In 2012, the US Chamber of Commerce put out a report claiming that intellectual property is responsible for 55 million US jobs—46 percent of private sector employment. This is a ridiculous statistic if you merely stop and think about it for a minute. But the fact that the statistic is ridiculous doesn’t mean that it won’t continue to circulate around Washington. For example, last year Rep. Marsha Blackburn cited it uncritically in an oped in The Hill.

In a new paper from Mercatus (here’s the PDF), Ian Robinson and I expose this statistic, and others like them, as pseudoscience. They are based on incredibly shoddy and misleading reasoning. Here’s the abstract of the paper:

In the past two years, a spate of misleading reports on intellectual property has sought to convince policymakers and the public that implausibly high proportions of US output and employment depend on expansive intellectual property (IP) rights. These reports provide no theoretical or empirical evidence to support such a claim, but instead simply assume that the existence of intellectual property in an industry creates the jobs in that industry. We dispute the assumption that jobs in IP-intensive industries are necessarily IP-created jobs. We first explore issues regarding job creation and the economic efficiency of IP that cut across all kinds of intellectual property. We then take a closer look at these issues across three major forms of intellectual property: trademarks, patents, and copyrights.

As they say, read the whole thing, and please share with your favorite IP maximalist.

Sherwin Siy, Vice President of Legal Affairs at Public Knowledge, discusses emerging issues in digital copyright policy. He addresses the Department of Commerce’s recent green paper on digital copyright, including the need to reform copyright laws in light of new technologies. This podcast also covers the DMCA, online streaming, piracy, cell phone unlocking, fair use recognition, digital ownership, and what we’ve learned about copyright policy from the SOPA debate.

Download

Related Links

• Sherwin Siy, Public Knowledge
• What the DMCA cell phone unlock ban means to you, Reardon
• Why The Library Of Congress Has A Lock On Your Phone, Henn

Richard Brandt, technology journalist and author, discusses his new book, One Click: Jeff Bezos and the Rise of Amazon.Com. Brandt discusses Bezos’ entrepreneurial drive, his business philosophy, and how he’s grown Amazon to become the biggest retailer in the world. This episode also covers the biggest mistake Bezos ever made, how Amazon uses patent laws to its advantage, whether Amazon will soon become a publishing house, Bezos’ idea for privately-funded space exploration and his plan to revolutionize technology with quantum computing.

Download

Related Links

• One Click: Jeff Bezos and the Rise of Amazon.com, Brandt
• History of Google/About Google, Brandt
• Five minutes with Richard Brandt, Author of One Click, Ennyman

On Forbes today, I look at the phenomenon of memes in the legal and economic context, using my now notorious “Best Buy” post as an example. Along the way, I talk antitrust, copyright, trademark, network effects, Robert Metcalfe and Ronald Coase.

It’s now been a month and a half since I wrote that electronics retailer Best Buy was going out of business…gradually.  The post, a preview of an article and future book that I’ve been researching on-and-off for the last year, continues to have a life of its own.

Commentary about the post has appeared in online and offline publications, including The Financial Times, The Wall Street Journal, The New York Times, TechCrunch, Slashdot, MetaFilter, Reddit, The Huffington Post, The Motley Fool, and CNN. Some of these articles generated hundreds of user comments, in addition to those that appeared here at Forbes.

(I was also interviewed by a variety of news sources, including TechCrunch’s Andrew Keen.)

Today, the original post hit another milestone, passing 2.9 million page views.

Watching the article move through the Internet, I’ve gotten a first-hand lesson in how network effects can generate real value.

Network effects are an economic principle that suggests certain goods and services experience increasing returns to scale.  That means the more users a particular product or service has, the more valuable the product becomes and the more rapidly its overall value increases.  A barrel of oil, like many commodity goods, does not experience network effects – only one person can own it at a time, and once it’s been burned, it’s gone.

In sharp contrast, the value of networked goods increase in value as they are consumed.  Indeed, the more they are used, the faster the increase–generating a kind of momentum or gravitational pull.  As Robert Metcalfe, founder of 3Com and co-inventor of Ethernet explained it, the value of a network can be plotted as the square of the number of connected users or devices—a curve that approaches infinity until most everything that can be connected already is.  George Gilder called that formula “Metcalfe’s Law.”

Since information can be used simultaneously by everyone and never gets used up, nearly all information products can be the beneficiaries of network effects.  Standards are the obvious example.  TCP/IP, the basic protocol that governs interactions between computers connected to the Internet, started out humbly as an information exchange standard for government and research university users.  But in part because it was non-proprietary and therefore free for anyone to use without permission or licensing fees, it spread from public to private sector users, slowly at first but over time at accelerating rates.

Gradually, then suddenly, TCP/IP became, in effect, a least common denominator standard by which otherwise incompatible systems could share information.  As momentum grew, TCP/IP and related protocols overtook and replaced better-marketed and more robust standards, including IBM’s SNA and DEC’s DECnet.  These proprietary standards, artificially limited to the devices of a particular manufacturer, couldn’t spread as quickly or as smoothly as TCP/IP.

From computing applications, Internet standards spread even faster, taking over switched telephone networks (Voice over IP), television (over-the-top services such as YouTube and Hulu), radio (Pandora, Spotify)—you name it.

Today the TCP/IP family of protocols, still free-of-charge, is the de facto global standard for information exchange, the lynchpin of the Internet revolution.  The standards continue to improve, thanks to the largely-voluntary efforts of The Internet Society and its virtual engineering task forces.  They’re the best example I know of network effects in action, and they’ve created both a platform and a blueprint for other networked goods that make use of the standards.

Beyond standards, network effects are natural features of other information products including software.  Since the marginal cost of a copy is low (essentially free in the post-media days of Web-based distribution and cloud services), establishing market share can happen at relatively low cost.  Once a piece of software—Microsoft Windows, AOL instant messenger in the old days, Facebook and Twitter more recently—starts ramping up the curve, it gains considerable momentum, which may be all it takes to beat out a rival or displace an older leader.  At saturation, a software product becomes, in essence, the standard.

From a legal standpoint, unfortunately, market saturation begins to resemble an illegal monopoly, especially when viewed through the lens of industrial age ideas about markets and competition.  (That, of course, is the lens that even 21 ^st century regulators still use.)  But what legal academics, notably Columbia’s Tim Wu, misunderstand about this phenomenon is that such products have a relatively short life-cycle of dominating.  These “information empires,” as Wu calls them, are short-lived, but not, as Wu argues, because regulators cut them down.

Even without government intervention, information products are replaced at accelerating speeds by new disruptors relying on new (or greatly improved) technologies, themselves the beneficiaries of network effects.  The actual need for legal intervention is rare.  Panicked interference with the natural cycle, on the other hand, results in unintended consequences that damage emerging markets rather than correcting them.  Distracted by lingering antitrust battles at home and abroad, Microsoft lost momentum in the last decade.  No consumer benefited from that “remedy.”

For more, see “What Makes an Idea a Meme?” on Forbes.

For CNET today, I have a long analysis and commentary on the “Stop Online Piracy Act,” introduced last week in the House. The bill is advertised as the House’s version of the Senate’s Protect-IP Act, which was voted out of Committee in May.

It’s very hard to find much positive to say about the House version. While there’s considerable evidence its drafters heard the criticisms of engineers, legal academics, entrepreneurs and venture capitalists, their response was unfortunate.

Engineers pointed out, for example, that court orders requiring individual ISPs to remove or redirect domain name requests was a futile and dangerous way to block access to “rogue” websites. Truly rogue sites can easily relocate to another domain, or simply have users access them with their IP address and bypass DNS altogether.

There are millions of DNS servers, according to Verisign, so getting all of them to make the change would be impossible, splintering the system. And redirecting DNS requests is some sense introducing a bug in the system, one that is inconsistent with upcoming security measures aimed at protecting users from being hijacked.

But all the drafters of SOPA seemed to have heard was the part about “futile.” Their response has been to make the DNS provisions vaguer and more open-ended, in hopes that whatever mechanisms the rogue sites come up with to evade the law will also be illegal.  Blocking is now extended not just to “parasite” sites but to a “portion thereof,” for example.

And the Attorney General can now apply for injunctive relief against any “entity” that provides “a product or service designed or marketed for the circumvention or bypassing of measures” taken in response to an earlier court order.

Similar efforts are found throughout SOPA, particularly in the felony streaming provision, and the private right of action (or what the bill calls the “market-based system”) for private enforcement of copyright and trademark abuses.  Where clarity isn’t possible, the drafters have opted for vagueness, open-ended definitions, and hedges.  Even the term “including” is defined, to be clear that it means “including but not limited to.”

The point to criticism of Protect-IP was instead that it was impossible to regulate technology that is changing so quickly, and that any effort to do so would only prove obsolete on arrival.  As previous efforts from CAN-SPAM to ECPA and back make clear, you cannot future-proof legislation aimed at specfiic features of emerging technologies.

That, unfortunately, is exactly what SOPA tries to do.  And beyond making the legislation clumsy and imprecise, the intentional vagueness greatly increases the potential for unintended consequences.  I describe several unintentionally dangerous examples from SOPA in the CNET piece; other analysts have done the same in pieces listed at the end of this post.

Two good things I found in the 79-page draft:

1.  The failure of Protect-IP to define “nonauthoritative domain name server” has been addressed.  That term is now defined, and the definition looks correct to me.

2.  SOPA recognizes, at least, the better approach to solving the problem of foreign websites that blatantly violate copyright and trademark.  Near the back, Section 205 calls on the State and Commerce Departments to make enforcement of existing international law and treaties regarding information products and services a priority.  This includes the assignment of new attaches dedicated to information products.

Would that SOPA started and ended with this provision, there would be little basis to fault its drafters.  If the problem SOPA is attempting to solve, after all, is the scourge or foreign websites that distribute movies, music, and counterfeit goods without a license (often pretending to be legitimate), then surely the solution is one of foreign and trade policy and not micromanaging Internet protocols.

Instead, we have a bill that treats all U.S. consumers as guilty until proven innocent, and hands Hollywood the keys to the inner workings of the Internet.  Just what they’ve always wanted.

Worth reading:

• Ryan Radia, “Preliminary thoughts on SOPA “  (TLF)
• David Sohn, “House Copyright Bill Casts Dangerously Wide Net”  (CDT)
• Corynne McSherry, “Disastrous IP Legislation Back–and it’s Worse than Ever “  (EFF)
• Sherwin Siy, “House Version of Rogue Websites Bill Adds DMCA Bypass, Penalties for DNS Workarounds” (Public Knowledge)
• Mike Masnick, “E-Parasites Bill Ends Internet as we Know it”  (TechDirt)

For CNET this morning, I offer five crucial corrections to the Protect IP Act, which was passed out of committee in the Senate back in May.

Yesterday, Rep. Bob Goodlatte, co-chair of the Congressional Internet Caucus, told a Silicon Valley audience that the House was working on its own version and would introduce it in the next few weeks.

Protect IP would extend efforts to combat copyright infringement and trademark abuse online, especially by websites registered outside the U.S.

Since Goodlatte promised the new bill would be “quite different” from the Senate version, I thought it a good time to get out my red pen and start crossing off the worst mistakes in policy and in drafting in Protect IP.

The full details are in the article, but in brief, here’s what I hope the House does in its version:

1. Drop provisions that tamper with the DNS system in an effort to block U.S. access to banned sites.
2. Drop provisions that tamper with search engines, indices, and any other linkage to banned sites.
3. Remove a private right of action that would allow copyright and trademark holders to obtain court orders banning ad networks and financial transaction processors from doing business with banned sites.
4. Scale back current enforcement abuses by the Department of Homeland Security under the existing PRO-IP Act of 2008.
5. Focus the vague and overinclusive definition of the kind of websites that can be banned, limiting it to truly criminal enterprises.

