Yesterday, June 25, 2014, the U.S. Supreme Court issued two important opinions that advance free markets and free people in Riley v. California and ABC v. Aereo. I’ll soon have more to say about the latter case, Aereo, in which my organization filed a amicus brief along with the International Center for Law and Economics. But for now, I’d like to praise the Court for reaching the right result in a duo of cases involving police warrantlessly searching cell phones incident to lawful arrests.

Back in 2011, when I wrote in a feature story in Ars Technica—which I discussed on these pages—police in many jurisdictions were free to search the cell phones of individuals incident to their arrest. If you were arrested for a minor traffic violation, for instance, the unencrypted contents of your cell phone were often fair game for searches by police officers.

Now, however, thanks to the Supreme Court, police may not search an arrestee’s cell phone incident to her or his arrest—without specific evidence giving rise to an exigency that justifies such a search. Given the broad scope of offenses for which police may arrest someone, this holding has important implications for individual liberty, especially in jurisdictions where police often exercise their search powers broadly.

Last week, the Mercatus Center and the R Street Institute co-hosted a video discussion about copyright law. I participated in the Google Hangout, along with co-liberator Tom Bell of Chapman Law School (and author of the new book Intellectual Privilege), Mitch Stoltz of the Electronic Frontier Foundation, Derek Khanna, and Zach Graves of the R Street Institute. We discussed the Aereo litigation, compulsory licensing, statutory damages, the constitutional origins of copyright, and many more hot copyright topics.

You can watch the discussion here:

Two weeks ago, with much fanfare, PiracyData.org went live. Created by co-liberators Jerry Brito and Eli Dourado, along with Matt Sherman, the website tracks TorrentFreak’s list of which movies are most pirated each week, and indicates whether and how consumers may legally watch these movies online. The site’s goal, Brito explains, is to “shed light on the relationship between piracy and viewing options.” Tim Lee has more details over on The Switch.

Assuming the site’s data are accurate—which it appears to be, despite some launch hiccups—PiracyData.org offers an interesting snapshot of the market for movies on the Internet. To date, the data suggest that a sizeable percentage of the most-pirated movies cannot be purchased, rented, or streamed from any legitimate Internet source. Given that most major movies are legally available online, why do the few films that aren’t online attract so many pirates? And why hasn’t Hollywood responded to rampant piracy by promptly making hit new releases available online?

Is Hollywood leaving money on the table?

To many commentators, PiracyData.org is yet another nail in Hollywood’s coffin. Mike Masnick, writing on Techdirt, argues that “the data continues to be fairly overwhelming that the ‘piracy problem’ is a problem of Hollywood’s own making.” The solution? Hollywood should focus on “making more content more widely available in more convenient ways and prices” instead of “just point[ing] the blame finger,” Masnick concludes. Echoing this sentiment, CCIA’s Ali Sternburg points out on DisCo that “[o]ne of the best options for customers is online streaming, and yet piracydata.org shows that none of the most pirated films are available to be consumed in that format.”

But the argument that Hollywood could reap greater profits and discourage piracy simply by making its content more available has serious flaws. For one thing, as Ryan Chittum argues in the Columbia Journalism Review, “the movies in the top-10 most-pirated list are relatively recent releases.” Thus, he observes, these movies are “in higher demand—including from thieves—than back-catalog films.” If PiracyData.org tracked release dates, each film’s recency of release might well turn out to be more closely correlated with piracy than availability of legitimate viewing options.

In fairness to Masnick and Sternburg, Hollywood probably could make a dent in piracy if it put every new movie on iTunes, Vudu, Google Play, Amazon, and Netflix the day of release. Were these lawful options available from the get-go, they’d likely attract some people who would otherwise pirate a hit new film by grabbing a torrent on The Pirate Bay. Those who pirate movies may be law-breaking misers, but they still weigh tradeoffs and respond to incentives like any other consumer. Concepts like legality may not matter to pirates, but they still care about price, quality, and convenience. This is why you won’t see a video that’s freely available in high-definition on YouTube break a Bittorrent record anytime soon.

But even if Hollywood could better compete with piracy by vastly expanding online options for viewing new release films, this might not be a sound money-making strategy. Each major film studio is owned by a publicly-held corporation that operates for the benefit of its shareholders. In other words, the studios are in the business of earning profits, not maximizing their audiences. For every two people who stream a movie on Netflix instead of pirating it, another person may watch the same Netflix stream in lieu of renting the movie for $2.99 on Google Play, resulting in a net loss for the copyright holder. Deciding how to distribute an information good such as a hit new movie—and how much to charge for it—poses an extremely complex business challenge, especially in an ever-changing economic and technological environment, as Carl Shapiro and Hal Varian explain in their classic 1998 book, Information Rules: A Strategic Guide to the Network Economy.

Why are release windows still around?

Instead of giving Hollywood the benefit of the doubt by assuming the studios are acting rationally, let’s consider whether the industry has a plausible case for releasing movies online only after they’ve been in theaters for months. By way of background, in case you’ve lived under a rock for the past half-century, major studio movie releases typically don’t appear online or in video stores until 90 to 120 days after theatrical release, depending on the movie and distribution avenue. Preserving the box office exclusivity of newly released films encourages moviegoers to head to their local theater—where ticket prices hover around $8—instead of renting the movie on Blu-ray or online at a lower price.

This strategy, a form of price discrimination known as “versioning,” aims to expand the market for movies by appealing to a broader array of consumers. When executed properly, versioning increases studio profits, and probably makes society better off as well. Consider the book market: publishers often release a book in hardcover format at first, then a year later, in paperback at a much lower price. Were both versions released simultaneously, fewer hardcovers would sell, so the publisher would likely charge more for paperbacks. In the end, fewer consumers could afford to purchase and enjoy certain books.

Of course, staggering release dates isn’t the only way studios distinguish different versions of the same movie. In fact, the release window has a serious downside: it doesn’t accommodate people who, for various reasons, can’t easily get to a movie theater. For instance, nearly 11 million disabled Americans receive Social Security Disability Insurance benefits. Around 60 million reside in rural areas, some hundreds of miles from the nearest city. And 14 million U.S. households include one or more children under 6 years of age. For many of these people, traveling to a movie theater may be extremely difficult or costly. Simply getting out of the house for a couple hours may be burdensome, especially for parents with young kids at home. Or, like Mike Masnick, maybe you just hate the experience that movie theaters typically offer.

Fortunately, enjoying a film need not entail trekking to a movie theater. Thanks to television and broadband Internet, watching a movie at home is often as easy as pressing a few buttons on a remote control. This is great news for movie lovers who are disabled, have young kids at home, or live in remote areas. If you want to catch a brand new movie from the comfort of your own couch, however, you’re probably out of luck.

From Hollywood’s perspective, this presents a problem. If a family of four is willing to pay $30 to watch a brand new movie, whether they watch it at home or in a theater is inconsequential. Instead, Hollywood wants to capture as many high-value consumers as possible. The release window is merely an imperfect proxy for consumers’ marginal willingness to pay for movies. It also enables more flexible pricing—one ticket for every person—which is infeasible for digital rentals and purchases. But there’s nothing sacred about the release window. Back in the 1980s, “[t]he video window opened six months after the theatrical release and four months before the pay-per-view window,” according to Edward Jay Epstein, author of The Hollywood Economist. Later, as DVD sales began to rival and sometimes exceed box office receipts, the major studios gradually shortened their release windows, which are now often as short as three months.

Even the 90 day release window is showing signs of obsolescence. Recently, Hollywood has experimented on several occasions with letting consumers watch movies at home just weeks after their theatrical release, as I explained on these pages in 2008. In late 2011, for instance, Universal Studios sought to make Tower Heist available on-demand to 500,000 Comcast subscribers just 21 days after the film’s release. Despite the planned $60 rental fee, however, Universal called off the trial just weeks before Tower Heist‘s release after Cinemark, a major movie theater chain, threatened to boycott the film. If you’re still balking at the price tag—yes, a $60 rental is too expensive for all but the most profligate movie buffs—rest assured Hollywood isn’t giving up. As a recent article in The Convergence explains:

Two years ago, a number of major studios tested early release models based on varying windows. Disney rolled out an animated film, “Tangled,” in Portugal just a month and a half after its initial release. In the U.S., DirecTV served up several movies with a 60-day window for $30 a pop from Sony, Warner Bros., Universal Pictures and 20^th Century Fox.

A few months ago, The Wall Street Journal reported that Sony offered Django Unchained in South Korea for online and cable rental three weeks after its April 2013 premier in Korean theaters. And Disney offered two of its animated films, Wreck-it Ralph and Brave, for online rental in South Korea just a few weeks after their releases in 2012. Also this summer, in a more modest trial, Canadian theater company Cineplex joined with Warner Bros. to sell ticket purchasers a digital copy of Pacific Rim for an extra $19.99 to $24.99 atop the ticket price.

Will these experiments become the new norm over the next few years? Quite possibly. Although the theater owners who distribute Hollywood films will surely fight tooth and nail to preserve the release window, whether the theaters prevail depends on consumers themselves. If enough consumers are willing to pay for the privilege of watching new release movies on-demand or online, the studios won’t hesitate to meet this demand—theater owners be damned. But if the studios offer hit new films online at too low a price, some people who would otherwise be willing to spend $8 to see a movie in theaters will instead view it online for much less. This tradeoff, perhaps more than any other factor, explains the release window’s persistence.

If spending $20 or $30 on a digital rental of a new movie sounds unappealing, you’re not alone. Lots of people watch movies using free or inexpensive services such as broadcast television, Netflix, or Amazon Instant Video. There’s nothing wrong with that. But calling on Hollywood to offer popular new films on inexpensive streaming services is asking the studios to take a major pay cut for no good reason. Even if every last U.S. household signed up for Netflix, at $7.99 per month, the company would only bring in $11b annually. That’s a lot of cash, but consider that in 2012, the big six film studios generated $21.8b in revenues, according to Variety.

The upshot is that while cutting prices can be a great business strategy, especially in information markets where the marginal cost is near-zero, there’s little evidence that Hollywood is systematically over-pricing its movies. Some niche markets may be underserved—I for one wish VUDU’s HDX rentals offered 5.1 audio to PC users, in addition to Xbox 360 and PS3 owners—but all in all, Hollywood has made a ton of progress in the past few years when it comes to offering movies on all sorts of devices at a variety of price points.

Do release windows help combat piracy?

Above, I discussed how shorter release windows can help curb piracy, even if the net result is consumers spending less on movies. But giving consumers more movie options is a double-edged sword. Perhaps the big studios fear that if they begin releasing films online and in theaters simultaneously, the piracy problem may get worse, not better.

Are such concerns legitimate, or are Hollywood bigwigs making a mountain out of a molehill?

To answer this question, a visit to The Pirate Bay is in order. No, I won’t advise you to download a copyrighted movie. Rather, I’ll compare the search results for the last two movies I saw in theaters, both of which made the latest most-pirated list on PiracyData.org. First up is Pacific Rim, currently listed as the fourth most-pirated movie of the week. Released on July 12, 2013, Pacific Rim is available for digital rental and digital purchase, along with Blu-ray and DVD. The other film is Elysium, the sixth most-pirated movie of the week. Released on August 9, 2013, Elysium isn’t available from any authorized online outlets or on disc.

Searching The Pirate Bay for these two films reveals strikingly different results. See for yourself. Here are the top results for Pacific Rim, sorted by number of leeches:

And here are the top results for Elysium:

See the difference? Several Blu-ray rips of Pacific Rim are available, including several 1080p files and even a 12.9 GB 3D file (good luck getting it to play!). Note also that all of the top Pacific Rim torrents were uploaded during the past few weeks, even though the film came out back in July.

Elysium, on the other hand, is only available as an “HDRip,” “CAM,” “Screener,” “Webrip,” or “Telesync.” According to comments on The Pirate Bay, these files—many of which were uploaded in September or earlier—offer poor quality audio and video, while some files include “hardcoded subs” in a foreign language.

Why the discrepancy between Pacific Rim and Elysium? Because the former is available online and on disc, while the latter has yet to be released in either format. Acquiring a digital copy of a movie, it turns out, is much more cumbersome if the film is still only in theaters. For brand new movies, pirates typically distribute so-called “cams”—whereby a person simply records a movie in a theater with a handheld or tripod-mounted video camera—or “telesyncs,” which are similar to cams but include a direct connection to the sound source. Also sometimes uploaded are “screeners,” a pre-release DVD of a film usually sent to critics and award voters.

But when a hit new movie is released online and on Blu-ray, pristine digital copies of the film soon begin appearing on The Pirate Bay and similar outlets. Despite studios’ ongoing efforts to protect access to their works using digital rights management (DRM), nearly every major movie format has been cracked in short order. Blu-ray’s BD+ DRM, for instance, was cracked not long after its 2007 release by the Antiguan company SlySoft. To this day, newly released Hollywood films invariably end up online almost immediately after their release window ends—if not a few days sooner. Videophiles can even download untouched 30GB MPEG-2 Transport Stream files that are bit-for-bit identical to the Blu-ray version of the film.

If we assume pirates are more or less rational, it follows that they care about video and audio quality, much like their law-abiding counterparts. The easier it is for pirates to acquire a high-quality digital file of a new movie using Bittorrent, therefore, the less likely pirates are to bite the bullet and buy a ticket at the box office for a much awaited film. Although some pirates may be unwilling to pay to see a movie in a theater at any price, other pirates are surely more flexible when it comes to deciding how to enjoy a new movie. For consumers of the latter type, waiting three or four months to enjoy a new movie in a high-quality format may be unbearable for certain films.

So long as new DRM technologies are cracked soon after their release, many copyright owners will think twice before making high-value content available in a digital format. Unfortunately for law-abiding consumers, this understandable aversion to digital distribution results in fewer lawful venues for enjoying content online. Despite Congress’s efforts to bar the circumvention of technological measures that protect copyrighted works, DRM remains fallible—and the release window persists.

Don’t blame the victim-blamer

Some critics have accused PiracyData.org’s creators of “blaming the victim.” For instance, Larry Spiwak of the Phoenix Center writes that the site’s “mentality is nothing new to the digital piracy debate and it entirely misses the point: intellectual property is property” (his emphasis). Jeff Eisenach makes a similar point over on AEI’s TechPolicyDaily.com.

One need not loathe copyrights, however, to care about how lawful markets for expressive works affect unlawful markets for such works. I’m strongly against assault and robbery—and support the criminalization of both acts—but I still care to know how to avoid being mugged or gunned down. If a journalist pens an article about neighborhoods to shun late at night if you’re alone and unarmed, it doesn’t mean she is pro-robbery or pro-violence. The law isn’t our only fount of protection from would-be aggressors. If we pretend otherwise by ignoring self-help options—or, worse, by trying to craft a government that can safeguard us against all ills—we’re kidding ourselves and screwing our posterity.

To be sure, I think copyright infringement is a problem. Brito agrees with me. And, as I’ve argued here, here, here, and here, federal law probably should do more to address piracy. But this proposition is not self-evident, however much its advocates wish it were so. Indeed, if Hollywood could double its profits while cutting piracy in half by revising its business model over the coming year, that’s a extremely good reason for Congress to hold off on anti-piracy legislation. If, however, Hollywood is doing its damnedest to curb infringement while preserving economic returns that are commensurate to the risks entailed in movie production, then it’s up to lawmakers to determine whether and how to better secure copyrights in a manner that serves human flourishing. Insofar as PiracyData.org can help inform this debate, may a thousand similar websites bloom.

It’s been over five years since Congress passed major legislation addressing copyright protection, but this hasn’t stopped copyright owners from achieving real progress in securing their expressive works. In cooperation with private-sector stakeholders, rights holders have made several deals aimed at combating copyright infringement and channeling consumer demand for original content toward legitimate outlets. These voluntary agreements will be the subject of a hearing this afternoon (9/18) before the House Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet. This panel marks the latest in a series of hearings the committee launched earlier this year to review the Copyright Act, much of which dates back to 1976 or earlier.

Copyright consensus may sound like an oxymoron, especially in the wake of last year’s bruising legislative battle over SOPA and PIPA. But in reality, there’s no shortage of common ground when it comes to copyright protection. Despite all the controversy that surrounds the issue, copyright isn’t so much a “conflict of visions”, to borrow from Thomas Sowell, but a conflict of tactics, as I argued earlier this year on Cato Unbound.

Indeed, with some notable exceptions, most scholars, business leaders, and policymakers accept that government has a legitimate and important role in securing to inventors and creators the fruits of their labors“. Unsurprisingly, the devil is in the details, where genuinely tough questions arise regarding the government’s proper role in policing the Internet for copyright violations. Should the law hold online intermediaries accountable for their users’ infringing acts? What remedies should the law afford rights holders whose works are unlawfully distributed all over the Internet, often by profit-generating foreign actors?

Although Congress has struggled mightily with these questions, business leaders from a variety of sectors have worked together to devise several approaches to the problem of copyright infringement that go above and beyond the Copyright Act. Perhaps most notably, in February 2013, a coalition of five major ISPs and several trade associations representing filmmakers and artists announced the launch of the Copyright Alert System (“CAS”). Administered by the Center for Copyright Information, the CAS aims to educate users about copyright law—and deter them from violating it—by delivering Copyright Alert notices to ISP subscribers found to be sharing infringing files on peer-to-peer networks.

It’s too early to render a verdict on the CAS’s effectiveness, but as data accumulates in coming months and years, researchers will surely examine how the system has impacted user behavior. Similar approaches to infringement by ISP subscribers have been tried in other countries such as France—albeit on a mandatory, not voluntary, basis—and several studies have found that these so-called “graduated response” systems have indeed reduced infringement in nations where they’ve been implemented. But other studies have reached the opposite conclusion, so more research is needed in this area. Whether or not CAS succeeds, however, experimentation involving novel approaches to copyright protection is crucial for the future of creative expression, as is experimentation among business models to monetize content.

Speaking of voluntary approaches to copyright protection, Google last week unveiled a report describing its anti-piracy efforts. As Google’s Fred von Lohmann explained:

[W]e are releasing a report, “How Google Fights Piracy,” bringing together in one place an overview of the programs, policies, and technologies we have put in place to combat piracy online.

The report discusses how Google penalizes websites that receive a high percentage of DMCA takedown notices in Google’s search results, hopefully thereby directing users toward legitimate sources of content. It explains the “Content ID” system pioneered by YouTube, which enables rights holders to identify potentially infringing videos posted to the site, and gives copyright owners the choice to monetize such videos in lieu of removing them altogether. And the report points out that in 2012, Google voluntarily disabled ad service to 46,000 websites dedicated to infringement. Check out the full report for much more information on these efforts and many others that Google has taken to better secure copyrights—and for another perspective, check out a MPAA-commissioned study released today critiquing the role that Internet search engines play in helping users find infringing websites.

After today’s hearing, I’ll have more thoughts on the state of voluntary cooperation to protect copyrights, and on the debate about whether file lockers and search engines ought to do more to combat infringement.

