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I dashed off a quick analysis of the Bilski decision for CNET yesterday (see “Supreme Court Hedges on Business Method Patents”), a follow-up to a piece I wrote for The Big Money when the case was argued last fall.  (See “Not with my Digital Economy, You Don’t.”)

The decision was a surprise for me.  I had fully expected the Court to reject outright the experiment in granting patents to paper-and-pencil business methods launched by the Federal Circuit in 1998 with the State Street decision.  Especially since the Federal Circuit itself, in its rejection of Bilski’s application, had all but dismissed State Street as the disaster most businesses—even businesses who have benefited from business method patents--know it to be.

Indeed, as an experiment (in hubris, perhaps), I actually drafted my article over the weekend, even making up quotes I thought might appear in the majority opinion, which I presumed would be written by retiring Justice John Paul Stevens.

Here’s the lede from the piece, which I headlined “Supreme Court Ends Era of Business Method Patents”:

"In a dramatic change in U.S. law, the U.S. Supreme Court today rejected the patenting of business methods, casting doubt on the viability of [XX,XXX] such patents granted by the U.S. Patent Office since 1998.  The sprawling opinion by a divided Court also cast doubts on the long-term viability of patents for most software products.  (The Court’s XXX hundred page opinions are available here [link].)"

Needless to say, I got it wrong, and when the actual decision was released yesterday morning at 11 AM Eastern time, I had to start over.

In the end, the majority opinion was a mere 16 pages.  It basically did nothing to change patent law or to settle enormous and mushrooming uncertainties, both for business methods and, more generally, for software applications.

Justice Kennedy’s opinion explicitly refused to endorse or reject State Street, nor did it foreclose future efforts by the Federal Circuit to find some way to reign in the madness of patents for reserving office bathrooms, exercising cats and, my favorite, for the process of obtaining a patent—madness for which the Federal Circuit itself is fully to blame.

Justice Stevens, joined by Justices Breyer, Sotomayor and Ginsburg, would have gone much farther, as evidenced by his much-longer concurring opinion, which had all indications of having started life as the majority opinion.  Stevens has made no secret of his disdain for the judicial expansion of patent protection over the years.  Had his opinion been the majority I would have had to make very few changes to the earlier version of my article.

Stevens Loses his Majority

So what happened?

I think it’s pretty clear reading all the opinions together that Stevens lost his majority when he and Justice Kennedy couldn’t agree on the breadth of Stevens’ rejection of recent judicial expansions of patentability.  At that point the other Justices who wanted to deny Bilski his patent but didn’t want to go as far as Stevens had a majority.  As the swing vote, Kennedy was asked to write the new majority opinion, such as it is.

With the loss of Kennedy, Stevens lost his last chance to have a big impact on the Court’s intellectual property jurisprudence.  As Timothy B. Lee lovingly details in an Ars Technica article updated yesterday, Stevens had a long history of writing important decisions that protected nascent technology industries from the excesses of patent and copyright maximalists.

Perhaps most important among those cases was Betamax, in which Stevens stretched the doctrine of fair use to hold that Sony was not responsible for widespread unauthorized time-shifting of television programming by users of the VCR devices it sold.  The Betamax fight was a highlight of a battle that is perhaps 100 years old or more between content owners and technology providers.  The VCR, much as every innovation since in digital encoding has done, sent Hollywood into apoplexy.   Echoing ongoing hysteria by content owners over the continued advance of Moore’s Law, the MPAA’s Jack Valenti famously said in 1982 that “the VCR is to the American film producer and the American public as the Boston strangler is to the woman home alone.”

Like the Viacom v. YouTube case I wrote about the other day, by the way, one way of looking at the result in Betamax is that it highlights the institutional limits of the judicial branch, particularly in crafting, supervising, and enforcing remedies.  The studios in Betamax, and Viacom today, implicitly or explicitly want the offending technology banned. But with millions of Betamaxes already in American homes by the time the case reached the Supreme Court, how exactly would such a remedy have been operationalized?  How could YouTube, likewise, comply with an a priori rule of no infringing content without simply shutting down?

