Introduction

We welcome the opportunity to comment on the European Commission’s call for evidence on “Virtual worlds (metaverses) – a vision for openness, safety and respect.”[1]

The metaverse is an exciting and rapidly evolving set of virtual worlds. As with any new technology, concerns about the potential risks and negative consequences that the metaverse may bring have moved policymakers to explore how best to regulate this new space.

In its call for evidence, the commission suggests that preemptive regulatory steps may be needed to avoid the metaverse becoming “a more closed ecosystem with the prevalence of proprietary systems and gatekeepers.”[2] But this diagnosis rests on dubious premises.

From the outset, it is important to recognize that simply because the metaverse is new does not mean that it is unregulated. Existing regulations may not explicitly or exclusively target metaverse ecosystems, but a vast regulatory apparatus already covers most aspects of business in virtual worlds. As we explain in greater detail (Section I), this includes European competition law, the Digital Markets Act (“DMA”), the General Data Protection Act (“GDPR), the Digital Services Act (“DSA”), and many more. Before it enacts any new rules, the commission should carefully consider whether there are any metaverse-specific problems not already addressed by these legal provisions.

This sense that the metaverse is already adequately regulated is reinforced by two important factors.

The first is that competition appears particularly intense in this space (Section II). There are currently multiple firms vying to offer compelling virtual worlds. At the time of writing, however, none appears close to dominating the market. In turn, this intense competition will encourage platforms to design services that meet consumers’ demands, notably in terms of safety and privacy. Nor does the market appear likely to fall into the hands of one of the big tech firms that command a sizeable share of more traditional internet services. Meta notoriously has poured more than $3.99 billion into its metaverse offerings during the first quarter of 2023, in addition to $13.72 billion the previous calendar year.[3] Despite these vast investments and a strategic focus on metaverse services, the company has, thus far, struggled to achieve meaningful traction in the space.[4]

Second, the commission’s primary concern appears to be that metaverses will become insufficiently “open and interoperable”.[5] But to the extent that these ecosystems do, indeed, become closed and proprietary, there is no reason to believe this to be a problem. Closed and proprietary ecosystems have several features that may be attractive to consumers and developers (Section III). These include improved product safety, performance, and ease of development. This is certainly not to say that closed ecosystems are always better than more open ones, but rather that the commission is wrong to assume that one model or the other is optimal. Instead, the proper balance depends on tradeoffs that markets are better placed to decide.

Finally, timing is of the essence (Section IV). The commission’s call for evidence appears to assume that, by acting preemptively, it can shape the metaverse industry according to its idiosyncratic preferences:

It is crucial for the EU to be present in the development of virtual worlds and their governance, and lead the way through important challenges such as setting standards, building infrastructure, and addressing legal, economic, societal and ethical aspects.[6]

The commission has further expressed hopes that this will enable European firms to thrive:

The initiative is expected to create more opportunities for EU industrial players along the value chain, such as for EU providers of hardware and software components, system integrators and content creators.[7]

But intervening so early in a fledgling industry’s life cycle is like shooting a moving target from a mile away. New rules might end up being irrelevant. Worse, by signaling that metaverses will be subject to heightened regulatory scrutiny for the foreseeable future, the commission may chill investment from the very firms is purports to support. In short, the commission should resist the urge to intervene so long as the industry is not fully mature.

I.        Old Rules for a New Frontier

The commission’s call for evidence appears to be premised on the idea there is something new and unique about metaverse ecosystems that warrants industry-specific rules and regulations.

Against this backdrop, Frank Easterbrook’s seminal piece “Cyberspace and the Law of the Horse” seems more relevant than ever.[8] In his article, Easterbrook analogized the then-emerging field of cyberspace law to the “law of the horse.” He argued, in essence, that legal incidents involving horses are best understood by studying general legal disciplines like torts and property law, rather than studying all the legal incidents involving horses:

Lots of cases deal with sales of horses; others deal with people kicked by horses; still more deal with the licensing and racing of horses, or with the care veterinarians give to horses, or with prizes at horse shows. Any effort to collect these strands into a course on “The Law of the Horse” is doomed to be shallow and to miss unifying principles.

From a policy standpoint, Easterbrook’s intuition is clear. Policymakers should be less worried about developing new bodies of law to regulate legal disputes in cyberspace and, instead, concentrate their efforts on understanding how traditional rules apply to the disputes that arise in this space:

When asked to talk about “Property in Cyberspace,” my immediate reaction was, “Isn’t this just the law of the horse?”… This leads directly to my principal conclusion: Develop a sound law of intellectual property, then apply it to computer networks.[9]

Easterbrook’s intuition would appear even more appropriate to law in the metaverse. Policymakers often assume that, because the metaverse is new and not covered by specific regulations, it must surely be a lawless area where few rules apply and companies are free to exclude their competitors and exploit consumers. As the commission puts it, drawing an analogy to the emergence of the first big tech companies:

The first wave of the Internet developed mostly in an uncoordinated and unregulated manner leading to a more closed ecosystem with the prevalence of proprietary systems and gatekeepers.

Although virtual worlds and the transition to Web 4.0 are still in the early stages, we are witnessing the dawn of a similar situation, where global corporations are massively investing in core technologies, filing trademarks, and setting de facto standards as early movers…[10]

A.                  The Internet Was Never an Unregulated World

Unfortunately, this assertion both rewrites the history of the internet and ignores the plethora of regulations that currently apply to metaverse services, particularly when they operate in the European Union.

For a start, it is important to recognize that digital platforms fall under several pieces of European legislation. Chief among these is European competition law, which has long applied to tech firms. After all, the Microsoft competition cases date back to the early 2000s and the commission opened its competition cases against Google way back in 2011.[11] These early cases were followed by investigations into online platforms like Apple’s iPhone and App Store, as well as Amazon’s online marketplace.[12] It is simply not true that the internet emerged in an unregulated environment (at least in terms of competition policy). EU oversight of digital platforms has also grown steadily more capacious, including through the recent passage of the DMA, which will arguably apply to metaverse worlds when they reach a certain size.[13]

And it is not just competition law that has directly shaped the European internet as we know it today. The e-Commerce Directive has governed how online platforms conduct business since it entered into force in 2000.[14] Oversimplifying, the directive shields online intermediaries from liability when illegal content is hosted on their platforms, conditional on them fulfilling certain limited obligations.[15] In turn, this has enabled online platforms to grow without fear of being held liable for their users’ behavior, while guaranteeing some level of safety and compliance with existing laws. More recent legislation, such as the DSA, will only reinforce the extent to which online markets (including virtual worlds) must maintain high standards of safety and content curation. [16]

B.                  Metaverse’s Regulatory Framework Is Already in Place

Existing laws and regulations that govern such areas as intellectual property, contracts, consumer protection, and online safety are equally applicable to the metaverse. The metaverse is not a separate and unique realm, but rather an extension of the physical world we already inhabit. Or, to put it differently, the metaverse is populated by real consumers and firms who are bound by the laws that are applicable in their jurisdictions.

The commission’s call for evidence appears to recognize this much, although it doesn’t appears to consider the possibility that—given this large body of existing laws—more regulation might not be the answer:

Furthermore, the EU already has a strong regulatory framework to address potential impacts that virtual worlds may have on aspects such as competition, cybersecurity, artistic creation and privacy. EU legislation such as the General Data Protection Regulation, Digital Services Act, Digital Markets Act, Net Neutrality Regulation and the Unfair Commercial Practices Directive will ensure that users are protected in relation to several aspects and that EU small and medium-sized enterprises are not driven out of the market. The revised Directive on Security of Network and Information Systems will strengthen supply chain cybersecurity while the upcoming EU Digital ID will give full control to users over their identity and data.[17]

To put this in more concrete terms, a virtual item or avatar created within the metaverse is subject to the same copyright and trademark laws as a physical product. Property over those creations may be transferred, subject to the metaverse platform’s terms of service, which are governed by existing contract and consumer-protection laws. For example, the terms of use governing Decentraland (a blockchain-based virtual world) include a detailed section on how ownership of copyright-protected works may or may not be transferred from users to the platform.[18] In turn, these terms are subject to the same consumer-protection laws that apply to the physical world.

Of course, the application of existing laws to the metaverse is not always straightforward. There are some unique challenges and complexities that arise in this new space. The enforceability of some existing laws may, for example, be complicated in virtual worlds (like Decentraland) that rely on blockchain technology. Indeed, blockchains often have characteristics—such as immutability, decentralized ownership, and a reliance on pseudonymity or anonymity—that complicate legal enforcement.[19] These potential obstacles are specific to blockchain technology, however, not to metaverses.

Indeed, there is no reason to believe that all, or even most, successful metaverse services will be blockchain-based. In fact, two of the most successful virtual worlds do not rely on the blockchain.[20] The upshot is that enacting metaverse-specific rules to deal with blockchain-specific issues is almost certainly the wrong way to proceed.

C.                  New Rules Are Not Always the Best Path Forward

More fundamentally, even if metaverses do give rise to legal blind spots, this does not necessarily mean that new regulation is warranted.

In his seminal rebuttal to Easterbrook’s “Law of the Horse”, Lawrence Lessig cited two examples of cyberspace law that, in his opinion, fell under the radar of existing legal provisions and necessitated the creation of internet-specific laws: the widespread accessibility of pornographic content and firms’ ability to track users’ behavior online.[21] No champion of free markets, Lessig nonetheless argued that blinds spots of this sort do not necessarily warrant the adoption of new regulations (though, in those two cases, that is largely what the European Union decided to do[22]). Instead, he argued four main factors constrain firms’ behavior in cyberspace. Legal provisions are only one of those four constraints—the others being norms, markets, and code.[23] If other constraints are operating, then what may appear to be a legal blind spot may not, in fact, give rise to problematic behavior or outcomes. And because regulation may sometimes be over-inclusive, it will sometimes be better for regulators to adopt a laissez-faire approach.[24]

This intuition is perhaps best understood with reference to Ronald Coase. In his Nobel-winning work on “The Problem of Social Cost”, Coase essentially argued that governments need not worry about the initial allocation of rights (and, by extension, externalities) when they are well-delimited and transaction costs are low:

It is always possible to modify by transactions on the market the initial legal delimitation of rights. And, of course, if such market transactions are costless such a rearrangement of rights will always take place if it would lead to an increase in the value of production.[25]

This has important ramifications for the regulation of business in the metaverse. Even if it were true that existing laws were inapplicable in the metaverse, this is not sufficient justification for passing new regulations. Instead, the real question is whether various frictions prevent consumers and businesses from reaching agreements that grow the value of these online ecosystems. If these agreements can take place, then the scope for beneficial government intervention is more limited. As things stand, there is little reason to believe that frictions of this sort prevent consumers, platforms, and content creators from concluding such deals in the metaverse context—for example, determining how the rights over metaverse creations are allocated.

Finally, even if the commission surmised that there are currently market failures in the metaverse, this does not necessarily mean that entirely new regulations are appropriate. Indeed, it may be preferrable to adapt existing legal principles, rather than enact new rules. As explained in Section IV, creating new regulations that are specific to the metaverse could be counterproductive. They could create uncertainty and additional compliance costs for businesses, without necessarily achieving any meaningful improvements in consumer protection or other regulatory goals. Furthermore, new rules could stifle innovation and limit the potential of this exciting new technology.

In short, there is little to suggest that new rules are required to govern the metaverse. The existing legal framework appears largely sufficient to address most concerns that may arise in this space. Policymakers should instead focus on adapting and refining this existing framework, as necessary.

II.      Competing for Consumer Trust

As suggested above, the extent to which metaverse services compete with each other (and continue to do so in the future) will largely determine whether they fulfil consumers’ expectations and meet the safety and trustworthiness requirements to which the commission aspires. As even the left-leaning Lessig put it:

Markets regulate behavior in cyberspace too. Prices structures often constrain access, and if they do not, then busy signals do. (America Online (AOL) learned this lesson when it shifted from an hourly to a flat-rate pricing plan.) Some sites on the web charge for access, as on-line services like AOL have for some time. Advertisers reward popular sites; online services drop unpopular forums. These behaviors are all a function of market constraints and market opportunity, and they all reflect the regulatory role of the market.[26]

The commission’s call for evidence implicitly recognizes the important role that competition plays, although it frames the subject primarily in terms of the problems that would arise if competition ceased to operate:

There is a risk of having a small number of big players becoming future gatekeepers of virtual worlds, creating market entry barriers and shutting out EU start-ups and SMEs from this emerging market. Such a closed ecosystem with the prevalence of proprietary systems can negatively affect the protection of personal information and data, the cybersecurity and the freedom and openness of virtual worlds at the same time.[27]

It is thus necessary to ask whether there is robust competition in the market for metaverse services. The short answer is a resounding yes.

A.                  Competition Without Tipping

While there is no precise definition of what constitutes a metaverse—much less a precise definition of the relevant market—available data suggests the space is highly competitive. This is evident in the fact that even a major global firm like Meta—having invested billions of dollars in its metaverse branch (and having rebranded the company accordingly)—has struggled to gain traction.[28]

Other major players in the space include the likes of Roblox, Fortnite, and Minecraft, which all have somewhere between 70 and 200 million active users.[29] This likely explains why Meta’s much-anticipated virtual world struggled to gain meaningful traction with consumers, stalling at around 300,000 active users.[30] Alongside these traditional players, there are also several decentralized platforms that are underpinned by blockchain technology. While these platforms have attracted massive investments, they are largely peripheral in terms of active users, with numbers often only in the low thousands.[31]

There are several inferences that can be drawn from these limited datasets. For one, it is clear that the metaverse industry is not yet fully mature. There are still multiple paradigms competing for consumer attention: game-based platforms versus social-network platforms; traditional platforms versus blockchain platforms, etc. In the terminology developed by David Teece, the metaverse industry has not yet reached a “paradigmatic” stage. It is fair to assume there is still significant scope for the entry of differentiated firms.[32]

It is also worth noting that metaverse competition does not appear to exhibit the same sort of network effects and tipping that is sometimes associated with more traditional social networks.[33] Despite competing for nearly a decade, no single metaverse project appears to be running away with the market.[34] This lack of tipping might be because these projects are highly differentiated.[35] It may also be due to the ease of multi-homing among them.[36]

More broadly, it is far from clear that competition will lead to a single metaverse for all uses. Different types of metaverse services may benefit from different user interfaces, graphics, and physics engines. This cuts in favor of multiple metaverses coexisting, rather than all services coordinating within a single ecosystem. Competition therefore appears likely lead to the emergence of multiple differentiated metaverses, rather than a single winner.

Ultimately, competition in the metaverse industry is strong and there is little sense these markets are about to tip towards a single firm in the year future.

B.                  Competing for Consumer Trust

As alluded to in the previous subsection, the world’s largest and most successful metaverse entrants to date are traditional videogaming platforms that have various marketplaces and currencies attached.[37] In other words, decentralized virtual worlds built upon blockchain technology remain marginal.

This has important policy implications. The primary legal issues raised by metaverses are the same as those encountered on other digital marketplaces. This includes issues like minor fraud, scams, and children buying content without their parents’ authorization.[38] To the extent these harms are not adequately deterred by existing laws, metaverse platforms themselves have important incentives to police them. In turn, these incentives may be compounded by strong competition among platforms.

Metaverses are generally multi-sided platforms that bring together distinct groups of users, including consumers and content creators. In order to maximize the value of their ecosystems, platforms have an incentive to balance the interests of these distinct groups.[39] In practice, this will often mean offering consumers various forms of protection against fraud and scams and actively policing platforms’ marketplaces. As David Evans puts it:

But as with any community, there are numerous opportunities for people and businesses to create negative externalities, or engage in other bad behavior, that can reduce economic efficiency and, in the extreme, lead to the tragedy of the commons. Multi-sided platforms, acting selfishly to maximize their own profits, often develop governance mechanisms to reduce harmful behavior. They also develop rules to manage many of the same kinds of problems that beset communities subject to public laws and regulations. They enforce these rules through the exercise of property rights and, most importantly, through the “Bouncer’s Right” to exclude agents from some quantum of the platform, including prohibiting some agents from the platform entirely…[40]

While there is little economic research to suggest that competition directly increases hosts’ incentive to policy their platforms, it stands to reason that doing so effectively can help platforms to expand the appeal of their ecosystems. This is particularly important for metaverse services whose userbases remain just a fraction of the size they could ultimately reach. While 100 or 200 million users already comprises a vast ecosystem, it pales in comparison to the sometimes billions of users that “traditional” online platforms attract.

The bottom line is that the market for metaverses is growing. This likely compounds platforms’ incentives to weed out undesirable behavior, thereby complementing government efforts to achieve the same goal.

III.    Opening Platforms or Opening Pandora’s Box?

In its call for evidence, the commission implicitly assumes that open ecosystems are better for consumers than closed ones. Indeed, the commission laments that a lack of regulation made the Internet less open than it would otherwise have been. In its own words:

The first wave of the Internet developed mostly in an uncoordinated and unregulated manner leading to a more closed ecosystem with the prevalence of proprietary systems and gatekeepers.[41]

According to the commission, it would be detrimental to consumers if metaverse competition led to closed and proprietary ecosystems:

Such a closed ecosystem with the prevalence of proprietary systems can negatively affect the protection of personal information and data, the cybersecurity and the freedom and openness of virtual worlds at the same time.[42]

But this assumption is simply wrong. There are many benefits to closed ecosystems. Choosing the optimal degree of openness entails tradeoffs. At the very least, this suggests that policymakers should be careful not to assume that opening platforms up will systematically provide net benefits to consumers.

A.      Antitrust Enforcement and Regulatory Initiatives

To understand why open (and highly propertized) platforms are not always better for consumers, it is worth looking at past competition enforcement in the online space. Recent interventions by competition authorities have generally attempted (or are attempting) to move platforms toward more openness and less propertization. For their part, these platforms are already tremendously open (as the “platform” terminology implies) and attempt to achieve a delicate balance between centralization and decentralization.

The Microsoft cases and the Apple investigation both sought or seek to bring more openness and less propertization to those respective platforms. Microsoft was made to share proprietary data with third parties (less propertization) and to open its platform to rival media players and web browsers (more openness).[43] The same applies to Apple. Plaintiffs in private antitrust litigation brought in the United States[44] and government enforcement actions in Europe[45] are seeking to limit the fees that Apple can extract from downstream rivals (less propertization), as well as to ensure that it cannot exclude rival mobile-payments solutions from its platform (more openness).

The various cases that were brought by EU and U.S. authorities against Qualcomm broadly sought to limit the extent to which it was monetizing its intellectual property.[46] The European Union’s Amazon investigation centers on the ways in which the company uses data from third-party sellers (and, ultimately, the distribution of revenue between those sellers and Amazon).[47] In both cases, authorities are ultimately trying to limit the extent to which firms can propertize their assets.

Finally, both of the EU’s Google cases sought to bring more openness to the company’s main platform. The Google Shopping decision sanctioned Google for purportedly placing its services more favorably than those of its rivals.[48] The separate Android decision sought to facilitate rival search engines’ and browsers’ access to the Android ecosystem. The same appears to be true of ongoing litigation brought by state attorneys general in the United States.[49]

Much of the same can be said of the numerous regulatory initiatives pertaining to digital markets. Indeed, draft regulations being contemplated around the globe mimic the features of the antitrust/competition interventions discussed above. For instance, it is widely accepted that Europe’s DMA effectively transposes and streamlines the enforcement of the theories harm described above.[50] Similarly, several scholars have argued that the proposed American Innovation and Choice Online Act (“AICOA”) in the United States largely mimics European competition policy.[51] The legislation would ultimately require firms to open up their platforms, most notably by forcing them to treat rival services as they would their own and to make their services more interoperable with those rivals.[52]

What is striking about these decisions and investigations is the extent to which authorities are pushing back against the very features that distinguish the platforms they are investigating. Closed (or relatively closed) platforms are forced to open up, and firms with highly propertized assets are made to share them (or, at the very least, monetize them less aggressively).

B.      The Empty Quadrant

All of this would not be very interesting if it weren’t for a final piece of the puzzle: the model of open and shared platforms that authorities apparently favor has traditionally struggled to gain traction with consumers. Indeed, there seem to be vanishingly few successful consumer-oriented products and services in this space.

There have been numerous attempts to introduce truly open consumer-oriented operating systems in both the mobile and desktop segments. Most have ended in failure. Ubuntu and other flavors of the Linux operating system remain fringe products. There have been attempts to create open-source search engines, but they have not met with success.[53] The picture is similar in the online retail space. Amazon appears to have beaten eBay, despite the latter being more open and less propertized. Indeed, Amazon has historically charged higher fees than eBay and offers sellers much less freedom in the ways in which they may sell their goods.[54]

This theme is repeated in the standardization space. There have been innumerable attempts to impose open, royalty-free standards. At least in the mobile-internet industry, few (if any) of these have taken off. Instead, proprietary standards such as 5G and WiFi have been far more successful. That pattern is repeated in other highly standardized industries, like digital-video formats. Most recently, the proprietary Dolby Vision format seems to be winning the war against the open HDR10+ format.[55]

This is not to say that there haven’t been any successful examples of open, royalty-free standards. Internet protocols, blockchain, and Wikipedia all come to mind. Nor does it mean that we will not see more decentralized goods in the future. But by and large, firms and consumers have not yet taken to the idea of fully open and shared platforms. Or, at least, those platforms have not yet achieved widespread success in the marketplace (potentially due to supply-side considerations, such as the difficulty of managing open platforms or the potentially lower returns to innovation in weakly propertized ones).[56] And while some “open” projects have achieved tremendous scale, the consumer-facing side of these platforms is often dominated by intermediaries that opt for much more traditional business models (think of Coinbase in the blockchain space, or Android’s use of Linux).

C.      Potential Explanations

The preceding section posited a recurring reality: the digital platforms that competition authorities wish to bring into existence are fundamentally different from those that emerge organically. But why have authorities’ ideal platforms, so far, failed to achieve truly meaningful success?

Three potential explanations come to mind. First, “closed” and “propertized” platforms might systematically—and perhaps anticompetitively—thwart their “open” and “shared” rivals. Second, shared platforms might fail to persist (or grow pervasive) because they are much harder to monetize, and there is thus less incentive to invest in them. This is essentially a supply-side explanation. Finally, consumers might opt for relatively closed systems precisely because they prefer these platforms to marginally more open ones—i.e., a demand-side explanation.

In evaluating the first conjecture, the key question is whether successful “closed” and “propertized” platforms overcame their rivals before or after they achieved some measure of market dominance. If success preceded dominance, then anticompetitive foreclosure alone cannot explain the proliferation of the “closed” and “propertized” model.[57]

Many of today’s dominant platforms, however, often overcame open/shared rivals, well before they achieved their current size. It is thus difficult to make the case that the early success of their business models was due to anticompetitive behavior. This is not to say these business models cannot raise antitrust issues, but rather that anticompetitive behavior is not a good explanation for their emergence.

Both the second and the third conjectures essentially ask whether “closed” and “propertized” might be better adapted to their environment than “open” and “shared” rivals.

In that respect, it is not unreasonable to surmise that highly propertized platforms would generally be easier to monetize than shared ones. For example, to monetize open-source platforms often requires relying on complementarities, which tend to be vulnerable to outside competition and free-riding.[58] There is thus a natural incentive for firms to invest and innovate in more propertized environments. In turn, competition enforcement that limits a platform’s ability to propertize their assets may harm innovation.

Similarly, authorities should reflect on whether consumers really want the more “competitive” ecosystems that they are trying to design. The European Commission, for example, has a long track record of seeking to open digital platforms, notably by requiring that platform owners do not preinstall their own web browsers (the Microsoft decisions are perhaps the most salient example). And yet, even after these interventions, new firms have kept using the very business model that the commission reprimanded, rather than the “pro-consumer” model it sought to impose on the industry. For example, Apple tied the Safari browser to its iPhones; Google went to some length to ensure that Chrome was preloaded on devices; and Samsung phones come with Samsung Internet as default.[59] Yet this has not ostensibly steered consumers away from those platforms.

Along similar lines, a sizable share of consumers opt for Apple’s iPhone, which is even more centrally curated than Microsoft Windows ever was (and the same is true of Apple’s MacOS). In other words, it is hard to claim that opening platforms is inherently good for consumers when those same consumers routinely opt for platforms with the very features that policymakers are trying to eliminate.

Finally, it is worth noting that the remedies imposed by competition authorities have been anything but successes. Windows XP N (the version of Windows that came without Windows Media Player) was an unmitigated flop, selling a paltry 1,787 copies.[60] Likewise, the internet-browser “ballot box” imposed by the commission was so irrelevant to consumers that it took months for authorities to notice that Microsoft had removed it, in violation of the commission’s decision.[61]

One potential inference is that consumers do not value competition interventions that make dominant ecosystems marginally more open and less propertized. There are also many reasons why consumers might prefer “closed” systems (at least, relative to the model favored by many policymakers), even when they must pay a premium for them.

Take the example of app stores. Maintaining some control over the apps that can access the store enables platforms to easily weed out bad actors. Similarly, controlling the hardware resources that each app can use may greatly improve device performance. Indeed, it may be that a measure of control facilitates the very innovations that consumers demand. Therefore, “authorities and courts should not underestimate the indispensable role control plays in achieving coordination and coherence in the context of systemic ef?ciencies. Without it, the attempted novelties and strategies might collapse under their own complexity.”[62]

Relatively centralized platforms can eliminate negative externalities that “bad” apps impose on rival apps and consumers.[63] This is especially true when consumers will tend to attribute dips in performance to the overall platform, rather than to a particular app.[64] At the same time, they can take advantage of positive externalities to improve the quality of the overall platform.

And it is surely the case that consumers prefer to make many of their decisions at the inter-platform level, rather than within each platform. In simple terms, users arguably make their most important decision when they choose between an Apple or Android smartphone (or a Mac and a PC, etc.). In doing so, they can select their preferred app suite with one simple decision. They might thus purchase an iPhone because they like the secure App Store, or an Android smartphone because they like the Chrome Browser and Google Search. Absent false information at the time of the initial platform decision, this decision will effectively incorporate expectations about subsequent constraints.[65]

Furthermore, forcing users to make too many “within-platform” choices may undermine a product’s attractiveness. Indeed, it is difficult to create a high-quality reputation if each user’s experience is fundamentally different.[66] In short, contrary to what antitrust authorities appear to believe, closed platforms might give most users exactly what they desire.

All of this suggests that consumers and firms often gravitate spontaneously toward both closed and highly propertized platforms, the opposite of what the commission and other competition authorities tend to favor. The reasons for this trend are still misunderstood, and mostly ignored. Too often it is simply assumed that consumers benefit from more openness, and that shared/open platforms are the natural order of things. Instead, what some regard as “market failures” may in fact be features that explain the rapid emergence of the digital economy.

When considering potential policy reforms targeting the metaverse, policymakers would be wrong to assume openness (notably, in the form of interoperability) and weak propertization are always objectively superior. Instead, these platform designs entail important tradeoffs. Closed metaverse ecosystems may lead to higher consumer safety and better performance, while interoperable systems may reduce the frictions consumers face when moving from one service to another. There is little reason to believe policymakers are in a better position to weigh these tradeoffs than consumers, who vote with their virtual feet.

IV.    Conclusion

A final important argument against intervening today is that the metaverse industry is nowhere near mature. Tomorrow’s challenges and market failures might not be the same as today’s. This makes it exceedingly difficult for policymakers to design appropriate regulation and increases the risk that regulation might harm innovation.

At the time of writing, the entire metaverse industry (both hardware and software) is estimated to be worth somewhere in the vicinity of $80 billion, and projections suggest this could grow by a factor of 10 by 2030.[67] Growth projections of this sort are notoriously unreliable. But in this case, they do suggest there is some consensus that the industry is not fully fledged.

Along similar lines, it remains unclear what types of metaverse services will gain the most traction with consumers, what sorts of hardware consumers will use to access these services, and what technologies will underpin the most successful metaverse platforms. In fact, it is still an open question whether the metaverse industry will foster any services that achieve widespread consumer adoption in the foreseeable future.[68] In other words, it is not exactly clear what products and services metaverse-specific rules would end up covering.

Given these uncertainties—and the other arguments against regulation discussed in the previous sections—it would be premature to enact metaverse-specific rules. And yet, that is precisely what the commission appears to be contemplating.

In its call for evidence, the commission suggests that acting now will enable it to shape the metaverse industry to fit its own preferences, while guaranteeing that European firms are central to metaverse ecosystems:

The EU is well positioned to shape this next evolution, reflecting the EU‘s vision for the Digital Decade 20302 and in line with the European Declaration on Digital Rights and Principles , from the outset: open, interoperable, trusted, secure, privacy preserving, virtual worlds, respecting our legislation.[69]

But this outcome is anything but certain. Intervening so early in the industry’s life cycle is like aiming at a moving target. New rules or guidelines might end up being irrelevant before they have any influence on the products that firms develop. More worryingly, acting now signals that the metaverse industry will be subject to heightened regulatory scrutiny for the foreseeable future. In turn, this may deter large platforms from investing in the European market. It also may funnel venture-capital investments away from the European continent.

The core problem is that, without a clear sense of the market failures that need to be fixed, there is little apparent upside to offset the costs of regulation. The best evidence concerning these potential costs comes from the GDPR. While privacy regulation is obviously not the same as other types of economic regulation, the evidence concerning the GDPR suggests that regulation may, at least in some instances, slow down innovation and reduce competition.

The most-cited empirical evidence concerning the effects of the GDPR comes from a paper by Garrett Johnson and co-authors, who link the GDPR to widespread increases to market concentration, particularly in the short-term:

We show that websites’ vendor use falls after the European Union’s (EU’s) General Data Protection Regulation (GDPR), but that market concentration also increases among technology vendors that provide support services to websites…. The week after the GDPR’s enforcement, website use of web technology vendors falls by 15% for EU residents. Websites are relatively more likely to retain top vendors, which increases the concentration of the vendor market by 17%. Increased concentration predominantly arises among vendors that use personal data, such as cookies, and from the increased relative shares of Facebook and Google-owned vendors, but not from website consent requests. Although the aggregate changes in vendor use and vendor concentration dissipate by the end of 2018, we find that the GDPR impact persists in the advertising vendor category most scrutinized by regulators.[70]

Along similar lines, an NBER working paper by Jian Jia and co-authors finds that enactment of the GDPR markedly reduced venture-capital investments in Europe:

Our findings indicate a negative differential effect on EU ventures after the rollout of GDPR relative to their US counterparts. These negative effects manifest in the overall number of financing rounds, the overall dollar amount raised across rounds, and in the dollar amount raised per individual round. Specifically, our findings suggest a $3.38 million decrease in the aggregate dollars raised by EU ventures per state per crude industry category per week, a 17.6% reduction in the number of weekly venture deals, and a 39.6% decrease in the amount raised in an average deal following the rollout of GDPR.[71]

In another paper, Samuel Goldberg and co-authors find that the GDPR led to a roughly 12% reduction in website pageviews and e-commerce revenue in Europe.[72] Finally, Rebecca Janssen and her co-authors show that the GDPR decreased the number of apps offered on Google’s Play Store between 2016 and 2019:

Using data on 4.1 million apps at the Google Play Store from 2016 to 2019, we document that GDPR induced the exit of about a third of available apps; and in the quarters following implementation, entry of new apps fell by half.[73]

Of course, the body of evidence concerning the GDPR’s effects is not entirely unambiguous. For example, Rajkumar Vekatesean and co-authors find that the GDPR had mixed effects on the returns of different types of firms.[74] Other papers also show similarly mixed effects.[75]

Ultimately, the empirical literature concerning the effects of the GDPR shows that regulation—in this case, privacy protection—is no free lunch. Of course, this does not mean that regulating the metaverse would necessarily have these same effects. But in the absence of a clear market failure to solve, it is unclear why policymakers should run such a risk in the first place.

In the end, regulating the metaverse is unlikely to be costless. The metaverse is still in its infancy, regulation could deter essential innovation, and the commission has thus far failed to identify any serious market failures that warrant public intervention. The result is that the commission’s call for evidence appears premature or, in other words, that the commission is putting the meta-cart before the meta-horse.

[1] Virtual Worlds (Metaverses) – A Vision for Openness, Safety and Respect, European Commission, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13757-Virtual-worlds-metaverses-a-vision-for-openness-safety-and-respect/feedback_en?p_id=31962299H (hereafter, “Call for Evidence”).

[2] Id.

[3] Jonathan Vaian, Meta’s Reality Labs Records $3.99 Billion Quarterly Loss as Zuckerberg Pumps More Cash into Metaverse, CNBC (Apr. 26, 2023), https://www.cnbc.com/2023/04/26/metas-reality-labs-unit-records-3point99-billion-first-quarter-loss-.html.

[4] Alan Truly, Horizon Worlds Leak: Only 1 in 10 Users Return & Web Launch Is Coming, Mixed News (Mar. 3, 2023), https://mixed-news.com/en/horizon-worlds-leak-only-1-in-10-users-return-web-launch-coming; Kevin Hurler, Hey Fellow Kids: Meta Is Revamping Horizon Worlds to Attract More Teen Users, Gizmodo (Feb. 7, 2023), https://gizmodo.com/meta-metaverse-facebook-horizon-worlds-vr-1850082068; Emma Roth, Meta’s Horizon Worlds VR Platform Is Reportedly Struggling to Keep Users, The Verge (Oct. 15, 2022),
https://www.theverge.com/2022/10/15/23405811/meta-horizon-worlds-losing-users-report; Paul Tassi, Meta’s ‘Horizon Worlds’ Has Somehow Lost 100,000 Players in Eight Months, Forbes, (Oct. 17, 2022), https://www.forbes.com/sites/paultassi/2022/10/17/metas-horizon-worlds-has-somehow-lost-100000-players-in-eight-months/?sh=57242b862a1b.

[5] Call for Evidence, supra note 1.

[6] Id.

[7] Id.

[8] Frank H. Easterbrook, Cyberspace and the Law of the Horse, 1996 U. Chi. Legal F. 207 (1996).

[9] Id. at 208.

[10] Call for Evidence, supra note 1.

[11] See Case COMP/C-3/37.792, Microsoft, OJ L 32 (May 24, 2004); see also, Case COMP/39.530, Microsoft (Tying), OJ C 120 (Apr. 26, 2013); Case AT.39740, Google Search (Shopping), 2017 E.R.C. I-379; Case AT.40099 Google Android, 2018 E.R.C.

[12] See European Commission Press Release IP/20/1073, Antitrust: Commission Opens Investigations into Apple’s App Store Rules (Jun. 16, 2020); European Commission Press Release IP/20/1075, Antitrust: Commission Opens Investigation into Apple Practices Regarding Apple Pay (Jun. 16, 2020); European Commission Press Release IP/19/4291, Antitrust: Commission Opens Investigation into Possible Anti-Competitive Conduct of Amazon (Jul. 17, 2019).

[13] Regulation (EU) No 2022/1925 of the European Parliament and of the Council of 14 September 2022 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act), https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32022R1925.

[14] Directive 2000/31/EC of the European Parliament and of the Council of 8 June 2000 on Certain Legal Aspects of Information Society Services, in Particular Electronic Commerce, in the Internal Market (hereafter, “eCommerce Directive”), https://eur-lex.europa.eu/legal-content/EN/ALL/?uri=celex%3A32000L0031.

[15] Id. art. 12 to 15.

[16] Regulation EU 2022/2065 of the European Parliament and of the Council of 19 October 2022 on a Single Market For Digital Services and Amending Directive 2000/31/EC (Digital Services Act), https://eur-lex.europa.eu/legal-content/EN/TXT/HTML/?uri=CELEX:32022R2065 (hereafter, “DSA”).

[17] Call for Evidence, supra note 1.

[18] Terms of Use, Decentraland, https://decentraland.org/terms (last visited May 2, 2023).

[19] Andrew N. Choi & Cynthia A. Gierhart, Intellectual Property Enforcement in the Metaverse, Part 2, Holland & Knight (Oct. 13, 2022), https://www.hklaw.com/en/insights/publications/2022/10/intellectual-property-enforcement-in-the-metaverse-part-2; see, more generally, Thibault Schrepel, Blockchain + Antitrust (Elgar, 2021).

[20] Aron Garst, Fortnite and Roblox Are Dueling for the Future of User-Built Games, The Verge (Apr. 7, 2023), https://www.theverge.com/23674121/fortnite-roblox-user-generated-games.

[21] Lawrence Lessig, The Law of the Horse: What Cyberlaw Might Teach, 113 Harv. L. Rev. 510 (1999).

[22] 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); DSA, supra note 16; eCommerce Directive, supra note 14

[23] Lessig, supra note 22, at 507 (“Behavior, we might say, is regulated by four kinds of constraints. Law is just one of those constraints. Law (in at least one of its aspects) orders people to behave in certain ways; it threatens punishment if they do not obey. The law tells me not to buy certain drugs, not to sell cigarettes without a license, and not to trade across international borders without first filing a customs form. It promises strict punishments if these orders are not followed. In this way, we say that law regulates. But not only law regulates in this sense. Social norms do as well. Norms control where I can smoke; they affect how I behave with members of the opposite sex; they limit what I may wear; they influence whether I will pay my taxes. Like law, norms regulate by threatening punishment ex post. But unlike law, the punishments of norms are not centralized. Norms are enforced (if at all) by a community, not by a government. In this way, norms constrain, and therefore regulate. Markets, too, regulate. They regulate by price. The price of gasoline limits the amount one drives – more so in Europe than in the United States. The price of subway tickets affects the use of public transportation – more so in Europe than in the United States. Of course the market is able to constrain in this manner only because of other constraints of law and social norms: property and contract law govern markets; markets operate within the domain permitted by social norms. But given these norms, and given this law, the market presents another set of constraints on individual and collective behavior. And finally, there is a fourth feature of real space that regulates behavior – “architecture.””).

