Category Archives: Trademarks

What the Protect IP Act says about the current state of the Internet content wars

I’ve written two articles on the Protect IP Act of 2011, introduced last week by Sen. Leahy (D-Vt.).

For CNET, I look at some of the key differences, better and worse, between Protect IP and its predecessor last year, known as COICA.

On Forbes this morning, I have a long meditation on what Protect IP says about the current state of the Internet content wars.  Copyright, patent, and trademark are under siege from digital technology, and for now at least are clearly losing the arms race.

The new bill isn’t exactly the nuclear option in the fight between the media industries and everyone else, but it does signal increased desperation.

I’m not exactly a non-combatant here.  Increasingly, everyone is being dragged into this fight, including search engines, ISPs, advertisers, financial transaction processors, and, in Protect IP is passed, anyone who uses a hyperlink.

But as someone who earns his living from information exchanges–what the law anachronistically calls “intellectual property”–I’m not exactly an anarchist either (or as one recent commenter on CNET called me, a complete anarchist!).

The development of an information economy will stabilize and mature at some point, and, I believe, the new supply chain will be richer, more profitable, and give a greater share of the value than the current one does to those who actually create new content.  (Most of the cost of information products and services today is eaten up by middlemen, media, and distribution.)

But it’s not an especially smooth or predictable trajectory.  Joseph Schumpeter didn’t call it creative destruction for nothing.


Congress's Tech Agenda: Something Old, Something Older

I reported for CNET yesterday on highlights from the State of The Net 2011 conference, sponsored by the Advisory Committee to the Congressional Internet Caucus.  Though I didn’t attend last year’s event, I suspect much of the conversation hasn’t changed.

For an event that took place nearly a month after the FCC’s “final” vote on net neutrality, the issue seems not to have quieted down in the least.  A fiery speech from Congresswoman Martha Blackburn promised a “Congressional hurricane” in response to the FCC’s perceived ultra vires decision to regulate where Congress has refused to give it authority, a view supported by House and Senate counsel who spoke later in the day.

There seemed to be agreement from Republicans and Democrats that undoing the Open Internet Report and Order was the Republicans’ top priority on the tech agenda.  Blackburn has already introduced a bill, with at least one Democratic co-sponsor, to make clear (clearer?) that the FCC has no authority to regulate any Internet activity.  And everyone agreed that the Republicans would move forward with a resolution of disapproval under the Congressional Review Act, and that the resolution would pass the House and probably the Senate.  (Such resolutions are filibuster-proof, so Senate Republicans would need only a few Democrats.)

House Energy and Commerce senior counsel Neil Fried had mentioned the CRA resolution at CES a few weeks ago.  But now it’s been upgraded from a possibility to a likelihood.

The disagreement comes over whether President Obama would veto the resolution. Speculating in a vacuum, as many participants did, doesn’t really help.   The answer will ultimately depend on what other horse trading is in progress at the time.  (See:  tax cuts, health care, etc.)  Much as those of us who follow net neutrality may think it’s the center of the political universe, the reality is that it could easily become a bargaining chip.

That’s especially so given that almost no one was happy with the rules as they were finally approved.   Among advocates, opponents, and even among the five FCC Commissioners, only Chairman Genachowski had any enthusiasm for Order.  (He may be the only enthusiast, full stop.  On a panel on which I participated on the second day, advocates for net neutrality were tepid in their support of the Order or its prospects in court.  I think tepid is being generous.)

And everyone agreed that there would be legal challenges based on the FCC’s dubious statutory authority.  Amy Schatz of the Wall Street Journal said she knew of several lawyers in town shopping for friendly courts, and that pro-regulation advocates may themselves challenge the rule.  Timing could be important, or not.

Beyond net neutrality, which seems likely to dominate the tech agenda for the first six months of the new Congress, bi-partisan words were flung over the need to resolve the imminent (arrived?) “spectrum crisis,” and to reform the bloated and creaky Universal Service Fund.  These, it’s worth remembering, were two of the top priorities from last year’s National Broadband Plan, which sadly disappeared into the memory hole soon after publication.