Where Kennedy Feared to Tread

Of course I don’t have any inside knowledge that Kennedy bolted from Stevens’ Bilski opinion, but I’m pretty sure the truth is something close to that.  My explanation would also explain why it took so long to issue such a short opinion—for Bilski was argued in the fall, and only released on the very last day of the 2010 term.  If Stevens initially had a majority that fell apart, of course, that would have left Kennedy to start later in the game than if he knew all along he was writing for the majority.

There are also some interesting clues in those portions of Justice Kennedy’s decision that Justice Scalia refused to join (those parts only got four votes, so they don’t stand as binding precedent).  It’s been clear since 2006 that Kennedy was one of the Justices skeptical of business method patents.  In his concurrence in eBay Inc. v. MercExchange, L. L. C., 547 U. S. 388, 397 (2006), a case dealing with patent injunctions, Kennedy noted that many patents on business methods are of “suspect validity,” a concern he repeats in Bilski.

But, it turns out, Kennedy’s disdain for business methods doesn’t necessarily apply to the closely-related problem of patents for software.  Had the Supreme Court endorsed the Federal Circuit’s proposed “machine-or-transformation” test, not only would business method patents be out but so too would most if not all patents for software.  Kennedy at least was not willing to go that far.

Let’s back up a bit.  The “machine-or-transformation” test, the basis on which the Federal Circuit rejected Bilski’s application, derives from earlier Supreme Court patent cases (some of them quite old) that attempted to deal with the growing convergence of inventions based on information technology with those of the more traditional variety.  It states that for a process patent to be considered in the first place, it must as a threshold matter describe a process that is either “tied to a particular machine or apparatus,” or one that “transforms a particular article into a different state or thing.”

The “machine” part of the test comes from an early software case, in which the applicant attempted to patent the basic algorithm for translating binary representation into binary arithmetic.  The Supreme Court rejected that claim on the basis that algorithms or “mental steps” were too abstract to be patented, a sensible limit given the potential sweep such patents could have in emerging fields.

The “transformation” part of the test comes from a later case, in which a famous algorithm was translated into software that opened molds when environmental conditions (temperature, pressure) indicated the material inside had properly cured.  Here the patent was allowed, on the basis that the process described effected a transformation not of numbers on a piece of paper but of some actual, constrained physical article.  It was not the algorithm itself that was patented, in other words, but a very specific implementation.

If “machine-or-transformation” were applied as a threshold test for process patents, it’s clear that business methods would be out.  For by definition they are not tied to a particular machine, nor does the execution of their steps affect change a particular article into a different state or thing.  In most cases, the method can be applied mentally or with paper and pencil.  When software is used, it is generally to automate the steps and to allow the method to be executed repeatedly and quickly.

Well, What About Software?

So how would software patents prevail had the Court adopted “machine-or-transformation”?  As I wrote in Law 8 of The Laws of Disruption, most software patents would likely fail the test.  First, most software patents are written for general purpose computers, and so would fail the particular machine test (probably—the meaning of “particular machine” has never really been explored since the 1972 case involving binary translation).

And what about “transformation”?  All software, when executing, transforms a particular article (memory circuits) into a different state (on/off), but it can’t be that every piece of software is therefore eligible for a process patent.  (As “written expression,” all but the simplest programs receive automatic protection under copyright for something close to 100 years.)  Following the mold case, perhaps the Court would say that only software whose execution transforms something other than the computer’s internal circuitry itself would qualify.  But that would limit the class of software eligible for patent protection to almost nothing.

So Kennedy is probably right to say that the “machine-or-transformation” test, if adopted as a threshold requirement for process patents, would “create uncertainty as to the patentability of software, advanced diagnostic medicine techniques, and inventions based on linear programming, data compression, and the manipulation of digital signals.”