Yesterday, Time Warner Cable and CBS reached a deal to end the weeks-long impasse that had resulted in CBS being blacked out in over 3 million U.S. households.

I predicted the two companies would resolve their differences before the start of the NFL season in a RealClearPolicy op-ed published last week:

From Los Angeles to New York, 3 million Americans in eight U.S. cities haven’t been able to watch CBS on cable for weeks, because of a business dispute between the network and Time Warner Cable (TWC). The two companies can’t agree on how much TWC should pay to carry CBS, so the network has blacked out TWC subscribers since August 1. With the NFL season kicking off on September 5, the timing couldn’t be worse for football fans.

Regulators at the Federal Communications Commission (FCC) face growing pressure to force the feuding companies to reach an agreement. But despite viewers’ frustrations with this standoff, government intervention isn’t the answer. If bureaucrats begin “overseeing” disputes between network owners and video providers, television viewers will face higher prices or lower-quality shows.

TWC and CBS are playing hardball over serious cash. CBS reportedly seeks to double its fee to $2 per subscriber each month, which TWC claims is an outrageous price increase. But CBS argues it costs more and more to develop hit new shows like Under the Dome, so it’s only fair viewers pay a bit more.

Both sides have a point. TWC is looking out for its millions of subscribers—and its bottom line—by keeping programming costs down. CBS, on the other hand, needs cash to develop creative new content, and hopes it can make some money doing so.

What’s the “fair” price for CBS? The answer lies in the marketplace, which empowers firms to “discover” prices through negotiation. Both CBS and TWC have strong incentives to end this dispute—their shareholders won’t put up with this dispute forever. CBS can’t be happy about losing a reported $400,000 each day TWC subscribers can’t tune in, while TWC is surely losing customers to competing providers—including Verizon, which is aggressively wooing New Yorkers with its CBS-equipped FiOS service.

If the FCC intervenes, it must decide how much TWC should pay CBS. Regulators may be able to read charts, but they can’t read minds. How, then, can the FCC divine how much value the two companies and their customers place on these competing priorities? Given how Washington works, the feds will probably bend to whichever side hires the best-connected lobbyists and influence peddlers.

As long as networks are free to bargain with video providers, television blackouts will happen—but not often. According to economist Jeffrey Eisenach, blackouts disrupt less than 1 in 10,000 viewing hours for consumers. Disputes over fees rarely interrupt programming because they infuriate viewers, ultimately harming networks and cable companies alike. But this hardly means blackouts should be illegal. Imagine a labor union that couldn’t strike—no rational private-sector employer would take its wage demands seriously.

Why should cable companies pay for broadcast networks in the first place, given that broadcasters transmit their networks over the air for free? Because consumers prefer the convenience and reliability of network channels distributed by cable, and in order to satisfy this preference cable companies need access to material that does not belong to them. This access requires negotiating with the networks.

The alternative isn’t forcing networks to give their content away for free, but rather for cable subscribers to pay slightly lower bills but lose broadcast channels which they could still watch via antenna, just like everyone else. If customers preferred this, cable companies would happily stop paying broadcasters. As it is, cable consumers are paying more for convenience by choice, not unlike someone who goes to a weekend movie for $12 when they could go on a Tuesday night for $7.

If the government truly wants to help television viewers, Congress should nix the unfair and anti-competitive legal perks that broadcast affiliates currently enjoy, such as the federal regulation requiring cable companies to buy broadcast content only from the local affiliates in each city. In other words, a cable company can’t let New Yorkers watch primetime shows provided by any CBS station in the nation other than the New York CBS affiliate.

CBS and Time Warner Cable will reach a deal soon enough—they can’t afford not to. Meanwhile, if you’re sticking with TWC, you can still catch your CBS favorites over the air or on Internet platforms like Netflix, Amazon, and Hulu. So long as government stays out of the vibrant entertainment market, there will always be alternatives.

For more on this subject, see the recent essays by fellow Liberators Adam Thierer and Jerry Brito.

In June, The Guardian ran a groundbreaking story that divulged a top secret court order forcing Verizon to hand over to the National Security Agency (NSA) all of its subscribers’ telephony metadata—including the phone numbers of both parties to any call involving a person in the United States and the time and duration of each call—on a daily basis. Although media outlets have published several articles in recent years disclosing various aspects the NSA’s domestic surveillance, the leaked court order obtained by The Guardian revealed hard evidence that NSA snooping goes far beyond suspected terrorists and foreign intelligence agents—instead, the agency routinely and indiscriminately targets private information about all Americans who use a major U.S. phone company.

It was only a matter of time before the NSA’s surveillance program—which is purportedly authorized by Section 215 of the USA PATRIOT Act (50 U.S.C. § 1861)—faced a challenge in federal court. The Electronic Privacy Information Center fired the first salvo on July 8, when the group filed a petition urging the U.S. Supreme Court to issue a writ of mandamus nullifying the court orders authorizing the NSA to coerce customer data from phone companies. But as Tim Lee of The Washington Post pointed out in a recent essay, the nation’s highest Court has never before reviewed a decision of the Foreign Intelligence Surveillance Act (FISA) court, which is responsible for issuing the top secret court order authorizing the NSA’s surveillance program.

Today, another crucial lawsuit challenging the NSA’s domestic surveillance program was brought by a diverse coalition of nineteen public interest groups, religious organizations, and other associations. The coalition, represented by the Electronic Frontier Foundation, includes TechFreedom, Human Rights Watch, Greenpeace, the Bill of Rights Defense Committee, among many other groups. The lawsuit, brought in the U.S. district court in northern California, argues that the NSA’s program—aptly described as the “Assocational Tracking Program” in the complaint—violates the First, Fourth, and Fifth Amendments to the Constitution, along with the Foreign Intelligence Surveillance Act.

In a statement today, TechFreedom President Berin Szoka described the lawsuit as follows:

We’re standing up for the constitutional rights of all Americans: The First Amendment protects our right to communicate and associate privately. The Fourth Amendment protects us against unreasonable searches and seizures by barring the kind of general warrant that compelled U.S. telephone carriers to turn over potentially sensitive information about Americans’ telephone call records. The secretive processes of the Foreign Intelligence Surveillance Court violate the most fundamental guarantees of the Fifth Amendment to due process, as well as basic principles of the rule of law.

Amen. Our founding fathers wrote the 4th Amendment to prevent precisely this kind of secretive sifting through citizens’ private records. As the recent scandal involving the IRS targeting tea party groups illustrates, America’s founders knew all too well that government would always be tempted to use perfectly innocuous information about Americans’ beliefs and behaviors to harass them and treat them unfairly. This is why our Constitution and federal laws restrict the government’s power to collect private information about its citizens. These rules exist not so criminals can conceal their behavior, but to protect you and me. And when the government violates those rules, it is acting criminally.

Think you’re off the the hook because you communicate primarily using the Internet, rather than via phone? Think again. We know that far more extensive collection of Americans’ data has occurred under the same authority—50 U.S.C. § 1861—upon which the Associational Tracking Program is based.

According to a leaked 2009 NSA Inspector General report, NSA in 2001 began collecting “bulk Internet metadata” from at least three unknown large Internet companies. A 2007 DOJ memo regarding “supplemental procedures” for NSA data collection authorized the agency to collect Internet metadata—including the “email address[es]” of each sender and recipient of an email, along with their “IP address”—for “persons in the United States.” The memo further states that “NSA has in its database a large amount of communications metadata associated with persons in the United States.” However, a spokesman for James Clapper, the Director of National Intelligence has claimed this Internet metadata collection program was “discontinued in 2011 for operational and resource reasons.” Who knows if this is accurate, or another “clearly erroneous” statement that will be corrected in future months or years in a statement resembling the letter James Clapper sent to the Senate Intelligence Committee a few weeks ago.

Yet if the NSA’s Associational Tracking Program is lawful, the Internet metadata program is probably legal as well. If courts fail to halt the NSA’s program as it currently exists, and clarify what Section 215 of the USA PATRIOT Act really means, nothing is stopping the government from resuming its acquisition of Internet metadata—that is, if it hasn’t already done so.

These suspicionless mass surveillance programs don’t just endanger our constitutional rights. They also threaten free enterprise in the information economy. Increasingly, we transact, communicate, innovate, and create in the digital realm, where information itself is a form of wealth. But if Americans reasonably perceive their digital communications—including metadata—are subject to warrantless governmental interception, some who might use cloud services will choose not to do so. Not only would this distort the future of Internet commerce, it might cause cloud computing servers and businesses to move or be formed abroad—which, ironically, could deny U.S. law enforcement access to this cloud data.

If the information age is to realize its full potential, providers of electronic communications services must be free to make credible assurances to their users about when private information will be shared, and with whom. Users need to know that the data they relinquish is confined to agreed-upon business, transactional, and record-keeping purposes—not automatically stored in a government datacenter.

In the past couple weeks, three bills addressing the legality of cell phone unlocking have been introduced in the Senate:

• Sens. Leahy, Grassley, Franken, and Hatch’s “Unlocking Consumer Choice and Wireless Competition Act” (S.517)
• Sen. Ron Wyden’s “Wireless Device Independence Act” (S.467)
• Sen. Amy Klobuchar’s “Wireless Consumer Choice Act” (S.481)

This essay will explain how these bills would affect users’ ability to lawfully unlock their cell phones.

Background

If you buy a new cell phone from a U.S. wireless carrier and sign a multi-year service contract, chances are your phone is “locked” to your carrier. This means if you want to switch carriers, you’ll first need to unlock your phone. Your original carrier may well be happy to lend you a helping hand—but, if not, unlocking your phone may violate federal law.

The last few months have seen an explosion of public outcry over this issue, with a recent White House “We the People” petition calling for the legalization of cell phone unlocking garnering over 114,000 signatures—and a favorable response from the Obama administration. The controversy was sparked in October 2012, when a governmental ruling (PDF) announced that unlocking cell phones purchased after January 26, 2013 would violate a 1998 federal law known as the Digital Millennium Copyright Act (the “DMCA”).

Under this law’s “anti-circumvention” provisions (17 U.S.C. §§ 1201-05), it is generally illegal to “circumvent a technological measure” that protects a copyrighted work. Violators are subject to civil penalties and, in serious cases, criminal prosecution.

However, the law includes an escape valve: it empowers the Librarian of Congress, in consultation with the Register of Copyrights, to periodically determine if any users’ “ability to make noninfringing uses . . . of a particular class of copyrighted works” is adversely affected by the DMCA’s prohibition of tools that circumvent access controls. Based on these determinations, the Librarian may promulgate rules exempting categories of circumvention tools from the DMCA’s ban.

One such exemption, originally granted in 2006 and renewed in 2010, permits users to unlock their cell phones without their carrier’s permission. (You may be wondering why phone unlocking is considered an access control circumvention—it’s because unlocking requires the circumvention of limits on user access to a mobile phone’s bootloader or operating system, both of which are usually copyrighted.)

But late last year (2012), when the phone unlocking exemption came up for its triennial review, the landscape had evolved regarding a crucial legal question: do cell phone owners  own a copy of the operating system software installed on their phone, or are they merely licensees of the software?

Until a few years ago, the leading authority on what it means to own a copy of a computer program was the 2nd Circuit’s 2005 opinion in Krause v. Titleserv, Inc., 402 F.3d 119. There, the court held that a person owns a copy of software if he “exercises sufficient incidents of ownership over a copy of the program to be sensibly considered the owner of the copy . . . .” As the Copyright Office noted in its 2012 recommendation to the Librarian of Congress, the 2006 and 2010 rules exempting cell phone unlocking from the DMCA reflected an understanding, based in part on the holding in Krause, that a typical cell phone owner exercises a level of dominion over her device (and its digital contents) more akin to traditional property ownership than the licensed use of property owned by another.

But in 2010, the 9th Circuit took a very different approach in  Vernor v. Autodesk, Inc., 621 F.3d 1102, in which the court held that a “software user is a licensee rather than an owner of a copy where the copyright owner (1) specifies that the user is granted a license; (2) significantly restricts the user’s ability to transfer the software; and (3) imposes notable use restrictions.” Because a typical cell phone owner is bound by a “click-wrap” agreement that significantly restricts her ownership rights in her phone’s operating system, she’s arguably a licensee of the software—not an owner of a copy—according to Vernor.

In light of the  Vernor-Krause circuit split, combined with pronounced trend toward more permissive carrier unlocking policies in recent years, the Librarian of Congress substantially curtailed the exemption for cell phone unlocking for all new phones purchased after January 26, 2013. Today, an owner of a new phone may unlock it only if “the operator of the wireless communications network to which the handset is locked has failed to unlock it within a reasonable period of time following a request by the owner of the wireless telephone handset, and when circumvention is initiated by the owner, an individual consumer, who is also the owner of the copy of the computer program in such wireless telephone handset . . . .”

So it is that cell phone unlocking is now in many cases a violation of federal law. (For more background, check out the writings of Timothy Lee at Ars Technica, Derek Khanna at The Atlantic, and Mike Masnick at Techdirt.)

How would the bills recently introduced in Congress address the cell phone unlocking issue? Let’s take a look at each bill.

The Unlocking Consumer Choice and Wireless Competition Act

To begin with the simplest of the cell phone unlocking bills, Sens. Leahy, Grassley, Franken, and Hatch’s Unlocking Consumer Choice and Wireless Competition Act (S.517) would simply amend the Code of Federal Regulations, replacing the pertinent paragraph from the Librarian of Congress’s 2012 rulemaking (codified at 37 C.F.R. § 201.40(b)(3)) with its more permissive 2010 analogue. The bill also tasks the Librarian of Congress with determining whether to extend the unlocking exemption to other wireless devices (e.g., mobile broadband-enabled tablets), based on the DMCA’s usual rulemaking criteria.

By restoring the broad DMCA exemption for phone unlocking in force from 2006 to 2012, S.517 addresses the problem at hand without going too far. It neither forces carriers to help users unlock their phones, nor limits carriers’ ability to recover damages from subscribers who breach their contracts. Rather, the bill would simply shield users who unlock their cell phones from the DMCA’s harsh penalties. In striking this balance, S.517 deserves credit for aiming to solve a discrete problem with a narrowly-tailored solution.

But would S.517’s fix last? Given that “[n]othing in [the] Act alters . . . the authority of the Librarian of Congress under [the DMCA],” S.517 would presumably leave unchanged the substantial deference enjoyed by the Librarian regarding his decisions about which circumvention tools to exempt—including cell phone unlocking tools. If, three years from now, the Librarian boldly decides that his 2012 decision to curtail the phone unlocking exemption was correct, and thus restores the language currently in force, Congress will be back at square one.

For a more lasting solution, Congress could act under the Congressional Review Act (“CRA”) to pass a resolution expressing its disapproval of the Librarian’s 2012 rule. If both houses of Congress were to pass such a resolution, and the President were to sign it, the narrow cell phone unlocking rule would be nullified—permanently. And the Librarian couldn’t simply reissue the rule, as a rule nullified under the CRA “may not be reissued in substantially the same form.” 5 U.S.C. § 801(b)(2).

Admittedly, this would be a novel use of the CRA. Congress has historically used the law’s disapproval procedure to review rules promulgated by “ordinary” federal agencies (i.e., agencies that are entirely within the Executive Branch). Nevertheless, the Library of Congress is arguably an “agency” for purposes of the CRA insofar as it promulgates rules of general applicability. As the D.C. Circuit recently held in Intercollegiate Broad. Sys., Inc. v. Copyright Royalty Bd., when the Library of Congress exercises its “powers . . . to promulgate copyright regulations . . . the Library is undoubtedly a ‘component of the Executive Branch.'” 684 F.3d 1332, 1341-42 (D.C. Cir. 2012) (citing Free Enterprise Fund v. Public Company Accounting Oversight Bd., 130 S.Ct. 3138, 3163 (2010)).

The Wireless Device Independence Act

Sen. Ron Wyden’s Wireless Device Independence Act (S.467) is the only cell phone unlocking bill that actually amends the DMCA. It would add to section 1201 a clause specifying that modifying software on a mobile device so that it operates on a different network is exempt from the law. While his colleagues dance around the underlying problem—the DMCA itself—Sen. Wyden tackles it head-on. To his credit, this approach embodies Congress exercising its proper constitutional role. If the legislative branch is dissatisfied with how an agency has exercised its statutorily delegated authority, the legislature ought to respond by amending the agency’s enabling statute.

However, S.467 contains a potentially massive loophole: it only exempts from DMCA liability “user[s] [who] legally own[] a copy of the computer program” installed on their mobile phone. In other words, the bill would do nothing for users who are mere licensees of the software installed on their phone. This may not matter for residents of the three states under the jurisdiction of the Second Circuit, where Krause controls—but for cell phone owners in the Ninth Circuit, where Vernor controls, S.467 is unlikely to offer much relief. Because most mobile operating systems are accompanied by click-wrap contracts that impose significant use and transfer restrictions on users, under Vernor these users are considered licensees, rather than owners of a copy of the operating system.

If the Wireless Device Independence Act were enacted, therefore, most Americans wishing to unlock their cell phones would still face significant legal uncertainty regarding their potential liability under the DMCA. To remedy this, the bill could extend its safe harbor to encompass cell phone unlocking by licensees, as well as owners, of software.

The Wireless Consumer Choice Act

Sen. Amy Klobuchar, along with Sens. Mike Lee and Richard Blumenthal, take a very different approach from their colleagues in their Wireless Consumer Choice Act (S.481). The bill’s full text is worth posting (PDF):

Pursuant to its authorities under title III of the Communications Act of 1934 . . . the [FCC], not later than 180 days after the date of enactment of this Act, shall direct providers of commercial mobile services and commercial mobile data services to permit the subscribers of such services, or the agent of such subscribers, to unlock any type of wireless device used to access such services. Nothing in this Act alters, or shall be construed to alter, the terms of any valid contract between a provider and a subscriber.

Note the absence of any explicit amendments to the DMCA or related regulations, or any mention of circumvention tools. Instead, the bill empowers the FCC to regulate carriers’ unlocking policies, yet leaves the DMCA intact. This drafting decision has led some commentators to pan the legislation, questioning its effectiveness and scope.

While I too have serious concerns about S.481, I think Sina Khanifar (who started the White House petition about cell phone unlocking) may be incorrect to suggest the bill “doesn’t do anything at all.” It seems to me that S.481 would alter the DMCA’s unwritten contours, albeit in narrow ways.

How can a law that doesn’t even mention the DMCA effectively “rewrite” its anti-circumvention provisions? Consider that S.481 and the DMCA’s section 1201 both purport to deal with the subject of cell phone unlocking. To borrow a term from legal Latin, the two laws are in pari materia (“upon the same subject”). While section 1201 focuses on the general issue of circumvention of copyright access controls without mentioning cell phone unlocking, S.481 specifically and exclusively addresses cell phone unlocking.