Other possible agenda items I heard over the course of the two day event, but much farther down the list:  revival of COICA (giving DHS new powers to seize domains used for trademark and copyright violations), privacy, cloud computing, cybersecurity, ECPA reform, retransmission, inter-carrier compensation, and Comcast/NBC merger.  I missed a few panels, so I’m sure there was more.

What are the chances any of these conversations will actually generate new law?  Anybody?

Domain Name Seizures and the Limits of Civil Forfeiture

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 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, 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.

After the deluge, more deluge

If I ever had any hope of “keeping up” with developments in the regulation of information technology—or even the nine specific areas I explored in The Laws of Disruption—that hope was lost long ago.  The last few months I haven’t even been able to keep up just sorting the piles of printouts of stories I’ve “clipped” from just a few key sources, including The New York Times, The Wall Street Journal, CNET and The Washington Post.

I’ve just gone through a big pile of clippings that cover April-July.  A few highlights:  In May, YouTube surpassed 2 billion daily hits.  Today, Facebook announced it has more than 500,000,000 members.   Researchers last week demonstrated technology that draws device power from radio waves.

If the size of my stacks are any indication of activity level, the most contentious areas of legal debate are, not surprisingly, privacy (Facebook, Google, Twitter et. al.), infrastructure (Net neutrality, Title II and the wireless spectrum crisis), copyright (the secret ACTA treaty, Limewire, Google v. Viacom), free speech (China, Facebook “hate speech”), and cyberterrorism (Sen. Lieberman’s proposed legislation expanding executive powers).

There was relatively little development in other key topics, notably antitrust (Intel and the Federal Trade Commission appear close to resolution of the pending investigation; Comcast/NBC merger plodding along).  Cyberbullying, identity theft, spam, e-personation and other Internet crimes have also gone eerily, or at least relatively, quiet.

Where are We?

There’s one thing that all of the high-volume topics have in common—they are all moving increasingly toward a single topic, and that is the appropriate balance between private and public control over the Internet ecosystem.  When I first started researching cyberlaw in the mid-1990’s, that was truly an academic question, one discussed by very few academics.

But in the interim, TCP/IP, with no central authority or corporate owner, has pursued a remarkable and relentless takeover of every other networking standard.  The Internet’s packet-switched architecture has grown from simple data file exchanges to email, the Web, voice, video, social network and the increasingly hybrid forms of information exchanges performed by consumers and businesses.

As its importance to both economic and personal growth has expanded, anxiety over how and by whom that architecture is managed has understandably developed in parallel.

(By the way, as Morgan Stanley analyst Mark Meeker pointed out this spring, consumer computing has overtaken business computing as the dominant use of information technology, with a trajectory certain to open a wider gap in the future.)

The locus of the infrastructure battle today, of course, is in the fundamental questions being asked about the very nature of digital life.  Is the network a piece of private property operated subject to the rules of the free market, the invisible hand, and a wondrous absence of transaction costs?  Or is it a fundamental element of modern citizenship, overseen by national governments following their most basic principles of governance and control?

At one level, that fight is visible in the machinations between governments (U.S. vs. E.U. vs. China, e.g.) over what rules apply to the digital lives of their citizens.  Is the First Amendment, as John Perry Barlow famously said, only a local ordinance in Cyberspace?  Do E.U. privacy rules, being the most expansive, become the default for global corporations?

At another level, the lines have been drawn even sharper between public and private parties, and in side-battles within those camps.  Who gets to set U.S. telecom policy—the FCC or Congress, federal or state governments, public sector or private sector, access providers or content providers?  What does it really mean to say the network should be “nondiscriminatory,” or to treat all packets anonymously and equally, following a “neutrality” principle?

As individuals, are we consumers or citizens, and in either case how do we voice our view of how these problems should be resolved?  Through our elected representatives?  Voting with our wallets?  Through the media and consumer advocates?

