News from November 11-15, 2002

FCC Releases Spectrum Policy Task Force Report

11/15. The Federal Communications Commission's (FCC) Spectrum Policy Task Force (SPTF) released its Report [73 pages in PDF]. The FCC announced the completion of this report at its November 7 meeting, but revealed few details of its contents.

The report is wide ranging, and contains numerous findings and recommendations. One of its key recommendations is that "spectrum policy must evolve towards more flexible and market oriented regulatory models." However, it recommends moving towards a market system, rather than transforming into a market system.

Much of the report focuses on the implications of new technologies. It finds that "Advances in technology create the potential for systems to use spectrum more intensively and to be much more tolerant of interference than in the past." Moreover, "In many bands, spectrum access is a more significant problem than physical scarcity of spectrum, in large part due to legacy command and control regulation that limits the ability of potential spectrum users to obtain such access."

The report labels the FCC's historic control and planning of spectrum use as the "command and control" model. The report advocates continuing this model for some spectrum uses, such as broadcasting and public safety, but also recommends using two other models. It states that the FCC should also allow "the granting of exclusive spectrum usage rights through market based mechanisms" and "spectrum commons".

The "commons" model would allow "unlimited numbers of unlicensed users to share frequencies, with usage rights that are governed by technical standards or etiquettes but with no right to protection from interference." This is the WiFi model.

The report recommends expanding the use of both the exclusive use model and the commons model.

The report deals with interference at length. It recommends "a more quantitative approach to interference management based on the concept of ``interference temperature.创 The interference temperature metric would establish maximum permissible levels of interference, thus characterizing the ``worst case创 environment in which a receiver would be expected to operate."

The report also recommends that the FCC "should consider applying receiver performance requirements for some bands and services, either through incentives, regulatory mandates, or some combination of incentives and mandates."

The report also finds that spectrum is under utilized. "Preliminary data and general observations indicate that many portions of the radio spectrum are not in use for significant periods of time, and that spectrum use of these ``white spaces创 (both temporal and geographic) can be increased significantly."

While the report makes numerous recommendations regarding reducing regulatory constraints, allowing more flexibility of use, and increasing regulatory certainty, it does not advocate a system of property ownership in spectrum. Entities that use spectrum would still be licensees, not owners, and still be subject to FCC regulation, except in the case of unlicensed users, who would not be owners either.

Indeed, the words "property", "owner", and "ownership" are barely used in the report, and usually only in the context of making clear that the report is not recommending a system of property ownership. Also, while the word "rights" is used frequently throughout the report, it is usually coupled with words that dilute its meaning. For example, the report refers to "spectrum users' rights and obligations", "spectrum rights and obligations", "Spectrum Rights and Responsibilities", and "flexible rights ... and clarity in the rules".

The report articulates several paragraphs on the meaning of spectrum rights. It states that "all spectrum users require clear rules governing their interactions with the Commission and other spectrum users. Regardless of how or to whom particular rights are assigned, ensuring that all rights are clearly delineated is important to avoiding disputes, and provides a clear common framework from which spectrum users can negotiate alternative arrangements."

The report further states that "the Commission must clearly define the following basic spectrum rights parameters for all licensed and unlicensed spectrum uses: 1. Designated frequency range and bandwidth; 2. Geographic scope of right to operate; 3. Maximum RF output, both in-band and out-of-band; and 4. Interference protection, i.e. the maximum level of noise/interference that the spectrum user must accept from other RF sources."

It adds that "the rules should be written to define spectrum rights in terms of spectrum uses that are excluded, prohibited, or limited. Thus, the Commission抯 approach should be that licensees and unlicensed users are allowed to do anything not explicitly prohibited by the Communications Act, the Commission's rules, Commission orders, licenses or authorizations, rather than the presumption being that anything not affirmatively authorized requires a rule change or waiver before it can be done."

FCC Releases OPP Paper With Spectrum Reform Proposal

11/15. The Federal Communications Commission's (FCC) Office of Plans and Policy (OPP) released the long awaited OPP Working Paper No. 38 [62 pages in PDF] titled "A Proposal for a Rapid Transition to Market Allocation of Spectrum." It was written by Evan Kwerel and John Williams of the OPP.

It proposes that FCC organize "a series of large-scale, two-sided spectrum auctions in which all spectrum incumbents can voluntarily offer the spectrum they now control, along with spectrum held by the FCC."

The paper has nothing kind to say about the current system of government control of spectrum. It states that "The current administrative allocation of spectrum has led to shortages and waste." It adds that "A consensus is forming that the current process of allocating radio spectrum by administrative decision making is in serious need of reform. ... Billions of dollars of cumulative loss to the U.S. economy have been attributed to inefficient spectrum allocations under the current system. The solution, according to most economists, is to replace the current administrative allocation with a spectrum market." (Footnote omitted.)

The report even compares the current situation to the failed communist systems of the former Soviet Union and eastern Europe. It states that "Reforming spectrum policy is like reforming planned economies. The form of the transition from central planning to markets matters, as we have seen in Eastern Europe and Russia. Markets do not create themselves. The central planners can't just not show up for work one day and expect an efficient transition to markets to occur spontaneously."

But then, this paper was written by FCC economists, not FCC lawyers.

This paper proposes "a means to speed the transition from the current restricted spectrum allocation to an efficient market allocation."

