Today, thirty-nine different companies and policy experts from a wide swath of the political spectrum signed a letter urging lawmakers to create a “portable benefits” platform that will enable sharing economy companies to continue innovating while simultaneously providing desirable social safety net benefits to workers. This is well timed, as there is a growing consensus among lawmakers (such as Senator Warner) that “something must be done” to provide benefits to workers in the so-called “gig economy.”

In total, the thirty-nine signatories to the letter are pushing for changes to existing law based on a set of principles holding that benefits should be:

1. Independent;
2. Flexible and pro-rated;
3. Portable;
4. Universal; and
5. Supportive of innovation

In a nutshell, this would effectively mean that there is some form of benefits available to gig economy workers that follows them around and is accessible regardless of who employs them (or, ostensibly, whether they are employed at all).

Looking past the text of the letter, this would likely entail a package of changes to existing law that would allow individual workers to utilize some form of privately created platform for managing the benefits that are normally obtained in a traditional employee-employer relationship. Such benefits would include, for instance, workers’ compensation, unemployment, disability, professional development, and retirement. A chief advantage of a portable benefits platform is that–much as in an underlying justification of the ACA–workers would no longer be tied to particular companies in order to enjoy these traditionally employer-based benefits.

Although platform-based work facilitated by smartphone apps is cutting edge, there is historical precedent for this approach to the provision of benefits. Unions have long relied upon multi-employer plans for providing benefits, and the healthcare industry developed portable health savings accounts as a means to free individuals from employer-bound health insurance plans. And the industry has been seeking fully private solutions to these sorts of problems for some time. For instance, Uber recently partnered with Stride Health to provide health insurance benefits to verified drivers.

There will, of course, be some necessary legislative changes in order to make these portable benefits platforms a reality. First, there probably needs to be a provision in the tax code that allows for workers’ contributions to their own plans to receive the same tax-favored treatment that traditional employer-based benefits receive (or, even better, the political give-away would need to be removed from employer-based benefits). Additionally, companies would need to be able to make optional matching contributions with a similar tax treatment. And lurking in the background of all of this is the specter of a large number of employer obligations. Thus, a necessary quid pro quo to get sharing economy companies to pay into these platforms will be some form of safe harbor shielding them from further obligations.

This is a win for both companies and workers. The truth is that our labor market is very fractured–labor force participation rates are at a low, and those who are working remain chronically underemployed. Coupled with this reality, the technology that enables work is becoming ever more flexible and, as shown by their expressed preferences, individuals are clearly interested in the gig economy as a means of easily obtaining work as needed. A portable benefits platform could provide the sort of support to make flexible work a viable alternative to employee status.

And for many employers–sharing economy and non-sharing economy alike–removing antiquated legal strictures from the employment relationship promises a number of increased efficiencies. Particularly in the context of sharing economy companies, this will include the ability to exert some form of control over platform workers without being sucked into an onerous employer-employee relationship.

For instance, Instacart recently moved a number of its platform workers to part-time employee status. Although the decision was very likely multi-faceted, a big part of it had to be Instacart’s desire to give training and guidance to the shoppers who provided services to the platform’s consumers (for instance, instructing them on the best sequence in which to pick groceries in order to ensure maximum freshness). However, to provide any modest degree of oversight would likely mean that Instacart would move from empowering contractors to directing employees, and thereby run into a thicket of labor laws.

Yet why should this particular employee classification be necessary? Platform-based work is a revolutionary way to defeat the traditional transaction costs that justified large, centrally-organized firms. Companies like Uber and Instacart enable what otherwise would have been fallow resources–spare labor, unused cars, and the like–to be fitted to consumer demand.

Moreover, forcing rigid employee classifications upon sharing economy workers will only reintroduce inefficiency into the worker-company relationship. Instead of allowing workers to sign on just for the amount of work they are willing to do, and allowing consumers just to purchase the amount of work they desire, an employee classification essentially requires companies to purchase labor in blocks of hours. At scale, this necessarily introduces allocation and pricing errors into the system. If a smart safe harbor is included in any legislative push for a portable benefits platform, companies could have much more flexibility in directing platform workers.

I am excited to see this development emerging from the industry and from policy makers, and I look forward to the response of our lawmakers (although, this being election season, I don’t expect too much from that response — at least not yet). There is understably a lot of concern about the welfare of workers in the new economy. But it’s important not to lose the innovative new ways of working, producing, and consuming that the modern digital economy affords by resorting to ill-fitted legal regimes from the past.

Filed under: Labor Law, Sharing Economy Tagged: Labor Law, Sharing Economy

Last July, the Eastern District of Virginia upheld the cancellation of various trademarks of the Washington Redskins on the grounds that the marks were disparaging to Native Americans. I am neither a fan of football, nor of offensive names for sports teams–what I am is a fan of free speech. Although the Redskins may be well advised to change their team name, interfering with both the team’s right to free speech as well as its property right in the registered mark is the wrong way–both legally and in principle–to achieve socially desirable ends.

Various theories have been advanced, but the really interesting part of the dispute–a topic upon which I published a paper this year–is the likelihood that the Lanham Act’s prohibition of immoral, scandalous, or disparaging marks runs afoul of the First Amendment. I was cheered to see this week that the First Amendment Lawyers Association filed an amicus brief largely along the lines of my paper. However, there were a couple of points that I still feel deserve more attention when thinking about the § 2(a) (the Lanham Act’s so-called “morality clauses”).

Trademarks Are Not License Plates

The district court tried to sidestep the First Amendment issue by declaring that the trademarks themselves are not at issue, but merely the right to register the trademarks. To reach its result, the court relied on the recent Walker case wherein the Supreme Court declared that Texas was at liberty to prevent Confederate flags from appearing on its license plates, since license plates could be considered the speech of the government.

However, there is an important distinction between license plates and trademarks. License plates are a good totally of government manufacture. One cannot drive a car on a public road without applying to the government for permission and affixing a government registration tag on the vehicle. The plate is not a blank slate upon which one may express one’s self, but is a state-issued information placard used for law enforcement purposes.

Trademarks, arising as they do from actual use, preexist federal recognition. The Lanham Act merely provides a mechanism for registering trademarks that happen to be used in interstate commerce. The federal government then chooses to recognize that trademark when contested or offered for registration.

This is a major distinction: the social field of trademarks already exists – the federal government has chosen to regulate and provide an enforcement mechanism for these property rights and speech acts when used in interstate commerce. Thus it is the market for trademarks that constitutes the forum, and not the physically recorded government register. Given that the government has interfered in a preexisting market in a way in which it protects some state-created trademark property rights, but not others, is it proper to regulate speech by virtue of its content? I think not.

Further, license plates are obviously government property to anyone who looks at them. Plates bear the very name of the state directly on their face. The system of trademark registration is a largely invisible process that only becomes relevant during legal proceedings. When the public looks at a given trademark I would argue that the state’s imprimatur is certainly one of the last things of which they would think.

