICLE White Paper 2015-1 (2015) (“Technologies such as DVRs and MP3 players that predominantly enable users to shift the time, location and/or format of consumption may increase the value of the creative work to the consumer and hence the creator. But there is also a risk that they will be used for illegal distribution of works, reducing income to the creator—since it is almost impossible for the creator to appropriate that value. To the extent that the value added by the technologies may be appropriated by creators, it is in the interests of the creator to permit their use—and to develop technologies that minimize infringing uses. But if the infringing use dominates—as was clearly the case with Napster, for example—then it is in the creators and society’s interest for the use to be prohibited.”); See also Benjamin Klein et al., The Economics of Copyright “Fair Use” in a Networked World, 92 Am. Econ. Ass’n Papers & Proc. 205, 208 (2002).

^[27] See H.R. Rep. No. 105-796, at 72 (1998) (Conf. Rep.) (noting that the purpose of Section 512 was to “preserve[] strong incentives for service providers and copyright owners to cooperate to detect and deal with copyright infringements that take place in the digital networked environment” while “provid[ing] greater certainty to service providers concerning their legal exposure for infringements that may occur in the course of their activities.”); See also Irina Y. Dmitrieva, I Know It When I See It: Should Internet Providers Recognize Copyright Violation When They See it?, 16 Santa Clara Computer & High Tech. L.J. 233, 235-39 (2000) (discussing debates that emerged in academic circles over the problems faced by both rightsholders and online service providers under the pre-DMCA case law).

[28] 17 U.S.C. § 512.

[29] Id. § 512(a).

[30] Id. § 512(b).

[31] Id. § 512(c).

[32] Id. § 512(d).

[33] Intermediaries that qualify on the basis of caching, hosting, or linking must comply with the notice-and-takedown procedures prescribed in Section 512(c)(3). See also Io Grp., Inc. v. Veoh Networks, Inc., 586 F. Supp. 2d 1132, 1148 (N.D. Cal. 2008).

[34] See, e.g., 17 U.S.C. § 512(c)(1)(A) (providing safe harbor on the condition that the online service provider “(i) does not have actual knowledge that the material or an activity using the material on the system or network is infringing [or] (ii) in the absence of such actual knowledge, is not aware of facts or circumstances from which infringing activity is apparent”). Courts have progressively made it more difficult for rightsholders to assert claims against OSPs on the basis that they had such knowledge. For example, in Capitol Records v. Vimeo, the 2^nd U.S. Circuit Court of Appeals construed fair use as a barrier to employees of Vimeo being able to detect potentially illegitimate uses of copyrighted material, even where that employee knew the work was copyrighted. Capitol Records, LLC v. Vimeo, LLC, 826 F.3d 78, 96–97 (2d Cir. 2016), cert. denied, 137 S. Ct. 1374 (2017) (“Even assuming awareness that a user posting contains copyrighted music, the service provider’s employee cannot be expected to know how to distinguish, for example, between infringements and parodies that may qualify as fair use.”). This is particularly striking, because fair use is ostensibly an affirmative defense. See Kristian Stout, A Takedown of Common Sense: The Ninth Circuit Overturns the Supreme Court in a Transparent Effort to Gut the DMCA, Truth on the Market (Sep. 23, 2015), https://truthonthemarket.com/2015/09/23/a-takedown-of-common-sense-the-9th-circuit-overturns-the-supreme-court-in-a-transparent-effort-to-gut-the-dmca.

[35] Ernie Smith, How File Sharing Broke the Internet’s First Forum, Motherboard (Feb. 6, 2018), https://motherboard.vice.com/en_us/article/a34z85/how-file-sharing-broke-the-internets-first-forum-usenet.

^[36] As noted above, Google did not exist until 1998 and the then-available search engines were far inferior. See Caleb Donaldson, Beyond the DMCA: How Google Leverages Notice and Takedown at Scale, 10 Landslide 2 (2017), available at https://www.americanbar.org/content/dam/aba/publications/landslide/2017-nov-dec/beyond-dmca.authcheckdam.pdf.

^[37] See Howard A. Shelanski, The Speed Gap: Broadband Infrastructure and Electronic Commerce, 14 (2) Berkley Tech L. J. 721 (1999), available at https://lawcat.berkeley.edu/record/1116740/files/fulltext.pdf.

^[38] See Tom Lamont, Napster: The Day the Music Was Set Free, The Guardian (Feb. 23, 2013), https://www.theguardian.com/music/2013/feb/24/napster-music-free-file-sharing.

^[39] The Digital Millennium Copyright Act of 1998, S. Rep. No. 105-190, at 8 (1998).

^[40] Id. at 2-3.

[41] Playboy Enterprises, Inc. v. Frena, 839 F. Supp. at 1554.

[42] Id. at 1554.

[43] Id.

[44] Id. at 1559.

[45] Id. at 1555-58. It is noteworthy that the court and litigants did not appear to bring up even the possibility of treating Frena as a secondarily liable party.

[46] Religious Tech. Ctr. v. Netcom On-Line Commc’n Servs., Inc., 907 F. Supp. at 1365–66.

[47] Id. at 1365-66.

[48] Id. at 1368–70.

[49] Id. at 1373.

[50] Id. at 1376-81.

[51] Id. at 1383.

[52] Irina Y. Dmitrieva, I Know It When I See It: Should Internet Providers Recognize Copyright Violation When They See It?, 16 Santa Clara Computer & High Tech. L.J. 233, 237 (2000).

[53] The Digital Millennium Copyright Act of 1998, S. Rep. 105-190, at 19.

[54] Id. at 20.

[55] Id. See also Section 512 Report, supra note 14, at 21 (“The legislative history of section 512 thus acknowledges two key components of the balance that Congress sought to achieve: the assurance that good faith actions to address internet piracy by OSPs would qualify for safe harbors, providing ‘greater certainty’ regarding their liability, and the preservation of ‘strong incentives for service providers and copyright owners to cooperate to detect and deal with copyright infringements that take place in the digital networked environment,’ providing creators with viable remedies against online infringement.”) available at https://www.copyright.gov/policy/section512/section-512-full-report.pdf; The Digital Millennium Copyright Act at 22: What Is It, Why Was it Enacted, and Where Are We Now: Hearing Before the Subcomm. on Intellectual Property of the S. Comm. on the Judiciary, 116^th Cong. (2020) (statement of Senior Judge Edward J. Damich, at 2), available at https://www.judiciary.senate.gov/imo/media/doc/Damich%20Testimony.pdf.