As I’ve written elsewhere, the Senate version was in some ways even worse than last year’s COICA bill.  It imposes significant costs on innocent Internet users, and would do so with no corresponding benefits to anyone, including rightsholders.

The best thing the House could do would be to ignore this dud and work instead on reforming the broken copyright system.  That would do the most to correct the imbalance in endless copyrights and a shrinking public domain, eliminating much of the incentive for infringement that exists today.

But short of that, I hope at least that the most dangerous provisions are removed.

Their lawyers seem to think so.

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.

I was quoted this morning in Sara Jerome’s story for The Hill on the weekend seizures of domain names the government believes are selling black market, counterfeit, or copyright infringing goods.

The seizures take place in the context of an on-going investigation where prosecutors make purchases from the sites and then determine that the goods violate trademarks or copyrights or both.

Several reports, including from CNET, The Washington Post and Techdirt, wonder how it is the government can seize a domain name without a trial and, indeed, without even giving notice to the registered owners.

The short answer is the federal civil forfeiture law, which has been the subject of increasing criticism unrelated to Internet issues.  (See http://law.jrank.org/pages/1231/Forfeiture-Constitutional-challenges.html for a good synopsis of recent challenges, most of which fail.)

The purpose of forfeiture laws is to help prosecutors fit the punishment to the crime, especially when restitution of the victims or of the cost of prosecution is otherwise unlikely to have a deterrent effect, largely because the criminal has no assets to attach.  In the war on drugs, for example, prosecutors can now seize pretty much any property used in the commission of the crime, including a seller’s vehicle or boat.  (See U.S. v. 1990 Toyota 4 Runner for an example and explanation of the limits of federal forfeiture law.)

Forfeiture laws have been increasingly used to fund large-scale enforcement operations, and many local and federal police now develop budgets for these activities based on assumptions about the value of seized property.  This has led to criticism that the police are increasingly only enforcing the law when doing so is “profitable.”  But police point out that in an age of regular budget cuts, forfeiture laws are all they have in the way of leverage.

Sometimes the forfeiture proceedings happen after the trial, but as with the domain names, prosecutors also have the option to seize property before any indictment and well before any trial or conviction.  Like a search warrant, a warrant to seize property requires only that a judge find probable cause that the items to be seized fit the requirements of forfeiture—in general, that they were used in the commission of a crime.

The important difference between a seizure and a finding of guilt—the difference that allows the government to operate with such a free hand—is that the seizure is only temporary.  A forfeiture, as here, isn’t permanent until there is a final conviction.

The pre-trial seizure is premised on the idea that during the investigation and trial, prosecutors need to secure the items so that the defendant doesn’t destroy or hide it.

If the defendant is acquitted, the seized items are returned.  Or, if the items turn out not to be subject to forfeiture (e.g., they were not used in the commission of any crimes the defendant is ultimately convicted for), they are again returned.  Even before trial, owners can sue to quash the seizure order on the grounds that there was insufficient (that is, less than probable) cause to seize it in the first place.

All of that process takes time and money, however, and many legal scholars believe in practice that forfeiture reverses the presumption of innocence, forcing the property owner to prove the property is “innocent” in some way.

In current (and expanding) usage, forfeiture may also work to short-circuit due process of the property owner.  (Or owners—indeed, seized property may be jointly owned, and the victim of the crime may be one of the owners, as when the family car is seized when the husband uses it to liaison with a prostitute.)

That’s clearly a concern with the seizure of domain names.  This “property” is essential for the enterprise being investigated to do business of any kind.  So seizing the domain names before indictment and trial effectively shuts down the enterprise indefinitely. (Reports are that most if not all of the enterprises involved in this weekend’s raid, however, have returned under new domain names.)

If prosecutors drag their heels on prosecution, the defendant gets “punished” anyway.  So even if the defendant is never charged or is ultimately acquitted, there’s nothing in the forfeiture statute that requires the government to make them whole for the losses suffered during the period when their property was held by the prosecution.  The loss of the use of a car or boat, for example, may require the defendant to rent another while waiting for the wheels of justice to turn.

For a domain name, even a short seizure effectively erases any value the asset has.  Even if ultimately returned, it’s now worthless.

Clearly the prosecutors here understand that a pre-trial seizure is effectively a conviction.  Consider the following quote from Immigration and Customs Enforcement Director John Morton, who said at a press conference today, “Counterfeiters are prowling in the back alleys of the Internet, masquerading, duping and stealing.”  Or consider the wording of the announcement placed on seized domain names (see http://news.cnet.com/8301-1023_3-20023918-93.html), implying at the least that the sites were guilty of illegal acts.

There’s no requirement for the government to explain the seizures are only temporary measures designed to safeguard property that may be evidence of crime or may be an asset used to commit it.  Nor do they have to acknowledge that none of the owners of the domain names seized has been charged or convicted of any crime yet.  But the farther prosecutors push the forfeiture statute, the bigger the risk that courts or Congress will someday step in to pull them back.

Toy Story 3 offers many pleasures and not a little wisdom. I absorbed them with a shocking output of tears, both the laughing kind and otherwise. At one point, too, I raised my fist in solidarity, moved by the political philosophy voiced by Barbie (brilliantly played by Barbie). I liked Barbie’s quote so much that I put it on a t-shirt:

Fellow Bluebook geeks will notice that, despite its graphic fripperies, the shirt sports a proper legal citation. Scholars might take comfort in the fact that I crosschecked the quote against the junior novel version of Toy Story 3. Lawyers for Disney/Pixar must admit that my usage falls within the traditional bounds of the fair use defense to copyright infringement, and Hasbro cannot justly complain that the shirt’s use of “Barbie” violates that trademark.

Tyrants might not like the shirt, granted. But Barbie showed us what happens to tyrants. I won’t say more about that, here; just go see the movie!

UPDATE: Notwithstanding law and logic, Zazzle.com pulled the shirt almost immediately after I posted it for sale. I’m currently trying to correct the matter. Sorry for the inconvenience.

[Crossposted at Agoraphilia and The Technology Liberation Front.]

I’m late to the party, but I wanted to say a few things about the District Court’s decision in the Viacom v. YouTube case this week and.  This will be a four-part post, covering:

1.  The holding

2.  The economic principle behind it

3.  The next steps in the case

4.  A review of the errors in legal analysis and procedure committed by reporters covering the case

I’ve written before (see “Two Smoking Guns and a Cold Case”, “Google v. Everyone” and “The Revolution will be Televised…on YouTube”) about this case, in which Viacom back in 2007 sued YouTube and Google (which owns YouTube) for $1 billion in damages, claiming massive copyright infringement of Viacom content posted by YouTube users.

There’s no question of the infringing activity or its scale.  The only question in the case is whether YouTube, as the provider of a platform for uploading and hosting video content, shares any of the liability of those among its users who uploaded Viacom content (including clips from Comedy Central and other television programming) without permission.

The more interesting questions raised by the ascent of new video sites aren’t addressed in the opinion.  Whether the users understood copyright law or not and whether their intent in uploading their favorite clips from Viacom programming was to promote Viacom rather than to harm it, were not considered.   Indeed, whether on balance Viacom was helped more than harmed by the illegal activity, and how either should be calculated under current copyright law, is not relevant to this decision, and are saved for another day and perhaps another case.

That’s because Google moved for summary judgment on the basis of the Digital Millennium Copyright Act’s “safe harbor” provisions, which immunize service providers from any kind of attributed or “secondary” liability for user behavior when certain conditions are met.  Most important, a service provider can dock safe from liability only if it can show that it :

– did not have “actual knowledge that the material…is infringing,” or is “not aware of facts or circumstances from which infringing activity is apparent” and

– upon obtaining such knowledge or awareness “acts expeditiously to remove…the material” and

– does not “receive a financial benefit directly attributable to the infringing activity, “in a case in which the service provider has the right ability to control such activity,” and

– upon notification of the claimed infringement, “responds expeditiously to remove…the material that is claimed to be infringing….”

Note that all four of these elements must be satisfied to benefit from the safe harbor

The question for Judge Stanton to decide on YouTube’s motion for summary judgment was whether YouTube met all the conditions, and he has ruled that they did so.

1.  The Slam-Dunk for Google

The decision largely comes down to an interpretation of what phrases like “the material” and “such activity” means in the above-quoted sections of the DMCA.

Indeed, the entire opinion can be boiled down to one sentence on page 15.  After reviewing the legislative history of the DMCA at length, Judge Stanton concludes that the “tenor” of the safe harbor provisions leads him to interpret infringing “material” and “activity” to mean “specific and identifiable infringements of particular individual items.”

General knowledge, which YouTube certainly had, that some of its users were (and still are) uploading content protected by copyright law without permission, is not enough to defeat the safe harbor and move the case to a determination of whether or not secondary liability can be shown.  “Mere knowledge of prevalence of such activity in general,” Judge Stanton writes, “is not enough.”

To defeat a safe harbor defense at the summary judgment stage, in other words, a content owner must show that the service provider knew or should have known about specific instances of infringement.  Such knowledge could come from a service provider hosting subsites with names like “Pirated Content” or other “red flags.”  But in most cases, as here, the service provider would not be held to know about specific instances of infringement until informed of them, most often from takedown notices sent by copyright holders themselves.

Whether ad revenue constitutes “direct financial benefit” was not tested, because, again, that provision only applies to “activity” the service provider has the right to control.  “Activity,” as Judge Stanton reads it, also refers to specific instances of illegal content distribution.

As Judge Stanton notes, YouTube users currently post 24 hours of video content every minute, making it difficult if not impossible, as a practical matter, for YouTube to have any idea which ones are not authorized by rights holders.  And when Viacom informed the site of some 100,000 potentially-infringing clips, YouTube removed nearly all of them within a day.  That is how the DMCA was intended to work, according to Judge Stanton, and indeed demonstrates that it is working just fine.

Viacom, of course, is free to pursue the individuals who posted its content without permission, but everyone should know by now that for many reasons that’s a losing strategy.

2.  The Least-Cost Avoider Principle

On balance, Judge Stanton is reading what is clearly an ambiguous statute with a great deal of common sense.  To what extent the drafters of the DMCA intended the safe harbor to apply to general vs. specific knowledge is certainly not clear from the plain language, nor, really, from the legislative history.  (Some members of the U.S. Supreme Court believe strongly that legislative history, in any case, is irrelevant in interpreting a statute, even if ambiguous.)

To bolster his interpretation that the safe harbor protects all but specific knowledge of infringement, interestingly, Judge Stanton points out that this case is similar to one decided a few months ago in the Second Circuit.  In that case, the court refused to apply vicarious liability for trademark infringement to eBay for customer listings of fake Tiffany’s products.

Though trademark and copyright law are quite different, the analogy is sensible.  In both cases, the question comes down to one of economic efficiency.  Which party, that is, is in the best position to police the rights being violated?

Here’s how the economic analysis might go.  Given the existence of new online marketplaces and video sharing services, and given the likelihood and ease with which individuals can use those services to violate information rights (intentionally or otherwise, for profit or not), the question for legislators and courts is how to minimize the damage to the information rights of some while still preserving the new value to information in general that such services create.

For there is also no doubt that the vast majority of eBay listings and YouTube clips are posted without infringing the rights of any third party, and that the value of such services, though perhaps not easily quantifiable, is immense.  EBay has created liquidity in markets that were too small and too disjointed to work efficiently offline.  YouTube has enabled a new generation of users with increasingly low-cost video production tools to distribute their creations, get valuable feedback and, increasingly, make money.