So how would a court reconcile S.481 with section 1201 if a mobile subscriber were sued for unlocking his cell phone despite his full compliance with the carrier’s service contract? Here’s an excerpt from the leading treatise on statutory interpretation, Sutherland Statutory Construction, summarizing how courts have historically sought to reconcile incompatible statutes:

Where one statute deals with a subject in general terms and another deals with a part of the same subject in a more detailed way, the two should be harmonized if possible. But if two statutes conflict, the general statute must yield to the specific statute involving the same subject . . . .

2B Sutherland Statutory Construction § 51:5 (7th ed.) (internal citations omitted).

The DMCA, it seems, must yield to S.481—at least as far as contractually-authorized cell phone unlocking is concerned. As Sean Flaim points out, if you unlock your phone with help from your carrier, it cannot be said that you’ve “circumvented” a technological measure. Thus, under S.481, carriers would lose their existing ability under the DMCA (17 U.S.C. § 1203) to sue a subscriber who has unlocked his phone without breaching his service contract. Similarly, the law might deny the DMCA’s civil remedies to other rights holders—say, mobile operating system creators—against consumers who unlock their phones without breaching any contractual provisions. S.481 also purports to eliminate criminal liability in such situations; as Sen. Mike Lee explained in a joint statement announcing the bill, “[c]onsumers shouldn’t have to fear criminal charges if they want to unlock their cell phones and switch carriers.”

But courts could just as well construe S.481 to effect none of these changes. There is no such thing as  stare decisis  when it comes to statutory construction. If Congress wanted to alter the DMCA, courts might reason, Congress would have done just that. S.481 simply requires that carriers help off-contract subscribers unlock their phones, so why read into the statute a meaning that conflicts with other laws?

Perhaps there are persuasive reasons for trying to tweak the DMCA without actually amending the law, but I’m not aware of any. Given how widely courts vary in interpreting vague statutes, it’s awfully risky to gamble on judges who review S.481 correctly divining Congress’s intent if it enacts the law.

Another worrisome aspect of S.481 is its expansion of the FCC’s regulatory authority to encompass cell phone unlocking. While this grant of authority may seem innocuous, Congress should think twice before involving the FCC in mobile carriers’ decisions about when to permit subscribers to unlock their phones. If the FCC is tasked with policing carriers’ policies regarding cell phone unlocking, the agency might interpret this narrow grant of jurisdiction as a grant of  “ancillary authority” to dictate the contours of mobile service contracts (not that the FCC isn’t already eager to regulate this space). The FCC is notorious for taking an extremely broad view of its own powers; as the Electronic Frontier Foundation has warned, the FCC’s willingness to overreach “raises the specter of discretionary FCC regulation of the Internet not just in the area of net neutrality, but also in a host of other areas.”

Given the FCC’s historically limited understanding of how markets work, unleashing it on the wireless industry is especially unwise. This isn’t a market in need of regulation; in fact, consumers enjoy plenty of choices among devices, carriers, and payment plans. If you want to buy the latest smartphone sans carrier lock, chances are you can order it today and have it on your doorstep tomorrow. If anything, Congress should be exploring ways to shrink  the FCC’s role in the mobile communications space, among others.

Conclusion

Like co-liberator Jerry Brito, I think the ideal public policy approach to cell phone unlocking is fairly straightforward. If I own a cell phone, I should be free to modify its software (or hardware) so that it works on any carrier’s network—unless I’ve agreed in contract not to unlock my phone. If I go ahead and unlock my phone anyway, I owe my carrier compensation for its damages resulting from my breach—which are typically specified in advance in the form of an early termination fee. If the contract doesn’t specify an early termination fee, I owe my carrier damages equal to the amount necessary to put the carrier in the same position it would have ended up had I held up my end of the bargain. This is the common law in action, simple yet elegant.

Notice that the approach I’ve outlined makes no mention of the Copyright Act. That a particular type of wrongful conduct happens to involve a copyrighted work doesn’t necessarily make it proper to invoke the copyright laws. While I support robust copyright protection, tweaking the operating software installed on my own phone so that it will operate on my preferred mobile carrier is a far cry from actionable copyright infringement. The potential market for Apple’s iOS, Google’s Android, or Windows Phone 8 suffers no adverse effect if a user unlocks her smartphone so she can switch carriers. As the Copyright Office explained in 2006:

[T]he access controls do not appear to actually be deployed in order to protect the interests of the copyright owner or the value or integrity of the copyrighted work; rather, they are used by wireless carriers to limit the ability of subscribers to switch to other carriers, a business decision that has nothing whatsoever to do with the interests protected by copyright.

This is not to say that carriers are wrong to limit some subscribers’ ability to switch networks. To the contrary, American consumers enjoy substantial benefits thanks to the availability of carrier-subsidized, locked cell phones, as George Ford, Thomas Koutsky, and Larry Spiwak argue in A Policy and Economic Exploration of Wireless Carterfone Regulation, 25 Santa Clara Computer & High Tech. L.J. 647 (2009). The question is thus not whether consumers should be permitted to unlock their cell phones, but what legal regime(s) should deter wrongful unlocking. As Jerry rightly argues, contract law affords mobile carriers a far more appropriate set of remedies for wrongful unlocking than the Copyright Act does.

Cell phone unlocking may be a fairly clear-cut issue, but the broader debate over whether, and to what extent, federal laws should ban tools that circumvent technological measures protecting copyrighted works is anything but straightforward. Critics of the DMCA’s anti-circumvention provisions offer powerful arguments why Congress shouldn’t be in the business of banning technologies, but there remains a fine line between selling lock picking tools and helping people unlawfully pick locks. In a forthcoming essay, I’ll explore the anti-circumvention debate in greater detail.

For a scholarly treatment of the interplay between the DMCA and cell phone unlocking, check out Daniel J. Corbett’s article,  Would You Like That iPhone Locked or Unlocked?: Reconciling Apple’s Anticircumvention Measures with the DMCA, 8 U. Pitt. J. Tech. L. Pol’y 8 (2008).

Imagine a service that livestreams major broadcast television channels over the Internet for $4.99 a month — no cable or satellite subscription required. For an extra 99 cents a month, the service offers DVR functionality, making it possible to record, rewind, and pause live broadcast television on any broadband-equipped PC.

If this service sounds too good to be true, that’s because it is. But for a time, it was the business model of ivi. Cheaper than a cable/satellite/fiber subscription and more reliable than an over-the-air antenna, ivi earned positive reviews when it launched in September 2010.

Soon thereafter, however, a group of broadcast networks, affiliates, and content owners sued ivi in federal court for copyright infringement. The court agreed with the broadcasters and ordered ivi to cease operations pending the resolution of the lawsuit.

ivi appealed this ruling to the 2nd Circuit, which affirmed the trial court’s preliminary injunction earlier this month in an opinion (PDF) by Judge Denny Chin. The appeals court held as follows:

• The rights holders would likely prevail on their claim that ivi infringed on their performance rights, as ivi publicly performed their copyrighted programs without permission;
• ivi is not a “cable system” eligible for the Copyright Act’s compulsory license for broadcast retransmissions, as ivi distributes video over the Internet, rather than its own facilities;
• Allowing ivi to continue operating would likely cause irreparable harm to the rights holders, as ivi’s unauthorized distribution of copyrighted programs diminishes the works’ market value, and ivi would likely be unable to pay damages if it loses the lawsuit;
• ivi cannot be “legally harmed by the fact that it cannot continue streaming plaintiffs’ programming,” thus tipping the balance of hardships in plaintiffs’ favor;
• While the broad distribution of creative works advances the public interest, the works streamed by ivi are already widely accessible to the public.

As much as I enjoy a good statutory construction dispute, to me, the most interesting question here is whether ivi caused “irreparable harm” to rights holders.

Writing on Techdirt, Mike Masnick is skeptical of the 2nd Circuit’s holding, criticizing its “purely faith-based claims … that a service like ivi creates irreparable harm to the TV networks.” He argues that even though ivi “disrupt[s] the ‘traditional’ way that [the broadcast television] industry’s business model works … that doesn’t necessarily mean that it’s automatically diminishing the value of the original.” Citing the VCR and DVR, two technologies that disrupted traditional methods of monetizing content, Mike concludes that “[t]here’s no reason to think” ivi wouldn’t “help [content owners’] business by increasing the value of shows by making them more easily watchable by people.”

Mike has a point. Perhaps many ivi subscribers previously didn’t watch much, if any, broadcast television. But thanks to ivi, some of these viewers may get hooked on hit network shows like American Idol, NCIS, or Person of Interest. Some ivi subscribers might even go on to buy seasons of their favorite shows on Blu-ray or DVD. If these assumptions hold true, ivi might actually increase the market value of the television programs it streams. So why aren’t rights holders applauding ivi — or emulating it — instead of trying to shut it down?

Perhaps it’s because the rights holders worry that ivi could attract a large audience of “cord cutters” who previously bought season passes to their favorite shows from Internet media stores such as iTunes or Amazon Instant Video. Rights holders might also worry that ivi could induce  cord cutting by inducing people to cancel their basic cable or satellite television service. Why pay a cable company $16.50 a month for local broadcast channels when you can get them from ivi for less than a third of the price of cable?

Broadcasters might worry about ivi undercutting their advertising revenues. Because television ad rates are largely based on viewership statistics — as determined by audience measurement companies like Nielsen — each person who unplugs his antenna or cancels his cable subscription for ivi is one fewer Nielsen viewer. (Although ivi is reportedly interested in cutting a deal with Nielsen to ensure its ratings reflect ivi’s audience, it appears no deal was in place when ivi launched.) From the broadcasters’ perspective, it doesn’t matter if lots of ivi subscribers actually watch television ads, as advertisers typically aren’t willing to pay for eyeballs they can’t measure.

Adding insult to injury, ivi streamed the local channels of two markets, Seattle and New York City, to subscribers worldwide. Because broadcast affiliates typically sell ad slots to local businesses, every person who uses ivi but doesn’t reside in Seattle or NYC amounts to one fewer set of eyeballs for a local affiliate.

So ivi could be helping rights holders, hurting them, or doing some of both. To determine ivi’s net impact on content owners’ bottom line, we need to know whether the first type of viewers discussed above (those who spend more on content because of ivi) makes more money for content owners than they lose on other viewers (those who substitute ivi viewing for media store purchases, over-the-air viewing, or pay-TV subscriptions). Unfortunately, we lack the data to answer these questions with confidence.

Nevertheless, there are good reasons to assume that ivi subscribers who generate less revenue for content owners after signing up for ivi vastly outnumber those who generate more revenue.

Consider ivi’s natural subscriber base: people who already pay for network television content — via pay-TV, Internet media stores, or streaming services like Hulu Plus — or watch for free via authorized, ad-supported sources. For many of these viewers, ivi presents a compelling alternative to other sources of network television content.

But what about ivi’s potential to deliver networks a new, untapped audience? Well, at $60 per year, ivi won’t likely play well with casual viewers who aren’t even sure if network television is worth watching. These viewers far more likely to test the network TV waters by streaming recently-aired shows for free on Hulu or network websites.

ivi is also unlikely to attract many network television lovers who’d otherwise miss out on it because they lack the cash. That’s because most low-income television junkies already tune in — perhaps via free, over-the-air network television (which nearly all TV owners can already access with nothing more than a $20 antenna and $30 converter box). From the content owners’ perspective, each user who switches from an over-the-air antenna to an ivi subscription is basically a wash.

At best, ivi may attract some viewers who can’t afford or aren’t willing to pay for basic cable, and live too far away from an urban area to receive an over-the-air signal. But do these viewers outnumber the many TV junkies who want cheaper, more convenient access to network television content? I highly doubt it. And, had ivi tried to persuade the 2nd Circuit that its service actually benefits rights holders, I suspect the Court wouldn’t have bought the argument unless ivi could marshall data that probably doesn’t exist.

Business Models, Innovation, and Incentives

If ivi is such an attractive alternative to “legacy” business models, why don’t the broadcast networks simply follow ivi’s lead by offering a comparable service? It seems like a no-brainer; after all, networks and affiliates already have established relationships with advertisers, and enjoy immediate access to perfect digital copies of their content. A joint venture of the major networks, perhaps in collaboration with their affiliates, would surely dominate ivi (assuming both services were comparably priced).

What explains the broadcasters and rights holders’ reticence toward this business model? Perhaps they’re too stupid or lazy to see the green in front of them. Maybe they’re too attached to obsolete business models to monetize their content in a rational, profit-maximizing manner.

But the rights holders could also be acting perfectly rationally. Maybe the $6 monthly fee ivi charges isn’t the profit-maximizing price at which to charge consumers for high definition, live, recordable, rewindable network television content. Perhaps the business strategy currently employed by broadcasters and creators — complex and confusing as it may be to most people — captures more income for the creation and distribution of television shows than alternative business models.

I don’t know whether content owners ought to shun or embrace ivi’s business model. Neither does Mike Masnick — or, for that matter, anyone. At best, armed with extensive economic data and market research, we’d still only be able to make an educated guess as to how content owners should structure their businesses. Modern consumers’ preferences are simply too opaque, divergent, and dynamic for any producer to systematically squeeze out every last drop of profits or surplus.

Even under uncertainty, however, decisions must still be made. In the market for creative works, their creators (and their assignees) are empowered by the Copyright Act with an exclusive, but limited, right to decide how to monetize their works. So it is that broadcasters and affiliates may dictate how television shows are distributed, and decide how much to charge for them, for a limited time and with certain exceptions.

This is why broadcasters may give their content away for free to anybody near a metropolitan area who has an antenna and converter box, while simultaneously preventing third parties like ivi from distributing the same exact content (whether free of charge or for a fee). At first, this may seem absurd, but consider how many websites freely distribute their content on the terms they see fit. That’s why I can read all the Techdirt articles I desire, but only on Techdirt’s website. If copyright protection excluded content distributed freely to the general public, creators of popular ad-supported content would soon find others reproducing their content with fewer ads. Between Hulu — with its several minutes of ads per episode — and a competing service offering the same content, but with nothing more than a few text ads, many viewers would prefer the latter option.

Of course, the Copyright Act is no guarantee that a particular business model will succeed, or that a content creator will make a profit. It simply vests in each rights holder the  power to decide among business models for monetizing their content.

Why let creators and their assignees make these decisions? Even if we believe that that public policy ought to “promote the Progress of … useful Arts” — an admittedly controversial belief that is beyond the scope of this essay — why give content creators exclusive rights to copy, distribute, perform, transmit, and sell their expressive works? There are, after all, plenty of other ways government could encourage people to create movies, books, music, video games, and other socially valuable expressions.

For instance, we could award monetary prizes to creators of popular works, perhaps by measuring how often they’re viewed or experienced. We could create a federal Department of Creative Expression and hire 50,000 of the nation’s most talented writers, artists, and musicians to create books, movies, television shows, and songs all day. We could also give individuals and companies generous, refundable tax credits for income derived from expressive works.

But, for the most part, we don’t do these things. Of the many ways our government could foster the creation of expressive works, we chose copyrights — as have many other governments over the years.

So why copyright? Two reasons: knowledge and incentives.

In an ever-changing world, the best way to discover how to  monetize creative works is through trial-and-error. By empowering lots of individual creators and companies to experiment with different ways of distributing content, knowledge emerges through spontaneous order, as rights holders mimic their successful competitors while constantly trying to figure out an even smarter way to make money. Instead of relying on a centralized bureaucracy or a small group of lawmakers to decide how much to charge for creative works, the institution of copyright disperses such decisions, harnessing the wisdom of the crowd for a better outcome.

If decentralized decision-making works so well, why limit it to creators? Surely if  everybody could monetize creative works, we’d enjoy even more innovative distribution strategies. But this would push the value of creative works down to their marginal price, zero. While it’s still possible to make money by distributing free content, as Mike has explained as comprehensively as anyone, it’s not necessarily the best way for creators to make money. If it were, everybody would already be doing it!

Therefore, we give content creators and their assignees a limited, exclusive right — a temporary monopoly, as it’s often described — over their works. They get to decide not only what to create, but how to distribute it. Whether they reap vast rewards or lose their shirts depends solely on the decisions they make.

To be sure, our Copyright Act abounds with excesses and deficiencies, many of which we’ve discussed on these pages over the years. (For instance, it lacks a registration or renewal requirements, imposes draconian criminal penalties on noncommercial infringement, and confers copyrights on too broad a range of subject matter.) Despite these problems, however, the exclusive right to monetize expressive works — a right that ivi flagrantly violates — is at the core of copyright. If there’s one exclusive right that copyright laws  should  secure for content creators, it’s the right to sell complete copies of newly-produced creative works made for the purpose of private commercial gain.

If ivi doesn’t violate this right, I don’t know what does.

By Ryan Radia and Berin Szoka

A new version of the Cybersecurity Act of 2012 was introduced last night (PDF), and a vote on the Senate floor reportedly may occur as early as next week. Although we’re still digesting the 211-page bill, its revised information sharing title stands out for its meaningful safeguards regarding what cybersecurity information may be shared by providers and its limits on how government may use shared information. Such prudence is of utmost importance in any bill that gives private entities blanket immunity from civil and criminal laws, including the common law, for activities such as cybersecurity information sharing.

By way of background, our organizations—the Competitive Enterprise Institute and TechFreedom— joined several other free market groups in sending a coalition letter to House leadership back in April regarding CISPA (which ultimately passed that chamber). While we support legislation streamlining federal laws to ensure cybersecurity information flows freely among private companies and, where appropriate, to and from the government, we urged important changes to CISPA to limit potential governmental abuses and meaningfully protect individuals’ private information. Unfortunately, most of our suggestions were not reflected in the final version of that bill.

We’re very glad to see that many of our free market principles are now reflected in Title VII of the Cybersecurity Act (the part of the bill that deals with information sharing). The bill’s sponsors adopted many significant, positive changes to Title VII to better protect privacy and individual liberties, including:

• Allowing individuals harmed by governmental misuse of shared cyber threat information to sue the federal government for actual or statutory damages of $1000 (whichever is greater);
• Proscribing all governmental use and sharing of cyber threat information for purposes unrelated to cybersecurity, except to avert imminent threats of death or serious bodily harm or sexual exploitation of minors;
• Barring the federal government from conditioning the award of a federal grant, contract, or purchase on a private entity’s sharing of cybersecurity threat information (except in limited circumstances);
• Immunizing only private entities that share cybersecurity threat information upon a reasonable and good faith belief that such sharing is authorized by the Title;
• Providing for meaningful oversight of information sharing and use by the Privacy and Civil Liberties Oversight Board.

We also applaud Senators Franken, Durbin, Coons, Wyden, Blumenthal, and Sanders, whose efforts made these important revisions to the Cybersecurity Act possible. It’s not every day that CEI or TechFreedom praise members of Congress—or government in general!  We do so here because the changes to Title VII of the Cybersecurity Act will meaningfully reduce the likelihood that the bill, if enacted, will enable government to impermissibly access and abuse citizens’ private information. (For more on changes to the Cybersecurity Act, see this ACLU blog post by Michelle Richardson.)

To be sure, we still have serious concerns about Title VII of the bill — and even greater concerns about other provisions in the bill, especially those regulating cybersecurity of “critical infrastructure”. We’ll offer plenty of criticism about those provisions in coming days, but for now, seeing a few rays of light from Capitol Hill is enough to give us pause.

