From the NY Times:

Uber, a company based in San Francisco, is introducing a smartphone app to New York that allows available taxi drivers and cab-seeking riders to find one another. The company said the service would begin operating on Wednesday in 105 cabs — a bit less than 1 percent of the city’s more than 13,000 yellow cabs. Uber added that it hoped to recruit 100 new drivers each week.

But the program may have a significant problem: Taxi officials say that Uber’s service may not be legal since city rules do not allow for prearranged rides in yellow taxis. They also forbid cabbies from using electronic devices while driving and prohibit any unjustified refusal of fares. (Under Uber’s policy, once a driver accepts a ride through the app, no other passenger can be picked up.)

So, who else might be interested in fighting the rise of Uber and similar services?

The influx of apps appears to have created a moment of unity among yellow-taxi, livery and black-car operators, all of whom have raised concerns about the apps’ legality. Some industry officials said the commission was not acting forcefully enough; the result, said Avik Kabessa, the chief executive of Carmel Car and Limousine Service and a member of the board of the Livery Roundtable, a group representing livery drivers, is a New York City version of “the Wild West.”  An analysis conducted by the Metropolitan Taxicab Board of Trade, which represents yellow-taxi operators, identified what it deemed to be 11 potential violations of taxi guidelines in Uber’s model. These included charging a tip automatically, not allowing for cash payments and turning away passengers while being on duty.

Uber and similar services face similar threats in other cities, including here in DC, where Uber faced the “Uber Amendments” which would require Uber to charge five times the price of a cab!  At least the DC Commission was incredibly clear about the role of the regulation: to suppress competition and harm consumers:

Explanation and Rationale
· This section would clarify how sedan services operate.

· Sedans would be required to charge a minimum fare of 5 times the drop rate for taxicabs.

· Sedans would be required to charge time and distance rates that are greater as those for taxicabs.

· These requirements would ensure that sedan service is a premium class of service with a substantially higher cost that does not directly compete with or undercut taxicab service.

Here is Uber’s response to the DC Council:

The Council’s intention is to prevent Uber from being a viable alternative to taxis by enacting a price floor to set Uber’s minimum fare at today’s rates and no less than 5 times a taxi’s minimum fare. Consequently they are handicapping a reliable, high quality transportation alternative so that Uber cannot offer a high quality service at the best possible price. It was hard for us to believe that an elected body would choose to keep prices of a transportation service artificially high – but the goal is essentially to protect a taxi industry that has significantexperience in influencing local politicians. They want to make sure there is no viable alternative to a taxi in Washington DC, and so on Tuesday (tomorrow!), the DC City Council is going to formalize that principle into law.

There appears to be subsequent history, including a temporary shelving of the Amendment with the potential to bring it back on its own in the future.  Councilwoman and George Washington Law Prof Mary Cheh is a force behind the Uber Amendment and complained that a settlement could not be reached with Uber that would shed the requirement of having prices 5 times higher, but retain a price differential in the name of shielding taxi cabs from competition (emphasis my own):

Establishing a minimum fare is important to distinguish premium sedan service from traditional taxicab service and to prevent sedans from directly competing with or undercuting taxicabs.  Taxi companies want minimum fares that are much higher than what I am proposing in my amendment.  However, I believe that simply preserving the status quo is appropriate and reasonable.

I am deeply disappointed that Uber has decided that it no longer supports this amendment that we negotiated in good faith.  The taxi industry is one that has been regulated for a very long time.  If Uber wishes to operate taxis, then it is free to do so, but it should then be subject to the same regulations and requirements of taxis.

As I frequently point out on the blog, local barriers to entry cause substantially greater dissipation of consumer surplus than is conventionally acknowledged (e.g., here, here, and here).

HT: Hal Singer.