[24] Id. at 538-541; see also, Frank H. Easterbrook, Limits of Antitrust, 63 Tex. L. Rev. 1 (1984); Geoffrey A. Manne & Joshua D. Wright, Innovation and the Limits of Antitrust, 6 J. Comp. L. & Econ. 153 (2010); Geoffrey A. Manne, Error Costs in Digital Markets, 3 GAI Report on Competition in Digital Markets 33 (2020).

[25] R. H. Coase, The Problem of Social Cost, 9 J.L. & Econ. 15 (1960).

[26] Lessig, supra note 22, at 508.

[27] Call for Evidence, supra note 1.

[28] Catherine Thorbecke, What Metaverse? Meta Says Its Single Largest Investment Is Now in ‘Advancing AI’, CNN Business (Mar. 15, 2023), https://www.cnn.com/2023/03/15/tech/meta-ai-investment-priority/index.html; Ben Marlow, Mark Zuckerberg’s Metaverse Is Shattering into a Million Pieces, The Telegraph (Apr. 23, 2023), https://www.telegraph.co.uk/business/2023/04/21/mark-zuckerbergs-metaverse-shattering-million-pieces; Will Gendron, Meta Has Reportedly Stopped Pitching Advertisers on the Metaverse, BusinessInsider (Apr. 18, 2023), https://www.businessinsider.com/meta-zuckerberg-stopped-pitching-advertisers-metaverse-focus-reels-ai-report-2023-4.

[29] Mansoor Iqbal, Fortnite Usage and Revenue Statistics, Business of Apps (Jan. 9, 2023), https://www.businessofapps.com/data/fortnite-statistics; Matija Ferjan, 76 Little-Known Metaverse Statistics & Facts (2023 Data), Headphones Addict (Feb. 13, 2023), https://headphonesaddict.com/metaverse-statistics.

[30] James Batchelor, Meta’s Flagship Metaverse Horizon Worlds Struggling to Attract and Retain Users, Games Industry (Oct. 17, 2022), https://www.gamesindustry.biz/metas-flagship-metaverse-horizon-worlds-struggling-to-attract-and-retain-users; Ferjan, id.

[31] Richard Lawler, Decentraland’s Billion-Dollar ‘Metaverse’ Reportedly Had 38 Active Users in One Day, The Verge (Oct. 13, 2022), https://www.theverge.com/2022/10/13/23402418/decentraland-metaverse-empty-38-users-dappradar-wallet-data; The Sandbox, DappRadar, https://dappradar.com/multichain/games/the-sandbox (last visited May 3, 2023); Decentraland, DappRadar, https://dappradar.com/multichain/social/decentraland (last visited May 3, 2023).

[32] David J. Teece, Profiting from Technological Innovation: Implications for Integration, Collaboration, Licensing and Public Policy, 15 Research Policy 285-305 (1986), https://www.sciencedirect.com/science/article/abs/pii/0048733386900272.

[33] Geoffrey Manne & Dirk Auer, Antitrust Dystopia and Antitrust Nostalgia: Alarmist Theories of Harm in Digital Markets and Their Origins, 28 Geo. Mason L. Rev. 1279 (2021).

[34] Roblox, Wikipedia, https://en.wikipedia.org/wiki/Roblox (last visited May 3, 2023); Minecraft, Wikipedia, https://en.wikipedia.org/wiki/Minecraft (last visited May 3, 2023); Fortnite, Wikipedia, https://en.wikipedia.org/wiki/Fortnite (last visited May 3, 2023); see Fiza Chowdhury, Minecraft vs Roblox vs Fortnite: Which Is Better?, Metagreats (Feb. 20, 2023), https://www.metagreats.com/minecraft-vs-roblox-vs-fortnite.

[35]  Marc Rysman, The Economics of Two-Sided Markets, 13 J. Econ. Perspectives 134 (2009) (“First, if standards can differentiate from each other, they may be able to successfully coexist (Chou and Shy, 1990; Church and Gandal, 1992). Arguably, Apple and Microsoft operating systems have both survived by specializing in different markets: Microsoft in business and Apple in graphics and education. Magazines are an obvious example of platforms that differentiate in many dimensions and hence coexist.”).

[36] Id. at 134 (“Second, tipping is less likely if agents can easily use multiple standards. Corts and Lederman (forthcoming) show that the fixed cost of producing a video game for one more standard have reduced over time relative to the overall fixed costs of producing a game, which has led to increased distribution of games across multiple game systems (for example, PlayStation, Nintendo, and Xbox) and a less-concentrated game system market.”).

[37] What Are Fortnite, Roblox, Minecraft and Among Us? A Parent’s Guide to the Most Popular Online Games Kids Are Playing, FTC Business (Oct. 5, 2021), https://www.ftc.net/blog/what-are-fortnite-roblox-minecraft-and-among-us-a-parents-guide-to-the-most-popular-online-games-kids-are-playing; Jay Peters, Epic Is Merging Its Digital Asset Stores into One Huge Marketplace, The Verge (Mar. 22, 2023), https://www.theverge.com/2023/3/22/23645601/epic-games-fab-asset-marketplace-state-of-unreal-2023-gdc.

[38] Luke Winkie, Inside Roblox’s Criminal Underworld, Where Kids Are Scamming Kids, IGN (Jan. 2, 2023), https://www.ign.com/articles/inside-robloxs-criminal-underworld-where-kids-are-scamming-kids; Fake Minecraft Updates Pose Threat to Users, Tribune (Sept. 11, 2022), https://tribune.com.pk/story/2376087/fake-minecraft-updates-pose-threat-to-users; Ana Diaz, Roblox and the Wild West of Teenage Scammers, Polygon (Aug. 24, 2019) https://www.polygon.com/2019/8/24/20812218/roblox-teenage-developers-controversy-scammers-prison-roleplay; Rebecca Alter, Fortnite Tries Not to Scam Children and Face $520 Million in FTC Fines Challenge, Vulture (Dec. 19, 2022), https://www.vulture.com/2022/12/fortnite-epic-games-ftc-fines-privacy.html; Leonid Grustniy, Swindle Royale: Fortnite Scammers Get Busy, Kaspersky Daily (Dec. 3, 2020), https://www.kaspersky.com/blog/top-four-fortnite-scams/37896.

[39] See, generally, David Evans & Richard Schmalensee, Matchmakers: The New Economics of Multisided Platforms (Harvard Business Review Press, 2016).

[40] David S. Evans, Governing Bad Behaviour By Users of Multi-Sided Platforms, Berkley Technology Law Journal 27:2 (2012), 1201.

[41] Call for Evidence, supra note 1.

[42] Id.

[43] See Case COMP/C-3/37.792, Microsoft, OJ L 32 (May 24, 2004). See also, Case COMP/39.530, Microsoft (Tying), OJ C 120 (Apr. 26, 2013).

[44] See Complaint, Epic Games, Inc. v. Apple Inc., 493 F. Supp. 3d 817 (N.D. Cal. 2020) (4:20-cv-05640-YGR).

[45] See European Commission Press Release IP/20/1073, Antitrust: Commission Opens Investigations into Apple’s App Store Rules (Jun. 16, 2020); European Commission Press Release IP/20/1075, Antitrust: Commission Opens Investigation into Apple Practices Regarding Apple Pay (Jun. 16, 2020).

[46] See European Commission Press Release IP/18/421, Antitrust: Commission Fines Qualcomm €997 Million for Abuse of Dominant Market Position (Jan. 24, 2018); Federal Trade Commission v. Qualcomm Inc., 969 F.3d 974 (9th Cir. 2020).

[47] See European Commission Press Release IP/19/4291, Antitrust: Commission Opens Investigation into Possible Anti-Competitive Conduct of Amazon (Jul. 17, 2019).

[48] See Case AT.39740, Google Search (Shopping), 2017 E.R.C. I-379. See also, Case AT.40099 (Google Android), 2018 E.R.C.

[49] See Complaint, United States v. Google, LLC, (2020), https://www.justice.gov/opa/pr/justice-department-sues-monopolist-google-violating-antitrust-laws; see also, Complaint, Colorado et al. v. Google, LLC, (2020), available at https://coag.gov/app/uploads/2020/12/Colorado-et-al.-v.-Google-PUBLIC-REDACTED-Complaint.pdf.

[50] See, e.g., Giorgio Monti, The Digital Markets Act: Institutional Design and Suggestions for Improvement, Tillburg L. & Econ. Ctr., Discussion Paper No. 2021-04 (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3797730 (“In sum, the DMA is more than an enhanced and simplified application of Article 102 TFEU: while the obligations may be criticised as being based on existing competition concerns, they are forward-looking in trying to create a regulatory environment where gatekeeper power is contained and perhaps even reduced.”) (Emphasis added).

[51] See, e.g., Aurelien Portuese, “Please, Help Yourself”: Toward a Taxonomy of Self-Preferencing, Information Technology & Innovation Foundation (Oct. 25, 2021), available at https://itif.org/sites/default/files/2021-self-preferencing-taxonomy.pdf. (“The latest example of such weaponization of self-preferencing by antitrust populists is provided by Sens. Amy Klobuchar (D-MN) and Chuck Grassley (R-IA). They introduced legislation in October 2021 aimed at prohibiting the practice.2 However, the legislation would ban self-preferencing only for a handful of designated companies—the so-called “covered platforms,” not the thousands of brick-and-mortar sellers that daily self-preference for the benefit of consumers. Mimicking the European Commission’s Digital Markets Act prohibiting self-preferencing, Senate and the House bills would degrade consumers’ experience and undermine competition, since self-preferencing often benefits consumers and constitutes an integral part, rather than an abnormality, of the process of competition.”).

[52] Efforts to saddle platforms with “non-discrimination” constraints are tantamount to mandating openness. See Geoffrey A. Manne, Against the Vertical Discrimination Presumption, Foreword, Concurrences No. 2-2020 (2020) at 2 (“The notion that platforms should be forced to allow complementors to compete on their own terms, free of constraints or competition from platforms is a species of the idea that platforms are most socially valuable when they are most ‘open.’ But mandating openness is not without costs, most importantly in terms of the effective operation of the platform and its own incentives for innovation.”).

[53] See, e.g., Klint Finley, Your Own Private Google: The Quest for an Open Source Search Engine, Wired (Jul. 12, 2021), https://www.wired.com/2012/12/solar-elasticsearch-google.

[54] See Brian Connolly, Selling on Amazon vs. eBay in 2021: Which Is Better?, JungleScout (Jan. 12, 2021), https://www.junglescout.com/blog/amazon-vs-ebay; Crucial Differences Between Amazon and eBay, SaleHOO, https://www.salehoo.com/educate/selling-on-amazon/crucial-differences-between-amazon-and-ebay (last visited Feb. 8, 2021).

[55] See, e.g., Dolby Vision Is Winning the War Against HDR10 +, It Requires a Single Standard, Tech Smart, https://voonze.com/dolby-vision-is-winning-the-war-against-hdr10-it-requires-a-single-standard (last visited June 6, 2022).

[56] On the importance of managers, see, e.g., Nicolai J Foss & Peter G Klein, Why Managers Still Matter, 56 MIT Sloan Mgmt. Rev., 73 (2014) (“In today’s knowledge-based economy, managerial authority is supposedly in decline. But there is still a strong need for someone to define and implement the organizational rules of the game.”).

[57] It is generally agreed upon that anticompetitive foreclosure is possible only when a firm enjoys some degree of market power. Frank H. Easterbrook, Limits of Antitrust, 63 Tex. L. Rev. 1, 20 (1984) (“Firms that lack power cannot injure competition no matter how hard they try. They may injure a few consumers, or a few rivals, or themselves (see (2) below) by selecting ‘anticompetitive’ tactics. When the firms lack market power, though, they cannot persist in deleterious practices. Rival firms will offer the consumers better deals. Rivals’ better offers will stamp out bad practices faster than the judicial process can. For these and other reasons many lower courts have held that proof of market power is an indispensable first step in any case under the Rule of Reason. The Supreme Court has established a market power hurdle in tying cases, despite the nominally per se character of the tying offense, on the same ground offered here: if the defendant lacks market power, other firms can offer the customer a better deal, and there is no need for judicial intervention.”).

[58] See, e.g., Josh Lerner & Jean Tirole, Some Simple Economics of Open Source, 50 J. Indus. Econ. 197 (2002).

[59] See Matthew Miller, Thanks, Samsung: Android’s Best Mobile Browser Now Available to All, ZDNet (Aug. 11, 2017), https://www.zdnet.com/article/thanks-samsung-androids-best-mobile-browser-now-available-to-all.

[60] FACT SHEET: Windows XP N Sales, RegMedia (Jun. 12, 2009), available at https://regmedia.co.uk/2009/06/12/microsoft_windows_xp_n_fact_sheet.pdf.

[61] See Case COMP/39.530, Microsoft (Tying), OJ C 120 (Apr. 26, 2013).

[62] Konstantinos Stylianou, Systemic Efficiencies in Competition Law: Evidence from the ICT Industry, 12 J. Competition L. & Econ. 557 (2016).

[63] See, e.g., Steven Sinofsky, The App Store Debate: A Story of Ecosystems, Medium (Jun. 21, 2020), https://medium.learningbyshipping.com/the-app-store-debate-a-story-of-ecosystems-938424eeef74.

[64] Id.

[65] See, e.g., Benjamin Klein, Market Power in Aftermarkets, 17 Managerial & Decision Econ. 143 (1996).

[66] See, e.g., Simon Hill, What Is Android Fragmentation, and Can Google Ever Fix It?, DigitalTrends (Oct. 31, 2018), https://www.digitaltrends.com/mobile/what-is-android-fragmentation-and-can-google-ever-fix-it.

[67] Metaverse Market Revenue Worldwide from 2022 to 2030, Statista, https://www.statista.com/statistics/1295784/metaverse-market-size (last visited May 3, 2023); Metaverse Market by Component (Hardware, Software (Extended Reality Software, Gaming Engine, 3D Mapping, Modeling & Reconstruction, Metaverse Platform, Financial Platform), and Professional Services), Vertical and Region – Global Forecast to 2027, Markets and Markets (Apr. 27, 2023), https://www.marketsandmarkets.com/Market-Reports/metaverse-market-166893905.html; see also, Press Release, Metaverse Market Size Worth $ 824.53 Billion, Globally, by 2030 at 39.1% CAGR, Verified Market Research (Jul. 13, 2022), https://www.prnewswire.com/news-releases/metaverse-market-size-worth–824-53-billion-globally-by-2030-at-39-1-cagr-verified-market-research-301585725.html.

[68] See, e.g., Megan Farokhmanesh, Will the Metaverse Live Up to the Hype? Game Developers Aren’t Impressed, Wired (Jan. 19, 2023), https://www.wired.com/story/metaverse-video-games-fortnite-zuckerberg; see also Mitch Wagner, The Metaverse Hype Bubble Has Popped. What Now?, Fierce Electronics (Feb. 24, 2023), https://www.fierceelectronics.com/embedded/metaverse-hype-bubble-has-popped-what-now.

[69] Call for Evidence, supra note 1.

[70] Garret A. Johnson, et al., Privacy and Market Concentration: Intended and Unintended Consequences of the GDPR, Forthcoming Management Science 1 (2023).

[71] Jian Jia, et al., The Short-Run Effects of GDPR on Technology Venture Investment, NBER Working Paper 25248, 4 (2018), available at https://www.nber.org/system/files/working_papers/w25248/w25248.pdf.

[72] Samuel G. Goldberg, Garrett A. Johnson, & Scott K. Shriver, Regulating Privacy Online: An Economic Evaluation of GDPR (2021), available at https://www.ftc.gov/system/files/documents/public_events/1588356/johnsongoldbergshriver.pdf.

[73] Rebecca Janßen, Reinhold Kesler, Michael Kummer, & Joel Waldfogel, GDPR and the Lost Generation of Innovative Apps, Nber Working Paper 30028, 2 (2022), available at https://www.nber.org/system/files/working_papers/w30028/w30028.pdf.

[74] Rajkumar Venkatesan, S. Arunachalam & Kiran Pedada, Short Run Effects of Generalized Data Protection Act on Returns from AI Acquisitions, University of Virginia Working Paper 6 (2022), available at: https://conference.nber.org/conf_papers/f161612.pdf. (“On average, GDPR exposure reduces the ROA of firms. We also find that GDPR exposure increases the ROA of firms that make AI acquisitions for improving customer experience, and cybersecurity. Returns on AI investments in innovation and operational efficiencies are unaffected by GDPR.”)

[75] For a detailed discussion of the empirical literature concerning the GDPR, see Garrett Johnson, Economic Research on Privacy Regulation: Lessons From the GDPR And Beyond, NBER Working Paper 30705 (2022), available at https://www.nber.org/system/files/working_papers/w30705/w30705.pdf.

If it looks like a duck, walks like a duck and quacks like a duck, then it just may be a duck.
—Walter Reuther

Executive Summary

Rate regulation can take many forms. Rates may be regulated through overt price controls, such as price ceilings or price floors; through less-overt rules governing the pace of price changes; or through quality mandates or restrictions. Some rate regulations can provide short-run benefits to certain groups of consumers or producers, but often result in shortages or surpluses that diminish overall welfare. In the long run, rate regulation often distorts investment incentives, leading to a misallocation of investment (e.g., to under- or over-investment).

For these reasons, since the late 1970s, direct rate regulation generally has fallen out of favor across most sectors of the economy, although there are some—such as insurance and utilities—where it remains commonplace. Nevertheless, elected officials and other policymakers frequently come under pressure from constituents and stakeholders to “do something” about the price of goods and services in the ostensibly “deregulated” sectors of the economy, such as when consumers characterize short-term price disruptions as “price gouging.” In some cases, firms may seek regulations to “stabilize” prices, while in others, rate regulation may be seen as a means to “increase access” to crucial goods and services.

Because the costs of overt rate regulations are so well-known, price controls are often buried under layers of bureaucracy or wrapped in with other policies and programs, such that policymakers can plausibly claim that their proposals do not directly regulate rates. While not explicit price controls, these programs amount to de facto rate regulation. It’s a regulatory version of the Duck Test.

Rate regulation—in any form and whatever the imagined benefits—is not a costless endeavor. Costs and risk do not disappear under rate regulation. Instead, they are shifted in one direction or another—typically with costs borne by consumers through some mix of suppressed or misdirected investment, sluggish improvements in quality, and reduced innovation.

This issue brief gives an overview, with a particular focus on the telecommunications sector, of the consequences of different types of overt rate regulation—price ceilings and prices floors—as well as how quality regulations can amount to rate regulation. Price controls, such as price ceilings and price floors, are government interventions in the market that aim to regulate the prices of goods and services. While they may have some short-term benefits, they can also lead to long-term consequences that are not always positive. We examine, in particular, four telecommunications programs in which de facto rate regulation is a key component.

• The National Telecommunications and Information Administration’s (NTIA) notice of funding opportunity under the Broadband Equity, Access, and Deployment Program (BEAD), which requires each program participant to include a “middle-class affordability plan to ensure that all consumers have access to affordable high-speed internet”;
• The U.S. Agriculture Department’s (USDA) ReConnect Loan and Grant Program, which gives preference to applicants who agree to abide by “net neutrality” and who provide a “low-cost” option to consumers;
• New York State’s Affordable Broadband Act, which requires internet service providers (ISPs) to offer all qualifying low-income households at least two internet-access plans: a $15-a-month plan with download speeds of at least 25 megabits-per-second, or a $20-a-month plan with download speeds of at least 200 megabits-per-second; and
• The Federal Communications Commission’s (FCC) 2015 Open Internet Order’s “net neutrality” and “zero rating” provisions.

In each of these examples, policymakers have gone to extraordinary lengths to avoid characterizing the programs’ pricing provisions as direct rate regulation. No matter how the policies are characterized, however, the consequences remain. When regulation is used to set prices on one side of the multi-sided broadband market at below-market rates, there will be upward pricing pressure on another side of the market. Ultimately, consumers who are not subject to the regulated rates will face higher prices, in turn putting pressure on policymakers to impose yet another layer of imprecise and complex regulation and even deeper constraints on investment.

Government policy may well be able to help accelerate broadband deployment to the unserved portions of the country where it is most needed. This issue brief concludes that the way to achieve that goal is not by imposing price controls on broadband providers. Instead, broadband access can best be expanded by removing costly, government-erected barriers to buildout and/or by subsidizing and educating consumers, where needed.

I.        Introduction

Since the deregulation of railroads, airlines, and trucking in the late 1970s, direct rate regulation has generally, except in a few outlier examples like insurance and utilities, fallen out of favor with elected officials and policymakers. To be sure, there are times when experts and activists have called for price controls in response to short-term price disruptions they characterize as “price gouging.” Because of a widespread skepticism of explicit price controls, rate-regulation efforts are instead often described as efforts to “stabilize” prices or “increase access” to goods and services. In many cases, the price controls are buried under layers of bureaucracy or bundled with other policies and programs, such that policymakers can plausibly claim that their proposals do not amount to regulating rates.

For example, the Wall Street Journal recently reported that 50 members of Congress sent a letter to President Joe Biden urging his administration “to pursue all possible strategies to end corporate price gouging in the real estate sector and ensure that renters and people experiencing homelessness across this country are stably housed this winter.”[1] Proposals include directing the Federal Housing Finance Agency (FHFA) to establish “anti-price gouging protections” and “just cause eviction standards” in rental properties with government-backed mortgages. Another proposal would have the Federal Trade Commission (FTC) issue new regulations defining “excessive” rent increases as an unfair trade practice. A third proposal would condition grants from the U.S. Department of Housing and Urban Development (HUD) on localities mitigating housing cost burdens and “adopting anti-rent-gouging measures.” None of these proposals amount to direct rent controls, but they would, in tandem, establish de facto rent regulation.

Efforts by policymakers to control prices, while distancing themselves from explicit rate regulation, have targeted myriad industries, including telecommunications services. For example, under former Chair Tom Wheeler, the Federal Communications Commission (FCC) voted to enact the 2015 Open Internet Order (OIO), which categorized internet service providers (ISPs) as “common carriers” under Title II of the Communications Act of 1934, thereby subjecting them to, among other things, net-neutrality principles. While rate regulation is among the defining features of most Title II services,^[2] Wheeler nonetheless promised at the time to forebear from applying such regulations, stating flatly that “we are not trying to regulate rates.”[3]

But this assurance proved a small consolation. While the agency decided to waive “the vast majority of rules adopted under Title II,” it also made clear that the commission would “retain adequate authority to” rescind such forbearance in the future.^[4] In his dissent from the OIO, Commissioner Ajit Pai noted the forbearance merely meant that “the FCC will not impose rules ‘for now.’”^[5] Thus, while stopping short of imposing explicit rate regulation immediately, the OIO dangled the threat of rate regulation in the future.

Such threats amount to de facto rate regulation, in which agencies hold out the potential use of onerous rules in the future to shape providers’ pricing policies today. Tim Wu—credited with coining the term “net neutrality” and a recently departed senior advisor to President Joe Biden—has explicitly endorsed the use of threats by regulatory agencies as a means to obtain favored policy outcomes:

The use of threats instead of law can be a useful choice—not simply a procedural end run. My argument is that the merits of any regulative modality cannot be determined without reference to the state of the industry being regulated. Threat regimes, I suggest, are important and are best justified when the industry is undergoing rapid change—under conditions of “high uncertainty.” Highly informal regimes are most useful, that is, when the agency faces a problem in an environment in which facts are highly unclear and evolving. Examples include periods surrounding a newly invented technology or business model, or a practice about which little is known. Conversely, in mature, settled industries, use of informal procedures is much harder to justify.[6]

In 2017, under then-Chairman Pai, the FCC reclassified broadband under Title I of the Communications Act. In a 2018 article referencing the repeal of the 2015 rules, Gigi Sohn lamented that removing ISPs from Title II’s purview meant losing the “power to constrain ‘unjust and unreasonable’ prices, terms, and practices by [broadband] providers.”^[7] More recently, standing as a nominee to the FCC, Sohn was asked during a 2021 confirmation hearing before the U.S. Senate Commerce Committee if she would support the agency’s regulation of broadband rates.^[8] She responded: “No. That was an easy one.” Around the same time, FCC Chair Jessica Rosenworcel said in written comments that she did not plan to regulate broadband rates directly or indirectly.^[9] Her comments indicated that the agency’s 2015 net-neutrality rules “expressly eschew future use of prescriptive, industry-wide rate regulation” and that she “supported this approach in the past and would do so again in the future.”

Nonetheless, policymakers’ interest in imposing controls on broadband rates continues unabated. In 2021, for example, President Biden’s American Jobs Plan called on Congress to reduce broadband prices:

President Biden believes that building out broadband infrastructure isn’t enough. We also must ensure that every American who wants to can afford high-quality and reliable broadband internet. While the President recognizes that individual subsidies to cover internet costs may be needed in the short term, he believes continually providing subsidies to cover the cost of overpriced internet service is not the right long-term solution for consumers or taxpayers. Americans pay too much for the internet—much more than people in many other countries—and the President is committed to working with Congress to find a solution to reduce internet prices for all Americans.[10]

But even in those cases in which rate regulation is imposed, proponents are careful to avoid calling it rate regulation. In defending the State of New York’s 2021 Affordable Broadband Act, for example, the state claimed that the law’s pricing provisions did not amount to rate regulation because they specified a price ceiling, rather than a specific price.[11]

This brief first provides an overview of the problems inherent in rate regulation, de facto or otherwise. It then identifies several instances of rate regulation being covertly introduced into broadband policy, and the dangers this poses to deployment.

II.      A Primer on Rate Regulation

In a competitive market, prices allow for the successful coordination of supply and demand, and the market price reflects both consumer demand and the costs of production. Of course, for those on the demand side of the equation, the price of a good or service is a cost to them, and they would prefer falling prices to rising prices. For suppliers, the price represents the revenue from selling the good or service and they would prefer rising prices to falling prices.

Because of this inherent tension, there is a natural inclination on the part of both consumers and producers to seek the government’s intervention in the competitive process to halt or slow price changes. The most obvious way the government can intervene is through rate regulation, such as price controls. Price controls can be divided into two categories: price ceilings that set a maximum price that sellers can charge and price floors that set the minimum price that consumers can pay. It is well-known and widely accepted that price controls can make both consumers and sellers worse off.[12] Consequently, policymakers may pitch policies that control prices under another name (e.g., “second generation rent relief”) or introduce policies that are not explicit price controls, but have substantially the same effects as price controls (e.g., quality-of-service mandates).

A.      Price Ceilings

The most well-known example of a price ceiling is rent control—so well-known, in fact, that just about every introductory microeconomics textbook discusses the topic. Consider the market for apartment rentals shown in Figure I, which is based on an example from Gregory Mankiw’s widely used economics textbook.[13] In a competitive market, the price of apartments would be $1,500 and 2,500 apartments would be rented out.

Figure I: Rent Control in the Short Run and in the Long Run

 

SOURCE: Mankiw

At the market price, however, tenant advocates would complain of a housing “affordability crisis”—that apartment rents are too high. They argue that if prices were lower, more people could afford apartments. As a result, the government imposes a price ceiling, mandating that apartment rents cannot be any higher than $1,200. But at this price, in the short run, Panel (a) shows the number of apartments demanded (2,500) exceeds the quantity supplied (2,000). Because of this excess demand of 500 apartments, some people who want to rent an apartment would be unable to do so. In other words, there is a shortage of apartments.

In this example, the price ceiling makes the housing “crisis” worse, because fewer people are able to rent apartments than before the rent control was imposed. Some renters are better off because they are paying lower rents, but others are worse off because they cannot rent an apartment—even if they are willing to pay the market price.

Rent-control advocates might argue that there would be no shortage of apartments because apartments don’t just disappear. But they do, just not in the most obvious ways. In the short run, property owners may be more selective regarding to whom they will rent apartments. In the medium term, property owners might convert their apartments to short-term rentals (e.g., listing them on a service like Airbnb). In the somewhat longer term, property owner will reduce their maintenance investments or might convert their apartment buildings to condominiums or sell their rental house to an owner-occupier. Ultimately, developers may decide to invest in an area that is not subject to rent control, thereby reducing the construction of new rental housing. Thus, as shown in Panel (b), in the long run, rent control shifts the supply curve, further reducing the supply of housing and increasing the shortage to 1,000 apartments.

This is not just a theory. There are plenty of real-world examples of this phenomenon playing out. Some nonetheless advocate for a modified version of rent control, sometimes called “second generation” rent control.[14] Rather than regulating the price of apartments, the newer iterations of rent control cap the rate at which prices can rise (e.g., rents can rise no higher than the rate of inflation, plus 3%). Second-generation rent control still results in shortages and all the other consequences, but draws out these effects over a longer time period.

B.      Price Floors

The most well-known form of price-floor regulation is the minimum wage, but there are many industries that are also subject to regulated price floors in the United States. Some states impose floors on the price of milk and alcoholic beverages. For decades, many U.S. agricultural products have been subject to price floors. Until the late 1970s and early 1980s, airline fares and stock-broker charges were subject to price-floor regulation.

Consider the market for wheat shown in Figure II, also adapted from Mankiw’s textbook.[15] In a competitive market, the price of wheat would be $3 and 100 bushels of wheat would be sold. At the market price, however, farmers would complain that the price is “too low.” They argue that, without assistance, their family farms would go under.

Figure II: Rent Market with a Price Floor

SOURCE: Mankiw

As a result, the government imposes a price floor, mandating that wheat cannot be bought for less than $4 per bushel. But at this price, the amount of wheat grown (120) exceeds the quantity demanded (80). Because of this excess supply of 40 bushels, there is a surplus of wheat and some farmers who want to sell wheat at the regulated price would be unable to do so. This introduces another problem for policymakers: price floors do not help suppliers who cannot sell their products at the regulated price.

To solve this problem, policymakers often turn to another set of policies. In some cases, the government promises to purchase any surplus. In one notable example, there is a cave in Missouri that contains 1.4 billion pounds of cheese purchased under such a program.[16] In other cases, the government replaces the price-floor regulation with a subsidy that promises to pay the difference between the market price and a “target price.”[17]

While a price ceiling can lead to “under” investment, a price floor can encourage “over” investment. For example, if a wheat farmer knows the minimum price that a bushel of wheat will fetch and that all the wheat grown will be purchased by someone, then the farmer has incentive to invest in wheat production rather than some other alternative.

Firms often respond to price floors in nonobvious ways. Baby boomers and their parents can tell stories of the luxurious accommodations enjoyed by those who flew coach in the 1960s and 1970s. Planes had spacious seating and some larger planes had a piano lounge onboard—features that were due, in a large part, to rate regulation that set a price floor on airline tickets. Because airlines faced no price competition, they competed for customers by offering superior service. In other words, they responded to price-floor regulations by “over” investing in service and amenities.[18]

In jurisdictions with high minimum wages, firms respond by using less labor. For example, restaurants may switch from table service to counter service, or they may replace some counter service with self-service electronic kiosks. Restaurants that maintain table service may assign more tables to each server. As the perceived level of service declines, consumers may substitute dining at-home for dining out.

C.      Not-Quite Rate Regulations

Because the effects of explicit rate regulation are so well-known and so obvious, policymakers who seek to regulate prices often attempt to do so in less-obvious ways. One already-discussed way is the regulation of price changes, rather than the prices themselves. For example, many rent-control price ceiling programs limit the rate at which rents can increase from year-to-year, a policy described as “rent stabilization.”[19] Many jurisdictions with minimum wage price-floor programs mandate an increase in the minimum wage in-line with the inflation rate.[20]

Another way in which officials can effectively—but not explicitly—regulate rates is through quality mandates. For example, some agricultural products are subject to “marketing orders,” which are legal cartels than can dictate the price and quality of produce.[21] Consider an apple market subject to a marketing order that specifies fresh apples must be of a certain shape and size, such that only large, round apples can be sold as fresh produce.

Presumably, consumers prefer large apples to small apples and prefer round apples to misshapen apples. Thus, as shown in Figure III, the order that only large, round apples can be sold as fresh has the effect of increasing/shifting the demand curve. Consumers would be willing to pay more for the seemingly better fruit, and they’d be willing to buy more. But the order also increases the cost to apple growers. They have to find a way to dispose of their smaller or misshapen apples, perhaps by making apple sauce or juicing the fruit. They also incur higher costs of managing their crop to produce more of the higher-quality fruit. This has the effect of decreasing/shifting the supply curve for fresh fruit. Growers will supply less fruit at a higher cost.

Figure III: Market with a Quality Mandate

Combining the effects from both the shift in supply and the shift in demand shows that the marketing order unambiguously results in a higher price for apples. What is not known, however, is whether more or fewer apples are sold. That will depend on the elasticities of demand and supply. Because the order results in a higher price, however, it has created a de facto price floor without explicitly setting one. Consumers are not aware that they are paying a higher price because they do not know what type of fruit would be available, and at what price, absent the quality restrictions.

III.    Recent Attempts at De Facto Rate Regulation in Broadband

The FCC obviously has a long history of explicit rate regulation since its inception in 1934.[22] Among its founding mandates, the commission was charged with ensuring that rates were fair, that service was reliable and efficient, and that access to telecommunications services was available to all Americans.[23] During this time, the FCC governed telephone-service rates through a system of rate-of-return regulation, in which rates were set based on the cost of providing service and the company’s desired return on investment.[24] In the latter half of the 20th century, and especially since Congress passed a major overhaul of the Communications Act in 1996, a more deregulatory approach to telecommunications has prevailed.

This made sense in the 1990s, and has only made more sense over time, as different communications modalities have been developed, and competition has flourished throughout the market. The reality of the competitive market is acknowledged by regulators across the political spectrum, as we noted above. Both potential and current FCC commissioners note that rate regulation of the broadband industry is undesirable.[25]

At the same time, however, current and potential FCC commissioners—along with other regulators at adjacent agencies—have shaped federal policy in ways that effectively amount to de facto rate regulation. Rate regulation by design and rate regulation in effect arrive at the same damaging economic consequences for consumers and the economy as a whole, however. As such, it is worth reviewing some of the recent efforts to enact de facto rate regulation.

A.      BEAD: Middle-Class Affordability Mandate

The National Telecommunications and Information Administration’s (NTIA) notice of funding opportunity under the Broadband Equity, Access, and Deployment (BEAD) program requires each participating U.S. state or territory to include a “middle-class affordability plan to ensure that all consumers have access to affordable high-speed internet” (emphasis in original).[26] The notice provides several examples of how this could be achieved, including:

1. Require providers to offer low-cost, high-speed plans to all middle-class households using the BEAD-funded network; and
2. Provide consumer subsidies to defray subscription costs for households not eligible for the Affordable Connectivity Benefit or other federal subsidies.

Despite the Infrastructure Investment and Jobs Act’s (IIJA) explicit prohibition of price regulation, the NTIA’s approval process appears to envision exactly this. The first example provided above is clear rate regulation. It specifies a price (“low-cost”); a quantity (“all middle-class households”); and imposes a quality mandate (“high-speed”). Toward these ends, the notice provides an example of a “low-cost” plan that would be acceptable to NTIA:

• Costs $30 per month or less, inclusive of all taxes, fees, and charges, with no additional non-recurring costs or fees to the consumer;
• Allows the end user to apply the Affordable Connectivity Benefit subsidy to the service price;
• Provides download speeds of at least 100 Mbps and upload speeds of at least 20 Mbps, or the fastest speeds the infrastructure is capable of if less than 100 Mbps/20 Mbps;
• Provides typical latency measurements of no more than 100 milliseconds; and
• Is not subject to data caps, surcharges, or usage-based throttling.[27]

The notice states that the focus of this portion of the program is to foster broadband access, rather than broadband adoption. But broadband access alone may not be sufficient to drive greater rates of broadband adoption. A report by the U.S. Government Accountability Office concluded that “even where broadband service is available … an adoption gap may persist due to the affordability of broadband and lack of digital skills.”[28] The GAO report notes that nearly one-third of those with access to broadband do not subscribe to it.[29] Brian Whitacre and his co-authors found that, while the reduced levels of broadband access in rural areas explained 38% of the rural-urban broadband-adoption gap in 2011, differences in other general characteristics—such as income and education—explain “roughly half of the gap.”[30]

A policy bulletin published by the Phoenix Center for Advanced Legal & Economic Public Policy Studies notes that the NTIA did not conclude that broadband was unaffordable for middle-class households.[31] George Ford, the bulletin’s author, collected data on broadband adoption by income level. The data indicate that, in general, internet-adoption rates increase with higher income levels. Higher-income households have higher adoptions rates (97.3%) than middle-income households (92.9%) which in turn have higher adoption rates than lower-income households (78.1%). For each of the 50 states and the District of Columbia, the Phoenix bulletin finds that middle-income internet-adoption rates are, to a statistically significant degree, higher than lower-income adoption rates.