That these sites (and others, including Craigslist) are often Trojan Horses for illegal activities could lead legislators to ban them outright, but that clearly gets the cost-benefit equation wrong.  A ban would generate too much protection.

At the same time, throwing up one’s hands and saying that a certain class of rights-holders must accept all the costs of damage without any means of reducing or eliminating those costs, would be overly generous in the other direction.  Neither users, service providers, nor rights holders would have any incentives to police user behavior.  The basic goals of copyright and trademark might be seriously damaged as a result.

The goal of good legislation in situations like this—where overall benefit outweighs individual harm and where technology is changing the equation rapidly–is to produce rules that are most likely to get the balance right and do so with the least amount of expensive litigation.  The DMCA provisions described above are one attempt at creating such rules.

But those rules, given the uncertainties of emerging technologies and the changing behaviors of users, can’t possibly give judges the tools to decide every case with precision.  Such rules must be a least a little ambiguous (if not a lot).  Judges, as they have done for centuries, must apply other, objective interpretive tools to help decide individual cases even as the targets keep moving.

Judge Stanton’s interpretation of the safe harbor provisions follows, albeit implicitly, one of those neutral tools, the same one applied by the Second Circuit in the eBay case.  And that is the principle of the least-cost avoider.

This principle encourages judges to interpret the law, where possible, such that the burden of reducing harmful behavior falls to the party in the best position, economically, to avoid it.  That way, as parties in similar situations in the future evaluate the risk of liability, they will be more likely to choose a priori behaviors that not only reduce the risk of damages but also the cost of more litigation.

In the future, if Judge Stanton’s ruling stands, rights holders will be encouraged to police video sites more carefully.  Service providers such as YouTube will be encouraged to respond quickly to legitimate demands to remove infringing content.

Given the fact that activities harmful to rights holders are certain to occur, in other words, the least cost avoider principles says that a judge should rule in a way that puts the burden of minimizing the damage on the party who can most efficiently avoid it.  In this case, the choice would be between YouTube (preview all content before posting and ensure legal rights have been cleared), Viacom (monitor sites carefully and quickly demand takedown of infringing content) or the users themselves (don’t post unauthorized content without expecting to pay damages or possible criminal sanctions).

Here, the right answer economically is Viacom, the rights holder who is directly harmed by the infringing behavior.

That may seem unfair from a moral standpoint.  For, after all, Viacom is the direct victim of the users’ clearly unlawful behavior and the failure of YouTube, the enabler of the users, to stop it.  Why should the victim be held responsible for making sure they are not caused further damage in the future?

But there’s a certain economic logic to that decision, though one difficult to quantify (Judge Stanton made no effort to do so; indeed he did not invoke the least cost avoider principle explicitly.)  The grant of a copyright or a trademark is the grant of a monopoly on a certain class of information, a grant that itself comes with inherent economic inefficiencies in the service of encouraging overall social value–encouraging investment in creative works.

Part of the cost of having such a valuable monopoly is the cost of policing it, even in new media and new services that the rights holder may not have any particular interest in using itself.

By interpreting the DMCA as protecting service providers from mere general knowledge of infringing behavior, Judge Stanton has signaled that Viacom can police YouTube more efficiently than YouTube can.  Why?  For one thing, Viacom has the stronger incentive to ensure unauthorized content stays off the site.  It alone also has the knowledge both of what content it has rights to and when that content appears without authorization.  (Several examples arose in the course of discovery of content Viacom ordered YouTube to remove that, it turned out, had been posted by Viacom or its agents masquerading as users in order to build buzz.)

The cost of monitoring and stopping unauthorized posting is not negligible, of course.  But YouTube, eBay and other service providers increasingly provide tools to make the process easier, faster, and cheaper for rights holders.  They may or may not be obligated to do so as a matter of law; for now, their decision to do so represents an organic and efficient form of extra-legal rulemaking that Judge Stanton is eager to encourage.

No matter what, someone has to bear the bulk of the cost of monitoring and reporting violations.  Viacom can do it cheaper, and can more easily build that cost into the price it charges for authorized copies of its content.

And where it cannot easily issue takedown orders to large, highly-visible service providers like YouTube, it retains the option, admittedly very expensive, to sue the individuals who actually infringed.  It can also try to invoke the criminal aspect of copyright law, and get the FBI (that is, the taxpayer) to absorb the cost.

To rule the other way–to deny YouTube its safe harbor–would encourage service providers to overspend on deterrence of infringing behavior.  In response, perhaps YouTube and other sites would require, before posting videos, that users provide legally-binding and notarized documentation that the user either owns the video or has a license to post it.  Obtaining such agreements, not to mention evaluating them for accuracy, would effectively mean the end of video sites.  Denying the safe harbor based on general knowledge, to put it another way, would effectively interpret the DMCA as a ban on video sites.

That would be cheaper for Viacom, of course, but would lead to overall social loss.  Right and wrong, innocence and guilt, are largely excluded from this kind of analysis, though certainly not from the rhetoric of the parties.  And remember that actual knowledge or general awareness of specific acts of infringement would, according to Judge Stanton’s rule, defeat the safe harbor.  In that case, to return to the economic terminology, the cost of damages—or, if you prefer, assigning some of the blame—would shift back on YouTube.

3.  What’s Next?

Did Judge Stanton get it right as a matter of information economics?  It appears that the answer is yes.  But did he get it right as a matter of law—in this case, of the DMCA?

That remains to be seen.

Whether one likes the results or not, as I’ve written before, summary judgment rulings by district courts are never the last word in complex litigation between large, well-funded parties.  That is especially so here, where the lower court’s interpretation of a federal law is largely untested in the circuit and indeed, as here, in any circuit.

Judge Stanton cites as authority for his view of the DMCA a number of other lower court cases, many of them in the Ninth Circuit.  But as a matter of federal appellate law, Ninth Circuit cases are not binding precedent on the Second Circuit, where Judge Stanton sits.  And other district (that is, lower) court opinions cannot be cited by the parties as precedent even within a circuit.  They are merely advisory.  (A Ninth Circuit case involving Veoh is currently on appeal; the service provider won on a “safe harbor” argument similar to Google’s in the lower court.)

So this case will certainly head for appeal to the Second Circuit, and perhaps from there to the U.S. Supreme Court.  But a Supreme Court review of the case is far from certain.  Appeals to the circuit court are the right of the losing party.  A petition to the Supreme Court, on the other hand, is accepted at the Court’s discretion, and the Court turns down the vast majority of cases that it is asked to hear, often without regard to the economic importance or newsworthiness of the case.  (The Court refused to hear an appeal in the Microsoft antitrust case, for example, because the lower courts largely applied existing antitrust precedents.)

A circuit court reviewing summary judgment will make a fresh inquiry into the law, accepting the facts alleged by Viacom (the losing party below) as if they were all proven.  If the Second Circuit follows Judge Stanton’s analogy to the eBay case, Google is likely to prevail.

If the appellate court rejects Judge Stanton’s view of specificity, the case will return to the lower court and move on, perhaps to more summary judgment attempts by both parties and, failing that, a trial.  More likely, at that point, the parties will reach a settlement, or an overall licensing agreement, which may have been the point of bringing this litigation in the first place.  (A win for Viacom, as in most patent cases, would have given the company better negotiating leverage.)

4.  Getting it Right or Wrong in the Press

That brief review of federal appellate practice is entirely standard—it has nothing to do with the facts of this case, the parties, the importance of the decision, or the federal law in question.

Which makes it all the more surprising when journalists who regularly cover the legal news of particular companies continually get it wrong when describing what has happened and/or what happens next.

Last and perhaps least, here are a few examples from some of the best-read sources:

The New York Times – Miguel Helft, who covers Google on a regular basis, commits some legal hyperbole in saying that Judge Stanton “threw out” Viacom’s case, and that “the ruling” (that is, this opinion) could have “major implications for …scores of Internet sites.”  The appellate court decision will be the important one, but technically it will apply only to cases brought in the Second Circuit.  The lower court’s decision, even if upheld, will have no implications for future litigation.  Helft also quotes from counsel at both Viacom and Google which are filled with legal errors, though perhaps understandably so.

The Wall Street Journal –Sam Schechner and Jessica E. Vasellaro make no mistakes in their report of the decision.  They correctly explain what summary judgment means, and summarize the ruling without distorting it.  Full marks.

The Washington Post – Cecilia Kang, who covers technology policy for the Post, incorrectly characterizes Judge Stanton’s ruling as a “dismissal” of Viacom’s lawsuit.  A dismissal, as opposed to the granting of a motion for summary judgment, generally happens earlier in litigation, and signals a much weaker case, often one for which the court finds it has no jurisdiction or which, even if all the alleged facts are true, doesn’t amount to behavior for which a legal remedy exists.  Kang repeats the companies’ statements, but also adds a helpful quote from Public Knowledge’s Sherwin Siy about the balance of avoiding harms.

The National Journal – At the website of this legal news publication, Juliana Gruenwald commits no fouls in this short piece, with an even better quote from PK’s Siy.

CNET News.com – Tech news site CNET’s media reporter Greg Sandoval suggests that “While the case could continue to drag on in the appeals process, the summary judgment handed down in the Southern District of New York is a major victory for Google . . . .”  This is odd wording, as the case will certainly “drag on” to an appeal to the Second Circuit.  (A decision by the Second Circuit is perhaps a year or more away.)  Again, a district court decision, no matter how strongly worded, does not constitute a “major victory” for the prevailing party.

Sandoval (who, it must be said, posted his story quite quickly), also exaggerates the sweep of Google’s argument and the judge’s holding.  He writes, “Google held that the DMCA’s safe harbor provision protected it and other Internet service providers from being held responsible for copyright infringements committed by users.  The judge agreed.”  But Google argued only that it (not other providers) was protected, and protected only from user infringements it didn’t know about specifically.  That is the argument with which Judge Stanton agreed

Perhaps these are minor infractions.  You be the judge.

As the Wall Street Journal is already reporting, today eBay sustained an important win in its long-running dispute with Tiffany over counterfeit goods sold through its marketplace.  (The full opinion is available here.)

I wrote about this case as my leading example of the legal problems that appear at the border between physical life and digital life, both in “ The Laws of Disruption” and a 2008 article for CIO Insight.

To avoid burying the lede, here’s the key point:  for an online marketplace to operate, the burden has to be on manufacturers to police their brands, not the market operator.  Any other decision, regardless of what the law says or does not say, would effectively mean the end of eBay and sites like it.

Back to the beginning.  Tiffany sued eBay over counterfeit Tiffany goods being sold by some eBay merchants.  The luxury goods manufacturer claimed eBay was “contributorily” liable for trademark infringement—that is, for confusing consumers into thinking that non-Tiffany goods were in fact made by Tiffany.

The problem of counterfeit items has been a long-standing problem for electronic commerce, and as one of the largest and first online marketplaces it’s little surprise that eBay has found itself so often in the cross-hairs of unhappy manufacturers.  While the company has generally won these lawsuits, it lost an important case in France at about the same time the trial court in the Tiffany case ruled it its favor in 2008.

(A related problem that was explicit in the French case is that luxury goods manufacturers are unhappy in general with secondary markets given the tight—sometimes illegal—control they exert over primary channels.  Electronic commerce doesn’t respect local territories, fixed pricing and regulating discounting, perhaps the bigger headache for companies such as Tiffany’s.)

The struggle for courts is to apply traditional law to new forms of behavior.  Many of the opinions in these cases tie themselves in knots trying to figure out just what eBay actually is—is it a department store, where a variety of goods from different manufacturers are sold?  Is it a flea market, where merchants pay for space to sell whatever they want?  Or is it a bulletin board at a local grocery store, where individuals offer products and services?

