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Comments, In the Matter of the Joint Guidelines for the Licensing of IP

Regulatory Comments The proposed guidelines are founded on a commendable set of underlying assumptions: that intellectual property (“IP”) is, for antitrust purposes, amenable to the same sort of analysis that applies to other forms of property...

Summary

The proposed guidelines are founded on a commendable set of underlying assumptions: that intellectual property (“IP”) is, for antitrust purposes, amenable to the same sort of analysis that applies to other forms of property, and, that IP licensing presents presumptively procompetitive opportunities for market actors to manage their property rights.

As the proposed guidelines recognize, licensing, along with a variety of vertical arrangements, frequently allows separate firms to realize efficiencies in the pro- duction, marketing and commercialization process that are otherwise difficult, if not impossible, to achieve individually.1 As the proposed guidelines note, this translates not merely into single firms commercializing a particular discovery, but also into their undertaking a variety of licensing relationships that, for example, encourage licensees to further improve upon the original invention.

More broadly, in many cases, licensing arrangements allow inventive firms that lack sufficient capital to license inventions to firms that are better positioned to engage in the efficient production of complicated or expensive processes and products. Economic literature broadly recognizes the value of this form of specialization, and the proposed guidelines are to be commended for likewise recognizing this reality and generally encouraging the practice.

Although, in short, our assessment of the proposed guidelines is positive, we offer some constructive criticism in the remainder of this comment. In particular, we believe, first, that the proposed guidelines should more strongly recognize that a refusal to license does not deserve special scrutiny; and, second, that traditional antitrust analysis is largely inappropriate for the examination of innovation or R&D markets.

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Intellectual Property & Licensing

Amicus Brief, Fox Television Stations, Inc. v. Aereo Killer LLC, 9th Circuit

Amicus Brief Although the immediate question presented in this case is whether Internet-based retransmission services are eligible for the compulsory license made available by Section 111 of the Copyright Act, this statute does not exist in a vacuum.

Summary

Although the immediate question presented in this case is whether Internet-based retransmission services are eligible for the compulsory license made available by Section 111 of the Copyright Act, this statute does not exist in a vacuum. Rather, Congress has established a comprehensive statutory regime governing the retransmission of broadcast television through several laws that span two titles of the United States Code. In particular, Section 111’s compulsory license is available only to a “cable system”—a type of broadcast retransmission service that is also subject to, and defined by, a host of statutory requirements enacted by Congress in the 1992 Cable Act. When the Copyright Act is read in conjunction with the Cable Act, as it must be, along with other provisions of the Communications Act and a long line of judicial decisions, the unmistakable conclusion is that Defendants’ service cannot be a “cable system” within the meaning of the Copyright Act.

Of greatest importance to Congress’s legislative framework governing retransmission is the requirement that any entity retransmitting broadcast television—regardless of the technical means—first obtain consent from the owner or primary transmitter of the television programming. By interpreting the Copyright Act’s compulsory license to make it available to Internet-based retransmission services, the lower court undercuts that legislative framework. Although cable systems (and satellite carriers) are eligible for a compulsory copyright license for which they do not need explicit permission from television program owners, under the Communications Act they must still generally obtain a broadcast station’s consent before retransmitting its signal. To obtain this consent, cable companies must generally pay an agreed upon amount to broadcasters on top of statutory copyright royalties. For all other entities that wish to retransmit broadcast television, no compulsory copyright license is available; they must bargain for the right to publicly perform television shows with the shows’ owners.

Defendants seek to sidestep both of these obligations by concocting a supposed loophole in federal law—engaging in a sort of regulatory arbitrage between the  Communications Act and the Copyright Act. Thus, Defendants claim that they are both eligible for the compulsory copyright license available to cable systems, and also that their service is technically configured to escape the reach of the Communications Act’s provision empowering broadcast stations to decide whether to consent to a cable system’s retransmission of their signals. Not surprisingly, and as the text and purpose of the Copyright Act and the Communications Act reveal, Congress never authorized this ploy.

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Intellectual Property & Licensing

Josh Wright, Commissioner-Provocateur

Popular Media Much ink will be spilled at this site lauding Commissioner Joshua (Josh) Wright’s many contributions to the Federal Trade Commission (FTC), and justly so. I . . .

Much ink will be spilled at this site lauding Commissioner Joshua (Josh) Wright’s many contributions to the Federal Trade Commission (FTC), and justly so. I will focus narrowly on Josh Wright as a law and economics “provocateur,” who used his writings and speeches to “stir the pot” and subject the FTC’s actions to a law and economics spotlight. In particular, Josh highlighted the importance of decision theory, which teaches that bureaucratic agencies (such as the FTC) are inherently subject to error and high administrative costs, and should adopt procedures and rules of decision accordingly. Thus, to maximize welfare, an agency should adopt “optimal” rules, directed at minimizing the sum of false positives, false negatives, and administrative costs. In that regard, the FTC should pay particular attention to empirical evidence of actual harm, and not bring cases based on mere theoretical models of possible harm – models that are inherently likely to generate substantial false positives (predictions of consumer harm) and thereby run counter to a well-run decision-theoretical regime.

Josh became a Commissioner almost three years ago, so there are many of his writings to comment upon. Nevertheless, he is so prolific that a very good understanding of his law and economics approach may be gleaned merely by a perusal of his 2015 contributions. I will selectively focus upon a few representative examples of wisdom drawn from Josh Wright’s (hereinafter JW) 2015 writings, going in reverse chronological order. (A fuller and more detailed exposition of his approach over the years would warrant a long law review article.)