[56] See, e.g., Erik Brynjolfsson, Avinash Collis, & Felix Eggers, Using Massive Online Choice Experiments to Measure Changes in Well-Being, 116 Proc. Nat’l. Acad. Sci. 7250 (April 2019) (finding that digital goods and services have “created large gains in well-being that are not reflected in conventional measures of GDP and productivity.”).

[57] See YouTube, Britannica.com (last visited Oct. 11, 2022), https://www.britannica.com/topic/YouTube.

[58] See YouTube for Press (last visited Oct. 11, 2022), https://blog.youtube/press.

[59] See Number of Daily Active Facebook Users Worldwide as of 4^th Quarter 2021, Statista (last visited Oct. 11, 2022), https://www.statista.com/statistics/346167/facebook-global-dau.

[60] See Danny Sullivan, Google Now Handles at Least 2 Trillion Searches Per Year, Search Engine Land (May 24, 2016), https://searchengineland.com/google-now-handles-2-999-trillion-searches-per-year-250247.

[61] See, e.g., TuneCore (last visited Oct. 11, 2022), https://www.tunecore.com; see also CD Baby (last visited Oct. 11, 2022), https://cdbaby.com.

[62] Erik Brynjolfsson, et al., supra note 53.

[63] Yan Chen, Grace YoungJoo Jeon & Yong-Mi Kim, A Day Without a Search Engine: An Experimental Study of Online and Offline Searches, 17 Exp. Econ. 512 (2014).

[64] Kenneth Li, YouTube Anti-Piracy Software Policy Draws Fire, Reuters (Feb. 16, 2007),  https://www.reuters.com/article/us-youtube-media/youtube-anti-piracy-software-policy-draws-fire-idUSN1321663620070217, (noting that, in 2007, one copyright holder alone was demanding the removal of 100,000 copyright-protected videos from YouTube).

[65] See, e.g., Transparency Report 2021, Reddit.com, https://www.redditinc.com/policies/transparency-report-2021-2, (Reddit reports a 104% increase in takedown requests for 2021, amounting to nearly 1 million pieces of content); see also Notice and Takedown, Facebook Transparency Report, Meta, https://transparency.fb.com/data/intellectual-property/notice-and-takedown/facebook, (In the first half of 2021, Facebook reports taking down more than 3 million pieces of content for copyright violations in response to 738,000 notices).

[66] See, e.g., Brett Danaher, et al., The Effect of Piracy Website Blocking on Consumer Behavior (2019), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2612063, (discussing the effects of site-blocking on the well-known piracy site The Pirate Bay); see also Brett Danaher & Michael D. Smith, Gone in 60 Seconds: The Impact of the Megaupload Shutdown on Movie Sales (2013), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2229349.

[67] T. Randolph Beard, George S. Ford & Michael L. Stern, Safe Harbors and the Evolution of Music Retailing, Phoenix Center, Phoenix Center Policy Bulletin No. 41 (2017).

[68] Id. at 3.

[69] Id. at 20.

[70] See Paige Leskin, YouTube Is 15 Years Old. Here’s a Timeline of How YouTube Was Founded, Its Rise to Video Behemoth, and Its Biggest Controversies Along Way, Business Insider (May 30, 2020), https://www.businessinsider.com/history-of-youtube-in-photos-2015-10.

[71] See, e.g., Overview of Copyright Management Tools, YouTube Help (last visited Oct. 11, 2022), https://support.google.com/youtube/answer/9245819. “Monetization” is the process, typically, of permitting YouTube to run ads alongside the content in question and to share the proceeds of that ad sale in different ways (e.g., between YouTube, the video creator, and the copyright holder).

[72] House Section 512 Hearing, 113th Cong. 54 (statement of Maria Schneider, Grammy Award Winning Composer/Conductor/Producer, Member of the Board of Governors, New York Chapter of the Recording Academy); see also Directors Guild of America (“DGA”), Comments Submitted in Response to U.S. Copyright Office’s Dec. 31, 2015, Notice of Inquiry at 8 (Apr. 1, 2016) (“DGA Initial Comments”) (“[I]ndividual creators usually do . . . not have any access to, or in many cases awareness of . . . [content-filtering technologies].  That . . . needs to be rectified.”); FMC, Additional Comments Submitted in Response to U.S. Copyright Office’s Nov. 8, 2016, Notice of Inquiry at 6 (Feb. 21, 2017).

[73] Note, however, that the full picture of enforcement online remains relatively complicated. For example, acknowledging that search results can be a major vector for individuals locating pirated content, Google has begun working with the Motion Picture Association to delist sites in voluntary compliance with no-fault injunctions. See, e.g., Ernesto Van der Sar, MPA: Google’s Delisting of Thousands of Pirate Sites Works, TorrentFreak (Mar. 22, 2022), https://torrentfreak.com/mpa-googles-delisting-of-thousands-of-pirate-sites-works-220322. No-fault injunctions are discussed further, infra, at notes 175-185 and accompanying text.

[74] See section notes 100-118, infra, and accompanying text.

[75] See section notes 119-130, infra, and accompanying text.

[76] Jennifer M. Urban, et al., Notice and Takedown in Everyday Practice at 115, Berkley Public Law Research Paper No. 2755628 (Mar. 17, 2017), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2755628. See also, e.g., Amazon.com, Comments Submitted in Response to U.S. Copyright Office’s Dec. 31, 2015, Notice of Inquiry at 3 (Apr. 1, 2016) (“Amazon Initial Comments”) (“A key principle of both federal Internet policy and the DMCA is that online service providers should not be required to police the activities of their users or make difficult legal determinations about the nature of any particular content on the service provider’s system.  Lawful services like Amazon and other U.S. Internet companies could not have flourished without such a policy.  This principle is crucial to the growth of the Internet where today, a single service can facilitate real-time discourse among over three billion worldwide users.”); See The DMCA’s Notice-and-Takedown System Working in the 21st Century: Hearing Before the S. Comm. on the Judiciary Subcomm. on Intell. Prop., 116th Cong. (2020) (statement of Abigail A. Rives, Intell. Prop. Couns.).