The Phoenix bulletin concludes that broadband currently is “affordable” to middle-class households and that “no direct intervention is required” to ensure affordability to the middle class. These observations, however, invite questions regarding how NTIA intends to administer the BEAD program.

• How will the agency distinguish broadband access from broadband adoption? A nearly 93% adoption rate among middle-income households suggests that somewhere close to 100% of these households have broadband access.
• Does “all middle-class households” literally mean all? Even among the highest-income households, broadband adoption is less than 100%. Is NTIA’s objective to reach 100% of middle-income households, or the same level as higher-income households?
• With such high adoption rates among middle-income households, what would be the cost of providing access and/or encouraging adoption by the remaining 4% to 7% of households?
• It seems obvious that some households will not adopt broadband at any price. Should some households pay a negative price for broadband under the BEAD program?
• Does NTIA really intend to encourage states to provide money to households that do not qualify for ACP but already adopt broadband? If so, in what sense does this actually further the goal of spending scarce resources to get the unconnected online?

As John Mayo, Greg Rosston, & Scott Wallsten note:

A substantial portion of the unserved and underserved areas of the country that are the likely targets of the BEAD program, however, are rural, low-population density areas where deployment costs will be high. These high deployment costs may seem to indicate that even “cost-based” rates—normally seen as an attractive competitive benchmark—may be high, violating the IIJA’s “affordability” standard.[32]

The only effective way to reduce broadband price, increase access, and improve quality simultaneously is to increase supply. That would call for prioritizing subsidies to broadband providers before consumers. Although consumer subsidies would increase the demand for broadband, which would have a knock-on effect of potentially attracting long-term investment from providers, it could also increase the price for households who do not receive the subsidy. Direct provider subsidies targeted at hard-to-connect areas could avoid many of the problems that price controls and direct user subsidies can create.[33] Ultimately, however, price controls—even de facto or “backdoor” price controls—would likely slow broadband deployment.

B.      ReConnect Loan and Grant Program

In 2018, Congress provided the secretary of U.S. Department of Agriculture authority to establish a pilot project intended to expand broadband deployment in rural areas, known as the ReConnect Loan and Grant Program. According to the Congressional Research Service, as of December 2022, USDA had awarded more than $3 billion of ReConnect funds through three funding rounds.[34]

With its third round of funding in 2021, USDA announced that, for the first time, applicants would receive a preference, in the form of “points,” for agreeing to abide by so-called “net neutrality” rules similar to those that the FCC had eliminated in 2018’s Restoring Internet Freedom Order. The department simultaneously added affordability—providing a “low-cost option”—as a point criteria. In addition, the third round required that projects must provide broadband access at speeds of at least 100/100 Mbps (i.e., 100 Mbps symmetrical speed). Round 4, announced in August 2022, includes the same criteria.

USDA’s third- and fourth-round requirements under the ReConnect program could be characterized as “back-door” rate regulation. They specify pricing as a point criteria (“low-cost option”) and impose a quality mandate (100/100 Mbps). While it does not mandate a low-cost option, the point weighting indicates that pricing is a priority in awarding funds under the program.

This sort of second-generation price control, while it does not create a centrally directed rate schedule, amounts to the same dynamic. These preferences, while potentially more diffuse in the short term, ultimately create the same medium- and long-term dynamics that drive up prices, and reduce quality and availability.

C.      New York State’s Affordable Broadband Act

In 2021, the State of New York passed the Affordable Broadband Act (ABA).[35] The act requires ISPs to offer all qualifying low-income households at least two internet-access plans: (1) download speeds of at least 25 megabits-per-second for no more than $15-a-month, or (2) download speeds of at least 200 megabits-per-second for no more than $20-a-month. Providers with fewer than 20,000 subscribers may be eligible for exemption from the law. More than one-third of households in the state would be eligible to participate in the program.

Before it went into effect, a group of ISPs obtained an injunction in federal court to block the law.[36] The plaintiffs claimed that the ABA amounted to common-carrier rate regulation, which is preempted by federal law. ISPs are regulated as an “information service” under Title I of the Federal Communications Act of 1934, rather than as Title II common-carrier “telecommunications services.” As such, the plaintiffs claim neither the FCC nor the states can regulate ISPs as common carriers.

New York attempted to dance around this complication by asserting that the ABA merely set a price ceiling.[37] Because ISPs were permitted to charge any price below the ceiling, “the ABA does not ‘rate regulate’ broadband services,” the state argued.[38] The court shut down that line of reasoning, citing several earlier decisions that conclude “‘[p]rice ceilings’ regulate rates.”[39] The matter is currently on appeal before the 2^nd U.S. Circuit Court of Appeals, where oral arguments were heard in January 2023.[40]

D.     Net Neutrality and Zero Rating

The FCC’s 2015 Open Internet Order (“OIO”),[41] although explicitly forbearing from rate regulation,[42] was a regulatory scheme that imposed many of the same effects. Further, with prohibitions on practices like “zero rating,” the regulation walks right up to the line of explicit rate regulation, if not over it.

At an abstract level, the OIO was predicated on the idea that it was possible to impose some common-carriage obligations on broadband providers but to leave out rate regulation. Fundamentally, the OIO failed to take account of the economics that drive ISP investment and pricing, for both edge providers and consumers. In short, in a condition of scarcity—such as limited bandwidth and limited infrastructure to increase bandwidth—there will always be some form of rationing; it will be accomplished either through prices or through regulatory intervention. Even if a regulator disavows explicit rate regulation, intervention into providers’ business models and technical decisions will inevitably shape pricing in much the same way as explicit price regulation does, through the “hydraulic effect” of regulation.[43]

Generally speaking, the OIO imposed a form of “negative” rate regulation that short circuited the normal course of rationing among broadband providers and their customers. It prohibited providers from applying anything other than a zero price to edge providers.^[44] It outright prohibited “paid prioritization”—that is, seeking payments for network utilization from edge providers like Google, Facebook, and Netflix—while casting suspicion on other pricing schemes under the Internet Conduct Standard.[45] Thus, on one hand, the OIO did explicitly regulate rates by imposing a zero price, and, on the other, implemented a de facto rate-regulation scheme by subjecting providers to regulatory scrutiny if they sought novel business relationships with partners.

The best example of this latter situation was the commission’s attack on “zero rating.” Zero rating is the practice of a broadband provider not counting data from certain sources against a customer’s data allowance within a given period.[46] In truth, this is a business model very familiar to any casual internet user: edge providers like gaming companies, email hosts, and social-media platforms frequently offer free or low-cost versions of their service in order to attract a critical mass of users.[47]

Zero-rated broadband service works identically. A content provider like Netflix or YouTube will partner with an ISP like T-Mobile or Comcast in order to provide broadband customers with access to the provider’s content without that use counting against their data plan. Zero rating does not mean that other services are blocked; just that those other services will count against a periodic data allowance.[48] Generally speaking, this sort of business arrangement is a boon to consumers, particularly low-income consumers who can only afford the most restrictive data plans.[49]

With the OIO, however, the FCC introduced the vague Internet Conduct Standard, which gave it broad latitude to ban practices like zero rating.[50] The standard prohibited providers from “unreasonably interfer[ing] with or unreasonably disadvantage[ing]” consumers’ access to lawful content, applications, or services, as well as edge providers’ ability to distribute lawful content, applications, or services.[51] In 2016, the FCC sent letters to AT&T and Verizon, suggesting that the two companies’ use of zero rating were likely violations of the OIO.[52]

Even this implicit threat of regulatory proceedings to examine the propriety of zero rating likely had a chilling effect. Indeed, in an analogous context, the U.S. Circuit Court of Appeals for the D.C. Circuit struck down earlier net-neutrality regulations from the FCC on the grounds that they amounted to the application of de facto common-carriage obligations, even though that commission had refrained from applying Title II.[53]

Regulatory presumptions against zero rating and other forms of paid prioritization similarly amount to de facto rate regulation.[54] As multi-sided platforms, broadband providers seek to balance service and pricing across users and edge providers. As regulation restricts broadband providers’ ability to seek agreements with other large service providers, investment and consumers prices will be forced to shift in order to accommodate. In the long run, this will result in price increases, shortages, declines in quality or, most likely, some mix of the three.

IV.    Conclusion

Both economics and history demonstrate that rate regulations that cap the price of a product below the market price lead to shortages by increasing the quantity demanded without increasing the quantity supplied. Over time, such price caps can reduce the overall supply, as providers curtail or slow output-improving investments.

Broadband rate regulation—whether in the forms of direct and explicit price controls or back-door de facto policies—will result in slowed broadband investment and deployment. Broadband providers have a wide range of investment opportunities, with expected returns as a key consideration in evaluating these opportunities. Policies like price ceilings, which reduce the returns on deployment investments, will in turn reduce the likelihood that such investments will be made, thereby slowing broadband deployment.

As we noted in an earlier issue brief, broadband providers—like all firms—have limited resources with which to make their investments.[55] While profitability is a necessary precondition for investment, not all profitable investments can be undertaken. Among the universe of potentially profitable projects, firms are likely to give priority to those that promise greater returns on investment relative to those with lower ROI. Thus, any evaluation of broadband deployment and access must examine not only whether a given deployment is likely to be profitable, but also how its expected returns compare to other investment opportunities.

In broadband, returns on investment depend on several factors. Population density, terrain, regulations, and taxes are all important cost factors. The consumer population’s willingness to adopt and pay for broadband are key demand-related factors. In addition to these cost and demand factors, timing factors concerning both investment and adoption affect the ROI of any deployment investment. Generally speaking, the longer it takes for a given deployment to recoup its investment and generate a return, the lower the ROI and, in turn, the lower the likelihood that the investment will be made. Similarly, binding rate regulation—whether explicit or de facto—will reduce the ROI of deployments subject to that regulation.

Not only would existing broadband providers make fewer and less-intensive investments to maintain their networks, but they would also invest less in improving quality:

When it faces a binding price ceiling, a regulated monopolist is unable to capture the full incremental surplus generated by an increase in service quality. Consequently, when the firm bears the full cost of the increased quality, it will deliver less than the surplus-maximizing level of quality. As Spence (1975, p. 420, note 5) observes, “where price is fixed … the firm always sets quality too low.”[56]

Quality suffers under price regulation not just because firms can’t capture the full value of their investments, but also because it is often difficult to account for quality improvements in regulatory-pricing schemes:

The design and enforcement of service quality regulations is challenging for at least three reasons. First, it can be difficult to assess the benefits and the costs of improving service quality. Absent accurate knowledge of the value that consumers place on elevated levels of service quality and the associated costs, it is difficult to identify appropriate service quality standards. It can be particularly challenging to assess the benefits and costs of improved service quality in settings where new products and services are introduced frequently.

Second, the level of service quality that is actually delivered sometimes can be difficult to measure. For example, consumers may value courteous service representatives, and yet the courtesy provided by any particular representative may be difficult to measure precisely. When relevant performance dimensions are difficult to monitor, enforcing desired levels of service quality can be problematic.

Third, it can be difficult to identify the party or parties that bear primary responsibility for realized service quality problems. To illustrate, a customer may lose telephone service because an underground cable is accidentally sliced. This loss of service could be the fault of the telephone company if the company fails to bury the cable at an appropriate depth in the ground or fails to notify appropriate entities of the location of the cable. Alternatively, the loss of service might reflect a lack of due diligence by field workers from other companies who slice a telephone cable that is buried at an appropriate depth and whose location has been clearly identified.[57]

None of these concerns dissipate where regulators use indirect, de facto means to cap prices. Broadband is a classic multi-sided market.[58] If the price on one side of the market is set at below-market rates through rate regulation, then there will be upward pricing pressure on the other side of the market. Ultimately, consumers who are not subject to the regulated rates will face higher prices, which puts pressure on policymakers to impose yet another layer of imprecise and complex regulation and even deeper constraints on investment.

It’s important to understand that rate regulation—in any form and whatever the imagined benefits—is not a costless endeavor. Costs and risk do not disappear under rate regulation. Instead, they are shifted in one direction or another—typically with costs borne by consumers through some mix of suppressed investment, sluggish improvements in quality, and reduced innovation.

Government policy may well be able to help accelerate broadband deployment to the unserved portions of the country where it is most needed. But the way to get there is not by imposing price controls on broadband providers. Instead, broadband access can best be expanded by removing costly, government-erected barriers to buildout and/or by subsidizing and educating consumers where necessary.

[1] The Editorial Board, Nationwide Rent Control?, Wall St. J. (Jan. 22, 2023), https://www.wsj.com/articles/nationwide-rent-control-congress-democrats-progressives-housing-president-biden-11674233540.

[2] Lawrence J. Spiwak, USTelecom and Its Aftermath, 71 Fed. Comm. L. J. 39 (2018), available at http://www.fclj.org/wp-content/uploads/2018/12/71.1-%E2%80%93-Lawrence-J.-Spiwak.pdf.

[3] FCC Reauthorization: Oversight of the Commission, Hearing Before the Subcommittee on Communications and Technology, Committee on Energy and Commerce, House of Representatives, 114 Cong. 27 (Mar. 19, 2015) (Statement of Tom Wheeler).

[4] Protecting and Promoting the Open Internet, 80 FR 19737 (Apr. 13, 2015) (codified at 47 CFR 1, 47 CFR 8, and 47 CFR 20), https://www.federalregister.gov/documents/2015/04/13/2015-07841/protecting-and-promoting-the-open-internet, (“2015 OIO”) at ¶¶ 51 & 538

[5] Id., Dissenting Statement of Ajit Pai, https://docs.fcc.gov/public/attachments/FCC-15-24A5.pdf.

[6] Tim Wu, Agency Threats, 60 Duke L.J. 1841, 1842 (2011).

[7] Gigi B. Sohn, A Policy Framework for an Open Internet Ecosystem, 2 Geo. L. Tech. Rev. 335 (2018) at 345.

[8] David Shepardson, FCC Nominee Does Not Support U.S. Internet Rate Regulation, Reuters (Dec. 1, 2021), https://www.reuters.com/world/us/fcc-nominee-does-not-support-us-internet-rate-regulation-2021-12-01.

[9] Id.

[10] The White House, Fact Sheet: The American Jobs Plan (Mar. 31, 2021), https://www.whitehouse.gov/briefing-room/statements-releases/2021/03/31/fact-sheet-the-american-jobs-plan (emphasis added).

[11] NY State Telecom. Assoc. v. James, 2:21-cv-2389 (DRH) (AKT), Memorandum and Order, Document 25 (E.D. N.Y. June 11, 2021), https://ecf.nyed.uscourts.gov/doc1/123117827301 (“Memorandum and Order”).

[12] See, for example, N. Gregory Mankiw, PRINCIPLES OF MICROECONOMICS, 4th ed., Thomson South-Western (2007); Paul Krugman & Robin Wells, Economics, 6th ed., MacMillan (2021); Steven A. Greenlaw & David Shapiro, Principles of Microeconomics 2nd ed., OpenStax (2017).

[13] Id., Mankiw.

[14] See, e.g., David L. Mengle, The Effect of Second Generation Rent Control on the Quality of Rental Housing, Fed. Res. Bank of Rich., Working Paper 85-5 (Nov. 1985), https://www.richmondfed.org/-/media/RichmondFedOrg/publications/research/working_papers/1985/pdf/wp85-5.pdf.

[15] Mankiw, supra note 12.

[16] Gitanjali Poonia, Why Does the U.S. Government Have 1.4 Billion Pounds of Cheese Stored in a Cave Underneath Springfield, Missouri?, Deseret News (Feb. 14, 2022), https://www.deseret.com/2022/2/14/22933326/1-4-billion-pounds-of-cheese-stored-in-a-cave-underneath-springfield-missouri-jimmy-carter-reagan.

[17] For example, the U.S. Department of Agriculture’s Price-Loss Coverage program issues payments when the effective price of a covered commodity is less than the respective reference price for that commodity. See, Agriculture Risk Coverage (ARC) & Price Loss Coverage (PLC), USDA (Oct. 2022), https://www.fsa.usda.gov/Assets/USDA-FSA-Public/usdafiles/FactSheets/2022/fsa_arc_plc_factsheet_101922.pdf.

[18] See, Richard H. K. Vietor, Contrived Competition: Regulation and Deregulation in America (1996) at 45 (“Since capacity could no longer serve as a means of differentiation, the trunk carriers had to devise new means of service competition. ‘Capacity wars’ gave way to ‘lounge wars.’”).

[19] See, e.g., Rent Stabilization, Oregon Dept. of Admin. Serv. (n.d.), https://www.oregon.gov/das/OEA/pages/rent-stabilization.aspx.

[20] Dave Kamper & Sebastian Martinez Hickey, Tying Minimum-Wage Increases to Inflation, as 13 States Do, Will Lift Up Low-Wage Workers and Their Families across the Country, Econ. Pol’y Inst. (Sep. 6, 2022), https://www.epi.org/blog/tying-minimum-wage-increases-to-inflation-as-12-states-do-will-lift-up-low-wage-workers-and-their-families-across-the-country.

[21] See, Darren Filson, Edward Keen, Eric Fruits & Thomas Borcherding, Market Power and Cartel Formation: Theory and an Empirical Test, 44 J. L. & Econ. 465 (2001).

[22] Vietor, supra note 17 at ch. 4.

[23] Id.

[24] Id.

[25] Supra notes 13-15

[26] Notice of Funding Opportunity, Broadband Equity, Access, and Deployment Program, NTIA-BEAD-2022, NTIA (May 2022), available at https://broadbandusa.ntia.doc.gov/sites/default/files/2022-05/BEAD%20NOFO.pdf (note that the IIJA itself did not include this requirement, and this is an addition by NTIA as part of the NOFO process; thus, it is unclear the extent to which this represents a valid requirement by NTIA under the BEAD program).

[27] Id.

[28] Broadband: National Strategy Needed to Guide Federal Efforts to Reduce Digital Divide, GAO-22-104611, U.S. Gov’t Accountability Off. (May 31, 2022), https://www.gao.gov/assets/gao-22-104611.pdf, [hereinafter “GAO-22-104611”].

[29] Id. (“According to FCC data, about 31 percent of people nationwide who have access to broadband at speeds of 25/3 Mbps have not subscribed to it ….); see also, How Do Speed, Infrastructure, Access, and Adoption Inform Broadband Policy?, Pew Research Center (Jul. 7, 2022), https://www.pewtrusts.org/en/research-and-analysis/fact-sheets/2022/07/how-do-speed-infrastructure-access-and-adoptioninform-broadband-policy (“nearly 1 in 4 Americans do not subscribe to a home broadband connection, even where one is available”).

[30] Brian Whitacre, Sharon Strover, & Roberto Gallardo, How Much Does Broadband Infrastructure Matter? Decomposing the Metro–Non-Metro Adoption Gap with the Help of the National Broadband Map, 32 Gov’t Info. Q. 261 (2015).

[31] George S. Ford, Middle-Class Affordability of Broadband: An Empirical Look at the Threshold Question, Phoenix Ctr. for Adv. Leg. & Econ. Pub. Pol’y Stud., Pol’y Bull. No. 61 (Oct. 2022), https://phoenix-center.org/PolicyBulletin/PCPB61Final.pdf.

[32] John W. Mayo, Gregory L. Rosston & Scott J. Wallsten, From a Silk Purse to a Sow’s Ear? Implementing the Broadband, Equity, Access and Deployment Act, Geo. U. McDonough Sch. of Bus. Ctr. for Bus. & Pub. Pol’y (Aug. 2022), https://georgetown.app.box.com/s/yonks8t7eclccb0fybxdpy3eqmw1l2da?mc_cid=95d011c7c1&mc_eid=dc30181b39.

[33] Even as a second-best option, user subsidies remain far preferable to price controls, as they at least directionally work within a market framework and encourage providers to deploy where there is genuine need and demand.

[34] Lisa S. Benson, USDA’s ReConnect Program: Expanding Rural Broadband, Cong. Res. Serv., R47017 (Dec. 14, 2022), https://crsreports.congress.gov/product/pdf/R/R47017.

[35] Memorandum and Order, supra note 11.

[36] Id.

[37] Id. (“In Defendant’s words, the ABA concerns ‘Plaintiffs’ pricing practices’ by creating a ‘price regime’ that ‘set[s] a price ceiling,’ which flatly contradicts her simultaneous assertion that ‘the ABA does not “rate regulate” broadband services.’”)

[38] Id.

[39] Id.

[40] Randolph J. May & Seth L. Cooper, Second Circuit Hears Preemption Challenge to New York’s Broadband Rate Regulation Law, FedSoc Blog (Feb. 7, 2023), https://fedsoc.org/commentary/fedsoc-blog/second-circuit-hears-preemption-challenge-to-new-york-s-broadband-rate-regulation-law.

[41] 2015 OIO, supra note 4.

[42] As noted above, however, the FCC still retained the power to impose rate regulation at a future date. This obviously muddies the discussion, as a looming threat of potential rate regulation would likely exert some influence over broadband providers’ decisions.

[43] See Geoffrey A. Manne, The Hydraulic Theory of Disclosure Regulation and Other Costs of Disclosure, 58 Ala. L. Rev. 473 (2007).

[44] The OIO banned paid prioritization outright, but regulated nonlinear pricing mechanisms like sponsored data under the Internet Conduct Standard. See 2015 OIO, supra note 4 at ¶ 151-53. But the order also rejected the “commercially reasonable” standard of the 2010 OIO and replaced it with a more amorphous, and more restrictive, “unreasonable interference or unreasonable disadvantages” standard. Following the commission’s letters expressing its hostility to AT&T’s and Verizon’s zero-rating programs (supra note 52, and accompanying text), it is safe to assume that such pricing schemes stood on extremely thin ice under the 2015 OIO.

[45] See 2015 OIO, supra note 4 at ¶ 151-53.

[46] See 2015 OIO, supra note 4 at ¶ 151; Jeffrey A. Eisenach, The Economics of Zero Rating, NERA (Mar. 2015), available at https://www.nera.com/content/dam/nera/publications/2015/EconomicsofZeroRating.pdf.

[47] See, e.g., Geoffrey A. Manne & Kristian Stout, In the Matter Of: Telecom Regulatory Authority of India’s 9/12/15 Consultation Paper On Differential Pricing For Data Services at 4 and accompanying citations, Int’l Ctr. for L & Econ. (Jan. 4, 2015), available at https://laweconcenter.org/wp-content/uploads/2017/08/icle-india_diff_pricing_comments_2016.pdf.

[48] Id. at 9.

[49] See, Understanding and Appreciating Zero-Rating: The Use and Impact of Free Data in the Mobile Broadband Sector, Multicultural Media, Telecom and Internet Council (May 9, 2016), available at http://mmtconline.org/WhitePapers/MMTC_Zero_Rating_Impact_on_Consumers_May2016.pdf.

[50] 2015 OIO, supra note 4 at ¶ 136.

[51] Id.

[52] See Jeff Dunn, The FCC Thinks AT&T’s Policies ‘Harm Consumers’ – And It’s Warning Verizon, Too, Business Insider (Dec. 2, 2016), http://www.businessinsider.com/fcc-verizon-att-zero-rating-net-neutrality-letter-directv-now-2016-12.

[53] Verizon, 740 F.3d at 657 (“The Commission has provided no basis for concluding that in permitting ‘reasonable’ network management, and in prohibiting merely ‘unreasonable’ discrimination, the Order’s standard of ‘reasonableness’ might be more permissive than the quintessential common carrier standard.”).

[54] See, e.g., Kristian Stout, Geoffrey A. Manne, & Allen Gibby, Policy Comments of the International Center for Law & Economics, Restoring Internet Freedom NPRM, WC Docket No. 17-108 at 36 and associated citations, Int’l Ctr. for L. & Econ. (Jul. 17, 2017), available at https://laweconcenter.org/wp-content/uploads/2017/09/icle-comments_policy_rif_nprm-final.pdf; see also Daniel A. Lyons, Usage-Based Pricing, Zero-Rating, and the Future of Broadband Innovation, 11 Free State Foundation Perspectives 1 (2016), http://works.bepress.com/daniel_lyons/80.

[55] Eric Fruits & Kristian Stout, The Income Conundrum: Intent and Effects Analysis of Digital Discrimination, Int’l Ctr. for L & Econ., Issue Brief 2022-11-14 (Nov. 2022), https://laweconcenter.org/wp-content/uploads/2022/11/The-Income-Conundrum-Intent-and-Effects-Analysis-of-Digital-Discrimination.pdf.

[56] David E. M. Sappington & Dennis L. Weisman, Price Cap Regulation: What Have We Learned from Twenty-Five Years of Experience in the Telecommunications Industry?, 38 J. Regul. Econ. 227 (Sep. 2010), http://bear.warrington.ufl.edu/centers/purc/docs/papers/1012_Sappington_Price_Cap_Regulation.pdf, at 9.

[57] Id. at 10.

[58] Issue Spotlight: Two-Sided Markets, Int’l Ctr. for L & Econ. (Nov. 8, 2022), https://laweconcenter.org/resources/policy-comments-international-center-law-economics-restoring-internet-freedom-nprm.

Abstract

The concept of fairness is not foreign to competition law, nor are considerations of fairness new to it. Persistent uncertainty regarding what constitutes fairness has, however, traditionally counseled against its application as a standalone legal standard. Indeed, antitrust enforcers often have been reluctant to define even what constitutes unfair terms and conditions. Nonetheless, amid a swell of accusations of undue corporate power and market concentration in the digital economy, debates about fairness have recently taken center stage in the policy debate—particularly in Europe, where several recent regulatory interventions have been touted as promoting fairness in digital markets. This paper argues that policymakers are attracted to “fairness” remedies precisely because the term’s meaning is so ambiguous, thus granting them more discretion and room for intervention.

Introduction

In public debates over the emerging ubiquity of digital markets and platform-business models, the concept of “fairness” has been elevated into a guiding principle of competition-law enforcement. Dissatisfied with the ways that profits are allocated in digital-services markets and decrying what they see as undue corporate power and market concentration, interlocutors in such debates have invoked fairness as the cure for bigness.

This is particularly apparent in the European Union (EU), where several recent legislative initiatives have been adopted with the stated goal of promoting fairness in the digital economy. A central focus of such initiatives is the “gatekeeping” position enjoyed by a few large online platforms, which purportedly allows them to exert intermediation power over whether and under what terms the platform’s business users can reach their end users. As such, critics of so-called “Big Tech” assert, these platforms represent unavoidable trading partners who can exploit their superior bargaining power by imposing unfair contract terms and conditions. Moreover, since they often occupy a dual role—acting simultaneously as intermediaries and as competitors on their own platforms—they may have incentive to discriminate in favor of their own services or subsidiaries (so-called self-preferencing).[1]

In response to the perceived risks generated by these conflicts of interest and imbalances of bargaining power, policymakers in various jurisdictions around the world have proposed or enacted provisions intended to ensure a level playing field and to neutralize the competitive advantages of large intermediator platforms. According to this line of reasoning, Big Tech firms must be compelled to treat both their rivals and their guests on the platform fairly.

Fairness has therefore become part of the larger debate on the role of competition law in the digital economy, with some militating for more aggressive intervention to ensure fairness and questioning whether the consumer welfare standard should remain the lodestar of antitrust law. Because it eschews many other potential goals of competition law, the argument goes, the consumer welfare standard systematically biases antitrust toward underenforcement,[2] with some even labeling it a “distraction” or a “catch phrase.”[3] Rather than the efficiency-oriented approach favored by the Chicago School, the ostensibly holistic approach that has earned support among progressives would combine competition law with other fields of law in order to take into account such broad social interests and ethical goals as labor protection, wealth inequality, and environmental sustainability.[4]

Considerations of fairness are not, however, new to competition law.[5] The history of antitrust law in the United States, for example, demonstrates that U.S. lawmakers and jurists have long had a profound concern for economic liberty as a notion embedded in the nation’s conception of freedom.[6] After all, “[i]f efficiency is so important in antitrust, then why doesn’t that word, ‘efficiency,’ appear anywhere in the antitrust statutes?”[7] Indeed, antitrust has been described as a body of law designed to promote economic justice, fairness, and opportunity.[8] Therefore, the purpose of antitrust law is to protect the competitive process in service of both prosperity and freedom. Rather than a myopic focus on promoting efficiency, antitrust economics should be concerned with ensuring that competition may flourish among a significant number of rivals in free and open markets.[9] And at the heart of the competitive process is the guarantee that “everyone participating in the open market—consumers, farmers, workers, or anyone else” has the opportunity to choose freely among alternative offers.[10]

This is also evident in the EU, where competition law has always reflected various social, political, and ethical objectives, even as the so-called “more economic approach” was adopted in the late 1990s.[11] Moreover, the goal of ensuring equal opportunity in the marketplace by guaranteeing a level playing field among firms has been incorporated in EU antitrust law, reflecting the influence of the philosophy of Ordoliberalism and the Freiburg School of economic thought.[12] From this perspective, fairness would include the protection of economic freedom, rivalry, the competitive process, and small- and medium-size firms.[13]

Nonetheless, it should not be overlooked that the rise of the Chicago School approach, which affirms the need to anchor antitrust enforcement in objective criteria, was itself a response to the limitations and drawbacks of prioritizing various noneconomic goals in competition law. Precisely because “fairness” is so difficult to both define and delineate, it has traditionally proven unsuitable as a standalone legal standard.[14] The same doubts are raised today by some U.S. scholars regarding the possibility of replacing the consumer welfare standard with what has been called the “competitive process test.”[15]

Like considerations of distribution or justice, debates about fairness are inevitably bedeviled by the existence of many differing and sometimes contradictory definitions, rendering the term’s content undefined and incomplete.[16] Despite its many appealing features in the abstract, fairness is a subjective and vague moral concept and, hence, essentially useless as a decision-making tool. Behavioral economics has provided evidence that fairness motives do affect many people’s behavior and can restrict the actions of profit-seeking firms, while simultaneously confirming that notions of fairness can vary widely among individuals.[17] As a result, it is inherently unclear what benchmark should be applied to measure fairness. This poses a serious challenge for legal certainty, as actors cannot predict ex ante whether a practice will be sanctioned for having trespassed the unfairness threshold. Accordingly, policymakers have been invited to give no weight to fairness in choosing legal rules, but rather to assess policies entirely on the basis of their effects on individuals’ well-being.[18]

As notions of fairness have taken a central place in recent EU regulatory interventions, it is worth investigating whether a clear and enforceable definition has been provided (and, in this case, whether the content of fairness has been specified as a rule or as a standard) or whether the vagueness and ambiguity associated with the term’s meaning can be exploited to grant policymakers convenient procedural shortcuts. Indeed, an unmeasurable goal will tend to be irresistibly attractive to enforcement agencies, as it can mean anything they want it to. This paper aims to demonstrate that the revival of fairness considerations in competition law functions primarily to offer policymakers greater latitude to intervene, relieving them of the burden of economic analysis and allowing them to pursue political ends. Chief among the latter is restoring what the U.S. neo-Brandeisian movement considers the original mission of antitrust law: namely, to ensure a more democratic distribution of power and to protect “small dealers and worthy men.”[19] Rather than being used to assess whether practices are anti-competitive, fairness is used to correct market outcomes.

Similar concerns have been raised about a new policy statement issued recently by the U.S. Federal Trade Commission (FTC) regarding the scope of the agency’s authority to prohibit unfair methods of competition (UMC) under the Section 5 of the FTC Act.[20] The FTC points to the legislative record to argue that Section 5 was enacted to protect “smaller, weaker business organizations from the oppressive and unfair competition of their more powerful rivals.”[21] Against the declared aim of “reactivating Section 5,”[22] Commissioner Christine S. Wilson noted in her dissent that, by preferring a “near-per se approach” that discounts or ignores both the business rationales that may underly challenged conduct and the potential efficiencies that such conduct may generate, the policy statement reflects a “repudiation of the consumer welfare standard and the rule of reason” and resembles the work of an academic or a think tank fellow who “dreams of banning unpopular conduct and remaking the economy.”[23]

This paper is structured as follows. Section I describes how fairness considerations lie at the core of European Commissioner for Competition Margrethe Vestager’s political mandate. Section II examines how the notion of unfairness has been applied in EU antitrust case law. Section III analyzes the use of fairness as a rationale for recent EU legislative initiatives in the digital economy. Section IV illustrates that these initiatives do not provide a meaningful contribution to the application of fairness, either as a standard or as a rule. Section V concludes.

I.        The Vestager Mandate: Fairness as Political Signaling

As has been widely noted, fairness has emerged as a guiding principle of EU competition policy during Commissioner Vestager’s previous and current terms.[24] She has referred to fairness in numerous speeches, characterizing her political mandate as one of advocating vigorously for antitrust rules to uphold notions of fairness. But rather than articulate a substantive standard of fairness that could be applied consistently in antitrust enforcement, Vestager has weaponized the notion of fairness as political signaling.

Among Vestager’s pronouncements on the subject are that “competition policy also reflects an idea of what society should be like” and that this is “the idea of a Europe that works fairly for everyone.”[25] She has contended that “when competition works, we end up with a market that treats people more fairly.”[26] Moreover, Vestager concludes that “fair markets are just what competition is about”[27] and “we all have a responsibility to help build a fairer society.”[28]  As the power of digital platforms has grown, Vestager says, “it’s become increasingly clear that we need something more, to keep that power in check, and to keep our digital world open and fair.”[29]

The Europe envisaged by the founders of the Treaty of Rome is, she argues, “one that would bring prosperity and fairness, not just to a few, but to all Europeans.”[30] While some of the commissioner’s speeches invoke fairness primarily in the context of competition giving consumers the power to demand a “fair deal”[31] by ensuring that “their choices and preferences count,”[32] others imply that firms have a responsibility to run their businesses “in a way that is fair to your competitors, fair to your business partners.”[33]

Taken as a whole, her various invocations of fairness frame antitrust law not as economic policy, but as a kind of morality play.[34] Addressing her speeches to the “people,” Vestager emphasizes competition law’s fundamental role in building a fair society. [35]

People don’t just want to be told that open markets make us better off. They want to know that they benefit everyone, not just the powerful few. And that is exactly what competition enforcement is about … public authorities are here to defend the interests of individuals, not just to take care of big corporations. And that everyone, however rich or powerful, has to play by the rules.[36]

II.      EU Antitrust Enforcement: Fairness as a Standard

The notion of fairness is not foreign to EU competition law. The Preamble to the Treaty on the Functioning of the European Union (TFEU) includes a reference to “fair competition.” Its antitrust provisions, while prohibiting restrictive agreements and practices, creates an exception for those that grant consumers a “fair share” of procompetitive benefits (Article 101). The provisions also prohibit abuses of dominant position that impose “unfair purchase or selling prices” or other “unfair trading conditions” (Article 102). Moreover, Vestager has argued that state-aid rules, which prevent member states from granting companies a selective advantage, likewise reflect the notion of fairness within “the ordinary meaning of the word.”[37]

In general, these provisions endorse a standard-based approach to fairness that specifies the content of the law ex post, rather than a rule-based approach that introduces more specific legal commands ex ante.[38] Because fairness remains undefined and its meaning is disputed, the standard is hard to operationalize.

A.      Unfair Terms and Excessive Pricing

While only a handful of judgments and decisions by the European Court of Justice (CJEU) and the European Commission analyze the notion of unfairness, what these typically share is a focus on clauses that either were not functional to achieve the purpose of the agreement or that unjustifiably restricted the freedom of the parties.[39] The relationship between unfairness and the absence of a functional relationship between the contract’s purpose and challenged contractual clauses was highlighted in Tetra Pak II[40] and Duales System Deutschland (DSD).[41] It can be inferred from some of the Commission’s other decisions that unfairness may been associated with opaque contractual conditions that render a dominant firm’s counterparties weaker, particularly when those counterparties are unable to understand the terms of the commercial offer in question.^[42]

Recent years have seen a revival of cases concerning “unfair prices,” particularly in cases concerned with drug pricing or the collection of  royalties.[43] But rather than establish the meaning of fairness, courts and competition authorities have tended toward a rule-based approach to identify unfair prices, developing alternative measures rooted in economic reasoning.[44] Indeed, since United Brands, the CJEU has evaluated whether a price is unfair by  determining whether it has a reasonable relation to the economic value of the product.[45] For example, in SABAM, the CJEU confirmed that the royalty rate requested by a collective society should bear relation to the economic value of the copyright work.[46] But courts and antitrust authorities have also struggled to apply the test set out by the CJEU in United Brands to assess whether prices are unfair.[47] As acknowledged in AKKA-LAA, “there is no single adequate method” to evaluate unfair-pricing cases.[48] Given this, Advocate General Nils Wahl has argued that a price charged by a dominant undertaking should be deemed abusive only when no rational economic explanation (other than a firm possessing the capacity and willingness to use its market power) can be found for why it is so high.[49]

B.      Margin Squeeze

Unfair-pricing practices have also been investigated in the context of the margin-squeeze strategy, which is a standalone abuse under EU competition law on grounds that it undermines equality of opportunity between economic operators.[50] Rather than refusing to supply, a vertically integrated dominant firm may instead charge a price for a product on the upstream market that would not allow an equally efficient competitor to compete profitably on a lasting basis with the price the dominant firm charges on the downstream market. A margin squeeze exists if the difference between the retail prices charged by a dominant undertaking and the wholesale prices it charges its competitors for comparable services is negative, or insufficient to cover the product-specific costs to the dominant operator of providing its own retail services to end-users.[51] Accordingly, the unfair spread between the upstream price and the retail price is deemed exclusionary when it squeezes rivals’ margins on the retail market, thereby undermining their ability to compete on equal terms. The dominant player is therefore required to leave its rivals a fair margin between the wholesale and retail prices.[52]

C.      FRAND-Encumbered SEPs

The notion of fairness has also been raised in the context of standard-essential patents (SEPs), whose holders are subject to fair, reasonable, and non-discriminatory (FRAND) licensing obligations.[53] The process of developing standards can create opportunities for companies to engage in anticompetitive behavior where such standards give rise to holdup problems involving the strategic use of patents. The claim is that SEPs confer market power because the standardization process leads to the exclusion of alternative technologies. As a consequence, SEP owners enjoy ex post monopoly power that could enable them to charge excessively high royalty rates in their licensing agreements or to constructively refuse to license their patents.