Earlier this month, in commenting on the importance of granting FTC economists (housed in the FTC’s Bureau of Economics (BE)) a greater public role in the framing of FTC decisions, JW honed in on the misuse of consent decrees to impose constraints on private sector behavior without hard evidence of consumer harm:

One [unfortunate] phenomenon is the so?called “compromise recommendation,” that is, a BE staff economist might recommend the FTC accept a consent decree rather than litigate or challenge a proposed merger when the underlying economic analysis reveals very little actual economic support for liability. In my experience, it is not uncommon for a BE staff analysis to convincingly demonstrate that competitive harm is possible but unlikely, but for BE staff to recommend against litigation on those grounds, but in favor of a consent order. The problem with this compromise approach is, of course, that a recommendation to enter into a consent order must also require economic evidence sufficient to give the Commission reason to believe that competitive harm is likely. . . . [What, then, is the solution?] Requiring BE to make public its economic rationale for supporting or rejecting a consent decree voted out by the Commission could offer a number of benefits at little cost. First, it offers BE a public avenue to communicate its findings to the public. Second, it reinforces the independent nature of the recommendation that BE offers. Third, it breaks the agency monopoly the FTC lawyers currently enjoy in terms of framing a particular matter to the public. The internal leverage BE gains by the ability to publish such a document may increase conflict between bureaus on the margin in close cases, but it will also provide BE a greater role in the consent process and a mechanism to discipline consents that are not supported by sound economics. I believe this would go a long ways towards minimizing the “compromise” recommendation that is most problematic in matters involving consent decrees.

In various writings, JW has cautioned that the FTC should apply an “evidence-based” approach to adjudication, and not lightly presume that particular conduct is anticompetitive – including in the area of patents. JW’s most recent pronouncement regarding an evidence-based approach is found in his July 2015 statement with fellow Commissioner Maureen Ohlhausen filed with the U.S. International Trade Commission (ITC), recommending that the ITC apply an “evidence-based” approach in deciding (on public interest grounds) whether to exclude imports that infringe “standard essential patents” (SEPs):

There is no empirical evidence to support the theory that patent holdup is a common problem in real world markets. The theory that patent holdup is prevalent predicts that the threat of injunction leads to higher prices, reduced output, and lower rates of innovation. These are all testable implications. Contrary to these predictions, the empirical evidence is not consistent with the theory that patent holdup has resulted in a reduction of competition. . . .  An evidence-based approach to the public interest inquiry, i.e., one that requires proof that holdup actually occurred in a particular case, protects incentives to participate in standard setting by allowing SEP holders to seek and obtain exclusion orders when permitted by the SSO agreement at issue and in the absence of a showing of any improper use. In contrast, any proposal that would require the ITC to presume the existence of holdup and shift the burden of proof to SEP holders to show unwillingness threatens to deter participation in standard setting, particularly if an accused infringer can prove willingness simply by agreeing to be bound by terms determined by neutral adjudication.

In such matters as Cephalon (May 2015) and Cardinal Health (April 2015), JW teamed up with Commissioner Ohlhausen to caution that disgorgement of profits as an FTC remedy in competition cases should not be lightly pursued, and indeed should be subject to a policy statement that limits FTC discretion, in order to reduce costly business uncertainty and enforcement error.

JW also brought to bear decision-theoretic insights on consumer protection matters. For example, in his April 2015 dissent in Nomi Technologies, he castigated the FTC for entering into a consent decree when the evidence of consumer harm was exceedingly weak (suggesting a high probability of a false positive, in decision-theoretic terms):

The Commission’s decision to issue a complaint and accept a consent order for public comment in this matter is problematic for both legal and policy reasons. Section 5(b) of the FTC Act requires us, before issuing any complaint, to establish “reason to believe that [a violation has occurred]” and that an enforcement action would “be to the interest of the public.” While the Act does not set forth a separate standard for accepting a consent decree, I believe that threshold should be at least as high as for bringing the initial complaint. The Commission has not met the relatively low “reason to believe” bar because its complaint does not meet the basic requirements of the Commission’s 1983 Deception Policy Statement. Further, the complaint and proposed settlement risk significant harm to consumers by deterring industry participants from adopting business practices that benefit consumers.

Consistent with public choice insights, JW stated in an April 2015 speech that greater emphasis should be placed on public advocacy efforts aimed at opposing government-imposed restraints of trade, which have a greater potential for harm than purely private restraints. Thus, welfare would be enhanced by a reallocation of agency resources toward greater advocacy and less private enforcement:

[P]ublic restraints are especially pernicious for consumers and an especially worthy target for antitrust agencies. I am quite confident that a significant shift of agency resources away from enforcement efforts aimed at taming private restraints of trade and instead toward fighting public restraints would improve consumer welfare.

In March 2015 congressional testimony, JW explained his opposition to Federal Communications Commission (FCC) net neutrality regulation, honing in on the low likelihood of harm from private conduct (and thus implicitly the high risk of costly error and unwarranted regulatory costs) in this area:

Today I will discuss my belief that the FCC’s newest regulation does not make sense from an economic perspective. By this I mean that the FCC’s decision to regulate broadband providers as common carriers under Title II of the Communications Act of 1934 will make consumers of broadband internet service worse off, rather than better off. Central to my conclusion that the FCC’s attempts to regulate so-called “net neutrality” in the broadband industry will ultimately do more harm than good for consumers is that the FCC and commentators have failed to identify a problem worthy of regulation, much less cumbersome public-utility-style regulation under Title II.

At the same time, JW’s testimony also explained that in the face of hard evidence of actual consumer harm, the FTC could take – and indeed has taken on several instances – case-specific enforcement action.