[77] Urban, et al., id.

[78] Id. at 116-21.

[79] Id. at 116-18; See also Marc J. Randazza, Lenz v. Universal: A Call to Reform Section 512(f) of the DMCA and to Strengthen Fair Use, 18 JETLaw 743 (2020), available at https://scholarship.law.vanderbilt.edu/jetlaw/vol18/iss4/3; Rashmi Rangnath, ?U.S. Chamber of Commerce Uses the DMCA to Silence Critic?, ?Public Knowledge (Oct. 27, 2019), https://www.publicknowledge.org/blog/u-s-chamber-of-commerce-uses-the-dmca-to-silence-critic.

[80] See, e.g., Computer & Communications Industry Association (“CCIA”), Comments Submitted in Response to U.S. Copyright Office’s Dec. 31, 2015, Notice of Inquiry at 11 (Apr. 1, 2016) (“CCIA Initial Comments”); Microsoft Corporation, Comments Submitted in Response to U.S. Copyright Office’s Dec. 31, 2015, Notice of Inquiry at 9 (Mar. 31, 2016) (“Microsoft Initial Comments”) (“In 2012, Microsoft received notices targeting under 1.8 million links to alleged infringing works appearing in Bing’s search results.  In 2015, that number grew to over 82 million alleged links to infringing works appearing in Bing’s search results, with more than 99% of such notices sent using Microsoft’s online forms.  Processing this volume of notices without the benefit of automated tools and processes, using human review, would not be viable.”); Motion Picture Association of America, Inc. (“MPAA”), Comments Submitted in Response to U.S. Copyright Office’s Dec. 31, 2015, Notice of Inquiry at 18 (Apr. 1, 2016) (“MPAA Initial Comments”) (“For smaller owners, the phenomenon may well make the notice-and-takedown exercise cost prohibitive.  One independent film maker, for example, had to send 56,000 takedown notices regarding her film, and that volume of notices did not result in the film’s permanent removal.”)

[81] Section 512 Report, supra note 12, at 81.

^[82] For just one album (“1989” by Taylor Swift), UMG had to hire full-time staff to issue more than 180,000 takedown requests between October 2014 and March 2016. Nonetheless, that album alone was illegally downloaded more than 1.4 million times. See Karen Gwee, How Artists Are Struggling for Control in an Age of Safe Harbors, Consequence (Jul. 8, 2016), https://consequenceofsound.net/2016/07/how-artists-are-struggling-for-control-in-an-age-of-safe-harbors.

[83] Now More than Ever, Creative Future (Jun. 10, 2020), https://creativefuture.org/now-more-than-ever (providing data from research firm MUSO).

[84] Id.

[85] Pirate Subscription Services Now a Billion-Dollar U.S. Industry, Joint Digital Citizens Alliance-NAGRA Report Finds, Digital Citizens Alliance, (Aug. 6, 2020), https://www.digitalcitizensalliance.org/news/press-releases-2020/pirate-subscription-services-now-a-billion-dollar-u.s.-industry-joint-digital-citizens-alliance-nagra-report-finds.

[86] David Blackburn, Jeffrey Eisenach, & David Harrison Jr., Impacts of Digital Video Piracy on the U.S. Economy, Nera Consulting (June 2019), available at https://www.theglobalipcenter.com/wp-content/uploads/2019/06/Digital-Video-Piracy.pdf.

[87] See, e.g., The Internet Association, Comments Submitted in Response to U.S. Copyright Office’s Dec. 31, 2015 Notice of Inquiry at 15 (Apr. 1, 2016) (“Internet Association Initial Comments”) (“[T]he problems of scale are true for Internet platform creators: startups and small businesses lack the sophisticated resources of larger, more established businesses in responding to takedown requests.”)

[88] Section 512 Report, supra note 12, at 32.

[89] Copyright Content Removal Requests Report, Microsoft (last visited Oct. 11, 2022), https://www.microsoft.com/en-us/corporate-responsibility/copyright-removal-requests-report.

[90] Id.

[91] Id.

[92] Intellectual Property 2021: Jul 1-Dec 31, Automattic (last visited Oct. 11, 2022), https://transparency.automattic.com/wordpress-dot-com/intellectual-property/intellectual-property-2021-jul-1-dec-31.

[93] Id.

[94] Over Thirty Thousand DMCA Notices Reveal an Organized Attempt to Abuse Copyright Law, Lumen (Apr. 22, 2022), https://www.lumendatabase.org/blog_entries/over-thirty-thousand-dmca-notices-reveal-an-organized-attempt-to-abuse-copyright-law.

[95] Urban, et al., supra note 76, at 2.

[96] Section 512 Report, supra note 14, at 84 (“Over the decades, the shift in the balance of the benefits and obligations for copyright owners and OSPs under section 512 has resulted in an increasing burden on rightsholders to adequately monitor and enforce their rights online, while providing enhanced protections for OSPs in circumstances beyond those originally anticipated by Congress”).

^[97] Some rightsholders have claimed that the way DMCA safe harbors have been construed has led to a “culture of free” — expectations by users that content has near-zero cost. See U.S. Copyright Office, Docket No. 2015-7, Section 512 Study: Notice and Request for Public Comment (2015), available at https://downloads.regulations.gov/COLC-2015-0013-89806/attachment_1.pdf. According to these commentators, the end result of safe harbors in the presence of a “culture of free” is that the perceived value of licenses themselves goes down, resulting in a vicious circle of devaluation that affects their subsequent bargaining position with the platforms. This is, however, another way of restating the argument here. If the licensing value is diminished because existing safe harbors are improperly biased toward platform owners, then the devalued license reveals that the costs of piracy are born by rightsholders, instead of being allocated more equitably between platforms and rightsholders.