Thus, a restriction on “immoral” or “disparaging” trademarks constitutes viewpoint discrimination. Eugene Volokh echoed this sentiment when he wrote on the refusal to register “Stop the Islamisation of America”:

Trademark registration … is a government benefit program open to a wide array of speakers with little quality judgment. Like other such programs … it should be seen as a form of “limited public forum,” in which the government may impose content-based limits but not viewpoint-based ones. An exclusion of marks that disparage groups while allowing marks that praise those groups strikes me as viewpoint discrimination.

The Lanham Act endows registrants with government-guaranteed legal rights in connection with the words and symbols by which they are recognized in society. Particularly in a globalized, interconnected society, the brand of an entity is a significant component of how it speaks to society. Discriminating against marks as “immoral” or “disparaging” can be nothing short of viewpoint discrimination.

Commercial Speech Is Protected Speech

As everyone is well aware, the First Amendment provides broad protection for a wide spectrum of speech. The definition of speech itself is likewise broad, including not only words, but also non-verbal gestures and symbols. Any governmental curtailing of such speech will be “presumptively invalid,” with the burden of rebutting that presumption on the government.

When speech is undertaken as part of commerce it does not magically lose any political, social or religious dimension it had when in a noncommercial context. Cartoons issued bearing the image of the Prophet as part of a commercial magazine are surely a political statement deserving of protection. The situation is the same if an organization adopts a logo that is derisive to a particular political or religious ideology – that publication is making a protected, expressive statement through its branding.

At first glance, one might think that defenders of § 2(a) would attempt to qualify scandalous and immoral trademarks as “obscene” and thereby render them subject to censorship. But, in McGinley the Federal Circuit explicitly refused to apply the obscenity standards from the Supreme Court to §2(a) on the grounds that the Lanham Act does not itself use the word “obscenity.” Instead, the Federal Circuit, following the TTAB, was of the opinion that “[w]hat is denied are the benefits provided by the Lanham Act which enhance the value of a mark” and that the appellant still had legal recourse under state common law. Therefore, so the court in McGinley reasoned, since the right to use the mark is not actually abridged, no expression is abridged. And this is the primary basis upon which the district court in Pro-Football built its argument that no First Amendment concerns were implicated in canceling the Redskins trademark.

This of course willfully ignores once again the notion that in intervening in the field of trademarks, and in favoring certain speakers over others, courts effectively allows the Lanham Act to amplify preferred speech and burden disfavored speech. This is true whether or not we classify the trademark right as a bundle of procedural rights (which in turn make speech competitively possible) or as pure speech directly.

That said, it’s much more in keeping with the tradition of the First Amendment to understand trademarks as a protected category of commercial speech. The Supreme Court has noted that otherwise commercial information may at times be more urgent than even political dialog, and that information relating to a financial incentive was not necessarily commercial for First Amendment purposes. “[S]ignificant societal interests are served by such speech.” This is so because even entirely commercial speech “may often carry information of import to significant issues of the day.”

Even were commercial speech not fully protected–as I believe it to be–the Supreme Court has also recognized that commercial speech may be so intertwined with noncommercial speech so as to make them inseparable for First Amendment purposes. In particular, commercial messages do more than merely provide information about the characteristics of goods and services:

[S]olicitation is characteristically intertwined with informative and perhaps persuasive speech seeking support for particular causes or for particular views on economic, political, or social issues, and for the reality that without solicitation the flow of such information and advocacy would likely cease.

The analogy to trademarks is rather clear in this context. Although trademarks may refer to a particular product or service, that product or service is not of necessity a purely commercial object. Further, even if the product or service is a commercial object, the trademark itself can be, or can become, a symbolic referent and not a mere sales pitch. Consider, for instance, Mickey Mouse. The iconic mouse ears certainly represent a vast commercial empire generally, and specifically operate as a functional trademark for Mickey Mouse cartoons and merchandise. However, is there not much more of cultural significance to the mark than mere commercial value? The mouse ears represent something culturally – about childhood, about America, and about art – that is much more than merely a piece of pricing or quality information.

The Unconstitutional Conditions Doctrine Prevents Trading Rights for Privileges

The district court (and Federal Circuit, for that matter) have missed a very important dimension in summarily dismissing First Amendment concerns of trademark holders. These courts dismiss owners of “immoral” or “disparaging” trademarks on the belief that no actual harm is done – the mark holders still own the mark, and, as far as the court is concerned, no speech has been suppressed. However, trademark registration, in addition to providing a forum in which to speak, also provides real procedural benefits for the mark holder. For instance, businesses and individuals enjoy a nationwide recognition of their presence and can vindicate their interests in federal courts. Without the federal registration that is presumptively supplied to marks that are not “immoral” or “scandalous,” an individual can find himself attempting to protect his interests in a mark in the courts of every state in which he does business.

However, under the unconstitutional conditions doctrine even though the benefits of trademark registration are not constitutionally guaranteed rights, those benefits cannot be offered in exchange for a trademark owner’s loss of actually guaranteed rights. Thus, the tight link between trademark registration and First Amendment protections that the courts just keep ignoring.

Its also worth noting that this doctrine did not emerge in constitutional jurisprudence until after the period in which the Lanham Act was drafted. Instead, the Lanham Act era was characterized by the rights-privileges distinction–made famous by then Chief Justice of the Massachusetts Supreme Judicial Court Oliver Wendell Holmes. In McAuliffe, a police officer sued for reinstatement after he was dismissed for his participation in a political organization. In dismissing the case, Chief Justice Holmes held that “[t]he petitioner may have a constitutional right to talk politics, but he has no constitutional right to be a policeman.” This quote from Holmes captures precisely the sense in which the Federal Circuit dismisses the First Amendment concerns of mark holders. 

In contrast to this rather antiquated view, the Supreme Court has recently reaffirmed the proposition that “the government may not deny a benefit to a person because he exercises a constitutional right.” Although this principle contains exceptions, it has been applied to a wide variety of situations including refusal to renew teaching contracts over First Amendment-protected speech acts, and infringement of the right to travel by refusing to adequately extend healthcare benefits to sick persons who had not been residents of a county for at least a year.

Basically, the best defense one can offer for § 2(a) is rooted in an outmoded view of the First Amendment that is, to put it mildly, unconstitutional. We don’t shut down speakers who offend us (at least for the time being), and we should stop attacking trademarks that we find to be immoral.