To which many, including me, would say, “Good!”  Given the automatic application of copyright to most software applications, one might ask why software needs patent protection at all.  The long answer is quite long.  The short answer is that it probably doesn’t.

Put another way, the granting of a 20-year monopoly for software puts a drag on the speed with which information technology can be developed and deployed, one that probably isn’t balanced with the additional innovation the availability of that monopoly encourages.  And keeping that balance is the sole rationalization for creating the patent system in the first place.

But Justice Kennedy did not want to go that far, and, it seems, for much the same reason that Justice Stevens did:  to protect emerging information technology industries.  “[T]imes change,” writes Kennedy.  “Technology and other innovation progress in unexpected ways.”  It may be, according to Kennedy, that a simple rule like “machine-or-transformation” would strike the balance between protection and the public domain too far on the side of the latter.  Or maybe not.  “Nothing in this opinion,” he says, “should be read to take a position on where that balance ought to be struck.”

So, says Kennedy, again in a plurality section of his opinion, the Federal Circuit should search for a better way to control the patent tsunami created by State Street.  How?  Here’s a hint, though just barely, as to how such a test ought to be crafted to satisfy Justice Kennedy, if not Justice Roberts, Thomas, and Alito, who joined this paragraph of the opinion:

“[I]f the Court of Appeals were to succeed in defining a narrower category or class of patent applications that claim to instruct how business should be conducted, and then rule that the category is unpatentable because, for instance, it represents an attempt to patent abstract ideas, this conclusion might well be in accord with controlling precedent.”

Translation:  I (we?) am not opposed to threshold tests that exclude business method patents.  I just didn’t like the particular test the Federal Circuit came up with, because it probably leaves out software as well.

Is he Right?

On balance, I’m surprised to find myself agreeing with Justice Kennedy.  The “machine-or-transformation” test had the salutary effect of eliminating business method patents, which, I suspect most of the Justices (certainly a majority) do not believe deserving of patent protection.  It also had the effect, perhaps, of eliminating most software patents.

But Kennedy is right to say that “machine-or-transformation” would at a minimum cast great doubt on the viability of software patents.  For that test, despite being derived from computer-related cases, doesn’t at all take into account the very nature of software.  General purpose computers have revolutionized every aspect of business and life precisely because they are general purpose machines (or, to use the technical term, “virtual machines”).  Through software, computing devices of all shapes and sizes can be transformed into millions of other, specific, machines, often simultaneously.

It’s probably better to say that some software applications do rise to the level of innovation necessary to sustain a patent.  The “machine-or-transformation” test, however, would have given courts little guidance as to how to separate the truly novel and nonobvious (other necessary conditions of patentability) from the mundane.  All software either passes or fails.

For Justice Kennedy, the possibility of over-exclusion was too high.  For Justice Stevens, the possibility of over-inclusion was more dangerous.

Both are eager to create the right environment for continued innovation in information technology.  In the end, they just couldn’t agree on where the risk was greatest.

What would be better?  As Kennedy suggests, a different test that wouldn’t affect software patents would likely survive a future challenge.  That would get rid of business method patents, certainly a good first step.

Then, the courts—or better, Congress—could take a separate and clear-headed look at the software patent problem.

To me, the best solution would be to undo the extension to software of both copyright (by Congress) and patent (by the courts), and to create instead a form of protection that is more limited, constrained, and constructed around the unique and indeed miraculous properties of the virtual machine.  A specific form of protection for "Information Age" inventions.

No sense in describing that protection in any great detail now.  The chances of that solution being implemented, needless to say, are too slim to be visible.

Postscript:  What About Scalia?

One loose end in Bilski is the curious role played by Justice Scalia in the opinions.  As noted, Scalia joined all of Justice Kennedy’s opinion other than the two sections expressing concern about the impact “machine-or-transformation” would have on software, or what Kennedy refers to repeatedly as inventions of “The Information Age.”