[98] See, e.g., Capitol Records, Ltd. Liab. Co. v. Vimeo, Ltd. Liab. Co., 826 F.3d 78 (2d Cir. 2016); Viacom Int’l, Inc. v. YouTube, Inc., 676 F.3d 19 (2d Cir. 2012); Mavrix Photographs, Ltd. Liab. Co. v. LiveJournal, Inc., 873 F.3d 1045 (9th Cir. 2017).

[99] See infra notes at 87-94 and accompanying text.

[100] See 17 U.S.C. § 512(c)–(d).

[101] In Grokster, the Supreme Court noted that secondary liability for “vicarious” infringement could attach when an OSP directly profits from an infringement, while also declining to exercise its right to stop or limit that infringement.  Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 930 (2005). While not an explicit command to proactively monitor infringement, the Supreme Court recognized some circumstances in which a service provider’s obligations are heightened with respect to deterring the presence of infringing material on their services.

[102] 17 U.S.C. § 512(m).

[103] Digital Millennium Copyright Act, H.R. Rep. No. 105-551, at 53 (1998) (Conf. Rep.).

[104] Viacom, 676 F.3d at 31.

[105] See, e.g., UMG Recordings, Inc. v. Shelter Capital Partners LLC, 718 F.3d 1006, 1021 (9th Cir. 2013) (noting that “actual knowledge” as being “specific” knowledge of “particular infringing activity”); BWP Media USA, Inc. v. Clarity Digital Grp., LLC, 820 F.3d 1175, 1182 (10th Cir. 2016) (“general knowledge of potential infringement could not count as ‘actual’ knowledge”); Sony Music Entm’t v. Cox Commc’ns, Inc., 426 F. Supp. 3d 217, 230–31 (E.D. Va. 2019) (adopting the 9th Circuit’s interpretation of actual knowledge of infringement).

[106] Viacom, 676 F.3d at 31.

[107] Shelter Capital, 718 F.3d at 1023.

[108] Perfect 10, Inc. v. CCBill LLC, 488 F.3d 1102, 1114 (9th Cir. 2007). This case may be a classic instance of bad facts making bad law, with the subject content—pornography—perhaps being viewed negatively by the reviewing court in such a way that users’ increasing the “salacious appeal” of the content was seen as expected behavior.

[109] Shelter Capital, 718 F.3d at 1023 (emphasis added).

[110] Viacom, 676 F.3d at 31.

[111] Id. The court felt that the two provisions did not collapse into each other because of the addition of the “objective” standard for red-flag knowledge, even though the set of circumstances in which the knowledge standard could apply would become virtually identical (“The red flag provision, because it incorporates an objective standard, is not swallowed up by the actual knowledge provision under our construction of the § 512(c) safe harbor. Both provisions do independent work, and both apply only to specific instances of infringement.”).

[112] Vimeo, 826 F.3d at 85-86.

[113] Id. at 86.

[114] Id. at 94.

[115] Id. at 93-94.

[116] Id. at 94.

[117] Id.

[118] Section 512 Report, supra note 14, at 123 (emphasis added).

[119] See WHOIS Database Under GDPR: Temporary Measures in Place, Eurodns (Jul. 17, 2018), https://www.eurodns.com/blog/whois-database-gdpr-compliance. The WHOIS information is now considered protected. A third party with a valid interest can still obtain this information, but the process has become more cumbersome and may require appeals through the ICANN organization.

[120] Jan Bernd Nordemann, The Functioning of the Internal Market for Digital Services: Responsibilities and Duties of Care of Providers of Digital Services, European Parliament IMCO Committee at 51 (2020), available at https://www.europarl.europa.eu/RegData/etudes/STUD/2020/648802/IPOL_STU(2020)648802_EN.pdf.

[121] Id. at 51-54.

[122] Id. at 54.

[123] 17 U.S.C. § 512 (h).

[124] See, e.g., In re Subpoena to Univ. of N.C. at Chapel Hill, 367 F. Supp. 2d 945, 955 (M.D.N.C. 2005); see also Recording Industry Association of America, Inc. v. Verizon Internet Services, Inc., 351 F.3d 1229, 1233 (D.C. Cir. 2003).

[125] See, e.g., Strike 3 Holdings, LLC v. Doe, 964 F.3d 1203, 1213 (D.C. Cir. 2020).

[126] Id.

[127] 17 U.S.C. 512(j)(1).

[128] 17 U.S.C. 512(j)(2).

[129] See, e.g., Wolk v. Kodak Imaging Network, Inc., No. 10 CIV. 4135 RWS, 2011 WL 940056, at *8 (S.D.N.Y. Mar. 17, 2011).

[130] Section 512 Report, supra note 14, at 171.

[131] Id. at 67.

[132] See e.g., Authors Guild, Inc., Comments Submitted in Response to U.S. Copyright Office’s Dec. 31, 2015, Notice of Inquiry at 27 (Apr. 1, 2016) (“As a result, there has been no impetus to conduct the sort of standards creation process to develop STMs that was contemplated by Congress . . . .”); Comput. & Commc’ns Indus. Ass’n (“CCIA”), Comments Submitted in Response to U.S. Copyright Office’s Dec. 31, 2015, Notice of Inquiry at 24 (Mar. 31, 2016) (“CCIA Initial Comments”) (“CCIA is unaware of any successful or emerging inter-industry technological effort that satisfies the requirements of Section 512(i)(2).”); see also SMART Copyright Act of 2022, S. 3880, 117th Congress (2022) [hereinafter “SMART Copyright Act”].

[133] How ContentID Works, YouTube Help (last visited Oct. 11, 2022), https://support.google.com/youtube/answer/2797370?hl=en.

[134] About Rights Manager, Meta for Business (last visited Oct. 11, 2022), https://www.facebook.com/business/help/2015218438745640?id=237023724106807.

[135] Technology, Audible Magic (last visited Oct. 11, 2022), https://www.audiblemagic.com/technology.

[136] Section 512 Report, supra note 14, at 67-68.

[137] Id. at 68

^[138] Urban, et al. supra note 68, at 71.

[139] SMART Copyright Act, supra note 108.

[140] Doug Lichtman & Eric Posner, Holding Internet Service Providers Accountable, 14 Sup. Ct. Econ. Rev. 221, 223 (2006).