Filed under: First amendment, intellectual property, Trademark Tagged: First Amendment, Intellectual property, trademark

Abstract

This Article examines a relatively new business strategy in the pharmaceutical market — “product hopping” or “product replacement” — in which brand pharmaceutical companies shift their marketing efforts from a drug nearing the end of its patent period to a new, substitute drug with a longer patent life. In July 2015, the Second Circuit issued an opinion in the first appellate case addressing pharmaceutical product replacement, NY v. Actavis. This Article explains that product replacement is the predictable business response to the incentives created by patent law and state substitution laws, and withdrawing an obsolete product from market when there is a new and improved version is clearly within the patent rights of a patent holder. However, in NY v. Actavis, the Second Circuit ruled that such product replacement activities are exclusionary and produce anticompetitive effects. The Court’s decision creates a duty for brand drug companies to continue selling obsolete drugs after patent expiry in order to allow generic competitors to take advantage of automatic substitution laws. Although the court intended this new duty to benefit consumers, the actual effects of the ruling are likely to be the opposite. Requiring pharmaceutical companies to continue marketing obsolete drugs will reduce incentives for innovation and will likely increase health care spending in the long run.

Last week, FCC General Counsel Jonathan Sallet pulled back the curtain on the FCC staff’s analysis behind its decision to block Comcast’s acquisition of Time Warner Cable. As the FCC staff sets out on its reported Rainbow Tour to reassure regulated companies that it’s not “hostile to the industries it regulates,” Sallet’s remarks suggest it will have an uphill climb. Unfortunately, the staff’s analysis appears to have been unduly speculative, disconnected from critical market realities, and decidedly biased — not characteristics in a regulator that tend to offer much reassurance.

Merger analysis is inherently speculative, but, as courts have repeatedly had occasion to find, the FCC has a penchant for stretching speculation beyond the breaking point, adopting theories of harm that are vaguely possible, even if unlikely and inconsistent with past practice, and poorly supported by empirical evidence. The FCC’s approach here seems to fit this description.

The FCC’s fundamental theory of anticompetitive harm

To begin with, as he must, Sallet acknowledged that there was no direct competitive overlap in the areas served by Comcast and Time Warner Cable, and no consumer would have seen the number of providers available to her changed by the deal.

But the FCC staff viewed this critical fact as “not outcome determinative.” Instead, Sallet explained that the staff’s opposition was based primarily on a concern that the deal might enable Comcast to harm “nascent” OVD competitors in order to protect its video (MVPD) business:

Simply put, the core concern came down to whether the merged firm would have an increased incentive and ability to safeguard its integrated Pay TV business model and video revenues by limiting the ability of OVDs to compete effectively, especially through the use of new business models.

The justification for the concern boiled down to an assumption that the addition of TWC’s subscriber base would be sufficient to render an otherwise too-costly anticompetitive campaign against OVDs worthwhile:

Without the merger, a company taking action against OVDs for the benefit of the Pay TV system as a whole would incur costs but gain additional sales – or protect existing sales — only within its footprint. But the combined entity, having a larger footprint, would internalize more of the external “benefits” provided to other industry members.

The FCC theorized that, by acquiring a larger footprint, Comcast would gain enough bargaining power and leverage, as well as the means to profit from an exclusionary strategy, leading it to employ a range of harmful tactics — such as impairing the quality/speed of OVD streams, imposing data caps, limiting OVD access to TV-connected devices, imposing higher interconnection fees, and saddling OVDs with higher programming costs. It’s difficult to see how such conduct would be permitted under the FCC’s Open Internet Order/Title II regime, but, nevertheless, the staff apparently believed that Comcast would possess a powerful “toolkit” with which to harm OVDs post-transaction.

Comcast’s share of the MVPD market wouldn’t have changed enough to justify the FCC’s purported fears

First, the analysis turned on what Comcast could and would do if it were larger. But Comcast was already the largest ISP and MVPD (now second largest MVPD, post AT&T/DIRECTV) in the nation, and presumably it has approximately the same incentives and ability to disadvantage OVDs today.

In fact, there’s no reason to believe that the growth of Comcast’s MVPD business would cause any material change in its incentives with respect to OVDs. Whatever nefarious incentives the merger allegedly would have created by increasing Comcast’s share of the MVPD market (which is where the purported benefits in the FCC staff’s anticompetitive story would be realized), those incentives would be proportional to the size of increase in Comcast’s national MVPD market share — which, here, would be about eight percentage points: from 22% to under 30% of the national market.

It’s difficult to believe that Comcast would gain the wherewithal to engage in this costly strategy by adding such a relatively small fraction of the MVPD market (which would still leave other MVPDs serving fully 70% of the market to reap the purported benefits instead of Comcast), but wouldn’t have it at its current size – and there’s no evidence that it has ever employed such strategies with its current market share.

It bears highlighting that the D.C. Circuit has already twice rejected FCC efforts to impose a 30% market cap on MVPDs, based on the Commission’s inability to demonstrate that a greater-than-30% share would create competitive problems, especially given the highly dynamic nature of the MVPD market. In vacating the FCC’s most recent effort to do so in 2009, the D.C. Circuit was resolute in its condemnation of the agency, noting:

In sum, the Commission has failed to demonstrate that allowing a cable operator to serve more than 30% of all [MVPD] subscribers would threaten to reduce either competition or diversity in programming.

The extent of competition and the amount of available programming (including original programming distributed by OVDs themselves) has increased substantially since 2009; this makes the FCC’s competitive claims even less sustainable today.

It’s damning enough to the FCC’s case that there is no marketplace evidence of such conduct or its anticompetitive effects in today’s market. But it’s truly impossible to square the FCC’s assertions about Comcast’s anticompetitive incentives with the fact that, over the past decade, Comcast has made massive investments in broadband, steadily increased broadband speeds, and freely licensed its programming, among other things that have served to enhance OVDs’ long-term viability and growth. Chalk it up to the threat of regulatory intervention or corporate incompetence if you can’t believe that competition alone could be responsible for this largesse, but, whatever the reason, the FCC staff’s fears appear completely unfounded in a marketplace not significantly different than the landscape that would have existed post-merger.

OVDs aren’t vulnerable, and don’t need the FCC’s “help”

After describing the “new entrants” in the market — such unfamiliar and powerless players as Dish, Sony, HBO, and CBS — Sallet claimed that the staff was principally animated by the understanding that

Entrants are particularly vulnerable when competition is nascent. Thus, staff was particularly concerned that this transaction could damage competition in the video distribution industry.

Sallet’s description of OVDs makes them sound like struggling entrepreneurs working in garages. But, in fact, OVDs have radically reshaped the media business and wield enormous clout in the marketplace.

Netflix, for example, describes itself as “the world’s leading Internet television network with over 65 million members in over 50 countries.” New services like Sony Vue and Sling TV are affiliated with giant, well-established media conglomerates. And whatever new offerings emerge from the FCC-approved AT&T/DIRECTV merger will be as well-positioned as any in the market.