The report summarized its proposal as follows: "A key aspect of the proposal is the use of a two-sided auction in which the FCC would offer unassigned spectrum in a band (sometimes referred to as ``overlay licenses创 or ``white space创) simultaneously with encumbered spectrum offered by existing licensees. The simultaneous auction of encumbered and unencumbered spectrum in a band would allow bidders to acquire highly complementary spectrum assets quickly in a single event rather than through the current sequential process consisting of an FCC auction followed by post-auction negotiations with incumbents. Ideally, all technically fungible spectrum, e.g., everything from 300 to 3000 MHz, would be included in a single auction. This ideal scenario would also include spectrum now reserved for government uses and bands that might be used for the relocation of incumbents. However, practical considerations that we will discuss below constrain us to propose something more limited as an initial implementation. The nature of current use also suggests that certain bands will be more suitable for this approach than others. Taking these factors into account we propose an initial implementation that we believe is practical yet large enough to provide significant benefits. If implemented, it could make available in as little as two to five years 438 MHz of very desirable spectrum for such potentially high value uses as next generation mobile services. Assuming satisfactory results from the initial application of this approach, we propose that it be extended more broadly across a wide range of spectrum to bring about a permanent, systemic solution to the spectrum allocation problem." (Footnotes omitted.)

The report adds that "For our proposal to work, incumbents must participate in the auction. To encourage such participation, we propose that incumbents be allowed to keep all proceeds from the sale of encumbered spectrum. To further encourage participation, we propose that the spectrum encumbered by an incumbent who does not participate in the auction be frozen in its current allocation for five years. Participation would thus become a quid pro quo for incumbents' receiving flexibility of use, and what could be a substantial windfall from transfer of their spectrum to a higher valued use. We propose to further protect incumbents by allowing them to bid on their own licenses in the auction. This would ensure an incumbent's spectrum is not sold for less than its value to the incumbent. Since the cost to participate in the auction should be small relative to potential gains from flexibility of use, a high level of participation is likely."

The FCC's Spectrum Policy Task Force (SPTF) report (see accompanying story), which was released on the same day, offers the following legislative recommendation: "Consider amending Section 309(j) of the Communications Act to provide the Commission authority to conduct two-sided auctions and simultaneous spectrum exchanges."

The proposal contained in this report goes further than the proposals contained in the SPTF report in creating a spectrum market. It states that "removing barriers to flexible use isn't enough to achieve a rapid transition to the market allocation of spectrum for several reasons. It doesn't make spectrum held by FCC (and NTIA) available for flexible use. It doesn't reconfigure existing spectrum rights into tradable, flexible rights. It doesn't solve the coordination problem of ensuring that all interdependent spectrum is up for sale at the same time. And, it doesn't solve the incentive problems that may prevent efficiency enhancing trades." It adds that "all restrictions unrelated to interference would be removed."

Both authors, Kwerel and Williams, are also members of the FCC's SPTF. Evan Kwerel is a Senior Economist in the FCC's OPP. He can be reached at 202 418-2045 or John Williams can be reached at 202 418-2050 or See also, FCC release [PDF].

Congress Passes Small Webcaster Amendments Act

11/15. The Senate amended and passed HR 5469, the Small Webcaster Amendments Act of 2002, by unanimous consent on Thursday, November 14. On November 15, the House approved the bill, as amended by the Senate, by unanimous consent.

Sen. Patrick Leahy (D-VT), the Chairman of the Senate Judiciary Committee, explained the bill on the Senate floor. (See, Congressional Record, November 14, 2002, at Page S11138.)

"The advent of webcasting -- streaming music online rather than broadcasting it over the air as traditional radio stations do -- has marked one of the more exciting and quickly growing of the new industries that have sprung up on the Web. Many of the new webcasters, unconstrained by the technological limitations of traditional radio transmission, can and do serve listeners across the country and around the world."

But, he added, "we must not neglect the artists who create and the businesses which produce the digital works that make the online world so fascinating and worth visiting. With each legislative effort to provide clear, fair and enforceable intellectual property rules for the Internet, a fundamental principle to which we have adhered is that artists and producers of digital works merit compensation for the value derived from the use of their work."

Sen. Leahy then reviewed the legislative history relevant to compensation of artists. "In 1995, we enacted the Digital Performance Right in Sound Recordings Act, which created an intellectual property right in digital sound recordings, giving copyright owners the right to receive royalties when their copyrighted sound recordings were digitally transmitted by others. Therefore when their copyrighted sound recordings are digitally transmitted, royalties are due. In the 1998 Digital Millennium Copyright Act, DMCA, we made clear that this law applied to webcasters and that they would have to pay these royalties. At the same time, we created a compulsory license so that webcasters could be sure of the use of these digital works. We directed that the appropriate royalty rate could be negotiated by the parties or determined by a Copyright Arbitration Royalty Panel -- or CARP -- at the Library of Congress."

"Despite some privately negotiated agreements, no industry wide agreement on royalty rates was reached and therefore a CARP proceeding was instituted that concluded on February 20, 2002. The CARP decision set the royalty rate to be paid by commercial webcasters, no matter their size, at .14 cents per song per listener, with royalty payments retroactive to October 1998, when the DMCA was passed", said Sen. Leahy. "On appeal, the Librarian in June, 2002, cut the rate in half, to .07 cents per song per listener for commercial webcasters."

"The retroactive fees were to be paid in full by October 20th and would have resulted in many small webcasters in particular, going out of business."

Sen. Leahy then described this latest version of the bill. "The legislation reflects a compromise for all the parties directly affected by this legislation -- small webcasters that could not survive with the rates set by the Librarian and copyright owners and performers who under this bill will give certain eligible webcasters an alternative royalty payment scheme."

Sen. Patrick LeahySen. Leahy (at right) explained that "This legislation does three things to help small webcasters pay royalties and stay in business. ... First, the Librarian royalty rate is based on a per performance formula, which has the unfortunate effect of requiring webcasters to pay high fees for their use of music, even before the audience of the webcaster has grown to a sufficient size to attract any appreciable advertising revenues. Without any percentage of revenue option (as provided by the legislation), the webcasting industry would be closed to all but those with the substantial resources necessary to subsidize the business until the advertising revenue caught up to the per performance royalty rate. The bill provides a percentage of revenue option for small businesses with less than $500,000 in gross revenue in 2003 and $1.25 million dollars in 2004. The bill also provides for minimum fees and a percentage of expenses floor on the royalties, to assure that copyright owners and artists receive some payment for performance of their music." (Parentheses in original.)