Also in March 2015, in his dissent in Par Petroleum, JW further developed the theme that the FTC should not enter into a consent decree unless it has hard evidence of competitive harm – a mere theory does not suffice:

Prior to entering into a consent agreement with the merging parties, the Commission must first find reason to believe that a merger likely will substantially lessen competition under Section 7 of the Clayton Act. The fact that the Commission believes the proposed consent order is costless is not relevant to this determination. A plausible theory may be sufficient to establish the mere possibility of competitive harm, but that theory must be supported by record evidence to establish reason to believe its likelihood. Modern economic analysis supplies a variety of tools to assess rigorously the likelihood of competitive harm. These tools are particularly important where, as here, the conduct underlying the theory of harm – that is, vertical integration – is empirically established to be procompetitive more often than not. Here, to the extent those tools were used, they uncovered evidence that, consistent with the record as a whole, is insufficient to support a reason to believe the proposed transaction is likely to harm competition. Thus, I respectfully dissent and believe the Commission should close the investigation and allow the parties to complete the merger without imposing a remedy.

In a February 2015 speech on the need for greater clarity with respect to “unfair methods of competition” under Section 5 of the FTC Act, JW emphasized the problem of uncertainty generated by the FTC’s failure to adequately define unfair methods of competition:

The lack of institutional commitment to a stable definition of what constitutes an “unfair method of competition” leads to two sources of problematic variation in the agency’s interpretation of Section 5. One is that the agency’s interpretation of the statute in different cases need not be consistent even when the individual Commissioners remain constant. Another is that as the members of the Commission change over time, so does the agency’s Section 5 enforcement policy, leading to wide variations in how the Commission prosecutes “unfair methods of competition” over time. In short, the scope of the Commission’s Section 5 authority today is as broad or as narrow as a majority of commissioners believes it is.

Focusing on the empirical record, JW offered a sharp critique of FTC administrative adjudication (and the value of the FTC’s non-adjudicative research function) in another February 2015 speech:

The data show three things with significant implications for those  important questions. The first is that, despite modest but important achievements in administrative adjudication, it can offer in its defense only a mediocre substantive record and a dubious one when it comes to process. The second is that the FTC can and does influence antitrust law and competition policy through its unique research-and-reporting function. The third is, as measured by appeal and reversal rates, generalist courts get a fairly bad wrap relative to the performance of expert agencies like the FTC.

In the same speech, JW endorsed proposed congressional reforms to the FTC’s exercise of jurisdiction over mergers, embodied in the draft “Standard Merger and Acquisition Reviews Through Equal Rules (SMARTER) Act.” Those reforms include harmonizing the FTC and Justice Department’s preliminary injunction standards, and divesting the FTC of its authority to initiate and pursue administrative challenges to unconsummated mergers, thus requiring the agency to challenge those deals in federal court.

Finally, JW dissented from the FTC’s publication of an FTC staff report (based on an FTC workshop) on the “Internet of Things,” in light of the report’s failure to impose a cost-benefit framework on the recommendations it set forth:

[T]he Commission and our staff must actually engage in a rigorous cost-benefit analysis prior to disseminating best practices or legislative recommendations, given the real world consequences for the consumers we are obligated to protect. Acknowledging in passing, as the Workshop Report does, that various courses of actions related to the Internet of Things may well have some potential costs and benefits does not come close to passing muster as cost-benefit analysis. The Workshop Report does not perform any actual analysis whatsoever to ensure that, or even to give a rough sense of the likelihood that the benefits of the staff’s various proposals exceed their attendant costs.  Instead, the Workshop Report merely relies upon its own assertions and various surveys that are not necessarily representative and, in any event, do not shed much light on actual consumer preferences as revealed by conduct in the marketplace. This is simply not good enough; there is too much at stake for consumers as the Digital Revolution begins to transform their homes, vehicles, and other aspects of daily life. Paying lip service to the obvious fact that the various best practices and proposals discussed in the Workshop Report might have both costs and benefits, without in fact performing such an analysis, does nothing to inform the recommendations made in the Workshop Report.

To conclude, FTC Commissioner Josh Wright went beyond merely emphasizing the application of economic theory to individual FTC cases, by explaining the need to focus economic thinking on FTC policy formulation – in other words, viewing FTC administrative processes and decision-making from an economics-based, decision-theoretical perspective, with hard facts (not mere theory) a key consideration. If the FTC is to be true to its goal of advancing consumer welfare, it should fully adopt such a perspective on a going-forward basis. One may only hope that current and future FTC Commissioners will heed this teaching.

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Intellectual Property & Licensing

Newsflash! Commercial contracts are often confidential (but that doesn’t make them anticompetitive)

Popular Media Microsoft and its allies (the Microsoft-funded trade organization FairSearch and the prolific Google critic Ben Edelman) have been highly critical of Google’s use of “secret” . . .

Microsoft and its allies (the Microsoft-funded trade organization FairSearch and the prolific Google critic Ben Edelman) have been highly critical of Google’s use of “secret” contracts to license its proprietary suite of mobile apps, Google Mobile Services, to device manufacturers.

I’ve written about this at length before. As I said previously,

In order to argue that Google has an iron grip on Android, Edelman’s analysis relies heavily on ”secret” Google licensing agreements — “MADAs” (Mobile Application Distribution Agreements) — trotted out with such fanfare one might think it was the first time two companies ever had a written contract (or tried to keep it confidential).

For Edelman, these agreements “suppress competition” with “no plausible pro-consumer benefits.”

Microsoft (via another of its front groups, ICOMP) responded in predictable fashion.

While the hysteria over private, mutually beneficial contracts negotiated between sophisticated corporations was always patently absurd (who ever heard of sensitive commercial contracts that weren’t confidential?), Edelman’s claim that the Google MADAs operate to “suppress competition” with “no plausible pro-consumer benefits” was the subject of my previous post.