Filed under: barriers to entry, business, economics, licensing, markets, technology

The e-book market is quite remarkable. The economic models for the distribution of this unique product are original and differ from one jurisdiction to another. The antitrust litigations, in both the US and Europe, against Apple and publishing companies as well as the French law on e-Book price-fixing are challenging the boundaries of antitrust.

SSRN-id2140778

Michael McCann (Vermont, CNNSI) has a very interesting column on developments in Ed O’Bannon’s lawsuit against the NCAA.   O’Bannon is challenging the NCAA’s licensing of the names, images and likenesses of former Division I college athletes for commercial purposes without compensation or consent.  McCann discusses the implications of O’Bannon’s motion to expand the class to include current players:

The prospect of O’Bannon v. NCAA radically reshaping college sports is real. If O’Bannon ultimately prevails, “student-athletes” and “amateurism” would take on new meanings in the context of D-I sports. While college athletes would still not obtain compensation for their labor, they would be compensated for the licensing of their identity. If O’Bannon instead extracts a favorable settlement from the NCAA, these athletes would likely be compensated as well.

Still, it’s early in the litigation process and, besides, the NCAA has a good record in court. The NCAA is sure to raise concerns about the new world of D-I college sports as envisioned by O’Bannon. For one, how a fund for current student-athletes is distributed and how former student-athletes are compensated will spark questions. Should star players get more? Would Title IX be implicated if male student-athletes receive more licensing revenue because they might generate more revenue than female student-athletes? Also expect some colleges and universities to bemoan that they cannot afford to contribute to player trusts unless they eliminate most of their teams and give pay cuts to coaches and staff. Along those lines, schools with large endowments or those with high revenue-generating teams may only become “richer” in a college sports world where certain schools have the financial wherewithal to compensate student-athletes while others do not.

Go read the whole thing.

 

 

Filed under: antitrust, cartels, sports

In a response to my essay, The Trespass Fallacy in Patent Law, in which I explain why patent scholars like Michael Meurer, James Bessen, T.J. Chiang and others are committing the nirvana fallacy in their critiques of the patent system, my colleague, T.J. Chiang writes at PrawfsBlawg:

The Nirvana fallacy, at least as I understand it, is to compare an imperfect existing arrangement (such as the existing patent system) to a hypothetical idealized system. But the people comparing the patent system to real property—and I count myself among them—are not comparing it to an idealized fictional system, whether conceptualized as land boundaries or as estate boundaries. We are saying that, based on our everyday experiences, the real property system seems to work reasonably well because we don’t feel too uncertain about our real property rights and don’t get into too many disputes with our neighbors. This is admittedly a loose intuition, but it is not an idealization in the sense of using a fictional baseline. It is the same as saying that the patent system seems to work reasonably well because we see a lot of new technology in our everyday experience.

I would like to make two quick points in response to T.J.’s attempt at wiggling out from serving as one of the examples I identify in my essay as a patent scholar who uses trespass doctrine in a way that reflects the nirvana fallacy.

First, what T.J. describes as what he is doing — comparing an actual institutional system to a “loose intuition” about another institutional system — is exactly what Harold Demsetz identified as the nirvana fallacy (when he roughly coined the term in 1969).  When economists or legal scholars commit the nirvana fallacy, they always justify their idealized counterfactual standard by appeal to some intuition or gestalt sense of the world; in fact, Demsetz’s example of the nirvana fallacy is when economists have a loose intuition that regulation always works perfectly to fix market failures.  These economists do this for the simple reason that they’re social scientists, and so they have to make their critiques seem practical.

It’s like the infamous statement by Pauline Kael in 1972 (quoting from memory): “I can’t believe Nixon won, because I don’t know anyone who voted for him.” Similarly, what patent scholars like T.J. are doing is saying: “I can’t believe that trespass isn’t clear and efficient, because I don’t know anyone who has been involved in a trespass lawsuit or I don’t hear of any serious trespass lawsuits.”  Economists or legal scholars always have some anecdotal evidence — either personal experiences or merely an impressionistic intuition about other people — to offer as support for their counterfactual by which they’re evaluating (and criticizing) the actual facts of the world. The question is whether such an idealized counterfactual is a valid empirical metric or not; of course, it is not.  To do this is exactly what Demsetz criticized as the nirvana fallacy.