"Second," said Leahy, "for noncommercial webcasters, such as college webcasters, the bill corrects an anomaly in the Librarian's decision. Under that decision, nonprofit entities held FCC licenses were given a lower per performance rate than were commercial entities. However, the decision made no such provision for noncommercial entities that were not FCC licenses. The bill extends the lower rate to all nonprofit entities."

"Finally, the bill reduces the retroactive burden on many of the small commercial webcasters by allowing them to make their payments based on a percentage of revenue or percentage of expense, but also allows both small commercial and noncommercial webcasters to pay these retroactive fees in three payments over the span of a year."

The Recording Industry Association of America (RIAA) stated in a release that "The parties support the Senate compromise that addresses the concerns of certain broadcasters about the small webcaster legislation passed by the House of Representatives. The Senate language authorizes SoundExchange, whose governing board is composed of artists and record companies, to reach agreements with small commercial and noncommercial webcasters that can be applied to all artists and record companies."

"The recording industry did not seek nor propose this authorization. Although the intent of the House bill was to preclude the use of the rates and terms in the bill as precedent in future negotiations and rate proceedings, certain broadcasters were concerned that it did not adequately achieve that objective and proposed the approach in the Senate compromise as a means of addressing that concern."

The RIAA concluded that "In an effort to support the goal of the bill passed by the House, we support the Senate language."

John Simson of the SoundExchange stated in a release that "This legislation is a positive step forward for webcasters, artists and record labels because it brings some long awaited certainty to the marketplace. We are pleased that Congress found a way to implement the rates and terms for small webcasters that the House proposed last month. We will work expeditiously toward putting those rates and terms into effect as Congress has requested."

"On another important issue, we are pleased that revisions to the bill offered the opportunity for record companies and artists to extend a six month stay of payments for noncommercial webcasters. This provides all parties time to address the unique circumstances of noncommercial webcasters and reach an appropriate arrangement."

Congress Passes NSF Authorization Bill

11/15. On November 11 the Senate amended and passed HR 4664, the National Science Foundation Authorization Act of 2002, by unanimous consent. The House then passed HR 4664 on November 15 by unanimous consent. The House agreed to the Senate amendments to the bill. The President is expected to sign the bill.

The original HR 4664 was a bill to authorize appropriations for the National Science Foundation. It passed the House by a vote of 397-25 on June 5, 2002. See, Roll Call No. 212. See also, story titled "House Approves NSF Authorization Bill" in TLJ Daily E-Mail Alert No. 445, June 6, 2002. This version of the bill, also known as the "Investing in America's Future Act" authorized the appropriation of $5.5 Billion for FY 2003 for the NSF. It included in the funding authorization $704 Million for networking and information technology research, $238 Million for the Nanoscale Science and Engineering Priority Area, and $60 Million for the Mathematical Sciences Priority Area.

HR 4664, as passed by the House and Senate in November, is a vehicle for the combination and passage of several related bills. House Science Committee stated in a release that "The version of H.R. 4664 approved last night is a House-Senate compromise that includes language from five House-passed Science Committee bills -- H.R. 4664 (the NSF authorization); H.R. 1858 (on K-12 math and science education); H.R. 100 (on master teachers); H.R. 3130 (The Tech Talent Act, on undergraduate education); and H.R. 2051 (on biotechnology research) -- and from the Senate NSF authorization (S. 2817). The compromise was reached in mid-October, but could not come to the Senate floor then because of Administration objections."

The release added that "H.R. 4664 adds language worked out with the Office of Management and Budget (OMB) to satisfy the Administration's objections. The language makes the last two years of authorization (fiscal years 2006 and 2007) contingent on a finding by the Congress that NSF ``has made successful progress toward meeting [specified] management goals,创 taking into consideration OMB's evaluation on that progress."


11/15. The Federal Communications Commission (FCC) released its Notice of Proposed Rule Making and Order [MS Word] proposing rules for Intelligent Transportation Systems (ITS). It announced the NPRM on November 7, but did not release the NPRM until November 15.

This NPRM seeks comment on licensing and service rules for the 5.850 - 5.925 GHz band for Dedicated Short Range Communications (DSRC) in the ITS Radio Service. ITS provides wireless communications links between moving surface vehicles, and between vehicles and road side units. Its primary applications pertain to public safety, such as avoiding vehicle collisions, emergency vehicle traffic signal preemption, traffic management, and electronic toll collection.

However, this NPRM also requests comment on whether the FCC should also permit commercial use of this spectrum. It states that "In addition to public safety, ITS America recommends that private radio licensees providing DSRC-based ITS services be permitted in the band. ITS America believes that permitting private radio licensees in the 5.9 GHz band is necessary to achieve national interoperability of DSRC services; in essence ITS America maintains that permitting private radio licensees would create an incentive for vendors to quickly and economically develop the technology necessary for the numerous DSRC applications contemplated for this band. Incentives are needed because ``making DSRC available in the 5.9 GHz band will require a very large technology investment by prospective vendors创 who are ``reluctant to make such an investment unless there is a clear market for the resulting products.创 Public safety entities would then benefit from the cost savings derived from economies of scale, and ``safety-related DSRC services should be accorded the highest priority in the licensing and service rules.创 In light of ITS America's consensus building activities and the favorable comments on this issue in response to the Public Notice, we seek comment on whether to allow 損rivate,创 i.e., ``non-public safety创 DSRC operations in some portion of the 5.9 GHz band." (Footnotes omitted.)

This is WT Docket No. 01-90, ET Docket No. 98-95, and RM-9096. For more information, contact Nancy Zaczek at 202 418-0680 or

The FCC has yet to publish a notice of this item in the Federal Register. Comments will be due 60 days after publication. Reply comments will be due 90 after publication in the Federal Register.