I won’t rehash all of those arguments here, but rather point to another indication that such contract terms are not anticompetitive: The recent revelation that they are used by others in the same industry — including, we’ve learned (to no one’s surprise), Microsoft.

Much like the release of Google’s MADAs in an unrelated lawsuit, the ongoing patent licensing contract dispute between Microsoft and Samsung has obliged the companies to release their own agreements. As it happens, they are at least as restrictive as the Google agreements criticized by Edelman — and, in at least one way, even more so.

Some quick background: As I said in my previous post, it is no secret that equipment manufacturers have the option to license a free set of Google apps (Google Mobile Services) and set Google as the default search engine. However, Google allows OEMs to preinstall other competing search engines as they see fit. Indeed, no matter which applications come pre-installed, the user can easily download Yahoo!, Microsoft’s Bing, Yandex, Naver, DuckDuckGo and other search engines for free from the Google Play Store.

But Microsoft has sought to impose even-more stringent constraints on its device partners. One of the agreements disclosed in the Microsoft-Samsung contract litigation, the “Microsoft-Samsung Business Collaboration Agreement,” requires Samsung to set Bing as the search default for all Windows phones and precludes Samsung from pre-installing any other search applications on Windows-based phones. Samsung must configure all of its Windows Phones to use Microsoft Search Services as the

default Web Search  . . . in all instances on such properties where Web Search can be launched or a Query submitted directly by a user (including by voice command) or automatically (including based on location or context).

Interestingly, the agreement also requires Samsung to install Microsoft Search Services as a non-default search option on all of Samsung’s non-Microsoft Android devices (to the extent doing so does not conflict with other contracts).

Of course, the Microsoft-Samsung contract is expressly intended to remain secret: Its terms are declared to be “Confidential Information,” prohibiting Samsung from making “any public statement regarding the specific terms of [the] Agreement” without Microsoft’s consent.

Meanwhile, the accompanying Patent License Agreement provides that

all terms and conditions in this Agreement, including the payment amount [and the] specific terms and conditions in this Agreement (including, without limitation, the amount of any fees and any other amounts payable to Microsoft under this Agreement) are confidential and shall not be disclosed by either Party.

In addition to the confidentiality terms spelled out in these two documents, there is a separate Non-Disclosure Agreement—to further dispel any modicum of doubt on that score. Perhaps this is why Edelman was unaware of the ubiquity of such terms (and their confidentiality) when he issued his indictment of the Google agreements but neglected to mention Microsoft’s own.

In light of these revelations, Edelman’s scathing contempt for the “secrecy” of Google’s MADAs seems especially disingenuous:

MADA secrecy advances Google’s strategic objectives. By keeping MADA restrictions confidential and little-known, Google can suppress the competitive response…Relatedly, MADA secrecy helps prevent standard market forces from disciplining Google’s restriction. Suppose consumers understood that Google uses tying and full-line-forcing to prevent manufacturers from offering phones with alternative apps, which could drive down phone prices. Then consumers would be angry and would likely make their complaints known both to regulators and to phone manufacturers. Instead, Google makes the ubiquitous presence of Google apps and the virtual absence of competitors look like a market outcome, falsely suggesting that no one actually wants to have or distribute competing apps.

If, as Edelman claims, Google’s objectionable contract terms “serve both to help Google expand into areas where competition could otherwise occur, and to prevent competitors from gaining traction,” then what are the very same sorts of terms doing in Microsoft’s contracts with Samsung? The revelation that Microsoft employs contracts similar to — and similarly confidential to — Google’s highlights the hypocrisy of claims that such contracts serve anticompetitive aims.

In fact, as I discussed in my previous post, there are several pro-competitive justifications for such agreements, whether undertaken by a market leader or a newer entrant intent on catching up. Most obviously, such contracts help to ensure that consumers receive the user experience they demand on devices manufactured by third parties. But more to the point, the fact that such arrangements permeate the market and are adopted by both large and small competitors is strong indication that such terms are pro-competitive.

At the very least, they absolutely demonstrate that such practices do not constitute prima facie evidence of the abuse of market power.

[Reminder: See the “Disclosures” page above. ICLE has received financial support from Google in the past, and I formerly worked at Microsoft. Of course, the views here are my own, although I encourage everyone to agree with them.]

Filed under: antitrust, contracts, exclusionary conduct, google, licensing, monopolization, technology, tying, tying Tagged: Android, Ben Edelman, google, Google Mobile Services, microsoft

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Antitrust & Consumer Protection

Reply Comments, Assign or Transfer Control of Licenses and Authorizations

Regulatory Comments "The International Center for Law & Economics ("ICLE") and eleven independent professors and scholars of law and economics file these comments to address general merger review issues and certain specific concerns that were raised in some of the Comments and Petitions to Deny filed in this proceeding..."

Summary

“The International Center for Law & Economics (“ICLE”) and eleven independent professors and scholars of law and economics file these comments to address general merger review issues and certain specific concerns that were raised in some of the Comments and Petitions to Deny filed in this proceeding…”

“The FCC’s inquiry is limited to the proposed merger’s likely effect on the public interest. But many of the comments in opposition to the merger take issue with various aspects of the marketplace for residential broadband and video as it exists to- day. Indeed, much of the criticism seems leveled at decisions made decades ago with regard to cable franchising. But those criticisms, whether valid or not, do not speak to whether – against the backdrop of the relevant markets as they exist today and are likely to exist in the near future – the merger of Comcast and Time Warner Cable (“TWC”) is in the public interest. Among many other things, for example, the Comments of the American Antitrust Institute urge the FCC to consider the issue of network neutrality in reviewing the merger. But there is nothing merger-specific about net neutrality, and consideration of that issue (other than as a potentially relevant aspect of the market backdrop) is wholly inappropriate for merger review….”