Of course eBay is none of these things.  But courts must apply the law they have, and the case law for trademark infringement is based on these kinds of outdated classifications.  In the “common law” tradition, judges decide cases by analogy to existing case laws.  That means when there isn’t a good analogy to be found, the law is often thrown into confusion for a long period of time while new analogies get worked out.  Disruptive technologies create such discontinuities in the law, particularly for common law.

At the heart of these decisions is a question of control.  The more the marketplace operator controls the goods that are sold, the more likely they will be found liable for all manner of commercial misconduct.  (Tiffany also sued for false advertising, for example, claiming that eBay ads placed on Google searches promising Tiffany goods at low prices on its site were false, given that some of the goods were counterfeit.  Of course some of the goods were NOT counterfeit.)

A department store operator has complete control over the source of merchandise, and so would be held liable for selling counterfeits.  A bulletin board host has no control, and so would not be held liable.  Flea market operators sit somewhere in between, and depending on the extent and obviousness of the counterfeiting that takes place, operators are sometimes held liable along with the counterfeiters themselves.

The eBay marketplace sits somewhere between the two extremes.  On the one hand, eBay can and does have the ability to review the text of listings prior to their posting, and provides extensive service to merchants including listing services, postage and packaging, and payment management through PayPal.  It can and does respond to complaints by buyers of misrepresented goods (condition and source, e.g.) and by trademark holders who are given extensive tools to review listings to check for counterfeits.  And it charges the sellers for these services—indeed, that is the source of its revenue.

On the other hand, eBay never has physical possession of the goods that are sold through its marketplace—indeed, it never sees them.  That’s an essential feature of the company’s success—eBay couldn’t handle millions of listings in a limitless range of categories if merchants actually sent the goods to eBay during the course of an auction, the way high-end auctioneers such as Sotheby’s and Christie’s would do.

EBay (or buyers for that matter) can’t inspect the goods (other than through photos and text descriptions) prior to purchase, and even if it could the company doesn’t have the expertise to evaluate authenticity and condition of everything from buttons to Rolex watches to cars.  That’s why eBay’s buyer feedback system is so important to the efficient operation of the marketplace.

In today’s decision, the Second Circuit Court of Appeals in New York mostly affirmed the trial court’s holdings.  It agreed that for eBay to be liable for the trademark infringements of its misbehaving sellers, the company had to have actual knowledge of their activities and still continue doing business with them.

There was substantial evidence to the contrary—including direct policing by eBay as well as the tools provided to manufacturers to review and flag suspicious listings.  As the court noted, eBay has plenty of incentives to ensure counterfeit goods stay off the site—for unhappy buyers mean the loss of liquidity and the loss of any competitive advantage.

Tiffany objected to the fact that the eBay tools put the burden on trademark holders rather than marketplace operators to ensure the authenticity of the goods.  But the court agreed with eBay that such is indeed the burden of a trademark, a valuable and exclusive right given to manufacturers to encourage the creation of consistent and quality goods and services.  Since eBay acted on actual knowledge of infringement and could not be said to have willfully ignored the illegal behavior of some merchants, the company had fulfilled its legal obligation to trademark holders.

The opinion is, as to be expected, largely a discussion of legal precedent and the law of trademark.  That, after all, is the role of an appellate court—not to retry the case, but to review the trial judge’s findings in search of legal error.  The decision by the appellate court will serve as a powerful precedent for eBay and other e-commerce sites in the future.  (Tiffany says it may appeal to the U.S. Supreme Court, but it’s unlikely for many reasons that the Court would take the case.)

One important feature of the case that is not discussed directly in the appellate decision, however, is worth highlighting.  Though courts rarely say so explicitly, an important factor in deciding cases has to do with the practical limits of the remedy requested by a plaintiff, in this case Tiffany’s.  Given what eBay already does to police counterfeit goods, it’s hard to see what Tiffany’s actually wanted the company to do—that is, what it wanted the courts to order eBay to do had it won the lawsuit.

For aside from money damages, the purpose of a lawsuit and the reason the taxpayers fund the legal system is that court decisions let everyone know what behaviors are acceptable and which are not–and how to correct those that are not.  Had eBay lost, they would have had to pay damages, but more to the point the loss would have sent a message to then and others to change their behavior to avoid future damage claims.

So would would a loss have signaled?  In essence, eBay would have had either to agree not to sell any Tiffany goods (a limit other brands would have demanded as well) or to verify and authenticate all items before allowing them to be listed on the site.  That would have been the only way to satisfy Tiffany’s that their view of the law was being followed.

That remedy, though theoretically possible, would have meant the end of eBay and sites like it (including Amazon Marketplace).  It would in essence have said that any auction model or other third party sales approach other than the high-end Sotheby’s or Christie’s approach is inherently illegal.  For there would have been nothing left to distinguish eBay’s low-cost approach to buying and selling—all of the efficiencies would have been eaten up by the need to authenticate before the auction began.

Such a remedy would have been economically inefficient—it would, to use Ronald Coase’s terminology, have introduced a great deal of unnecessary transaction costs.  For most of the items on eBay are accurately described, and for them the cost of authentication would be a waste.  eBay practices in essence a post-auction model of authentication.  If the buyer doesn’t agree with the description of the item once they receive it, eBay will correct the problem after the fact.

That’s much more efficient, but it does introduce cost to brand holders such as Tiffany’s.  A buyer who gets a counterfeit good may think less not only of the seller and of eBay but also of Tiffany’s.  Worse, the buyer who doesn’t realize they’ve received a counterfeit good may attribute its poorer quality to Tiffany’s, another form of damage to the mark.

The court’s decision implicitly weighs these costs and concludes that eBay’s model is, overall, the more efficient use of resources.  The brand owner can always sue the eBay sellers directly, of course, and can use the tools provided by eBay to reduce the number of bad listings that get posted in the first place.  Those enforcement costs, the court implies, are less than the authentication costs of Tiffany’s proposed remedy.  Faced with two possible outcomes, the court chose the more economically efficient.

Under the “law and economics” approach to legal decision-making, that finding would have been made explicit.  Some appellate judges, including Richard Posner and Frank Easterbrook, would have actually done the math as best they could from the record.

In any case, the finding seems economically sound.  Meanwhile, the law is still struggling mightily to catch up to reality.



I had a long interview this morning with the Christian Science Monitor. Like many of the interviews I’ve had this year, the subject was Google. At the increasingly congested intersection of technology and the law, Google seems to be involved in most of the accidents.

Just to name a few of the more recent pileups, consider the Google books deal, net neutrality and the National Broadband Plan, Viacom’s lawsuit against YouTube for copyright infringement, Google’s very public battle with the nation of China, today’s ruling from the European Court of Justice regarding trademarks, adwords, and counterfeit goods, the convictions of Google executives in Italy over a user-posted video, and the reaction of privacy advocates to the less-than-immaculate conception of Buzz.

In some ways, it should come as no surprise to Google’s legal counsel that the company is involved in increasingly serious matters of regulation and litigation. After all, Google’s corporate goal is the collection, analysis, and distribution of as much of the world’s information as possible, or, as the company puts it,” to organize the world’s information and make it universally accessible and useful.” That’s a goal it has been wildly successful at in its brief history, whether you measure success by use (91 million searches a day) or market capitalization ($174 billion).

As the world’s economy moves from one based on physical goods to one driven by information flow, the mismatch between industrial law and information behavior has become acute, and Google finds itself a frequent proxy in the conflicts.

As I argue in “The Laws of Disruption”, the unusual economic properties of information make it a poor fit for a body of law that’s based on industrial-era assumptions about physical property. That’s not to say there couldn’t be an effective law of information, only that the law of physical property isn’t it. Particularly not when industrial law assumes that the subject of any conflict or effort to control (the res as they say in legal lingo) is visible, tangible, and unlikely to cross too many local, state, or national borders—and certainly not every border at the same time, all the time.

To see the mismatch in action, consider two of Google’s on-going conflicts, both in the news this week: Google v. China and Google v. Viacom.

Google v China

In 2006, Google made a Faustian bargain with the Chinese government. In exchange for permission to operate inside the country, Google agreed to substantially self-censor search results for topics (politics, pornography, religion) that the Chinese government considered dangerous. The company had strong financial motivations for gaining a foothold in the astronomically-fast expanding Chinese Internet market, of course, but also had a genuine belief that giving Chinese users access to the vast majority of its indexed information had the potential to encourage fewer restrictions over time.

Apparently the result was the opposite, with the government tightening, rather than loosening the reins. Google’s discomfort was compounded by the revelation in January that widespread hacking and phishing scams had penetrated the Gmail accounts of several Chinese dissidents, leading the company to announce it would soon end its censorship of Chinese searches. (It also added encryption technology to Gmail and, it is widely believed, began working closely with the National Security Agency to help identify the sources of the attacks.) Though Google has not claimed the attacks were the work of the Chinese government or entities under its control, the connection was hard to miss. Google is hacked, Google decides to end cooperation with the government.

This week, the company made good on its promise by closing its search site in China and rerouting searches from there to its site in Hong Kong. As a result of the long occupation of Hong Kong by western governments, which ended in 1997 when the U.K.’s “lease” expired, Hong Kong maintains special legal status within China. Searches originating in Hong Kong are not censored, and Hong Kong appears to be largely outside China’s “great firewall” which blocks undesirable information including YouTube and Twitter.

For residents of the mainland, however, the move is a non-event. China quickly applied the filters that Google had applied on behalf of the government for searches originating inside the country. So Google searches in China are still censored—only now Google isn’t doing the censoring. The damage to the company’s relationship with the Chinese government, meanwhile, has been severe, as has collateral damage to the relationship between China and the U.S. government.  (Google founder Sergey Brin today encouraged the U.S. to put pressure on the Chinese government to stop the censorship.)  The story is by no means over.

Google v Viacom

Also in the last week, a number of key documents were released by the court that is hearing Viacom’s long-running copyright infringement case against Google’s YouTube. The case, which began around the same time that Google made its deal with China, seeks $1 billion in damages from copyright violations against Viacom content perpetrated by YouTube users, who posted everything from short clips to music videos to entire programs, including “South Park” and “The Daily Show.”

Under U.S. law, Internet service providers are not liable for copyright infringement perpetrated by their users, provided the service provider is not aware of the infringement and that they respond “expeditiously” to takedown requests sent to them by the copyright holder. (See Section 512 of the Digital Millennium Copyright Act, http://www.copyright.gov/legislation/dmca.pdf) Viacom claims YouTube is not entitled to immunity in that it had actual knowledge of the infringing activities of its users.

Discovery in the case has revealed some warm if not smoking guns—guns that the parties resisted being made public. (See the New York Times Miguel Helft’s as-always excellent coverage, and also coverage in the Wall Street Journal.) Viacom claims it has found a number of internal YouTube emails that make clear the company knew of widespread copyright infringement by its users, though Google characterizes those messages as having been taken out of context.

Perhaps more interesting has been the embarrassing revelation that many (though still a minority) of the Viacom clips, from MTV and Comedy Central programming for example, were posted by Viacom itself. Indeed, these noninfringing posts were often put on YouTube under the guise of being posted by non-affiliated users in the hopes of giving the clips more credibility!

These “fake grassroots” accounts, as Viacom marketing executives referred to them, made use of as many as 18 outside marketing agencies. Most embarrassing is that Viacom’s own legal team has now admitted that hundreds of the YouTube postings it initially claimed in its list of infringing posts were actually authorized posting by Viacom or its affiliates, disguised to look like unauthorized postings.