In fact, we already know that the concerns of the FCC are off-base because they are of a piece with the misguided assumptions that underlie the Chairman’s recent NPRM to rewrite the MVPD rules to “protect” just these sorts of companies. But the OVDs themselves — the ones with real money and their competitive futures on the line — don’t see the world the way the FCC does, and they’ve resolutely rejected the Chairman’s proposal. Notably, the proposed rules would “protect” these services from exactly the sort of conduct that Sallet claims would have been a consequence of the Comcast-TWC merger.

If they don’t want or need broad protection from such “harms” in the form of revised industry-wide rules, there is surely no justification for the FCC to throttle a merger based on speculation that the same conduct could conceivably arise in the future.

The realities of the broadband market post-merger wouldn’t have supported the FCC’s argument, either

While a larger Comcast might be in a position to realize more of the benefits from the exclusionary strategy Sallet described, it would also incur more of the costs — likely in direct proportion to the increased size of its subscriber base.

Think of it this way: To the extent that an MVPD can possibly constrain an OVD’s scope of distribution for programming, doing so also necessarily makes the MVPD’s own broadband offering less attractive, forcing it to incur a cost that would increase in proportion to the size of the distributor’s broadband market. In this case, as noted, Comcast would have gained MVPD subscribers — but it would have also gained broadband subscribers. In a world where cable is consistently losing video subscribers (as Sallet acknowledged), and where broadband offers higher margins and faster growth, it makes no economic sense that Comcast would have valued the trade-off the way the FCC claims it would have.

Moreover, in light of the existing conditions imposed on Comcast under the Comcast/NBCU merger order from 2011 (which last for a few more years) and the restrictions adopted in the Open Internet Order, Comcast’s ability to engage in the sort of exclusionary conduct described by Sallet would be severely limited, if not non-existent. Nor, of course, is there any guarantee that former or would-be OVD subscribers would choose to subscribe to, or pay more for, any MVPD in lieu of OVDs. Meanwhile, many of the relevant substitutes in the MVPD market (like AT&T and Verizon FiOS) also offer broadband services – thereby increasing the costs that would be incurred in the broadband market even more, as many subscribers would shift not only their MVPD, but also their broadband service, in response to Comcast degrading OVDs.

And speaking of the Open Internet Order — wasn’t that supposed to prevent ISPs like Comcast from acting on their alleged incentives to impede the quality of, or access to, edge providers like OVDs? Why is merger enforcement necessary to accomplish the same thing once Title II and the rest of the Open Internet Order are in place? And if the argument is that the Open Internet Order might be defeated, aside from the completely speculative nature of such a claim, why wouldn’t a merger condition that imposed the same constraints on Comcast – as was done in the Comcast/NBCU merger order by imposing the former net neutrality rules on Comcast – be perfectly sufficient?

While the FCC staff analysis accepted as true (again, contrary to current marketplace evidence) that a bigger Comcast would have more incentive to harm OVDs post-merger, it rejected arguments that there could be countervailing benefits to OVDs and others from this same increase in scale. Thus, things like incremental broadband investments and speed increases, a larger Wi-Fi network, and greater business services market competition – things that Comcast is already doing and would have done on a greater and more-accelerated scale in the acquired territories post-transaction – were deemed insufficient to outweigh the expected costs of the staff’s entirely speculative anticompetitive theory.

In reality, however, not only OVDs, but consumers – and especially TWC subscribers – would have benefitted from the merger by access to Comcast’s faster broadband speeds, its new investments, and its superior video offerings on the X1 platform, among other things. Many low-income families would have benefitted from expansion of Comcast’s Internet Essentials program, and many businesses would have benefited from the addition of a more effective competitor to the incumbent providers that currently dominate the business services market. Yet these and other verifiable benefits were given short shrift in the agency’s analysis because they “were viewed by staff as incapable of outweighing the potential harms.”

The assumptions underlying the FCC staff’s analysis of the broadband market are arbitrary and unsupportable

Sallet’s claim that the combined firm would have 60% of all high-speed broadband subscribers in the U.S. necessarily assumes a national broadband market measured at 25 Mbps or higher, which is a red herring.

The FCC has not explained why 25 Mbps is a meaningful benchmark for antitrust analysis. The FCC itself endorsed a 10 Mbps baseline for its Connect America fund last December, noting that over 70% of current broadband users subscribe to speeds less than 25 Mbps, even in areas where faster speeds are available. And streaming online video, the most oft-cited reason for needing high bandwidth, doesn’t require 25 Mbps: Netflix says that 5 Mbps is the most that’s required for an HD stream, and the same goes for Amazon (3.5 Mbps) and Hulu (1.5 Mbps).

What’s more, by choosing an arbitrary, faster speed to define the scope of the broadband market (in an effort to assert the non-competitiveness of the market, and thereby justify its broadband regulations), the agency has – without proper analysis or grounding, in my view – unjustifiably shrunk the size of the relevant market. But, as it happens, doing so also shrinks the size of the increase in “national market share” that the merger would have brought about.

Recall that the staff’s theory was premised on the idea that the merger would give Comcast control over enough of the broadband market that it could unilaterally impose costs on OVDs sufficient to impair their ability to reach or sustain minimum viable scale. But Comcast would have added only one percent of this invented “market” as a result of the merger. It strains credulity to assert that there could be any transaction-specific harm from an increase in market share equivalent to a rounding error.

In any case, basing its rejection of the merger on a manufactured 25 Mbps relevant market creates perverse incentives and will likely do far more to harm OVDs than realization of even the staff’s worst fears about the merger ever could have.

The FCC says it wants higher speeds, and it wants firms to invest in faster broadband. But here Comcast did just that, and then was punished for it. Rather than acknowledging Comcast’s ongoing broadband investments as strong indication that the FCC staff’s analysis might be on the wrong track, the FCC leadership simply sidestepped that inconvenient truth by redefining the market.

The lesson is that if you make your product too good, you’ll end up with an impermissibly high share of the market you create and be punished for it. This can’t possibly promote the public interest.

Furthermore, the staff’s analysis of competitive effects even in this ersatz market aren’t likely supportable. As noted, most subscribers access OVDs on connections that deliver content at speeds well below the invented 25 Mbps benchmark, and they pay the same prices for OVD subscriptions as subscribers who receive their content at 25 Mbps. Confronted with the choice to consume content at 25 Mbps or 10 Mbps (or less), the majority of consumers voluntarily opt for slower speeds — and they purchase service from Netflix and other OVDs in droves, nonetheless.

The upshot? Contrary to the implications on which the staff’s analysis rests, if Comcast were to somehow “degrade” OVD content on the 25 Mbps networks so that it was delivered with characteristics of video content delivered over a 10-Mbps network, real-world, observed consumer preferences suggest it wouldn’t harm OVDs’ access to consumers at all. This is especially true given that OVDs often have a global focus and reach (again, Netflix has 65 million subscribers in over 50 countries), making any claims that Comcast could successfully foreclose them from the relevant market even more suspect.