On Wednesday morning, the U.S. House of Representatives Energy & Commerce Subcommittee on Communications and Technology will hold a hearing on “The Future of Video.”

As we Tech Liberators have long argued on these pages (1, 2, 3, 4, 5, 6, 7), government’s hands have been all over the video market since its inception, primarily in the form of the FCC’s rulemaking and enforcement enabled by the Communications Act. While the 1996 Telecommunications Act scrapped some obsolete video regulations, volumes of outdated rules remain law, and the FCC wields vast and largely unchecked authority to regulate video providers of all shapes and sizes. Wednesday’s hearing offers members an excellent opportunity to question each and every law that enables governmental intervention—and restricts liberty in—the television market.

It’s high time for Congress to free up America’s video marketplace and unleash the forces of innovation. Internet entrepreneurs should be free to experiment with novel approaches to creating, distributing, and monetizing video content without fear of FCC regulatory intervention. At the same time, established media businesses—including cable operators, satellite providers, telecom companies, broadcast networks and affiliates, and studios—should compete on a level playing field, free from both federal mandates and special regulatory treatment.

The Committee should closely examine the Communications and Copyright Acts, and rewrite or repeal outright provisions of law that inhibit a free video marketplace. Adam Thierer has chronicled many such laws. The Committee should, among other reforms, consider:

• Restoring traditional copyright protection to broadcast signals, instead of the compulsory license created by the 1976 Copyright Act;
• Abolishing the “must-carry” rule that requires pay-TV providers to transmit certain broadcast signals without compensation;
• Ending syndication exclusivity, network non-duplication, and sports blackout rules;
• Repealing programming availability mandates and set-top box regulation;
• Undoing broadcast/cable ownership restrictions and media cross-ownership rules;
• Eliminating program access rules;
• Stripping the FCC of the authority to intervene in and promulgate rules regarding retransmission negotiations;
• Ending special regulatory treatment for public, educational, and governmental channels.

Here’s to the success of Sen. Jim DeMint, Rep. Steve Scalise, and other members of Congress who are working to achieve real reform and ensure that the future of video is bounded only by the dreams of entrepreneurs.

Unshackling a market from obsolete, protectionist regulations can be a very challenging undertaking, especially when the lifeblood of a regulated industry is at stake. The latest push for regulatory reform to encounter the murky waters of modernization is the “Next Generation Television Marketplace Act.” The ambitious and comprehensive bill, introduced by Rep. Steve Scalise and Sen. Jim DeMint in their respective chambers of Congress, aims to free up the broadcast television market. The federal government’s hands have been all over this market since its inception, overseen primarily by the FCC, pursuant to the Communications Act.

The Next Generation Television Marketplace Act (“DeMint/Scalise”) is a bold and laudable bill that would, on the whole, substantially free up America’s television marketplace. But one aspect of the bill—its abolition of the retransmission consent regime—has sparked a vigorous debate among free marketers. This essay will explain what this debate is all about and why policymakers should think twice before getting rid of retransmission consent.

Toward a Free Market in Television

The DeMint/Scalise bill takes an axe to many of the myriad rules that stand in the way of a free market in television programming. As Co-Liberator Adam Thierer recently explained on these pages, the bill’s many provisions would among other things get rid of the compulsory licensing provisions in the Copyright Act that empower government to set the rates cable and satellite (“pay-TV”) providers must pay to retransmit distant broadcast signals. It would eliminate the “network non-duplication” rule, which generally bars pay-TV providers from carrying out-of-market signals that offer the same programs as local broadcasters. The bill would also end the “must-carry” rule that forces pay-TV providers to retransmit certain local broadcast signals without receiving any compensation.

These are just a few of the many provisions of the DeMint/Scalise bill that would substantially reform the Communications and Copyright Acts to foster a free video marketplace and bring television regulation into the 21st century. (For a more in-depth assessment of the positive aspects of the DeMint/Scalise proposal, see Adam’s informative Forbes.com essay, Toward a True Free Market in Television Programming; Randy May’s superb Free State Foundation Perspectives essay, Broadcast Retransmission Negotiations and Free Markets;” and Bruce Owen’s FSF essay, The FCC and the Unfree Market for TV Program Rights.)

What DeMint/Scalise Means For Retransmission Consent

While most of the DeMint/Scalise bill’s provisions are unequivocally pro-market and pro-consumer, some free marketers have criticized the bill because it would repeal the current statute that provides for “retransmission consent.” Retransmission consent, which Congress enacted by overriding President George H.W. Bush’s veto of the 1992 Cable Act, affords broadcasters an attenuated property right that entitles them to bar local pay-TV providers from retransmitting their signals without broadcasters’ permission—thus forcing negotiation over whether broadcasters should be paid for their content. Some broadcasters don’t elect to exercise this right, and instead demand that local pay-TV operators carry their signals pursuant to the “must-carry” rule. (Many unaffiliated broadcasters that transmit low-value programming elect to exercise must-carry because they recognize pay-TV operators are unlikely to pay retransmission fees.)

The current retransmission consent regime, which Congress created in 1992, is plagued with complex regulations that undermine free market negotiations. As Adam and Randy have explained, many of these regulations—including network non-duplication, syndication exclusivity, and must-carry—tilt the playing field in broadcasters’ favor, enabling them to earn hefty retransmission fees from cable and satellite providers that almost certainly exceed the fees they’d earn in a free market. This wealth transfer translates into higher monthly bills for pay-TV subscribers, and may enable some broadcasters to reap profits (economic rents) they would not otherwise enjoy.

The DeMint/Scalise bill would eliminate many of the existing rules that distort retransmission negotiations between broadcasters and pay-TV operators. In doing so, however, the bill would also eliminate the retransmission consent regime in its entirety. This has invoked the ire of some conservatives, such as the American Conservative Union (ACU), which recently sent a letter to Congress opposing the bill’s retransmission consent provisions.

But two venerable free market tech policy icons disagree with the ACU: Adam Thierer, writing on these pages, and Randy May, writing on The Free State Foundation blog. Adam argues that “ACU has mistakenly equated the retransmission consent regulatory process with an actual free market contracting process.” Randy argues that if the DeMint/Scalise bill were adopted, “[b]roadcasters would . . . continue to be paid for carriage of their signals – unless they choose to withhold the carriage rights because they don’t like the amount of compensation offered.”

I wholeheartedly agree with Adam and Randy that ACU’s characterization of the current regime as a “functioning market” is inaccurate. Nonetheless, ACU is right to worry that the retransmission consent provisions of the Next Generation Television Marketplace Act may undermine private bargaining. In particular, the bill appears to strip broadcasters of the authority to withhold carriage rights from pay-TV providers. Page 2 of the bill (PDF of bill text) states that:

Section 325 of the Communications Act of 1934 (47 U.S.C. 325) is amended . . . by striking subsections (b) and (e)

In striking these two subsections, the bill would restore 47 U.S.C. § 325 to its state prior to the enactment of the 1992 Cable Act—the law which established retransmission consent as it exists today.

On one hand, this would eliminate many onerous provisions, including the must-carry rule and the “good faith” negotiation requirement. But striking these subsections would also eliminate the legal authority that underlies broadcasters’ ability to withhold carriage rights from pay-TV operators. Under pre-1992 law, as the Senate Commerce Committee’s report on the Cable Act explained, “cable systems need not obtain consent from broadcast stations for retransmission of their signals, based on the reference in section 325 of retransmission by broadcasting stations.” S. Rep. No. 102–92, at 35 (1991). In other words, if 325(b) goes away, so does retransmission consent as we know it.

Retransmission consent is not without its critics. Some argue that broadcasters don’t deserve the right to exclude local pay-TV operators from retransmitting their signals, as subscribers can already freely watch over-the-air broadcast signals by simply putting up an antenna. Pay-TV providers simply retransmit broadcast signals without alteration and with advertisements intact, the argument goes, so why should broadcasters be able to demand compensation from pay-TV providers?

While this argument has rhetorical appeal, it ignores the economic realities of the modern television market. Today, unlike in the 1970s, a tiny percentage of viewers watch broadcast television over-the-air. The tiny minority of households with antennas pay no subscription fees, unlike the majority of viewers who pay a fee for a cable or satellite subscription. Broadcasters that demand retransmission fees from pay-TV operators are simply charging viewers who are willing to pay more than viewers who aren’t. This practice, known as price discrimination, ultimately benefits low-income families who rely on over-the-air signals by allowing them to view programming subsidized by pay-TV subscribers.

Copyright Versus Retransmission Consent

So what about content owners? Their legal rights, unlike those of broadcasters and pay-TV providers, arise primarily out of the Copyright Act, not the Communications Act.

While the DeMint/Scalise bill would eliminate the Communications Act’s retransmission consent provisions, it makes only minor changes to the Copyright Act—which, of course, prohibits most unauthorized public performances of copyrighted works, including television broadcasts. So copyright owners would retain the right to bar pay-TV providers from retransmitting their television shows without permission. (Indeed, in one sense, content owners would enjoy greater copyright protection under the bill, as it eliminates several limitations on copyright liability currently provided to secondary transmissions by cable and satellite providers.)

If the bill is enacted, therefore, pay-TV operators wishing to retransmit broadcast signals may no longer need to get permission from the broadcaster—but they’d still need permission from program owners to retransmit signals that contain copyrighted content. While broadcasters themselves own the rights to some of the programs they typically air—including local news shows and, in some cases, exclusive syndication rights for their area—the vast majority of broadcast television content is owned by third parties such as broadcast networks, production companies, syndicators, sports leagues, and the like. (Although the Copyright Act confers protection on compilations of copyrighted works in certain cases, whether broadcasters’ programming choices enjoy copyright protection is unclear. See 2 Patry on Copyright § 3:64.)

Before 1976, cable providers were free under federal law to retransmit local and distant broadcast signals without permission from the broadcaster or the rights holder. In 1976, Congress overhauled the Copyright Act to define public retransmissions of broadcast signals as “public performances” (which if containing copyrighted material generally require permission from the rights holder).

At the same time, however, Congress also created a compulsory license permitting cable providers to retransmit certain distant broadcast signals so long as they paid royalties to the Copyright Office (which in turn doles out payments to rights holders as it sees fit). The law also permitted cable providers to retransmit broadcast signals locally without paying any royalties to rights holders.

The DeMint/Scalise bill would leave intact the 1976 Copyright Act’s definition of “public performance,” while repealing not only the compulsory licensing system that currently governs retransmissions of distant signals but also the provision exempting pay-TV providers’ retransmissions of local signals from copyright liability. If the bill were enacted, owners of broadcast programs would gain the ability to freely negotiate rates with pay-TV providers, instead of relying on the rates set by the Copyright Office.

Consensual Retransmission—Or Unjust Enrichment?

How would the dynamics of the video marketplace shift if DeMint/Scalise were the law? For one thing, broadcasters would hold far fewer cards, losing the regulations that benefit them, such as syndication exclusivity, network non-duplication, and most importantly, retransmission consent. Pay-TV operators, many of which currently pay substantial retransmission fees to broadcasters, might seek out less costly sources of popular network television shows—perhaps by dealing directly with major networks. But would the networks play ball? Or would they rather leave today’s market structure intact and continue dealing exclusively with broadcasters? It’s hard to say.

Imagine that some large pay-TV providers succeed in inking deals with networks and other rights holders to publicly perform the same programs that broadcasters carry. On one hand, this disintermediation of broadcasters might benefit consumers, especially if it translates into lower fees (and, hence, more content choices and/or lower television bills). Indeed, a major selling point of the DeMint/Scalise bill is that it would enable an array of creative economic arrangements between pay-TV providers and content owners that are verboten under current law.

But disintermediating broadcasters in this manner may have a dark side.

Imagine cable provider CableCo reaches a licensing deal with commercial network NetworkCo to display the network’s primetime content to CableCo’s subscribers nationwide. CableCo, recognizing that its subscribers are accustomed to watching primetime network content originally transmitted by their local broadcaster, decides to continue retransmitting the local signals that independent NetworkCo affiliate stations broadcast in each market.

Although CableCo’s paid subscribers derive some value from these local signals, CableCo doesn’t compensate the local broadcasters whose signal it retransmits, since the Communications Act no longer enables broadcasters to demand retransmission fees. (To avoid copyright infringement liability, CableCo might replace all timeslots that contain local news shows—which are created and owned by each affiliate station—with syndicated programming.)

Is this scenario—which could conceivably occur if DeMint/Scalise were the law—an acceptable free market outcome? Absolutely, argues Professor Bruce Owen, a veteran telecommunications policy guru, who wrote the following in a recent Free State Foundation Perspectives essay:

Unlike program producers and networks, TV stations do nothing to “earn” this right, and the benefits to them are not rewards for innovation or production of valuable services. The economic value of a retransmission right comes solely from the ability of its owner to extract cash (or carriage) from cable systems and other multi-channel video program distributors (MVPDs). In fact, now that nearly everyone gets all TV signals by cable or satellite or Internet, broadcast stations are largely useless relics of a bygone technology, and the spectrum that is still reserved for their use has far better and more valuable uses.

But if Professor Owen is correct in arguing that broadcasters “do nothing to ‘earn’” the right to exclude others from retransmitting their signal, why is abolishing retransmission consent necessary? If broadcasters do nothing to enhance the value of the content they carry, the proper public policy response is to repeal the regulations (e.g., network non-duplication, syndication exclusivity, must-carry) that empower broadcasters to take a cut of exchanges that would otherwise occur directly between pay-TV providers and content owners. Without such rules in place, retransmission consent would be a dead letter (albeit technically intact) because pay-TV providers would simply obtain programming directly from the source.

What if Professor Owen is mistaken? Consider that many broadcasters work to differentiate their broadcasts from those carried by distant stations affiliated with the same network. For instance, some broadcasters overlay localized messages warning of impending perilous weather during primetime programming. Broadcasters sometimes display tickers (or “crawlers”) underneath network and syndicated shows, displaying such information as local sports scores, school closings, and election results. Some broadcasters select and display local ads during commercial breaks (in addition to national ads selected by networks). Although these alterations may in some cases enjoy copyright protection, facts cannot be copyrighted, nor can works that lack “originality” or “creativity.”

Unfortunately, we don’t know how much economic value (if any) these “signal enhancements” add to the underlying programming. Fortunately, the market can answer that question—assuming, of course, well-defined property rights exist and regulations do not mandate exclusive dealing or otherwise obstruct voluntary marketplace negotiations.

If retransmission consent is abolished, however, broadcasters’ ability to exclude others from free riding on their efforts will be severely diminished. Is this a problem? To the extent that broadcast signals possess some incremental value beyond that embodied in the programming they carry, the DeMint/Scalise bill tilts the scales in favor of pay-TV providers, and may enable them to reap economic rewards that would otherwise accrue to broadcasters.

This form of free riding offends the longstanding common law equitable principle of unjust enrichment, which holds that “[a] person who is unjustly enriched at the expense of another is subject to liability in restitution.” If pay-TV providers are free to monetize the efforts of broadcasters without permission or compensation, broadcasters may under-invest in signal enhancements. (For more on this issue, see Shyamkrishna Balganesh, The Social Costs of Property Rights in Broadcast (and Cable) Signals, 22 Berkeley Tech. L.J. 1303 (2007)).

If, as Randy May argues, consumers are best served by “[p]rivate bargaining, in which the parties know their own interests, and can contract freely,” then Sen. DeMint and Rep. Scalise should consider reforming the retransmission consent law, instead of gutting it in its entirety.

To do so, instead of repealing 47 U.S.C. § 325(b), DeMint and Scalise could rewrite the subsection to get rid of the must-carry and the good faith negotiation requirements while leaving retransmission consent intact. They could also strip the FCC of its existing authority to meddle with retransmission negotiations and instead create a private right of action for broadcasters to obtain recourse in federal court for unauthorized retransmissions. That way, if a pay-TV provider were to retransmit a broadcaster’s signal without permission, the aggrieved broadcaster could recover any profits the pay-TV provider earned as a result of the unauthorized retransmission.

The Long Run: Spectrum Liberalization

As policymakers work to liberalize the airwaves to ensure market participants put spectrum to its most highly valued uses, there may come a day when television broadcasting as we know it ceases to exist. Meanwhile, however, policymakers would be loath to lose sight of the basic principles that underlie free markets—voluntary exchange, property rights, and regulatory neutrality—in governing the television marketplace. Whatever one thinks about broadcasters’ public policy advocacy in general, two wrongs don’t make a right; the merits of protecting attenuated property rights in broadcast signals should stand on their own.

Broadcasters have long argued their efforts serve consumers and generate value for society. If they’re right, they deserve to reap the rewards of the value they create. Retransmission consent provides the means by which they may do so.

It’s high time for Congress to liberalize the television marketplace to bring it into the 21st century. Sen. DeMint and Rep. Scalise’s bill would, if enacted, mark a major step toward a freer video market. However, their bill could be improved by leaving retransmission consent intact.

In the ongoing debate over SOPA, PIPA, and rogue websites legislation, most commentators have focused on what Congress should and shouldn’t do to combat these sites. Less attention, however, has been paid to the underlying assumption that these rogue websites represent a public policy problem. While no one has defended websites that defraud consumers by deceptively selling them fake pharmaceuticals and other counterfeit goods, many consumers who frequent “rogue websites” do so for the express purpose of downloading copyright infringing content.

As Julian Sanchez explains over on Cato-at-Liberty, how the latter category of rogue websites (including The Pirate Bay and, until last week, MegaUpload) affects the U.S. economy and social welfare is hotly contested in the economic literature:

[I]t’s become an indisputable premise in Washington that there’s an enormous piracy problem, that it’s having a devastating impact on U.S. content industries, and that some kind of aggressive new legislation is needed tout suite to stanch the bleeding. Despite the fact that the [GAO] recently concluded that it is “difficult, if not impossible, to quantify the net effect of counterfeiting and piracy on the economy as a whole,” our legislative class has somehow determined that . . . this is an urgent priority. Obviously, there’s quite a lot of copyrighted material circulating on the Internet without authorization, and other things equal, one would like to see less of it. But does the best available evidence show that this is inflicting such catastrophic economic harm—that it is depressing so much output, and destroying so many jobs—that Congress has no option but to Do Something immediately? Bearing the GAO’s warning in mind, the data we do have doesn’t remotely seem to justify the DEFCON One rhetoric that now appears to be obligatory on the Hill. The International Intellectual Property Alliance . . . actually paints a picture of industries that, far from being “killed” by piracy, are already weathering a harsh economic climate better than most, and have far outperformed the overall U.S. economy through the current recession.

Julian makes several great points, and his essay is well worth reading in its entirety.

Nevertheless, in my view, rogue websites dedicated to the infringement of U.S. copyrights pose a public policy problem that merits not only serious congressional attention, but also prompt (albeit prudent) legislative action. While I’m relieved that the flawed SOPA and PIPA bills seem unlikely to pass in their current forms, I also think it would be unwise for Congress to dither on rogue sites legislation for years in search of “credible data” about how such sites impact our economy.