Ultimately, no social scientist or legal scholar ever commits the “nirvana fallacy” as T.J. has defined it in his blog posting, and this leads to my second point.  The best way to test T.J.’s definition is to ask: Does anyone know a single lawyer, legal scholar or economist who has committed the “nirvana fallacy” as defined by T.J.?  What economist or lawyer appeals to a completely imaginary “fictional baseline” as the standard for evaluating a real-world institution?

The answer to this question is obvious.  In fact, when I posited this exact question to T.J. in an exchange we had before he made his blog posting, he could not answer it.  The reason why he couldn’t answer it is because no one says in legal scholarship or in economic scholarship: “I have a completely made-up, imaginary ‘fictionalized’ world to which I’m going to compare to a real-world institution or legal doctrine.”  This is certainly is not the meaning of the nirvana fallacy, and I’m fairly sure Demsetz would be surprised to learn that he identified a fallacy that according to T.J. has never been committed by a single economist or legal scholar. Ever.

In sum, what T.J. describes in his blog posting — using a “loose intuition” of an institution an empirical standard for critiquing the operation of another institution — is the nirvana fallacy. Philosophers may posit completely imaginary and fictionalized baselines — it’s what they call “other worlds” — but that is not what social scientists and legal scholars do.  Demsetz was not talking about philosophers when he identified the nirvana fallacy.  Rather, he was talking about exactly what T.J. admits he does in his blog posting (and which he has done in his scholarship).

Filed under: economics, intellectual property, law and economics, legal scholarship, patent, scholarship

For those who follow these things (and for those who don’t but should!), Eric Goldman just posted an excellent short essay on Section 230 immunity and account terminations.

Here’s the abstract:

An online provider’s termination of a user’s online account can be a major-and potentially even life-changing-event for the user. Account termination exiles the user from a virtual place the user wanted to be; termination disrupts any social network relationship ties in that venue, and prevents the user from sending or receiving messages there; and the user loses any virtual assets in the account, which could be anything from archived emails to accumulated game assets. The effects of account termination are especially acute in virtual worlds, where dedicated users may be spending a majority of their waking hours or have aggregated substantial in-game wealth. However, the problem arises in all online environments (including email, social networking and web hosting) where account termination disrupts investments made by users.

Because of the potentially significant consequences from online user account termination, user-rights advocates, especially in the virtual world context, have sought legal restrictions on online providers’ discretion to terminate users. However, these efforts are largely misdirected because of 47 U.S.C. §230(c)(2) (“Section 230(c)(2)”), a federal statutory immunity. This essay, written in conjunction with an April 2011 symposium at UC Irvine entitled “Governing the Magic Circle: Regulation of Virtual Worlds,” explains Section 230(c)(2)’s role in immunizing online providers’ decisions to terminate user accounts. It also explains why this immunity is sound policy.

But the meat of the essay (at least the normative part of the essay) is this:

Thus, broadly conceived, § 230(c)(2) removes legal regulation of an online provider’s account termination, making the marketplace the main governance mechanism over an online provider’s choices. Fortunately, the marketplace is effective enough to discipline those choices.

Eric doesn’t talk explicitly here about property rights and transaction costs, but that’s what he’s talking about.  Well-worth reading as a short, clear, informative introduction to this extremely important topic.

Filed under: constitutional law, contracts, technology, telecommunications, torts Tagged: Communications Decency Act. Section 230, Eric Goldman, Immunity, ISPs, Online Communities

Thank you to Josh for inviting me to guest blog on Truth on the Market.  As my first blog posting, I thought TOTM readers would enjoy reading about my latest paper that I posted to SSRN, which has been getting some attention in the blogosphere (see here and here).  It’s a short, 17-page essay — see, it is possible that law professors can write short articles — called, The Trespass Fallacy in Patent Law.