(Since 2007, Google has somewhat quieted the concerns of copyright holders over YouTube by introducing filtering technologies that let copyright holders supply reference files that can be digitally compared to weed out infringing copies. This is an example, for better and for worse, of what Larry Lessig has in mind when he talks of implementing legal rules through software “code.” Better because it avoids some litigation, worse because the code may be overprotective—filtering out uses that might in fact be legal under “fair use.”)

Google v Everyone

What do the two examples have in common? Both highlight the difficulty of judging the use of information with traditional legal tools of property and borders.

In the first example, China considers some forms of information to be dangerous. To some extent, in fact, all governments restrict the flow of information in the name of national security, consumer safety, or other government aims. China (along with Burma and Iran) are at one end of the control spectrum, while the U.S. and Europe are at the other end.

Google believes, as do many information economists, that more information is always better than less, even when some of it is of poor quality, outright wrong or which espouses dangerous viewpoints. Google’s view was perhaps best put by Oliver Wendell Holmes, Jr. in his 1919 dissent in Abrams v. United States, 250 U.S. 616 (1919):

[T]he ultimate good desired is better reached by free trade in ideas…[T]he best test of truth is the power of the thought to get itself accepted in the competition of the market, and that truth is the only ground upon which their wishes safely can be carried out. That at any rate is the theory of our Constitution.

But even legal systems that believe in the “the marketplace of ideas” as the preferred forum for determining information value can’t resist the temptation sometimes to put their finger on the scales. Congress and some states have tried and failed repeatedly to censor “indecent” content on the Internet (fortunately, the First Amendment puts a stop to it, but, as John Perry Barlow says, in cyberspace the First Amendment is a local ordinance). Just this week, Australia came under fire for proposals to beef up the requirements it places on Internet service providers to censor material deemed harmful to children. The Google convictions in Italy last month suggest that not even Europe is fully prepared to let the marketplace of ideas operate without the worst kind of ex post facto oversight.

Likewise in the Viacom litigation, it’s clear regardless of the final determination of legal arguments that some information uses that are illegal are nonetheless valuable to those whose interests are supposedly being protected by the law. Viacom can make all the noise it wants to about “pirates” “stealing” their “intellectual property,” as if this were the 1800’s and the Barbary Coast. . Those who posted copyrighted material to YouTube were not doing it with the intent of harming Viacom—their intent was just the opposite. What’s really going on is that users—fans!—who value their programming were using YouTube to share and spread their enthusiasm with others.

Yet intent plays no part in copyright infringement. The law assumes that, as with physical property, any use that is not authorized by the “owner” of the information is with few exceptions likely to be financial detrimental. That is certainly what Viacom claims in the litigation. But the company’s own behavior tells a different story. Why else would they post their own material, and pretend to be regular users? Put another way, why is information posted by an anonymous fan more valuable to Viacom than information posted by the company itself? What is it about an unsanctioned sharing that communicates valuable information to the recipient?

By posting the clips, YouTube users added their own implicit and explicit endorsement to the content. The fact that Viacom marketing executives pretended to be fans themselves demonstrates the principle that the more information is used, the more valuable it can become. That’s not always the case, of course, but here the sharing clearly adds value—in fact, it adds new information to the content (the endorsement) that benefits Viacom.

Whether that added value is outweighed by lost revenue to Viacom from users who, having seen the content on YouTube, didn’t watch it (or the commercials that fund it) on an authorized channel ought to be a key consideration in the court’s determination, but in fact it has almost no place in the law of copyright. Yet Viacom obviously saw that value itself, or it wouldn’t have posted its own clips pretending to be fans of the programming.

Productive v Destructive Uses

Both these cases highlight why traditional property ideas don’t fit well with information uses. What would work better? I present what I think is a more useful framework in the book, a view that is so far absent from the law of information. That framework would analyze information uses not under archaic laws of property but would rather weigh the use as being “productive” or “destructive” or both and determine if, on the whole, the net social value created by the use is positive. If so, it should not be treated as illegal, regardless of the law.

What do I mean? Since information can be used simultaneously by everyone and, after use, is still intact if not enhanced by the use, it’s really unhelpful to think about information being “stolen” or, in the censorship context, of being “dangerous.” Rather, the law should evaluate whether a use adds more value to information than it takes away. Information use that adds value (reviewing a movie) is productive and should be legal. A use that only takes value away (for example, identity theft and other forms of Internet fraud) is destructive and should be illegal. Uses that do both (copyright infringement in the service of promoting the underlying content) should be allowed if the net effect is positive.

Under the productive/destructive model, Google’s actions in entering and now exiting from China make more sense as both policy and business decisions. Censoring information is destructive in that it gives users the appearance of complete access where in fact the access has been limited. That harm should be weighed against the benefit of providing information that otherwise wouldn’t have been available at all to Chinese users.

That the government became more rather than less concerned about Google over time might imply that Google had gotten the balance right—that is, that the Chinese government was increasingly aware that even what it originally thought of as benign information could have the kind of transformative effects it wanted to avoid.

Is China wrong to censor “dangerous” information? Economically, the answer is yes. There is a strong correlation between countries who are on the “freer” end of the censorship spectrum and those that have gained most financially from the spread of information technology. The more information there is, the more value gets added by its use, value that is allocated (roughly, sometimes poorly) among those who added the value.

Likewise, the posting of Viacom clips on YouTube should weigh the productive value of information sharing (promotion and endorsement) against the destructive aspects–lost revenue of paid viewers on an authorized channel supported by cable fees, advertising sponsorship, and purchased copies in whatever media.

Under that kind of analysis, it might turn out that Viacom lost little and gained a great deal from the unpaid services of its fans, and that in fact any true accounting would have credited the fans for $1 billion in generated value rather than the other way around. Or maybe it was a wash. But just to consider the lost revenue, particularly using the crazy method of modern copyright law (each viewed clip is considered as a lost sale), is certain to misjudge the true extent of the harm, if any.

A lingering problem in both these examples is the difficulty of determining both the quality and quantity of the productive and destructive uses of the information in question. How much harm did Google censoring cause? How much value did YouTube users generate?

We don’t know, not because the answers aren’t knowable but because the tools for making such determinations are so far very primitive. Traditional rules of accounting follow the industrial assumptions of physical property—that is, if I have it then you don’t, and once I’ve used it, it’s gone or at least greatly depleted—that information doesn’t follow. It makes little or no allowance for the fact that information use can be non-diminishing, or even productive.

So how would we measure the harm to Chinese Internet users from the censored information, or the value of the information they could get before Google left town? How would we measure the value of “viral” marketing of Viacom programming posted by real (as opposed to “fake grassroots”) fans? How would we measure the actual losses Viacom suffered—not the statutory damages they claim under copyright law, which are surely far too generous?

Well, one problem at a time. First let’s change the rhetoric about information use, positive and negative, from the language of property to a language that’s better-suited to a global, network economy. If we do, the metrics will invent themselves.

PFF Adjunct Fellow Mike Palage led this extraordinary discussion of ICANN’s origins, evolution and future with four of ICANN’s “Founding Fathers”: Milton Mueller (author of Ruling the Root), law professor David Johnson, ICANN’s first CEO Mike Roberts and then ICANN CEO Paul Twomey. In particular, the group discussed ICANN’s mission, governance structure, and accountability; the difficult issue of new generic Top Level Domain names (gTLDs) and trademark concerns; and ICANN’s future relationship with the U.S. government. Be sure to check out the handy ICANN Glossary on page 33. The audio can be downloaded here.

Here’s the transcript (PDF):

Google today unveiled the Data Liberation Front, a team of engineers in Chicago dedicated to ensuring that Google build “liberated products”—ones that have “built in features that make it easy (and free) to remove your data from the product in the event that you’d like to take it elsewhere.” We’ve spent a lot of time here warning about the dangers of Googlephobia, but now that Google has brazenly appropriated the TLF’s unique mock-Communist iconography, we’re starting to think that Jeff Chester and Scott Cleland may be right: Maybe Google really is trying to take over the world!

So we regret to announce our filing of a lawsuit in the Twelfth Circuit Court of Appeals to challenge Google’s infringement of our mark. We demand 50% of the $0.00 Google earns every time they “allow” users to port their application data out of Google to a competitor’s services! We will, of course, dedicate these royalties to the important project of educating and empowering users about how they can determine their own destiny online.

But seriously… We heartily agree with our Data Liberation Front comrades that users should be fully empowered to switch from one service to another online. This kind of competition is clearly the best protection for consumers in the Digital Age. Making switching easy should assuage not just antitrust concerns, but also concerns about how much privacy or security each web service offers to its users, no matter how big its market share: If you don’t like what a service offers, just take your data and leave! Who needs the government micro-managing the Internet when users have that kind of control?

Viva la (Technology) Revolution!

P.S. In case you haven’t seen it the Monty Python video we’re all riffing on:

http://www.youtube.com/v/gb_qHP7VaZE

By Michael Palage & Berin Szoka, The Progress & Freedom Foundation

Over the next month, the ICANN Board will consider its options for ensuring that some framework is in place to ensure ICANN’s accountability to the global Internet community after the approaching expiration of its Memorandum of Understanding and Joint Project Agreement (MOU/JPA) with the U.S. Department of Commerce. We analyze these options in our new paper, “Choosing the Right Path to a Permanent Accountability Framework for ICANN.”

We urge the ICANN Board to allow the time necessary for the development of a permanent accountability framework in consultation with the global Internet community, as required by ICANN’s Bylaws.  The authors caution the ICANN Board against rubber-stamping a recent proposal to essentially make the MoU/JPA a permanent instrument as inadequate to ensure ICANN’s long-term accountability.  The alternative, simply ending ICANN’s relationship with the U.S. Government, would raise serious legal questions concerning ICANN’s ability to collect fees from registrars and registries and the transfer of property rights underlying the domain name system.

We conclude by calling on ICANN’s new CEO Rod Beckstrom to exercise the kind of leadership he advocated in his 2005 book, The Starfish and the Spider: The Unstoppable Power of Leaderless Organizations, which explains the advantages of decentralized managerial “nervous systems” (“starfish”) over top-down hierarchies (“spiders”):

Instead of focusing on ‘spider’-esque permanent instruments with a single government, Beckstrom and the ICANN Board should focus on more ‘starfish’-like solutions that both continue the USG’s stewardship role and involve more governments that want to participate in the unique private-public partnership known as ICANN—without compromising ICANN’s guiding principles and commitment to private sector leadership. Only this outcome will ensure the long-term viability of ICANN as a global trustee of the Internet’s unique identifiers.

My PFF colleague Mike Palage just released a paper about a series of recent applications for national trademark rights in terms that correspond to likely strings for new top-level domain names, or TLDs, (e.g., “.BLOG”). These attempts highlight just one way in which ICANN’s new generic TLD (gTLD) application process is likely to be “gamed.” But it is also a strategy to which some trademark holders may feel compelled to resort to defend their rights to that string. Unfortunately, it does not appear that ICANN is addressing these important public policy considerations. In fact, based upon some of the provisions in the proposed draft registry agreements, it appears that ICANN staff’s actions may increase, rather than decrease, the ambiguity that opens the door to such gaming of the system.

http://d.scribd.com/ScribdViewer.swf?document_id=17847370&access_key=key-17v70dtd7qa1zrmq3z6x&page=1&version=1&viewMode=list

The proliferation of Web 2.0 social media services has magnified the old problem of cyber-squatting: Every new service represents the possibility that someone else might claim your name, or your organization’s trademark, as a user name before you do! This problem is especially significant where user names correspond to vanity URLs, as with Twitter and, more recently, Facebook.