There’s no way to know why Scalia declined to join those sections (and, therefore, robbed them of precedential status), but one clue can be found in a second concurrence, this one by Justice Breyer, which Scalia joined in part.

Breyer begins by acknowledging his view that business methods are flat-out unpatentable.  No surprise there—Breyer signed on to Stevens’ opinion, and has previously expressed grave doubts about business method patents in cases where the issue was raised but not decided.

Scalia joins Part II of Breyer’s opinion, which tries to summarize the points on which all nine Justices are, at the end of the day, in agreement.  (All nine, of course, voted to affirm the Federal Circuit’s rejection of Bilski’s application.  The only question had to do with the reasoning for that rejection.)

Breyer returns to the cases from which the Federal Circuit derived the “machine-or-transformation” test, and notes that “transformation is the clue to the patentability of a process claim that does not include particular machines.”  (emphasis in original)

The error of the Federal Circuit, then, was to treat “machine-or-transformation” not as a test, but as “the exclusive test.”  (emphasis in original)  And “machine-or-transformation” is still a far better test, Breyer (with Scalia) goes on, than the much broader statement from State Street (“useful, concrete and tangible result”) that started this whole mess.

Here’s the kicker.  Breyer and Scalia agree that “[t]o the extent that the Federal Circuit’s decision in this case rejected [the State Street] approach, nothing in today’s decision should be taken as disapproving of that determination.”

So, there you have it.  Scalia doesn’t like State Street and doesn’t hate “machine-or-transformation.”  But for some reason apparently not having to do with the impact of that test on the patentability of software, Scalia objected, like Kennedy, to Stevens’ willingness to adopt it as the threshold requirement for process patents.

Does that leave Scalia wanting more protection for software, or less?

Stay tuned!

My article for CNET on the Bilski case, "Supreme Court hedges on business method patents," appeared this morning.  I'm pleased to say that as a non-journalist I was able to file the story within two hours of the Court releasing the opinions!

Check back later for a blog post on the case and its importance to offline and online businesses alike.


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 – 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.

Not surprisingly, FCC Commissioners voted 3 to 2 today to open a Notice of Inquiry on changing the classification of broadband Internet access from an “information service” under Title I of the Communications Act to “telecommunications” under Title II.  (Title II was written for telephone service, and most of its provisions pre-date the breakup of the former AT&T monopoly.)  The story has been widely reported, including posts from The Washington Post, CNET, Computerworld, and The Hill.

As CNET’s Marguerite Reardon counts it, at least 282 members of Congress have already asked the FCC not to proceed with this strategy, including 74 Democrats.

I have written extensively about why a Title II regime is a very bad idea, even before the FCC began hinting it would make this attempt.  I’ve argued that the move is on extremely shaky legal grounds, usurps the authority of Congress in ways that challenge fundamental Constitutional principles of agency law, would cause serious harm to the Internet’s vibrant ecosystem, and would undermine the Commission’s worthy goals in implementing the National Broadband Plan.  No need to repeat any of these arguments here.  Reclassification is wrong on the facts, and wrong on the law.

What is Net Neutrality?

Instead, I thought it would be useful to return to the original problem, which is last fall’s Notice of Proposed Rulemaking on net neutrality.  For despite a smokescreen argument that reclassification is necessary to implement the NBP, everyone knows that today’s NOI was motivated by the Commission’s crushing defeat in Comcast v. FCC, which held that “ancillary authority” associated with Title I did not give the agency jurisdiction to enforce its existing net neutrality policy.

Rather than request an en banc rehearing of Comcast, or appeal the case, or follow the court’s advice and return to Congress for the authority to enforce the net neutrality rules, the FCC has chosen in the name of expediency simply to rewrite the Communications Act itself.

Many metaphors have been applied to this odd decision.  I liken it to setting your house on fire to light your cigarette.  (You shouldn’t be smoking in the first place.)