[141] Geoffrey A. Manne, Kristian Stout, & Ben Sperry, Who Moderates the Moderators?: A Law & Economics Approach to Holding Online Platforms Accountable Without Destroying the Internet at 38-39, International Center for Law & Economics, ICLE (2021), available at https://laweconcenter.org/resource/who-moderates-the-moderators-a-law-economics-approach-to-holding-online-platforms-accountable-without-destroying-the-internet.

[142] See id. at notes 25-100 and accompanying text.

[143] See T. Randolph Beard, et al., Fixing Safe Harbor: An Economic Analysis, Phoenix Center Policy Paper No. 52 (2017) at 23, available at https://www.phoenix-center.org/pcpp/PCPP52Final.pdf (stating that “the vetting of upload material prior to its availability for consumption on the UUC platform should be encouraged” and that “the protection of the safe harbors could be limited to UUC platforms with formal vetting policies and systems.”).

[144] See, e.g., Reiko Aoki & Aaron Schiff, Intellectual Property Clearinghouses: The Effects of Reduced Transaction Costs in Licensing, 22 Info. Econ. & Pol’y 218 (2010) (noting that third-party clearing houses are “two-sided platforms” that can improve intellectual-property licensing by centralizing information, reducing search friction, solving coordination and externality problems, simplifying contracting, and generally creating economic value by bringing upstream IP owners and downstream IP users together more efficiently); Bruce I. Carlin, Intermediaries and Trade Efficiency, at 6-7 (2005), https://ssrn.com/abstract=779485 (stating that intermediaries add value by allowing suppliers and consumers to trade objects of all quality levels, by alleviating the cost of obtaining a counterparty and decreasing search costs, and by decreasing the transaction cost); John E. Dubiansky, The Licensing Function of Patent Intermediaries, 15 Duke Law & Tech. Rev. 269, 269-70 (2017) (arguing that licensing to intermediaries can provide advantages over unilateral licensing because intermediaries can overcome search and valuation costs, avoid litigation costs, drive licensee demand by reducing uncertainty, and create network effects by increasing the number of prospective licensees accessed through the intermediary).

[145] See George R. Barker, The Value Gap in Music Markets in Canada and the Role of Copyright Law, at 8 (2018), https://ssrn.com/abstract=3320026 (stating that poor copyright law creates a “value gap” by enabling OSPs to commercially exploit copyrighted works at less than market-based rates, if they pay copyright holders anything at all); Daniel Lawrence, Addressing the Value Gap in the Age of Digital Music Streaming, 52 Vand. J. Transnat’l L. 511, 518-522 (2019), available at https://cdn.vanderbilt.edu/vu-wp0/wp-content/uploads/sites/78/2019/05/25124350/9.20Lawrence.pdf (explaining how flaws in the U.S. Copyright Act have caused a value gap); T. Randolph Beard et al., Safe Harbors and the Evolution of Music Retailing, Phoenix Center Policy Bulletin No. 41, at 20 (2017), available at https://www.phoenix-center.org/PolicyBulletin/PCPB41Final.pdf (estimating that the flawed safe harbors in the United States create a value gap of between $650 million and more than $1 billion per year for music, alone).

[146] See Beard et al., supra note 116 at 4-5, 8-10, 20, 21-22, 25-26 (2017) (stating that the United States’ flawed copyright safe harbors promote infringing platforms to the detriment of responsible ones, and recommending that the safe harbors be conditioned on platforms doing more to prevent piracy in the first place).

[147] See, e.g., Capitol Records, LLC v. Vimeo, LLC, 826 F.3d at 78; Viacom v. YouTube; Ventura Content, Ltd. v. Motherless, Inc., 885 F.3d 597, 610–11 (9th Cir. 2018); BWP Media USA, Inc. v. Clarity Digital Grp., LLC, 820 F.3d 1175, 1182 (10th Cir. 2016).

[148] 17 U.S.C. § 512(h)(1).

[149] Section 512 Report, supra note 14, at 6.

[150] Id. at 164.

[151] Verizon, 351 F.3d at 1234–36.

[152] See discussion, supra, at note 125 and accompanying text.

[153] Section 512 Report at 6, 166-67.

[154] But note that the Supreme Court has held that, in some cases, a lack of filtering is a relevant element of an infringement analysis. See Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd., 545 U.S. 913, 913 (2005) (noting that evidence suggested that Grokster and StreamCast were not “merely passive recipients of information about infringing use” but engaged in inducement, and observing that there was “no evidence that either company made an effort to filter copyrighted material from users’ downloads or otherwise impede the sharing of copyrighted files.”).

[155] See Beard et al., supra note 116, at 10 (observing that platforms are now capable of relatively effective filtering and suggesting that such filtering should be a “predicate for safe harbor,” with notice and takedown used as a “backstop.”).

[156] Principles For User Generated Content Services, UGCPrinciples.com (last visited Oct. 11, 2022), available at https://ugcprinciples.com.

[157] See supra notes 109 & 110.

[158] Greg Kumparak, How Dropbox Knows When You’re Sharing Copyrighted Stuff (Without Actually Looking At Your Stuff), TechCrunch (Mar. 30, 2014), https://techcrunch.com/2014/03/30/how-dropbox-knows-when-youre-sharing-copyrighted-stuff-without-actually-looking-at-your-stuff.

[159] Audible Magic (last visited Oct. 11, 2022), https://www.audiblemagic.com.

[160] See, e.g., Ventura Content v. Motherless, Inc., 885 F.3d 597, 616 (9^th Cir. 2018) (indicating a site in the case employed hashing software to police the presence of illicit clips on its service).

[161] Section 512 Report, supra note 14, at n. 501.

[162] Urban, et al. supra note 68, at 124.

[163] See SMART Copyright Act, supra note 108 and accompanying text.

[164] All else equal, firms are more intimately familiar with how their own technology works and how their users interact with that technology than are regulators. As such, regulators are usually best positioned to propose general standards and leave technical implementation details up to actual market participants (so long as such implementation reasonably comports with the requirements of the standard).

[165] Re:Create Statement on Dangerous Technical Mandate and Filtering Bill, S. 3880, re:create (Mar. 18, 2022), https://www.recreatecoalition.org/press_release/recreate-statement-on-dangerous-technical-mandate-and-filtering-bill-s-3880.