To address these concerns, standard-setting organizations (SSOs) typically require SEPs holders to submit FRAND commitments. The goal is to make SEPs available at a price equivalent to what patents would have been worth in the market prior to the time they were declared essential.

It is a matter of debate, however, whether FRAND commitments can effectively prevent SEP owners from imposing excessive royalty obligations on licensees. In fact, there are no generally agreed-upon tests to determine whether a particular license does or does not satisfy a FRAND commitment. There is also little consensus regarding the legal effects of FRAND commitments, such as whether they imply a waiver of the general law of remedies (more precisely, injunctive relief and other extraordinary remedies). Such broad uncertainty has prompted a wave of litigation around the globe in recent decades.

While some SSOs and courts have moved toward a rule-based approach to define fair/reasonable rates and to develop methods for the valuation of FRAND royalties, the CJEU in Huawei[54] endorsed a hybrid approach.[55] Indeed, rather than define the meaning of FRAND (which remains left to a standard-based approach), the CJEU imposed a procedural framework for good-faith SEP-licensing negotiations. The framework identifies the steps that patent holders and implementers must follow in negotiating FRAND royalties, with the threats of antitrust liability and patent enforcement as levers to steer the parties toward a mutually agreeable level. Nonetheless, none of these approaches has thus far proven effective in reducing either uncertainty or litigation.

D.     Abuse of Economic Dependence

Over the years, several EU member states have adopted provisions related to the abuse of economic dependence (also known as relative market power or superior bargaining power), creating yet another context in which the unfairness of terms and conditions may be implicated.[56] Rules forbidding the abuse of economic dependence reflect concerns about the asymmetry of economic power in business-to-business relationships, which is considered a potential source of unfair-trading practices.

Although abuse of economic dependence is not regulated at the EU level, national-level legislation is authorized by Article 3(2) of the Regulation 1/2003 on the implementation of competition rules, which allows member states to adopt and apply stricter laws prohibiting or sanctioning unilateral conduct.[57] Recital 8 of the regulation refers specifically to national provisions that prohibit or impose sanctions on abusive behavior toward economically dependent undertakings.

Economic dependence is typically the result of significant switching costs that may lock a party into a business relationship and prevent it from finding equivalent alternative solutions. Therefore, evaluations of economic dependence include examining the amount of relationship-specific investment the dependent firm has undertaken (i.e., investments required to support its trading relationship), which may expose weak parties to holdup, as well as whether the counterparty should be considered an unavoidable trading partner because of its exclusive control over an essential input.

It is worth noting that recent legislative initiatives signal a willingness by EU member states to rely on abuse-of-economic-dependence claims to tackle digital platforms’ purportedly unfair conduct and trading relationship with business users. In 2020, Belgium approved an amendment to its Code of Economic Law to insert a provision on abuse of economic dependence,[58] with lawmakers making specific reference to the perceived legislative gap concerning digital platforms. In 2021, alongside its new antitrust tool focused on firms of “paramount significance for competition across markets,” the German Bundestag extended its economic-dependence provision to target firms acting as “intermediaries on multi-sided markets,” insofar as business users are significantly dependent on their intermediary services to access supply and sales markets such that sufficient and reasonable alternatives do not exist.[59] Finally, in 2022, the Italian Annual Competition Law included a specific provision introducing a rebuttable presumption of economic dependence when a firm uses intermediation services provided by a digital platform that play a “key role” in reaching end users or suppliers due to network effects or the availability of data.[60]

E.      Summary of Findings

There are two primary takeaways from this brief overview of fairness in EU antitrust law. First, despite some references in the TFEU, antitrust enforcers have traditionally been reluctant to engage with the unfairness of terms and conditions. Uncertainty regarding the definition and legal boundaries of fairness make it challenging to use as an actionable standard for the evaluation of anticompetitive behavior. Second, if recent case law is suggestive of how attitudes about the use of fairness in antitrust are evolving, courts and competition authorities likely will continue to prefer that fairness be anchored in specific economic values or a detailed code of conduct (i.e., switching to a rule-based approach), rather than relying on political or moral considerations. The ongoing disputes over how to assess whether prices are excessive, as well as determining “fair” royalties for SEPs, suggest that questions about the scope and nature of unfair conduct cannot be usefully resolved by references to “the ordinary meaning of the word.”

Moreover, while fairness is explicitly mentioned in exploitative-abuse cases, Article 102 TFEU makes no reference to fairness as a benchmark for such cases. In this regard, the CJEU’s Servizio Elettrico Nazionale ruling affirmed the effects-based approach the court would take to assessing the abusive nature of unfair practices.[61] Notably, the CJEU definitively stated that competition law is not intended to protect the existing structure of the market, but rather that the ultimate goal of antitrust intervention is the protection of consumer welfare.[62] Accordingly, as the court previously found in Intel, not every exclusionary effect is necessarily detrimental to competition.[63] Competition on the merits may, by definition, mean that less-efficient competitors who are less attractive to consumers in terms of price, choice, quality, or innovation may be marginalized or forced to exit the market.[64]

III.    EU Competition Policy in Digital Markets: Fairness as a Rule?

The preceding overview of EU antitrust enforcement demonstrates that, despite recent political interest in the subject of fairness, authorities and courts continue to struggle to apply it as a substantive standard. Commissioner Vestager’s fairness agenda nonetheless permeates several recent legislative initiatives to regulate the digital economy through specific rules, rather than a general standard.

A common feature of these interventions is their preoccupation with the intermediation (or bottleneck) power that some large online platforms may wield vis-à-vis business users, to the extent that they may be unavoidable trading partners in a wide range of contexts. As a result, proponents argue, the interventions are needed to ensure a level playing field and to prevent unfair behavior to the detriment of business users.

A.      Platform-to-Business Regulation

In 2019, the EU adopted the regulation on promoting fairness and transparency for business users of online intermediation services (P2B Regulation).[65] Its aim was to lay down rules to ensure that digital intermediation platforms and search engines grant appropriate transparency, fairness, and effective redress to business users and corporate websites, respectively.[66] According to the P2B Regulation, online intermediation services can be “crucial” for the commercial success of firms who use such services to reach consumers. Given that dependence, such platforms often have superior bargaining power that enables them to behave unilaterally in ways that can be unfair, harmful to the legitimate interests of their business users, and also, indirectly, to consumers.[67]

While fairness is referenced in the P2B Regulation’s formal title, its provisions are more concerned with enhanced transparency, rather than forbidding or prescribing specific conduct. Nonetheless,  the regulation left open the potential for further measures if its provisions proved insufficient to adequately address imbalances and unfair commercial practices in the sector.[68] A few months after the P2B Regulation was promulgated, the European Commission unveiled in a communication to the European Parliament its view for the circumstances under which further legislative intervention would be needed.[69] Since platforms that act as “private gatekeepers to markets, customers and information” may jeopardize the fairness and openness of markets, and “competition policy alone cannot address all the systemic problems that may arise in the platform economy,” the Commission noted that additional rules may still be needed to ensure contestability, fairness, and innovation in digital markets, as well as the possibility of market entry.[70] Notably, the Commission’s declared policy goal was to ensure “a level playing field for businesses,” which it argued “is more important than ever” in the digital era.[71]

B.      Digital Markets Act

It was against this backdrop that the European Commission proposed the Digital Markets Act (DMA),[72] with the goal of ensuring “contestability and fairness” for digital markets.[73] In the Commission’s view, the distinctive characteristics of digital services (i.e., the presence of strong economies of scale, indirect network effects, economies of scope due to the role of data as a critical input, and conglomerate effects, along with consumers’ behavioral biases and single-homing tendency) generate significant barriers to entry that confer gatekeeping power on certain large platforms.[74]

The Commission warned that this situation would lead to “serious imbalances in bargaining power and, consequently, to unfair practices and conditions” both for business users and for platforms’ end users, to the detriment of prices, quality, “fair competition,” choice, and innovation in the market.[75] Moreover, gatekeepers frequently play a dual role, being simultaneously operators of a marketplace and sellers of their own products and services in competition with rival sellers.[76] Therefore, the Commission contended, rules are needed to prevent gatekeepers from unfairly benefitting and to impose on them a special responsibility to ensure a level playing field, which de facto amounts to the introduction of a platform-neutrality regime.[77]

Implicit in the DMA is the presumption that market processes are often incapable of ensuring “fair economic outcomes” with regard to core platform services,[78] apparently requiring a rethinking of competition policy. Under this view, competition law is deemed unfit to effectively address challenges posed by gatekeepers that are not necessarily dominant in competition-law terms.[79] Indeed, antitrust is limited to certain examples of market power (e.g., dominance on specific markets) and of anti-competitive behavior.[80] Further, its enforcement occurs ex post and requires an extensive investigation on a case-by-case basis of what are often very complex facts.[81]

The DMA therefore aims to protect a different legal interest from antitrust rules. Rather than protect undistorted competition on any given market, as defined in competition law terms, the DMA seeks to ensure that markets where gatekeepers are present are and remain “contestable and fair,” independent of the actual, likely, or presumed effects of gatekeeper conduct.[82] As a result, it introduces a set of ex ante obligations for online platforms designated as gatekeepers, thereby effectively relieving enforcers of the responsibility to define relevant markets, prove dominance, and measure market effects.

Despite that proclaimed protection of a different legal interest, however, there is no indication that the DMA’s promotion of fairness and contestability differs from the substance and scope of competition law.[83] The draft DMA didn’t define either fairness or contestability, nor did it indicate how the obligations it would impose on digital gatekeepers was intended to deliver each objective. The final version fills part of this gap, including a definition of these goals. With regard to contestability, the DMA targets practices that increase barriers to entry or expansion in digital markets and imposes obligations that tend to lower these barriers.[84] Therefore, contestability relates to firms’ ability to “effectively overcome barriers to entry and expansion and challenge the gatekeeper on the merits of their products and services.”[85] With respect to fairness, the obligations seek to address the “imbalance between the rights and obligations of business users” that allows gatekeepers to obtain a “disproportionate advantage” by appropriating the benefits of market participants’ contributions.[86] Indeed, “[d]ue to their gateway position and superior bargaining power, it is possible that gatekeepers engage in behaviour that does not allow others to capture fully the benefits of their own contributions, and unilaterally set unbalanced conditions for the use of their core platform services or services provided together with, or in support of, their core platform services.”[87]

Nonetheless, the DMA also considers fairness to be “intertwined” with contestability.[88] “The lack of, or weak, contestability for a certain service can enable a gatekeeper to engage in unfair practices. Similarly, unfair practices by a gatekeeper can reduce the possibility for business users or others to contest the gatekeeper’s position.”[89] Therefore, an obligation may address both. Unfortunately, because the DMA does not index the obligations based on the specific goal they purportedly advance, it also does not clarify which obligations are intended to safeguard contestability and/or promote fairness. This is despite the fact that the title of the DMA’s Chapter III refers to practices of gatekeepers that limit contestability “or” are unfair.[90]

The confusion between the two policy goals is confirmed in several passages of the text, which refer indiscriminately to contestability “and” fairness.[91] In line with the definition of contestability and fairness provided in the DMA, the table below summarizes the obligations according to protected interests and principal beneficiaries.

The vast majority of the DMA’s provisions seek to promote contestability. Most are clearly described in this way, including explicit references to terms such as contestability, switching, multi-homing, and barriers to entry and expansion.[92] Two of the provisions instead introduce pure transparency obligations. Although they are described as functional to promote contestability and fairness,[93] they do not appear to either affect the imbalance of bargaining power or lower barriers to entry and expansion.

An interesting case is provided by the ban on “sherlocking” (i.e., the use of business users’ data to compete against them), which apparently does not belong to any of the proclaimed goals. Indeed, even if the prohibition is justified to prevent gatekeepers from unfairly benefitting from their dual role,[94] the characterization of the conduct in question does not match the definition of fairness provided in Recital 33.

The goal of fairness is almost always confused (rectius, “intertwined”) with contestability. Indeed, some provisions are justified on grounds that the imposition of contractual terms and conditions by gatekeepers may limit inter-platform contestability.[95] Other provisions are deemed necessary to promote multi-homing and to prevent reinforcing business users’ dependence on gatekeepers’ core platform services.[96] Further, to ensure a “fair commercial environment” and to protect the contestability of the digital sector, the DMA considers it important to safeguard the right to raise concerns about unfair practices by gatekeepers.[97] Moreover, the DMA contends that, since certain services are “crucial” for business users, gatekeepers should not be allowed to leverage their position against their dependent business users and therefore “the freedom of the business user to choose alternative services” should be protected.[98] Finally, the law suggests that some practices should be prohibited because they give gatekeepers a means to capture and lock in new business users and end users, thus raising barriers to entry.[99]

Thus, there is significant definitional overlap between contestability and fairness under the DMA. Further, while Recital 33 links the notion of fairness to the imbalance between business users’ rights and obligations, some provisions also protect end users against unfair practices.[100] The law also embraces fairness as a notion applicable to both contractual terms and market outcomes. Indeed, in order to justify intervention that exceeds traditional antitrust rules, the DMA states that market processes are often incapable of ensuring “fair economic outcomes” with regard to core platform services.[101] In other words, rather than concern itself with specific practices, the DMA’s approach to fairness starts with a presumption that the outcome is unfair and regulates some practices to redress this.

Article 6(12) represents the only provision clearly addressed at ensuring just fairness as defined in Recital 33. Indeed, describing the FRAND access obligation, Recital 62 includes several keywords from that definition, stating that pricing or other general-access conditions should be considered unfair if they lead to an “imbalance of rights and obligations” imposed on business users or confer a “disproportionate advantage” on the gatekeeper. But “fairness” in such circumstances acts as a standard rather than a rule. To avoid the scenario already illustrated with regard to SEPs, Recital 62 provides some benchmarks to determine the fairness of general-access conditions.

Article 5(3) forbids parity clauses, also known as most-favored nation (MFN) agreements or across-platform parity agreements (APPAs). The provision bans both the broad and narrow versions of such clauses, thereby prohibiting gatekeepers from restricting business users’ ability to offer products or services under more favorable conditions through other online intermediation services or through direct online sales channels. The DMA maintains that, while the broad version of the parity clause may limit inter-platform contestability, its narrow version would unfairly restrain business users’ freedom to use direct online sales channels.[102]

To the extent that the rationale for the ban is to protect weak business parties against the superior bargaining power exerted by digital intermediaries, the potential effects of broad and narrow MFNs differ significantly. While broad parity clauses are more likely to produce net anti-competitive effects, efficiency justifications related to the protection of platforms’ investments against the risk of free riding usually prevail in case of narrow parity clauses. Indeed, the original DMA proposal only forbade broad MFNs, as the European Commission has traditionally endorsed a case-by-case analysis of their effects under competition law.[103] The more lenient approach toward narrow MFNs is seen in the new guidelines on vertical restraints, where it is stated that narrow retail-parity obligations are more likely to fulfil the conditions of Article 101(3) TFEU than across-platform retail parity obligations “primarily because their restrictive effects are generally less severe and therefore more likely to be outweighed by efficiencies” and “[m]oreover, the risk of free riding by sellers of goods or services via their direct sales channels may be higher, in particular because the seller incurs no platform commission costs on its direct sales.”[104]

By banning narrow MFNs, the final version of the DMA disregards these efficiency justifications. A more fulsome notion of fairness would be concerned not only with gatekeepers’ disproportionate advantage, but also with the risk of free riding by business users, which may reduce the incentive to invest in platform development.[105] Indeed, relying on the definition provided in Recital 33, this could be a case where fairness may even be invoked by a gatekeeper against business users, because the former may be unable to fully capture the benefits of its own investment.

C.      Data Act

Ambiguity about the notion of fairness also characterizes the proposed Data Act.[106] On the one hand, the proposal pursues the goal of “fairness in the allocation of value from data” among actors in the data economy.[107] This concern stems from the observation that the value of data is concentrated in the hands of relatively few large companies, while the data produced by connected products or related services are an important input for aftermarket, ancillary, and other services.[108] Given this, the Data Act attempts to facilitate access to and use of data by consumers and businesses, while preserving incentives to invest in ways of generating value from data. On the other hand, to ensure fairness in the underpinning data-processing services and infrastructure, the proposal seeks “fairer and more competitive markets” for data-processing services, such as cloud-computing services.[109]

Moreover, such objectives include operationalizing rules to ensure “fairness in data sharing contracts.”[110] Notably, to prevent the exploitation of contractual imbalances that hinder fair data-access and use for small or medium-sized enterprises (SMEs),[111] Chapter IV of the Data Act addresses unfair contractual terms in data-sharing contracts in situations where a contractual term is imposed unilaterally by one party on a SME. The proposal justifies this requirement by assuming that SMEs will typically be in a weaker bargaining position, without meaningful ability to negotiate the conditions for access to data. They are thus often left with no other choice but to accept take-it-or-leave-it contractual terms.[112]

Terms imposed unilaterally on SMEs are subject to an unfairness test,[113] where a contractual term is considered unfair if it is of such a nature that its use grossly deviates from good commercial practice, contrary to good faith and fair dealing.[114] But given how vague and broad concepts such as “gross deviation from good commercial practices” or “contrary to good faith and fair dealing” are, the unfairness test may simply serve to generate further uncertainty, which could be heightened by potential differing interpretations at the national level.

Therefore, rather than outline specific rules, the proposed Data Act opts for a standard-based approach and provides a yardstick to interpret the unfairness test.[115] Article 13 includes a list of terms that are always considered unfair and another list of terms that are presumed to be unfair. If a contractual term is not included in these lists, the general unfairness provision applies. Moreover, model contractual terms recommended by the Commission may assist commercial parties in concluding contracts based on fair terms.

Some terms considered unfair by the Data Act are clearly inspired by the abuse-of-economic-dependence standard.[116] Given the implicit parallel between data dependence and economic dependence, the exclusion of SMEs from the scope of application of Article 13 is not justified.[117] Indeed, abuse-of-economic-dependence cases involve scrutinizing the unfairness of terms and conditions due to the imbalance of bargaining power between business parties, regardless of the size of the players involved. Moreover, in the case of data-sharing contracts, such imbalance would be generated by data dependence, which may also emerge when SMEs exert control over certain data.

In summary, to achieve a greater balance in the distribution of the economic value from data among actors, the fairness of both contractual terms and market outcomes are addressed in the Data Act. The creation of a cross-sectoral governance framework for data access and use aims to ensure contractual fairness by rebalancing the bargaining power of SMEs vis-à-vis large players in data sharing contracts.[118] As a result, fairer and more competitive market outcomes shall be promoted in aftermarkets and in data processing services.[119]

D.     Summary of Findings

Recent EU legislative efforts motivated by the objective of promoting fairness in digital markets have thus far appeared to confirm traditional doubts about the possibility of relying on it as a suitable tool to assess anti-competitiveness.

If fairness has proven to be unsuitable to serve as a substantive standard in EU competition-law enforcement, the shift towards a rule-based approach does not seem to provide a significant improvement. Fairness represents a vague overarching goal. The envisaged black and white rules do not plainly address fairness, which instead is still essentially treated according to a standard-based approach. Moreover, the lack of clarity about the meaning of the term and the boundaries of its scope remains a relevant and thorny issue.

Indeed, the recent initiatives apply fundamentally different concepts of fairness. While the P2B Regulation treats fairness as de facto equivalent to transparency rules, the DMA defines it as referring to an imbalance in bargaining power that prevents a fair share of value among all players that contribute to a platform ecosystem. That definition notwithstanding, almost all of the DMA’s obligations putatively intended to promote fairness are, in effect, addressed at promoting contestability. Furthermore, the only provision clearly aimed at ensuring fairness as defined in the DMA relies on a standard-based approach. In a similar vein, the proposed Data Act treats fairness as a standard, introducing contractual protections based solely on the size of the players (i.e., SMEs) and providing a yardstick to apply the unfairness test.

IV.    Fairness as a Blanket License for Regulatory Intervention

Alongside the apparent difficulties in operationalizing fairness as either a standard or a rule, in practice, the lines separating fairness in the process from the outcomes of competition are inevitably blurred.[120] After all, Commissioner Vestager has not hidden her dissatisfaction with current market outcomes, showing an inclination to evaluate market structure as a proxy for fairness. Despite the efforts to describe efficiency and fairness as converging objectives for competition-policy enforcers, she implicitly acknowledged the trade-off between these goals.[121] Notably, Vestager argued that “[i]t’s true that competition, by its very nature, involves winners and losers. But as long as the social market economy is working properly, the efficiency gains that accrue from this process can be fairly and justly shared across all stakeholders.”

It is hard to deny the fundamental contradiction between defending efficient markets and promoting distributive justice. It is also difficult to reconcile Vestager’s message with the CJEU’s well-established principle that exclusionary effects do not necessarily undermine competition.[122] Indeed, rather than interpret fairness as equality of initial opportunities, Vestager explicitly refers to the fairness of market outcomes.

From this perspective, it would be more coherent to state that the reason why there is no clash between efficiency and fairness is because they perform different functions. While the former acts as a substantive standard for antitrust enforcement, the latter is a mere aspiration that has proven useful for political signaling.

It is not surprising that the recent push to revive fairness considerations in digital markets has originated outside the competition-law framework. Such policy choices implicitly acknowledge the impossibility of using fairness as an alternative standard to competition on the merits in antitrust law. As recently recalled by the CJEU, the ultimate goal of antitrust intervention is the protection of consumer welfare, rather than any particular market structure. The exclusion of as-efficient competitors is key to triggering antitrust liability for competition foreclosure. Therefore, for those who pursue the political agenda of building a fairer society,[123] it is necessary to bypass competition law, arguing—as the DMA does—that it is unfit to address the new challenges posed by digital gatekeepers. Indeed, in the setting of per se regulation, fairness can be invoked to justify more discretion, disregarding economic analysis and demonstration of the anticompetitive effects of conduct.

Against this background, the definition of fairness envisaged by the DMA (as protection against the asymmetric negotiating power of digital gatekeepers vis-à-vis business users to ensure an adequate sharing of the surplus) appears insufficient to provide the much-needed limits to its scope of application. This particular flavor of distributive justice may, indeed, favor regulatory capture, justifying interventions that actually reflect rent-seeking strategies aimed at shielding some legacy players from competition at the expense of consumers.

This is apparently the case with some EU policy initiatives such as the directive on copyright in the Digital Single Market.[124] In line with the proclaimed purpose of achieving “a well-functioning and fair marketplace for copyright,”[125] the directive grants to publishers a right to control the reproduction of digital summaries of press publications, which currently are often offered by information-service providers.[126] The new right aims to address the value gap dispute between digital platforms and news publishers, as the former are accused of capturing a huge share of the advertising revenue that might otherwise go to the latter by free riding on the investments made in producing news content. The argument is that these platforms take advantage of the value created by publishers when they distribute content that they do not produce and for which they do not bear the costs.[127]

Notably, because of publishers’ reliance on some Big Tech platforms for traffic (i.e., Google and Facebook), the latter are deemed to exert substantial bargaining power, which makes it difficult for publishers to negotiate on an equal footing.[128] Accordingly, it has been argued that a harmonized legal protection is needed to put publishers in better negotiating position in their contractual relations with large online platforms.

The European reform has not, however, been guided by an evidence-led approach. Indeed, there is no empirical evidence to support the free-riding narrative.[129] It relies merely on evidence of the crisis in the newspaper industry, without proof of the claim that digital infomediaries negatively impact legacy publishers by displacing online traffic. Looking at the previous ancillary-rights solutions at the national level (i.e., in Germany and Spain), empirical results show no evidence of a substitution effect, but rather demonstrate the existence of a market-expansion effect. This therefore proves that online news aggregators complement newspaper websites and may benefit them in terms of increased traffic and more advertising revenue. Such aggregators allow consumers to discover news outlets’ content that they would not otherwise be aware of, while reducing search times and enabling readers to consume more news.[130]

In a similar vein, as part of the 2030 digital-policy program,[131] the Commission and other European institutions appear set to deliver another legislative initiative that would force some large online platforms to contribute to the cost of telecommunications infrastructure.[132] Indeed, telecom operators claim that internet-traffic markets are unbalanced, arguing that just a few large online companies generate a significant portion of all network traffic, but they do not adequately contribute to the development of such networks[133]. As the argument goes, while network operators bear massive investments to ensure connectivity, digital platforms free ride on the infrastructure that carries their services.

Moreover, strong competition in the retail telecommunications market and regulatory interventions on the wholesale level have contributed to declining profit margins for telecom firms’ traditional retail revenue streams. Therefore, telecom operators argue that their costs of capital are higher than their returns on capital. Finally, network operators complain that they are not in a position to negotiate fair terms with these platforms due to their strong market positions, asymmetric bargaining power, and the lack of a level regulatory playing field. Hence, they argue, a legislative intervention is needed to address such imbalances and ensure a fair share of network usage costs are financed by large online content providers.[134]

Following this path, the EU Council has recently supported the view expressed in the European Declaration on Digital Rights and Principles for the Digital Decade that it is necessary to develop adequate frameworks so that “all market actors benefiting from the digital transformation assume their social responsibilities and make a fair and proportionate contribution to the costs of public goods, services and infrastructures, for the benefit of all Europeans.”[135]

The arguments advanced by telecom operators to support introducing a network-fee payment scheme would amount to a sending-party-network-pays system. Such proposals are not new, and they have already been rejected. As the Body of European Regulators for Electronic Communications (BEREC) noted 10 years ago, such proposals overlook that it is the success of content providers that lies at the heart of increases in demand for broadband access.[136] Indeed, requests for data flows stem not from content providers. but from internet consumers, from whom internet service providers already derive revenues.[137] From this perspective, both sides of the market (content providers and end users) already contribute to paying for Internet connectivity.[138] Further, “[t]his model has enabled a high level of innovation, growth in Internet connectivity, and the development of a vast array of content and applications, to the ultimate benefit of the end user.”[139]

Moreover, by charging Big Tech firms, the proposal may clash with the legal obligation of equal treatment that ensues from the Net Neutrality Regulation,[140] which has been justified under the opposite view that is it broadband providers who enjoy endemic market power as terminating-access monopolies, and hence should be precluded from discriminating against some traffic.[141] From this perspective, it would be difficult to justify an intervention intended to restore fairness in the relationship between network operators and content providers on the premise that the former suffers from an asymmetry of bargaining power without repealing the Net Neutrality Regulation.

BEREC recently affirmed its view in a preliminary assessment of the mechanism of direct compensation to telecom operators.[142] Changes in the traffic patterns do not modify the underlying assumptions regarding the sending-party-network-pays charging regime, therefore “the 2012 conclusions are still valid.”[143] The sending-party-network-pays model, BEREC argues, would provide ISPs “the ability to exploit the termination monopoly” and such a significant change could be of “significant harm to the internet ecosystem.”[144] Further, BEREC questioned the assumption that an increase in traffic directly translates into higher costs, noting that the costs of internet-network upgrades necessary to handle an increased traffic volume are very low relative to total network costs, while upgrades come with a significant increase in capacity.[145] Moreover, BEREC once again found no evidence of free riding along the value chain[146]: the IP-interconnection ecosystem is still largely competitive and the costs of internet connectivity are typically covered and paid for by ISP customers.

V.      Conclusion

Like the sirens’ music in the Odyssey, fairness exerts an irresistible allure. By evoking principles of equity and justice, fairness makes it hard for anyone to disagree with the pursuit of a goal that would make not just markets, but the whole society better off. As Homer warned, however, the rhetoric may be deceptive and designed to distract from the proper path. We see such risk in the call for fairness to serve as the guiding principle of EU competition policy in digital markets.

The experience of EU competition-law enforcement is illustrative of the difficulties inherent in relying on fairness as an applicable standard. It also underscores why enforcers have traditionally been reluctant to do so. Indeed, attempts to evaluate the unfairness of prices have required courts and competition authorities to identify economic values, while the struggle in finding agreement on the economic definition of what is fair has generated a wave of litigation in the SEP-licensing scenario. Therefore, while seeking refuge in the “ordinary meaning of the word” is apparently useless, envisaging an economic proxy for fairness is particularly challenging.

Despite this background, the EU institutions have embarked on a mission to appoint fairness as the lodestar of policy in digital markets. The DMA offers one definition of fairness, while all the other initiatives (P2B Regulation, the proposed Data Act, the Copyright Directive, and the ongoing discussion on the cost of telecom infrastructure) are likewise moved to address imbalances in bargaining power that do not guarantee that surplus will be adequately shared among market participants. On closer inspection, however, the initiatives are not fully consistent with any particular definition. The notion of fairness is often merged with contestability and is invoked to protect a wide range of stakeholders (business users, end users, rivals, or just small players), even when there is no evidence of disproportionate advantage for large online companies. Moreover, rather than being translated into specific rules, fairness is still primarily promoted according to a standard-based approach.

The revival of fairness considerations appears motivated primarily by policymakers’ desire to be free of any significant procedural constraints. An analogous policy trend can be seen among U.S. authorities, who likewise question the role of efficiency in antitrust enforcement and call for a “return to fairness.”[147] In the name of fairness, various business practice, strategies, and contractual terms can be evaluated without incurring the burden of economic analysis. And even the market structure can be questioned.

Fairness has the power to transform policymakers into judges, deciding what is right and who is worthy, which is a temptation that would require the sagacious foresight of Ulysses.

[1] Giuseppe Colangelo, Antitrust Unchained: The EU’s Case Against Self-Preferencing, International Center for Law & Economics (Oct. 7, 2022) ICLE White Paper, https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4227839.

[2] Jonathan Kanter, Remarks at New York City Bar Association’s Milton Handler Lecture, U.S. Justice Department (May 18, 2022) https://www.justice.gov/opa/speech/assistant-attorney-general-jonathan-kanter-delivers-remarks-new-york-city-bar-association.

[3] Ibid.

[4] See, e.g., Amelia Miazad, Prosocial Antitrust, 73 Hastings Law J. 1637 (2022); Dina I. Waked, Antitrust as Public Interest Law: Redistribution, Equity and Social Justice, 65 Antitrust Bull. 87 (Feb. 28, 2020); Ioannis Lianos, Polycentric Competition Law, 71 Curr Leg Probl 161 (Dec. 1, 2018); Lina M. Khan & Sandeep Vaheesan, Market Power and Inequality: The Antitrust Counterrevolution and its Discontents, 11 Harv. L. & Pol’y Rev. 235 (2017). See also Margrethe Vestager, Fairness and Competition Policy, European Commission (Oct. 10, 2022), https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_6067, arguing that properly functioning markets become an instrument of social change and progress as, e.g., “keeping markets open to smaller players and new entrants benefits female entrepreneurs and entrepreneurs with a migrant background.”

[5] Eleanor M. Fox, The Battle for the Soul of Antitrust, 75 Cal. L. Rev. 917 (May 1987).

[6] Kanter, supra note 2; See also Alvaro M. Bedoya, Returning to Fairness, Federal Trade Commission, 2 (Sep. 22, 2022), available at https://www.ftc.gov/system/files/ftc_gov/pdf/returning_to_fairness_prepared_remarks_commissioner_alvaro_bedoya.pdf, noting that “when Congress convened in 1890 to debate the Sherman Act, they did not talk about efficiency.”; See also Waked, supra note 4, framing antitrust as public-interest law and arguing that a sole focus on efficiency goals is inconsistent with the history of antitrust; For analysis of the conceptual links among competition, competition law, and democracy in the EU and the United States, see Elias Deutscher, The Competition-Democracy Nexus Unpacked—Competition Law, Republican Liberty, and Democracy, Yearbook of European Law (forthcoming), arguing that the idea of a competition-democracy nexus can only be explained through the republican conception of liberty as nondomination; In a similar vein, see Oisin Suttle, The Puzzle of Competitive Fairness, 21 PPE 190 (Mar. 7, 2022), distinguishing competitive fairness from equality of opportunity, sporting fairness (e.g., a level playing field), and economic efficiency, and arguing that competitive fairness is justified under the republican ideal of nondomination, namely the status of being a free agent protected from subjection to arbitrary interference.

[7] Bedoya, supra note 6, 8.

[8] See, e.g., Louis B. Schwartz, “Justice” and Other Non-Economic Goals of Antitrust, 127 Univ PA Law Rev 1076 (1979); John J. Flynn, Antitrust Jurisprudence: A Symposium on the Economic, Political and Social Goals of Antitrust Policy, 125 Univ PA Law Rev 1182 (1977).

[9] Eleanor M. Fox, Modernization of Antitrust: A New Equilibrium, 66 Cornell L. Rev. 1140 (August 1981).

[10] Kanter, supra note 2; See also Bedoya, supra note 6, 5, stating that “[w]hen antitrust was guided by fairness, these farmers’ families were part of a thriving middle class across rural America. After the shift to efficiency, their livelihoods began to disappear.”

[11] See Anu Bradford, Adam S. Chilton, & Filippo Maria Lancieri, The Chicago School’s Limited Influence on International Antitrust, 87 U Chi L Rev 297 (2020), arguing that the influence of the Chicago School has been more limited outside the United States.

[12] Niamh Dunne, Fairness and the Challenge of Making Markets Work Better, 84 Mod Law Rev 230, 236 (March 2021).

[13] Christian Ahlborn & Jorge Padilla, From Fairness to Welfare: Implications for the Assessment of Unilateral Conduct Under EC Competition Law, in Claus-Dieter Ehlermann & Mel Marquis (eds.), European Competition Law Annual 2007: A Reformed Approach to Article 82 EC (Hart Publishing, 2008), 55, 61-62; See also Vestager, supra note 4, stating that “[f]airness is what motivated us to take a look at the working conditions of the solo self-employed. … And fairness is what we considered first in our design of the Temporary Crisis Framework – avoiding subsidy races while ensuring those most affected by the crisis can receive the support they need.”

[14] See, e.g., Dunne, supra note 12, 237; Maurits Dolmans & Wanjie Lin, How to Avoid a Fairness Paradox in EU Competition Law, in Damien Gerard, Assimakis Komninos, & Denis Waelbroeck (eds.), Fairness in EU Competition Policy: Significance and Implications, GCLC Annual Conference Series, Bruylant (2020), 27-76; Francesco Ducci & Michael Trebilcock, The Revival of Fairness Discourse in Competition Policy, 64 Antitrust Bull. 79 (Feb. 12, 2019); Harri Kalimo & Klaudia Majcher, The Concept of Fairness: Linking EU Competition and Data Protection Law in the Digital Marketplace, 42 Eur. Law Rev. 210 (2017).

[15] See Einer Elhauge, Should The Competitive Process Test Replace The Consumer Welfare Standard?, ProMarket (May 24, 2022), https://www.promarket.org/2022/05/24/should-the-competitive-process-test-replace-the-consumer-welfare-standard; Herbert Hovenkamp, The Slogans and Goals of Antitrust Law, Faculty Scholarship at Penn Carey Law. 2853, (Jun. 2, 2022) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4121866.

[16] See Bart J. Wilson, Contra Private Fairness, 71 Am J Econ Sociol 407 (April 2012), arguing that the understanding and use of the term “fair” in economics can be described as muddled, at best.

[17] Daniel Kahneman, Jack L. Knetsch, & Richard Thaler, Fairness as a Constraint on Profit Seeking: Entitlements in the Market, 76 Am Econ Rev 728 (September 1986); See also Ernst Fehr & Klaus M. Schmidt, A Theory of Fairness, Competition, and Cooperation, 114 Q J Econ 817 (August 1999).

[18] Louis Kaplow & Steven Shavell, Fairness Versus Welfare, Harvard University Press (2002).

[19] United States v. Trans-Mo. Freight Ass’n, 166 U.S. 290, 323 (1897); See Bedoya, supra note 6, 2, arguing that “today, it is axiomatic that antitrust does not protect small business. And that the lodestar of antitrust is not fairness, but efficiency” (emphasis in original); See also Margrethe Vestager, The Road to a Better Digital Future, European Commission (Sep. 22, 2022), https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_5763, welcoming the Digital Markets Act because it will empower the EU “to make sure large digital platforms do not squeeze out small businesses.”