At the same time, while the staff apparently viewed the broadband alternatives as “limited,” the reality is that Comcast, as well as other broadband providers, are surrounded by capable competitors, including, among others, AT&T, Verizon, CenturyLink, Google Fiber, many advanced VDSL and fiber-based Internet service providers, and high-speed mobile wireless providers. The FCC understated the complex impact of this robust, dynamic, and ever-increasing competition, and its analysis entirely ignored rapidly growing mobile wireless broadband competition.

Finally, as noted, Sallet claimed that the staff determined that merger conditions would be insufficient to remedy its concerns, without any further explanation. Yet the Commission identified similar concerns about OVDs in both the Comcast/NBCUniversal and AT&T/DIRECTV transactions, and adopted remedies to address those concerns. We know the agency is capable of drafting behavioral conditions, and we know they have teeth, as demonstrated by prior FCC enforcement actions. It’s hard to understand why similar, adequate conditions could not have been fashioned for this transaction.

In the end, while I appreciate Sallet’s attempt to explain the FCC’s decision to reject the Comcast/TWC merger, based on the foregoing I’m not sure that Comcast could have made any argument or showing that would have dissuaded the FCC from challenging the merger. Comcast presented a strong economic analysis answering the staff’s concerns discussed above, all to no avail. It’s difficult to escape the conclusion that this was a politically-driven result, and not one rigorously based on the facts or marketplace reality.

Filed under: antitrust, Efficiencies, exclusionary conduct, federal communications commission, internet, law and economics, market definition, merger guidelines, mergers & acquisitions, net neutrality, regulation, technology, telecommunications, television Tagged: antitrust, Broadband, Comcast, FCC, Jonathan Sallet, merger, merger review, MVPD, Netflix, OVD, Time Warner Cable, TWC

Summary

“This case is not about broadband deployment or competition, nor local autonomy. It is about the FCC’s claim of sweeping power and its essentially unchecked discretion to govern the Internet, including the supposed power to preempt decisions made by elected state lawmakers—without Congressional authorization.

To reject the FCC’s reinterpretation of Section 706 as an independent grant of authority is not to say that nothing more need be done to promote broadband deployment and competition—but to affirm two facts about the Telecommunications Act of 1996 (“1996 Act”). First, Congress intended Section 706 as a command to the FCC to use the abundant authority granted to it elsewhere in the 1934 Communications Act (“1934 Act”) to promote broadband deployment to all Americans. As the FCC said in 1998:

“After reviewing the language of section 706(a), its legislative history, the broader statutory scheme, and Congress’ policy objectives, we agree with numerous commenters that section 706(a) does not constitute an independent grant of forbearance authority or of authority to employ other regulating methods. Rather, we conclude that section 706(a) directs the Commission to use the authority granted in other provisions, including the forbearance authority under section 10(a), to encourage the deployment of advanced services. Advanced Services Order, ¶ 69 (emphasis added)”

Second, rejecting the FCC’s reinterpretation means affirming that Congress intended “to preserve the vibrant and competitive free market that presently exists for the Internet and other interactive computer services, unfettered by Federal or State regulation,” 47 U.S.C. § 230(b)(2); see also 47 U.S.C. § 230(a)(5) (“The Internet and other interactive computer services have flourished, . . . with a minimum of government regulation.”)…”

The Ninth Circuit made waves recently with its decision in Lenz v. Universal Music Corp., in which it decided that a plaintiff in a copyright infringement case must first take potential fair use considerations into account before filing a takedown notice under the DMCA. Lenz, represented by the EFF, claimed that Universal had not formed a good faith belief that an infringement had occurred as required by § 512(c)(3)(A)(v). Consequently, Lenz sought damages under § 512(f), alleging that Universal made material misrepresentations in issuing a takedown notice without first considering a fair use defense.

In reaching its holding, the Ninth Circuit decided that fair use should not be considered an affirmative defense–which is to say that it is not properly considered after an allegation, but must be considered when determining whether a prima facie claim exists. It starts from the text of the Copyright Act itself. According to 17 U.S.C. § 107

Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work … is not an infringement of copyright.

In support of its contention, the Ninth Circuit goes on to cite a case in the Eleventh Circuit as well as legislative material suggesting that Congress intended that fair use no longer be considered as an affirmative defense. Thus, in the Ninth Circuit’s view, such fair use at best qualifies as a sort of quasi-defense, and most likely constitutes an element of an infringement claim. After all, if fair use is literally non-infringing, then establishing infringement requires ruling out fair use, as well.

Or so says the Ninth Circuit. But it takes little more than a Google search — let alone the legal research one should expect of federal judges and their clerks — to realize that the court is woefully, and utterly, incorrect.

Is Fair Use an Affirmative Defense ?

The Supreme Court has been perfectly clear that fair use is in fact an affirmative defense. In Campbell v. Acuff-Rose, the Supreme Court had occasion to consider the nature of fair use under § 107 in the context of determining whether 2 Live Crew’s parody of Roy Orbison’s “Pretty Woman” was a permissible use. In considering the fourth fair use factor, “the effect of the use upon the potential market for or value of the copyrighted work,” the Court held that “[s]ince fair use is an affirmative defense, its proponent would have difficulty carrying the burden of demonstrating fair use without favorable evidence about relevant markets.”

Further, in reaching this opinion the Court relied on its earlier precedent in Harper & Row, where, in discussing the “purpose of the use” prong of § 107, the Court said that “[t]he drafters [of § 107] resisted pressures from special interest groups to create presumptive categories of fair use, but structured the provision as an affirmative defense requiring a case-by-case analysis.”  Not surprisingly, other courts are inclined to follow the the Supreme Court. Thus the Eleventh Circuit, the Southern District of New York, and the Central District of California (here and here), to name but a few, all explicitly refer to fair use as an affirmative defense. Oh, and the Ninth Circuit did too, at least until Lenz.

The Ninth Circuit Dissembles

As part of its appeal, Universal relied on the settled notion that fair use is an affirmative defense in building its case. Perhaps because this understanding of fair use is so well established, Universal failed to cite extensively why this was so. And so (apparently unable to perform its own legal research), the Ninth Circuit dismissed § 107 as an affirmative defense out of hand, claiming that

Universal’s sole textual argument is that fair use is not “authorized by the law” because it is an affirmative defense that excuses otherwise infringing conduct … Supreme Court precedent squarely supports the conclusion that fair use does not fall into the latter camp: “[A]nyone who . . . makes a fair use of the work is not an infringer of the copyright with respect to such use.” Sony Corp. of Am. v. Universal City Studios, Inc., 464 U.S. 417, 433 (1984).”

It bears noting that the Court in Sony Corp. did not discuss whether or not fair use is an affirmative defense, whereas Acuff Rose (decided 10 years after Sony Corp.) and Harper & Row decisions do.