[166] See Section 512 Report, supra note 14, at n. 237 (quoting comments of the Business Software Alliance that “BSA members invest significant resources into developing state of the art systems for processing high volumes of takedown notices.”); In re Section 512 Study: Notice and Request for Public Comment, Copyright Office Docket No. 2015-7, Comments of the Information Technology and Innovation Foundation, at 3, (Mar. 21, 2016), available at http://www2.itif.org/2016-section-512-comments.pdf (stating that “[t]he best way to minimize the cost of sending and responding to so many notices of infringement is to use automated techniques. In particular, online service providers can use automated filtering systems that check content as it is uploaded to stop a user from reposting infringing content.”).

[167] See, e.g., Ben Depoorter & Robert Kirk Walker, Copyright False Positives, 89 Notre Dame Law Rev. 319, 322 (2013)  (“Second, and even more problematic, are instances where transaction  costs and risk aversion inhibit wrongly accused infringers from opposing copyright infringement actions.”).

[168] Id.

[169] The Role of Private Agreements and Existing Technology in Curbing Online Piracy: Hearing Before the Subcomm. on Intell. Prop. of the S. Comm. on the Judiciary, 116^th Cong. (2020) (written testimony of Katherine Oyama, at 9), available at https://www.judiciary.senate.gov/imo/media/doc/Oyama%20Testimony.pdf.

[170] Some users undoubtedly lack knowledge of their rights. Others will find the costs in time to outweigh the benefit of pressing a fair use claim. The relevant point here is that the reasons for failing to object are likely diverse. Thus, concerns rooted in a concept that all users who fail to object to a takedown are having their rights improperly ignored is potentially quite misleading.

[171] Admittedly, this is an extrapolation. But it is hard to imagine that a true author would fail to object to a takedown of her content. Similarly, a person who incorporates part of a work into his or her own work and feels entitled under fair use (e.g., a parody or a news commentary) has a relatively strong incentive to object. Whereas a user that incidentally includes a song in the background of a video has a much more ambiguous claim and is much less likely to object.

[172] Id.

[173] Id.; The Role of Private Agreements and Existing Technology in Curbing Online Piracy: Hearing Before the Subcomm. on Intell. Prop. of the S. Comm. on the Judiciary, 116^th Cong. (2020) (written testimony of Noah Becker, at 6), available at https://www.judiciary.senate.gov/imo/media/doc/Becker%20Testimony.pdf. And to the extent the illegitimate disputes were inadvertent, the education requirement discussed above would play an ameliorating role.

[174] Stan J. Liebowitz, Economic Analysis of Safe Harbor Provisions, CISAC, at 10 (2018), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3143811.

[175] Id. at 11.

[176] Id. (Noting that he is selecting numbers on the low side of the potential range of takedowns and putbacks). In another analysis of a study purporting to demonstrate “high” error rates from false takedown notices, George Ford demonstrates that the actual incidence is less than 0.2% of requests. George S. Ford, Notice and Takedown in Everyday Practice: A Review, 3 (2017), available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2963230.

[177] See, e.g., Submit a Copyright Counter Notification, YouTube (last viewed Apr. 7, 2022), https://support.google.com/youtube/answer/2807684.

[178] See DSM Directive, art. 17(4). To avoid liability for an instance of infringement on its service, an OSP must have “acted expeditiously, upon receiving a sufficiently substantiated notice from the rightholders, to disable access to, or to remove from their websites, the notified works or other subject matter, and made best efforts to prevent their future uploads.” (emphasis added)

[179] 17 U.S.C. § 512I(3)(A)(ii).

[180] 17 U.S.C. § 512(c)(3)(A)(iii).

[181] 17 U.S.C. § 512(c)(3)(B)(ii).

[182] 17 U.S.C. § 512(c)(3)(B)(i).

[183] See Perfect 10 v. CCBill, 488 F.3d 1102 (9^th Cir. 2007); Viacom Int’l v. YouTube, Inc., 940 F.Supp. 2d 110, 115 (S.D.N.Y. 2013).

[184] H.R. Report No. 105–551, at 55 (emphasis added).

[185] See Copyright and the Internet in 2020—Reactions to the Copyright Office’s Report on the Efficacy of 17 U.S.C. § 512 After Two Decades: Hearing Before the H. Comm. on the Judiciary, 116^th Cong. (Dec. 15, 2020) (statement of Terrica Carrington, at 8), available at https://copyrightalliance.org/wp-content/uploads/2020/11/Copyright-Alliance-512-DMCA-HJC-Testimony-for-September-30-FINAL.pdf (stating that “[i]ndividual creators face numerous other significant barriers to the effective use of the notice and takedown process, including the lack of uniformity and consistency from one OSP’s web form to the next, and the practice by some OSPs of imposing requirements beyond those prescribed under the law”).

[186] 17 U.S.C. § 512(i)(A).

[187] Section 512 Report, supra note 14, at 102 (citing H.R. Rep. No. 105-551, pt. 2, at 61 (1998); S. Rep. No. 105-190, at 52 (1998)).

[188] 885 F.3d 597 (9th Cir. 2018).

[189] Id. at 607-8.

[190] Id. at 616.

[191] Id. at 619.

[192] Capitol Records v. Escape Media Group, 12-CV-6646 (AJN) (S.D.N.Y. Mar. 25, 2015).

[193] UMG Recordings v. Grande Communications Networks, 384 F. Supp. 3d 743 (W.D. Tex. 2019).

[194] BMG Rights Management v. Cox Communications, No. 16-1972 (4th Cir. Feb. 1, 2018).

[195] 17 U.S.C. § 512(j).

[196] See Copyright Law in Foreign Jurisdictions—How Are Other Countries Handling Digital Piracy?: Hearing Before the Subcomm. on Intellectual Property of the S. Comm. on the Judiciary, 116^th Cong. (Mar. 10, 2020) (statement of Justin Hughes, at 11 & n.65), available at https://www.judiciary.senate.gov/imo/media/doc/Hughes%20Testimony.pdf (“§512(j)(1)(B) makes transmission ISPs eligible for injunctive orders to deny access to subscribers engaged in infringing activity ‘by terminating the accounts of the subscriber or account holder that are specified in the order’ as well as eligible for orders ‘restraining the service provider from providing access, by taking reasonable steps specified in the order to block access, to a specific, identified, online location outside the United States.’ I believe that §512(j)(3) makes it clear that these orders were intended to be “innocent” third party injunctions available without suing the ISP.”).