[20] Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, U.S. Federal Trade Commission (Nov. 10, 2022), https://www.ftc.gov/legal-library/browse/policy-statement-regarding-scope-unfair-methods-competition-under-section-5-federal-trade-commission.

[21] Ibid., footnotes 15, 18, and 21.

[22] Lina M. Khan, Rebecca Kelly Slaughter, Alvaro M. Bedoya, On the Adoption of the Statement of Enforcement Policy Regarding Unfair Methods of Competition Under Section 5 of the FTC Act, U.S. Federal Trade Commission (Nov. 10, 2022), 1, https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/statement-of-chair-khan-commissioners-slaughter-bedoya-on-policy-statement-regarding-section-5.

[23] Christine S. Wilson, Dissenting Statement Regarding the Policy Statement Regarding the Scope of Unfair Methods of Competition Under Section 5 of the Federal Trade Commission Act, U.S. Federal Trade Commission (Nov. 10, 2022), 1-3,  https://www.ftc.gov/legal-library/browse/cases-proceedings/public-statements/dissenting-statement-of-commissioner-wilson-on-policy-statement-regarding-section-5, also arguing that “[t]he only crystal-clear aspect of the Policy Statement pertains to the process following invocation of an adjective: after labeling conduct ‘facially unfair,’ the Commission plans to skip an in-depth examination of the conduct, its justifications, and its potential consequences.”

[24] See, e.g., Konstantinos Stylianou & Marios Iacovides, The Goals of EU Competition Law: A Comprehensive Empirical Investigation, Leg Stud (forthcoming), reporting the various goals mentioned in speeches by EU commissioners during their terms in office; Dunne, supra note 12, 238, noting that Vestager invoked fairness in 85% of speeches in her first term in office.

[25] Margrethe Vestager, Fair Markets in a Digital World, European Commission (Mar. 9, 2018), https://wayback.archive-it.org/12090/20191129214609/https://ec.europa.eu/commission/commissioners/2014-2019/vestager/announcements/fair-markets-digital-world_en.

[26] Ibid.

[27] Ibid.

[28] Margrethe Vestager, Competition and Fairness in a Digital Society, European Commission (Nov. 22, 2018) https://perma.cc/VF53-2ULV.

[29] Margrethe Vestager, Competition in a Digital Age, European Commission (Mar. 17, 2021), https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/competition-digital-age_en.

[30] Margrethe Vestager, What Is Competition For?, European Commission (Nov. 4, 2021), https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/speech-evp-margrethe-vestager-danish-competition-and-consumer-authority-2021-competition-day-what_en.

[31] See, e.g., Margrethe Vestager, Fairness and Competition, European Commission (Jan. 25, 2018), https://perma.cc/XXC2-7P7J; Margrethe Vestager, Making the Decisions that Count for Consumers, European Commission (May 31, 2018) https://perma.cc/BU47-D95T.

[32] Vestager, supra note 25.

[33] Margrethe Vestager, A Responsibility to Be Fair, European Commission (Sep. 3, 2018), https://perma.cc/AC36-B4KS.

[34] Thibault Schrepel, Antitrust Without Romance, 13 N. Y. Univ. J. Law Lib. 326 (May 4, 2020); As noted by Dolmans & Lin, supra note 14, 38, fairness, “with its moral overtones, confers a rhetorical flourish and sense of intrinsic righteousness when used to describe an act or situation.”; However, see Sandra Marco Colino, The Antitrust F Word: Fairness Considerations in Competition Law, 5 J. Bus. Law 329, 343 (2019), arguing that “[i]t makes little sense to defend a competition policy that develops with its back purposefully turned to the attainment of moral and social justice.”; For a more balanced reading, see Johannes Laitenberger, Fairness in EU Competition Law Enforcement, European Commission (Jun. 20, 2018) https://ec.europa.eu/competition/speeches/text/sp2018_10_en.pdf, arguing that “while ‘fairness’ is a guiding principle, it is not an instrument that competition enforcers can use off the shelf to go about their work in detail. In each and every case the Commission looks into, it must dig for evidence; conduct rigorous economic analysis; and check findings against the law and the guidance provided by the European Courts.”

[35] Margrethe Vestager, Competition for a Fairer Society, European American Chamber of Commerce (Sep. 29, 2016) https://eaccny.com/news/chapternews/eu-commissioner-margrethe-vestager-competition-for-a-fairer-society; see also Margrethe Vestager, Antitrust for the Digital Age, European Commission (Sep. 16, 2022) https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_5590, arguing that the power that large platforms wield “is not just an issue for fair competition; it is an issue for our very democracies” and that the most important goal of competition policy is to make markets work for people; Margrethe Vestager, Keynote at the Making Markets Work for People Conference, European Commission (Oct. 27, 2022) https://ec.europa.eu/commission/presscorner/detail/en/SPEECH_22_6445, stating that “[t]he only policy goal for markets is to serve the people.”; on the social rationale of competition law, see Damien Gerard, Fairness in EU Competition Policy: Significance and Implications, 9 J. Eur. Compet 211 (2018).

[36] Vestager, supra note 4, stating that “[w]e are on the side of the people, sometimes when no one else is.”; in a similar vein, on the U.S. side, see Bedoya, supra note 6, 9, describing antitrust as a way to protect “people living paycheck to paycheck” (“For me, that’s what antitrust is about: your groceries, your prescriptions, your paycheck. I want to make sure the Commission is helping the people who need it the most.”); see also Ariel Ezrachi & Maurice E. Stucke, The Fight over Antitrust’s Soul, 9 J. Eur. Compet 1 (2018), arguing that “[u]ltimately the divide is over the soul of antitrust: Is antitrust solely about promoting some form of economic efficiency (or as cynics argue, the interests of the powerful who hide behind a narrow utilitarian approach) or the welfare of the powerless (the majority of citizens who feel increasingly disenfranchised by big government and big business)?”; see also Adi Ayal, Fairness in Antitrust: Protecting the Strong from the Weak, Hart (2016).

[37] Vestager, supra note 28; see also @vestager, Twitter (Nov 8, 2022, 4:39 AM) https://twitter.com/vestager/status/1589915517833412610, featuring Vestager’s reaction to the European Court of Justice’s (CJEU) judgment annulling the Commission’s decision that found Luxembourg had granted selective tax advantages to Fiat in Fiat Chrysler Finance Europe v. Commission.

[38] There is an extensive literature devoted to investigating the tradeoffs between rules and standards: see, e.g., Daniel A. Crane, Rules Versus Standards in Antitrust Adjudication, 64 Wash. Lee Law Rev. 49 (2007); Louis Kaplow, Rules Versus Standards: An Economic Analysis, 42 Duke L.J. 557 (1992); Isaac Ehrlich & Richard A. Posner, An Economic Analysis Of Legal Rulemaking, 3 J. Leg. Stud. 257 (January 1974).

[39] See, e.g., CJEU, Case C-127/73, Belgische Radio en Televisie and Société Belge des Auteurs, Compositeurs et Editeurs v. SV SABAM and NV Fonior (Mar. 27, 1974), EU:C:1974:25, para. 15, holding that an exploitative abuse may occur when “the fact that an undertaking entrusted with the exploitation of copyrights and occupying a dominant position … imposes on its members obligations which are not absolutely necessary for the attainment of its object and which thus encroach unfairly upon a member’s freedom to exercise his copyright.”

[40] European Commission, Case IV/31.043, Tetra Pak II (Jul. 24, 1991), paras. 105-108, (1992) OJ L 72/1.

[41] European Commission, Case COMP D3/34493, DSD (Apr. 20, 2001), para. 112, (2001) OJ L 166/1; affirmed in GC, Case T-151/01, DerGrünePunkt – Duales System DeutschlandGmbH v. European Commission (May 24, 2007), EU:T:2007:154 and CJEU, Case C-385/07 P (Jul. 16, 2009), EU:C:2009:456.

[42] See European Commission, Case COMP/E-2/36.041/PO, Michelin (Michelin II) (Jun. 20, 2001), paras. 220-221 and 223-224, (2002) OJ L143/1, arguing that a discount program was unfair because it “placed [Michelin’s dealers] in a situation of uncertainty and insecurity,” because “it is difficult to see how [Michelin’s dealers] would of their own accord have opted to place themselves in such an unfavourable position in business terms,” and because Michelin’s retailers were not in a position to carry out “a reliable evaluation of their cost prices and therefore [could not] freely determine their commercial strategy.”

[43] Opinion of Advocate General Pitruzzella, Case C-372/19, Belgische Vereniging van Auteurs, Componisten en Uitgevers CVBA (SABAM) v. Weareone.World BVBA, Wecandance NV (Jul. 16, 2020), EU:C:2020:598, para. 21; see also Marco Botta, Sanctioning Unfair Pricing Under Art. 102(a) TFEU: Yes, We Can!, 17 Eur. Compet. J. 156 (2021); for an overview of recent case law, see Giovanni Pitruzzella, Recent CJEU Case Law on Excessive Pricing Cases, in The Interaction of Competition Law and Sector Regulation: Emerging Trends at the National and EU Level (Marco Botta, Giorgio Monti, and Pier Luigi Parcu, eds.), Elgar 2022, 169; Margherita Colangelo, Excessive Pricing In Pharmaceutical Markets: Recent Cases in Italy and in the EU, ibid., 210.

[44] Dolmans & Lin, supra note 14, 59-60; see also Botta, supra note 43, arguing that, since the imposition of excessive prices by a dominant firm directly harms consumer welfare, the resurgence of excessive-pricing cases is linked to the role of consumer’s welfare standard in EU competition policy.

[45] CJEU, Case C-27/76, United Brands Company and United Brands Continental BV v. Commission of the European Communities (Feb. 14, 1978) EU:C:1978:22.

[46] CJEU, Case C-372/19, Belgische Vereniging van Auteurs, Componisten en Uitgevers CVBA (SABAM) v. Weareone.World BVBA, Wecandance NV (Nov. 25, 2020), EU:C:2020:959.

[47] United Brands, supra note 45, para. 252, holding that the questions to be determined are “whether the differences between the costs actually incurred and the price actually charged is excessive, and, if the answer to this question is in the affirmative, whether a price has been imposed which is either unfair in itself or when compared to competing products.”

[48] CJEU, Case C-177/16, Autortiesi?bu un Komunice?s?ana?s Konsulta?ciju Ag?entu?ra v. Latvijas Autoru Apvieni?ba v Konkurences Padome (Sep. 14, 2017), EU:C:2017:689, para. 49.

[49] Opinion of Advocate General Wahl, Case C-177/16 (Apr. 6, 2017), EU:C:2017:286, para. 131.

[50] See European Commission, Guidance on the Commission’s enforcement priorities in applying Article 82 of the EC Treaty to abusive exclusionary conduct by dominant undertakings, (2009) OJ C 45/7, para. 80; CJEU, 14 October 2010, Case C-280/08 P, Deutsche Telekom AG v. European Commission, EU:C:2010:603; CJEU, 17 February 2011, Case C-52/09, Konkurrensverket v. TeliaSonera Sverige AB, EU:C:2011:83; CJEU, 10 July 2014, Case C?295/12 P, Telefónica SA and Telefónica de España SAU v. European Commission, EU:C:2014:2062; CJEU, 25 March 2021, Case C-165/19 P, Slovak Telekom a.s. v. Commission, EU:C:2021:239.

[51] However, in Teliasonera (supra note 50), the CJEU found that there can be an exclusionary abuse even where the margin level of input purchasers is positive (so-called positive margin squeeze theory), being enough that rivals’ margins are insufficient, for instance because they must operate at artificially reduced levels of profitability.

[52] On the US side, rejecting margin squeeze as a stand-alone offense, the Supreme Court in Pacific Bell Tel. Co. v. linkLine, 555 U.S. 438 (2009) argued that it is nearly impossible for courts to determine the fairness of rivals’ margins and quoted Town of Concord v. Boston Edison Co., 915 F. 2d 17, 25 (1^st Cir. 1990) asking “how is a judge or jury to determine a ‘fair price?’ Is it the price charged by other suppliers of the primary product? None exist. Is it the price that competition ‘would have set’ were the primary level not monopo­lized? How can the court determine this price without examining costs and demands, indeed without acting like a rate-setting regulatory agency, the rate-setting proceedings of which often last for several years? Further, how is the court to decide the proper size of the price ‘gap?’ Must it be large enough for all inde­pendent competing firms to make a ‘living profit,’ no matter how inefficient they may be? . . . And how should the court respond when costs or demands change over time, as they inevitably will?”

[53] For an overview, see Oscar Borgogno & Giuseppe Colangelo, Disentangling the FRAND Conundrum, DEEP-IN Research Paper (2019), https://ssrn.com/abstract=3498995.

[54] CJEU, Case C-170/13, Huawei Technologies Ltd. v. ZTE Corp. (Jul. 16, 2015), EU:C:2015:477.

[55] Nicolas Petit & Amandine Le?onard, FRAND Royalties: Relus v Standards? Chi.-Kent J. Intell. Prop. (forthcoming).

[56] For an overview, see Giuseppe Colangelo, The European Digital Markets Act and Antitrust Enforcement: A Liaison Dangereuse, 47Eur. Law Rev. 597 (July 2022); see also Inge Graef, Differentiated Treatment in Platform-to-Business Relations: EU Competition Law and Economic Dependence, 38 Yearbook of European Law 448 (2019), suggesting giving a stronger role to economic dependence both within and outside EU competition law.

[57] Council Regulation (EC) No. 1/2003 of 16 December 2002 on the implementation of the rules on competition laid down in Articles 81 and 82 of the Treaty, [2003] OJ L 1/1.

[58] Belgian Royal Decree of 31 July 2020 amending books I and IV of the Code of economic law as concerns the abuse of economic dependence, Article 4.

[59] GWB Digitalization Act, 18 January 2021, Section 20.

[60] Italian Annual Competition Law, 5 August 2022, No. 118, Article 33.

[61] CJEU, Case C-377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato (May 12, 2022), EU:C:2022:379.

[62] Ibid., para. 46.

[63] CJEU, Case C-413/14 P, Intel v. Commission (Sep. 6, 2017), EU:C:2017:632, paras. 133-134. The same principle has been affirmed in discrimination and margin-squeeze cases, such as CJEU, C?525/16, MEO v. Autoridade da Concorrência (Apr. 19, 2018), EU:C:2018:270 and CJEU, Case C-209/10, Post Danmark A/S v. Konkurrencerådet (Mar. 27, 2012), EU:C:2012:172, respectively.

[64] CJEU, Intel, supra note 63, para. 73; see Alfonso Lamadrid de Pablo, Competition Law as Fairness, 8 J. Eur. Compet 147 (Feb. 15, 2017), arguing that the notion of merit-based competition implicitly carries in it a sense of fairness, understood as equality of opportunity; see also Alberto Pera, Fairness, Competition on the Merits and Article 102, 18 Eur. Compet. J. 229 (April 2022).

[65] Regulation (EU) 2019/1150 of the European Parliament and of the Council of 20 June 2019 on promoting fairness and transparency for business users of online intermediation services, [2019] OJ L 186/57.

[66] Ibid., Article 1(1).

[67] Ibid., Recital 2.

[68] Ibid., Recital 49.

[69] European Commission, Shaping Europe’s Digital Future, COM(2020) 67 final.

[70] Ibid., 8-9.

[71] Ibid., 8.

[72] Regulation (EU) 2022/1925 on contestable and fair markets in the digital sector and amending Directives (EU) 2019/1937 and (EU) 2020/1828 (Digital Markets Act), (2022) OJ L 265/1.

[73] Ibid., Recital 7.

[74] Ibid., Recital 2.

[75] Ibid., Recitals 2 and 4.

[76] Ibid., Recitals 46, 47, 51, 56, and 57.

[77] Colangelo, supra note 60; see also Oscar Borgogno & Giuseppe Colangelo, Platform and Device Neutrality Regime: The New Competition Rulebook for App Stores?, 67 Antitrust Bull. 451 (2022).

[78] DMA, supra note 72, Recital 5.

[79] Ibid.

[80] Ibid.

[81] Ibid.

[82] Ibid., Recital 11.

[83] Pinar Akman, Regulating Competition in Digital Platform Markets: A Critical Assessment of the Framework and Approach of the EU Digital Markets Act, 47 Eur. Law Rev. 85 (Mar. 30, 2022); Colangelo, supra note 60; Heike Schweitzer, The Art to Make Gatekeeper Positions Contestable and the Challenge to Know What Is Fair: A Discussion of the Digital Markets Act Proposal, 3 ZEuP 503 (May 7, 2021).

[84] DMA, supra note 72, Recital 32. See also Article 12(5).

[85] Ibid..

[86] Ibid., Recital 33 and Article 12(5); see also Recital 62 providing some benchmarks that can serve as a yardstick to determine the fairness of general access conditions (i.e., prices charged or conditions imposed for the same or similar services by other providers of software application stores; prices charged or conditions imposed by the provider of the software application store for different related or similar services or to different types of end users; prices charged or conditions imposed by the provider of the software application store for the same service in different geographic regions; prices charged or conditions imposed by the provider of the software application store for the same service the gatekeeper provides to itself).

[87] Ibid.; see also Monopolkomission, Recommendations for an Effective and Efficient Digital Markets Act, (2021) 15, https://www.monopolkommission.de/en/reports/special-reports/special-reports-on-own-initiative/372-sr-82-dma.html, recommending that the DMA objective of fairness should address the economic dependence of business users vis-a?-vis a gatekeeper, and hence the asymmetric negotiating power favoring the gatekeeper; see also Gregory S. Crawford, Jacques Cre?mer, David Dinielli, Amelia Fletcher, Paul Heidhues, Monika Schnitzer, Fiona M. Scott Morton, & Katja Seim, Fairness and Contestability in the Digital Markets Act, Yale Digital Regulation Project, Policy Discussion Paper No. 3 (2021), 4-10, https://tobin.yale.edu/sites/default/files/Digital%20Regulation%20Project%20Papers/Digital%20Regulation%20Project%20-%20Fairness%20and%20Contestability%20-%20Discussion%20Paper%20No%203.pdf, supporting the interpretation of fairness with respect to surplus sharing. According to the authors, since a platform ecosystem is a co-creation of the platform itself and its users, regulation should correct the distortion related to unfair outcomes when users are not rewarded for their contribution to the success of the platform.

[88] DMA, supra note 72, Recital 34.

[89] Ibid.; see also Recital 16 referring to “unfair practices weaking contestability.”; see, instead, Monopolkomission, supra note 87, 16, suggesting to clearly distinguish the objectives pursued by the DMA, which should be understood such that only ecosystem-related questions of contestability are addressed by the DMA when it comes to the intersection of exclusion and fairness with exploitation of business users.

[90] See also DMA, supra note 72, Articles 12(1, 3, 4, and 5), 19(1), 41(3 and 4), and Recitals 15, 69, 77, 79, 93.

[91] Ibid., Articles 1(1 and 5), 18(2), 40(7), 53 (2 and 3), and Recitals 8, 11, 28, 31, 42, 45, 50, 58, 67, 73, 75, 97, 104, 106.

[92] Ibid., Recital 36 regarding Article 5(2), Recital 50 regarding Article 6(4), Recital 51 regarding Article 6(5), Recital 53 regarding Article 6(6), Recital 59 regarding Article 6(9), Recital 61 regarding Article 6(11), Recital 64 regarding Article 7.

[93] Ibid., Recital 45 regarding Article 5(9-10) and Recital 58 regarding Article 6(8).

[94] Ibid., Recital 46; see also European Commission, Commission Sends Statement of Objections to Amazon for the Use of Non-Public Independent Seller Data and Opens Second Investigation into Its E-Commerce Business Practices (Nov. 10, 2020), https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2077.

[95] DMA, supra note 72, Recital 39 regarding Article 5(3).

[96] Ibid., Recital 40 regarding Article 5(4).

[97] Ibid., Recital 42 regarding Article 5(6).

[98] Ibid., Recital 43 regarding Article 5(7).

[99] Ibid., Recital 44 regarding Article 5(8).

[100] Ibid., Articles 5(6), 5(8), and 6(13); see also Recital 2 referring to the impact on “the fairness of the commercial relationship between [gatekeepers] and their business users and end users.”

[101] Ibid., Recital 5; see also Recital 42 referring to “fair commercial environment.”

[102] Ibid., Recital 39.

[103] Commission Staff Working Document accompanying the Report from the Commission to the Council and the European Parliament Final Report on the E-commerce Sector Inquiry, SWD(2017) 154 final. Conversely, in Germany, the Federal Supreme Court has supported the Bundeskartellamt’s strict approach against narrow price parity clauses used. See Bundesgerichtshof, Case KVR 54/20, Booking.com (May 18, 2021).

[104] European Commission, Guidelines on Vertical Restraints (2022) OJ C 248/1, para. 374.

[105] Ibid., para. 372.

[106] European Commission, Proposal for a Regulation of the European Parliament and of the Council on Harmonised Rules on Fair Access and Use of Data (Data Act), COM(2022) 68 final; see also Giuseppe Colangelo, European Proposal for a Data Act – A First Assessment, CERRE Assessment Paper (Aug. 30, 2022) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4199565.

[107] Data Act, supra note 106, Explanatory Memorandum, 2.

[108] Ibid., Recital 6 and Explanatory Memorandum, 1.

[109] European Commission, Inception Impact Assessment – Data Act, Ares (2021) 3527151, 1, https://ec.europa.eu/info/law/better-regulation/have-your-say/initiatives/13045-Data-Act-amended-rules-on-the-legal-protection-of-databases_en,1-2.

[110] Data Act, supra note 106, Explanatory Memorandum, 3.

[111] Ibid., Recital 5.

[112] Ibid., Recital 51 and Explanatory Memorandum, 13

[113] Ibid., Recital 52

[114] Ibid., Article 13(2).

[115] Ibid., Recital 55.

[116] See, e.g., ibid., Article 13(4)(e), according to which a contractual term is presumed unfair if its object or effect is to enable the party that unilaterally imposed the term to terminate the contract with unreasonably short notice, taking into consideration the reasonable possibilities of the other contracting party to switch to an alternative and comparable service and the financial detriment caused by such termination.

[117] Colangelo, supra note 106.

[118] European Commission, supra note 109, 2.

[119] Ibid..

[120] Dunne, supra note 12, 239; see also Massimo Motta, Competition Policy: Theory and Practice, Cambridge University Press, 2004, 26, distinguishing between ex ante equity, which is consistent with competition policy and implies equal initial opportunities of firms in the marketplace, and ex post equity representing equal outcomes of market competition.

[121] Vestager, supra note 4.

[122] CJEU, supra notes 61 and 63; see also Opinion of Advocate General Rantos, Case C?377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato (Dec. 9, 2021), EU:C:2021:998, para. 45, arguing that if any conduct having an exclusionary effect were automatically classed as anticompetitive, antitrust would become a means for protecting less-capable, less-efficient undertakings and would in no way protect more meritorious undertakings that can serve as a stimulus to a market’s competitiveness.

[123] Vestager, supra note 28.

[124] Directive (EU) 2019/790 of 17 April 2019 on copyright and related rights in the Digital Single Market and amending Directives 96/9/EC and 2001/29/EC, [2019] OJ L 130/92.

[125] Ibid., Recital 3.

[126] Ibid., Article 15.

[127] See Giuseppe Colangelo, Enforcing Copyright Through Antitrust? The Strange Case of News Publishers Against Digital Platforms, 10 J. Antitrust Enforc 133 (Jun. 22, 2022).

[128] Directive 2019/790, supra note 124, Recitals 54 and 55; see also European Commission, Impact Assessment on the Modernisation of EU Copyright Rules, SWD(2016) 301 final, §5.3.1, arguing that the gap in the current EU rules “further weakens the bargaining power of publishers in relation to large online service providers.”

[129] Ibid.; see also Lionel Bently, Martin Kretschmer, Tobias Dudenbostel, Maria Del Carmen Calatrava Moreno, & Alfred Radauer, Strengthening the Position of Press Publishers and Authors and Performers in the Copyright Directive, European Parliament (September 2017) http://www.europarl.europa.eu/RegData/etudes/STUD/2017/596810/IPOL_STU(2017)596810_EN.pdf.

[130] See, e.g., Susan Athey, Markus Mobius, & Jeno Pal, The Impact of Aggregators on Internet News Consumption, NBER Working Paper No. 28746 (2021), http://www.nber.org/papers/w28746; Joan Calzada & Ricard Gil, What Do News Aggregators Do?, 39 Mark. Sci. 134 (2020); Joint Research Centre for the European Commission, Online News Aggregation and Neighbouring Rights for News Publishers, (2017) https://www.asktheeu.org/en/request/4776/response/15356/attach/6/Doc1.pdf.

[131] See European Commission, 2030 Digital Compass: the European Way for the Digital Decade, COM/2021/118 final; and European Commission, Proposal for a Decision of the European Parliament  and of the Council Establishing the 2030 Policy Programme “Path to the Digital Decade,” (2021) https://data.consilium.europa.eu/doc/document/ST-11900-2021-INIT/en/pdf.

[132] See the public statements released in May 2022 by Commissioners Margrethe Vestager (https://www.reuters.com/business/media-telecom/eus-vestager-assessing-if-tech-giants-should-share-telecoms-network-costs-2022-05-02) and Thierry Breton (https://www.euractiv.com/section/digital/news/commission-to-make-online-platforms-contribute-to-digital-infrastructure).

[133] Axon Partners Group Consulting, Europe’s Internet Ecosystem: Socio-Economic Benefits of a Fairer Balance Between Tech Giants and Telecom Operators, (2022) Report prepared for the European Telecommunications Network Operators’ Association (ETNO), https://etno.eu/downloads/reports/europes%20internet%20ecosystem.%20socio-economic%20benefits%20of%20a%20fairer%20balance%20between%20tech%20giants%20and%20telecom%20operators%20by%20axon%20for%20etno.pdf; see also Frontier Economics, Estimating OTT Traffic-Related Costs on European Telecommunications Networks, (2022) A report for Deutsche Telekom, Orange, Telefonica, & Vodafone, https://www.telekom.com/resource/blob/1003588/384180d6e69de08dd368cb0a9febf646/dl-frontier- g4-ott-report-stc-data.pdf.

[134] See also the appeal published by the CEOs of Telefo?nica, Deutsche Telekom, Vodafone and Orange, United Appeal of the Four Major European Telecommunications Companies (2022), https://www.telekom.com/en/company/details/united-appeal-of-the-four-major-european-telecommunications-companies-646166; and, more recently, the statement released by several CEOs, CEO Statement on the Role of Connectivity in Addressing Current EU Challenges (2022), https://etno.eu//downloads/news/ceo%20statement_sept.2022_26.9.pdf.

[135] European Commission, European Declaration on Digital Rights and Principles for the Digital Decade, COM(2022) 28 final, 3; see also European Council, 2030 Policy Programme ‘Path to the Digital Decade’: The Council Adopts Its Position (2022), https://www.consilium.europa.eu/en/press/press-releases/2022/05/11/programme-d-action-a-l-horizon-2030-la-voie-a-suivre-pour-la-decennie-numerique-le-conseil-adopte-sa-position.

[136] Body of European Regulators for Electronic Communications, BEREC’s Comments on the ETNO Proposal for ITU/WCIT or Similar Initiatives Along These Lines, BoR(12) 120 (2012), 3, https://www.berec.europa.eu/en/document-categories/berec/others/berecs-comments-on-the-etno-proposal-for-ituwcit-or-similar-initiatives-along-these-lines; see also Body of European Regulators for Electronic Communications, Report on IP-Interconnection practices in the Context of Net Neutrality, BoR (17) 184 (2017), https://www.berec.europa.eu/en/document-categories/berec/reports/berec-report-on-ip-interconnection-practices-in-the-context-of-net-neutrality, finding the internet-protocol-interconnection market to be competitive.

[137] See former Commissioner Neelie Kroes, Adapt or Die: What I Would Do if I Ran a Telecom Company (2014), https://ec.europa.eu/commission/presscorner/detail/de/SPEECH_14_647, arguing that the current situation of European telcos is not the fault of OTTs, given that the latter are the ones driving digital demand: “[EU homes] are demanding greater and greater bandwidth, faster and faster speeds, and are prepared to pay for it. But how many of them would do that, if there were no over the top services? If there were no Facebook, no YouTube, no Netflix, no Spotify?”

[138] Body of European Regulators for Electronic Communications, supra note 136, 4. Concerns about side effects on consumers of the possible introduction of a network infrastructure fee have been raised  by the European consumer organisation BEUC, Connectivity Infrastructure and the Open Internet, (2022) https://www.beuc.eu/sites/default/files/2022-09/BEUC-X-2022-096_Connectivity_Infrastructure-and-the_open_internet.pdf; see also the open letter signed by 34 civil-society organisations from 17 countries (https://epicenter.works/sites/default/files/2022_06-nn-open_letter_cso_0.pdf) arguing that nothing has changed that would merit a different response to the proposals that have been already discussed over the past 10 years and that charging content and application providers for the use of internet infrastructure would undermine and conflict with core net-neutrality protections; see also David Abecassis, Michael Kende, & Guniz Kama, IP Interconnection on the Internet: A European Perspective for 2022, (2022) https://www.analysysmason.com/consulting-redirect/reports/ip-interconnection-european-perspective-2022, finding no evidence for significant changes to the way interconnection works on the internet and arguing that the approach advocated by proponents of network-usage fees would involve complexity and regulatory costs, and risks being detrimental to consumers and businesses in Europe; futhermore, see David Abecassis, Michael Kende, Shahan Osman, Ryan Spence, & Natalie Choi, The Impact of Tech Companies’ Network Investment on the Economics of Broadband ISPs (2022), https://www.analysysmason.com/internet-content-application-providers-infrastructure-investment-2022, reporting significant investments undertaken by content and application providers in Internet infrastructure.

[139] Body of European Regulators for Electronic Communications, supra note 136, 4. In the next months, the BEREC is expected to assess again the impact of the potential sending party network pays principle the on Internet ecosystem: see Body of European Regulators for Electronic Communications, Work Programme 2023, BoR (22) 143 (2022), 26-27, https://www.berec.europa.eu/en/document-categories/berec/berec-strategies-and-work-programmes/draft-berec-work-programme-2023.

[140] Regulation (EU) 2015/2120 laying down measures concerning open internet access and amending Directive 2002/22/EC on universal service and users’ rights relating to electronic communications networks and services and Regulation (EU) No 531/2012 on roaming on public mobile communications networks within the Union, (2015) OJ L 310/1.

[141] For a summary of the net-neutrality debate, see Giuseppe Colangelo & Valerio Torti, Offering Zero-Rated Content in the Shadow of Net Neutrality, 5 M&CLR 41 (2021); see also Tobias Kretschmer, In Pursuit of Fairness? Infrastructure Investment in Digital Markets, (2022) https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4230863, arguing that the policy solution at issue would fall short of the principles of efficient risk allocation, time consistency, and net neutrality, and might seem like arbitrarily targeting a group of (largely U.S.-based) firms while letting (at least partly European) newcomers and/or smaller firms enjoy the same externalities at no cost. Indeed, the author notes that a transfer from Big Tech to telecom-infrastructure providers would be equivalent to a tax on success, since it would be based on ex post estimates of benefits from prior investments. Further, a direct and unrestricted transfer may not ensure sufficient infrastructure investment in the future, as it is not conditional on future behavior, but rather it would serve as a windfall profit for past (imprudent) behavior that can finance any kind of activity by telecom-infrastructure providers. Finally, a fair distribution of investment financing would require all complementors to the basic service to pay a share of future investments proportional to the expected benefit from the investments to be undertaken.

[142] Body of European Regulators for Electronic Communications, BEREC preliminary assessment of the underlying assumptions of payments from large CAPs to ISPs, BoR (22) 137 (2022).

[143] Ibid., 4-5.

[144] Ibid., 5.

[145] Ibid., 7-8.

[146] Ibid., 11-14.

[147] Bedoya, supra note 6, 8.

Abstract

Although most studies of major communications reform legislation focus on the merits of their substantive provisions, analyzing the political dynamics behind the legislation can yield important insights. An examination of the tradeoffs that led the major industry segments to support the Telecommunications Act of 1996 (the “1996 Act”) provides a useful illustration of a political bargain. Analyzing the current context identifies seven components that could form the basis for the next communications statute: (1) universal service; (2) pole attachments; (3) privacy; (4) intermediary immunity; (5) net neutrality; (6) spectrum policy; and (7) antitrust reform. Assessing where industry interests overlap and diverge and the ways that the political environment can hinder passing reform legislation provides insights into how these components might combine to support the enactment of the next Telecommunications Act of 1996.

I. Introduction

We thank the U.S. Treasury Department for the opportunity to participate in this Request for Comment on “Ensuring Responsible Development of Digital Assets.”[1] Our response most directly addresses part “B” of the Request for Comments, focusing particularly on the following questions:

• “What additional steps should the United States government take to more effectively deter, detect, and disrupt the misuse of digital assets and digital asset service providers by criminals?” (B1)
• “Are there specific areas related to AML/CFT and sanctions obligations with respect to digital assets that require additional clarity?” (B2)
• “What additional steps should the U.S. government consider to address the illicit finance risks related to mixers and other anonymity-enhancing technologies?” (B7)
• “What steps should the U.S. government take to effectively mitigate the illicit finance risks related to DeFi?” (B8)

Agencies whose primary function is law enforcement are chiefly concerned with the effectiveness of that mission and may not have the resources to properly consider the costs of actions that appear to promise effectiveness. We thus welcome the whole-of-government approach to the responsible development of digital assets adopted in Executive Order 14067, which invites a rigorous assessment of costs and benefits across various policy objectives.[2] The principal policy objectives set out in the Executive Order cover both law-enforcement and national-security concerns, while supporting technological advances and promoting access to safe and affordable financial services. Given the Order’s broad scope, some ways of pursuing its diverse policy objectives may be in tension. Our aim in this response is to shed light on two important areas of such tension.

First, policymakers must determine which entities in the crypto ecosystem are the most appropriate targets for law-enforcement and national-security efforts. We suggest that the costs of targeting crypto’s infrastructural or “base” layer may to a disproportionate extent impede the attainment of other policy objectives.

Second, it is important to determine the appropriate policy response to privacy-enhancing crypto technologies. As Treasury seeks to forward the goals of consumer and investor protection, promotion of access to finance, support of technological advances, and reinforcement of U.S. leadership, all point in favor of facilitating responsible use of privacy-enhancing technologies, including so-called “privacy coins.”

II. Targeting the ‘Base Layer’

Crypto’s “base layer” is in some important ways analogous to the basic infrastructure of the Internet and of traditional finance. We understand the base layer to include:

• The “infrastructural” participants of blockchain networks—g., miners, validators, and node operators;[3] and
• Service providers that directly serve the former—g., private relay operators like Flashbots and specialized node-hosting services[4] like Infura, Alchemy, or even Google.[5]

One approach to prevent and counteract undesirable activity “on top” of crypto’s infrastructure layer would be to lay legal duties on base-layer participants to mitigate such activity, particularly where they may, in even some remote sense, have facilitated it. This approach will often be inappropriate, however, either because it is bound to be ineffective or because it will impose disproportionate costs relative to its benefits.

Infrastructural participants of blockchain networks are not often in the best position to apply rules like anti-money-laundering (“AML”) and combating-the-financing-of-terrorism (“CFT”) obligations because they do not have direct relationships with end users. They therefore do not possess the information needed and, even if they do act, cannot offer redress to the affected users. Moreover, in open networks like Ethereum and Bitcoin, imposing legal duties on U.S.-based actors (e.g., miners or validators) is very likely to be ineffective, as many network participants will be located in other jurisdictions. Finally, some base-layer participants may simply find it impossible to comply with some legal duties, which could prompt them to leave U.S. jurisdiction.

Recent enforcement actions arising from the strict-liability duty not to facilitate transactions with entities sanctioned by the U.S. Treasury Department help to illustrate the concerns that attend imposing such duties on base-layer participants. In August 2022, a number of Ethereum addresses deployed by Tornado Cash were added to the Specially Designated Nationals and Blocked Persons List (“SDN”).[6] Following this designation—out of an abundance of caution and adopting an expansive interpretation of the law—some base-layer participants of Ethereum (validators, block builders, proposers, and relay operators) began to filter out transactions that interacted with SDN-listed Ethereum addresses, so that they would not contribute to including those transactions on the blockchain. While it appears that a fairly large segment of the base layer joined in this effort, it has been—and will very likely remain—ineffective at stopping transactions with sanctioned entities from being included on the blockchain.

One reason the filtering effort has been ineffective is that it was focused on blockchain addresses, which is what base-layer participants have access to. But sanctioned entities can create new addresses and use other methods to obfuscate their identities in transactions. The scope of filtering could theoretically be broadened, also using on-chain analysis, but this would likely be overinclusive.[7] It would therefore threaten to harm other users; potentially leave filtering base-layer operators less competitive than non-filtering ones; and likely hasten the development of changes to Ethereum to bypass such filtering.