So I was intrigued to discover that the market is responding to this need: ClaimMyName (CMN) will take care of user registrations on 30 Web 20 services for $329 or on an astounding 300 services for $799. CMN is a “freemium” service offered by DandyID.com, a nifty free service that allows users to organize all their social media profiles for something like 390 services so that buttons for each service can easily be added to an author bio page on a blog, as we’ve done at the TLF. So if I really wanted to make sure that no one else registered http://<WEB2.0service>.com/berinszoka, or /techliberation or /ProgressFreedom, this service would allow me to do so with just a few clicks—at a price of either $10.97/service for thirty or $2.66/service for 300 services.

CMN is essentially a mini-Mark Monitor, the international company famous for protecting trademarks online—except that CMN facilitates self-help by users outside of trademark law: No registration is required; everything is done on a first-come-first-serve basis. Pretty cool.

PFF Adjunct Fellow Mike Palage, who served on the ICANN board from 2003 to 2006, filed these comments (PDF) on the NTIA’s recent Notice of Inquiry regarding ICANN’s future.  Mike’s four key points were as follows:

1. ICANN’s Periodic Review of its internal operations and supporting organizations has failed, and has become nothing more than a “perpetual motion machine of public comments and documentation producing no meaningful results.” Only a second Evolution and Reform Process can solve ICANN’s current deficiencies;
2. ICANN must hardcode into its policies and its contracts the principle that its policies cannot supersede national laws;
3. ICANN must cease any operational role in technical infrastructure as required by its bylaws and focus instead on its mission as a technical coordinator; and
4. Congress must avoid “kicking the JPA can down the road” and instead provide much-needed leadership by creating a solid foundation for ICANN 3.0 in legislation after proper consultation with the Government Accountability Office.

Google has announced that it will soon begin allowing U.S. advertisers to use trademarked keywords in limited circumstances in text ads, much as Yahoo! already does.  Google currently allow advertisers to bid on trademarked terms as keywords that could cause an ad to appear, either next to Google search results or on a third-party publisher’s website.  That policy will not change, and is discussed here by my PFF colleague Sid Rosenzweig.  The new policy is focused on the text seen by users in ads themselves and applies only if the “landing page” (to which the ad links) is used by a reseller, aggregator or parts supplier to sell only products that are relevant to the mark in question, or if the page is used to provide impartial reviews or other information about the trademarked product.  The new policy does not apply to sites/pages that (a) facilitate the sale of counterfeit goods, (b) allow the sale of a competitor’s goods, (c) criticize the trademarked good, or (d) do not provide substantial information or a purchase option.  Despite these limitations and other safeguards, Google has been sharply criticized by some trademark holders and might even be sued (e.g., for contributory infringement).

I’ll defer to the real trademark lawyers to figure out whether Google is correct that its new policy falls within the bounds of trademark law (particularly the “nominative fair use” doctrine).  But since Adam Thierer and I have been involved in an ongoing defense of online advertising against those who would squelch it through regulation in the name of privacy concerns (not at play here), I think it’s important to highlight the potential benefits to users from this seemingly arcane policy change-and to consider what this episode says about online advertising generally.  I see three main benefits to consumers from the policy change that should be considered alongside the vitally important role that trademarks play in our economy in communicating reputational information.

First, Google’s new policy will allow consumers to find products more easily because advertisers will be able to offer more descriptive and therefore informative ads, mentioning what they sell by name. Looking for a Prada handbag?  You’d probably find the ads that appear next to your search results for “Prada Handbag” more useful if the text of the ad specifically mentioned “Prada”-and if, as Google’s new policy requires (to protect trademark holders), the landing page actually sold Prada handbags, and only Prada handbags.  You’ll currently see a few ads that mention Prada, reflecting the current policy, which allows advertisers to use a trademark in an ad text, but only with permission of the trademark holder.  But the new policy will allow any advertiser that meets the criteria stated above to compete for attention with ads that convey more useful information to users and that are therefore more likely to be clicked on.  This might particularly benefit the Long Tail of products and services, because it could help retailers of niche products advertise, particularly if those products are accessories to major brands.

Of course, Marxists have long argued that advertising is a dead-weight loss to society because it doesn’t actually convey useful information:  Ads just “manipulate” users, who are-the elites tell us-too stupid to tell the difference between what they really want and what they’ve been tricked into thinking they want (“false consciousness”).  Whatever one thinks of this argument, it’s pure hypocrisy to criticize advertising as being “information-poor” and also attack tools and policies that convey more information-in this case, the fact that the advertised page concerns a particular trademarked good/service.

Second, this policy change will allow the Long Tail of retailers & review/information sites to compete more effectively by letting users know they’re out there.  As anyone who’s ever started a business knows, perhaps the single greatest barrier to entry is simply the difficulty and expense entailed in building awareness among potential customers.  This is why effective, targeted speech is so vitally important to competition and the overall health of the economy.  Giving consumers more information means more small businesses will be able to break in to compete with entrenched firms by offering lower prices and higher quality (including on non-price factors like privacy).

Third, by raising the value of advertising, this policy change will create more funding for free content & services, both those provided directly by Google and those provided by third parties supported by ads sold through Google.  Obviously, Google wouldn’t be adopting this new policy they didn’t think it would allow them to make more money:  Allowing more descriptive ads means users are more likely to find the ads they see relevant and to click on them, which, in turn raises the value of ads sold by Google.  But contrary to what some Googlephobes might have us believe (based on the usual reaction to every Google announcement), Larry & Serge won’t just spend that new revenue on building a Clone Army to implement some nefarious scheme to take over the Galaxy.  I can’t disprove the Clone Army possibility any more than I can disprove the existence of the Easter Bunny, Sasquatch or Zeus, but if this phantom menace does exist (perhaps on one of Google’s planned floating data centers), our soon-to-be Digital Overlords are sure doing a good job of hiding it amid all the “free” (i.e., ad-supported) stuff they give away to consumers-at considerable expense:

• As I’ve written previously, two-thirds ($14.41B) of Google’s 2008 global revenue ($21.78B) came from advertising on its own sites, primarily the search engine. These sites and the dozens of its free services like Maps and Gmail aren’t cheap, altogether costing Google another $3.34B to support, including the enormous cost of its data centers (“cost of revenues”). Google spent $2.79B on R&D, much of which will lead to innovative new services for users. Of course, until the Clone Army can take over Google’s daily operations, someone’s got to keep the lights on (and the Cylons machines from rebelling)-so throw in another $1.8 billion for personnel, post-it notes, ethically harvested coffee and other “general and administrative” expenses.
• The remaining third of Google’s global 2008 revenue ($6.71B) came from ads sold on the “Google Content Network”: third-party publishers that sell ad space on their pages to advertisers through the AdSense auction system. Of that, Google paid out $5.28B (78.7%) to publishers, who used the money to support the content and services they give away to users-from simply paying hosting costs in the case of the smallest sites to, say, trying to keep cash-strapped newspapers alive.

Again, there is great value to protecting trademarks to minimize the possibility of confusion and fraud among Internet users.  But while this policy change is ultimately an issue of trademark law, it also highlights the benefits of improved online advertising for consumers.  If Google (and other ad networks) can increase the value of information-richness of advertising (and therefore its effectiveness and economic value) in a way that is consistent with the consumer protection purposes of trademark law, that’s something to be celebrated.   Sure, Google will benefit, but in this case, a rising tide will truly lift all boats.

If Google wants to minimize concerns about the automated process Google will use in deciding whether a trademark may be included in an ad for any particular page, the company could proactively address these concerns by providing trademark owners (and the third parties that monitor their online brands) tools that would indicate whether a particular trademark could be used in advertising a particular page.  This would alleviate the uncertainty of trademark holders as to whether their brands are at risk and allow them to call attention to inevitable shortcomings in Google’s algorithm, which will have to evolve constantly.  This would allow Google to keep its algorithms secret, but in order to prevent those who would abuse such tools from reverse-engineering Google’s abuse-detection algorithm, it would probably be necessary to restrict access to these tools to legitimate trademark holders and monitoring services.  How to implement that system might not be easy, but if anyone can figure that out, it’s Google.  I’ve applauded Google’s leadership in the privacy context, where Google has given users tools (the Ad Preference Manager and the Advertising Cookie Opt-Out Cookie plug-in) to manage their preferences about behavioral advertising.  I hope to see Google follow the same approach here:  addressing legitimate concerns through technological means in a way that maximizes consumer welfare.

Finally, it’s interesting to note here that Google is playing catch-up with Yahoo! here-just as Google lagged behind Yahoo! in introducing behavioral targeting, which has caused considerable privacy consternation.  As I’ve said before:

it’s no accident that Google was a late-comer to the [Online Behavioral Advertising] market, lagging behind Yahoo! in particular.  The most likely reason Google has taken its time in rolling out an OBA product is that Google is subject to a unique level of scrutiny by privacy advocates by virtue of its size.  Being the “big kid on the block,” Google has to be especially careful not to appear to be “Big Brother.”  This reputational check on Google should allay some concerns about Google’s size.

It seems Microsoft is facing much the same problem Pepsi faced in the 70s, when it created the Pepsi challenge (a blind taste test between Coke and Pepsi):

A stark sign of the challenge Yusuf Mehdi faces as a point man for Microsoft in the company’s battle with Google comes from the company’s own research into the habits of consumers online. During regular “blind taste tests,” in which Microsoft asks randomly-selected consumers to score the quality of results from various Internet search engines, the quality of Microsoft’s search results have so improved that people can’t tell the difference between Microsoft and Google search results, says Mr. Mehdi, senior vice president of Microsoft’s online audience business group. But when Microsoft slaps the Google brand name on the results from Microsoft’s own search engine during another portion of its tests, users invariably score them highest. “Just by putting the name up, people think it’s more relevant,” he says. … Microsoft still faces the problem of the strong association in consumers’ minds between Google and Internet search. In theory, it’s far easier for a consumer to switch Internet search engines than it is for them to switch other forms of software. But Mr. Mehdi–a veteran of the Web browser wars of the late 90s in which Microsoft managed to overtake the pioneer in the category, Netscape Communications–says in reality it’s very hard to convince consumers to change their search behavior.

So, Microsoft faces an uphill battle.  Happily for the Internet marketplace, it seems they’re embracing the challenge cheerily by attempting to kill two birds with one stone:  launching an innovative new semantic search engine capable of answering users’ questions more directly while also creating a fresh new brand for what Microsoft acknowledges is a “confusing jumble of brand names for its search efforts.”  I, for one am looking forward to Microsoft’s forthcoming search engine, dubbed “Kumo.”

But I think there’s a bigger lesson here:  Google’s most valuable asset is its brand. Sure, much of the strength of its brand may lie in the intangible irrationalities of human psychology:  Microsoft’s search engine will probably have to be significantly better than Google’s before the software giant can begin regrowing its 8% share of the search market.  However unfair this might seem to Microsoft, consider how Google reached this height of brand power:  by offering consumers a number of terrific products (for free!) and by carefully cultivating a reputation not just of coolness (think Google Lunar X-Prize) but of “Don’t be evil“-ness.  Many ridicule that motto and attack Google for trying to take over the world, as we’ve detailed in our ongoing Googlephobia series.  But consider what Google stands to loose by offending consumers:  the brand power that makes consumers keep coming back to its search engine.  Google’s reputation as helpful, cool and “non-evil” is perhaps just as valuable as Coke’s secret formula.  So why would Google risk throwing that away by offending real sensitivities about, say, its privacy practices?

Some might fear that the equation of the term “google” with “Search” could permanently entrench Google in a position of dominance in the search market (think “Kleenex” in the market for facial tissue).  Such worriers might be surprised to learn that Google actively discourages the “genericization” of the term “Google”—the use of “google” as a synonym for all search, just as Kleenex is commonly used for tissue paper, Xerox for copying and Coke for soda.  The reason?  Under trademark law, a company can lose its unique rights to its trademark if that term becomes sufficiently generic—a catastrophe for a corporation commonly referred to as “genericide.”  Thus, Google is actively working to check the very phenomenon that gives its products special appeal.