Why am I urging policymakers act without “all the facts?” Two reasons. First, I’m quite skeptical that we’ll obtain anything resembling dispositive data on the question of how rogue websites impact consumer welfare in the foreseeable future. Countless academics have spent years seeking to understand how often consumers download content on rogue websites, how frequently consumers substitute unlawful content for the lawful kind, and the extent to which copyright infringement indirectly benefits creators by inducing greater overall content consumption. Yet reliable data on these topics remains the stuff of dreams.

Second, the ease with which U.S. consumers can and do access near-perfect infringing copies of movies, songs, television shows, and video games gives rise to a reasonable presumption that we’d probably be better off if Congress were to throw up at least some carefully-constructed roadblocks to obstruct rogue sites. That’s because if such roadblocks are erected, the consumers most likely to shift from unlawful to lawful consumption of content are also the same consumers who are most likely to benefit social welfare (and the U.S. economy) if they pay more for the content they value and enjoy.

Imagine two hypothetical “pirates” (or users who frequently infringe on copyrighted works, if you prefer less loaded terminology). Pirate #1 is a broke college sophomore with a subsidized ultra-fast broadband connection and eons of spare time on his hands. While this pirate lacks the disposable income to pay for content at virtually any price, he’s perfectly willing to spend hours on end sitting hunched over a laptop in his dorm room scouring various Web forums for links to his favorite TV shows and movies, most of which are available unlawfully on cyberlockers, Bittorrent, Usenet, etc.

Pirate #2 is a 30-something, tech-savvy mid-career IT professional with plenty of disposable income. Even though he owns a Blu-ray player and could afford to buy or rent several discs per month, he instead opts to download Blu-ray image files on his 50Mbps Verizon FiOS connection and watches them on a laptop hooked up to his high-def television. Using his Mastercard, he spends $10 a month to subscribe to a popular Seychelles-based content search website that enables him to find picture-perfect movie rips in seconds. Although he has the means to pay for content, he sees no reason to bother with physical discs, DRM, and platform restrictions given that pirated content is so much cheaper, and virtually as accessible. While he ultimately purchases some of the content he acquires unlawfully, attending the occasional live concert and theatrical performance, he only does so occasionally. He has few moral qualms about his behavior; with millions of other consumers paying for the content he enjoys, what difference can one more legitimate purchaser make? (Julian correctly observes that some individuals who “sample” music through illicit outlets ultimately spend more money on artists because they’re more likely to attend live performances. However, given the growing prevalence of free and lawful sources of music “samples,” and considering that piracy’s effects on creators of other types of content (e.g. movies, TV shows, video games) is far less ambiguous, the “file sharing actually benefits artists” hypothesis is hardly persuasive).

Turning back to the issue of rogue sites legislation, a law that serves only to make it impossible for Pirate #1 (and the millions in America like him) to access infringing content won’t do anybody much good. Content creators won’t get paid more, as Pirate #1 has no money, while the aggregate utility society derives from artists’ expressive works will decrease. Instead of enjoying movies and music acquired unlawfully, Pirate #1 will simply find another, presumably inferior, way to spend his free time. It’s a no-win situation.

But a law that makes it impossible for Pirate #2 (and the millions like him) to access infringing content would almost certainly benefit content creators — and society at large. No longer able to download movies, TV shows, and video games illegally, Pirate #2 might consume less overall content, but he’ll also pay for a lot more lawfully-acquired content. He’ll spend less of his disposable income on goods and services other than content, meaning some legitimate businesses will experience a decline in revenue. But since Pirate #2’s overall spending habits will more closely match his true consumption preferences, society’s aggregate resources will likely end up being allocated more efficiently than before .

The virtue of a “follow the money” approach to rogue websites is that it’s likely to curb piracy by users like Pirate #2, who are already willing and able to pay for legitimate content. Users who have a credit card and use it to pay for infringing content — or for services that facilitate access to infringing content — presumably have at least some disposable income to spend on expressive works. While rogue websites legislation is likely to leave many, if not most, websites that facilitate piracy unaffected, disabling U.S. payment services from doing business with a handful of especially popular offshore piracy sites will frustrate users. Many of these users will simply seek out alternatives, but some users will give up and “go legitimate.” By driving piracy further underground, such a law might cause users like Pirate #1 to spend more of their relatively worthless time seeking out infringing content. But this is the Internet we’re talking about; the determined user will find what he seeks, no matter the roadblocks lawmakers throw up.

Whether a targeted law aimed at combating offshore rogue sites’ revenue sources would, on net, measurably benefit the U.S. economy is far from certain. But even a law that has greater-than-even odds of improving aggregate social welfare by the equivalent of a few hundred million dollars amounts to a step in the right direction. In a world of uncertainty, we all make decisions with harshly limited knowledge every day. All else equal, making highly-informed decisions is vastly superior to educated guesses, but educated guesses are often the best feasible option.

In an ideal world, of course, Congress would be focused on far more crucial legislative priorities than combating rogue websites, such as solving the entitlement mess, fixing America’s overly litigious legal system, reining in the ever-growing regulatory state, and even reforming the Copyright Act to reduce the insanely long term of copyright protection. But given that both the House and Senate Judiciary Committees, which handle copyright legislation, seem more focused on undermining our liberty and prosperity than on enhancing it — from data retention to employment verification mandates to the PATRIOT Act renewal — passing a consensus rogue websites bill may be the best of all feasible outcomes this session of Congress.

If lawmakers act swiftly but carefully — holding a handful of additional hearings, focusing on crafting legislation that Silicon Valley can tolerate (if not embrace), and emphasizing a transparent process — there may still be hope for prudent rogue websites legislation this session. And that could be a good thing.

The Stop Online Piracy Act (SOPA), a controversial bill before the House of Representatives aimed at combating “rogue websites,” isn’t just about criminal, foreign-based sites that break U.S. intellectual property laws with impunity. Few dispute that these criminal websites that profit from large-scale counterfeiting and copyright infringement are a public policy problem. SOPA’s provisions, however, extend beyond these criminal sites, and would potentially subject otherwise law-abiding Internet intermediaries to serious legal risks.

Before moving forward with rogue websites legislation, it’s crucial that lawmakers take a deep breath and appreciate the challenges at stake in legislating online intermediary liability, lest we endanger the Nozickian “utopia of utopias” that is today’s Internet. The unintended consequences of overbroad, carelessly drafted legislation in this space could be severe, particularly given the Internet’s incredible importance to the global economy, as my colleagues have explained on these pages (1, 2, 3, 4, 5, 6)

To understand why SOPA could be a game-changer for online service providers, it’s important to understand the simmering disagreement surrounding the Digital Millennium Copyright Act (DMCA) of 1998, which grants certain online service providers a safe harbor from liability for their users’ copyright infringing actions. In exchange for these protections, service providers must comply with the DMCA’s notice-and-takedown system, adopt a policy to terminate users who repeatedly infringe, and meet several other conditions. Service providers are only eligible for this safe harbor if they act to expeditiously remove infringing materials upon learning of them. Also ineligible for the safe harbor are online service providers who turn a blind eye to “red flags” of obvious infringement.

The DMCA does not, however, require providers to monitor their platforms for infringing content or design their services to facilitate monitoring. Courts have held that a DMCA-compliant service provider does not lose its safe harbor protection if it fails to act upon generalized knowledge that its service is used for many infringing activities, in addition to lawful ones, so long as the service provider does not induce or encourage users’ infringing activities.

Defenders of the DMCA safe harbor argue that it’s helped enable America’s Internet-based economy to flourish, allowing an array of web businesses built around lawful user-generated content — including YouTube, Facebook, and Twitter — to thrive without fear of copyright liability or burdensome monitoring mandates.

Conversely, some commentators, including UCLA’s Doug Lichtman, argue that the DMCA inefficiently tips the scales in favor of service providers, to the detriment of content creators — and, ultimately, consumer welfare. Pointing to a series of court rulings interpreting the safe harbor’s provisions, critics argue that the DMCA gives online intermediaries little incentive to do anything beyond the bare minimum to stop copyright infringement. Critics further allege that the safe harbor has been construed so broadly that it shields service providers that are deliberately indifferent to their users’ infringing activities, however rampant they may be.

What does SOPA have to do with all of this? Buried in the bill’s 78 pages are several provisions that run a very real risk of effectively sidestepping many of the protections conferred on online service providers by the DMCA safe harbor.

Section 102

Section 102 of SOPA empowers the Attorney General to seek a court order against an allegedly infringing foreign website. Such a court order would, if granted, effectively deny the site access to payment processors, ad networks, and even parts of the domain name system. Under § 102, a foreign, U.S.-directed website is deemed a “foreign infringing site” if:

[T]he owner or operator of such Internet site is committing or facilitating the commission of criminal violations [involving illegal copyright infringement, counterfeiting, or theft of trade secrets] and the Internet site would . . . [therefore] be subject to seizure in the United States . . . if such site were a domestic Internet site.

The part about websites “subject to seizure in the United States” refers to 18 U.S.C. § 2323, which states among other things that “[p]roperty subject to forfeiture” includes:

Any property used, or intended to be used, in any manner or part to commit or facilitate the commission of [criminal copyright or trademark infringement].

This definition of a “foreign infringing site” is enormously troubling. Note the absence of any requirement of actual or constructive knowledge on the part of the site operator, let alone criminal intent. Under § 102, a foreign website built around user-generated content may be deemed an “infringing site” simply because its server has facilitated the criminally infringing acts of a single user — even if the site operator neither induced nor knew of the user’s unlawful activities. While an innocent foreign site operator might eventually be able to persuade a court to vacate an order deeming it a “foreign infringing site,” SOPA imposes an astonishingly low burden on the Attorney General of showing that a site is a “foreign infringing site.” If the bill is enacted as is, foreign websites that contain any user-generated content had better watch out.

SOPA proponents defend § 102 by pointing out that its definition of infringing sites comes straight out of the 2008 PRO-IP Act, which established the aforementioned civil forfeiture provision in 18 U.S.C. § 2323. But this statute’s constitutionality is currently being challenged in federal court by a team of attorneys that includes Stanford law professor and copyright guru Mark Lemley. The law’s breadth raises serious First Amendment concerns since it permits ex parte seizures of entire outlets of speech (e.g., websites) simply because the outlet has been used in some unlawful manner. SOPA may be based on existing law, but why should Congress extend this overbroad provision of the PRO-IP Act to encompass an even broader range of websites? If anything, lawmakers should revisit PRO-IP and narrow its applicability to sites intentionally operated for the purpose of committing or facilitating criminal infringement. Via Techdirt, even Floyd Abrams, a constitutional scholar who represents content companies that strongly back SOPA, conceded in a recent letter to Congress that unanswered questions remain regarding the constitutionality of 18 U.S.C. § 2323.

Section 103

The next section of SOPA, Section 103, isn’t any better. This section provides for private rights holders to seek court orders against U.S.-directed websites — including domestic sites — to deny them access to U.S. payment processors and ad networks. Section 103 deems a website “dedicated to theft of U.S. property” if any of the following conditions are met:

1. [The site] is primarily designed or operated for the purpose of, has only limited purpose or use other than, or is marketed by its operator or another acting in concert with that operator for use in, offering goods or services in a manner that engages in, enables, or facilitates [copyright infringement, circumvention of copyright protection systems, or trademark infringement]; or
2. [The site operator] is taking, or has taken, deliberate actions to avoid confirming a high probability of the use of the . . . site to carry out acts that constitute [copyright infringement or the circumvention of copyright protection systems]; or
3. [The site operator] operates the . . . site with the object of promoting, or has promoted, its use to carry out acts that constitute [copyright infringement or the circumvention of copyright protection systems], as shown by clear expression or other affirmative steps taken to foster infringement.

The first prong of this definition encompasses any website that “has only limited purpose or use other than . . . engag[ing] in, enabl[ing], or facilitat[ing]” copyright infringement, circumvention of copyright protection systems, or trademark infringement. This language comes from 17 U.S.C. § 1201, also known as the DMCA anti-circumvention provisions. Just how “limited” of non-infringing uses must a site have to meet this definition? It’s hard to say. As Rob Pegoraro cheekily observed in a recent Roll Call op-ed, “‘[l]imited’ is one of those wonderfully elastic words — notice the ever-longer yet still ‘limited’ copyright terms granted to artists and creators?” This section of SOPA would be more clear if it relied on the “capable of substantial non-infringing uses” test originally articulated by the U.S. Supreme Court in its famous 1984 Betamax opinion, Sony Corp. v. Universal City Studios, Inc., which has since been interpreted by numerous federal courts in copyright infringement cases.

The second prong of the § 103 definition, which covers websites that take “deliberate actions to avoid confirming a [high probability of infringement],” is perhaps the most worrisome of the three prongs. This language appears to have been lifted directly from a 2011 U.S. Supreme Court decision,  Global-Tech Appliances, Inc. v. SEB S.A. In that case, a patent infringement lawsuit, the Court found the defendant liable for inducement on the grounds that it took willful steps to blind itself of the existence of the patent at suit. The Court held that “willful blindness” exists when (1) a defendant subjectively believes that there is a high probability that a fact exists; and (2) the defendant takes deliberate actions to avoid learning of that fact.

Note, however, that Section 103 omits the first prong of the Global Tech willful blindness test, the subjective belief element. This omission might simply be an oversight — or it could reveal the intent of the bill’s authors to cast aside the subjective knowledge standard (which currently applies to service providers in the context of knowledge for purposes of the DMCA) and replace it with an objective, “reasonable person” standard. If plaintiff bringing a SOPA action is only required to show that a website operator should have known of its users’ infringement from the perspective of a “reasonable” operator, and that the site’s operator acted in some manner that had the effect of contributing to its ignorance of infringing activities by users, a vast array of websites that currently enjoy the protections of the DMCA safe harbor may face significant new legal risks. After all, website operators make design decisions all the time that might foreseeably impact on their awareness (or lack thereof) of user’ potentially infringing activities. Who knows what sort of well-intentioned, albeit deliberate, decisions might amount to”avoiding confirming a high probability” of infringement?

As David Sohn of the Center for Democracy & Technology has pointed out, “[t]his seems like a backdoor way of imposing a monitoring obligation on any website that allows users to post content.”  Temple Law Professor David Post, writing at the Volokh Conspiracy, observed that the bill might make it a “violation of law to keep the prosecutors from ‘confirming’ that you’re violating the law — all the prosecutor has to show, to make you vanish from the Net, is that you’ve somehow tried to keep the prosecutor off of your website!”

Why SOPA Could Endanger the DMCA Safe Harbor

SOPA proponents have dismissed concerns that the bill would risk undermining the DMCA safe harbor. U.S. Register of Copyrights Maria Pallante, testifying in a House Judiciary Committee hearing on SOPA on November 16, told members of Congress that it was extremely unlikely that any actions brought under SOPA would impact websites otherwise shielded by the DMCA safe harbor. Techdirt reports that Viacom executive Stanley Pierre-Louis recently argued that SOPA would not “[expand] the scope of secondary liability claims and [diminish] DMCA protections,” noting that “[t]here is no rule that permits ‘willful blindness’ of obvious wrongdoing under U.S. law, and nothing in the DMCA or any other statute has been deemed to hold otherwise.”

Technically, Pallante and Pierre-Louis are correct; SOPA’s provision at 102(c)(2)(A)(iii) appears to leave existing doctrines of copyright liability vis-à-vis the DMCA safe harbor untouched.

In practice, however, SOPA has the potential to effectively usurp the DMCA safe harbor in important respects. If the bill is enacted, online service providers would face a new worst nightmare: being cut off from payment processors, ad networks, and possibly even Internet service providers. As Eric Goldman recently explained, if a “website goes offline because of cash flow problems caused by the cutoff attributable to a single UGC content item, all of the UGC on that website goes dark because of a single content item.”

To avoid such an outcome, website operators will likely do everything they can to avoid falling under SOPA’s definitions — even if that means going above and beyond the requirements of the DMCA safe harbor. While I’m all for websites voluntarily taking prudent and measured actions to combat unlawful user activities (e.g., YouTube’s Content ID system), there are good reasons to be very skeptical of any legislation that effectively imposes on site operators any duty or obligation to monitor, or facilitate the monitoring of, user activities.

Fair concerns have been raised by thoughtful commentators about the DMCA’s limitations and shortcomings. Those concerns deserve a serious examination in the halls of Congress, and perhaps may even merit some careful, targeted tweaks to the DMCA. But the extraordinary remedies provided contained in SOPA should be reserved for genuine rogue sites that willfully flout U.S. laws with impunity and are beyond the reach of U.S. law enforcement authorities. While there are U.S.-based websites out there that violate copyright and trademark laws, extraordinary remedies (such as “going after the money”) should not be the primary method of penalizing such sites. If a rights holder believes that a domestic website is infringing on its copyright or trademark, the proper means of obtaining recourse is to file a civil lawsuit and, when appropriate, seek injunctive relief. The U.S. Marshals Service is tasked with enforcing civil judgments and other court orders entered against domestic actors by federal courts, and parties may obtain writs of execution to order law enforcement intervention against American individuals or businesses that violate court orders.

We Have To Pass The Bill To Find Out What’s In It

Reasonable people read SOPA’s provisions in very different ways. For instance, Terry Hart, writing at Copyhype, has eloquently defended SOPA’s definitions, arguing that “[t]he actions that would subject a provider to SOPA’s provisions are the same ones that would subject it to a copyright infringement suit under existing law and are actions that would not be protected under DMCA safe harbors.” But while SOPA’s definitions are based largely on well-established, time-tested statutes and precedents, some of the language isn’t as clear-cut as it might seem at first glance, as I explain above.

As a result, it’s tough to predict how SOPA would actually impact online service providers. Federal judges vary widely in the methods they employ in attempting to interpret vague statutes. There is no such thing as stare decisis when it comes to statutory construction; some judges focus on the plain meaning of a statute’s language, while others pour through committee reports and hearing transcripts in hopes of divining the legislature’s true underlying intent.

With apologies to Nancy Pelosi, what this means is that we probably won’t know what’s in SOPA until it’s passed. Even then, only after years of costly litigation will the contours of the bill’s provisions likely begin to approach a state of clarity. Consider that the DMCA, now thirteen years old, continues to engender serious disagreement among federal courts to this day. (For instance, courts disagree on what it means for a service provider to take “volitional acts” that encourage users to engage in infringement.)

SOPA’s potential breadth is especially problematic given that its potential victims are small, entrepreneurial Internet start-ups that lack the resources to pay a team of lawyers to examine their operational decisions for potential SOPA violations. As leading high-tech venture capitalist Fred Wilson has argued, “venture capitalists will think more than twice about putting $3mm of early stage capital into startups if they know that the vast majority of the funds will go to pay lawyers to defend the companies instead of to hire engineers to create and build product.”