Let me be clear, once again, that I am all for an open and transparent Internet.  I believe the packet-switching architecture is one of the key reasons TCP/IP has become the dominant data communications protocol (and will soon dominate voice and video).

Packet-switching isn't the only reason the Internet has triumphed.  Perhaps the other, more important secrets to TCP/IP’s success are that it is a non-proprietary standard --so long SNA, DECNet and OSI and the corporate strategies their respective owners tried to pursue through them--and simple enough to be baked in to even the least-powerful computing devices. The Internet doesn’t care if you are an RFID tag or a supercomputer.  If you speak the language, you can participate in the network.

These features have made the Internet, as I first argued in 1998 in “Unleashing the Killer App,” an engine for remarkable innovation over the last ten years

The question for me, as I wrote in Chapter 4 of “The Laws of Disruption,” comes down most importantly to one of institutional economics.  Who is best-suited, legal authority aside, to enforce the features of the Internet’s architecture and protocols that make it work so well?  The market?  Industry self-regulation?  A global NGO?  The FCC?  Or put another way, why is a federal government agency (limited, by definition, to enforcing it authority only within the U.S.) such a poor choice for the job, despite the best intentions of its leadership and the obviously strong work ethic of its staff?

To answer that, let’s back all the way up.  Net neutrality is a political concept overlayed on a technical and business architecture.  That's what makes this debate both dangerous and frustrating.

For starters, it's hard to come up with a concise definition of net neutrality, largely because it’s one of those terms like “family values” that means something different to everyone who uses it.  For me it’s become something of a litmus test—people who use it positively are generally hostile to large communications companies.  People who use it negatively are generally hostile to regulatory agencies.  A lot of that anger, wherever it comes, seems to get channeled into net neutrality.

In fact the FCC doesn’t even use the term—they talk about the “open and transparent” Internet instead.

But here’s the general idea.  The defining feature of the Internet is that information is broken up into small “packets” of data which are routed through any number of computers on the world-wide network and then are reassembled when they reach their destination.

Up until now, with some notable exceptions, every participating computer relays those packets without knowing what’s in them or who they come from.  The network operates on a packet-neutral model—when one computer receives it, it looks only to see where it’s heading and sends it, depending on traffic congestion at the time, to some other computer along the way just as quickly as it can.

That’s still the model on which the Internet works.  The FCC’s concern is not with current practice, but of future problems.   Increasingly, they see a few dominant providers controlling the outgoing and incoming packets to and from consumers—the first and last mile.  So while the computers between my house and Google headquarters all treat my packets to Google and Google’s packets back to me in a neutral fashion, there’s no law that keeps Comcast (my provider) from opening those packets on their way in or on their way out and deciding to slow or speed up some or all of them.

(Well, the law of antitrust and unfair trade could in fact apply here, depending on how the non-neutral behavior was expressed and by whom.  See below.)

Why would they do that?  Perhaps they make a deal with Google to give priority to Google-related packets in exchange for a fee or a share of Google’s ad revenues.  Or, maybe they want to encourage me to watch Comcast programming instead of YouTube videos, and intentionally slow down YouTube packets to make those videos less appealing to watch.

Most of this is theoretical so far.  No ISP offers the premium or “fast lane” service to individual applications.  Comcast, however, was caught a few years ago experimenting with slowing down the BitTorrent peer-to-peer protocol.  Some of Comcast’s most active customers were clogging the pipes sending and receiving very large files (mostly illegal copies of movies, it turns out).

When they were caught, the company agreed instead to stop offering “unlimited” access and to use more sophisticated network management techniques to ensure a few customers didn’t slow traffic for everyone else.  Comcast and BitTorrent made peace, but the FCC held hearings and sanctioned Comcast after-the-fact, leading to the court case that made clear the FCC has no authority to enforce its neutrality policies.