It’s by no means a perfect solution.  Microsoft, Yahoo! and others will still have to work extra-hard to overcome Google’s brand appeal.  But there is a certain elegance to the fact that existing laws provide some competitive check on the marketplace without the need for government regulation or an antitrust lawsuit.

I’ve been working closely with PFF Adjunct Fellow & former ICANN Board member Michael D. Palage on ICANN issues.  Michael had this to say about the ongoing saga of ICANN’s attempt to create new gTLDs.

During the recent ICANN Board meeting in Mexico City, the Board authorized the creation and funding of an Implementation Recommendation Team (IRT).  This team was to be comprised of “an internationally diverse group of persons with knowledge, expertise, and experience in the fields of trademark, consumer protection, or competition law, and the interplay of trademarks and the domain name system to develop and propose solutions to the overarching issue of trademark protection in connection with the introduction of new gTLDs.” This IRT is tasked to produce a report for consideration by the ICANN community at the Sydney meeting.

The IRT consists of 24 members:

• Chairwoman Caroline G. Chicoine; and
• Seventeen members; and
• Six ex officio members:  Four IPC-elected officers and two-GNSO elected Board Directors (Bruce Tonkin and Rita Rodin Johnston).  

I have a number of friends and colleagues serving on this team and I wish them well in their important endeavor.

I’ve previously proposed a number of rights-protection mechanisms that IRT should consider.  Today, I offer a few suggestions that I hope will guide IRT as they embark on their important work tomorrow.  In particular, I hope they’ll implement some of my suggestions intended to make the IRT process more transparent-so the rest of the global Internet can follow along with their important work and provide constructive input where possible.

ICANN has just released a second draft of its Applicant Guidebook, which would guide the creation of new generic topmore generic top-level domains (gTLDs) such as .BLOG, .NYC or .BMW. As ICANN itself declared (PDF), “New gTLDs will bring about the biggest change in the Internet since its inception nearly 40 years ago.”  PFF Adjunct Fellow Michael Palage and former ICANN Board member addressed the key problems with ICANN’s original proposal in his  paper ICANN’s “Go/ No-Go” Decision Concerning New gTLDs (PDF & embedded below), released earlier this week.

ICANN deserves credit for its detailed analysis of the many comments on the original draft which Mike summarized back in December.  ICANN also deserved credit for addressing two strong concerns of the global Internet community in response to the first draft:

• ICANN has removed its proposed 5% global domain name tax on all registry services, something Mike explains in greater detail in his “Go/No-Go” paper.
• ICANN has commissioned a badly-needed economic study on the dynamics of the domain name system “in broad.” But such a study must address how the fees ICANN collects from specific user communities relate to the actual costs of the services ICANN provides. The study should also consider why gTLDs should continue to provide such a disproportionate percentage of ICANN’s funding—currently 90%—given increasing competition between gTLDs and ccTLDs (e.g., the increasing use of .CN in China instead of .COM).

These concerns are part of a broader debate:  Will ICANN abide by its mandate to justify its fees based on recovering the costs of services associated with those fees, or will ICANN be free to continue “leveraging its monopoly over an essential facility of the Internet ( i.e., recommending additions to the Internet’s Root A Server) to charge whatever fees it wants?”  If, as Mike has discussed, ICANN walks away from its existing contractual relationship with the Department of Commerce and claims “fee simple absolute” ownership of the domain name system, who will enforce such a cost-recovery mandate?  

But ICANN simply “kicked the can down the road on the biggest concern”: how to minimize abusive domain name registrations ( e.g., cybersquatting, typosquatting, phishing, etc.) and reduce their impact on consumers. ICANN seems only to have made a vague promise to engage in additional outreach and consultation on this problem.  But Mike has proposed a number of potential solutions that are narrowly tailored to protect brand holders while respecting the fair use rights of other, including: 

• A Rebuttable Reserve Names List that would minimize the need for defensive registrations of marks that have been subject to abusive registrations by freezing registration of domain names (e.g., DELTA.AIR) that precisely correspond to those marks (e.g., Delta Airlines’ “Delta” trademark)  for the 60 days leading up to the opening of a new TLD (e.g., .AIR)—although anyone can rebut this presumption upon making a fair use showing under existing UDRP principles.
• An Expedited Domain Suspension Policy, either  as a new policy, or an amendment to the existing UDRP, that would provide a faster and more cost-effective remedy for abusive domain name registrations on an ongoing basis, but only for marks that have been registered with a national trademark authority (or the equivalent thereof).
• A Uniform Proxy Registration Policy governing the use of proxy services that substitute their own contact information for the registration’s information in the Whois database; such baseline practices and safeguards would reduce abuse that could harm legitimate users while preserving the option of proxy registration for privacy-sensitive users.

Washington Internet Daily (subscription-only) reports that:

ICANN is also rethinking its timeline for launching the gTLD application process, it said. There will be a third draft guidebook, making it unlikely applications will be accepted before December, it said. The new draft leaves provisions on four major issues – security and stability, malicious misconduct, trademark protection and demand/economic analysis of the need for new gTLDs – unchanged pending further discussion, ICANN said. Comments are due April 13. 

PFF wil continue to respond to ICANN’s call for comment to promote responsible expansion of the domain name space.  Here’s Mike’s paper (click on the rectangle-in-rectangle button at the top right to maximize the iPaper viewer):

I’ve gotten an unusually strong reaction to a TechKnowledge piece that went out today describing how the Nordstrom retail chain is capitalizing on a Patent and Trademark Office error to throw a small business under the bus.

Beckons is an organic yoga and lifestyle clothing business that Nordstrom is trying to force off of a trademark – or out of business. It’s owned by two businesswomen in Colorado who have done everything right to get a trademark, but now may have tens of thousands of dollars in legal bills to defend it. The short article is called U.S. Patent and Trademark Office: FAIL.

I wrote about it because I think it’s an outrage. People have written to me since I published it asking what they can do.

Well, there are a couple of things. The original error is with the PTO, so you can send a copy of the story or a link to your Member of Congress. The U.S. Patent and Trademark Office is within the jurisdiciation of the House and Senate Judiciary Committees.

But it’s Nordstrom that has really taken advantage of things. And you don’t have to beg for a politician’s help to bring companies to heel. Here’s a four-step plan for helping Beckons beat Goliath. Do one or all of the items listed below.

1. Send this page to all your friends. That’s probably the most important thing, because the more people doing the other things on this list, the better.
2. Write a letter to Nordstrom, telling them that you disapprove of their abuse of the trademark process, and that you won’t be shopping there until they mend their ways. Here’s the address for the president of the company. Blake W. Nordstrom, President Nordstrom, Inc. 1700 Seventh Avenue, Suite 300 Seattle, WA 98101
3. Print this page, copy it, and hand it out at Nordstrom. Or slip copies into the purses they sell – especially any with the “Beckon” label!
4. If you do yoga, or know anybody who does, shop at Beckons! (Be sure to send this along to friends who do yoga.)

So those are just a few ideas for getting Nordstrom to correct its abuse of the trademark process against this small business. Please feel free to put additional ideas or report on your successes in the comments. (Got a sample letter to Nordstrom, for example?)

A well-functioning marketplace requires assertive consumers – so assert yourself!

My piece about the U.S. Chamber of Commerce event last Friday on U.S. intellectual property attachés giving a report, and taking a hard line, on the enforcement of U.S. intellectual property, overseas, is now live on ip-watch.org.

Here’s the first couple of paragraphs:

WASHINGTON, DC – Nations ranging from Brazil to Brunei to Russia are failing to properly protect the intellectual property assets of US companies and others, and international organisations are not doing enough to stop it, seven IP attachés to the US Foreign and Commercial Service lamented recently.

Meanwhile, an industry group issued detailed recommendations for the incoming Obama administration’s changes to the US Patent and Trademark Office.

The problems in other nations extend from Brazil’s failure to issue patents for commercially significant inventions by US inventors, to an almost-complete piracy-based economy in Brunei, to an only-modest drop in the rate of Russian piracy from 65 percent to 58 percent.

The attachés, speaking at an event organised by the US Chamber of Commerce and its recently beefed-up Global Intellectual Property Center (GIPC), blasted the record of familiar intellectual property trouble zones like Brunei, Thailand and Russia.

But the problems extend to the attitudes and omissions of major trading partners like Brazil, India and even well-developed European nations, said the attachés.

[more at http://www.ip-watch.org/weblog/index.php?p=1387….]

Mike Palage, the first Adjunct Fellow at PFF’s Center for Internet Freedom, just published the following piece on the PFF blog.

ICANN‘s plan to begin accepting applications for new generic top-level domains (gTLDs) in mid-2009 may have been derailed by last week’s outpouring of opposition from the global business community and the United States Government (USG). Having been involved with ICANN for over a decade and having served on its Board for three years, I’ve never seen such strong and broad opposition to one of ICANN’s proposals.

This past June, the ICANN Board directed its staff to draft implementation guidelines based upon the policy recommendations of the Generic Names Supporting Organization (GNSO) that ICANN should allow more gTLDs such as .cars to supplement existing gTLDs such as .com. In late October, the ICANN staff released a draft Applicant Guidebook detailing its proposal. The initial public forum on this proposal closed on December 15-with over 200 comments filed online.

In its December 18 comments, the USG questioned whether ICANN had adequately addressed the “threshold question of whether the consumer benefits outweigh the potential costs.” This stinging rebuke from the Commerce Department merely confirms the consensus among the 200+ commenters on ICANN’s proposal: ICANN needs to do more than merely rethinking its aggressive time-line for implementing its gTLD proposal or tweaking the mechanics of the proposal on the edges. Instead, ICANN needs to go back to the drawing board and propose a process that results in a responsible expansion of the name space, not merely a duplication of it.

United States Government’s Wake-Up Call to ICANN

The comments submitted by the USG consisted of two letters. The first, from the Commerce Department’s National Telecommunications and Information Administration (NTIA) began by citing the failure of ICANN staff to conduct a detailed study on the costs, benefits and implementation of a new gTLD process-as called for by an October 2006 ICANN Board resolution. NTIA then listed a number of prerequisites for implementation of any gTLD proposal, including:

• Ensuring that the introduction of a potentially large number of new gTLDs would not jeopardize the stability and security of the Domain Name System (DNS);
• Revising the gTLD approval process to take into account (i) adverse competitive welfare effects; (ii) competitive bidding mechanisms; and (iii) maximum price caps or other term to protect consumers;
• Demonstrating ICANN has sufficient contract compliance staff;
• Explaining further how ICANN will conduct legal reviews of gTLD applications;
• Requiring ICANN to focus on technical functions related to the management of the DNS and leaving other matters such as the adjudication of morality and public order to be addressed by governments;
• Developing a mechanism to expand the gTLD reserved names associated with technical or infrastructure-related names; and
• Expressing a clear rationale for the gTLD fee structure, as well as a transparent mechanism for the disposition of any excess revenues.

More Feedback to Come from Other Governments

Just as the U.S. government filed comments on the proposal only after ICANN’s deadline for public comment had passed, other governments have indicated that they need more time to provide substantive comments on ICANN’s proposal-including the Government Advisory Committee and the Australian government. The U.S. government’s strong opposition to ICANN’s proposal may inspire other countries to voice their own concerns in the next two months-which could derail ICANN’s current plans to publish a revised draft of the proposal shortly before its next meeting in Mexico City the first week of March, 2009. If ICANN does not revise its aggressive timeline, the GAC and other governments will be commenting on the October 2008 Draft just as the ICANN staff is seeking new comments on the February 2009 draft. Given the timing of GAC deliberations, GAC probably will not be able to provide comments on any draft released in February until ICANN’s June meeting in Sydney.