Lawmakers Should Tread Carefully

While combating rogue foreign websites that violate U.S. laws flagrantly and with impunity should be a priority for lawmakers, SOPA’s definitions and remedies are simply too broad and too vague in their current form. They would cast a cloud of legal uncertainty over America’s innovative, startup-driven Internet economy. It would be a grave mistake to grant such powerful new tools to Justice Department and rights holders and assume that federal trial judges will interpret SOPA’s provisions as narrowly as is necessary to ensure legitimate Internet companies do not suffer adverse effects.

The recent House Judiciary Committee hearing on SOPA made clear just how much work remains to be done to craft an effective but targeted approach to rogue sites. Serious questions remain unresolved — not only about SOPA’s impact of the DMCA safe harbor, but also about cybersecurity, due process and free speech. Additional hearings are needed to explore these important issues with Internet engineers, law professors, and venture capitalists. Marking up the legislation before the end of 2011 — as Chairman Lamar Smith desires, according to the National Journal — would be a serious mistake.

For more on SOPA and rogue websites legislation; see: 

• Ryan Radia, Preliminary Thoughts  on Stop Online Piracy Act (SOPA)
• Ryan Radia, Congress Should Amend SOPA to Address Cybersecurity, Due Process Concerns
• Ryan Radia, Congress takes another stab at combating Rogue Websites with the PROTECT IP Act
• Ryan Radia, Five Ways Congress Can Fix COICA Copyright Bill
• Joint Letter from Public Interest Groups to the House Judiciary Committee on the Stop Online Piracy Act
• Timothy B. Lee, ArsTechnica, The Stop Online Piracy Act: Big Content’s full-on assault against the Safe Harbor
• Letter from Sens. Ron Wyden, Rand Paul, Jerry Moran, and Maria Cantwell to Congressional Leadership objecting to the PROTECT IP Act
• U.S. Rep. Zoe Lofgren’s Opening Letter on SOPA
• Prof. Eric Goldman, Why I Oppose the Stop Online Piracy Act (SOPA)/E-PARASITES Act
• Prof. David Post, How About Occupy Hollywood?
• Fred Wilson, Protecting The Safe Harbors Of The DMCA And Protecting Jobs
• Terry Hart, SOPA: New remedies for existing liability
• Rob Pegoraro, Online Piracy Act is Copyright Overreach
• Center for Democracy & Technology, The Stop Online Piracy Act: Summary, Problems and Implications
• Sherwin Siy, Public Knowledge, House Version of Rogue Websites Bill Adds DMCA Bypass, Penalties for DNS Workarounds
• Techdirt’s SOPA coverage
• Parker Higgins, Electronic Frontier Foundation, What’s On the Blacklist? Three Sites That SOPA Could Put at Risk
• Corynne McSherry, Electronic Frontier Foundation, SOPA: Hollywood Finally Gets A Chance to Break the Internet
• Larry Downes, TechFreedom, SOPA: Hollywood’s latest effort to turn back time

This afternoon the Stop Online Piracy Act (H.R. 3261) was introduced by Rep. Lamar Smith of the House Judiciary Committee. This bill is a companion to the PROTECT IP Act and S.978, both of which were reported by the Senate Judiciary Committee in May.

There’s a lot some to like about the bill, but I’m uneasy about some quite a few of its provisions. While I’ll have plenty to say about this bill in the future, for now, here are a few preliminary thoughts:

• The bill’s definition of “foreign infringing sites” at p. 10 borrows heavily from 18 U.S.C. § 2323, covering any site that commits or facilitates the commission of criminal copyright infringement and would be subject to civil forfeiture if it were U.S.-based. Unfortunately, the outer bounds of 18 U.S.C. § 2323 are quite unclear. The statute, which was enacted only a few years ago, encompasses “any property used, or intended to be used, in any manner or part to commit or facilitate” criminal copyright infringement. While I’m all for shutting down websites operated by criminal enterprises, not all websites used to facilitate crimes are guilty of wrongdoing. Imagine a user commits criminal copyright infringement using a foreign video sharing site similar to YouTube, but the site is unaware of the infringement. Since the site is “facilitating” criminal copyright infringement, albeit unknowingly, is it subject to the Stop Online Piracy Act?
• Section 103 of the bill, which creates a DMCA-like notification/counter-notification regime, appears to lack any provision encouraging ad networks and payment processors to restore service to a site allegedly “dedicated to theft of U.S. property” upon receipt of a valid counter-notification and when no civil action has been brought. The DMCA contains a safe harbor protecting service providers who take reasonable steps to take down content from liability, but the safe harbor only applies if service providers promptly restore allegedly infringing content upon receipt of a counter notification and when the rights holder does not initiate a civil action. Why doesn’t H.R. 3261 include a similar provision?
• The bill’s private right of action closely resembles that found in the PROTECT IP Act. Affording rights holders a legal avenue to take action against rogue websites makes sense, but I’m uneasy about creating a private right of action that allows courts to issue such broad preliminary injunctions against allegedly infringing sites. I’m also concerned about the lack of a “loser pays” provision.
• Section 104 of the bill, which provides immunity for entities that take voluntary actions against infringing sites, now excludes from its safe harbor actions that are not “consistent with the entity’s terms of service or other contractual rights.” This is a welcome change and alleviates concerns I expressed about the PROTECT IP Act essentially rendering certain private contracts unenforceable.
• Section 201 of the bill makes certain public performances via electronic means a felony. The section contains a rule of construction at p. 60 that clarifies that intentional copying is not “willful” if it’s based on a good faith belief with a reasonable basis in law that the copying is lawful. Could this provision cause courts to revisit the willfulness standard discussed in United States v. Moran, in which a federal court found that a defendant charged with criminal copyright infringement was not guilty because he (incorrectly) thought his conduct was permitted by the Copyright act?

Hot-tempered police offers, pushover judges, and vague laws make for a dangerous combination. In July, a controversy erupted in Renton, Washington (a Seattle suburb) when the town’s police department launched a legal assault on an anonymous YouTube user for merely uploading a few sarcastic videos poking fun at the department’s scandals.

Last week’s blockbuster LinkedIn IPO valued the company at nearly $9 billion, surprising many investors, especially given the company’s initial valuation of about $4 billion. While some analysts have pointed to LinkedIn’s valuation as evidence that we may be headed into another tech bubble (a la 2000), it’s important to remember that major tech IPOs remain far less frequent in comparison to their heyday in the dot com boom. While there are many good reasons behind the recent reduction in IPO frequency, ill-conceived public policies have distorted the decision-making process of thriving startups.

In an op-ed in tomorrow’s Investor’s Business Daily, Jacque Otto and I elaborate on this argument:

Silicon Valley is teeming with budding startups whose user bases and valuations are skyrocketing. As these companies seek breathing room to grow, they will face a tough decision: stay private, seek out a buyer or go public.

Making this complex choice all the more challenging is government uncertainty. Filing for an initial public offering is harder than ever due to the onerous regulations and burdensome laws Washington has handed down over the past decade. Microsoft’s $8.5 billion purchase of Skype surprised analysts, many of whom had predicted Skype would seek an IPO or a deal with Facebook or Google.

Meanwhile, Facebook has kept quiet in face of speculation over whether it might file for an IPO. So far, the social networking giant has focused on raising capital privately. Given the risks of going public in this environment, Facebook’s decision is understandable.

While some tech firms — including LinkedIn, Kayak and Demand Media — have gone public or filed for IPOs in the past year, many others — including Hulu, Zynga, and Twitter — are reportedly leaning against going public this year. Some of these may be acquired, as happened with AdMob, a mobile advertising startup rumored to be pondering an IPO until Google bought it for $750 million in 2009.

Why do tech companies appear more reluctant to go public today than they were during the tech sector’s heyday of the early 2000s?

While many factors are at play, new regulations on the finance sector and heavy-handed legislation enacted since the dot-com boom deserve much of the blame. Raising capital through an IPO is especially tough, discouraging startups from seeking to go public. This increases the attractiveness of raising capital through private sources or by being acquired by a bigger firm.

The Sarbanes-Oxley Act, enacted in 2002 after the Enron scandal, has been devastating for investors and promising startups. The law’s onerous mandates on public companies have forced many nascent companies to forget about or delay going public.

Read the rest of the piece here.

Social widgets, such as the now-ubiquitous Facebook “Like” button and Twitter “Tweet” button, offer users a convenient way to share online content with their friends and followers. These widgets have recently come under scrutiny for their privacy implications. Yesterday, The Wall Street Journal reported that Facebook, Twitter, and Google are informed each time a user visits a webpage that contains one of the respective company’s widgets:

Internet users tap Facebook Inc.’s “Like” and Twitter Inc.’s “Tweet” buttons to share content with friends. But these tools also let their makers collect data about the websites people are visiting. These so-called social widgets, which appear atop stories on news sites or alongside products on retail sites, notify Facebook and Twitter that a person visited those sites even when users don’t click on the buttons, according to a study done for The Wall Street Journal.

It wasn’t exactly a secret that social widgets “phone home.” However, the Journal’s story shed new light on how the firms that offer social widgets handle the data they glean regarding user browsing habits. Facebook and Google reportedly store this data for a limited period of time — two weeks and 90 days, respectively — and, importantly, the data isn’t recorded in a way that can be tied back to a user (unless, of course, the user affirmatively decides to “like” a webpage). Twitter reportedly records browsing data as well, but deletes it “quickly.”

Assuming the companies effectively anonymize the data they glean from their social widgets, privacy-conscious users have little reason to worry. I’m not aware of any evidence that social widget data has been misused or breached. However, as Pete Warden reminded us in an informative O’Reilly Radar essay posted earlier this week, anonymizing data is harder than it sounds, and supposedly “anonymous” data sets have been successfully de-anonymized on several occasions. (For more on the de-anonymization of data sets, see Arvind Narayanan and Vitaly Shmatikov’s 2008 research paper on the topic).

While these social widgets may well pose no real threat to privacy, some especially privacy-sensitive users might be wary of the risk of being “tracked” by a social networking service, however small that risk may be. Such concerns aren’t totally unreasonable — if, say, the browsing data collected by Facebook or Google were to be breached and subsequently de-anonymized and tied to authenticated (logged-in) users by malicious actors, the resulting privacy harms could be quite serious.

Fortunately for privacy-conscious users, there are several ways to stop social widgets from collecting data about your browsing habits. As the Journal points out, you can simply log out of your Twitter or Facebook account prior to visiting other websites. Other methods include clearing out your cookies or using your browser’s privacy mode when visiting social networking sites. And, of course, there’s always the “nuclear option” of deleting your social networking accounts entirely.

Perhaps the most convenient, slick way to avoid social widgets is to simply use a browser add-on that selectively disables cross-site requests from Facebook, Twitter, and Google. The WSJ profiled one such add-on, Disconnect, which is compatible with Chrome, Firefox, and Safari.

If you’re a Firefox user, the popular add-on NoScript also offers a robust and effective mechanism for blocking social widgets. To do so, you’ll need to paste a few lines of code in NoScript’s Application Boundaries Enforcer (ABE), a powerful module that allows users to establish custom rules governing scripts and cross-site requests. If you’ve got NoScript installed (get it here), simply go to the ‘Options’ menu, select the ‘Advanced’ tab, then the ‘ABE’ subtab:

After checking the ‘Enable ABE’ box, select the USER Ruleset, then paste in the following lines:

Site .facebook.com .fbcdn.net facebook.net
Accept from SELF
Accept from .facebook.com .fbcdn.net facebook.net
Deny INCLUSION

Site .twitter.com
Accept from SELF
Accept from .twitter.com
Deny INCLUSION

Site .google.com googleapis.com
Accept from SELF
Accept from .google.com
Deny INCLUSION

Then hit ‘Refresh’ and ‘OK’ and you’re all set. If you’ve done this correctly, you should no longer see Facebook, Twitter, or Google widgets. To verify that no data is being transmitted to the companies, install and run HTTP traffic analyzer Fiddler then visit a webpage featuring social widget. If no HTTP request is transmitted to a social networking service, you’re in the clear. Note that this technique also doesn’t affect the functionality of Twitter, Facebook, or Google, so you can still use each of these services with full functionality. If you want to block other social widgets, simply add additional lines to ABE in NoScript in the same manner as above including the domains of the services you wish to block.

As this post hopefully illustrates, privacy-conscious users aren’t helpless; extant technological solutions can address many privacy concerns already, while more robust tools are constantly emerging. As for Facebook, Twitter, and Google, it’s hard to fault them for responding to user demands. Statistics indicate that social widgets are immensely valuable and popular among users, so activating them by default is a sensible decision.

I’d like to see these firms offer a mechanism for authenticated users to opt out of social widget data collection entirely. Greater transparency regarding how the data sets are anonymized would also be welcome. Meanwhile, privacy-conscious users can take matters into their own hands by opting out manually.

Last November, I penned an essay on these pages about the COICA legislation that had recently been approved unanimously by the U.S. Senate Judiciary Committee. While I praised Congress’s efforts to tackle the problem of “rogue websites” — sites dedicated to trafficking in counterfeit goods and/or distributing copyright infringing content — I warned that the bill lacked crucial safeguards to protect free speech and due process, as several dozen law professors had also cautioned. Thus, I suggested several changes to the legislation that would have limited its scope to truly bad actors while reducing the probability of burdening protected expression through “false positives.” Thanks in part to the efforts of Sen. Ron Wyden (D-Ore.), COICA never made it a floor vote last session.

Today, three U.S. Senators introduced a similar bill, entitled the PROTECT IP Act (bill text), which, like COICA, establishes new mechanisms for combating Internet sites that are “dedicated to infringing activities.” I’m glad to see that lawmakers adopted several of my suggestions, making the PROTECT IP Act a major improvement over its predecessor. While the new bill still contains some potentially serious problems, on net, it represents a more balanced approach to fighting online copyright and trademark infringement while recognizing fundamental civil liberties.

Some of the major differences between COICA and PROTECT IP include:

• Under COICA, a website would have been deemed “dedicated to infringing activities” if it had no “demonstrable, commercially significant purpose other than” (emphasis added) to facilitate infringing activities. PROTECT IP, however, only covers websites with “no significant use other than” to facilitate infringing activities. This slight change in wording may seem trivial, but it’s actually quite significant, as lots of blogs, forums, and other sites engaged in noncommercial, but still protected, speech that may well have been subject to domain name disabling under COICA would likely be in the clear under PROTECT IP. However, as Public Knowledge’s Sherwin Siy points out, PROTECT IP’s definition of sites “dedicated to infringing activities” remains overly broad, as it doesn’t explicitly exempt online intermediaries that are otherwise protected by the 17 U.S.C. § 512(c) safe harbor. A site operator that is not engaged in direct or willful secondary infringement should be exempt from actions taken under the PROTECT IP Act if the site abides by the DMCA notice and takedown process, has no actual knowledge of infringing activities, does not derive a financial benefit directly attributable to infringement, and does not induce infringement.

• PROTECT IP, unlike COICA, does not categorically deem websites “otherwise subject to civil forfeiture” under 18 U.S.C. § 2323 to be “dedicated to infringing activities.” Given the extraordinary breadth of section 2323, which permits the government to seize any  “property used, or intended to be used, in any manner or part to commit or facilitate the commission of” criminal copyright infringement, it’s a relief that language was removed.

• PROTECT IP requires that the Justice Department or a rights holder, in bringing an action against a site under the statute, attempt to commence an in personam action against the operator of an allegedly infringing website before an in rem action can be brought. From a due process perspective, this change is an improvement over COICA (which only provided for in rem actions), as it’s much more likely that an in personam action will provide a site operator with an opportunity to participate in an adversarial hearing prior to the issuance of a temporary restraining order or preliminary injunction requiring an intermediary to disable service to the site.

• PROTECT IP adds information location tools to the list of intermediaries that are required to disable service or cease linking to a website upon being served with a court order deeming the site “dedicated to infringing activities.” This provision would apply not only to search engines, but also to blogs, chat rooms, and message boards. Like COICA, PROTECT IP also applies to DNS operators, financial transaction providers, and Internet advertising services.

• PROTECT IP allows the Justice Department to take action only against nondomestic domain names. (DHS asserts that it is already empowered to seize domestic domain names in accordance with 18 U.S.C. § 2323, as it has done successfully on numerous occasions in recent months.)

• PROTECT IP contains a new private right of action under which a rights holder may seek a court order against any domain name. Actions initiated by rights holders, if successful, only require ad networks and/or payment processors – but not DNS servers or information location tools – to disable service to infringing sites.

Considering all the changes made to the bill, I’m inclined to disagree with commentators, such as Techdirt’s Mike Masnick, who’ve argued that the PROTECT IP, a.k.a. the “Son of COICA,” is worse than its father. On net, PROTECT IP appears to be less likely to impose incidental burdens on protected expression and more likely to afford website operators a chance to successfully challenge actions brought against their sites.

However, I’m still concerned about several aspects of PROTECT IP. Its private right of action, while limited in scope, may result in small websites whose users frequently post infringing content being targeted by costly, burdensome litigation initiated by rights holders. CDT’s David Sohn elaborates on the risks of creating a private right of action in his superb analysis of the bill.

The voluntary actions clause is also quite troubling, as I’ve argued before and as Wendy Seltzer argues on her blog. While I’m all for voluntary actions in principle, such actions should not override private contracts or terms of service agreements that would otherwise be enforceable.

It’s also unfortunate that the PROTECT IP Act does not include a cost reimbursement section, as I suggested last year, or at least an exemption for small entities. While the bill establishes an affirmative defense for an information location tools that doesn’t comply with an order “by showing that the defendant does not have the technical means to comply . . . without incurring an unreasonable economic burden,” it’s far from clear what exactly court would deem “unreasonable.” News of the Justice Department seeking injunctive relief against a small search site operator for failing to comply with a court order issued under PROTECT IP will have a chilling effect on all kinds of small-time Internet platforms.

As lawmakers consider the PROTECT IP Act in coming weeks and months, they should also revisit 18 U.S.C. § 2323, a civil forfeiture provision enacted in 2008 as part of the PRO-IP Act. This extraordinarily broad statute has recently been criticized by many legal scholars. Rep. Zoe Lofgren, among other legislators, has been very critical of the way in which seizures have been conducted. While seizures are certainly justified in some instances, the statute should be narrowed to include only websites “dedicated to infringing activities,” and it should require the government to attempt to commence in personam actions in all instances. Domain names aren’t movable property — unlike illegal drugs or weapons, there is no risk of a criminal “hiding” a domain name or destroying it before evidence of its illegality can be secured.

Update: The final version of the bill text changed the term “interactive computer service” to “information location tool,” which is a positive change. I’ve changed this essay slightly to reflect the distinction.

POLITICO reports that a bill aimed at combating so-called “rogue websites” will soon be introduced in the U.S. Senate by Sen. Patrick Leahy. The legislation, entitled the PROTECT IP Act, will substantially resemble COICA (PDF), a bill that was reported unanimously out of the Senate Judiciary Committee late last year but did not reach a floor vote. As more details about the new bill emerge, we’ll likely have much more to say about it here on TLF.