People and Appointments

11/15. Michael Capellas was named Chairman and CEO of WorldCom. He was previously Ch/CEO of Compaq Computer, and then briefly President of Hewlett Packard after it merged with Compaq. See, WorldCom release.

11/15. The Senate Judiciary Committee approved the nominations of Dennis Shedd to be a judge of the U.S. Court of Appeals for the Fourth Circuit, and Michael McConnell to be a judge of the U.S. Court of Appeals for the Tenth Circuit on November 11. The full Senate confirmed Michael McConnell by a voice vote on November 15. The Senate is scheduled to take up the Shedd nomination on Monday, November 18.

11/15. Hewitt Pate was named Acting Assistant Attorney General for the Department of Justice's (DOJ) Antitrust Division (ATR). Pate is currently a Deputy Assistant Attorney General (DAAG) at the ATR in charge of regulatory matters. The current Assistant Attorney General (AAG), Charles James, departs on November 22, 2002 to become Vice President and General Counsel of Chevron Texaco Corporation. In addition, William Kolasky, the DAAG at ATR for international matters has announced his return to the law firm of Wilmer Cutler & Pickering. See, ATR release and White House release.

11/15. The Senate confirmed Jonathan Adelstein to be a Commissioner of the Federal Communications Commission (FCC). Commission Michael Copps released a statement [MS Word] praising Adelstein, and stating that now the FCC "will be up and running at full complement and in the way intended by the statutes that guide us." Regulated companies and the groups that represent them released statements praising the new Commissioner. See, for examples, statement by CTIA, statement by NCTA, statement by CompTel, statement by NAB, and statement by BellSouth.

More News

11/15. The Copyright Office published a notice in the Federal Register stating that it has adopted a "final rule amending its regulation governing notices of termination of transfers and licenses covering the extended renewal term. The current regulation is limited to notices of termination made under section 304(c) of the copyright law. The Sonny Bono Copyright Term Extension Act created a separate termination right under section 304(d). The final rule establishes procedures governing notices of termination of the extended renewal term under either section 304(c) or section 304(d)." For more information, contact Kent Dunlap at 202 707-8380. See, Federal Register, November 15, 2002, Vol. 67, No. 221, at Pages 69134 - 69137.

11/15. SpectraSite Holdings, a wireless tower operator, filed a Chapter 11 petition for bankruptcy in the U.S. Bankruptcy Court (EDNC). See, release.

11/15. Former IBM CEO Lou Gerstner's book titled Who Says Elephants Can't Dance? Inside IBM's Historic Turnaround has climbed to No. 2 on Amazon's sales ranking.

11/15. The FBI's National Infrastructure Protection Center (NIPC) issued an advisory in which it states that "The Internet security community has identified several new vulnerabilities in the Internet Software Consortium's (ISC) Berkeley Internet Name Domain (BIND) software, which is used by many ISPs to provide DNS services."

11/15. Bruce Mehlman, Assistant Secretary for Technology Policy at the Department of Commerce, gave a speech titled "Technology Led Economic Development in the Post Bubble, Post 9/11, Post Enron America". He spoke in Baton Rouge, Louisiana.

FCC Releases AT&T Comcast Order

11/14. The Federal Communications Commission (FCC) released its Memorandum Opinion and Order [PDF] in the AT&T Comcast merger proceeding. This order conditionally approves the merger.

This is the proceeding titled "In the matter of Applications for Consent to the Transfer of Control of Licenses from Comcast Corporation and AT&T Corp., Transferors, to AT&T Comcast Corporation, Transferee". It is MB Docket No. 02-70. The FCC announced, but did not release, this order earlier this week.

Some of the broadband Internet related parts of the Order are summarized below.

Unaffiliated ISP Access. FCC states that it will not mandate nondiscriminatory access to unaffiliated ISPs. The Order notes that "Each Applicant operates a proprietary broadband Internet access service. In addition, Comcast has entered into an agreement with United Online, Inc (揢nited Online) pursuant to which United Online markets and sells a high-speed ISP service to residential customers using Comcast抯 cable modem platform. AT&T has entered into similar agreements with EarthLink, Net1Plus, Internet Central and Galaxy Internet Services. EarthLink began offering such service over AT&T抯 systems in greater Seattle in July 2002, and in New England in October 2002. In connection with the TWE Restructuring Agreement, the Applicants will enter into a 搕hree-year non-exclusive agreement with AOL Time Warner under which AOL high-speed broadband service would be made available on AT&T Comcast cable systems (the 揂OL ISP Agreement)."

The Order also notes that "Comcast, AT&T, and AT&T Comcast have entered into an agreement with Microsoft, which provides that, for a specified period of time, if AT&T Comcast offers a high-speed Internet service agreement to any third party on any of its cable systems, AT&T Comcast will be obligated to offer an Internet service agreement on non-discriminatory terms with respect to the same cable systems to Microsoft抯 ISP, The Microsoft Network (揗SN)."

The Order states that "Several commenters are concerned about the ability of unaffiliated ISPs to access the merged firm抯 facilities, a concern the Commission has addressed in prior cable mergers, and is addressing in our Cable Modem NPRM. These commenters urge us to deny the merger, or, at a minimum, to condition the merger on a requirement that the merged firm offer unaffiliated ISPs nondiscriminatory access to their cable modem platform."

However, the FCC rejected these commenters' request. It wrote in the Order that "We have never mandated, as a merger condition or in any other context, that any cable operator provide access to its systems to unaffiliated ISPs. ... Having evaluated, as we have in prior license transfer proceedings, the Applicants' pre-merger and post-merger incentive and ability to deny unaffiliated ISPs access to their cable systems, we conclude that the merger is not likely to reduce unaffiliated ISP access to the Applicants' cable systems. Therefore we will not condition the merger on such access or deny the merger on these grounds."