Global Business Community Opposition

A common thread of concern expressed among the majority of the submissions from the business sector is how the proliferation of gTLDs will significantly increase the cost of defensively registering domain names to protect trademarks and prevent consumer confusion. Currently, many global brand holders must maintain enormous portfolios of domain names (sometimes in excess of ten thousand). Only a tiny percentage of these domain names are actually used; the vast majority are variants on the names of a company’s products or services, such as yah00.com. Because the existing procedures for protecting trademark holders cost far more than it costs to register a single domain name, there currently exists a gross imbalance between “offense” (cyber-squatting) and “defense” (brand protection). Without additional safeguard mechanisms in any new gTLD application procedure to protect existing trademarks, every new gTLD created would simply compel existing trademark holders to duplicate their domain portfolio for that new domain name-for example, if .search were created, Yahoo might have to register yah00.search (as well as every other domain name it has currently defensively registered). This could mean additional costs of millions of dollars every year in purely defensive registrations-all because of the lack of procedural safeguards.

The sheer outpouring of opposition to ICANN’s proposal makes it difficult for the non-expert to know where to start, and few readers are likely to take the time to digest all 200+ comments. So here’s a quick overview of those comments I’d consider required reading for anyone who wants to understand the problems raised by ICANN’s proposal-which might seems very attractive on its face. After all, having “more choices” is something we’d all generally agree with.

The comments of corporate registrar MarkMonitor (endorsed by over seventy global corporate giants such as 3M, Costco, eBay, FedEx, Nike, Goodyear, Verizon and Viacom) provide an excellent summary of important points raised that were common threads in many of the other submissions, including:

• Reevaluation of the new gTLD process and its associated costs in light of the global economic downturn;
• The need for increased safeguards above and beyond the Uniform Dispute Resolution Policy and Sunrise registrations periods to protect brand-holders and prevent consumer confusion;
• Removing any costs to a successful challenger under ICANN’s various dispute processes; and
• A commitment to publicly accessible, free and accurate WHOIS data.

MarkMonitor’s position is perhaps unsurprising, given its obvious interests as a registrar for large corporations with extensive trademark portfolios. But some of these same concerns were raised by GoDaddy-which, as the world’s largest domain name registrar, represents a far more diverse array of interests.

The comments of AT&T offered detailed recommendations for improving ICANN’s proposal, including:

• A tiered roll-out of new TLDs with an initial focus on internationalized domain names (IDNs, which display non-ASCII characters) and “sponsored/community TLDs,” such as .coop or .travel;
• That ICANN conduct an economic analysis of the impact new gTLDs will have on the domain name marketplace;
• Creating a “white list” for global brand holders that could be utilized at both the top (.ibm) and second level (ibm.com); and
• A mandate for “thick” WHOIS data, as opposed to “thin” WHOIS data. The WHOIS service identifies who owns a particular domain name. “Thick” WHOIS data incorporates specific registrant information, and would allow law enforcement to track down illegal activity or trademark-holders to discover the identity of someone cybersquatting a domain related to their mark.

Last, Microsoft filed two sets of comments. The first emphasized Microsoft’s legal concerns, which were consistent with the criticism of other major brand holders: questioning the demand for new TLDs, stressing the need for rights protection mechanisms, and urging transparency in the dispute challenge processes. Microsoft also stressed the need to protect against ‘gTLD flipping” where top-level domain names could be traded by speculators in the secondary market. The second emphasized Microsoft’s technical concerns, such as single label names; hosting services in new gTLDs; DNS heuristics in web based sub-systems; and intranet certificates.

International Concern

While U.S.-based businesses (e.g., Adobe, TimeWarner, eBay, HP and ITT) were strongly represented among the comments, a substantial number of non-U.S. businesses and organizations also submitted comments expressing their concerns about ICANN’s draft proposal including the BBC, economiesuisse ( the largest umbrella organization representing the Swiss economy), and MARQUES (the European Association of Trade Mark Owners).

Financial Sector Concern

The financial services sector has traditionally not been a very active on ICANN policy matters except those related to the WHOIS domain-look up service. But this sector expressed its concerns about the new TLD process-especially concerning the possibility that banking or finance related gTLDs (such as .bank) might be created without necessary safeguards. See the comments of GE Money, Bank of America, Securities Industry and Financial Markets Association, Visa, the American Bankers Association, and FDIC.

What’s Next?

The ball is clearly in ICANN’s court, as both the private and public sector wait anxiously for ICANN’s next steps. ICANN has planned to release a revised Draft Applicant Guidebook sometime in late February (shortly before the next ICANN regional meeting in March in Mexico City). But at a minimum, ICANN owes both the global business community and governments a detailed response to the many concerns raised about its proposal. ICANN’s existing public forum format offers an excellent vehicle for ICANN to engage affected parties constructively. Let us hope that ICANN takes advantage of this opportunity to discuss the October draft proposal at the Mexico City meeting in March-before issuing yet another draft.

But more fundamentally, it is difficult to see how the ICANN Board can adopt any new gTLD process and claim bottom-up consensus unless substantial and substantive modifications are made to the October Draft Applicant Guidebook. In advance of the March ICANN regional meeting, I will be working with the staff of The Progress & Freedom Foundation as an Adjunct Fellow to develop a number of changes that address the serious concerns expressed about ICANN’s proposal.

The stakes in the discussion are high. The second letter in the USG’s comments, from DOJ’s Antitrust Division to NTIA, raised a number of concerns about the competitive dynamics of the gTLD marketplace, and declared that “ICANN has not come close to fulfilling its obligations to employ competitive principles in its management of TLD registry obligations.” While there has been growing international demand for the USG to set ICANN free of its oversight, the rather pointed analysis from the DOJ regarding the inadequacy of ICANN process to date on this critical mission objective raises serious questions about whether a extension/renegotiation of the Joint Project Agreement currently set to expire in 2009 is warranted.

ICANN has a lot of work to do between now and September.

The intrepid Chris Soghoian has turned up an important wrinkle in Google’s services. Google pulled his AdWords ad pointing out AT&T’s campaign contributions to an Indiana politician after AT&T lodged a trademark complaint about it.

Trademark law is for preventing confusion about the source of goods and services. There is no possibility that Chris’ ad would confuse consumers in this way. He’s not providing telecommunications services, and his ad didn’t suggest it. Chris’ use of “AT&T” did not violate AT&T’s trademarks.

The subject matter of Chris’ ad is an important part of our national discourse, and something people should be able to run ads about on a platform like Google. It would be, well, evil, to kick small public policy advocates to the curb in favor of big corporations.

A company like Google is in a tough spot, of course, trying to adjudicate trademark claims at scale. But it is not acceptable to treat trademark complaints as proven just for having been submitted.

Google should take some steps to make its process more fair, such as by allowing advertisers to respond to a trademark complaint before Google acts on it. Much of the process could be automated, and it could explain to both sides what trademark rights include – and what they don’t. If after a few automated steps, the two remained at loggerheads, Google employees could take a look to see whether the claim or the response were meritorious. (A trained monkey could have determined that Chris’ ad is not a trademark violation.)

In close cases, Google should leave it to the parties to resolve, while it works in the courts to generate a substantive body of law that service providers in the position of Google are not properly liable for the trademark infringements of users. (My brief pitch for common law findings of “no liability” in such situations – as opposed to statutory protections like CDA section 230 – starts at minute 22 of this video.)

Would these ideas increase Google’s cost and potential liability? Yes, some. But Google should embrace those costs as it educates its users, employees, courts, and – most important – trademark holders about what trademark does and does not do.

Kudos to Chris for his tenacity. Google, fix this.

[The following post discusses a matter of public interest and people who have brought public attention upon themselves. It contains only expressions of opinion and recitations of facts that I believe in good faith to be true. It should be clear, and I urge you to be clear, that the only service provider discussed in the post, involved in authoring the post, or involved in publishing the post is the law firm Jones Day and its attorneys. Let there be no confusing that this is all about Jones Day. Since it’s a post critical of Jones Day, there should be no implication to anyone that Jones Day could possibly endorse the content of this post or this blog. I say all this so that any nitwit attorney who thinks this blog post gives him or her a cause of action will be on notice that nothing said here violates trademark law, everything here is protected speech under the First Amendment, and that no cause of action can possibly lie against any person for this publication.]

It’s fascinating sometimes to see lawyers with an abundance of power and no sense of judgment – especially big-firm lawyers who shouldn’t exhibit their poor judgment and ignorance of basic legal doctrine to current and prospective clients.

But the law firm of Jones Day has some lawyers working for it who really don’t seem to have a clue about trademark law. I never practiced trademark law, and I seem to know more about it than they do.

The case is well described on the Citizen Media Law Project Web site.

Founded in 2006, BlockShopper.com is a start-up local online real estate news service covering Chicago, South Florida, Las Vegas, and St. Louis. Its reporting staff is made up of ex-print journalists who collect public real estate sales data, then use information in the public domain (e.g. company web sites) to write news stories about recent transactions. . . . Three [BlockShopper stories] reported the real estate transactions of partners and associates from Jones Day, the large international law firm. Jones Day sued BlockShopper.com on Aug. 12, 2008 in federal court in Illinois. The complaint alleges that Blockshopper.com infringed and diluted the firm’s service mark and violated state trademark and unfair competition laws by using the word “Jones Day” when referring to the real estate transactions of Jones Day attorneys, linking to its site and using lawyers’ photos from its site. The firm contends that these activities creates the false impression that Jones Day is affiliated with or sponsors BlockShopper.com. Jones Day sought a temporary restraining order preventing BlockShopper from writing about its lawyers or linking to its web site. . . . Jones Day told BlockShopper it would drop the case if BlockShopper paid it $10,000 and agreed to never write about its lawyers’ real estate transactions again, according to the National Law Journal. BlockShopper declined the offer.

Some exhibits to the Jones Day lawsuit are here. It shows the demand letters that a Jones Day attorney named Meredith M. Wilkes sent. She’s a partner in the Cleveland office specializing in – believe it or not – intellectual property. Her letters, and the complaint she filed with another Jones Day attorney named Paul Schroeder, appear to me to reflect an embarrassing ignorance of trademark law. It’s pretty darn obvious that the uses Blockshopper made of Jones Day’s name, and the names and images of Jones Day lawyers, don’t violate Jones Day‘s rights.

Yet these lawyers signed the Jones Day firm onto a lawsuit, the only basis of which could be some absurd extension of trademark to where it obviously doesn’t belong. It’s foolishness. And it makes Jones Day look bad. Jones Day, the big law firm. It looks like its attorneys don’t know the law. People could say, “The lawyers at Jones Day, they’re not my kinda lawyers.”

As I said in my last post, Lindberg uses a number of computer metaphors to explain legal concepts. Here’s one I thought was particularly clever:

The shortcut in Figure 5-1 [a screenshot of the Firefox shortcut on a Windows desktop] is not the Firefox web browser itself. Rather, this icon is associated with a shortcut, or link. It points to the real executable file, which is located somewhere else on the disk. Without the linked application, the shortcut has no purpose. In fact, in Windows, a shortcut without a properly linked application reverts to a generic icon. It is the linked aplication that gives the shortcut both its appearance and its meaning. Like the shortcut icon, a trademark is a symbol that is linked in the mind of consumers with a real company or with real products and services. WIthout the association of the symbol with the real product, service, or company, the symbols that we currently recognize as trademarks would be nothing but small, unrelated bits of art. The purpose of the trademark is to be a pointer to the larger “real” entity that the trademark represents. It is the larger entity that defines the trademark and gives it form and meaning.