There are, to be sure, examples of situations where it would be difficult to use a new address to circumvent filtering. Some designated blockchain addresses (e.g., the addresses of autonomous smart contracts deployed by Tornado Cash) are not controlled by anyone and thus cannot “move” to new addresses on their own. But even where a smart contract is autonomous, its original deployers—or, in the case of open-source code, anyone—could copy the code and deploy a new smart contract that would perform the same functions as the original. The need to redeploy smart contracts to new addresses often would create significant friction and costs for all who relied on the original smart contract, but as we will note in a moment, there are also cases where redeployment may not be necessary.

Even if the scope of filtering is broadened, one reason that filtering efforts may remain ineffective is that even a relatively small number of validators—including those located outside the United States—can ensure that any transaction be included on the blockchain, albeit with some delay. The extent of that delay will be proportionate to how many non-filtering validators there are among the universe of all validators. Importantly, the Ethereum addresses included on the Tornado Cash SDN list largely do not represent the kinds of smart contracts that require rapid communication.[8]

With more time-sensitive transactions—e.g., smart contracts used to liquidate on-chain collateral—delays could significantly affect utility. In cases where such delays could harm users, there would be a strong incentive to swiftly redeploy contracts to new addresses. Moreover, were the addresses of such time-sensitive smart contracts ever included on the SDN list, it would likely prompt changes to the Ethereum protocol to render base-layer filtering impossible. Indeed, development work in this direction was already underway prior to the Tornado Cash designation and may have accelerated in its aftermath. The proposed changes would involve the introduction of privacy-enhancing solutions to Ethereum, which we will discuss in the next section.

Here, we wish to focus on what these technical changes could mean for U.S. sanctions law if a determination is made that it is, indeed, illegal (on a strict-liability basis, i.e., irrespective of intent) for a U.S.-based Ethereum validator to propose (or perhaps even “attest to”) a block containing transactions with sanctioned entities.[9] If changes to the Ethereum protocol render the contents of transactions hidden from validators, then those validators could never be certain that they are in compliance with the prohibitions. This would effectively force validators (and other base-layer operators) to leave the United States. Ethereum would likely continue to function and remain accessible to U.S.-based users, but the technological and economic position that the United States currently holds in the base layer of the ecosystem would be diminished significantly.

To this point, our comments have concerned targeting the base layer for undesirable activity that happens “on top” of it—i.e., for facilitating the actions of others. It is, however, also possible for base-layer participants to engage in illicit activity in their own right. In such cases, it would certainly be appropriate that they be a target of law enforcement. For example, node operators could use their privileged access to private information about pending securities or commodities transactions in ways that would constitute market manipulation under the Securities Exchange Act or the Commodity Exchange Act.[10] Validators could also engage in potentially illegal market manipulation through some forms of “MEV extraction.”[11]

An alternative to targeting the base layer is to target the application layer—i.e., services built on top of the base layer, with the primary function of interacting with end users.[12] Of particular interest in this space are services that intermediate between crypto assets and the rest of the financial system—i.e., “on-ramps” and “off-ramps.”[13] Due to their user-facing role, such services tend to already possess—and can more easily acquire—information needed for effective compliance with legal obligations related to user activity, such as AML/CFT and sanctions obligations. Because these services have direct relationships with users, they also can ask for additional information and provide redress opportunities in certain cases—e.g., where a user is mistakenly flagged as high risk by automated tools. Moreover, crypto on- and off-ramps have been regulated as money transmitters or under analogous regulatory regimes in certain other jurisdictions.[14]

Targeting the base layer of permissionless blockchain networks may have symbolic value, but it is unlikely to achieve genuine law-enforcement or national-security goals. Imposing rules with which it would be impossible for base-layer operators to comply will simply push those operators to other jurisdictions. More effective targeting of the base layer is possible in permissioned blockchain networks, but requiring blockchain networks to be permissioned would run counter to the goal of reinforcing U.S. financial and economic leadership. It would amount to giving up on the promise of permissionless blockchains like Ethereum and Bitcoin. Finally, targeting the base layer is unnecessary, as the application layer presents a more appropriate target for legal obligations.

A.   Recommendation addressing ‘specific areas related to AML/CFT and sanctions obligations with respect to digital assets that require additional clarity’ (RFC question B2)

As we note above, base-layer efforts to filter transactions with sanctioned entities are currently ineffective and are likely to become impossible, given in-progress technological developments. We also noted that the application layer is the more appropriate target for sanctions law. The primary effect of the prevailing uncertainty surrounding the potential legal exposure of base-layer participants of public blockchains like Ethereum and Bitcoin has been to threaten U.S. technological and economic leadership in digital assets.

The U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) could address this uncertainty by offering a public statement—perhaps in its sanctions FAQs—that it does not regard any of the following as the prohibited facilitation of a transaction with a designated entity, either on public blockchains in general or, at least, on Ethereum and Bitcoin:

1. To include such a transaction in a block, by mining or validating (“proposing”);
2. To accept such a transaction and the block in which it was included as valid for the purposes of adding new blocks referencing the first block; or
3. To receive and retransmit such a transaction for inclusion by potential miners or validators (g., by a node, a block builder, or a relay).

We stress that this issue is independent from any evaluation of either the propriety or legality of sanctioning any particular entity, or of the inclusion of addresses of autonomous smart contracts on the SDN list.[15]

III. Privacy-Enhancing Technologies

Ethereum and Bitcoin—the most widely used public blockchains—were not designed with user privacy in mind. Pseudonymity of blockchain addresses is easily broken, for example, whenever a user discloses their identity to make a purchase. The effect of breaking pseudonymity is that the other party will likely be able to discover the entirety of that user’s past activity on the blockchain. It is akin to a user giving someone access to their entire history of bank or credit-card transactions. The risk of so massive a breach of financial privacy—potentially exposing users to targeting by thieves and fraudsters—is inimical to the goal of “access to safe and affordable financial services” that President Biden set out in Executive Order 14067.[16]

The lack of privacy on blockchains like Ethereum and Bitcoin has proven convenient for law enforcement, who have leveraged it to prosecute crimes.[17] But it would be mistaken to regard the current level of transparency as a benchmark either for “responsible” public blockchains or for services built atop them. Safe and accessible public blockchains of the near future—including planned changes to Ethereum—will not offer the same transparency on which today’s criminals and law enforcement alike rely.

It is useful to examine the now-sanctioned Tornado Cash within this context. Tornado Cash was arguably the most effective “on-chain” tool to protect user privacy.[18] For some use cases, users can enjoy similar privacy-protecting effects by routing their transactions through regulated exchanges like Coinbase, FTX, or Binance, but this comes at the expense of having to trust one of those third parties. The tradeoffs involved in going “off-chain” to achieve “on-chain” privacy include additional risk, friction, and delays, which could at least partially negate the point of using a public permissionless blockchain. If public blockchains are an innovation worth preserving and supporting, as the Executive Order implies, then a solution should be found that does not erase their primary salutary features.

Fortunately, there are technological solutions to preserve user privacy that simultaneously enable effective mitigation of illicit activity. One such solution is selective disclosure.[19] Even where the pseudonymous identifiers of senders and recipients—or the contents of a blockchain message (transaction)—are hidden, users may nonetheless be able to selectively disclose in a non-falsifiable way that, for example, they control the account from which a certain transaction was made. This would allow on- and off-ramp services between crypto-assets and the rest of the economy to serve as gatekeepers that perform appropriate AML/CFT or sanctions screening of customers who wish to exchange their “private coins” for fiat currency or other goods. To be sure, service providers and law enforcement would likely have access to less information under this sort of blockchain analysis than they do today, especially regarding the transactions of parties other than the customer in question (although service providers may have access to disclosed transactions from many customers). As we noted above, however, the current level of transparency poses a regrettable risk to user privacy and safety and thus cannot serve as a normative benchmark.

Tornado Cash, Zcash, and Monero all offer forms of selective disclosure.[20] While the transaction volume in these protocols is small relative to Ethereum or Bitcoin, it would be worthwhile to devote resources toward developing rules and guidance—especially for money transmitters and financial institutions—on how to facilitate transactions with those protocols responsibly. A pragmatic reason for this investment is that public blockchains and the services built on them are moving in the direction of increased privacy. Thus, the issue of privacy cannot be adequately addressed by blunt instruments like sanctioning an entire protocol, as happened with Tornado Cash. Even today, the hypothetical prohibition of Ethereum or Bitcoin would cause immense economic damage. Soon, such action could jeopardize the stability of the global economy.

As public blockchains grow, they will become more attractive both for lawful uses and for illicit uses. While illicit use may remain small as a percentage of total transactions, the volume of illicit transactions will likely rise in absolute numbers.[21] The anticipated improvements in crypto privacy will cause significant tension for the prevailing law-enforcement and national-security approaches to digital assets. In this context, Treasury’s Digital Asset Action Plan may not be entirely adequate.[22]

It is, to start, puzzling why the Digital Asset Action Plan adopted the label “anonymity-enhancing technologies,” rather the commonly used “privacy-enhancing technologies.”[23] This focus on “anonymity” rather than “privacy” directs attention away from the tension among important policy objectives set out in Executive Order 14067. The importance of privacy and the aim to strengthen it (while also countering illicit activities) is mentioned 10 times in the Executive Order. Anonymity is not mentioned.

The Action Plan itself also refers to the goal of strengthening privacy several times. It is notable, however, that Priority Action 5 (“Holding Accountable Cybercriminals and Other Illicit Actors”) does not. It is in this section that the Action Plan singles out “mixing services” as an area of “primary concern.” Treasury’s recent enforcement actions—notably the branding of Tornado Cash as a “notorious (…) mixer”[24]—suggest that the term “mixing services” is meant to refer to some of the popular privacy-enhancing technologies upon which both law-abiding Americans and foreign nationals alike have been relying.

In other words, rather than balancing the goals of strengthening privacy and mitigating illicit finance, as set out in the Executive Order, Priority Action 5 suggests a near-exclusive exclusive focus on the latter.[25] Furthermore, it is hard to avoid the impression that, in a further departure from the Executive Order, the Action Plan treats strengthening privacy as chiefly a research concern (and thus assigns it primarily to the National Science Foundation) and not an issue to be given considerable weight in law-enforcement or national-security missions.

A.   Recommendation: ‘additional steps the U.S. government should consider to address the illicit finance risks related to mixers and other anonymity-enhancing technologies’ (RFC question B7)

Given the value of both preserving and strengthening financial privacy, as well as the pragmatic concern that the largest public blockchains are moving in the direction of greater privacy, we suggest that a more constructive law-enforcement approach is needed with respect to the already-deployed privacy-enhancing technologies. This approach could include reversing the designation of Tornado Cash, combined with offering guidance for money transmitters and financial institutions on how to approach transactions with tools like Tornado Cash in a responsible manner. These guidelines could rely, among other mechanisms, on selective-disclosure functionalities built into privacy-enhancing tools.

 

[1] Ensuring Responsible Development of Digital Assets; Request for Comment, TREAS-DO-2022-0018-0001, 87 FR 57556, U.S. Dep’t of the Treasury (Sep. 20, 2022), https://www.federalregister.gov/d/2022-20279.

[2] Executive Order on Ensuring Responsible Development of Digital Assets, White House (Mar. 9, 2022), https://www.whitehouse.gov/briefing-room/presidential-actions/2022/03/09/executive-order-on-ensuring-responsible-development-of-digital-assets (hereinafter, “Executive Order”).

[3] Mikolaj Barczentewicz, Base Layer Regulation, Regulation of Crypto-Finance, https://cryptofinreg.org/projects/base-layer-regulation. Some operators (e.g., Infura) act both as infrastructural network participants in their own right (e.g., as node operators) and also offer services to infrastructural participants.

[4] Id.

[5] Amit Zavery & James Tromans, Introducing Blockchain Node Engine: Fully Managed Node-Hosting for Web3 Development, Google Cloud (Oct. 27, 2022), https://cloud.google.com/blog/products/infrastructure-modernization/introducing-blockchain-node-engine.

[6] U.S. Treasury Sanctions Notorious Virtual Currency Mixer Tornado Cash, U.S. Dep’t of the Treasury (Aug. 8, 2022), https://home.treasury.gov/news/press-releases/jy0916.

[7] @ElBarto_Crypto, Twitter (Aug. 13, 2022, 8:21 AM), https://twitter.com/ElBarto_Crypto/status/1558428428763815942 (“[W]hile only 0.03% of addresses received ETH from tornado cash, almost half the entire ETH network is only two hops from a tornado cash receiver.”).

[8] All but one designated Ethereum addresses deployed by Tornado Cash represent smart contracts, but the SDN list also includes Ethereum addresses that do not represent smart contracts, which are associated with other sanctioned entities.

[9] For an argument that it is not illegal, see Rodrigo Seira, Amy Aixi Zhang, & Dan Robinson, Base Layer Neutrality: Sanctions and Censorship Implications for Blockchain Infrastructure, Paradigm (Sep. 8, 2022), https://www.paradigm.xyz/2022/09/base-layer-neutrality.

[10] Mikolaj Barczentewicz & Anton Wahrstätter, How Transparent Is Ethereum and What Could This Mean for Regulation?,  Regulation of Crypto-Finance, https://cryptofinreg.org/projects/public-data-supervision.

[11] Mikolaj Barczentewicz & Alexander F. Sarch, Shedding Light in the Dark Forest: A Theory of Liability for Cryptocurrency “MEV” Sandwich Attacks, available at SSRN (Oct. 5, 2022), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=4187752.

[12] Autonomous smart contracts that do not rely on off-chain cooperation and also are not controlled are not part of the application layer, as we understand it here. From the perspective of asserting legal control, they are functionally part of the base layer (e.g., to “remove” such a smart contract from the blockchain, it would require the cooperation of an overwhelming majority of validators). Also, strictly speaking, end users may also interact with some base-layer participants, e.g., by submitting transactions directly to a node’s remote-procedure-calls (RPC) interface.

[13] See also Miles Jennings, Regulate Web3 Apps, Not Protocols, a16z (Sep. 29, 2022), https://a16zcrypto.com/web3-regulation-apps-not-protocols.

[14] Application of FinCEN’s Regulations to Certain Business Models Involving Convertible Virtual Currencies, Financial Crimes Enforcement Network (May 9, 2019), https://www.fincen.gov/resources/statutes-regulations/guidance/application-fincens-regulations-certain-business-models.

[15] There has been some controversy regarding the legality of sanctioning the autonomous smart contracts deployed by Tornado Cash. See Paul Grewal, Sanctions Should Target Bad Actors. Not Technology., Coinbase (Sep. 8, 2022), https://www.coinbase.com/blog/sanctions-should-target-bad-actors-not-technology; Jerry Brito & Peter Van Valkenburgh, Coin Center Is Suing OFAC Over Its Tornado Cash Sanction, Coincenter (Oct. 12, 2022), https://www.coincenter.org/coin-center-is-suing-ofac-over-its-tornado-cash-sanction; Steve Engel & Brian Kulp, OFAC Cannot Shut Down Open-Source Software, Dechert LLP (Oct. 18, 2022), https://ipfs.io/ipfs/QmTC9q5yidSWoM2HZwyTwB3VbQLVbG5cpDSBTaLP8voYNX.

[16] Executive Order, supra note 3, at Sec. 1; On cryptocurrencies’ promise for financial inclusion, including in situations especially needing privacy (e.g., domestic violence, authoritarian regimes), see, e.g., Alex Gladstein, Finding Financial Freedom in Afghanistan, Bitcoin Magazine (Aug. 26, 2021), https://bitcoinmagazine.com/culture/bitcoin-financial-freedom-in-afghanistan; Charlene Fadirepo, Why Bitcoin Is a Tool for Social Justice, CoinDesk (Feb. 17, 2022), https://www.coindesk.com/layer2/2022/02/16/why-bitcoin-is-a-tool-for-social-justice; How Cryptocurrency Meets Residents’ Economic Needs in Sub-Saharan Africa, Chainanalysis (Sep. 29, 2022), https://blog.chainalysis.com/reports/sub-saharan-africa-cryptocurrency-geography-report-2022-preview.

[17] See, e.g., Andy Greenberg, Inside the Bitcoin Bust That Took Down the Web’s Biggest Child Abuse Site, Wired (Apr. 7, 2022), https://www.wired.com/story/tracers-in-the-dark-welcome-to-video-crypto-anonymity-myth.

[18] For an explanation of Tornado Cash’s functionality, see Alex Wade, Michael Lewellen, & Peter Van Valkenburgh, How Does Tornado Cash Work?, Coincenter (Aug. 25, 2022) https://www.coincenter.org/education/advanced-topics/how-does-tornado-cash-work.

[19] See also Peter Van Valkenburgh, Open Matters: Why Permissionless Blockchains Are Essential to the Future of the Internet, Coincenter (December 2016) https://www.coincenter.org/open-matters-why-permissionless-blockchains-are-essential-to-the-future-of-the-internet.

[20] Zooko Wilcox & Paige Peterson, The Encrypted Memo Field, Electric Coin Co. (Dec. 5, 2016), https://electriccoin.co/blog/encrypted-memo-field; View Key, Moneropedia, https://www.getmonero.org/resources/moneropedia/viewkey.html; Wade, Lewellen, & Van Valkenburgh, supra note 18.

[21] Crypto Crime Trends for 2022: Illicit Transaction Activity Reaches All-Time High in Value, All-Time Low in Share of All Cryptocurrency Activity, Chainanalysis (Jan. 6, 2022), https://blog.chainalysis.com/reports/2022-crypto-crime-report-introduction.

[22] Action Plan to Address Illicit Financing Risks of Digital Assets, U.S. Dep’t of the Treasury (Sep. 20, 2022), https://home.treasury.gov/system/files/136/Digital-Asset-Action-Plan.pdf.

[23] A query for “anonymity-enhancing technologies” in the Google Scholar database returns about 40 results, while a query for “privacy-enhancing technologies” returns more than 30,000 results. See https://scholar.google.com/scholar?q=%22anonymity-enhancing+technologies%22 (accessed Oct. 28, 2022); https://scholar.google.com/scholar?q=%22privacy-enhancing+technologies%22 (accessed Oct. 28, 2022).

[24] U.S. Department of the Treasury, supra note 6.

[25] U.S. Department of the Treasury, supra note 22.

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.

Abstract

Whether self-preferencing is inherently anticompetitive has emerged as perhaps the core question in competition policy for digital markets. Large online platforms who act as gatekeepers of their ecosystems and engage in dual-mode intermediation have been accused of taking advantage of these hybrid business models to grant preferential treatment to their own products and services. In Europe, courts and competition authorities have advanced new antitrust theories of harm that target such practices, as have various legislative initiatives around the world. In the aftermath of the European General Court’s decision in Google Shopping, however, it is important to weigh the risk that labeling self-preferencing as per se anticompetitive may merely allow antitrust enforcers to bypass the legal standards and evidentiary burdens typically required to prove anticompetitive behavior. This paper investigates whether and to what extent self-preferencing should be considered a new standalone offense under European competition law.

I. Introduction

In recent years, widespread concern has emerged that large digital platforms may misuse their market positions by giving preferential treatment to their own products and services. One fear is that, by engaging in self-preferencing, so-called “Big Tech” firms may be able not only to entrench their power in core markets, but also to extend it into associated markets.1F[1] Notably, by controlling ecosystems of integrated complementary products and services—which usually represent important gateways for business users to reach end users—dominant platforms may enjoy a strategic market status that allows them to exercise bottleneck power. As the argument goes, by acting as gatekeepers and regulators within their ecosystems, these platforms represent unavoidable trading partners and may pick winners and losers in the marketplace.

Moreover, digital platforms often serve a dual role, acting as both an intermediary and a trader operating on the platform. Hence, they may be tempted to influence results in their own favor (so-called “biased intermediation”). Indeed, once an intermediation platform is also active in complementors’ markets, it loses its status of neutrality and risks of discrimination against rivals may arise because of potential conflict of interests. Therefore, quoting a slogan delivered by U.S. Sen. Elizabeth Warren (D-Mass.) during the 2020 Democratic Party presidential primary campaign: “you get to be the umpire or you get to have a team in the game—but you don’t get to do both at the same time.”2F[2] European Commissioner for Competition Margrethe Vestager has used a similar sporting analogy—arguing that a platform cannot be both a player who competes against rivals in the downstream market and, at the same time, the upstream referee who determines the conditions of that competition.3F[3]

In short, self-preferencing may allow large digital platforms to adopt a leveraging strategy to pursue a twofold anticompetitive effect—that is, excluding or impeding rivals from competing with the platform (defensive leveraging) and extending their market power into associated markets (offensive leveraging). The latter scenario may take the form of envelopment, in which a platform attempts to both exclude rivals and facilitate its own entry into a target market by tying the core functionalities of its platform to the services offered in that market.4F[4]

The legislative initiatives that have been undertaken around the world posit that, to ensure a level playing field, digital gatekeepers must be prevented from engaging in various forms of self-preferencing. The European Union’s Digital Markets Act (DMA), for example, prohibits gatekeepers from: engaging in any form of self-preferencing in ranking services and products offered by the platform itself; using any non-publicly available data generated through activities by business users to compete with those users on the platform; preventing the removal of preinstalled applications; giving preferential access to hardware, operating-system, or software features to their own ancillary services; and refusing to grant “fair, reasonable, and non-discriminatory” (FRAND) access to app stores, search engines, and social-networking services.5F[5] The United Kingdom’s proposed regulatory regime for digital markets, which imagines the adoption of firm-specific codes of conduct for online platforms with “strategic market status,” includes self-preferencing as an example of exclusionary behavior that large digital platforms sometimes engage in when they exert control over an ecosystem.6F[6] The German Digitalization Act likewise includes a ban on platforms favoring their own offers when they mediate access to supply and sales markets, particularly in cases where they present their own offers in a more favorable manner, exclusively pre-install them on devices, or integrate them in any other way.7F[7]

The American Innovation and Choice Online Act (AICOA) would go even further. The bill would declare it unlawful to engage in conduct that would “unfairly preference the covered platform operator’s own products, services, or lines of business over those of another business user on the covered platform in a manner that would materially harm competition on the covered platform.”8F[8] Accordingly, for example, Google would be prevented from launching only Google Maps in response to a query for restaurants, or from placing Google services at the top of a search-results page unless it is accompanied by all possible rival services. Similarly, Amazon would be constrained from showcasing its branded products or favoring third-party products that use its fulfillment service, while Apple would be banned from supplying prominent app-search results for its own apps or even from preinstalling its own apps.9F[9]

These provisions and others like them would essentially treat digital platforms as common carriers, and therefore subject them to a neutrality regime and utilities-style regulation. In some markets, lawmakers have proposed even more stringent reforms designed to reduce digital platforms’ potential bottleneck and intermediation power, and to prevent conflicts of interest, such as requirements that intermediation and operating units be structurally separated, restrictions on lines of business, and imposed duties to deal.10F[10]

In addition to these legislative initiatives, self-preferencing has also emerged as a theory of harm before European courts and antitrust authorities. After all, much of the behavior prohibited explicitly in the DMA initially attracted attention as part of antitrust investigations. In particular, the ban against self-preferencing appears to have been informed by the European Commission’s decision in the Google Shopping case, in which Google was fined for having systematically demoted the results of competing comparison-shopping products on its search results pages, while having granted prominent placement to its own comparison-shopping service.11F[11] The fact that the decision came following a protracted seven-year investigation has been cited as evidence of the need for an ex ante prohibition of such practices, thus removing the annoying hurdles and burdens posed by standard antitrust analysis.

The European General Court recently upheld the Commission’s decision,12F[12] although it narrowed the original decision’s scope by focusing on the context in which the practice occurred. Rather than articulating a legal test for a new antitrust offense, the Court applied fact-specific criteria to examine the potential for discrimination by a search engine. This approach notably differs from defining self-preferencing as a standalone abuse, as has been supported by the European Commission and some national competition authorities (NCAs).13F[13]

The DMA, it should be noted, will not displace Europe antitrust rules;14F[14] rather, the law will be implemented alongside them. This heightens the potential for interpretative uncertainty regarding the degree to which self-preferencing will or ought to be treated, in practice, as an infringement of competition law. This paper therefore sets out to investigate whether, in the aftermath of the Google Shopping ruling, self-preferencing by digital platforms has peculiar features that justify its consideration as a new theory of harm.

Indeed, one of the primary challenges posed by treating self-preferencing as a competitive harm, from a competition-law perspective, is the lack of an obvious limiting principle.15F[15] Notably, recent European case law suggests that, rather than a standalone theory of harm, self-preferencing is a catch-all category that includes various practices already addressed by antitrust rules. The risk is that labeling self-preferencing as per se anticompetitive would merely provide antitrust authorities with the opportunity to elide the application of legal standards and evidentiary burdens traditionally required to prove anticompetitive behavior.

This paper calls for appreciation of the continuing wisdom of antitrust orthodoxy against the prevailing zeitgeist, arguing that many of the perceived limits of antitrust actually represent its virtues.16F[16] Indeed, the goal of competition law ought not be to satisfy urgent policy objectives. Rather, antitrust is about limiting principles, even where that means it is unpopular.17F[17]

The remainder of the paper is structured as follows. Section II provides an overview of the relevant traditional antitrust theories of harm and emerging case law to analyze whether and to what extent self-preferencing could be considered a new standalone offense in EU competition law. Section III investigates whether platform neutrality more generally belongs to the scope of competition law, according to its legal foundations and settled principles. Section IV concludes.

II. Self-Preferencing as a Standalone Offense

The debate over self-preferencing revolves around its novelty. Antitrust concerns are raised regarding the preferential treatment granted by a vertically integrated dominant firm to its own products and services because of the firm’s dual role as both host and competitor. This is of particular interest when such potential conflicts of interest may result in the leveraging of market power in adjacent lines of business in ways capable of producing exclusionary effects.

From this perspective, competitive risks associated with self-preferencing do not appear significantly different from those that emerge in any scenario of vertical integration. Vertical integration is, indeed, often procompetitive, specifically because it can be used to improve efficiency and reduce transaction costs. Furthermore, while there is some dispute as to whether a dominant firm is required to ensure a level playing field by treating rivals in the same way as it does its own businesses, competition law is already equipped with tools to forbid practices that pursue discriminatory leveraging strategies. The emergence of digital platforms does not, in and of itself, challenge antitrust enforcement. To investigate whether self-preferencing should be considered a new standalone offense, it is necessary to first analyze the scope of relevant antitrust prohibitions and to evaluate the peculiar features of self-preferencing, as illustrated by courts and antitrust authorities that have recently sanctioned this behavior.

A.   Traditional European Theories of Antitrust Harm

Although predatory pricing and loyalty rebates may sometimes lead a firm to favor its own downstream services, our attention will be devoted to those practices that appear closer to self-preferencing: namely, refusal to deal, tying, bundling and mixed bundling, margin squeezes, and discrimination. In particular, the last of these represents the most obviously relevant comparison, as the favorable treatment a platform grants to its own products and services entails discriminatory treatment of rivals.

Under European competition law’s non-discrimination provisions, preferential treatment may be investigated when a vertically integrated firm applies to rivals (primary line injury) or other partners (secondary line injury) more onerous conditions than it applies to its own downstream businesses.18F[18] The second-degree price discrimination is mainly addressed by Article 102(c) TFEU, which establishes the abusive character of applying dissimilar conditions to equivalent transactions with trading parties, thereby placing them at a competitive disadvantage. It has been noted that the provision may be considered a straightforward legal basis for a theory of self-preferencing, as shown by the case law that has predominantly applied the provision in settings where a vertically integrated dominant firm sought to advantage its downstream operations at the expense of rivals.19F[19]

In the aftermath of the MEO ruling and following the effects-based approach affirmed in Intel,20F[20] discrimination is not, in itself, problematic from the point of view of competition law.21F[21] As a consequence, not every disadvantage that affects some customers of a dominant firm will amount to an anticompetitive effect; competitive disadvantages cannot be presumed. Antitrust enforcers are instead required to consider all the circumstances of the relevant case, assessing whether there is a strategy to exclude from the downstream market a trading partner that is at least as efficient as its competitors.

Self-preferencing may also take the form of tying, bundling, or mixed bundling. In the first of these, a dominant player leverages its market position in the tying product, making the purchase of the latter subject to the acceptance of another (tied) product. Bundling refers to the way products are offered and priced. In the case of pure bundling, the products are only sold jointly in fixed proportions. In mixed bundling, the products are also made available separately, but the sum of prices when sold separately is higher than the bundled price.22F[22]

Any of these practices may lead to anticompetitive foreclosure in the tied market and, indirectly, in the tying market. The exclusion of as-efficient-competitors is key to triggering antitrust liability for competition foreclosure. Mixed bundling may be anticompetitive if the discount is so large that equally efficient competitors offering only some of the components cannot compete against the discounted bundle. With bundling, the greater the number of products on which the undertaking exerts market power, the stronger the likelihood of anticompetitive foreclosure. In the case of tying, if an insufficient number of customers would buy the tied product on its own to sustain competitors of the dominant undertaking in the tied market, the tying could lead to those customers facing higher prices. Finally, the risk of foreclosure in tying and bundling strategies is expected to be greater where the dominant player makes it last—e.g., through technical tying (i.e., designing a product in such a way that it only works properly with the tied product and not with alternatives offered by competitors).

As tying strategies can be implemented either through contractual terms or by technical means, antitrust authorities are increasingly prone to challenge platforms’ product-design decisions that favor their own products or services by limiting interoperability, thereby impeding compatibility with rival products or services.23F[23] In Microsoft, the European General Court argued that the ubiquity of a dominant player in the tying market is likely to foreclose competition in the tied market. The Court noted that the practice of bundling a specific piece of software to an operating system through pre-installation allows the tied product “to benefit from the ubiquity of that operating system … which cannot be counterbalanced by other methods of distributing media players.”24F[24]

Foreclosure also may arise when consumers obtain the tied product free of charge and are not prevented from obtaining rival services. In Google Android, the Commission fined Google for having engaged in a leveraging practice to preserve and strengthen its position in the search-engine market by requiring device manufacturers to preinstall Google Search and the Chrome browser as preconditions to license the Google Play app store. By locking down Android in the Google-controlled ecosystem, manufacturers wishing to pre-install Google apps were prevented from selling smart-mobile devices that run on versions of Android not approved by Google (so-called Android “forks”).25F[25] According to the Commission, pre-installation can create a status quo bias, which reduces the incentives for manufacturers to pre-install competing search and browser apps, as well as the incentives for users to download such apps. The therefore affects rivals’ ability to compete effectively with Google. Despite the fact that Android is mostly distributed as open-source software, the Commission rejected both of the justifications Google put forward: that leveraging practices reflected a legitimate appropriation strategy to preserve incentives to innovate in a regime of weak appropriability26F[26] and that fork restrictions fell under governance rules needed to protect multi-sided platforms from negative externalities (in this case, preventing software fragmentation and the potential diffusion of incompatible versions of the software).27F[27]

Taken to its extreme, self-preferencing can result in refusals to deal,28F[28] which explains why European policymakers have invoked the essential facilities doctrine to address such cases. The aim of the doctrine, which imposes on dominant firms a duty to deal with all who request access, is to prevent a firm with control over an essential asset from excluding rivals or from extending its monopoly into another stage of production. Because it requires sacrificing the dominant firm’s freedom of contract and right to property, however, it may weaken incentives to invest, innovate, and compete.

These refusal-to-deal infringements are, under European competition law, generally limited to “exceptional circumstances.” According to Magill, a refusal to deal may trigger an antitrust violation when: (i) access to the product or service is indispensable to a firm’s ability to do business in a market; (ii) the refusal is unjustified; (iii) the refusal excludes competition on a secondary market; and (iv), if intellectual property rights are involved, it prevents the emergence of a new product for which there is potential consumer demand.29F[29] The IMS30F[30] and Microsoft31F[31] judgments substantially dismantled the third and fourth requirements, respectively, by considering the secondary-market requirement met even if that market is just potential or hypothetical, and the new product requirement satisfied even when access to the facility is necessary for rivals to develop follow-on innovation (i.e., improved products with added value).

Nonetheless, pursuant to the interpretation provided in Bronner, the requirement that a requested facility be indispensable remains in place and represents the last bulwark against the dangers of uncontrolled application of the doctrine.32F[32] Indeed, access to an input is considered indispensable if there are no technical, legal, or even economic obstacles that would render it impossible (or even unreasonably difficult) to duplicate. To demonstrate the lack of realistic potential alternatives, a requesting firm must establish that it is not economically viable to create the resource on a scale comparable to that of the firm controlling the existing product or service.

Against this background, the recent Slovak Telekom judgment introduced a relevant novel claim that the conditions laid down in Bronner do not apply where the dominant undertaking does give access to its infrastructure but makes that access subject to unfair conditions.33F[33] In addition, the Court of Justice (CJEU) implied that enforcers do not have to prove indispensability when access to a facility has been granted as a result of a regulatory obligation.34F[34] The implications are particularly relevant to digital markets, as the regulatory framework established by the DMA requiring access to platforms designated as gatekeepers would exempt antitrust authorities from having to demonstrate the indispensability of those facilities.

Finally, self-preferencing may be construed as a “margin squeeze,” which EU competition law defines as a standalone abuse that undermines the condition of equality of opportunity between economic operators. The European Commission initially equated this practice to a constructive refusal to deal, noting that, instead of refusing to supply, a dominant undertaking charges a price for a product on the upstream market that would not allow even an equally efficient competitor to trade profitably in the downstream market on a lasting basis.35F[35] The Commission therefore introduced the so-called Telefonica exceptions to categorize a specific class of cases where Bronner’s requirements would not apply. These exceptions hold that an obligation to supply cannot have negative effects on the input owner’s and/or other operators’ incentives to invest and innovate upstream.36F[36]  The CJEU has, however, gradually moved toward rejecting the concept of an implicit refusal to grant access, holding that margin squeezes should be treated as a separate theory of harm, thereby introducing an even broader exception to Bronner.

Notably, while an essential facility was involved in Deutsche Telekom I, the owner of the facility had a regulatory obligation to share and rivals’ margins were negative.37F[37] Teliasonera found a margin squeeze in a situation where the input of the dominant undertaking was not indispensable, there was no regulatory obligation to supply, and rival firms’ margins were positive, but insufficient, as the rivals were forced to operate at artificially reduced levels of profitability.38F[38] Telefonica39F[39] and Slovak Telekom40F[40] upheld the approach of considering margin squeezes as an independent form of abuse to which the criteria established in Bronner are not applicable.

B.   European Case Law on Self-Preferencing

Against this background, doubts about the potential to identify self-preferencing as a standalone abuse under EU law emerge from the court analysis and antitrust decisions that have been issued to date sanctioning dominant platforms for preferential treatment granted of own products and services. Indeed, recent European case law would appear to question whether self-preferencing is sufficiently novel to constitute a standalone theory of harm, given that it has been readily addressed under existing theories of harm. With the exceptions of the Amsterdam Court of Appeal41F[41] and the Italian Competition Authority,42F[42] courts generally do not even use the term “self-preferencing,” opting instead to label the conduct “favoring.”

1.  UK Streetmap decision and European Commission Google Shopping decision

The birth of self-preferencing as a standalone theory of harm is usually associated with the European Commission’s investigation of Google for having positioned and displayed, in its general search-results pages, its own comparison-shopping service more favorably than rival comparison-shopping services.43F[43]

However, a similar issue was addressed a few months earlier by the High Court of England and Wales in the dispute between Streetmap and Google, which involved the interaction of competition between online search engines and online maps.44F[44] Indeed, Streetmap contended that Google abused its dominant position by prominently and preferentially displaying its own related online-map product. Streetmap contended that, by visually displaying a clickable image from Google Maps (and no other map) in response to certain geographic queries (Maps OneBox) at or near the very top of its search-engine results page (SERP), and consequently relegating Streetmap to a blue link lower down the page, Google abused its dominant position in the market for online search and online search advertising.

Given the evident similarity with the Google Shopping case, Justice Roth’s analysis is worthy of examination. While Streetmap framed Google’s practice in terms of bundling or tying, and referred extensively to the European Microsoft decision, the U.K. Court held that the complaint should have been appropriately characterized as an allegation of discrimination.45F[45] The user who sees the Maps OneBox is, indeed, under no obligation to click on it or to use Google Maps; she remains free to use any other online-mapping provider without penalty. In contrast to Microsoft, where obtaining a competing streaming-media player by downloading from the Internet was regarded by a significant number of users as more complicated than using the pre-installed Microsoft product, the Google SERP includes clickable links to other relevant online maps and users experience no difficulty in clicking on those blue links.

To establish whether Google’s conduct constituted anticompetitive foreclosure, the Court concluded that it was necessary to prove that the effects of that conduct appreciably affected competition, which cannot simply be assumed. Indeed, the Google’s introduction a Maps OneBox containing a thumbnail map was intended to improve the quality of the SERP, and hence must be evaluated as a technical efficiency46F[46]: “The unusual and challenging feature of this case is that conduct which was pro-competitive in the market in which the undertaking is dominant is alleged to be abusive on the grounds of an alleged anti-competitive effect in a distinct market in which it is not dominant.”47F[47] For this reason, evaluating alternative ways that Google might have made this procompetitive improvement without allegedly distorting competition in online maps played a significant role in the Court’s analysis.