This essay responds to the widely-heard cries today that the patent system is broken, as expressed in the popular press and by tech commentators, legal academics, lawyers, judges, congresspersons and just about everyone else.  The $1 billion verdict issued this past Friday against Samsung in Apple’s patent infringement lawsuit, hasn’t changed anything. (If anything, Judge Richard Posner finds the whole “smart phone war” to be Exhibit One in the indisputable case that the patent system is broken.)

Although there are many reasons why people think the patent system is systemically broken, one common refrain is that patents fail as property rights because patent infringement doctrine is not as clear, determinate and efficient as trespass doctrine is for real estate. Thus, the explicit standard that is invoked to justify why we must fix patent boundaries — or the patent system more generally — is that the patent system does not work as clearly and efficiently as fences and trespass doctrine do in real property. As Michael Meurer and James Bessen explicitly state in their book, Patent Failure: “An ideal patent system features rights that are defined as clearly as the fence around a piece of land.”

My essay explains that this is a fallacious argument, suffering both empirical and logical failings. Empirically, there are no formal studies of how trespass functions in litigation; thus, complaints about the patent system’s indeterminacy are based solely on an idealized theory of how trespass should function.  Often times, patent scholars, like my colleague, T.J. Chiang, just simply assert without any supporting evidence whatsoever that fences are “crystal clear” and thus there are “stable boundaries” for real estate; T.J. thus concludes that the patent system is working inefficiently and needs to be reformed (as captured in the very title of his article, Fixing Patent Boundaries). The variability in patent claim construction, asserts T.J. is tantamount to “the fence on your land . . . constantly moving in random directions. . . . Because patent claims are easily changed, they serve as poor boundaries, undermining the patent system for everyone.”

Other times, this idealized theory about trespass is given some credence by appeals to loose impressions or a gestalt of how trespass works, or there are appeals to anecdotes and personal stories about how well trespass functions in the real world. Bessen and Meurer do this in their book, Patent Failure, where they back up their claim that trespass is clear with a search they apparently did on Westlaw of innocent trespass cases in California in a 3-year period. Either way, assertions backed by intuitions or a few anecdotal cases cannot serve as an empirical standard by which one makes a systemic evaluation that we should shift to anther institutional arrangement because the current one is operating inefficiently. In short, the trespass standard represents the nirvana fallacy.

Even more important, anecdotal evidence and related studies suggest that trespass and other boundary disputes between landowners are neither as clear nor as determinate as patent scholars assume them to be (something I briefly summarize on in my essay and call for more empirical studies to be done).

Logically, the comparison of patent boundaries to trespass commits what philosophers would call a category mistake. It conflates the boundaries of an entire legal right (a patent), not with the boundaries of its conceptual counterpart (real estate), but rather with a single doctrine (trespass) that secures real estate only in a single dimension (geographic boundaries). As all 1Ls learn in their Property courses, real estate is not land. Accordingly, estate boundaries are defined along the dimensions of time, use and space, as represented in myriad doctrines like easements, nuisance, restrictive covenants, and future interests, among others. In fact, the overlapping possessory and use rights shared by owners of joint tenancies or by owners of possessory estates with overlapping future interests share many conceptual and doctrinal similarities to the overlapping rights that patent-owners may have over a single product in the marketplace (like a smart phone).  In short, the proper conceptual analog for patent boundaries is estate boundaries, not fences.

In sum, the trespass fallacy is driving an indeterminacy critique in patent law that is both empirically unverified and conceptually misleading, and check out my essay for much more evidence and more in-depth explanation of why this is the case.