I discussed my concerns about and suggested changes to the COICA legislation here last November; the PROTECT IP Act reportedly contains several new provisions aimed at mitigating concerns about the statute’s breadth and procedural protections. However, as Mike Masnick points out on Techdirt, the new bill — unlike COICA — contains a private right of action, although that right may not permit rights holders to disable infringing domain names. Also unlike COICA, the PROTECT IP Act would apparently require search engines to cease linking to domain names that a court has deemed to be “dedicated to infringing activities.”

For a more in-depth look at this contentious and complex issue, check out the panel discussion that the Competitive Enterprise Institute and TechFreedom hosted last month. Our April 7 event explored the need for, and concerns about, legislative proposals to combat websites that facilitate and engage in unlawful counterfeiting and copyright infringement. The event was moderated by Juliana Gruenwald of National Journal. The panelists included me, Danny McPherson of VeriSign, Tom Sydnor of the Association for Competitive Technology, Dan Castro of the Information Technology & Innovation Foundation, David Sohn of the Center for Democracy & Technology, and Larry Downes of TechFreedom.

CEI-TechFreedom Event: What Should Lawmakers Do About Rogue Websites? from CEI Video on Vimeo.

User-driven websites — also known as online intermediaries — frequently come under fire for disabling user content due to bogus or illegitimate takedown notices. Facebook is at the center of the latest controversy involving a bogus takedown notice. On Thursday morning, the social networking site disabled Ars Technica’s page after receiving a DMCA takedown notice alleging the page contained copyright infringing material. While details about the claim remain unclear, given that Facebook restored Ars’s page yesterday evening, it’s a safe bet that the takedown notice was without merit.

Understandably, Ars Technica wasn’t exactly pleased that its Facebook page — one of its top sources of incoming traffic — was shut down for seemingly no good reason. Ars was particularly disappointed by how Facebook handled the situation. In an article posted yesterday (and updated throughout the day), Ars co-founder Ken Fisher and senior editor Jacqui Cheng chronicled their struggle in getting Facebook to simply discuss the situation with them and allow Ars to respond to the takedown notice.

Facebook took hours to respond to Ars’s initial inquiry, and didn’t provide a copy of takedown notice until the following day. Several other major tech websites, including ReadWriteWeb and TheNextWeb, also covered the issue, noting that Ars Technica is the latest in a series of websites to have suffered from their Facebook page being wrongly disabled. In a follow-up article posted today, Ars elaborated on what happened and offered some tips to Facebook on how it could have better handled the situation.

It’s totally fair to criticize how Facebook deals with content takedown requests. Ars is right that the company could certainly do a much better job of handling the process, and Facebook will hopefully re-evaluate its procedures in light of this widely publicized snafu. In calling out Facebook’s flawed approach to dealing with takedown requests, however, Ars Technica doesn’t do justice to the larger, more fundamental problem of bogus takedown notices.

As Mike Masnick explains on Techdirt, U.S. federal laws strongly discourage online intermediaries from trying to figure out if takedown notices are legitimate or not. If Facebook were to refuse to comply with a copyright takedown notice that subsequently turned out to be meritorious, it would lose its safe harbor provided for in 17 U.S.C. § 512(c). Should Facebook err in its judgment, therefore, it would potentially be on the hook for harsh copyright infringement penalties. In effect, the DMCA incentivizes what Masnick describes as “massive overreactions” by online intermediaries.

That’s not to say that there aren’t some simple steps Facebook could take to combat bogus takedown notices without exposing itself to additional liability, especially in “easy” cases, as Ars and others have argued. Verifying that takedown notices are associated with valid email addresses is one such step that Facebook apparently does not currently employ. Facebook could also be more responsive to users whose content has been disabled, at least when the content in question is highly visible.

Perhaps more importantly, Facebook should adopt a system for enabling users who believe their content has been wrongly disabled to file a counter notification. YouTube, for instance, has a slick online system that lets users challenge wrongful takedown requests. Under 17 U.S.C. § 512(g), an online service provider may restore previously-disabled content between 10 and 14 days after receipt of a valid counter notification if the content owner hasn’t initiated legal proceedings. It’s odd that Facebook hasn’t adopted an online counter notification system, especially given that service providers are shielded from liability if they respond to counter notices in accordance with section 512(g).

While it would be great if Facebook were to manually and thoroughly screen all user complaints and requests, expecting online intermediaries to pay for a live human being — say, an intellectual property lawyer or a paralegal — to vet the legal merits of each takedown notice is simply unreasonable. Facebook has more than 600 million active users, but a mere 2,000 or so employees (although that number may soon grow substantially). That’s over 300,000 users per employee!

And let’s not forget that Facebook is a free service. The company generated a scant $4 of revenue per user in 2010. Facebook’s going to have to do a much better job of monetizing its platform before we can reasonably expect it to vet legal requests on its users’ behalf. Even Google — with a head count and revenue more than ten times Facebook’s — is frequently chastised for not doing enough to identify bogus or otherwise invalid takedown notices. Based on some of the “horror stories” that have been reported recently, Ars Technica is lucky that Facebook restored its page within a day of its removal.

Even if Facebook improves its system, however, the underlying problem of bogus takedown notices is probably here to stay — that is, until Congress acts. Reopening the legislative debate over the DMCA is a risky gambit, but at least in theory, Congress could improve the statute by adopting some relatively minor tweaks.

First, the DMCA should do more to deter parties from filing invalid or bad faith DMCA takedown notices. Courts rarely punish parties for filing illegitimate takedown notices, as it is very difficult in practice to show  that a notice was filed in bad faith. All in all, the overwhelming majority of incidents of bogus takedown notices go unpunished, as I’ve discussed before on these pages.

Wendy Seltzer of Princeton’s Center for Information Technology Policy chronicled the chilling effects of DMCA takedown abuses in a recent Harvard Journal of Law & Technology article. She suggests a few legislative fixes to 17 U.S.C. § 512(f) to better balance the interests of users and rightsholders:

The law should require greater diligence: declarations on penalty of perjury to match those required by the respondent, and perhaps even a bond against erroneous claims. . . . Strengthening the counter-suit provisions could encourage a plaintiffs’ bar to take up these cases as private attorneys general. Stiffening the penalties against claimants who obtained takedowns through misrepresentation of infringement would encourage claimants to verify and support their claims of infringement or penalize them for failure to do so rather than allowing them to shift that burden to service providers and posters.

Congress should also create a safe harbor, notice-and-takedown system for online trademark infringement, as Elizabeth Levin has argued. While copyright takedown notices receive most of the attention in the IP debates, there’s no DMCA-esque process established in statute to provide for online intermediaries to disable and repost allegedly trademark-infringing content.

Consumers are buying more and more stuff from online retailers located out-of-state, and state and local governments aren’t happy about it. States argue that this trend has shrunk their brick and mortar sales tax base, causing them to lose out on tax revenues. (While consumers in most states are required by law to annually remit sales taxes for goods and services purchased out of state, few comply with this practically unenforceable rule).

CNET’s Declan McCullagh recently reported that a couple of U.S. Senators are pushing for a bill that would require many Internet retailers to collect sales taxes on behalf of states in which they have no “nexus” (physical presence).

In his latest Forbes.com column, “The Internet Tax Man Cometh,” Adam Thierer argues against this proposed legislation. He points out that while cutting spending should be the top priority of state governments, the dwindling brick and mortar tax base presents a legitimate public policy concern. However, Thierer suggests an alternative to “deputizing” Internet retailers as interstate sales tax collectors:

The best fix might be for states to clarify tax sourcing rules and implement an “origin-based” tax system. Traditional sales taxes are already imposed at the point of sale, or origin. If you buy a book in a Seattle bookstore, the local sales tax rate applies, regardless of where you “consume” it. Why not tax Net sales the same way? Under an origin-based sourcing rule, all sales would be sourced to the principal place of business for the seller and taxed accordingly.

Origin-based taxation is a superb idea, as my CEI colleague Jessica Melugin explained earlier this month in the San Jose Mercury News in an op-ed critiquing California’s proposed affiliate nexus tax:

An origin-based tax regime, based on the vendor’s principal place of business instead of the buyer’s location, will address the problems of the current system and avoid the drawbacks of California’s plan. This keeps politicians accountable to those they tax. Low-tax states will likely enjoy job creation as businesses locate there. An origin-based regime will free all retailers from the accounting burden of reporting to multiple jurisdictions. Buyers will vote with their wallets, “choosing” the tax rate when making decisions about where to shop online and will benefit from downward pressure on sales taxes. Finally, brick-and-mortar retailers would have the “even playing field” they seek.

Congress should exercise its authority over interstate commerce and produce legislation to fundamentally reform sales taxes to an origin-based regime. In the meantime, California legislators should resist the temptation to tax those beyond their borders. Might we suggest an awards show tax?

Origin-based sourcing is not without its detractors, but the arguments against it are weak. R. David L. Campbell, for instance, responds to Thierer’s Forbes.com column by claiming that origin-based taxation amounts to “taxation without representation,” because it would result in some consumers paying sales taxes despite having no say over the elected officials who established such taxes.

That’s true, but so what? Consumers who buy from retailers located out-of-state are already impacted by laws in those states all the time. For instance, DC residents cannot buy wine and have it shipped to them from any Pennsylvania-based retailer due to that state’s laws, even though the District of Columbia has fairly permissive laws regarding direct-to-consumer wine shipments from out-of-state.

Cconsumers who buy online also pay all sorts of indirect taxes. Consider that major electronics retailer Newegg.com, which is incorporated in California, paid $22m in state corporate income taxes in 2008. A big chunk of that $22m was passed on to out-of-state consumers who have no say over California tax rates. While most Newegg.com customers can’t vote in California, many of the firm’s thousands of employees can. The company is also better positioned than thousands of dispersed citizens to lobby state legislators for a favorable business climate.

Campbell also brings up the SSTP (Streamlined Sales Tax Project), an effort launched back in 2000 by a group states to establish a cooperative sales tax regime. While the project’s objective to “streamline” sales taxes is laudable in theory, it turns out — unsurprisingly — that getting dozens of state governments to get behind a simple, uniform, reciprocal sales tax regime is quite challenging in practice.

Joseph Henchman, the Tax Foundation’s Vice President of Legal & State Projects, discussed the project’s massive shortcomings in his 2009 testimony before the Maryland Legislature [emphasis in original]:

The SSTP already abandoned the notion of taxing like transactions alike when they adopted “destination sourcing” for online sales, but permitted states to adopt “origin sourcing” for intrastate sales. This in effect requires Internet companies to collect sales taxes based on where their customer is located, but allows brick-and-mortar stores to collect sales taxes based on where the store is located. In this way, the SSTP prevents a level playing field between Internet business and brick-and-mortar businesses.

Coupled with the SSTP’s non-worry about reducing the number of jurisdictions . . . full implementation of the SSTP at this time, without serious reforms, could result in a serious and inequitable burden on e-commerce. . . . The SSTP has not accomplished its mission. The SSTP should look again at serious simplification efforts before declaring themselves a success and seeking to expand state taxing power. . . . Neither the wholesale adoption nationwide of uniform sales tax statutes, nor the development of a working alternative that provides the certainty needed for long-term investment, are likely in the foreseeable future.

While the SSTP has made some progress in the last couple of years, it continues to encounter resistance from state governments, and sales taxes remain exceedingly complex.

Congress could address the issue in a far simpler manner by enacting legislation that provides for origin-based taxation. Dr. Michael S. Greve, the John G. Searle Scholar at the American Enterprise Institute (and the Chairman of the Competitive Enterprise Institute) wrote a superb study in 2003, Sell Globally, Tax Locally, in which he articulates the case for origin-based taxation in painstaking detail. Greve discusses the importance of tax competition and dismisses the “race to the bottom” argument on pages 26 to 28:

By rendering sellers indifferent to the local tax, destination-based taxation minimizes tax competition. Under an origin-based regime, in contrast, sellers in a low-tax jurisdiction enjoy a competitive advantage. States and countries will seek to attract firms by offering a low tax rate. As jurisdictions attempt to stem the flight of business firms into lowtax jurisdictions, sales taxes will spiral downward. If sellers are perfectly mobile and transaction costs (such as shipping cost) are negligible, the equilibrium tax rate—all else equal—is zero. This “race to the bottom” argument is the sum and substance of the case for destination-based taxation and the true reason why governments consistently and vociferously oppose origin-based taxation. But the argument is unpersuasive.

First of all, all else is not in fact equal. We would probably see the zero-tax equilibrium if sellers were entirely free to designate their home state, or to designate their place of incorporation as their home state. The principal-place-of-business rule, in contrast, disciplines the sellers’ choices. As already suggested, sales taxes are one element in a bundle of services and obligations that are offered by each jurisdiction. A jurisdiction that provides an educated labor force, an excellent infrastructure, a favorable regulatory environment, a sensible and efficient judicial system, or sufficient “quality of life” benefits may be able to exact a sales tax or its economic equivalent. . . . An unattractive jurisdiction that drives up the cost of doing business, meanwhile, will be unable to compensate those selfinflicted disadvantages by becoming a “sales tax haven.”

More fundamentally, one cannot assume that the downward pressure on tax competition necessarily translates into a race to the bottom. Under certain (heroic) assumptions, tax competition may compromise local governments’ ability to finance public goods; in that event, the race is to the bottom. But . . . it is equally plausible . . . to welcome tax competition as a much-needed discipline and countervailing force to local rent-seeking and interest group exploitation. Under these more realistic assumptions, tax competition reduces the “political residuum” that is available to local politicians for purposes of redistribution—without, at the same time, compromising local governments’ abilities to levy taxes, akin to user fees, to finance public goods.

It is true that destination-based systems also curtail some tax competition. The local tax mix, including the sales tax, will be a factor in the citizens’ (though not firms’) locational decisions. . . . In many cases, though, firms may be more responsive to changes in the local tax structure—and to advantageous changes in “foreign” jurisdictions—than are individual citizens. A 2-percent local sales tax hike may not induce an individual to move. . . . That same increase, though, may have a rather dramatic effect on firms’ locational decisions.

States compete for citizens and firms on any number of margins—environmental regulation, labor regulation, business and income taxes. All elements of the regulatory and tax environment operate as factors for local firms. Countless government decisions provide firms with competitive advantages or disadvantages and, at the margin, shape business decisions to locate in a given state or locality.

Amen.

Like Milton, I’m very worried about the political vulnerabilities that might arise if the wireless sector grows more concentrated. Still, I think it’s a big mistake to legitimize one repressive incarnation of coercive state power (antitrust intervention) to reduce the likelihood that another incarnation (information control) will intensify. This approach is not only defeatist, as Hance argues, but it also requires a tactical assessment that rests on several dubious assumptions.

First, Milton overestimates the marginal risk that the AT&T – T-Mobile deal will pave the way for an information control regime. The wireless market isn’t static; the disappearance of T-Mobile as an independent entity (which may well occur regardless of whether this deal goes through) hardly means we’re forever “doomed” to live with 3 nationwide wireless players. With major spectrum auctions likely on the horizon, and the possibility of existing spectrum holdings being combined in creative ways, the eventual emergence of one or more nationwide wireless competitors is quite possible — especially if, as skeptics of the AT&T – T-Mobile deal often argue, the wireless market underperforms in the years following the acquisition.

More importantly, network operators, like almost all Internet gatekeepers, face mounting pressure from their users not to facilitate censorship, surveillance, and repression. Case in point: AT&T is a leading member of the Digital Due Process coalition (to which I also belong) that’s urging Congress to substantially strengthen the 1986 federal statute that governs law enforcement access to private electronic communications. Consider that AT&T’s position on this major issue is officially at odds with the official position of the same Justice Department that’s currently reviewing the AT&T – T-Mobile deal. Would a docile, subservient network operator challenge its state overseers so publicly?

Or take Google. Arguably, it’s an enormously important gatekeeper — in many respects, it’s an even greater “chokepoint” than any single network operator — but the firm has held strong against substantial pressures from the U.S. government to facilitate censorship and surveillance. (See, e.g.: Google’s successful 2006 challenge to a Justice Department request seeking search query logs; Google’s recent refusal to remove DUI apps from its Android market; Google’s widely noted hesitance toward censoring search results absent a lawfully issued takedown request; Google’s 2010 joint amicus brief urging a federal district court to reject a Justice Department subpoena seeking to compel Yahoo! to disclose the contents of a user’s opened emails).

I could go on. The point is that large network operators are often willing to vigorously resist — both in private and in public — governmental demands that they facilitate information control. Working in cahoots with unpopular governmental actors is terrible PR; some major players seem to think it’s bad for business, too.

It’s often overlooked that antitrust intervention deprives us of beneficial competitive reactions to business deals — even deals that, viewed in isolation, appear to be “harmful.” The consequence of the AT&T – T-Mobile deal won’t simply be the two companies operating as a single entity; the deal will also force rivals to respond in unforeseeable ways that will tend to benefit consumers and fuel innovation. As Hance reminds us, this virtuous cycle of Schumpeterian creative destruction is fundamental to the long-term evolution of markets. When government blocks proposed business arrangements, it contributes to stasis — and static markets tend to be much easier to regulate and control than relatively dynamic markets.

To be sure, if the combination of AT&T and T-Mobile exacerbates political pressures for imposing a network information control regime, we cyber-libertarians should fight back vigorously. Turning to antitrust intervention to keep markets relatively unconcentrated — and, hence, more difficult to regulate — is a mistake.

If you welcome the growing pressures for regulating business arrangements in the high-tech sector, an emboldened antitrust regime is just what the doctor ordered.

In the ongoing copyright debates, areas of common ground are seemingly few and far between. It’s easy to forget that not all approaches to combating copyright infringement are mired in controversy. One belief that unites many stakeholders across the spectrum is that more efforts are needed to educate Internet users about copyright. The Internet has spawned legions of amateur content creators, but not all of the content that’s being created is original. Indeed, a great deal of online copyright infringement owes to widespread ignorance of copyright law and its penalties.

For its part, Google yesterday unveiled “Copyright School” for YouTube users. As Justin Green explains on the official YouTube blog, users whose accounts have been suspended for allegedly uploading infringing content will be required to watch this video and then correctly answer questions about it before their account will be reinstated:

Of course, boiling down the basics of copyright into a four and a half minute video is not an easy task, to put it mildly. (The authoritative treatment of copyright law, Nimmer on Copyright, fills an 11-volume treatise.) Copyright geeks and fans of “remix culture” will appreciate that Google’s video touches on fair use and includes links to in-depth resources for users to learn more about copyright. It will be interesting to see how Google’s effort influences the behavior of YouTube users and the incidence of repeat infringement.

Update: EFF’s Corynne McSherry has an essay up on the Deeplinks blog arguing that YouTube’s Copyright School video omits several important facts about copyright. She raises several very good points, but the unfortunate reality of copyright law is that uploading content that’s not substantially original — even in cases that might constitute fair use — is legally risky, particularly for those who aren’t familiar with copyright law. While I’d love to see YouTube create a follow-up video that explains fair use doctrine in an accessible manner, Google’s decision to urge YouTube uploaders to err on the side of caution is quite reasonable in light of the severity of the statutory penalties for copyright infringement.