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Telecommunications & Regulated Utilities

Watching local and a la carte is a recipe for STAVRation

Popular Media The free market position on telecom reform has become rather confused of late. Erstwhile conservative Senator Thune is now cosponsoring a version of Senator Rockefeller’s previously . . .

The free market position on telecom reform has become rather confused of late. Erstwhile conservative Senator Thune is now cosponsoring a version of Senator Rockefeller’s previously proposed video reform bill, bundled into satellite legislation (the Satellite Television Access and Viewer Rights Act or “STAVRA”) that would also include a provision dubbed “Local Choice.” Some free marketeers have defended the bill as a step in the right direction.

Although it looks as if the proposal may be losing steam this Congress, the legislation has been described as a “big and bold idea,” and it’s by no means off the menu. But it should be.

It has been said that politics makes for strange bedfellows. Indeed, people who disagree on just about everything can sometimes unite around a common perceived enemy. Take carriage disputes, for instance. Perhaps because, for some people, a day without The Bachelor is simply a day lost, an unlikely alliance of pro-regulation activists like Public Knowledge and industry stalwarts like Dish has emerged to oppose the ability of copyright holders to withhold content as part of carriage negotiations.

Senator Rockefeller’s Online Video Bill was the catalyst for the Local Choice amendments to STAVRA. Rockefeller’s bill did, well, a lot of terrible things, from imposing certain net neutrality requirements, to overturning the Supreme Court’s Aereo decision, to adding even more complications to the already Byzantine morass of video programming regulations.

But putting Senator Thune’s lipstick on Rockefeller’s pig can’t save the bill, and some of the worst problems from Senator Rockefeller’s original proposal remain.

Among other things, the new bill is designed to weaken the ability of copyright owners to negotiate with distributors, most notably by taking away their ability to withhold content during carriage disputes and by forcing TV stations to sell content on an a la carte basis.

Video distribution issues are complicated — at least under current law. But at root these are just commercial contracts and, like any contracts, they rely on a couple of fundamental principles.

First is the basic property right. The Supreme Court (at least somewhat) settled this for now (in Aereo), by protecting the right of copyright holders to be compensated for carriage of their content. With this baseline, distributors must engage in negotiations to obtain content, rather than employing technological workarounds and exploiting legal loopholes.

Second is the related ability of contracts to govern the terms of trade. A property right isn’t worth much if its owner can’t control how it is used, governed or exchanged.

Finally, and derived from these, is the issue of bargaining power. Good-faith negotiations require both sides not to act strategically by intentionally causing negotiations to break down. But if negotiations do break down, parties need to be able to protect their rights. When content owners are not able to withhold content in carriage disputes, they are put in an untenable bargaining position. This invites bad faith negotiations by distributors.

The STAVRA/Local Choice proposal would undermine the property rights and freedom of contract that bring The Bachelor to your TV, and the proposed bill does real damage by curtailing the scope of the property right in TV programming and restricting the range of contracts available for networks to license their content.

The bill would require that essentially all broadcast stations that elect retrans make their content available a la carte — thus unbundling some of the proverbial sticks that make up the traditional property right. It would also establish MVPD pass-through of each local affiliate. Subscribers would pay a fee determined by the affiliate, and the station must be offered on an unbundled basis, without any minimum tier required – meaning an MVPD has to offer local stations to its customers with no markup, on an a la carte basis, if the station doesn’t elect must-carry. It would also direct the FCC to open a rulemaking to determine whether broadcasters should be prohibited from withholding their content online during a dispute with an MPVD.

“Free market” supporters of the bill assert something like “if we don’t do this to stop blackouts, we won’t be able to stem the tide of regulation of broadcasters.” Presumably this would end blackouts of broadcast programming: If you’re an MVPD subscriber, and you pay the $1.40 (or whatever) for CBS, you get it, period. The broadcaster sets an annual per-subscriber rate; MVPDs pass it on and retransmit only to subscribers who opt in.

But none of this is good for consumers.

When transaction costs are positive, negotiations sometimes break down. If the original right is placed in the wrong hands, then contracting may not assure the most efficient outcome. I think it was Coase who said that.

But taking away the ability of content owners to restrict access to their content during a bargaining dispute effectively places the right to content in the hands of distributors. Obviously, this change in bargaining position will depress the value of content. Placing the rights in the hands of distributors reduces the incentive to create content in the first place; this is why the law protects copyright to begin with. But it also reduces the ability of content owners and distributors to reach innovative agreements and contractual arrangements (like certain promotional deals) that benefit consumers, distributors and content owners alike.

The mandating of a la carte licensing doesn’t benefit consumers, either. Bundling is generally pro-competitive and actually gives consumers more content than they would otherwise have. The bill’s proposal to force programmers to sell content to consumers a la carte may actually lead to higher overall prices for less content. Not much of a bargain.

There are plenty of other ways this is bad for consumers, even if it narrowly “protects” them from blackouts. For example, the bill would prohibit a network from making a deal with an MVPD that provides a discount on a bundle including carriage of both its owned broadcast stations as well as the network’s affiliated cable programming. This is not a worthwhile — or free market — trade-off; it is an ill-advised and economically indefensible attack on vertical distribution arrangements — exactly the same thing that animates many net neutrality defenders.

Just as net neutrality’s meddling in commercial arrangements between ISPs and edge providers will ensure a host of unintended consequences, so will the Rockefeller/Thune bill foreclose a host of welfare-increasing deals. In the end, in exchange for never having to go three days without CBS content, the bill will make that content more expensive, limit the range of programming offered, and lock video distribution into a prescribed business model.