To shore up its argument, the Ninth Circuit then goes on to cite the Eleventh Circuit for the notion that the 1976 Act fundamentally changed the nature of fair use, moving it away from its affirmative defense roots. Quoting Bateman v. Mnemonics, Inc., the court claims that

Although the traditional approach is to view “fair use” as an affirmative defense, . . . it is better viewed as a right granted by the Copyright Act of 1976. Originally, as a judicial doctrine without any statutory basis, fair use was an infringement that was excused—this is presumably why it was treated as a defense. As a statutory doctrine, however, fair use is not an infringement. Thus, since the passage of the 1976 Act, fair use should no longer be considered an infringement to be excused; instead, it is logical to view fair use as a right. Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.

But wait — didn’t I list the Eleventh Circuit as one of the (many) courts that have held fair use to be an affirmative defense? Why yes I did. It turns out that, as Devlin Hartline pointed out last week, the Ninth Circuit actually ripped the Eleventh Circuit text completely out of context. The full Bateman quote (from a footnote, it should be noted) is as follows:

Fair use traditionally has been treated as an affirmative defense to a charge of copyright infringement …. In viewing fair use as an excused infringement, the court must, in addressing this mixed question of law and fact, determine whether the use made of the original components of a copyrighted work is “fair” under 17 U.S.C. § 107 … Although the traditional approach is to view “fair use” as an affirmative defense, this writer, speaking only for himself, is of the opinion that it is better viewed as a right granted by the Copyright Act of 1976. Originally, as a judicial doctrine without any statutory basis, fair use was an infringement that was excused—this is presumably why it was treated as a defense. As a statutory doctrine, however, fair use is not an infringement. Thus, since the passage of the 1976 Act, fair use should no longer be considered an infringement to be excused; instead, it is logical to view fair use as a right. Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.” (internal citations omitted, but emphasis added)

Better yet, in a subsequent opinion the Eleventh Circuit further clarified the position that the view of fair use as an affirmative defense is binding Supreme Court precedent, notwithstanding any judge’s personal preferences to the contrary.

But that’s not the worst of it. Not only did the court shamelessly misquote the Eleventh Circuit in stretching to find a justification for its prefered position, the court actually ignored its own precedent to the contrary. In Dr. Seuss Enterprises, L.P. v. Penguin Books USA, Inc., the Ninth Circuit held that

Since fair use is an affirmative defense, [the Defendant-Appellants] must bring forward favorable evidence about relevant markets. Given their failure to submit evidence on this point … we conclude that “it is impossible to deal with [fair use] except by recognizing that a silent record on an important factor bearing on fair use disentitle[s] the proponent of the defense[.]

Further, even if the Lenz court is correct that § 107 “unambiguously contemplates fair use as a use authorized by the law” — despite Supreme Court precedent — the authority the Ninth Circuit attempts to rely upon would still require defendants to raise a fair use defense after a prima facie claim was made, as “the burden of proving fair use is always on the putative infringer.”  

It Also Violates a Common Sense Reading of the DMCA

As with all other affirmative defenses, a plaintiff must first make out a prima facie case before the defense can be raised. So how do we make sense of the language in § 107 that determines fair use to not be infringement? In essence, it appears to be a case of inartful drafting.  Particularly in light of the stated aims of the DMCA — a law that was enacted after the Supreme Court established that fair use was an affirmative defense — the nature of fair use as an affirmative defense that can only be properly raised by an accused infringer is as close to black letter law as it gets.

The DMCA was enacted to strike a balance between the interests of rightsholders in protecting their property, and the interests of society in having an efficient mechanism for distributing content. Currently, rightsholders send out tens of millions of takedown notices every year to deal with the flood of piracy and other infringing uses. If rightsholders were required to consider fair use in advance of each of these, the system would be utterly unworkable — for instance, in Google’s search engine alone, over 54 million removal requests were made in just the month of August 2015 owing to potential copyright violations. While the evisceration of the DMCA is, of course, exactly what the plaintiffs (or more accurately, EFF, which represented the plaintiffs) in Lenz wanted, it’s not remotely what the hard-wrought compromise of the statute contemplates.

And the reason it would be unworkable is not just because of the volume of the complaints, but because fair use is such an amorphous concept that ultimately requires adjudication.

Not only are there four factors to consider in a fair use analysis, but there are no bright line rules to guide the application of the factors. The open ended nature of the defense essentially leaves it up to a defendant to explain just why his situation should not constitute infringement. Until a judge or a jury says otherwise, how is one to know whether a particular course of conduct qualifies for a fair use defense?

The Lenz court even acknowledges as much when it says

If, however, a copyright holder forms a subjective good faith belief the allegedly infringing material does not constitute fair use, we are in no position to dispute the copyright holder’s belief even if we would have reached the opposite conclusion. (emphasis added)

Thus, it is the slightest of fig leaves that is necessary to satisfy the Lenz court’s new requirement that fair use be considered before issuing a takedown notice.

What’s more, this statement from the court also demonstrates the near worthlessness of reading a prima facie fair use requirement into the takedown requirements. Short of a litigant explicitly disclaiming any efforts to consider fair use, the standard could be met with a bare assertion. It does, of course, remain an open question whether the computer algorithms the rightsholders employ in scanning for infringing content are actually capable of making fair use determinations — but perhaps throwing a monkey wrench — any monkey wrench — into the rightsholders’ automated notice-and-takedown systems was all the court was really after. I think we can at least be sure that that was EFF’s aim, anyway, as they apparently think that § 512 tends to be a tool of censorship in the hands of rightsholders.

The structure of the takedown and put-back provisions of the DMCA also cut against the Lenz court’s view. The put-back requirements of Section 512(g) suggest that affirmative defenses and other justifications for accused infringement would be brought up after a takedown notice was submitted. What would be the purpose of put-back response, if not to offer the accused infringers justifications and defenses to an allegation of infringement? Along with excuses such as having a license, or a work’s copyright being expired, an alleged infringer can bring up the fair use grounds under which he believed he was entitled to use the work in question.

In short, to require a rightsholder to analyze fair use in advance of a takedown request effectively requires her to read the mind of an infringer and figure out what excuse that party plans to raise as part of her defense. This surely can’t have been what Congress intended with the takedown provisions of the DMCA — enacted as they were years after the Supreme Court had created the widely recognized rule that fair use is an affirmative defense.

Well, widely recognized, that is, except in the Ninth Circuit. This month, anyway.

Update: I received some feedback on this piece which pointed out an assumption I was making with respect to the Ninth Circuit’s opinion, and which deserves a clarifying note. Essentially, the Lenz court splits the concept of affirmative defenses into two categories: (1) an affirmative defense that is merely a label owing to the procedural posture of a case and (2) an affirmative defense, as it is traditionally understood and that always puts the burden of production on a defendant.  By characterizing affirmative defenses in this way, the Lenz court gets to have its cake and eat it too:  when an actual proceeding is filed, a defendant will procedurally have the burden of production on the issue, but since fair use is at most a quasi-affirmative defense, the court felt it was fair to shift that same burden onto rightsholders when issuing a takedown letter.  So technically the court says that fair use is an affirmative defense (as a labeling matter), but it does not practically treat is as such for the purposes of takedown notices.