Internet Content. The FCC also declined to imposed any conditions regarding Internet content. The Order states that "Some commenters assert that the merger would present harms affecting Internet content. Specifically, they allege that: (1) the merged firm will have the incentive and ability to favor affiliated broadband content and discriminate against unaffiliated content; (2) the merged firm will limit access to its affiliated content, which would reduce the amount of content available to subscribers of competing broadband access services and harm competing providers of such services; and (3) the merged firm will have monopsony power in the market for the purchase of broadband content. Commenters claim that these concerns are particularly acute with regard to the delivery of video programming over the Internet, an offering that would compete not only with the merged firm's affiliated broadband content, but also with its core multichannel video programming business. We conclude that the merger is not likely to result in harms to the quantity, quality, or diversity of Internet content, and we decline to impose conditions or reject the merger on the basis of alleged harms to Internet content."

DSL Relief. The FCC also declined to provide regulatory relief to the incumbent local exchange carriers (ILECs). The Order notes that "Several commenters assert that because the merged firm will enjoy an unprecedented share of the broadband Internet access market, the merger should be denied or conditioned on establishment of regulatory parity for incumbent LECs, either by relaxing or removing regulations applicable to incumbent LECs or by imposing requirements on the merged firm to make its regulatory status more similar to that of incumbent LECs."

The FCC concluded in the Order that "We decline to relax or remove regulations applicable to incumbent LECs in the context of this proceeding, to condition our approval of the merger on actions that we may or may not take in the context of other proceedings, or to impose new requirements on the merged firm in order to give the merged firm a regulatory status of an incumbent LEC. We do not agree with incumbent LECs that the merged entity抯 size poses a risk of harm to DSL service, and we will not reject the merger on these grounds."

FCC Antitrust Merger Reviews? FCC officials frequently state that the FCC does not conduct antitrust merger reviews. Rather, they state that the FCC conducts reviews of license transfer requests; and in so doing, it applies a public interest standard.

For example, the Order asserts that "The DOJ and the Federal Trade Commission (揊TC) review mergers pursuant to section 7 of the Clayton Act, which prohibits mergers that are likely to substantially lessen competition in any line of commerce. The Commission, on the other hand, is charged with determining whether the transfer of licenses serves the broader public interest."

But then, the Order continues that its public interest analysis includes competition analysis. And the Order, throughout, engages in competition analysis. The words "competition" or "antitrust" appear in the Order over 80 times.

In a related event, Commissioner Kathleen Abernathy gave speech regarding spectrum management at a November 14 Cato Institute event. She was asked about public safety concerns and the FCC's decision in the EchoStar DirecTV merger, which the FCC declined to approve last month. She responded, in part, that "that was really antitrust law".

Federalist Society Panel Discusses Privacy and Telecommunications

11/14. The Federalist Society hosted a panel discussion titled "Telecommunications Group: Privacy, Telecommunications, and Technology: Does Emerging Technology Force New Privacy Considerations?" The speakers were Federal Communications Commission (FCC) Commissioner Kathleen Abernathy, Stewart Baker of Steptoe & Johnson, Jerry Berman of the Center for Democracy and Technology (CDT), Reid Cox of the Center for Individual Freedom, and James Harper of Judge Stephen Williams of the U.S. Court of Appeals, D.C. Circuit, moderated.

Commissioner Abernathy gave a review of two FCC rulemaking proceedings, and federal court reviews of those proceedings, that pertain to privacy: Customer Proprietary Network Information (CPNI) and Communications Assistance for Law Enforcement Act (CALEA). CALEA is a statute that was enacted in 1994 to enable law enforcement authorities to maintain their existing wiretap capabilities in new telecommunications devices, such as cell phones.

Kathleen AbernathyAbernathy (at right) reviewed the opinion of the U.S. Court of Appeals (10thCir) in US West v. FCC, which overturned an earlier FCC CPNI rule which contained an opt in requirement. The Court held that carriers have a First Amendment  interest in using their customer information to communicate with their customers. See, 182 F.3d 1224 (10th Cir. 1999), cert. denied, 120 S. Ct. 2215 (Jun. 5, 2000).

Baker took issue with a Safire piece in the New York Times. William Safire wrote an sensationalistic op ed on November 14 titled "You Are a Suspect". In it he wrote that "Every purchase you make with a credit card, every magazine subscription you buy and medical prescription you fill, every Web site you visit and e-mail you send or receive, every academic grade you receive, every bank deposit you make, every trip you book and every event you attend" will go into one big government database run by "disgraced admiral" John Poindexter.

Baker said that law enforcement authorities could have easily found 11 of the 19 hijackers of September 11 if they have made use of available commercial databases. He added that if companies can use this data to market telephone service plans, the government ought to be able to use to to protect the country from terrorist attacks.

He said that "big government needs big information to fight terrorism" and that "we need to be able to get to data in an efficient way". He added that we currently have a "failed system for protecting privacy". He says there is too much focus on getting permission ahead of time to conduct searches. Instead, the focus should be more on auditing the users of data.

James Harper got philosophical about the nature of privacy. He stated that "to generalize about privacy is typically wrong". First, it is subjective. He cited religious and political beliefs as examples. Some people proselytize and campaign, while others are intensely private about their beliefs. He added that "very often, in addition, many privacy debates carry a lot of other debates within them. In Congress we deal with privacy, but it might be security you are talking about, it might be spam. It might be any of half a dozen separate information policy issues."

He offered a definition of privacy: "Privacy is a subjective condition that exists when two factors are in place; first, when people have legal power to control information about themselves, and second, exercise that power consistent with their values and interests."

He stated, with respect to the subjective nature of privacy, that "Law and regulation aimed at privacy is very likely only to be a fair approximation of what Congress or regulators thought privacy should be at the time. And so, it is sort of inherently flawed when you try to get to privacy through direct law or regulation."