Not to sound too dramatic, but there’s really no other way to see these fights as anything less than a struggle for the soul of the Internet.  As its importance has grown, so have the stakes—and the immediacy—in establishing the first principles, the Constitution, and the scriptures that will define its governance structure, even as it continues its rapid evolution.

The Next Wave

Network architecture and regulation aside, the other big problems of the day are not as different as they seem.  Privacy, cybersecurity and copyright are all proxies in that larger struggle, and in some sense they are all looking at the same problem through a slightly different (but equally mis-focused) lens.  There’s a common thread and a common problem:  each of them represents a fight over information usage, access, storage, modification and removal.  And each of them is saddled with terminology and a legal framework developed during the Industrial Revolution.

As more activities of all possible varieties migrate online, for example, very different problems of information economics have converged under the unfortunate heading of “privacy,” a term loaded with 19th and 20th century baggage.

Security is just another view of the same problems.  And here too the debates (or worse) are rendered unintelligible by the application of frameworks developed for a physical world.  Cyberterror, digital warfare, online Pearl Harbor, viruses, Trojan Horses, attacks—the terminology of both sides assumes that information is a tangible asset, to be secured, protected, attacked, destroyed by adverse and identifiable combatants.

In some sense, those same problems are at the heart of struggles to apply or not the architecture of copyright created during the 17th Century Enlightenment, when information of necessity had to take physical form to be used widely.  Increasingly, governments and private parties with vested interests are looking to the ISPs and content hosts to act as the police force for so-called “intellectual property” such as copyrights, patents, and trademarks.  (Perhaps because it’s increasingly clear that national governments and their physical police forces are ineffectual or worse.)

Again, the issues are of information usage, access, storage, modification and removal, though the rhetoric adopts the unhelpful language of pirates and property.

So, in some weird and at the same time obvious way, net neutrality = privacy = security = copyright.  They’re all different and equally unhelpful names for the same (growing) set of governance issues.

At the heart of these problems—both of form and substance—is the inescapable fact that information is profoundly different than traditional property.  It is not like a bush or corn or a barrel of oil.  For one thing, it never has been tangible, though when it needed to be copied into media to be distributed it was easy enough to conflate the media for the message.

The information revolution’s revolutionary principle is that information in digital form is at last what it was always meant to be—an intangible good, which follows a very different (for starters, a non-linear) life-cycle.  The ways in which it is created, distributed, experienced, modified and valued don’t follow the same rules that apply to tangible goods, try as we do to force-fit those rules.

Which is not to say there are no rules, or that there can be no governance of information behavior.  And certainly not to say information, because it is intangible, has no value.  Only that for the most part, we have no real understanding of what its unique physics are.  We barely have vocabulary to begin the analysis.

Now What?

Terminology aside, I predict with the confidence of Moore’s Law that business and consumers alike will increasingly find themselves more involved than anyone wants to be in the creation of a new body of law better-suited to the realities of digital life.  That law may take the traditional forms of statutes, regulations, and treaties, or follow even older models of standards, creeds, ethics and morals.  Much of it will continue to be engineered, coded directly into the architecture.

Private enterprises in particular can expect to be drawn deeper (kicking and screaming perhaps) into fundamental questions of Internet governance and information rights.

Infrastructure and application providers, as they take on more of the duties historically thought to be the domain of sovereigns, are already being pressured to maintain the environmental conditions for a healthy Internet.  Increasingly, they will be called upon to define and enforce principles of privacy and human rights, to secure the information environment from threats both internal (crime) and external (war), and to protect “property” rights in information on behalf of “owners.”

These problems will continue to be different and the same, and will be joined by new problems as new frontiers of digital life are opened and settled.  Ultimately, we’ll grope our way toward the real question:  what is the true nature of information and how can we best harness its power?

Cynically, it’s lifetime employment for lawyers.  Optimistically, it’s a chance to be a virtual founding father.  Which way you look at it will largely determine the quality of the work you do in the next decade or so.

Viacom v. YouTube: The Principle of Least Cost Avoidance

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.

EBay Wins Important Victory Against Tiffany

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 them 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 or other third-party sales model 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.