Filed under: copyright, intellectual property Tagged: copyright, Intellectual property

Recently, the en banc Federal Circuit decided in Suprema, Inc. v. ITC that the International Trade Commission could properly prevent the importation of articles that infringe under an indirect liability theory. The core of the dispute in Suprema was whether § 337 of the Tariff Act’s prohibition against “importing articles that . . . infringe a valid and enforceable United States patent” could be used to prevent the importation of articles that at the moment of importation were not (yet) directly infringing. In essence, is the ITC limited to acting only when there is a direct infringement, or can it also prohibit articles involved in an indirect infringement scheme — in this case under an inducement theory?

TOTM’s own Alden Abbott posted his view of the decision, and there are a couple of points we’d like to respond to, both embodied in this quote:

[The ITC’s Suprema decision] would likely be viewed unfavorably by the Supreme Court, which recently has shown reluctance about routinely invoking Chevron deference … Furthermore, the en banc majority’s willingness to find inducement liability at a time when direct patent infringement has not yet occurred (the point of importation) is very hard to square with the teachings of [Limelight v.] Akamai.

In truth, we are of two minds (four minds?) regarding this view. We’re deeply sympathetic with arguments that the Supreme Court has become — and should become — increasingly skeptical of blind Chevron deference. Recently, we filed a brief on the 2015 Open Internet Order that, in large part, argued that the FCC does not deserve Chevron deference under King v. Burwell, UARG v. EPA and Michigan v. EPA (among other important cases) along a very similar line of reasoning. However, much as we’d like to generally scale back Chevron deference, in this case we happen to think that the Federal Circuit got it right.

Put simply, “infringe” as used in § 337 plainly includes indirect infringement. Section 271 of the Patent Act makes it clear that indirect infringers are guilty of “infringement.” The legislative history of the section, as well as Supreme Court case law, makes it very clear that § 271 was a codification of both direct and indirect liability.

In taxonomic terms, § 271 codifies “infringement” as a top-level category, with “direct infringement” and “indirect infringement” as two distinct subcategories of infringement. The law further subdivides “indirect infringement” into sub-subcategories, “inducement” and “contributory infringement.” But all of these are “infringement.”

For instance, § 271(b) says that “[w]hoever actively induces infringement of a patent shall be liable as an infringer” (emphasis added). Thus, in terms of § 271, to induce infringement is to commit infringement within the meaning of the patent laws. And in § 337, assuming it follows § 271 (which seems appropriate given Congress’ stated purpose to “make it a more effective remedy for the protection of United States intellectual property rights” (emphasis added)), it must follow that when one imports “articles… that infringe” she can be liable for either (or both) § 271(a) direct infringement or § 271(b) inducement.

Frankly, we think this should end the analysis: There is no Chevron question here because the Tariff Act isn’t ambiguous.

But although it seems clear on the face of § 337 that “infringe” must include indirect infringement, at the very least § 337 is ambiguous and cannot clearly mean only “direct infringement.” Moreover, the history of patent law as well as the structure of the ITC’s powers both cut in favor of the ITC enforcing the Tariff Act against indirect infringers. The ITC’s interpretation of any ambiguity in the term “articles… that infringe” is surely reasonable.

The Ambiguity and History of § 337 Allows for Inducement Liability

Assuming for argument’s sake that § 337’s lack of specificity leaves room for debate as to what “infringe” means, there is nothing that militates definitively against indirect liability being included in § 337. The majority handles any ambiguity of this sort well:

[T]he shorthand phrase “articles that infringe” does not unambiguously exclude inducement of post-importation infringement… By using the word “infringe,” § 337 refers to 35 U.S.C. § 271, the statutory provision defining patent infringement. The word “infringe” does not narrow § 337’s scope to any particular subsections of § 271. As reflected in § 271 and the case law from before and after 1952, “infringement” is a term that encompasses both direct and indirect infringement, including infringement by importation that induces direct infringement of a method claim… Section 337 refers not just to infringement, but to “articles that infringe.” That phrase does not narrow the provision to exclude inducement of post-importation infringement. Rather, the phrase introduces textual uncertainty.

Further, the court notes that it has consistently held that inducement is a valid theory of liability on which to base § 337 cases.

And lest you think that this interpretation would give some new, expansive powers to the ITC (perhaps meriting something like a Brown & Williamson exception to Chevron deference), the ITC is still bound by all the defenses and limitations on indirect liability under § 271. Saying it has authority to police indirect infringement doesn’t give it carte blanche, nor any more power than US district courts currently have in adjudicating indirect infringement. In this case, the court went nowhere near the limits of Chevron in giving deference to the ITC’s decision that “articles… that infringe” emcompasses the well-established (and statutorily defined) law of indirect infringement.

Inducement Liability Isn’t Precluded by Limelight

Nor does the Supreme Court’s Limelight v. Akamai decision present any problem. Limelight is often quoted for the proposition that there can be no inducement liability without direct infringement. And it does stand for that, as do many other cases; that point is not really in any doubt. But what Alden and others (including the dissenters in Suprema) have cited it for is the proposition that inducement liability cannot attach unless all of the elements of inducement have already been practiced at the time of importation. Limelight does not support that contention, however.

Inducement liability contemplates direct infringement, but the direct infringement need not have been practiced by the same entity liable for inducement, nor at the same time as inducement (see, e.g., Standard Oil. v. Nippon). Instead, the direct infringement may come at a later time — and there is no dispute in Suprema regarding whether there was direct infringement (there was, as Suprema notes: “the Commission found that record evidence demonstrated that Mentalix had already directly infringed claim 19 within the United States prior to the initiation of the investigation.”).

Limelight, on the other hand, is about what constitutes the direct infringement element in an inducement case. The sole issue in Limelight was whether this “direct infringement element” required that all of the steps of a method patent be carried out by a single entity or entities acting in concert. In Limelight’s network there was a division of labor, so to speak, between the company and its customers, such that each carried out some of the steps of the method patent at issue. In effect, plaintiffs argued that Limelight should be liable for inducement because it practised some of the steps of the patented method, with the requisite intent that others would carry out the rest of the steps necessary for direct infringement. But neither Limelight nor its customers separately carried out all of the steps necessary for direct infringement.

The Court held (actually, it simply reiterated established law) that the method patent could never be violated unless a single party (or parties acting in concert) carried out all of the steps of the method necessary for direct infringement. Thus it also held that Limelight could not be liable for inducement because, on the facts of that case, none of its customers could ever be liable for the necessary, underlying direct infringement. Again — what was really at issue in Limelight were the requirements to establish the direct infringement necessary to prove inducement.