He continued that "The second factor is exercise of legal power consistent with interest and values. And, I think that is really the crux of the privacy problem. It is getting people to understand how information moves in the information economy, and then act according to their interests in light of that knowledge. The Internet did change how information moves." He suggested that the "online privacy problem, the telecommunications privacy problem, probably will last about a generation, because teenagers today have fantastic knowledge, and innate understanding of how information moves today in the online world."

Harper then applied the "legal power" component of his definition of privacy. He said that "legal power implicates government. What does the government do to erode power over personal information."

He then said that the second part of his definition, regarding exercise of that power, "implicates markets". "How do companies learn about people's privacy interests? How do they deliver them? How do individuals themselves learn what their privacy interests are?"

Harper elaborated that "The two rule makings that Commissioner Abernathy referred to fall into these two separate categories. Essentially, CALEA goes to the question of what legal power telecommunications companies will have to offer their users, and in those contexts, I encourage the FCC, and probably Congress needs it more, to be as protective of consumers' power over information as they possibly can. This will deliver privacy in the context of CALEA. In an area like CPNI, the question is markets. And, I think, agencies and Congress are out of their league when it comes to figuring out privacy. We have seen examples in several different areas. The Children's Online Privacy Protection Act, Title 5 of the Gramm Leach Bliley Act, HIPAA ... Each of them go to a version of privacy that maybe have something to do with what people think is important to them. But, most likely, what you have been delivered with those laws are higher prices, less services available to you in the market place, and not much privacy at all." See also, prepared text of Harper's remarks.

Judge Williams noted later in the program that he now get lots of privacy notices in the mail, and that he immediately throws them away.

The panelists were asked about how to get away from the Supreme Court's opinion in Smith v. Maryland, 442 US 735 (1979), which held, in the context of pen registers, that individuals have no expectation of privacy regarding information that they convey or entrust to third parties.

Berman suggested the more productive route was to pass legislation protecting privacy, rather than to rely on the courts. He said that when the public speaks up on a privacy issue, the Congress will pass legislation.

Baker said that reconsidering Smith v. Maryland is an "appalling" idea. He said the government needs that information.

Abernathy was asked whether there is a 5th Amendment takings clause issue when the FCC restricts a company's right to use its customer data.

"Yikes!," responded Abernathy. "We didn't have to address that". She offered the following reasoned legal analysis: "It's dicey."

FCC Relieves Winning Bidders in Auction 35

11/14. The Federal Communications Commission (FCC) announced, but did not release, an Order that some Auction 35 winning bidders "that request dismissal of their pending applications will be relieved of their bid obligations and receive a full refund of their deposits". See, FCC release [PDF]. Auction 35 is the FCC's re-auction of spectrum previously auctioned to NextWave, and now tied up by litigation.

The FCC announced also that "The relief granted today applies only to Auction No. 35 winning bidders of licenses for C and F block Personal Communications Services spectrum that had previously been licensed to NextWave Personal Communications Inc., NextWave Power Partners Inc., or Urban Comm-North Carolina, Inc." The FCC further stated that "it will waive default rules for bidders that elect the relief granted today. The Order also imposes no restrictions on electing bidders ability to acquire such spectrum in future auctions. Eligible winning bidders must make an election not later than 45 days from the release of today抯 Order, which also includes procedures for requesting dismissal and refunds and Department of Justice approval."

FCC Chairman Michael Powell released a statement [PDF]. He wrote that "The Auction 35 road endured by all the parties and the public has been long and difficult. While bidders were forewarned of the risks attending the Auction, and the Commission has pursued settlement and afforded bidders partial, interim relief, barriers to licensing remain. As the months have passed and the economic difficulties worsened, it has become increasingly clear that allowing the eligible Auction 35 winners to exit the auction is the right course. I recently outlined six components of a successful telecommunications recovery. Reduction of debt was among its highest priorities. Although the Commission cannot cure the capital crunch, it can remove the cloud of uncertainty that has followed the Auction 35 winners. Approximately three weeks ago, the record in this docket closed and today we take that step."

Commissioner Kathleen Abernathy wrote in a statement [PDF] that "I enthusiastically support today's Order. I have long believed that the delays occasioned by extensive litigation, when combined with significant changes in the marketplace over the last several years, lead us to today's result. In light of the ongoing uncertainty regarding our ability to award these licenses and current economic conditions, I do not believe the public interest is served by tying up deposits and, perhaps worse, subjecting carriers to the risk of having to produce billions of dollars on short notice if the Commission prevails in the U.S. Supreme Court."

Commissioner Kevin Martin wrote in his dissenting statement [PDF] that "Today the Commission finally takes action to relieve the winning bidders in Auction No. 35 of their obligations. The history of this Auction and the commensurate litigation has been long and tortured. This spring the Commission refunded a substantial portion of the monies on deposit to the winning bidders, but left their obligations in place. In light of the on-going economic burden of these obligations and the continuing litigation, the Commission should not keep these obligations in place any longer. Indeed, I have long thought that the Commission could and should provide an additional stimulus to the industry and the economy as a whole by relaxing these obligations."

However, he dissented from "the decision's requirement that carriers withdraw from the entire auction to be relieved of any of their obligations. I do not see a need to require carriers to make a single election for all of the markets awarded at auction as a condition to withdrawing from any one market."

The Cellular Telecommunication and Internet Association (CTIA) stated in a release that "We appreciate the Commission's leadership in freeing up $16 billion in wireless assets that had been held hostage for too long. This is a straightforward solution - allowing those resources to be put to work creating jobs in the telecomm sector and increasing service levels for wireless consumers. It is also a fair solution, releasing bidders from a transaction that never occurred. The Commission's action will help bring long-overdue certainty and stability to the wireless marketplace."

On October 10, Secretary of Commerce Donald Evans wrote a letter to the FCC requesting that the FCC grant relief to the winning bidders in Auction 35.