The simple-minded dichotomy of the ensuing “debate” leaves out some important and complicated technical details.  First, some applications already require and get “premium” treatment for their packets.  Voice and video packets have to arrive pretty much at the same time in order to maintain good quality, so Voice over IP telephone calls (Skype, Vonage, Comcast) get priority treatment, as do cable programming packets, which, after all, are using the same connection to your home that the data uses.

Google, as one of the largest providers of outbound packets, has deals with some ISPs to locate Google-only servers in their hubs to ensure local copies of their web pages are always close by, a service offered more generally by companies such as Akamai, which caches copies of the most frequently-used sites to speed things up for everyone.  In that sense, technology is being used to give priority even to data packets, about which no one should complain.

Fighting over the Future

So the net neutrality fight, aside from leaving out any real appreciation either for technological or business realities, is really a fight about the future.  As cable and telephone companies invest billions in the next generation of technology—including fiber optics and next-generation cellular services--application providers fear they will be asked to shoulder more of the costs of that investment through premium service fees.

Consumer groups have been co-opted into this fight, and see it as one that pits big corporations against powerless customers who need outside advocates to save them from dangers they do not understand.  That increasingly quaint attitude, for one thing, grossly underestimates the growing power of consumers to effect change using the Internet itself (see:  Facebook et al.). Consumers can save themselves, thanks very much.

What is true is that consumers do not and aren’t likely to be asked to pay the true costs of broadband access given the intense competition in major markets between large ISPs such as Comcast, AT&T, Verizon and others.  That is the source of anxiety for the application providers--they are seen as having more elasticity in pricing than end-users.

The existence of provider competition, however, also weighs heavily against the need for government intervention.  If an ISP interferes with the open and transparent Internet, customers will know and they will complain. Ultimately they will find a provider that gives them full and unfettered access.   (There are plenty of interested parties who help consumers with the “know” part of that equation, but still, I fully support the principle of ISP transparency with regard to network management principles.  Few consumers would actually read them, and fewer still understand them, but it’s still a good practice.)

If the market really does fail, or fails in significant local ways (rural or poor customers, for example), then some kind of regulatory intervention might make sense.  But it’s a bad idea to regulate ahead of a market failure, especially when dealing with technology that is evolving rapidly.  In the last ten years, as I argue in The Laws of Disruption, the Internet has proven to be a source of tremendous embarrassment for regulators trying to “fix” problems that shift under their feet even as they’re legislating.  Often the laws are meaningless by the time the ink is dry or—worse—inadvertently make the problems worse after the fact.

Nevertheless, in October of last year the FCC proposed—in a 107-page document—six net neutrality rules that would codify what I described above and a number of peripheral, perhaps unrelated, ideas.  Right now the agency has only a net neutrality policy, and that policy, the D.C. Circuit Court of Appeals ruled, doesn’t constitute enforceable law.  Implicit in that rulemaking was the assumption that someone needed to codify these principles, that the FCC was that someone, and that the agency had the authority from Congress to be that someone.  (The court’s ruling made clear that the latter is not the case.)

There are good reasons to be skeptical that the FCC in particular is the right agency to solve this problem even if it is a problem.  Through most of its existence the agency has been fixed on regulating a legal monopoly—the old phone company—and on managing what were very limited broadcast spectrum—now largely supplanted by cable and more sophisticated technologies for managing the spectrum.

The FCC, recall, is the agency that watches broadcast (but not cable) television and issues fines for indecent content—an activity they do more, rather than less, even as broadcast becomes a trivial part of programming reception.  Congress has three times tried to give the FCC authority to regulate indecency on the Internet as well, but the U.S. Supreme Court has stopped all three.

So if the FCC were to be the “smart cop on the beat” as Chairman Genachowski characterized his view of net neutrality, how would the agency’s temptation to shape content itself be curbed?

Worse, no one seems to have thought ahead as to how the FCC would enforce these rules.  If I complain that my access is slow today and I believe that must mean my ISP is acting in a non-neutral fashion, the agency would have to look at the traffic and inside the packets in order to investigate my complaint.  Again, the temptation to use that information and to share it with law enforcement under the name of anti-terrorism or other popular goals would be strong—strong enough that it ought to worry some of the groups advocating for net neutrality laws as a placebo to keep the ISPs in line.