On remand, the Federal Circuit reinforced the point that Limelight was really about direct infringement and, by extension, who must be involved in the direct infringement element of an inducement claim. According to the court:

We conclude that the facts Akamai presented at trial constitute substantial evidence from which a jury could find that Limelight directed or controlled its customers’ performance of each remaining method step. As such, substantial evidence supports the jury’s verdict that all steps of the claimed methods were performed by or attributable to Limelight. Therefore, Limelight is liable for direct infringement.

The holding of Limelight is simply inapposite to the facts of Suprema. The crux of Suprema is whether the appropriate mens rea existed to support a claim of inducement — not whether the requisite direct infringement occurred or not.

The Structure of § 337 Supports The ITC’s Ability to Block Inducement

Further, as the majority in Suprema notes, the very idea of inducement liability necessarily contemplates that there will be a temporal separation between the event that gives rise to indirect liability and the future direct infringement (required to prove inducement). As the Suprema court briefly noted “Section 337(a)(1)(B)’s ‘sale . . . after importation’ language confirms that the Commission is permitted to focus on post-importation activity to identify the completion of infringement.”

In particular, each of the enforcement powers in § 337(a) contains a clause that, in addition to a prohibition against, e.g., infringing articles at the time of importation, also prohibits “the sale within the United States after importation by the owner, importer, or consignee, of articles[.]” Thus, Congress explicitly contemplated that the ITC would have the power to act upon articles at various points in time, not limiting it to a power effective only at the moment of importation.

Although the particular power to reach into the domestic market has to do with preventing the importer or its agent from making sales, this doesn’t undermine the larger point here: the ITC’s power to prevent infringing articles extends over a range of time. Given that “articles that … infringe” is at the very least ambiguous, and, as per the Federal Circuit (and our own position), this ambiguity allows for indirect infringement, it isn’t a stretch to infer that that Congress intended the ITC to have authority under § 337 to ban the import of articles that induce infringement that occurs only after the time of importation..

To interpret § 337 otherwise would be to render it absurd and to create a giant loophole that would enable infringers to easily circumvent the ITC’s enforcement powers.

A Dissent from the Dissent

The dissent also takes a curious approach to § 271 by mixing inducement and contributory infringement, and generally making a confusing mess of the two. For instance, Judge Dyk says

At the time of importation, the scanners neither directly infringe nor induce infringement… Instead, these staple articles may or may not ultimately be used to infringe… depending upon whether and how they are combined with domestically developed software after importation into the United States (emphasis added).

Whether or not the goods were “staples articles” (and thus potentially capable of substantial noninfringing uses) has nothing to do with whether or not there was inducement. Section 271 makes a very clear delineation between inducement in § 271(b) and contributory infringement in § 271(c). While a staple article of commerce capable of substantial noninfringing uses will not serve as the basis for a contributory infringement claim, it is irrelevant whether or not goods are such “staples” for purposes of establishing inducement.

The boundaries of inducement liability, by contrast, are focused on the intent of the actors: If there is an intent to induce, whether or not there is a substantial noninfringing use, there can be a violation of § 271. Contributory infringement and inducement receive treatment in separate paragraphs of § 271 and are separate doctrines comprising separate elements. This separation is so evident on the face of the law as well as in its history that the Supreme Court read the doctrine into copyright in Grokster — where, despite a potentially large number of non-infringing uses, the intent to induce infringement was sufficient to find liability.

Parting Thoughts on Chevron

We have some final thoughts on the Chevron question, because this is rightly a sore point in administrative law. In this case we think that the analysis should have ended at step one. Although the Federal Circuit began with an assumption of ambiguity, it was being generous to the appellants. Did Congress speak with clear intent? We think so. Section 271 very clearly includes direct infringement as well as indirect infringement within its definition of what constitutes infringement of a patent. When § 337 references “articles … that infringe” it seems fairly obvious that Congress intended the ITC to be able to enforce the prohibitions in § 271 in the context of imported goods.

But even if we advance to step two of the Chevron analysis, the ITC’s construction of § 337 is plainly permissible — and far from expansive. By asserting its authority here the ITC is simply policing the importation of infringing goods (which it clearly has the power to do), and doing so in the case of goods that indirectly infringe (a concept that has been part of US law for a very long time). If “infringe” as used in the Tariff Act is ambiguous, the ITC’s interpretation of it to include both indirect as well as direct infringement seems self-evidently reasonable.

Under the dissent’s (and Alden’s) interpretation of § 337, all that would be required to evade the ITC would be to import only the basic components of an article such that at the moment of importation there was no infringement. Once reassembled within the United States, the ITC’s power to prevent the sale of infringing goods would be nullified. Section 337 would thus be read to simply write out the entire “indirect infringement” subdivision of § 271 — an inference that seems like a much bigger stretch than that “infringement” under § 337 means all infringement under § 271. Congress was more than capable of referring only to “direct infringement” in § 337 if that’s what it intended.

Much as we would like to see Chevron limited, not every agency case is the place to fight this battle. If we are to have agencies, and we are to have a Chevron doctrine, there will be instances of valid deference to agency interpretations — regardless of how broadly or narrowly Chevron is interpreted. The ITC wasn’t making a power grab in Suprema, nor was its reading of the statute unexpected, inconsistent with its past practice, or expansive.

In short, Suprema doesn’t break any new statutory interpretation ground, nor present a novel question of “deep economic or political significance” akin to the question at issue in King v. Burwell. Like it or not, there will be no roots of an anti-Chevron-deference revolution growing out of Suprema.

Filed under: administrative law, intellectual property, international trade, International Trade Commission, patent, regulation, Supreme Court Tagged: Chevron, inducement, Intellectual property, international trade commission, ITC, Limelight, Patent infringement, regulation, Suprema

Excerpt

Futurists say that the total sum of human knowledge doubles every year or two—and that the rate is increasing. “There were five exabytes of information created by the entire world between the dawn of civilization and 2003,” Google CEO Eric Schmidt said at a conference in 2010. “Now that same amount is created every two days.”

That’s part of the reason why “general search”—searching of all of the world’s accessible information and delivering results without differentiation—is fast becoming hopelessly outdated. In an era of exploding data, it is more efficient and more effective to presort information into categories. So it is hardly surprising that Google searches have evolved to emphasize specialized results better targeted to users’ queries.

Yet regulators seem perplexed. Consider what European Commissioner for Competition Margrethe Vestager said recently about the EU’s formal complaint against Google: “We find the conduct in one area where it has a very dominant position in one market, which is general search, has led to favorable treatment not based on the merits in another related market.”

This reflects a deep misunderstanding. It’s a mistake to consider “general search” and “comparison shopping” or “product search” to be distinct markets.

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