This is Order and Order on Reconsideration (FCC 02-311), adopted November 14, 2002. This is WT Docket No. 02-276. For more information, contact Bill Huber at 202 418-0660 or

11th Circuit Rules on FCC Pole Attachments Rates

11/14. The U.S. Court of Appeals (11thCir) issued its opinion in Alabama Power v. FCC, a challenge to the FCC's pole attachment rate under the takings clause of the Fifth Amendment. The Court upheld the FCC.

The petitioners in this consolidated action are Alabama Power Company (APC) and Gulf Power Company. Among the intervenors are other power companies. Other intervenors are cable companies. The respondent is the Federal Communications Commission (FCC), which promulgated the rule that is the subject of these petitions for review.

The Court wrote that in the Pole Attachments Act of 1978, and amendments thereto in the Telecommunications Act of 1996, the Congress "focused on the relationship between cable television companies and electric power companies. Power companies have something that cable companies need: pole networks. Concerned about the monopoly prices power companies could extract from the cable companies, Congress allowed cable companies to force their way onto utility poles at regulated rates."

47 U.S.C. 224, at subsection (f)(1), states that "A utility shall provide a cable television system or any telecommunications carrier with nondiscriminatory access to any pole, duct, conduit, or right-of-way owned or controlled by it." The Court described this language, which was added in 1996, as a "forced access regime".

The subject of cable companies' access to the poles of electric companies has been the subject of many FCC and court proceedings in the 11th Circuit. In the present proceeding, however, the power companies sought a ruling that the rate imposed by the FCC violates the takings clause of the Fifth Amendment. The Appeals Court rejected the petition for review. Judge Gerald Tjoflat wrote the opinion for the three judge panel.

Dam Addresses International Tax Policy

11/14. Kenneth Dam, Deputy Secretary Department of the Treasury, gave a speech in Washington DC in which he addressed the FSC/ETI issue and corporate inversions.

The World Trade Organization (WTO) has held that the U.S. Foreign Sales Corporation (FSC) tax regime, and its replacement, the Extraterritorial Income Exclusion (ETI), constitute illegal export subsidies. On August 30 the WTO released a Decision of the Arbitrator [46 pages in PDF] that authorizes the EU to impose $4 Billion in countermeasures, or retaliatory tariffs. Retaliatory tariffs by the EU could harm U.S. high tech companies, and other exporters.


Dam stated that "The sad truth is that our international tax rules no longer serve our national interest. In this age of globalization, international transactions generate a large and growing share of our national income. Yet changes to the international provisions of the U.S. corporate tax code in recent decades have ignored this trend, and have oftentimes more impaired than improved American companies ability to compete abroad. More often, changes to the tax code have focused on increasing tax revenues rather than assuring the competitiveness of U.S. business operations, and thus, strengthening the health of our economy."

He reiterated President Bush's position. "President Bush decided several months ago that the United States would comply with the WTO ruling. The President made two further decisions. He said that any response to the ruling would have to increase the competitiveness of U.S. business. He also pledged to work with the Congress to create the solution, and we have been working closely with Chairman Thomas and the House Ways and Means Committee.  We have begun to work just as closely with the Senate Finance Committee."

He offered a proposal for reforming the tax code. "I believe that legislative changes could be enacted to limit Subpart F to truly passive income such as portfolio dividends, interest and the like. At the very least we should take a hard look at the so-called active/passive dichotomy in Subpart F rules. We should not preserve tax rules that do not reflect the present realities of international corporate business, in which globalization requires centralization of functions, and in which services are not just a major wealth-creating activity, but one in which U.S. businesses have a comparative advantage."

People and Appointments

11/14. House Democrats elected Rep. Nancy Pelosi (D-CA) minority leader. Rep. Steny Hoyer (D-MD) was elected minority whip. Rep. Robert Menendez (D-NJ) was elected Chairman of the Democratic Caucus. Rep. James Clyburn (D-SC) was elected Vice Chairman of the Democratic Caucus.

Senate Democrats re-elected Sen. Tom Daschle (D-SD) Senate Majority Leader, soon to be Minority Leader. Sen. Harry Reid (D-NV) was elected Assistant Democratic Leader (Whip). Sen. Barbara Mikulski (D-MD) was elected Conference Secretary.

Senate Republicans re-elected Sen. Trent Lott (R-MS) Senate minority leader, soon to be majority leader. Sen. Mitch McConnell (R-KY) was elected Assistant Republican Leader (Whip). Sen. Rick Santorum (R-PA) was elected Republican Conference Chairman. Sen. Kay Hutchison (R-TX) was elected Republican Conference Vice Chairman. Sen. Jon Kyl (R-AZ) was elected Policy Committee Chairman. Sen. George Allen (R-VA) was elected Senatorial Campaign Committee Chairman.

House Republicans elected Rep. Denny Hastert (R-IL) to be Speaker of the House. Rep. Tom DeLay (R-TX) was elected Majority Leader, to replace the retiring Rep. Dick Armey (R-TX). Rep. Roy Blunt (R-MO) was elected Assistant Republican Leader (Whip). Rep. Deborah Pryce (D-OH) was elected Conference Chairman. Rep. Jack Kingston (R-GA) was elected Conference Vice Chairman. Rep. John Doolittle (R-CA) was elected Conference Secretary. Rep. Chris Cox (R-CA) was elected Policy Chairman. Rep. Thomas Reynolds (R-NY) was elected National Republican Congressional Committee Chairman.

11/14. Rich Baer was named General Counsel and EVP in charge of Qwest Communications' legal affairs department. See, Qwest release.

11/14. President Bush nominated Daniel Pearson to be a Member of the U.S. International Trade Commission (USITC) for the term expiring June 16, 2011. See, White House release.

11/14. Al Vincent was named Associate Administrator for Telecommunication Sciences and Director of the National Telecommunications and Information Administration's (NTIA) Institute for Telecommunication Sciences (ITS) in Boulder, Colorado. He will serve as the principal advisor on telecommunication sciences to the NTIA Director. See, NTIA release.