The Investment Effect

It should be obvious that the course being followed by the FCC – the enactment of net neutrality rules in the first place and the increasingly desperate methods by which it hopes to establish its authority to do so—will cast a pall over the very investments in infrastructure the FCC is counting on to achieve the worthy goals of the NBP.  If nothing else, the reclassification NOI will invariably end in some heavy-duty litigation, which is likely to take years to resolve.  Courts move even more slowly than legislators, who move more slowly than regulators, all of whom aren’t even moving compared to the speed of technological innovation.

How serious a drag on the markets will regulatory uncertainty prove to be?  For what it’s worth, New York Law School's Advanced Communications Law & Policy Institute today issued an economic analysis of the Commission’s proposed net neutrality rules, arguing that as many as 604,000 jobs and $80 billion in GDP loss would result from their passage.  Matthew Lasar at Ars Technica summarizes the report, which I have not yet read.

But one doesn’t need sophisticated economic analysis to understand why markets are already reacting poorly to the FCC’s sleight-of-hand.  The net neutrality rules the FCC proposed in October would, depending on how the agency decided to enforce them, greatly limit the future business arrangements that broadband providers could offer to their business customers.

Application providers worry that the offer of “fast lane” service invariably means everything else will become noticeably slower (not necessarily true from a technical standpoint).  But in any case the limitation of future business innovations by providers is bound to discourage, at least to some extent, up-front investments in broadband, which are characterized by high fixed costs and a long payback.

Worse, the proposed rules would also apply to Internet access over cellular networks, which is still in a very early stage of development and has much more limited capacity.  Cellular providers have to limit access to video and other high-bandwidth applications just to keep the networks up and running.   (Some of those limits are the result of resistance from local regulators to allow investments in cell towers and other infrastructure.)  The proposed rules would require them not to discriminate against any applications, no matter how resource-intensive.  That simply won't work.

Investors are worried that the hundreds of billions they've spent so far on fiber optics, cellular upgrades and cable upgrades and the amount left to be spent to get the U.S. to 100 mbps speeds in the next ten years are going to be hard to recover if they don't have flexibility to innovate new business models and services.

To Wall Street, the net neutrality rules are perceived not as enshrining a level playing field for the Internet so much as a land grab by content providers to ensure they are the only ones who can innovate with a free hand, pushing the access providers increasingly to a commodity business as, for example, long distance telephony has become.  Why should investors spend hundreds of billions to upgrade the networks if they won't be able to make their money back?

Investors are also concerned more generally that the FCC will implement and enforce the proposed neutrality rules in unpredictable ways, bowing to lobbying pressure by the content companies even more in the future.  Up until now, the FCC has played no meaningful role in regulating access or content, and the Internet has worked brilliantly.  The networks the FCC does regulate--local telephone, broadcast TV--are increasingly unprofitable.

How would the FCC proceed if the rules are enrolled and upheld?  The NPRM says only that the Commission would investigate charges of non-neutral behavior “on a case-by-case basis.”  That approach is understandable when technology is changing rapidly, but at the same time it introduces even more uncertainty and more opportunities for regulatory mischief.  Better to wait until an identifiable problem arises, one that has an identifiable solution a regulatory agency can implement more efficiently than any other institution.

It's possible of course that access providers, especially in areas where there is little competition, could use their leverage to make bad business decisions that would harm consumers, content providers, or both.  But that that risk could be adequately covered by existing antitrust law, or, if necessary, by FCC action when the problem actually arises.

The problem isn’t here yet, other than a handful of anecdotal problems dealt with quickly and without the need for federal intervention.  Again, the danger of rulemaking ahead of an actual failure of the market is acute, especially when one is dealing with an emerging and fast-changing set of technologies.