[197] See Copyright Law in Foreign Jurisdictions—How Are Other Countries Handling Digital Piracy?: Hearing Before the Subcomm. on Intellectual Property of the S. Comm. on the Judiciary, 116^th Cong. (Mar. 10, 2020) (testimony of Stanford K. McCoy, at 6), available at https://www.judiciary.senate.gov/imo/media/doc/McCoy%20Testimony.pdf.

[198] See Directive 2001/29 of the European Parliament and of the Council of 22 May 2001 on the Harmonisation of Certain Aspects of Copyright and Related Rights in the Information Society, art. 8(3), 2001 O.J. (L 167) (EC); Ellen Marja Wesselingh, Website Blocking: Evolution or Revolution? 10 Years of Copyright Enforcement by Private Third Parties, Rev. Internet Derecho Politica 38–39 (October 2014), https://idp.uoc.edu/articles/10.7238/idp.v0i19.2422/ galley/2482/download; Neil Turkewitz, Why the Canadian Supreme Court’s Equustek Decision Is a Good Thing for Freedom — Even on the Internet, Truth on the Market (Jul. 8, 2017), https://truthonthemarket.com/2017/07/08/why-the-canadian-supreme-courts-equustek-decision-is-a-good-thing-for-freedom-even-on-the-internet.

[199] See McCoy, supra note 175, at 3 (quoting Directive 2001/29/EC of the European Parliament and of the Council of 22 May 2001 on the harmonization of certain aspects of copyright and related rights in the information society, recital 59).

[200] Charles H. Rivkin, Working Toward a Safer, Stronger Internet, Motion Picture Association (Mar. 21, 2022), https://www.motionpictures.org/press/working-toward-a-safer-stronger-internet.

[201] Id.

[202] Id.

[203] See Brett Danaher et al., Website Blocking Revisited:  The Effect of the UK November 2014 Blocks on Consumer Behavior at 17 (Apr. 18, 2016) (unpublished article), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2766795; see also Rettighedsalliancen, Annual Report 2017, 5 (March 2018), available at https://rettighedsalliancen.dk/wpcontent/uploads/ 2018/08/ENGB_RettighedsAlliancen2018.pdf (noting the average 75% decrease in Danish IP traffic to piracy sites in the wake of DNS blocking orders).

[204] See McCoy, supra note 198, at 4 (“Our internal data shows us that site blocking is very effective at cutting traffic to pirate domains – meaning that an order applicable to the main access providers in a given country reduces traffic to a targeted domain by 70% on average and can be as high as 80-90% in some countries. That domain-specific impact is very clear and sustained over time. It becomes even more durable if the remedy specifies the underlying site, rather than just one or a few of the many domain names the site may use at any given time (this is the case in the UK, for example).”); Beard et al., supra note 116 (observing that site blocking has helped to curb digital piracy) (citing Brett Danaher, Michael D. Smith, and Raul Telang, Website Blocking Revisited: The Effect of the UK November 2014 Blocks on Consumer Behavior, Working Paper (Apr. 18, 2016), http://ssrn.com/abstract=2766795; Site Blocking Efficacy in Portugal: September 2015 to October 2016, Incopro (May 2017), available at http://www.incoproip.com/wp- content/uploads/2017/07/Site-Blocking-and-Piracy-Landscape-in-Portugal-FINAL.pdf; Site Blocking Efficacy Study: United Kingdom, Incopro (Nov. 13, 2014), available at http://auscreenassociation.film/uploads/reports/Incopro_Site_Blocking_Efficacy_Study-UK.pdf; Site Blocking in the World, Motion Picture Association (October 2015), available at http://www.mpa-i.org/wp-content/uploads/2016/02/Site-Blocking-October-2015.pdf; Nigel Cory, How Website Blocking is Curbing Digital Piracy Without “Breaking the Internet,” Information Technology & Innovation Foundation (August 2016), available at https://www.researchgate.net/publication/333292640_How_Website_Blocking_Is_Curbing_Digital_Piracy_Without_Breaking_the_Internet; T. Randolph Beard, et al., supra note 117.

[205] Brett Danaher, Michael D. Smith & Rahul Telang, Copyright Enforcement in Digital Age: Emprical Evidence and Policy Implications, 60 Comm’cns ACM 2, 11 (2017).

[206] A frequent reason for violating this provision appears to be simple error. For example, in Stevens v. CoreLogic, No. 16-56089 (9th Cir., Aug. 6, 2018) (Order and Amended Opinion), the defendants employed standard software libraries that did not adequately read and retain embedded metadata in photos, giving rise to a claim under Section 1202.

[207] See 17 U.S.C. § 1202(b) (making it unlawful for someone to “intentionally remove or alter any copyright management information” or to distribute or perform a copyrighted work “knowing that copyright management information has been removed or altered,” if that person also knows or has reasonable grounds to know that doing so “will induce, enable, facilitate, or conceal an infringement of any right under this title.”).

[208] Stevens v. CoreLogic, No. 16-56089 (9th Cir. 2018).

[209] Id. at 7.

[210] Id. at 9.

[211] Id. at 16-17.

[212] No. 18-cv-04479-TSH (N.D. Cal., Nov. 30, 2018).

[213] Id.

[214] Id.

A recent viral video captures a prevailing sentiment in certain corners of social media, and among some competition scholars, about how mergers supposedly work in the real world: firms start competing on price, one firm loses out, that firm agrees to sell itself to the other firm and, finally, prices are jacked up. (Warning: Keep the video muted. The voice-over is painful.)

Read the full piece here.

Abstract

Use of the familiar metaphor of the exchange of ideas as a “marketplace” has historically presumed that free and uninhibited competition among ideas will reliably arrive at truth. But even the most fervent economic free-market advocates recognize the possibility of market failure. Market failure is a market characteristic (e.g., monopoly power) that precludes the maximization of consumer welfare.