If anticompetitive effects are proven, then the issue of objective justification must be considered. This requires a proportionality assessment, which is a matter of fact and degree. Hence, the question of alternatives cannot be considered only with respect to competitive impact: “Where the efficiency is a technical improvement, proportionality does not require adoption of an alternative that is much less efficient in terms of greatly increased cost, or which imposes an unreasonable burden.”48F[48]

Following this line of reasoning, Justice Roth found that the introduction of the Maps OneBox with no shortcut hyperlinks to Streetmap (and other online maps) did not, in itself, have an appreciable effect in steering customers away from Streetmap; it therefore was not reasonably likely to give rise to anticompetitive foreclosure.49F[49] Moreover, even if it was likely to have such an effect, Google’s conduct was objectively justified because the way that it implemented the technical efficiency—i.e., presenting a thumbnail map on the SERP—was not disproportionate.50F[50]

The European Commission reached a different conclusion in Google Shopping. There, the Commission found that, by promoting its own comparison-shopping service in its search results and demoting those of competitors, Google engaged in a strategy of leveraging the dominance of its flagship product (i.e., the search engine) in the adjacent market for comparison-shopping services.

According to the Commission’s findings, Google’s strategy rested on two related practices: ensuring prominent placement for its own comparison-shopping service and demoting rival comparison-shopping services in its search results. Notably, while competing comparison-shopping services could appear only as generic search results—potentially subject to demotion in search listings by Google’s algorithms—Google’s own comparison-shopping service was prominently positioned, displayed in rich format, and free from the risk of demotion to the second page of search results.51F[51]

The Commission concluded that the conduct fell outside the scope of competition on the merits, could extend Google’s dominant position in the national markets for general search services to the national markets for comparison-shopping services (offensive leveraging), would tend to protect Google’s dominance in the former (defensive leveraging).

Rather than recognizing that it was deploying a novel theory of harm, the Commission argued that Google’s conduct belonged to the well-known category of leveraging. Accordingly, there was no need to look for a new legal test, since “it is not novel to find that conduct consisting in the use of a dominant position on one market to extend that dominant position to one or more adjacent markets can constitute an abuse.”52F[52] The Commission therefore found that self-preferencing constitutes a “well-established, independent, form of abuse.”53F[53]

To support its line of reasoning, the Commission invoked disparate case law, including judgments involving either specific theories of harm (e.g., Tetra Pack,54F[54] Irish Sugar,55F[55] and Microsoft,56F[56] with regards to tying and predatory pricing, loyalty rebates, and refusal to deal, respectively) or that are outdated (e.g., Telemarketing57F[57]).58F[58] The Commission’s rationale in offering this selection of decisions is unclear. References to one case in which the essential facilities doctrine was applied (i.e., Microsoft) and to another ruling that has since been replaced by the elaboration of the essential facilities doctrine (i.e., Telemarketing) are even more surprising.

The Commission ultimately dismissed Google’s claim that its conduct could be considered abusive only if Bronner’s criteria were fulfilled: namely, if access to Google’s general search results pages were indispensable to being able to compete.59F[59] According to the Commission, the decision merely required Google to cease the conduct. Hence, the Bronner criteria were “irrelevant in a situation, such as that of the present case, where bringing to an end the infringement does not involve imposing a duty on the dominant undertaking to transfer an asset or enter into agreements with persons with whom it has not chosen to contract.”60F[60]

The case spurred debate over the legal test applied to require Google to grant equal treatment to rival comparison-shopping services and its own service. Among the questions raised by the case are whether the conduct fell more within exclusionary or discriminatory abuses and, if it was the former, whether tying or the essential facilities doctrine was the proper framework to assess such self-preferencing abuse.61F[61] For instance, the experts appointed by the Commission to provide suggestions for the design of a competition policy for digital markets considered self-preferencing a specific technique of leveraging, which is not abusive per se, but subject to an effects test.62F[62] Furthermore, quoting Microsoft, they argued that, according to well-established case law, the owner of an essential facility must not engage in self-preferencing. Nonetheless, they believed that self-preferencing by a vertically integrated dominant digital platform can be abusive, not only under the preconditions set out by the essential facilities doctrine, but also wherever it is likely to result in leveraging market power and is not justified by a pro-competitive rationale.

2.   Amsterdam Court of Appeal ruling in Funda

In May 2020, the Amsterdam Court of Appeal handed down a decision in litigation between VBO Makelaars and NVM, two associations of real-estate agents, brokers, and appraisers.63F[63] NVM owns Funda, the largest online real-estate platform in the Netherlands and which, according to VBO, granted NVM agents more prominent positions in the ranking of properties. Funda also applied higher tariffs to and granted only limited website functionality to VBO agents, who also did not have access to the underlying Funda database. VBO’s complaint charged NVM with anticompetitive discrimination.

Upholding the decision of the district court, the Court of Appeal found that Funda did not abuse its dominant position in favoring the listings of NVM members over those of rival agents. Assessing self-preferencing as discriminatory conduct under Article 102(c) TFEU, the Court cited MEO, arguing that VBO’s complaint failed to demonstrate that the discrimination distorted the company’s competitive position in ways that led to a competitive disadvantage on the downstream market for real-estate services.

In particular, the Court noted that several factors play relevant roles in consumers’ home-purchase decisions and that it is implausible that a buyer would automatically assume that the listing placed highest on a website would be the one that best meets their demands. To the contrary, the Court concluded that the market for homes differs significantly from markets for other consumer products. For example, buyers generally conduct an intensive search over a long period of time to consider all relevant offers. Therefore, the Court found, a lower website ranking would be of minor importance and would not necessarily lead to a competitive disadvantage.

Accordingly, the Court considered comparisons with Google Shopping to be unhelpful.64F[64] In assessing NVM’s preferential treatment in accordance with the principles the CJEU elaborated in MEO, however, the Dutch court did frame self-preferencing as a discriminatory abuse, thus anticipating the approach that the European General Court would ultimately endorse in Google Shopping.

3.   French Competition Authority Apple ATT and Google AdTech decisions

In June 2021, the French Competition Authority (AdlC) followed the European Commission’s lead in investigating practices implemented by Google in the online-advertising sector.65F[65]

Responding to referrals from news publishers who monetize their websites and mobile apps through advertising, the AdlC found that Google engaged in abusive practices to favor its own advertising intermediation technologies, granting preferential treatment to its proprietary technologies offered under the Google Ad Manager brand. Notably, in the Authority’s view, Google used its dominant publisher ad server (DoubleClick for Publishers, or DFP) both to favor its own programmatic advertising sales platform (AdX) and, separately, used AdX to favor DFP in the market for supply-side ad-intermediation platforms (SSPs). Regarding the first practice, the preferential treatment consisted of informing AdX of the prices offered by competing SSPs, thus allowing it to optimize the bidding process by varying the commissions received on impressions sold according to the intensity of competition. Regarding the second practice, Google imposed technical and contractual limitations on the use of the AdX platform through a third-party ad server. As a result, the modalities of interaction offered to third-party ad-server clients were inferior to the modalities of interaction between DFP and AdX, which penalized both third-party SSPs and publisher clients.

Similar concerns about the impact of Google’s conduct in ad-tech services have also been raised by the Australian Competition and Consumer Commission (ACCC). The ACCC concluded that Google’s vertical integration and dominance across the ad-tech supply chain and related services have allowed the company to engage in leveraging and self-preferencing conduct and that this, in turn, has likely interfered with the competitive process.66F[66]

According to the AdlC, the evidence showed that DFP’s favorable treatment of AdX had a foreclosure effect on competition among platforms selling ad space, significantly reducing the attractiveness of rival SSPs. In addition, according to the Authority, DFP’s preferential treatment strengthened Google’s dominant position, impairing the competitiveness of rival ad-server providers, and limiting their ability to compete on the merits. Therefore, as regards the latter, limitations on interoperability were deemed a practice that cannot be considered competition on the merits, as it would tend to impose on rivals a competitive disadvantage by applying to them less favorable technical conditions.67F[67]

By and large, the French decision did not provide insights on the theory of harm or type of abuse that this form of discrimination would constitute. Like the European Commission, the AdlC did not refer to self-preferencing explicitly, instead describing Google’s conduct as favoring. With regards to Google’s leveraging strategy, the AdlC cited Google Shopping and quoted the very same case law the Commission mentioned in that decision.68F[68] The only significant addition made by the Authority was a reference to Slovak Telekom, a margin-squeeze case that, as already mentioned, brought about a remarkable change in confining the application of Bronner’s indispensability condition to “pure” refusals to deal.69F[69]

However, the AdlC is also currently investigating Apple’s privacy policy, where self-preferencing is mentioned explicitly and appears to be framed differently.70F[70] Notably, in March 2021, the French Authority rejected the request for interim measures against Apple’s adoption of the App Tracking Transparency (ATT) framework for applications on iOS 14, which create new consent and notification requirements for app publishers. The ATT solicitation was considered part of Apple’s longstanding strategy to protect iOS users’ privacy and its implementation was not expected to impose unfair trading conditions, such as excessive or disproportionate restrictions on the activities of app developers. The AdlC nonetheless advised that, as part of its investigation into the merits of the case, it would examine how the user-consent collection processes differ between Apple’s own advertising services and third-party advertising services. Differences in those processes might result in a “form of discrimination (or self-preferencing)” if Apple applied, without justification, more binding rules on third-party operators than those it applies to itself for similar operations.71F[71]

The growing suspicion of self-preferencing has likewise prompted the German Competition Authority to initiate its own proceeding on Apple’s ATT policy,72F[72] while the U.K. Competition and Markets Authority (CMA) raised similar concerns in its market study on mobile ecosystems.73F[73]

4.   General Court ruling in Google Shopping

Given this background, the European General Court’s judgment in Google Shopping was much awaited.74F[74] For those who were looking for legal certainty from the judgment, however, those expectations have been not completely met.

What was new in the ruling was its broad interpretation of the general principle of equal treatment, which the Court affirmed obligates vertically integrated platforms to refrain from favoring their own services over rivals.75F[75] While this approach was in line with the Commission’s expansive reading of the special responsibility of dominant firms, however, the ruling framed self-preferencing as a discriminatory abuse.76F[76] Notably, the Court highlighted that the various judgments the Commission cited in its original ruling do not support the conclusion that any use of a dominant position on one market to extend that position to one or more adjacent markets constitutes a “well-established” form of abuse.77F[77] After all, “leveraging” is a generic term covering several practices that are potentially abusive, such as tied sales, margin squeezes, and loyalty rebates.78F[78]

The three rulings the Court cited involve, instead, practices found to be discriminatory abuses specifically because they place third parties at a competitive disadvantage. Two of three involve discriminatory conditions applied by public undertakings operating a commercial port79F[79] and an airport.80F[80] This may support a link with recent legislative initiatives categorizing digital platforms as common carriers and thus subject to the neutrality regime of public utilities-style regulation. Nonetheless, the Court clarified that prohibiting self-preferencing to enforce the policy goal of neutrality is appropriate only when a competitive harm is demonstrated. Indeed, rather than deeming self-preferencing to be per se abusive, the Court moved to its potential anticompetitive effects. This is in line with the effects-based approach affirmed in MEO,81F[81] as well as in other judgments that, although they involve different abusive conduct, entail similar discriminatory elements.82F[82] The Court, however, surprisingly did not even mention MEO.

The Court’s ruling focused on potential exclusionary effects associated with specific leveraging strategies, reflected in the Commission’s original finding of abuse on the basis of certain relevant criteria.83F[83] The Commission had noted that, due to network effects, the traffic that Google’s search engine generates represents a critical asset; that users are significantly influenced by favoring, as they typically concentrate on the first few search results and tend to assume that the most visible results are the most relevant; and that traffic directed from Google’s search-results pages accounts for a large portion of traffic to competing comparison-shopping services, which cannot be effectively replaced by other sources.84F[84]

The Court outlined four criteria that differentiated Google’s self-preferencing from competition on the merits, therefore warranting a finding of antitrust liability.

First, the Court highlighted the “universal vocation” and openness of a search engine as features of its core mission.85F[85] These features distinguish a search engine, which designed to index results that might contain any possible content, from other services referenced in the case law, which consist of tangible or intangible assets (press-distribution systems or intellectual property rights, respectively) whose value depends on a proprietor’s ability to retain their exclusive use.86F[86]

While not explicitly mentioned, the reference is clearly to the essential facilities doctrine case law. Unlike these services, “the rationale and value of a general search engine lie in its capacity to be open” to results from external sources and to display multiple and diverse sources on its general results pages.87F[87] Moreover, the legal obligation of equal treatment that ensues from net-neutrality regulations88F[88] for Internet access providers on the upstream market cannot be disregarded when analyzing the practices of an operator like Google on the downstream market.89F[89]

Second, because Google holds a “superdominant” (or “ultra-dominant”) position on the market for general search services and acts as a “gateway” to the Internet, it is under a stronger obligation not to allow its behavior to impair genuine, undistorted competition on the related market for specialized comparison-shopping search services.90F[90]

Third, the market for general search services is characterized by very high barriers to entry.91F[91]

Fourth, in light of prior considerations (i.e., the mission of a search engine, Google’s dominance, and the presence of very high barriers to entry), the Court found that Google’s conduct is “abnormal.”92F[92] Indeed, for a search engine to limit the scope of its results to its own services entails an element of risk and is “not necessarily rational.” This is especially the case in a situation where, because of barriers to entry and the search engine’s own dominance, it is significantly unlikely that there would be market entry within a sufficiently short period of time in response to the limitations placed on Internet users’ choices.93F[93]

In this scenario, in the Court’s view, Google’s promotion of its own specialized results over third-party results contradicts the basic economic model of a search engine and hence involves a certain form of abnormality.94F[94] The suspicion is strengthened by Google’s “change of conduct.”95F[95] While it initially provided general search services and displayed all the results of specialized search services in the same way and according to the same criteria, once the firm had entered the market for specialized comparison-shopping search services—and after having experienced the failure of its dedicated comparison-shopping website (Froogle)—Google changed its practices and comparison-shopping services were no longer all treated equally.96F[96]

These four criteria suggest that the Court saw Google’s search engine as an essential facility. The Court, indeed, noted that, by envisaging equal treatment for any comparison-shopping services on Google’s general results pages, the Commission’s decision was seeking to provide competitors with access to Google’s general results pages. This was presented as particularly important to competing comparison-shopping services and something that was not effectively replaceable, as it accounted for such a large proportion of traffic to their websites.97F[97] Moreover, the Court acknowledged that the Commission considered Google’s traffic to be indispensable to competing comparison-shopping services.98F[98] As a consequence, the analysis would have required an assessment of preferential treatment pursuant to the conditions set out in Bronne, as Google itself had requested, rather than relying on the case law applicable to abusive leveraging, as the Commission did in its decision.

But despite characterized the features of Google’s general results page as “akin to those of an essential facility,”99F[99] the Court upheld the Commission’s decision not to apply Bronner’s indispensability requirement. In doing so, it drew a line between express refusals to supply and exclusionary practices that do not lie “principally” in a refusal, as such.100F[100] Indeed, “the present case is not concerned merely with a unilateral refusal by Google to supply a service to competing undertakings that is necessary in order to compete on a neighboring market, which would be contrary to Article 102 TFEU and would therefore justify the application of the ‘essential facilities’ doctrine.”101F[101]

Therefore, the Court shared the Commission’s viewpoint that Google’s self-preferencing was a standalone form of leveraging abuse, involving positive acts of discrimination in the treatment of the search results for comparison-shopping services.102F[102]

The Court’s ruling has been generally welcomed for two reasons. By affirming self-preferencing as an independent abuse, the judgment provides legal support to the policy goal of imposing a neutrality regime over large digital platforms, which has informed all the regulatory interventions promoted in different jurisdictions. At the same time, the Court advances a clearer legal qualification of the conduct in question. Indeed, while the Commission’s approach appeared unprecedented—because it revolved around the notion of favoring as a specific form of leveraging—the Court opted for the more defined legal framework of discrimination. The outcome should help to restrain the scope of application for self-preferencing prohibitions in comparison to other traditional practices that, although belonging to the general category of leveraging and including elements of discrimination, reflect specific theories of harm and are assessed according to their respective legal tests.103F[103] By and large, the Court confirms that there is no well-established case law that would forbid any extension of a dominant position in adjacent markets, in contrast with the Commission’s stance.

Nonetheless, the ruling raises new doubts. Notably, the definition of the conduct that would be covered remains unclear. While adopting the general principle of equal treatment as a legal basis to prohibit self-preferencing may allow intrusions into platforms’ design choices,104F[104] the listed criteria appear to define a narrow framework, ultimately calling into question the broad application of self-preferencing as a standalone abuse.

The Court underscored the relevance of the “particular context” in which favoring occurred.105F[105] Namely, the emphasis was on the role played by search engines on the Internet, including their “universal vocation” and “open” business models. This is strengthened by analogies to net neutrality, the characteristics “akin to those of an essential facility,” and the “superdominant position” that made Google a “gateway” to the Internet. Furthermore, the peculiar features of search engines (notably, their openness) are also deemed relevant in assessing the “abnormality” of Google’s behavior—which, in the Court’s evaluation, is indeed at odds with the basic economic model of its search engine. The legal framework is completed with the detection of opportunistic behavior by Google, which changed its strategy once it entered the adjacent market of comparison-shopping services.

It is left far from clear whether Google Shopping is even sanctioning the favoring practice as such. Indeed, the Court describes the anticompetitive strategy in question as formed by a combination of two practices—namely the promotion of Google’s own services and the demotion of its rivals’ services. Therefore, the conduct is not necessarily abusive even if it consists “solely in the special display and positioning” of the platform’s own products and services.106F[106] The practice has instead been judged illegal because it included the relegation of competing services in Google’s general results pages by means of adjustment algorithms. That, in conjunction with Google’s promotion of its own results, there was a simultaneous demotion of results from competing comparison services is considered a “constituent element” of the conduct and moreover plays a “major role” in the exclusionary effect identified.107F[107]

In summary, rather than articulating a legal test for a new antitrust offense, the criteria pointed out in the judgment for considering the preferential treatment abusive appear extremely fact-sensitive: both Google-specific and search engine-specific. Therefore, it is difficult to see how, according to these criteria, a self-preferencing prohibition may be applied to different forms of preferential treatment, digital services, and business models.108F[108]

5.   Italian Competition Authority Amazon Logistics decision

A few weeks after the General Court’s ruling, the Italian Competition Authority (AGCM) handed down a decision that significantly departed from the legal framework elaborated in Google Shopping, thus confirming that the precise contours of self-preferencing abuses under Article 102 TFEU remained anything but clear.109F[109]

In late November 2021, the AGCM issued a mammoth fine against Amazon for granting preferential treatment to third-party sellers who use the company’s own logistics and delivery services (i.e., Fulfilment by Amazon, or FBA). Amazon was accused of having leveraged its dominance in the market for intermediation services on marketplaces to favor the adoption of its own FBA by sellers active on Amazon.it, as well as to strengthen its own dominant position. Under AGCM’s view, this strategy ultimately harmed both competing logistics operators, by putting them at a competitive disadvantage, and competing marketplaces, by creating incentives for sellers to single-home.

Indeed, although third-party sellers are free to manage the logistics associated with their operations on the platform themselves or outsource them to an independent operator (Merchant Fulfilment Network, or MFN), Amazon was deemed to be artificially pushing them to use its own logistics service, thus deterring them from multi-homing.110F[110] Notably, the Authority found that Amazon “tied” the use of FBA to access to a set of exclusive benefits essential for gaining visibility and increasing sales on the marketplace.111F[111]

Among those benefits, the most relevant is the Prime label, which allows sellers to participate in special events promoted by Amazon (e.g., Black Friday, Cyber Monday, Prime Day) and benefit from fast and free shipping. Furthermore, Prime increases the likelihood of sellers’ offers being selected as featured offers displayed in the Buy Box. This is of the utmost importance to sellers, as the Buy Box prominently displays just a single seller’s offer for a given product on Amazon’s marketplaces and generates the vast majority of all sales for that product.

Quoting from several of Amazon CEO Jeff Bezos’ letters to shareholders, the AGCM noted the company believes FBA is the “glue” that links Marketplace and Prime112F[112]: “Thanks to FBA, Marketplace and Prime are no longer two things … Their economics and customer experience are now happily and deeply intertwined.”113F[113] Furthermore, FBA is a “game changer” for sellers because it makes their items eligible for Prime benefits, which drives their sales.114F[114] Pursuant to its leveraging strategy, Amazon prevented third-party sellers from associating the Prime label with offers not managed by FBA. In addition, the AGCM noted that third-party sellers using FBA are not subject to the performance-evaluation metrics that Amazon applies in monitoring non-FBA sellers’ performance. Such metrics can ultimately lead to the suspension of non-compliant sellers’ accounts on Amazon.it. All these benefits derived from the use of FBA were considered, to various extents, to be “crucial” to success on the marketplace.115F[115]

It is worth noting that the European Commission has also launched an investigation of Amazon for facts identical to those already addressed in the Italian inquiry, with the relevant market defined as the European Economic Area, except for Italy.116F[116]

The alleged unequal treatment of non-FBA sellers has also been investigated by the Austrian Federal Competition Authority (BWB).117F[117] Although concerned about potential discrimination against sellers who organize their deliveries independently, the Authority conceded that  a better ranking could have also resulted from the better service offered under FBA, compared with the independent organization of deliveries. Hence, the BWB remained open to the possibility that the appearance of preferential treatment for FBA Marketplace sellers was objectively justified.118F[118] The Austrian Authority concluded that a comprehensive and transparent legal framework was the best way to counter problematic business practices and accepted Amazon’s modifications to its terms and conditions.119F[119]

The link between Amazon Marketplace and FBA was also scrutinized as part of the investigation conducted by the U.S. House Judiciary Committee’s Antitrust Subcommittee into the state of competition in digital markets. The subcommittee’s final report found that many third-party sellers have no choice but to purchase fulfillment services from Amazon to maintain a favorable search-result position.120F[120] The report characterized Amazon’s strategy as tying.121F[121]

For the sake of our analysis, the Italian Amazon decision is especially remarkable because of how it contrasts with Google Shopping. As already mentioned, with the exception of the Amsterdam Court of Appeal, it represents the only decision in which the term self-preferencing is used.122F[122] Self-preferencing is here defined as an unequal and unjustified preferential treatment granted by a dominant player to its own services in pursuing a leveraging strategy, hence falling outside the scope of competition on the merits.123F[123] Therefore, rather than reflecting the criteria set out by the General Court, the Italian decision is clearly inspired by the Commission’s approach in Google Shopping. Indeed, in line with the idea of describing self-preferencing as a new form of leveraging abuse, Amazon’s practice is characterized as a form of tying.124F[124]

This definition of self-preferencing is convenient for enforcers, in that it would allow them to bypass the legal standards otherwise required to prove unlawful tying. Indeed, tying requires a form of coercion, such that customers do not have the choice to obtain the tying product without the tied product. In the Amazon case, by contrast, there is neither a contractual obligation nor technical integration between marketplace services and logistics services. Business users are free to run the logistics by themselves or to outsource it to an independent operator without losing the ability to operate on the Amazon e-commerce platform.

Apart from the legal qualification of the conduct in question (which may be more properly characterized as bundling), finding an abuse in a tying case also requires proof of potential foreclosure effects against equally efficient rivals. Looking at the effects on logistics operators, according to the AGCM’s view, vertical integration between the marketplace and logistics constitutes Amazon’s main competitive advantage, which is unmatchable even by equally efficient rivals.125F[125] Indeed, FBA is an integrated logistics service designed to represent “a one-stop shop solution” for storage, shipping, and customer service within a “closed and complete ecosystem” in which Amazon plays multiple roles.126F[126] While Amazon recently started offering a multi-channel logistics service, few retailers have adopted it due to its high operating costs.127F[127] Moreover, part of the AGCM’s decision concerning complaints raised by Amazon’s major e-commerce rival eBay—which reported that a large portion of its market share had been absorbed by Amazon—ultimately recognized that Amazon’s superiority stemmed from its popularity with users and retailers, especially in the critical areas of trust, shipping, and returns.128F[128]

In short, the thing that has made the playing field uneven has been Amazon’s creation of a successful ecosystem, which provides the company with competitive advantages that cannot be replicated either by pure online marketplaces or pure logistics providers.129F[129] A prohibition on self-preferencing may therefore functionally reflect a bias against ecosystems, which require massive and uncertain investment to create, and which provide significant benefits to both business users and final customers.

In summary, the AGCM endorsed an expansive view of the scope of anticompetitive self-preferencing that was at odds with the legal qualifications and narrow criteria set out by the General Court in Google Shopping, and that lacked the context the General Court had laid out to assess the circumstances in which preferential treatment constitutes discriminatory abuse. Notably, an online marketplace does not share many relevant features with an Internet search engine. Indeed, Amazon’s business model is “a closed and complete ecosystem.”130F[130] Moreover, unlike in the Google Shopping case, Amazon is not accused of changing its conduct in response to its market position. The only elements of the criteria defined in Google Shopping that Amazon could be argued to meet are operating in a market with high barriers to entry and being a vertically integrated firm with a super/hyper dominance in the upstream market.131F[131]

Although the General Court’s ruling is mentioned a few times,132F[132] these appear to be last-minute references included merely to note that the Commission’s decision had been upheld by the General Court.133F[133] Since the Italian Amazon decision was delivered just a few weeks after the Google Shopping ruling, it is possible that the AGCM simply did not have time to adjust its line of reasoning to comport with the Court’s qualifications and criteria.

C.   Preferential access to non-public data

A broad interpretation of self-preferencing could find that it covers the preferential provision of data and information, which could similarly be prohibited as abusive. Following this line of reasoning, the European Commission sent a statement of objections to Amazon in November 2020 informing the company of the Commission’s preliminary view that its practice of systematically using non-public business data from independent retailers who sell on its online marketplace infringes antitrust rules, on grounds that Amazon uses that data to benefit its own retail business that directly competes with those retailers.134F[134]

More recently, the UK CMA has also opened an investigation into how Amazon collects and uses third-party seller data, including whether Amazon gains an unfair advantage in business decisions made by its retail arm.135F[135] Similar concerns were raised by staff to the U.S. House Judiciary Antitrust Subcommittee, whose final report argued that Amazon’s asymmetric access to and use of third-party seller data constitutes unfair treatment of those third-party sellers.136F[136] The ACCC likewise warned that Apple and Google both have the ability and incentive to use their positions as app-marketplace operators to monitor downstream competitors.137F[137] For instance, the ACCC found that Apple’s Developer Agreement allows the company to develop, acquire, license, market, promote, and distribute products and software that perform functions the same or similar to any of the products, software or technologies provided by app developers that use the App Store. By contrast, Apple requires that app developers follow obligations to avoid being copycats.

Similar allegations of unfair use of user data have been levied against Facebook by the European Commission and the U.K. CMA, which charge that the company uses data gathered from advertisers in order to compete with them in markets in which Facebook is active, such as classified ads.138F[138] Finally, one focus of the European Commission’s investigation of Apple’s App Store rule requiring developers to use Apple’s in-app purchase mechanism for the distribution of paid apps and/or paid digital content is the potential that competing developers may be disintermediated from important customer data, while Apple can obtain valuable data about the activities and offers of its competitors.139F[139]

These investigations have inspired the bans on so-called “sherlocking” (i.e., the use of business users’ data to compete against them) included both in the DMA140F[140] and the proposed American Innovation and Competition Online Act,141F[141] as well as calls for structural separation and line-of-business restrictions.142F[142]

Amazon has faced accusations that it takes advantage of its dual role and hybrid business model in serving both as a marketplace-service provider and a retailer on the same marketplace, in competition with independent sellers. The charge is that the company can leverage its access to non-public third-party sellers’ data—such as the number of units ordered and shipped, the revenues sellers earn on the marketplace, the number of visits to sellers’ offers, data related to shipping and to sellers’ past performance, and consumer product claims—to identify and replicate popular and profitable products from among the hundreds of millions of listings on its marketplace.

Notably, according to the European Commission’s preliminary findings, such granular and real-time business data feed into the algorithms of Amazon’s retail business, allowing them to calibrate retail offers and strategic business decisions to the detriment of the other marketplace sellers. Thus, it is argued that the appropriation and the use of third-party sellers’ data enables Amazon to avoid the normal risks of retail competition, such as those associated with investing in a new product or choosing a specific price level, and to leverage its dominance in the market for the provision of marketplace services in France and Germany (i.e., the biggest markets for Amazon in the EU).143F[143]

The U.S. House Antitrust Subcommittee similarly charged that Amazon is able to use marketplace data from third-party merchants to create competing private-label products or to source products directly from manufacturers in order to free ride off sellers’ efforts.144F[144] The impact assessment study supporting the DMA confirmed this suspicion, noting that the launch of Amazon Basics (i.e., the most successful private label brand on Amazon’s marketplace) has negatively impacted the sales on Amazon of third-party products in identified attractive product segments.145F[145]

Leveraging this information exclusively, without sharing it with third-party sellers, is considered a form of self-preferencing because Amazon is in position to use data from its marketplace to gain a competitive advantage in market research and to identify new business opportunities without incurring any financial risk.146F[146] Furthermore, by using information from its Amazon fulfilment program, Amazon can also determine where products offered by third-party merchants are being manufactured and by whom. Since Amazon Basics products are sold in large volumes, Amazon can approach the manufacturers of goods for third-party merchants, buy these items in larger quantities, and sell them for a lower price than the competition on its own platform.147F[147]

This line of reasoning aligns with the core concerns about self-preferencing, such as conflicts of interest and the competitive advantages that a platform’s dual role may yield. But to invoke antitrust in cases where a platform performing a dual role gains a competitive advantage would require demonstrating proof of competitive harm, which isn’t apparent in this case. Indeed, while the impact on innovation appears uncertain,148F[148] Amazon’s practice likely benefits consumers by permitting close price comparisons, increasing output, and forcing sellers to reduce their prices.149F[149] Such effects are even more relevant when it comes to sellers with market power, as the introduction of products and services in competition with third parties would reduce double marginalization.

Moreover, the relevance of non-public third-party merchants’ data in facilitating copying by Amazon is questionable. Indeed, as noted, Amazon’s public product reviews supply a great deal of information and any competitor can obtain an item for the purposes of reverse engineering.150F[150] Conversely, if the products in question are protected by intellectual-property rights, Amazon could be found guilty of infringement. Finally, it is unclear whether and how this form of self-preferencing would meet the legal qualification and criteria set out by the General Court in Google Shopping.

Nonetheless, the European Commission is currently evaluating the commitments offered by Amazon, which has proposed to refrain from using non-public data relating to, or derived from, the activities of independent sellers on its marketplace for its retail businesses that compete with those sellers.151F[151] The relevant data would cover both individual and aggregate data (e.g., sales terms, revenues, shipments, inventory-related information, consumer-visit data, or seller performance on the platform). Amazon commits not to use such data for the purposes of selling branded goods, as well as in its private-label products.

III. Imposing platform neutrality under antitrust law

Because preferential treatment may result from a wide range of practices, self-preferencing potentially covers different types of behavior that are subject to different legal standards and that may include exploitative elements.152F[152] Prohibitions on self-preferencing as per se anticompetitive would therefore grant antitrust enforcers significant leeway to bypass the legal standards ordinarily required to prove traditional anticompetitive harms. As a result, such prohibitions would provide antitrust authorities with a powerful tool to intervene in digital markets. This issue is particularly sensitive in Europe where the DMA entrusts the European Commission with the sole power to apply the new regulation but does not displace national competition law. Hence, national competition authorities will remain in charge of the enforcement of national and European antitrust rules.

Besides its potential as an enforcement shortcut, self-preferencing prohibitions may function to impose a neutrality regime on online gatekeepers. The aim would be to ensure a level playing field that currently appears uneven because of the bottleneck and intermediation power exerted by large online platforms. Such rules also could neutralize conflicts of interests raised by platforms’ dual-mode intermediation. The dual roles that some platforms perform fuel the never-ending debate over vertical integration and the related concern that, by giving preferential treatment to its own products and services, an integrated provider may leverage its dominance from one market to related markets. Indeed, the circumstances that may give rise to conflicts of interests and the circumstances that can give rise to leveraging strategies can be similar.153F[153] From this perspective, self-preferencing is a byproduct of the emergence of ecosystems. By integrating complementary products and services, a platform that controls and operates at all levels of the value chain may have an incentive to favor its own offers.154F[154]

But as antitrust authorities generally recognize, self-preferencing conduct is “often benign.”155F[155] Furthermore, since the value that the ecosystem generates depends on the activities of independent complementors, that value is not completely under the control of the platform owner.156F[156] Firms operating on the platform and competing with the platform owner may be disadvantaged by a variety of legal, technological, and informational measures implicated by self-preferencing, but there also may be legitimate justifications for such conduct that would need to be carefully considered in each instance.157F[157] Platforms implement different business models and are driven by different incentives, which in turn affects their strategies.

Against this backdrop, an outright ban on self-preferencing could undermine the very existence of ecosystems by challenging their design and monetization strategies.158F[158] Given that preferential treatment can take many different forms and have very different effects, the different business models adopted by platforms should be subject to case-by-case and effects-based assessment.159F[159] This is also consistent with the industrial-organization literature, which has found mixed evidence on the impact of duality on welfare, thereby supporting the insight that absolute neutrality is not desirable and interventions should be product- and platform-specific.160F[160]

Finally, and more importantly, antitrust law does not impose a general duty to ensure a level playing field by sharing competitive advantages with rivals. Indeed, a competitive advantage cannot be automatically equated with anticompetitive effects.161F[161] Within this framework, the relevance of the general principle of equal treatment that has been invoked by the General Court in Google Shopping to frame self-preferencing as a discriminatory abuse should be regarded with significant skepticism.

This is even more evident in the aftermath of the recent CJEU ruling in Servizio Elettrico Nazionale, which confirmed that the effects-based approach to the assessment of abusive practices remains core to European competition law.162F[162] Notably, the CJEU definitively stated that competition law is not intended to protect the competitive structure of the market, but rather to protect consumer welfare, which represents the goal of antitrust intervention.163F[163]

Accordingly, as illustrated in Intel, not every exclusionary effect is necessarily detrimental to competition.164F[164] Competition on the merits may, by definition, lead some competitors— those that are less efficient and thus less attractive to consumers from the standpoint of price, choice, quality or innovation—to become marginalized or to depart from the market.165F[165] In particular, given that exclusionary effects do not necessarily undermine competition, a distinction must be drawn between a risk of foreclosure and a risk of anticompetitive foreclosure, since only the latter may be penalized under Article 102 TFEU.166F[166] If any conduct having an exclusionary effect were automatically classified as anticompetitive, such rules would become a means to protect less capable, less efficient undertakings and would in no way protect the more meritorious undertakings that stimulate a market’s competitiveness.167F[167]

By and large, these well-settled principles do not support the claim that antitrust rules are designed to ensure platform neutrality. As acknowledged by the General Court in Google Shopping, self-preferencing cannot be considered prima facie unlawful and therefore outside the scope of competition on the merits. Its assessment instead requires the demonstration of anticompetitive effects, taking account of the circumstances of the case and the relevant legal and economic context.168F[168] Toward this aim, a dominant platform remains free to demonstrate that its practice, albeit producing an exclusionary effect, is objectively justified on the basis of all the circumstances of the case, or that the effects are counterbalanced or outweighed by efficiency advantages that also benefit consumers, such as through lower prices, better quality, or a wider choice of new or improved goods and services.169F[169]

In order to assess the anticompetitive nature of a practice, it is necessary to examine whether the means used come within the scope of normal competition.170F[170] Anticompetitive effects do not amount to a mere competitive disadvantage, but require an impact on efficient firms’ ability and incentive to compete.171F[171] Servizio Elettrico Nazionale also clarified the meaning of competition on the merits, considering outside its scope conduct that is not based on obvious economic reasons or objective reasons.172F[172] It is therefore necessary to assess the ability of equally efficient competitors to imitate the conduct of the dominant undertaking. Exclusionary conduct by a dominant firm that can be replicated by equally efficient competitors does not represent the sort of conduct that would lead to anticompetitive foreclosure; it therefore comes within the scope of competition on the merits.173F[173] In order to assess whether a given practice comes within the scope of competition on the merits, the test of whether it would be impossible for an equally efficient rival to imitate the dominant firm’s conduct arises from the case law on both price-related (e.g., TeliaSonera and Post Danmark II) and non-price-related conduct (e.g., Bronner).174F[174]

Moving away from the goal of ensuring a level playing field, recent European case law on self-preferencing centers instead on the competitive advantages that platforms enjoy due to their dual role. A competitive advantage, however, need not amount to anticompetitive foreclosure. Foreclosure not only needs to be proved, but also assessed against potential advantages for consumers, in terms of price, quality, and choice of new goods and services. It is even less clear how NCAs’ expansive approach toward self-preferencing as a standalone abuse fit within this legal framework. Both the AdlC’s decision in Google AdTech and the AGCM’s decision in Amazon Logistics appear inconsistent both with the legal qualification and criteria defined by the General Court, and with the CJEU principles recalled in Servizio Elettrico Nazionale. Similar doubts are raised by the investigations into the preferential access to and use of non-public business data. Moreover, in these cases, the benefits for consumers appear particularly significant as, for instance in Amazon Marketplace, the conduct under investigation led to an immediate output increase and price reduction: in short, more competition.