The more the FCC pushes ahead on the net neutrality rules, even in the face of a court decision that it has no authority to do so, the more irrational the agency appears to the investor community.  And given the almost complete reliance for the broadband plan on private investment, this seems a poor choice of battles for the FCC to be spending its political capital on now.

Preserving the Ecosystem

There's a forest among all these trees.  So far, the Internet economy has thrived on a delicate balance today between infrastructure and the innovation of new products and services that Internet companies build on top of it.  If the infrastructure isn’t constantly upgraded in speed, cost, and reliability, entrepreneurs won’t continue to spend time and money building new products.

At the same time, if infrastructure providers don’t think the applications will be there, there’s no reason to invest in more and better capacity.  So far, consumers have shown a voracious appetite for both capacity and applications, in part because there’s been little to make them doubt more of both are always coming.

Given the long lead time for capital investments, the infrastructure providers have to bet pretty far into the future without a lot of information.  Sometimes they overbuild, or build ahead of demand (this has happened at least twice in the last ten years); sometimes (in the case of cellular), the applications arrive faster than the capacity after a long period of relative quiet.   3G support was an industry embarrassment until the iPhone finally put it to good use.

By and large the last decade has seen remarkable success in getting the right infrastructure to the right applications at the right time, as evidenced by the fact that the U.S. is still the leader by far in Internet innovation.   The U.S., despite its geography and economic diversity, is also still the leader in broadband access, with availability to over 96% of U.S. residents.  According to the latest OECD data, the U.S. has twice the number of broadband subscribers as the next-largest market.  Our per capita adoption is lower, as are our broadband speeds—both sources of understandable concern to the authors of the NBP.

The larger issue here is that regulatory intervention, or even the looming possibility of it, can throw a monkey wrench in all that machinery, and make it harder to make quick adjustments when one side gets too far ahead of the other.  Once the machine stalls, restarting it may be difficult if not impossible.   The Internet ecosystem works remarkably well.  By contrast, even regulatory changes intended to smooth out inefficiencies can wind up having the opposite effect, sometimes disastrously so.

That above all else should have given the FCC pause today in its vote.  Apparently not.

I've added almost twenty new posts to the Media Page from April and May. These were busy months for those interested in the dangerous intersection of technology and policy, the theme of The Laws of Disruption.

A major court decision upended the Federal Communications Commissions efforts to pass new net neutrality regulations, leading the Commission to begin execution of its "nuclear option"--the reclassification of Internet access under ancient rules written for the old telephone monopoly.  While I support the principles of net neutrality, I am increasingly concerned about efforts by the FCC to appoint itself the "smart cop" on the Internet beat, as Chairman Julius Genachowski put it last fall.

As consumer computing outstripped business computing for the first time, privacy has emerged as a leading concern of both users and mainstream media sources.  Not surprisingly, legal developments in information security go hand-in-hand with conversations about privacy policy and regulation, and I have been speaking and commenting to the press extensively on these topics.

The new entries run the full range of topics, including copyright, identity theft, e-commerce, new criminal laws for social networking behaviors, as well as privacy, security, and communications policy.

In the last few months, I have continued writing not only for this blog but for the Technology Liberation Front, the Stanford Law School Center for Internet & Society, and for CNET.  I've also written op-eds for The Orange County Register, The Des Moines Register, and Info Tech & Telecom News.

I've appeared on CNN, Fox News, and National Public Radio, and have been interviewed by print media sources as varied as El Pais, The Christian Science Monitor, TechCrunch and Techdirt.

My work has also been quoted by a variety of business and mainstream publications, including The Atlantic, Reason, Fortune and Fast Company.

As they say, may you live in interesting times!

"Internet Regulation? That Is The Billion Dollar Question", NextGenWeb, May 21, 2010. The good folks at NextGenWeb highlighted Larry's commentary on broadband regulation and its impact on Internet business, calling him "one of the leading voices on broadband policy."