The last few years have witnessed increased calls for censorship of speech and research pertaining to a variety of subjects (e.g., climate change; COVID-19 sources and treatments; and viewpoints concerning race, gender, and sexual orientation) across a variety of fora. The consistent refrain in favor of this censorship is that the spread of false or misleading information is preventing access to or distorting the truth and thereby inhibiting social progress: undermining democracy, fomenting bigotry, costing lives, and even threating the existence of the planet.

Though on their face these calls for censorship appear anti-liberal and contrary to the marketplace model, they can be made consistent with both if they are understood as a response to a market failure in the marketplace of ideas. While recent calls for censorship have not been justified expressly as a response to market failure, reframing the debate in these terms may prevent parties on both sides of the issue from engaging at cross purposes by locating the debate within an otherwise familiar model.

The Article proceeds as follows: Part I offers examples of recent calls for (and efforts at) censorship in the market of ideas concerning a variety of subjects and forums. Part II articulates a model of the marketplace of ideas that jibes with contemporary economic concepts, defines its components (e.g., sellers, buyers, intermediaries, etc.), considers the possibility of associated market failures, and highlights some common fallacies in the application of the concept of market failure more broadly. Part III explores the principal philosophical justifications for the utility of freedom of expression, focusing on the arguments articulated in John Stuart Mill’s classic, On Liberty. Part IV argues that, in light of these arguments (and taking into account contemporary critiques), the threat of false and misleading expression does not reflect market failure in the marketplace of ideas as modeled here. To the contrary, Part V argues that the ease with which recent public and private efforts at censorship have succeeded may itself reflect a market failure warranting correction—if not through legislation or the courts, then by social sanction and the court of public opinion.

Background…

California’s state Assembly earlier this year passed A.B. 2408, which would impose a duty of care on social-media platforms for “any design, feature, or affordance that causes a child user… to become addicted to the platform.” The bill,  which has also cleared the state Senate Judiciary Committee, would empower parents to bring class-action suits against Big Tech platforms, with minimum statutory damages set at $1,000 per class member. California prosecutors also could seek damages of $25,000 per violation, or $250,000 for knowing and willful violations. Liability would attach when a platform becomes aware that an algorithm is potentially addictive.

But…

Not only is the theory of social-media addiction strongly contested, but it would be difficult, if not unconstitutional, to enforce the bill’s terms. The line differentiating fomenting user addiction and making a platform more attractive to users is exceedingly blurry. Moreover, a strong case can be made that A.B. 2408 violates the First Amendment.

Read the full explainer here.

Abstract

The phenomenon of social-media-driven trading (SMD trading) entered the public consciousness earlier this year when GameStop’s stock price was driven up two orders of magnitude by a “hivemind” of individual investors coordinating their actions via social media. Some believe that GameStop’s price is artificially high and is destined to fall. Yet the stock prices of GameStop and other prominent SMD trading targets like AMC Entertainment continue to remain well above historical levels.

Much recent SMD trading is driven by profit motives. But a meaningful part of the rise has been a result of expressive trading—a subset of SMD trading—in which investors buy or sell for non-profit-seeking reasons like social or political activism, or for aesthetic reasons like a nostalgia play. To date, expressive trading has only benefited issuers by raising their stock prices. There is nothing, however, to prevent these traders from employing similar methods for driving a target’s stock price down (e.g., to influence or extort certain behaviors from issuers).

At least for now, stock prices raised by SMD trading have been sticky and appear at least moderately sustainable. The expressive aspect, which unites the traders under a common banner, is likely a reason that dramatic price increases resulting from profit-seeking SMD trading have persisted. Without a nonfinancial motivation to hold the group together, its members would be expected to defect and take profits.

Given that SMD trading appears to be more than a passing fad, issuers and their compliance departments ought to be prepared to respond when targeted by SMD trading. A question that might arise is whether and when SMD-trading-targeted issuers, and their insiders, may trade in their firms’ shares without running afoul of insider trading laws.

This Article proceeds as follows: Part I summarizes the current state of insider trading law, with special focus on the elements of materiality and publicity. Part II opens with a brief summary of the filing, disclosure, and other (non-insider-trading-related) requirements issuers and their insiders may face when trading in their own company’s shares under any circumstance. The remainder of this Part analyzes the insider trading-related legal implications of three different scenarios in which issuers and their insiders trade in their own company’s shares in response to SMD trading. The analysis reveals that although the issuer’s and insiders’ nonpublic internal information may be material (and therefore preclude their legal trading) prior to and just after the onset of third-party SMD trading in the company’s stock, subsequent SMD price changes (if sufficiently dramatic) may diminish the importance of the company’s nonpublic information, rendering it immaterial. If the issuer’s and insiders’ nonpublic information about the firm is immaterial, then they may trade while in possession of it without violating the anti-fraud provisions of the federal securities laws.

Abstract

Commentators have likened the recent surge in social-media-driven (SMD) retail trading in securities such as GameStop to a roller coaster: “You don’t go on a roller coaster because you end up in a different place, you go on it for the ride and it’s exciting because you’re part of it.” The price charts for GameStop over the past few months resemble a theme-park thrill ride. Retail traders, led by some members of the “WallStreetBets” subreddit “got on” the GameStop roller coaster at just under $20 a share in early January 2021 and rode it to almost $500 by the end of that month. Prices then dropped to around $30 dollars in February before shooting back to $200 in March. But, like most amusement park rides that end where they start, many analysts expect market forces will ultimately prevail, and GameStop’s share price will soon settle back to levels closer to what the company’s fundamentals suggest it should. Conventional wisdom counsels that bubbles driven by little more than noise and FOMO—fear of missing out—should eventually burst. There are, however, signs suggesting that something more than market noise and over-exuberance is sustaining the SMD retail trading in GameStop.

There is evidence that at least some of the recent SMD retail trading in GameStop and other securities is not only motivated by the desire to make a profit, but rather to make a point. This Essay identifies and addresses the emerging phenomenon of “expressive trading”—securities trading for the purpose of political, social, or aesthetic expression—and considers some of its implications for issuers, markets, and regulators.