Filed under: intellectual property, law and economics, patent, SSRN, truth on the market

Yesterday was seemingly a good day for users of smartphones, tablets and other mobile devices. The Federal Communications Commission approved, with conditions, Verizon’s purchase of wireless spectrum from SpectrumCo, a consortium of cable companies. The more spectrum that’s put to use, the more we’ll ease the coming “spectrum crunch” as exploding data demands outstrip supply. This particular spectrum has sat unused for years, and the FCC’s approval of the deal (following on the Department of Justice’s approval last week) clears the way for some welcome relief.

Read the full piece here.

Yesterday was seemingly a good day for users of smartphones, tablets and other mobile devices. The Federal Communications Commission approved, with conditions, Verizon’s purchase of wireless spectrum from SpectrumCo, a consortium of cable companies. The more spectrum that’s put to use, the more we’ll ease the coming “spectrum crunch” as exploding data demands outstrip supply. This particular spectrum has sat unused for years, and the FCC’s approval of the deal (following on the Department of Justice’s approval last week) clears the way for some welcome relief.

The FCC’s decision seems measured, citing both benefits and risks of the deal to consumers and rejecting most of the claims of the deal’s staunchest critics. But this apparent reasonableness masks the true, arbitrary nature of FCC review: a costly, unsupervised game of “Mother, May I?”, requiring applicants to rearrange their businesses in ways the agency could neither require by regulation nor extract as concessions without exceeding the proper scope of its transaction review. Most troublingly, the FCC need not even make its extra-legal demands explicit. Because all future applicants know that the actual approval of this deal is far less significant to them than the process behind it, even yesterday’s good news comes with an asterisk.

It’s no secret that some at the agency — to say nothing of the self-proclaimed consumer advocates who aggrandize it –seek to manage the tech sector based largely on their unsubstantiated belief that “Big is Bad.” Yesterday’s order and the conditions imposed on the parties are animated by this assertion. But it’s by no means clear that consumers are well served by this approach; rather, this maligned concentration of spectrum has been accompanied by lower prices — along with enormous investment, expanded access and rapid innovation.

[From Gerald R. Faulhaber, et al., Assessing Competition in U.S. Wireless Markets: Review of the FCC’s Competition Reports (July 11, 2011), available at http://ssrn.com/abstract=1880964.]

Of course, sometimes big really is bad. The central challenge for policymakers is ensuring they don’t erroneously thwart beneficial deals and instead heed Nobel laureate Ronald Coase’s caution: “if [a regulator] finds something — a business practice of one sort or other — that he does not understand, he looks for a monopoly explanation.” That’s why, in theory, we limit agencies’ authority to review deals. But in practice, the FCC exceeds limits on its authority, applies a vague “public interest” standard with little analytical rigor, and avoids even that minimal rigor by pressuring companies into making “voluntary” concessions.

In this case, the FCC’s review of the commercial agreements accompanying the spectrum deal exceeded the limits of Section 310(d) of the Communications Act. As Commissioner Pai noted in his concurring statement, “Congress limited the scope of our review to the proposed transfer of spectrum licenses, not to other business agreements that may involve the same parties.” We (and others) raised this concern in public comments filed with the Commission. Here’s the agency’s own legal analysis — in full: “The Commission has authority to review the Commercial Agreements and to impose conditions to protect the public interest.” There’s not even an accompanying footnote.

Accepting the limits Congress has imposed on the FCC doesn’t require approving the Verizon/SpectrumCo deal — or any other. The DOJ is perfectly willing to use antitrust to block such deals, such as rejecting the AT&T/T-Mobile merger last year. Just last week, DOJ demanded concessions of the parties to this deal (although its analysis, too, was flawed). The key difference is that DOJ can block or condition approval of a deal only if it shows the deal would substantially harm consumer welfare. And DOJ bears the burden of showing this harm, measured against extensive case law and economic analysis. But parties before the FCC bear the burden of demonstrating that their transactions enhance competition and serve the “public interest.” That phrase “lacks any definite meaning,” as Ronald Coase noted more than 50 years ago. Little has changed.