Former FCC Commissioner Rob McDowell sees the same hypocritical connection between net neutrality and broadcast regulation like the Local Choice bill:

According to comments filed with the FCC by Time Warner Cable and the National Cable and Telecommunications Association, broadcasters should not be allowed to take down or withhold the content they produce and own from online distribution even if subscribers have not paid for it—as a matter of federal law. In other words, edge providers should be forced to stream their online content no matter what. Such an overreach, of course, would lay waste to the economics of the Internet. It would also violate the First Amendment’s prohibition against state-mandated, or forced, speech—the flip side of censorship.

It is possible that the cable companies figure that subjecting powerful broadcasters to anti-free speech rules will shift the political momentum in the FCC and among the public away from net neutrality. But cable’s anti-free speech arguments play right into the hands of the net-neutrality crowd. They want to place the entire Internet ecosystem, physical networks, content and apps, in the hands of federal bureaucrats.

While cable providers have generally opposed net neutrality regulation, there is, apparently, some support among them for regulations that would apply to the edge. The Rockefeller/Thune proposal is just a replay of this constraint — this time by forcing programmers to allow retransmission of broadcast content under terms set by Congress. While “what’s good for the goose is good for the gander” sounds appealing in theory, here it is simply doubling down on a terrible idea.

What it reveals most of all is that true neutrality advocates don’t want government control to be limited to ISPs — rather, progressives like Rockefeller (and apparently some conservatives, like Thune) want to subject the whole apparatus — distribution and content alike — to intrusive government oversight in order to “protect” consumers (a point Fred Campbell deftly expands upon here and here).

You can be sure that, if the GOP supports broadcast a la carte, it will pave the way for Democrats (and moderates like McCain who back a la carte) to expand anti-consumer unbundling requirements to cable next. Nearly every economic analysis has concluded that mandated a la carte pricing of cable programming would be harmful to consumers. There is no reason to think that applying it to broadcast channels would be any different.

What’s more, the logical extension of the bill is to apply unbundling to all MVPD channels and to saddle them with contract restraints, as well — and while we’re at it, why not unbundle House of Cards from Orange is the New Black? The Rockefeller bill may have started in part as an effort to “protect” OVDs, but there’ll be no limiting this camel once its nose is under the tent. Like it or not, channel unbundling is arbitrary — why not unbundle by program, episode, studio, production company, etc.?

There is simply no principled basis for the restraints in this bill, and thus there will be no limit to its reach. Indeed, “free market” defenders of the Rockefeller/Thune approach may well be supporting a bill that ultimately leads to something like compulsory, a la carte licensing of all video programming. As I noted in my testimony last year before the House Commerce Committee on the satellite video bill:

Unless we are prepared to bear the consumer harm from reduced variety, weakened competition and possibly even higher prices (and absolutely higher prices for some content), there is no economic justification for interfering in these business decisions.

So much for property rights — and so much for vibrant video programming.

That there is something wrong with the current system is evident to anyone who looks at it. As Gus Hurwitz noted in recent testimony on Rockefeller’s original bill,

The problems with the existing regulatory regime cannot be understated. It involves multiple statutes implemented by multiple agencies to govern technologies developed in the 60s, 70s, and 80s, according to policy goals from the 50s, 60s, and 70s. We are no longer living in a world where the Rube Goldberg of compulsory licenses, must carry and retransmission consent, financial interest and syndication exclusivity rules, and the panoply of Federal, state, and local regulations makes sense – yet these are the rules that govern the video industry.

While video regulation is in need of reform, this bill is not an improvement. In the short run it may ameliorate some carriage disputes, but it will do so at the expense of continued programming vibrancy and distribution innovations. The better way to effect change would be to abolish the Byzantine regulations that simultaneously attempt to place thumbs of both sides of the scale, and to rely on free market negotiations with a copyright baseline and antitrust review for actual abuses.

But STAVRA/Local Choice is about as far from that as you can get.

Cross-posted from Truth on the Market

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Telecommunications & Regulated Utilities

New Paper on SSOs, SEP and Antitrust by Joanna Tsai & Joshua Wright

Popular Media An important new paper was recently posted to SSRN by Commissioner Joshua Wright and Joanna Tsai.  It addresses a very hot topic in the innovation industries: . . .

An important new paper was recently posted to SSRN by Commissioner Joshua Wright and Joanna Tsai.  It addresses a very hot topic in the innovation industries: the role of patented innovation in standard setting organizations (SSO), what are known as standard essential patents (SEP), and whether the nature of the contractual commitment that adheres to a SEP — specifically, a licensing commitment known by another acronym, FRAND (Fair, Reasonable and Non-Discriminatory) — represents a breakdown in private ordering in the efficient commercialization of new technology.  This is an important contribution to the growing literature on patented innovation and SSOs, if only due to the heightened interest in these issues by the FTC and the Antitrust Division at the DOJ.

http://ssrn.com/abstract=2467939.

“Standard Setting, Intellectual Property Rights, and the Role of Antitrust in Regulating Incomplete Contracts”

JOANNA TSAI, Government of the United States of America – Federal Trade Commission
Email:
JOSHUA D. WRIGHT, Federal Trade Commission, George Mason University School of Law
Email:

A large and growing number of regulators and academics, while recognizing the benefits of standardization, view skeptically the role standard setting organizations (SSOs) play in facilitating standardization and commercialization of intellectual property rights (IPRs). Competition agencies and commentators suggest specific changes to current SSO IPR policies to reduce incompleteness and favor an expanded role for antitrust law in deterring patent holdup. These criticisms and policy proposals are based upon the premise that the incompleteness of SSO contracts is inefficient and the result of market failure rather than an efficient outcome reflecting the costs and benefits of adding greater specificity to SSO contracts and emerging from a competitive contracting environment. We explore conceptually and empirically that presumption. We also document and analyze changes to eleven SSO IPR policies over time. We find that SSOs and their IPR policies appear to be responsive to changes in perceived patent holdup risks and other factors. We find the SSOs’ responses to these changes are varied across SSOs, and that contractual incompleteness and ambiguity for certain terms persist both across SSOs and over time, despite many revisions and improvements to IPR policies. We interpret this evidence as consistent with a competitive contracting process. We conclude by exploring the implications of these findings for identifying the appropriate role of antitrust law in governing ex post opportunism in the SSO setting.