The Competitive Enterprise Institute and TechFreedom are hosting a panel discussion this Thursday featuring intellectual property scholars and Internet governance experts. The event will explore the need for, and concerns about, recent legislative proposals to give law enforcement new tools to combat so-called “rogue websites” that facilitate and engage in unlawful counterfeiting and copyright infringement.

Video of the event will be posted here on TechLiberation.com.

Space is very limited. To guarantee a seat, please register for the event by emailing nciandella@cei.org.

In the latest example of big government run amok, several politicians think they ought to be in charge of which applications you should be able to install on your smartphone.

On March 22, four U.S. Senators sent a letter to Apple, Google, and Research in Motion urging the companies to disable access to mobile device applications that enable users to locate DUI checkpoints in real time. Unsurprisingly, in their zeal to score political points, the Senators—Harry Reid, Chuck Schumer, Frank Lautenberg, and Tom Udall—got it dead wrong.

Had the Senators done some basic fact-checking before firing off their missive, they would have realized that the apps they targeted actually  enhance the effectiveness of DUI checkpoints while reducing their intrusiveness. And had the Senators glanced at the Constitution – you know, that document they swore an oath to support and defend – they would have seen that sobriety checkpoint apps are almost certainly protected by the First Amendment.

While Apple has stayed mum on the issue so far, Research in Motion quickly yanked the apps in question. This is understandable; perhaps RIM doesn’t wish to incur the wrath of powerful politicians who are notorious for making a public spectacle of going after companies that have the temerity to stand up for what is right.

Google has refused to pull the DUI checkpoint finder apps from the Android app store, reports Digital Trends. Google’s steadfastness on this matter reflects well on its stated commitment to free expression and openness. Not that Google’s track record is perfect on this front – it’s made mistakes from time to time – but it’s certainly a cut above several of its competitors when it comes to defending Internet freedom.

Advance Publicity & DUI Checkpoints

Trying to keep the locations of DUI checkpoints secret is bad public policy. Contrary to the Senators’ assertion that “applications that alert users to DUI checkpoints” are “harmful to public safety,” there is zero evidence that publicizing sobriety checkpoints contributes to drunk driving accidents.

If anything, advance publicity actually  saves lives. DUI checkpoints aren’t primarily about catching drunk drivers, but about deterring drunk driving in the first place. When drivers know that police have set up checkpoints nearby, they’re likely to think twice about getting behind the wheel. Instead, they might hail a cab or catch a ride from a sober friend.

The California Supreme Court recognized in Ingersoll v. Palmer that DUI checkpoints are designed to deter drunk driving:

The stated goals of several law enforcement agencies explicitly point to deterrence as a primary objective of the checkpoint program. The Burlingame manual described the objectives of its program, noting the historical use of roving patrols as the principal law enforcement response to the drunk driving problem… Two major goals of the checkpoint as stated in the manual were to increase public awareness of the seriousness of the problem and to increase the perceived risk of apprehension.

The  Ingersoll court further stated with regard to the checkpoints that, “advance publicity is important to the maintenance of a constitutionally permissible sobriety checkpoint. Publicity both reduces the intrusiveness of the stop and increases the deterrent effect of the roadblock.”

California is not alone in focusing on the deterrent effect of DUI checkpoints. In 1990, shortly after the U.S. Supreme Court upheld the constitutionality of certain kinds of DUI checkpoints in Michigan Department of State Police v. Sitz, the National Highway Traffic Safety Administration (NHTSA) published a document (PDF) laying out guidelines for police in conducting sobriety checkpoints. NHTSA’s model sobriety checkpoint guidelines include the following section:

C. ADVANCE NOTIFICATION 1. For the purpose of public information and education, this agency will announce to the media that checkpoints will be conducted. 2. This agency will encourage media interest in the sobriety checkpoint program to enhance public perception of aggressive enforcement, to heighten the deterrent effect and to assure protection of constitutional rights.

Indeed, police departments routinely publicize information about DUI checkpoints in local newspapers and other media outlets. Many police officers think such publicity is beneficial to law enforcement. Take Indiana State Police Sgt. Dave Burstein, who brushed off the Senators’ concerns about DUI checkpoint apps, saying to local news affiliate WXIN-TV, “Let everybody know they’re there because the whole idea is to get voluntary compliance.”

Regulation Through Intimidation

The Senators’ letter isn’t just uninformed and irresponsible, it’s also arrogant – a prime example of regulation through intimidation. When politicians want to dictate behavior but know they cannot lawfully legislate or regulate it, a widely favored tactic is to demonize the target by sending a threatening letter accompanied by a vitriolic press release. When that doesn’t get the job done, politicians hold congressional hearings to publicly rake the alleged wrongdoers over the coals. This reprehensible strategy has long been used to suppress constitutionally protected speech in ways that, if legislated, would almost certainly be overturned by courts on First Amendment grounds. As former U.S. Senator Paul Simon warned in 2003:

I have no problem with holding hearings and putting on pressure. But the problem with holding hearings and putting on pressure is that most of the members have no sensitivity on the First Amendment…The only oath we take says that we promise to support and defend the Constitution of the United States against all enemies, foreign and domestic. The domestic enemies of the Constitution are often on the floor of the House and the Senate.

In a free society, it is unacceptable for a handful of Senators to attempt to dictate mobile app store decisions without a floor vote or any judicial oversight. Lawmakers’ function is to make laws, not exploit their bully pulpit to try to coerce private businesses into doing their bidding. If voters let these politicians get away with going after DUI checkpoint apps, which politically unpopular apps will be next? A ban on apps that locate abortion clinics? A ban on apps that locate handgun dealers? It’s a scary slippery slope, as ACT’s Morgan Reed reminds us.

If Reid, Schumer, Lautenberg, and Udall want to examine a serious threat to public safety, they should look in the mirror. Meanwhile, they should leave mobile app stores alone. The Washington Times nailed it in a recent editorial:

Real drunk drivers deserve severe punishment, but the best way to catch them is to respect the Fourth Amendment. Instead of having cops stand around behind barricades interrogating soccer moms, have them patrol the streets looking for evidence of impaired driving. It works. In the meantime, high-tech companies ought to email these senators a free Constitution app for their smart phones.

Amen.

The smartphone is arguably one of the most empowering and revolutionary technologies of the modern era. By putting the processing power of a personal computer and the speed of a broadband connection into a device that fits in a pocket, smartphones have revolutionized how we communicate, travel, learn, game, shop, and more.

Yet smartphones have an oft-overlooked downside: when they end up in the wrong hands, they offer overreaching agents of the state, thieves, hackers, and other wrongdoers an unparalleled avenue for uncovering and abusing the volumes of sensitive personal information we increasingly store on our mobile phones.

Over on Ars Technica, I have a long feature story that examines the constitutional and technical issues surrounding police searches of mobile phones:

Last week, California’s Supreme Court reached a controversial 5-2 decision in People v. Diaz (PDF) , holding that police officers may lawfully search mobile phones found on arrested individuals’ persons without first obtaining a search warrant. The court reasoned that mobile phones, like cigarette packs and wallets, fall under the search incident to arrest exception to the Fourth Amendment to the Constitution.

California’s opinion in Diaz is the latest of several recent court rulings upholding warrantless searches of mobile phones incident to arrest. While this precedent is troubling for civil liberties, it’s not a death knell for mobile phone privacy. If you follow a few basic guidelines, you can protect your mobile device from unreasonable search and seizure, even in the event of arrest. In this article, we will discuss the rationale for allowing police to conduct warrantless searches of arrestees, your right to remain silent during police interrogation, and the state of mobile phone security.

You can read the full essay on Ars Technica here. And while you’re at it, I highly recommend watching this informative YouTube video that explains why it’s not a good idea to talk to police:

Amazon made headlines last week when it abruptly cut off service to Wikileaks, allegedly on the grounds that the site had violated Amazon’s terms of acceptable use. However, Amazon’s supposedly “voluntary” decision came less than 24 hours after Amazon received a phone call from Senate Homeland Security Committee staff (at the behest of Sen. Joe Lieberman) inquiring about the firm’s relationship with Wikileaks. According to a report in The Guardian, Amazon’s decision to terminate service to Wikileaks was a “reaction to heavy political pressure.”

That’s not all. Glenn Greenwald reported last week on Salon.com that another Internet company, Tableau Software, also decided to disable service to Wikileaks because of pressure from Joe Lieberman. Unlike Amazon, Tableau admitted that its decision was directly prompted by pressure from Lieberman. From Tableau’s statement:

Our decision to remove the data from our servers came in response to a public request by Senator Joe Lieberman, who chairs the Senate Homeland Security Committee, when he called for organizations hosting WikiLeaks to terminate their relationship with the website.

It’s difficult to see Joe Lieberman’s “public request” as anything but a thinly-veiled threat. Case in point: In addition to his staffers’ phone calls, Lieberman went on MSNBC last week, stating bluntly, “we’ve got to put pressure on any companies … which provide access to the Internet to Wikileaks.”

As Chairman of the Senate Homeland Security Committee, Lieberman is in a uniquely powerful position to push for legislation that might harm private firms like Amazon. He can also hold Congressional hearings, which frequently turn into public spectacles and garner massive media coverage. A company’s CEO enduring a congressional grilling on Capitol Hill can significantly impact that firm’s public image — and, in some cases, its stock price as well. While no individual Senator has the power to enact laws, promulgate rules, or enforce regulations, a single crusading politician can arguably cause cognizable harm to any U.S. company that pushes back against “requests” to suppress unfavorable content.

How does this implicate the First Amendment? As EFF’s Rainey Reitman and Marcia Hofmann pointed out on the DeepLinks blog, “The First Amendment to the Constitution guarantees freedom of expression against government encroachment — but that doesn’t help if the censorship doesn’t come from the government.”

There’s an important caveat to this point, however: When government coerces private entities into suppressing protected speech, it can trigger First Amendment scrutiny. Via my colleague (and First Amendment guru) Hans Bader:

In First Amendment cases, not only the party bound by a settlement or regulation, but also people whose speech or access to information is affected by it, have the right to challenge its restrictions.  (See Korb v. Lehman, 919 F.2d 243 (4th Cir. 1990) (A private employee could sue a government official under the First Amendment for pressuring his private employer to fire him for his speech, even though private employers can voluntarily terminate employees for their speech when the employer is not operating under government pressure); and Truax v. Raich, 239 U.S. 33 (1916) (The Supreme Court held a state government liable under the Constitution for pressuring a private employer to fire a private employee based on his being an alien, even though his employer could have voluntarily dismissed him without violating any law)).

Of course, as an elected legislator, Lieberman enjoys fairly broad First Amendment rights to express his own political views. As the Supreme Court ruled in Bond v. Floyd:

The manifest function of the First Amendment in a representative government requires that legislators be given the widest latitude to express their views on issues of policy.

While Lieberman’s tirade against Wikileaks was certainly related to matter of public policy, was he actually expressing an opinion on policy? Or was he simply threatening private firms for facilitating the dissemination of speech he didn’t like? Legislators rightly enjoy broad leeway to speak their minds about legislative matters and criticize their political opponents, but should a legislator’s own First Amendment rights enable him to trample the First Amendment rights of private citizens engaged in political discourse?

If the First Amendment doesn’t protect Sen. Lieberman’s attack on Wikileaks, he may still be immune from suit. Under the doctrine of qualified immunity, government officials including legislators cannot be held personally liable or forced to stand trial for committing unlawful actions in their official, non-legislative capacity unless they violate “clearly established law.” Legislators also enjoy absolute immunity for actions they undertake in a legislative capacity.

As the former Connecticut Attorney General, Sen. Lieberman should have known full well that his actions were directly antithetical to Wikileaks’ First Amendment rights. As such, a court might find that his conduct is not covered by qualified immunity. Consider, for instance, this excerpt from a ruling by the Eighth Circuit in Zilich v. Longo (34 F.3d 359):

We also agree with the findings of the district court that Zilich’s First Amendment right of free speech was “clearly established” for qualified immunity purposes. The law is well settled in this Circuit that retaliation under color of law for the exercise of First Amendment rights is unconstitutional, and “retaliation claims” have been asserted in various factual scenarios.

Even if Lieberman is covered by qualified immunity, however, Wikileaks might still be able to obtain an injunction to prevent Lieberman from making any further statements pressuring private companies to terminate service to Wikileaks. While this wouldn’t undo the harm the site has already suffered on account of Lieberman’s “public request,” it would still mark an important symbolic victory for Wikileaks — and for the First Amendment.

A crucial question in determining whether Wikileaks has grounds for a First Amendment claim against Lieberman is whether the site’s ongoing dissemination of the 250,000 leaked cables is protected by the First Amendment. On one hand, Julian Assange may be guilty of violating the Espionage Act of 1917, as Sen. Dianne Feinstein argues forcefully in an op-ed in today’s The Wall Street Journal. On the other hand, the Wikileaks website may well enjoy the same First Amendment protection that the publication of the Pentagon Papers was found by the Supreme Court to enjoy in New York Times Co. v. United States. Via the WSJ Law Blog, which recently interviewed Jack Balkin of Yale Law School:

On the First Amendment question, Balkin said most First Amendment lawyers would say that preventing the publication of material “is justified only where absolutely necessary to prevent almost immediate and imminent disaster. It’s an extremely high standard.” Balkin said that the standard for exacting criminal punishment or winning a civil injunction after publication, as might be the situation in the WikiLeaks case, is less settled. “But one assumes the standard is going to be very very high too.”

An interesting 2005 opinion from the Eighth Circuit ( Dossett v. First State Bank, 399 F.3d 940) suggests that Wikileaks might even have a case against Amazon as well, depending on the specific nature of the interactions between Amazon and Sen. Lieberman’s office. Under 42 U.S.C. § 1983, private entities may face civil action if they conspire with government to deprive anybody within U.S. jurisdiction of their constitutional rights. Under Dossett , if Amazon “willfully participated with state officials and reached a mutual understanding concerning the unlawful objective of a conspiracy,” Wikileaks may be able to collect damages for harm it incurred due to Amazon’s termination of its service.

Whether Lieberman’s actions are legal or not — and whatever you think about Wikileaks in general — his efforts to coerce private companies to terminate service to Wikileaks should deeply concern anybody who cares about free speech. As Glenn Greenwald put it:

That Joe Lieberman is abusing his position as Homeland Security Chairman to thuggishly dictate to private companies which websites they should and should not host — and, more important, what you can and cannot read on the Internet — is one of the most pernicious acts by a U.S. Senator in quite some time.

Unfortunately, this is just the latest instance of a politician “thuggishly” pressuring a private firm to stifle speech. A few months ago, I wrote about a group of state attorneys general successfully bullying Craigslist into terminating its legal “adult services” section. And back in 2008, I wrote about former New York Attorney General Andrew Cuomo strong-arming Usenet providers into shutting down dozens of newsgroups in their entirety simply because they contained a handful of illegal files.

A victory for Wikileaks against Joe Lieberman would set a powerful precedent discouraging thuggish politicians from campaigning against Internet sites protected by the First Amendment.

By Ryan Radia and Wayne Crews

Today, the European Commission opened a formal antitrust investigation into Google to probe allegations that the firm rigged its search engine to discriminate against rivals. This intervention in the online search market, however, will distort the market’s evolution, discourage competitors from innovating, and ultimately hurt consumers.

Google isn’t a monopoly now, but the more it tries to become one, the better it will be for us all. When capitalist enterprises strive to earn a bigger market share, rival firms are forced to respond by trying to improve their offerings. Even if Google is delivering biased search results, it is only paving the way for competitors to break into the search market.

The European Commission is wrong to assume that Google possesses monopoly power. Google accounts for just 6 percent of all dollars spent on advertising in Europe. And even loyal Google users regularly find websites through competing search engines like Bing or through social websites like Facebook and Twitter.

Before resorting to tired old competition laws, European policy makers should remember that the Internet economy is hardly understood by anybody—including by regulators. We are in terra incognita; no one knows how information markets will evolve. But one thing is for sure: Online search technology cannot evolve properly if it is improperly regulated. Why make risky investments in hopes of revolutionizing Internet markets if marvelous success means regulation and confiscation?

The real threat to consumers is not from successful high-tech firms like Google, but from overreaching government interventions into competitive market processes. As economists have documented in scholarly journals, antitrust intervention is especially problematic in the information age, because it severely underestimates the critical role of innovation in dynamic high-tech markets.

In the information age, ingenuity—not market power—is the key to success. America’s high-tech sector is strewn with former market leaders who were no match for the relentless forces of creative destruction. Rapid, unpredictable change is the hallmark of the modern digital economy. Google may be on top in many high-tech markets today, but it won’t stay there for long unless it keeps innovating and delivering a superior search product.

On November 18, the Senate Judiciary Committee unanimously approved the “Combating Online Infringements and Counterfeits Act” (COICA). The bill would enable the U.S. Attorney General to obtain a court order disabling access to web domains that are “dedicated to infringing activities.”

These “rogue websites” are a real problem, as the website Fight Online Theft explains, so it’s a good thing that Congress is working to address them. However, some of COICA’s provisions raise profound constitutional concerns, and the bill lacks adequate safeguards to protect against the unwarranted suspension of Internet domain names, as the website Don’t Censor the Net argues. The bill also doesn’t provide a mechanism for website operators targeted by the Attorney General to defend their site in an adversary judicial proceeding. This week, a group of over 40 law professors submitted a letter to the U.S. Senate arguing that COICA, in its current form, suffers from “egregious Constitutional infirmities.”

To address these concerns, CEI is urging Congress to amend COICA to provide for more robust safeguards, including:

• ŸProviding a meaningful opportunity for Internet site operators to challenge before a federal court an Attorney General’s assertion that their site is “dedicated to infringing activities” prior to the suspension of their domain name;

• Requiring that the Attorney General, upon commencing an in rem action against a domain name, make a reasonable and good faith effort to promptly notify the site’s actual operator of the action;

• Clarifying the definition of an Internet site “dedicated to infringing activities” to ensure that websites with nontrivial lawful uses that facilitate infringing acts by third parties will not face domain name suspension if their operators:
  • Comply with legitimate takedown requests from rightsholders;
  • Do not receive a financial benefit directly attributable to infringing activities;
  • Do not design their site primarily for the purpose of facilitating infringing activities; and
  • Do not induce infringing activities.

• Instructing the Department of Justice and federal prosecutors not to request that domain name registrars, registries, or service providers suspend domain names that have not been deemed to be “dedicated to infringing activities,” or otherwise unlawful, by a federal court; and

• Requiring the Department of Justice to compensate domain name registrars, registries, and service providers for any reasonable costs they incur in the course of disabling access to infringing domain names.

EDIT 11/24/10: After reviewing in greater detail the amended version of the bill (PDF), I’d like to suggest a sixth change:

• Eliminating the “Voluntary Actions” clause, which grants blanket immunity from civil liability to any domain name registry, registrar, financial provider, or ad service that “voluntarily” disables a website that it reasonably believes to be dedicated to infringing activities.