The FCC falls prey all too easily to the problem Coase identified: overestimating the dangers of concentration and underestimating how much spectrum sales and other transactions can benefit consumers. Even the Obama DOJ has cautioned the FCC against “striving for broadband markets that look like textbook markets of perfect competition….” As industry evolves and competitors vie for scarce resources (especially in wireless broadband), they meet new competitive challenges with novel business arrangements and increased investment. Economies of scale may become more important, and concentration may increase, benefiting, rather than harming, consumers. But the FCC cries “Monopoly!” — without actually having to prove it.

Perhaps worse, having firms over a barrel, the FCC uses its leverage to regulate future conduct by extracting “voluntary” conditions in the name of the public interest –often conditions it couldn’t impose by regulation. That’s almost certainly what happened here with Verizon’s concession on data roaming. Verizon (but not its competitors) will be subject, for five years, to obligations the D.C. Circuit may soon rule the FCC has no authority to impose — much as Comcast “voluntarily” agreed to net neutrality conditions in its merger with NBC Universal even stricter than the regulations the D.C. Circuit seems likely to strike down for everyone else. This creates a patchwork of rules and obligations, coerced without sound economic justification, in a fashion largely unreviewable by courts, and in contravention of limits placed on the FCC’s authority by Congress and the courts.

This effectively grants the FCC unchecked power to stop transactions it doesn’t even have the authority to review, and to regulate companies in extra-legal ways it has no authority to.

Congress should rein in the FCC. The FCC Process Reform Act passed by the House in March (but now stalled in the Senate) is a good start, requiring that conditions be narrowly tailored to real harms the FCC actually has authority to regulate. But until Congress makes clear that the public interest standard is not a carte blanche and that the limits it explicitly imposed on the scope of the Commission’s reviewing authority are binding — or, even better, that the DOJ alone has the authority to analyze a transaction’s competitive effects — the FCC will continue playing games with our high-tech economy, even when it appears to be exercising restraint.

Cross-posted from CNET

My former student and recent George Mason Law graduate (and co-author, here) Angela Diveley has posted Clarifying State Action Immunity Under the Antitrust Laws: FTC v. Phoebe Putney Health System, Inc.  It is a look at the state action doctrine and the Supreme Court’s next chance to grapple with it in Phoebe Putney.  here is the abstract:

The tension between federalism and national competition policy has come to a head. The state action doctrine finds its basis in principles of federalism, permitting states to replace free competition with alternative regulatory regimes they believe better serve the public interest. Public restraints have a unique ability to undermine the regime of free competition that provides the basis of U.S.- and state-commerce policies. Nevertheless, preservation of federalism remains an important rationale for protecting such restraints. The doctrine has elusive contours, however, which have given rise to circuit splits and overbroad application that threatens to subvert the state action doctrine’s dual goals of federalism and competition. The recent Eleventh Circuit decision in FTC v. Phoebe Putney Health System, Inc. epitomizes the concerns associated with misapplication of state action immunity. The U.S. Supreme Court recently granted the FTC’s petition for certiorari and now has the opportunity to more clearly define the contours of the doctrine. In Phoebe Putney, the FTC has challenged a merger it claims is the product of a sham transaction, an allegation certain to test the boundaries of the state action doctrine and implicate the interpretation of a two-pronged test designed to determine whether consumer welfare-reducing conduct taken pursuant to purported state authorization is immune from antitrust challenge. The FTC’s petition for writ of certiorari raises two issues for review. First, it presents the question concerning the appropriate interpretation of foreseeability of anticompetitive conduct. Second, the FTC presents the question whether a passive supervisory role on the state’s part can be construed as state action or whether its approval of the merger was a sham. In this paper, I seek to explicate the areas in which the state action doctrine needs clarification and to predict how the Court will decide the case in light of precedent and the principles underlying the doctrine.

Go read the whole thing.

Filed under: antitrust, economics, federalism, george mason university school of law, legal scholarship