Filed under: antitrust, contracts, doj, federal trade commission, intellectual property, licensing, markets, patent, SSRN, technology Tagged: ETSI, FRAND, high tech, IEEE, Joanna Tsai, joshua wright, licensing, Patent, patent holdup, SEP, SSO, standards

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Antitrust & Consumer Protection

Teslas’s New Patent Policy: Long Live the Patent System!

Popular Media [First posted to the CPIP Blog on June 17, 2014] Last Thursday, Elon Musk, the founder and CEO of Tesla Motors, issued an announcement on . . .

[First posted to the CPIP Blog on June 17, 2014]

Last Thursday, Elon Musk, the founder and CEO of Tesla Motors, issued an announcement on the company’s blog with a catchy title: “All Our Patent Are Belong to You.” Commentary in social media and on blogs, as well as in traditional newspapers, jumped to the conclusion that Tesla is abandoning its patents and making them “freely” available to the public for whomever wants to use them. As with all things involving patented innovation these days, the reality of Tesla’s new patent policy does not match the PR spin or the buzz on the Internet.

The reality is that Tesla is not disclaiming its patent rights, despite Musk’s title to his announcement or his invocation in his announcement of the tread-worn cliché today that patents impede innovation. In fact, Tesla’s new policy is an example of Musk exercising patent rights, not abandoning them.

If you’re not puzzled by Tesla’s announcement, you should be. This is because patents are a type of property right that secures the exclusive rights to make, use, or sell an invention for a limited period of time. These rights do not come cheap — inventions cost time, effort, and money to create and companies like Tesla then exploit these property rights in spending even more time, effort and money in converting inventions into viable commercial products and services sold in the marketplace. Thus, if Tesla’s intention is to make its ideas available for public use, why, one may wonder, did it bother to expend the tremendous resources in acquiring the patents in the first place?

The key to understanding this important question lies in a single phrase in Musk’s announcement that almost everyone has failed to notice: “Tesla will not initiate patent lawsuits against anyone who, in good faith, wants to use our technology.” (emphasis added)

What does “in good faith” mean in this context? Fortunately, one intrepid reporter at the L.A. Times asked this question, and the answer from Musk makes clear that this new policy is not an abandonment of patent rights in favor of some fuzzy notion of the public domain, but rather it’s an exercise of his company’s patent rights: “Tesla will allow other manufacturers to use its patents in “good faith” – essentially barring those users from filing patent-infringement lawsuits against [Tesla] or trying to produce knockoffs of Tesla’s cars.” In the legalese known to patent lawyers and inventors the world over, this is not an abandonment of Tesla’s patents, this is what is known as a cross license.

In plain English, here’s the deal that Tesla is offering to manufacturers and users of its electrical car technology: in exchange for using Tesla’s patents, the users of Tesla’s patents cannot file patent infringement lawsuits against Tesla if Tesla uses their other patents. In other words, this is a classic deal made between businesses all of the time — you can use my property and I can use your property, and we cannot sue each other. It’s a similar deal to that made between two neighbors who agree to permit each other to cross each other’s backyard. In the context of patented innovation, this agreement is more complicated, but it is in principle the same thing: if automobile manufacturer X decides to use Tesla’s patents, and Tesla begins infringing X’s patents on other technology, then X has agreed through its prior use of Tesla’s patents that it cannot sue Tesla. Thus, each party has licensed the other to make, use and sell their respective patented technologies; in patent law parlance, it’s a “cross license.”

The only thing unique about this cross licensing offer is that Tesla publicly announced it as an open offer for anyone willing to accept it. This is not a patent “free for all,” and it certainly is not tantamount to Tesla “taking down the patent wall.” These are catchy sound bites, but they in fact obfuscate the clear business-minded nature of this commercial decision.

For anyone perhaps still doubting what is happening here, the same L.A Times story further confirms that Tesla is not abandoning the patent system. As stated to the reporter: “Tesla will continue to seek patents for its new technology to prevent others from poaching its advancements.” So much for the much ballyhooed pronouncements last week of how Tesla’s new patent (licensing) policy “reminds us of the urgent need for patent reform”! Musk clearly believes that the patent system is working just great for the new technological innovation his engineers are creating at Tesla right now.

For those working in the innovation industries, Tesla’s decision to cross license its old patents makes sense. Tesla Motors has already extracted much of the value from these old patents: Musk was able to secure venture capital funding for his startup company and he was able to secure for Tesla a dominant position in the electrical car market through his exclusive use of this patented innovation. (Venture capitalists consistently rely on patents in making investment decisions, and for anyone who doubts this need to watch only a few episodes of Shark Tank.) Now that everyone associates radical, cutting-edge innovation with Tesla, Musk can shift in his strategic use of his company’s assets, including his intellectual property rights, such as relying more heavily on the goodwill associated with the Tesla trademark. This is clear, for instance, from the statement to the LA Times that companies or individuals agreeing to the “good faith” terms of Tesla’s license agree not to make “knockoffs of Tesla’s cars.”