IV. Conclusion

In her opinion Post Danmark II opinion, Advocate General Juliane Kokott warned that, in enforcing antitrust rules, the CJEU “should not allow itself to be influenced so much by current thinking (‘Zeitgeist’) or ephemeral trends, but should have regard rather to the legal foundations on which the prohibition of abuse of a dominant position rests in EU law.”175F[175] Accordingly, this paper has addressed the prevailing zeitgeist in digital markets, analyzing the markets’ proclaimed peculiar features and the potential scope of application to evaluate whether it should be considered a novel standalone antitrust prohibition.

Indeed, common-carrier antitrust is on the rise. Following the 2017 decision in Google Shopping, the European Commission and some NCAs have advanced a new theory of harm pointing to the competitive disadvantage suffered by rivals. This therefore constitutes a de facto ban on any preferential treatment granted by dominant platforms to their own products and services. Such a strong stance in antitrust enforcement relies on the premise that the special responsibility that an incumbent dominant player bears implies that they must ensure a level playing field.

It remains the case, however, that European case law questions both the goal of relying on antitrust rules to impose a neutrality regime on dominant platforms and the very existence of self-preferencing as an autonomous abuse. Competition law does not impose a general duty to share competition advantages with rivals and does not protect the structure of the market; hence, not every exclusionary effect automatically undermines competition. Self-preferencing is not, in itself, unlawful and platform neutrality as such is outside the scope of competition law.

In contrast with the European Commission and some NCAs, the European General Court in Google Shopping not only framed self-preferencing as a discriminatory abuse but also highlighted some criteria to assess its potential exclusionary effects and considered it outside the scope of competition on the merits. Such criteria are particularly fact-sensitive, and therefore at odds with its wide application as a standalone abuse.

In summary, against the sirens of a fascinating, popular, and convenient new label, the limiting principles of competition law remind us that it cannot be weaponized to ensure a specific market outcome. Therefore, in the aftermath of the Google Shopping ruling, doubts about the characteristics and boundaries of self-preferencing remain on the table, and we still do not have a legal test that distinguishes such purported new antitrust offenses from other practices aimed at pursuing leveraging strategies and already addressed by antitrust rules.

[1] Jacques Cre?mer, Yves-Alexandre de Montjoye, and Heike Schweitzer, Competition Policy for the Digital Era, European Commission (2019) 7, available at https://ec.europa.eu/competition/publications/reports/kd0419345enn.pdf; Unlocking Digital Competition, UK Digital Competition Expert Panel (2019) 58, available at https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/785547/unlocking_digital_competition_furman_review_web.pdf.

[2] Elizabeth Warren, Here’s How We Can Break up Big Tech, Medium (2019) available at https://medium.com/@teamwarren/heres-how-we-can-break-up-big-tech-9ad9e0da324c.

[3] Margrethe Vestager, Statement Before the U.S. House of Representatives, Subcommittee on Antitrust, Commercial, and Administrative Law (2020) 2, available at https://www.euractiv.com/wp-content/uploads/sites/2/2020/07/Statement-EVP-Vestager-House-SubCommittee-30-July.pdf. See also id., Technology with Purpose (2020), https://ec.europa.eu/commission/commissioners/2019-2024/vestager/announcements/technology-purpose_en.

[4] Thomas Eisenmann, Geoffrey Parker, and Marshall Van Alstyne, Platform Envelopment, 32 Strateg. Manag. J. 1270 (2011).

[5] Regulation (EU) on Contestable and Fair Markets in the Digital Sector (Digital Markets Act), Article 6(1), (3), (5), (7), and (12), https://www.europarl.europa.eu/doceo/document/TA-9-2022-0270_EN.html.

[6] Impact Assessment – A New Pro-Competition Regime for Digital Markets, U.K. Government (2021) para. 21, https://www.gov.uk/government/consultations/a-new-pro-competition-regime-for-digital-markets.

[7] GWB Digitalization Act (Jan. 18, 2021), Section 19a, https://www.bundesrat.de/SharedDocs/beratungsvorgaenge/2021/0001-0100/0038-21.html.

[8] S.2992 – American Innovation and Choice Online Act, 117th Congress (2021-2022) Section 3(a)(1), available at https://www.congress.gov/117/bills/s2992/BILLS-117s2992rs.pdf.

[9] Richard J. Gilbert, The American Innovation and Choice Online Act: Lessons from the 1950 Celler-Kevaufer Amendment, Concurrentialiste (2022), https://leconcurrentialiste.com/gilbert-innovation-choice-act/?mc_cid=8bdf17d95a&mc_eid=34922555f0; Randal Picker, The House’s Recent Spate of Antitrust Bills Would Change Big Tech as We Know It, Promarket (2021), https://promarket.org/2021/06/29/house-antitrust-bills-big-tech-apple-preinstallation.

[10] Investigation of Competition in Digital Markets’, Majority Staff Reports and Recommendations, U.S. House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law (2020), 380, https://judiciary.house.gov/uploadedfiles/competition_in_digital_markets.pdf?utm_campaign=4493-519. See also Elettra Bietti, Self-Regulating Platforms and Antitrust Justice, Tex. Law Rev. (forthcoming); Nikolas Guggenberg, Essential Platforms, 24 STLR 237 (2021); Rory Van Loo, In Defense of Breakups: Administering a “Radical” Remedy, 105 Cornell L. Rev. 1955 (2020); Lina M. Khan, The Separation of Platforms and Commerce, 119 Columbia Law Rev. 973 (2019); K. Sabeel Rahman, Regulating Informational Infrastructure Internet Platforms as the New Public Utilities, 2 GLTR 234 (2018).

[11] Case AT.39740, Google Search (Shopping), European Commission (Jun. 27, 2017).

[12] Case T-612/17, Google LLC and Alphabet Inc. v. European Commission, European General Court (Nov. 10, 2021), EU:T:2021:763.

[13] See, e.g., Decision No. 29925, FBA Amazon, Autorità Garante della Concorrenza e del Mercato (Nov. 30, 2021), https://www.agcm.it/dettaglio?db=41256297003874BD&uid=801201274D8FDD40C12587AA0056B614&view=&title=A528-FBA%20AMAZON&fs=Abuso%20di%20posizione%20dominante. Previously, see Decision 21-D-11, Google, Autorité de la Concurrence (Jun. 7 2021) , https://www.autoritedelaconcurrence.fr/en/decision/regarding-practices-implemented-online-advertising-sector.

[14] Giuseppe Colangelo, The Digital Markets Act and EU Antitrust Enforcement: Double & Triple jeopardy, ICLE White Paper (2022), https://laweconcenter.org/resource/the-digital-markets-act-and-eu-antitrust-enforcement-double-triple-jeopardy.

[15] Pablo Iba?n?ez Colomo, Self-Preferencing: Yet Another Epithet in Need of Limiting Principles, 43 World Competition 417 (2020).

[16] Nicolas Petit, A Theory of Antitrust Limits, 28 Geo. Mason L. Rev. 1399 (2021).

[17] Herbert Hovenkamp, Selling Antitrust, Hastings L.J. (forthcoming).

[18] See Opinion of Advocate General Wahl, 20 December 2017, Case C?525/16, MEO — Serviços de Comunicações e Multimédia SA v. Autoridade da Concorrência, EU:C:2017:1020, paras. 76-77, arguing that a distinction must be drawn between undertakings that are vertically integrated (and have an interest in displacing competitors on the downstream market) and those that have no such interest. In the case of vertically integrated undertakings, the application by a dominant undertaking of discriminatory prices on the downstream or upstream market is, in reality, similar to first-degree price discrimination, which indirectly affects the undertaking’s competitors. See also Inge Graef, Differentiated Treatment in Platform-to-Business Relations: EU Competition Law and Economic Dependence, 38 YEL 448, 452-453 (2019), distinguishing among pure self-preferencing (whereby a vertically integrated platform treats its affiliated services more favorably than non-affiliated services), pure secondary line differentiation (whereby a non-vertically integrated platform engages in differentiated treatment among unaffiliated services in a market in which it is not active itself), and a hybrid category in which either a vertically integrated or a non-vertically integrated platform engages in differentiated treatment among unaffiliated services in an effort to favor its own business.

[19] Nicolas Petit, Theories of Self-Preferencing Under Article 102 TFEU: A Reply to Bo Vesterdorf, 1(3) CLPD 4 (2015).

[20] Case C-413/14 P, Intel v. Commission, Court of Justice of the European Union (Sept. 6, 2017), EU:C:2017:632.

[21] Id., C?525/16, MEO v. Autoridade da Concorrência (Apr. 19, 2018),  EU:C:2018:270. See also Wahl, supra note 18, para. 61.

[22] Guidance on the Commission’s Enforcement Priorities in Applying Article 82 of the EC Treaty to Abusive Exclusionary Conduct by Dominant Undertakings, European Commission (2009) OJ C 45/7, paras. 47-62.

[23] See Autorité de la Concurrence, supra note 13, para. 410, binding limits on interoperability with third-party services servers cannot be considered competition on the merits. See also Herbert Hovenkamp, Antitrust and the Design of Production, 103 Cornell L. Rev. 1155 (2018); Pablo Iba?n?ez Colomo, Product Design and Business Models in EU Antitrust Law, SSRN (2021), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3925396.

[24] Case T-201/04, Microsoft v. Commission, European General Court (Sept. 17, 2007), para. 1036, EU:T:2007:289.

[25] Case AT.40099, Google Android, European Commission, (Jul. 18, 2018), confirmed by Case T-604/18, Google v. Commission, European General Court (Sept. 14, 2022) EU:T:2022:541.

[26] Dirk Auer, Appropriability and the European Commission’s Android Investigation, 23 CJEL 647 (2017).

[27] Christopher S. Yoo, Open Source, Modular Platforms, and the Challenge of Fragmentation, 1 Criterion Journal on Innovation 619 (2016).

[28] UK Government, supra note 6, para. 21.

[29] Joined Cases C-241/91 P and 242/91 P, RTE and ITP v. Commission, Court of Justice of the European Union (Apr. 6, 1995), EU:C:1995:98.

[30] Id., 29, Case C-418/01, IMS Health GmbH & Co. OHG v. NDC Health GmbH & Co. GH (Apr. 29, 2004), EU:C:2004:257.

[31] European General Court, supra note 24.

[32] Case C-7/97, Oscar Bronner GmbH & Co. KG v. Mediaprint Zeitungs- und Zeitschriftenverlag GmbH & Co. KG, Mediaprint Zeitungsvertriebsgesellschaft mbH & Co. KG and Mediaprint Anzeigengesellschaft mbH & Co. KG, Court of Justice of the European Union (Nov. 26, 1998), EU:C:1998:569.

[33] Id., Case C-165/19 P, Slovak Telekom a.s. v. Commission (Mar. 25, 2021) para. 50, EU:C:2021:239.

[34] Ibid., para. 57. In a similar vein, see Case T?814/17, Lietuvos gele?inkeliai AB v. Commission, European General Court (Nov. 18, 2020), para. 92, EU:T:2020:545.

[35] European Commission, supra note 22, para. 80.

[36] Ibid., para. 82; and Case COMP/38.784, Wanadoo Espan?a v. Telefo?nica, European Commission (Jul 4, 2007). This is likely to occur in two cases: where regulation compatible with EU law already imposes an obligation to supply on the dominant undertaking and it is clear, from the considerations underlying such regulation, that the necessary balancing of incentives has already been made by the public authority when imposing such obligation; or where the upstream market position of the dominant firm has been developed under the protection of special or exclusive rights or has been financed by state resources.

[37] Case C-280/08 P, Deutsche Telekom AG v. European Commission (Deutsche Telekom I), Court of Justice of the European Union (Oct. 14, 2010), EU:C:2010:603.

[38] Id., Case C-52/09, Konkurrensverket v. TeliaSonera Sverige AB (Feb. 17, 2011), EU:C:2011:83.

[39] Id., Case C?295/12 P, Telefónica SA and Telefónica de España SAU v. European Commission (Jul. 10, 2014), EU:C:2014:2062.

[40] Id., supra note 33.

[41] Case C/13/528337, VBO Makelaar v. Funda, Gerechtshof Amsterdam (May 16, 2020), para. 3.12.3.

[42] Autorità Garante della Concorrenza e del Mercato, supra note 13, paras. 236, 393, 436, 504, 708, 710, 716, and 901.

[43] European Commission, supra note 11.

[44] Streetmap.EU Ltd. v. Google and Others, [2016] EWHC 253 (ch).

[45] Ibid., paras. 51-54.

[46] Ibid., paras. 84 and 147.

[47] Ibid., para. 84.

[48] Ibid., para. 149.

[49] Ibid., para. 139.

[50] Ibid., para. 161.

[51] European Commission, supra note 11, para. 344.

[52] Ibid., para. 649.

[53] Ibid.

[54] Case C-333/94, Tetra Pak International SA v. Commission, Court of Justice of the European Union (Nov. 14, 1996), EU:C:1996:436.

[55] Case T-288/97, Irish Sugar plc v Commission, European General Court (Oct. 7, 1999), EU:T:1999:246.

[56] Id., supra note 24.

[57] Case C-311/84, Centre Belge D’Etudes de Marché – Télémarketing (CBEM) v. SA Compagnie Luxembourgeoise de Télédiffusion (CLT) and Information Publicité Benelux (IPB), Court of Justice of the European Union (Oct. 3, 1985), EU:C:1985:394.

[58] European Commission, supra note 11, para. 334.

[59] Ibid., para. 645.

[60] Ibid., para. 651.

[61] See, e.g., Jay Pil Choi and Doh-Shin Jeon, A Leverage Theory of Tying in Two-Sided Markets with Nonnegative Price Constraints, 13 Am Econ J Microecon 283 (2021); Edward Iacobucci and Francesco Ducci, The Google Search Case in Europe: Tying and the Single Monopoly Profit Theorem in Two?Sided Markets, 47 Eur. J. Law Econ. 15 (2019); Eduardo Aguilera Valdivia, The Scope of the ‘Special Responsibility’ upon Vertically Integrated Dominant Firms after the Google Shopping Case: Is There a Duty to Treat Rivals Equally and Refrain from Favouring Own Related Business?, 41 World Competition 43 (2018);  Pinar Akman, The Theory of Abuse in Google Search: A Positive and Normative Assessment under EU Competition Law, 2 J. Tech. L. & Pol’y 301 (2017); Ioannis Kokkoris, The Google Case in the EU: Is There a Case?, 62 Antitrust Bull. 313 (2017); John Temple Lang, Comparing Microsoft and Google: The Concept of Exclusionary Abuse, 39 World Competition 5 (2016); Renato Nazzini, Unequal Treatment by Online Platforms: A Structured Approach to the Abuse Test in Google, SSRN (2016), https://papers.ssrn.com/sol3/papers.cfm?abstract_id=2815081; Bo Vesterdorf, Theories of Self-Preferencing and Duty to Deal – Two Sides of the Same Coin?, 1(1) CLPD 4 (2015); Petit, supra note 19.

[62] Cre?mer, de Montjoye, and Schweitzer, supra note 1.

[63] Gerechtshof Amsterdam, supra note 41.

[64] Ibid., para. 3.12.1.

[65] Autorité de la Concurrence, supra note 13.

[66] Digital Advertising Services Inquiry Final Report, Australian Competition and Consumer Commission (2021), available at https://www.accc.gov.au/system/files/Digital%20advertising%20services%20inquiry%20-%20final%20report.pdf.

[67] Autorité de la Concurrence, supra note 13, paras. 369 and 410.

[68] Ibid., paras. 366 and 369. Since Google did not hold a dominant position in the market for SSPs, the reference to Tetra Pak has also been used to argue that, under specific circumstances, behavior implemented in a non-dominated market that has effects on the dominated market may be considered abusive (see para. 367).

[69] CJEU, supra note 33.

[70] Decision 21-D-07, Apple, Autorité de la Concurrence, (Mar. 17, 2021) https://www.autoritedelaconcurrence.fr/en/decision/regarding-request-interim-measures-submitted-associations-interactive-advertising-bureau.

[71] Ibid., para. 163.

[72] Bundeskartellamt Reviews Apple’s Tracking Rules for Third-Party Apps (press release), Bundeskartellamt (2022) https://www.bundeskartellamt.de/SharedDocs/Meldung/EN/Pressemitteilungen/2022/14_06_2022_Apple.html.

[73] Mobile Ecosystems: Market Study Final Report, U.K. Competition and Markets Authority (2022), Chapter 6 and Appendix J, https://www.gov.uk/cma-cases/mobile-ecosystems-market-study.

[74] European General Court, supra note 12.

[75] Ibid., para. 155.

[76] More recently, see also Case 50972, Google Privacy Sandbox, U.K. Competition and Markets Authority (Feb. 11, 2022), https://www.gov.uk/cma-cases/investigation-into-googles-privacy-sandbox-browser-changes, which considered self-preferencing as a traditional discrimination abuse. In particular, the competitive risks the CMA highlighted involve Google’s self-preferencing its own ad inventory and ad-tech services by transferring key functionalities to Chrome. The Privacy Sandbox Project would offer Google the ability to affect digital-advertising-market outcomes through Chrome in a way that cannot be scrutinized by third parties. It could lead to conflicts of interests because Google operates as publisher and ad-tech provider simultaneously.

[77] General Court, supra note 12, para. 160.

[78] Ibid., para. 163.

[79] Case C-242/95, GT-Link A/S v. De Danske Statsbaner (DSB), Court of Justice of the European Union (Jul. 17, 1997), EU:C:1997:376.

[80] Id., Case C-82/01 P, Ae?roports de Paris v. Commission (Oct. 24, 2002), EU:C:2002:617.

[81] Id., supra note 21.

[82] See Lena Hornkohl, Article 102 TFEU, Equal Treatment and Discrimination after Google Shopping, 13 J. Eur. Compet. Law Pract. 99 (2022), mentioning Post Danmark I as an example of primary-line exclusionary discrimination in the predatory-pricing context and TeliaSonera (supra note 38) and Slovak Telekom (supra note 33) as examples of secondary-line exclusionary discrimination in the margin-squeeze context.

[83] General Court, supra note 12, paras. 166 and 175.

[84] Ibid., paras. 169-174.

[85] Ibid., paras. 176-177.

[86] Ibid.

[87] Ibid., para. 178.

[88] Regulation (EU) 2015/2120 laying down measures concerning open Internet access and amending Directive 2002/22/EC on universal service and users’ rights relating to electronic communications networks and services, and Regulation (EU) No 531/2012 on roaming on public mobile-communications networks within the European Union, (2015) OJ L 310/1.

[89] General Court, supra note 12, para. 180. Comparisons to net neutrality have also been made by the U.S. House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law, supra note 10, 382-383, recommending that Congress consider establishing nondiscrimination rules.

[90] General Court, supra note 12, paras. 180, 182 and 183.

[91] Ibid., paras. 178, 182, 183, and 237.

[92] Ibid., paras. 176 and 179.

[93] Ibid..

[94] Ibid., paras. 176 and 179.

[95] Ibid., para. 181.

[96] Ibid., paras. 182-184.

[97] Ibid., paras. 219-222.

[98] Ibid., paras. 227.

[99] Ibid., para. 224.

[100] Ibid., paras. 232 and 233.

[101] Ibid., para. 238.

[102] Ibid., para. 240.

[103] See Christian Ahlborn, Gerwin Van Gerven, and William Leslie, Bronner Revisited: Google Shopping and the Resurrection of Discrimination Under Article 102 TFEU, 13 J. Eur. Compet. Law Pract. 87 (2022); Friso Bostoen, The General Court’s Google Shopping Judgement Finetuning the Legal Qualification and Tests for Platform Abuse, 13 J. Eur. Compet. Law Pract. 75 (2022), and Hornkohl, supra note 82, arguing that the ruling has resurrected discriminatory abuses as potentially one of the most important tools for regulating the platform economy.

[104] See Elias Deutscher, Google Shopping and the Quest for a Legal Test for Self-preferencing Under Article 102 TFEU, 6 European Papers 1345, 1348 (2021), arguing that the judgment did not address the fundamental question of how far Article 102 TFEU can interfere with the design choices of dominant firms or prohibit them from granting favorable treatment to their own products or services.

[105] General Court, supra note 12, para. 196.

[106] Ibid., para. 187.

[107] Ibid., para. 245.

[108] See Bostoen, supra note 103, arguing that, at best, this form of favoritism may be applicable in other cases of prominent display and positioning in searches (e.g., the conduct of Amazon favoring its own retail offers); and Ahlborn, Van Gerven, and Leslie, supra note 103, noting that, in contrast to price discrimination, discriminatory access to an input can encompass a range of factors that are difficult to disentangle (e.g., greater interoperability or preferential access to core services).

[109] Autorità Garante della Concorrenza e del Mercato, supra note 13.

[110] Ibid., para. 702, describing Amazon’s conduct as an “abusive pressure.”

[111] Id., Italian Competition Authority: Amazon Fined over € 1,128 Billion for Abusing Its Dominant Position (2021), https://en.agcm.it/en/media/press-releases/2021/12/A528.

[112] Autorità Garante della Concorrenza e del Mercato, supra note 13, para. 254.

[113] Ibid..

[114] Ibid., paras. 253 and 737.

[115] Ibid., para. 698.

[116] See C(2020) 7692 Final, European Commission (Nov. 10, 2020). See also Margrethe Vestager, Statement by Executive Vice-President Vestager on Statement of Objections to Amazon for the Use of Non-Public Independent Seller Data and Second Investigation into Its E-Commerce Business Practices (2020), https://ec.europa.eu/commission/presscorner/detail/en/STATEMENT_20_2082. See also CMA Investigates Amazon over Suspected Anti-Competitive Practices, U.K. Competition and Markets Authority (2022), https://www.gov.uk/government/news/cma-investigates-amazon-over-suspected-anti-competitive-practices, opening an investigation into how Amazon sets criteria for allocation of suppliers to be the preferred in the Buy Box and how Amazon sets the eligibility criteria for selling under the Prime label. The European Commission is currently evaluating the commitments offered by Amazon (Commission Seeks Feedback on Commitments Offered by Amazon Concerning Marketplace Seller Data and Access to Buy Box and Prime, European Commission (2022) https://ec.europa.eu/commission/presscorner/detail/en/ip_22_4522). Amazon has committed to apply equal treatment to all sellers when selecting the winner of the Buy Box and to display a second competing offer to the Buy Box winner if there is a second offer that is sufficiently differentiated on price and/or delivery. Both offers will display the same descriptive information and provide for the same purchasing experience. Moreover, regarding Prime, Amazon has committed to set non-discriminatory conditions and qualifying criteria for marketplace sellers and offers, to allow Prime sellers to freely choose any carrier for their logistics and delivery services, and not to use any information obtained through Prime about the terms and performance of third-party carriers for its own logistics services.

[117] Bundeswettbewerbsbehörde (Jul. 17, 2019), available at https://www.bwb.gv.at/fileadmin/user_upload/Fallbericht_20190911_en.pdf.

[118] Ibid., para. 81.

[119] Ibid., para. 87.

[120] U.S. House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law, supra note 10, 287-291.

[121] Ibid., 287-288.

[122] Autorità Garante della Concorrenza e del Mercato, supra note 13, paras. 236, 504, 710, 716, and 901.

[123] Ibid., paras. 236, 504, 506, 716, 723, and 810.

[124] Ibid., paras. 505, 713, 726, 760, 826, 852, 857, and 874. See also Autorità Garante della Concorrenza e del Mercato, supra note 111.

[125] Id., supra note 13, para. 807.

[126] Ibid., paras. 127, 136, 188, 614, and 804.

[127] Ibid., paras. 834-835.

[128] Ibid., paras. 658-666, 679, and 682.

[129] Ibid., paras. 805-806.

[130] Ibid., para. 136.

[131] Ibid., paras. 506, 609, 610, 680, and 716.

[132] Ibid., paras. 610, 710, 716, and 723.

[133] Ibid., para. 710.

[134] Case AT.40462, Amazon Marketplace, European Commission (Nov. 10, 2020). See also Commission Sends Statement of Objections to Amazon for the Use of Non-Public Independent Seller Data and Opens Second Investigation into Its E-Commerce Business Practices, European Commission, (2020) https://ec.europa.eu/commission/presscorner/detail/en/ip_20_2077.

[135] U.K. Competition and Markets Authority, supra note 116.

[136] U.S. House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law, supra note 10, 275.

[137] App Marketplaces: Interim Report, Australian Competition and Consumer Commission, (2021), 134, available at https://www.accc.gov.au/system/files/Digital%20platform%20services%20inquiry%20-%20March%202021%20interim%20report.pdf.

[138] Case AT.40684, Facebook leveraging, European Commission (Jun. 4, 2021), https://ec.europa.eu/competition/elojade/isef/case_details.cfm?proc_code=1_AT_40684; CMA Investigates Facebook’s Use of Ad Data, U.K. Competition and Markets Authority (2021), https://www.gov.uk/government/news/cma-investigates-facebook-s-use-of-ad-data.

[139] Case AT.40716, Apple – App Store Practices, European Commission (Jun. 16, 2020).

[140] DMA, supra note 5, Article 6(1).

[141] AICOA, supra note 8, Section 3.

[142] See, e.g., U.S. House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law, supra note 10, 380. See also Simon P. Anderson and O?zlem Bedre-Defolie, Hybrid Platform Model, CEPR Discussion Paper No. 16243 (2021), available at https://cepr.org/active/publications/discussion_papers/dp.php?dpno=16243, arguing that the hybrid business model leads to higher platform fees for third-party sellers, less variety on the platform, and lower consumer welfare, compared to when the platform is a pure marketplace. On a different note, see Herbert Hovenkamp, Antitrust and Platform Monopoly, 130 Yale Law J. 1952 (2021), considering structural separation as the worst solution for the problems raised by Amazon’s strategy. See also Andrei Hagiu, Tat-How Teh, and Julian Wright, Should Platforms Be Allowed to Sell on Their Own Marketplaces?, 53 Rand J Econ 297 (2022), arguing that a structural remedy, such as an outright ban on the dual mode, would be detrimental to consumer surplus or total welfare, since the presence of the intermediary’s products constrains the pricing of the third-party sellers on its marketplace. The authors consider preferable policy interventions that target specific behaviors by the platform, such as a ban on product imitation and on self-preferencing.

[143] European Commission, supra note 134.

[144] U.S. House Judiciary Subcommittee on Antitrust, Commercial, and Administrative Law, supra note 10, 275.

[145] Digital Markets Act: Impact Assessment Support Study (Annexes), European Commission (2020), 301-308, https://op.europa.eu/en/publication-detail/-/publication/2a69fd2a-3e8a-11eb-b27b-01aa75ed71a1/language-en/format-PDF/source-search.

[146] Ibid., 304.

[147] Ibid..

[148] See Hagiu, Teh, and Wright, supra note 142, arguing that a ban on product imitation by a platform restores sellers’ incentive to innovate; Erik Madsen and Nikhil Vellodi, Insider Imitation, SSRN (2022) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3832712, finding that a ban on a platform’s use of marketplace data can either stifle or stimulate innovation, depending on the nature of innovation. Namely, it stimulates innovation only for experimental product categories with significant upside demand potential. On the impact of data usage on consumer welfare, because of the tradeoff between static benefits from lower prices and dynamic costs from lower sellers’ incentives to investment, see Federico Etro, Product Selection in Online Marketplaces, 30 J Econ Manag Strategy 614 (2021).

[149] See Herbert Hovenkamp, The Looming Crisis in Antitrust Economics, 101 B.U. L. 489, 543 (2021), finding no evidence to suggest that the practice is so prone to abuse or so likely to harm consumers in other ways that it should be categorically condemned: “Rather, it is an act of partial vertical integration similar to other practices that the antitrust laws have confronted and allowed in the past. One close analogy is dual distribution, which occurs when a firm sells through both independent franchisees and its wholly owned stores. Such practices nearly always increase output, benefitting consumers and typically even independent competing firms.” On the different impact of Amazon’s practice on consumer welfare and third-party sellers’ welfare, see also Feng Zhu and Qihong Liu, Competing with Complementors: An Empirical Look at Amazon.com, 39 Strateg. Manag. J. 2618 (2018), finding that Amazon tends to enter into high-quality, popular products sold by third-party merchants and that such entry tends to lower prices and lead to the exit of third-party sellers; and Nan Chen and Hsin-Tien Tsai, Steering via Algorithmic Recommendations, (2021) https://www.tse-fr.eu/sites/default/files/TSE/documents/sem2021/tsai.pdf, arguing that Amazon tends to recommend products sold by Amazon Retail to consumers over products sold by third-party retailers, and that this steering is inconsistent with Amazon promoting consumer welfare.

[150] Hovenkamp, supra note 142, 2015-2016.

[151] European Commission, supra note 116.

[152] See Graef, supra note 18, distinguishing Google Shopping and Amazon Marketplace as pure self-preferencing cases (i.e., primary-line injuries whose key objective is to exclude rivals from the market) from the Italian Amazon Logistics case, which belongs instead to a hybrid category that includes a mix of exploitative and exclusionary elements.

[153] Australian Competition and Consumer Commission, supra note 66, 92.

[154] Colomo, supra note 15, 418.

[155] Updating Competition and Consumer Law for Digital Platform Services, Australian Competition and Consumer Commission (2022), 85, https://www.accc.gov.au/media-release/feedback-sought-on-potential-new-rules-for-large-digital-platforms.

[156] Tobias Kretschmer, Aija Leiponen, Melissa Schilling, and Gurneeta Vasudeva, Platform Ecosystems as Meta?Organizations: Implications for Platform Strategies, 43 Strateg. Manag. J. 405 (2022).

[157] Kevin J. Boudreau and Andrei Hagiu, Platforms Rules: Multi-Sided Platforms as Regulators, in (Annabelle Gawer, ed.) Platforms, Markets and Innovation, Cheltenham, Edward Elgar Publishing (2009), 163; David Evans, Governing Bad Behavior by Users of Multi-sided Platforms, 27 BTLJ 1201 (2012).

[158] See Hovenkamp, supra note 17, considering the pending U.S. self-preferencing legislation “an affront to both antitrust policy and intelligent regulatory policy.” See also Geoffrey A. Manne, Against the Vertical Discrimination Presumption, 2 Concurrences 1, 2 (2020), arguing that forcing platforms to allow complementors to compete on their own terms would affect platform incentives for innovation. Indeed, platforms have an incentive to optimize openness and mandating maximum openness is not necessarily optimal because it would disregard the trade-off faced by platforms. Consequently, any presumption of harm from vertical discrimination is not based on sound economics. In a similar vein, Jonathan M. Barnett, The Host’s Dilemma: Strategic Forfeiture in Platform Markets for Informational Goods, 124 Harv. L. Rev. 1861 (2011).

[159] See Australian Competition and Consumer Commission, supra note 155, 87, arguing that rules might need to be “specifically tailored to each digital platform service with a high level of precision, to target the specific conduct that causes anti-competitive harm.”

[160] See Patrice Bougette, Axel Gautier, and Fre?de?ric Marty, Business Models and Incentives: For an Effects-Based Approach of Self-Preferencing?, 13 J. Eur. Compet. Law Pract.136, 140 (2022). On the welfare effects of Amazon’s dual role and the welfare implications of proposed regulations, see Germa?n Gutie?rrez, The Welfare Consequences of Regulating Amazon, (2021) available at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3965566, showing that interventions that eliminate either the Prime program or product variety are likely to decrease welfare. See also Guy Aridor and Duarte Gonçalves, Recommenders’ Originals: The Welfare Effects of the Dual Role of Platforms as Producers and Recommender Systems, 83 Int. J. Ind. Organ.102845 (2022), highlighting the importance of targeted restrictions on self-preferencing because of the ambiguity of the welfare implications of a policy remedy separating recommendation and production or imposing unbiased recommendations. However, with regards to app stores and device-funded gatekeepers, Jorge Padilla, Joe Perkins, and Salvatore Piccolo, Self-Preferencing in Markets with Vertically Integrated Gatekeeper Platforms, J. Ind. Econ. (forthcoming) find that consumer welfare would be increased by preventing the device seller from selling its own apps and associated services in competition with third-party apps. See also Morgane Cure, Matthias Hunold, Reinhold Kesler, Ulrich Laitenberger, and Thomas Larrieu, Vertical Integration of Platforms and Product Prominence, Quant. Mark. Econ. (forthcoming), studying the potential effects of self-preferencing in the online hotel-booking industry because of the integration between one of the major online travel agencies (Booking Holdings) and a meta-search platform (Kayak). According to their empirical findings, the horizontal ranking of sales channels for a given hotel indicate that sales channels of online travel agents by Booking Holdings are more often position leaders than price leaders and online travel agents affiliated to Booking Holdings have a higher probability than other online travel agents of being among the visible providers and of being the highlighted sales channel. Moreover, for the vertical ranking of hotels for a search request, hotels are ranked worse in the Kayak search results when an online travel agent of the Expedia Group is the cheapest sales channel.

[161] Colomo, supra note 15, 421; Id., Anticompetitive Effects in EU Competition Law, 17 J. Competition Law Econ. 309, 356 (2021).

[162] Case C-377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato, Court of Justice of the European Union (May 12, 2022), EU:C:2022:379.

[163] Ibid., para. 46.

[164] CJEU, supra note 20, paras. 133-134.

[165] CJEU, supra note 162, para. 73.

[166] Case C?377/20, Servizio Elettrico Nazionale SpA v. Autorità Garante della Concorrenza e del Mercato, Advocate General Rantos (Dec. 9, 2021), EU:C:2021:998, para. 43.

[167] Ibid., para. 45.

[168] See CJEU, TeliaSonera, supra note 38; Post Danmark I, supra note 82; Case C-23/14, Post Danmark A/S v. Konkurrencerådet (Post Danmark II), (Oct. 6, 2015), EU:C:2015:651; Intel, supra note 20; Case C-307/18, Generics (UK) and Others v. Competition and Markets Authority (Jan. 30, 2020), EU:C:2020:52; Case C-152/19 P, Deutsche Telekom v. Commission (Mar. 25, 2021) EU:C:2021:238.

[169] CJEU, supra note 162, paras. 84-85.

[170] Ibid., para. 75. See also Advocate General Rantos, supra note 166, paras. 48-50, arguing that demonstrating that a dominant undertaking used means other than those that come within the scope of normal competition is not a requirement that needs to be assessed separately from the restrictive effect of the conduct.

[171] See, e.g., CJEU, MEO, supra note 21, and Post Danmark II, supra note 168. See also Colomo, supra note 161.

[172] Advocate General Rantos, supra note 166, para. 62.

[173] Ibid., para. 68 and CJEU, supra note 162, paras. 77-79.

[174] CJEU, supra note 162, para. 79.

[175] Case C?23/14, Post Danmark A/S v. Konkurrencerådet, Advocate General Kokott (May 21, 2015), EU:C:2015:343, para. 4.

President Joe Biden in November 2021 signed the Infrastructure Investment and Jobs Act. Among other provisions, the law allocated $42.45 billion toward last-mile broadband development, with the National Telecommunications and Information Administration (NTIA) directed to administer those funds through the newly created Broadband Equity, Access & Deployment (BEAD) program. The BEAD program will provide broadband grants to states, who may then subgrant the money to public and private telecommunications providers.

Serious analysis of the proper roles for government and the private sector in reaching the unserved is a necessary prerequisite for successful rollout of broadband-infrastructure spending. Public investment in broadband infrastructure should focus on the cost-effective provision of Internet access to those who don’t have it, rather than subsidizing competition in areas that already do.

Read the full checklist here.

Executive Summary

Our response to the National Telecommunications and Information Administration’s (“NTIA”) request for comments (“RFC”) is broken into two parts. The first part raises concerns regarding what we see as the NTIA’s uncritical acceptance of certain contentious assumptions, as well as the RFC’s pre-commitment to a particular political viewpoint. The second part responds to several of the most pressing and problematic substantive questions raised in the RFC.

The RFC appears intended to invite comments that conform to a pre-established commitment to interventionist policy. The heuristics and assumptions on which it relies anticipate the desired policy outcome, rather than setting a baseline for genuine input and debate. Unfortunately, these biases also appear to carry over to the substantive questions. These comments offer four substantive observations:

First, that interoperability is not a panacea for mobile-apps ecosystems. There are risks and benefits that attend interoperability and these risks and benefits manifest differently for different groups of end-users and distributors. Specifically, some users may prefer “closed” platforms that offer a more curated experience with enhanced security features.

Second, considerations of security are intrinsic to determining whether interoperability is feasible or desirable. Centralized app distribution is what allows platforms like the App Store to filter harmful content through a two-tiered process of both human and automated app review. Such control over the ecosystem’s content would necessarily be relinquished if third-party app distribution and payment systems were allowed on “closed” platforms.

Third, determinations of “user benefit” in the mobile-app ecosystem must account for both end-users and developers. Where the interests of the two sides of the market conflict, total output—rather than price—should be the relevant benchmark.

Fourth, there is no objective “correct balance” between security and access. Some end-users and developers prefer more curated and ostensibly safer ecosystems, while others are most concerned with the sheer quantity of options. The NTIA should not substitute its own preferences for the revealed preferences of millions of users and distributors.

Read the full comments here.