There are other equally important commercial reasons for Tesla adopting its new cross-licensing policy, but the point has been made. Tesla’s new cross-licensing policy for its old patents is not Musk embracing “the open source philosophy” (as he asserts in his announcement). This may make good PR given the overheated rhetoric today about the so-called “broken patent system,” but it’s time people recognize the difference between PR and a reasonable business decision that reflects a company that has used (old) patents to acquire a dominant market position and is now changing its business model given these successful developments.

At a minimum, people should recognize that Tesla is not declaring that it will not bring patent infringement lawsuits, but only that it will not sue people with whom it has licensed its patented innovation. This is not, contrary to one law professor’s statement, a company “refrain[ing] from exercising their patent rights to the fullest extent of the law.” In licensing its patented technology, Tesla is in fact exercising its patent rights to the fullest extent of the law, and that is exactly what the patent system promotes in the myriad business models and innovative

Filed under: intellectual property, licensing, litigation, patent Tagged: Elon Musk, innovation, open source, Patent, patent enforcement, Patent infringement, patent licensing, patent reform, Patents, property rights, Tesla

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Intellectual Property & Licensing

Permissionless innovation does not mean “no contracts required”

Popular Media UPDATE: I’ve been reliably informed that Vint Cerf coined the term “permissionless innovation,” and, thus, that he did so with the sorts of private impediments . . .

UPDATE: I’ve been reliably informed that Vint Cerf coined the term “permissionless innovation,” and, thus, that he did so with the sorts of private impediments discussed below in mind rather than government regulation. So consider the title of this post changed to “Permissionless innovation SHOULD not mean ‘no contracts required,’” and I’ll happily accept that my version is the “bastardized” version of the term. Which just means that the original conception was wrong and thank god for disruptive innovation in policy memes!

Can we dispense with the bastardization of the “permissionless innovation” concept (best developed by Adam Thierer) to mean “no contracts required”? I’ve been seeing this more and more, but it’s been around for a while. Some examples from among the innumerable ones out there:

Vint Cerf on net neutrality in 2009:

We believe that the vast numbers of innovative Internet applications over the last decade are a direct consequence of an open and freely accessible Internet. Many now-successful companies have deployed their services on the Internet without the need to negotiate special arrangements with Internet Service Providers, and it’s crucial that future innovators have the same opportunity. We are advocates for “permissionless innovation” that does not impede entrepreneurial enterprise.

Net neutrality is replete with this sort of idea — that any impediment to edge providers (not networks, of course) doing whatever they want to do at a zero price is a threat to innovation.

Chet Kanojia (Aereo CEO) following the Aereo decision:

It is troubling that the Court states in its decision that, ‘to the extent commercial actors or other interested entities may be concerned with the relationship between the development and use of such technologies and the Copyright Act, they are of course free to seek action from Congress.’ (Majority, page 17)That begs the question: Are we moving towards a permission-based system for technology innovation?

At least he puts it in the context of the Court’s suggestion that Congress pass a law, but what he really wants is to not have to ask “permission” of content providers to use their content.

Mike Masnick on copyright in 2010:

But, of course, the problem with all of this is that it goes back to creating permission culture, rather than a culture where people freely create. You won’t be able to use these popular or useful tools to build on the works of others — which, contrary to the claims of today’s copyright defenders, is a key component in almost all creativity you see out there — without first getting permission.

Fair use is, by definition, supposed to be “permissionless.” But the concept is hardly limited to fair use, is used to justify unlimited expansion of fair use, and is extended by advocates to nearly all of copyright (see, e.g., Mike Masnick again), which otherwise requires those pernicious licenses (i.e., permission) from others.

The point is, when we talk about permissionless innovation for Tesla, Uber, Airbnb, commercial drones, online data and the like, we’re talking (or should be) about ex ante government restrictions on these things — the “permission” at issue is permission from the government, it’s the “permission” required to get around regulatory roadblocks imposed via rent-seeking and baseless paternalism. As Gordon Crovitz writes, quoting Thierer:

“The central fault line in technology policy debates today can be thought of as ‘the permission question,’” Mr. Thierer writes. “Must the creators of new technologies seek the blessing of public officials before they develop and deploy their innovations?”

But it isn’t (or shouldn’t be) about private contracts.

Just about all human (commercial) activity requires interaction with others, and that means contracts and licenses. You don’t see anyone complaining about the “permission” required to rent space from a landlord. But that some form of “permission” may be required to use someone else’s creative works or other property (including broadband networks) is no different. And, in fact, it is these sorts of contracts (and, yes, the revenue that may come with them) that facilitates people engaging with other commercial actors to produce things of value in the first place. The same can’t be said of government permission.

Don’t get me wrong – there may be some net welfare-enhancing regulatory limits that might require forms of government permission. But the real concern is the pervasive abuse of these limits, imposed without anything approaching a rigorous welfare determination. There might even be instances where private permission, imposed, say, by a true monopolist, might be problematic.

But this idea that any contractual obligation amounts to a problematic impediment to innovation is absurd, and, in fact, precisely backward. Which is why net neutrality is so misguided. Instead of identifying actual, problematic impediments to innovation, it simply assumes that networks threaten edge innovation, without any corresponding benefit and with such certainty (although no actual evidence) that ex ante common carrier regulations are required.

“Permissionless innovation” is a great phrase and, well developed (as Adam Thierer has done), a useful concept. But its bastardization to justify interference with private contracts is unsupported and pernicious.

Filed under: contracts, copyright, cost-benefit analysis, intellectual property, Knowledge Problem, licensing, markets, net neutrality, patent, privacy, regulation, technology, telecommunications, television Tagged: Aereo, airbnb, contracts, copyright, innovation, net neutrality, permissionless innovation, Tesla, uber

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Financial Regulation & Corporate Governance