11/14. The Senate confirmed Wayne Abernathy to be an Assistant Secretary of the Treasury.

11/14. The Senate confirmed Blanquita Cullum to be a Member of the Broadcasting Board of Governors for a term expiring August 13, 2005.

11/14. The Senate confirmed John Rogers to be a judge of the U.S. Court of Appeals for the Sixth Circuit. The Senate also confirmed 17 nominees to be U.S. District Court judges: Stanley Chesler (New Jersey), Rosemary Collyer (District of Columbia), Mark Fuller (Middle District of Alabama), Daniel Hovland (North Dakota), Kent Jordan (Delaware), James Kinkeade (Northern District of Texas), Robert Klausner (Central District of California), Robert Kugler (New Jersey), Ronald Leighton (Western District of Washington), Jose Linares (New Jersey), Alia Ludlum (Western District of Texas), William Martini (District of New Jersey), Thomas Phillips (Eastern District of Tennessee), Linda Reade (Northern District of Iowa), William Smith (Rhode Island), Jeffrey White (Northern District of California), and Freda Wolfson (New Jersey).

11/14. Belinda Anderson was named BellSouth's Vice President policy resolution, for regulatory and external affairs.

More News

11/14. The Federal Election Commission (FEC) fined the Kirkland & Ellis PAC $3,350 for a late filing of a mid year 2001 report. See FEC release.

11/14. The U.S. District Court (SDNY) entered judgments of permanent injunction against David Myers, a former Controller of WorldCom, and Buford Yates, a former Director of General Accounting of WorldCom, in civil enforcement actions brought by the Securities and Exchange Commission (SEC). See, SEC v. Myers, D.C. No. 02 CV 7749, and SEC v. Yates, D.C. No. 02 CV 7958. The injunctions prohibit Myers and Yates from acting as an officer or director of any public company. See, SEC release.

FCC and DOJ Approve AT&T Comcast Merger

11/13. The proposed merger of AT&T and Comcast received approval from the Federal Communications Commission (FCC) and the Department of Justice (DOJ). The FCC adopted, but did not release, a Memorandum Opinion and Order (MOO) authorizing the transfer of licenses from AT&T and Comcast to a new entity, AT&T Comcast. However, the FCC conditioned it approval upon divestment of all interest in Time Warner Entertainment (TWE). In addition, the DOJ, which has statutory authority to conduct antitrust merger reviews, issued a release in which it stated that it "will not challenge the transaction".

This is the FCC's proceeding titled "In the Matter of Applications for Consent to the Transfer of Control of Licenses from Comcast Corporation and AT&T Corp., Transferors, to AT&T Comcast Corporation, Transferee". It is MB Docket No. 02-70.

The FCC also stated that its Order requires AT&T and Comcast to place TWE into an irrevocable trust on the day the merger closes, and to fully divest themselves of any interest in TWE within 5 1/2 years after the merger's closing. The Order further provides that during the divestiture period, AT&T Comcast is prohibited from involvement in the video programming activities of TWE.

The DOJ wrote that "Following the announcement by the Federal Communications Commission that it would approve Comcast Corporation's proposed acquisition of AT&T Broadband, Inc. as restructured to place certain Time Warner Entertainment assets in a trust, the Department of Justice announced today that it will not challenge the transaction. After a thorough investigation and analysis that included a large number of interviews of industry participants and a review of documents from various firms in the business, the Department's Antitrust Division has closed its investigation into the merger."

The FCC vote was 3-1, with Commissioner Michael Copps voting against. He wrote in his dissent [PDF] that "The sheer economic power created by this mega-combination, and the opportunities for abuse that would accompany it, outweigh the very limited public interest benefits that either the Applicants or the majority find here."

He noted that AT&T and Comcast argue that the merger would result in "accelerated deployment of facilities based high-speed internet service, digital video, and other broadband services" and that they "cite economic efficiencies that will result from their agreement and how these will benefit the combined company's ability to do business." He countered that "there are some such efficiencies. Yet, while Comcast talks about the need to upgrade and modernize AT&T's broadband deployment, one wonders why this corporate resuscitation is better achieved by conglomeration and $30 billion of additional debt rather than through competition in the marketplace."

Gene Kimmelman of the Consumers Union criticized the decision. He wrote in a release that "This is a dangerous merger that allows one company to control video programming and high-speed Internet services for more than 40 percent of cable households in America. It is mind-boggling how federal officials have let the largest cable companies consolidate and thereby dictate the choices of cable channels and high-speed Internet services for consumers nationwide."

James Cicconi, AT&T General Counsel, stated in a release that "We're very pleased with the FCC's approval of this transaction. This represents a major milestone in delivering quality broadband services to consumers and value to our shareowners. We commend the FCC for its careful and comprehensive review of this merger, and we look forward to completing the transaction shortly."

Rep. Rick Boucher (D-VA) reacted to the FCC's decision in this matter, as well as in the EchoStar DirecTV merger. He wrote that "I am appalled that coming off the heels of the denial of the EchoStar Hughes merger application, on which the FCC acted prior to our nation's antitrust authorities, the FCC would now allow the massive combination of cable properties into the newly formed AT&T Comcast Corporation.  Claiming that this combination of cable companies will spur new investment and have a positive impact on the deployment of broadband services while only recently ignoring the 15 percent of Americans who would have received local television stations and perhaps the only viable broadband option through the EchoStar Hughes combination, rings disingenuous and hollow to rural America."

On October 10, 2002, the FCC announced at that it declined to approve the transfer of licenses from EchoStar Communications Corporation and Hughes Electronics Corporation, a subsidiary of General Motors Corporation, to a new entity". EchoStar and Hughes both provide direct broadcast satellite (DBS) service via their Dish Network and DirecTV. The FCC designated the application for a full evidentiary hearing before an Administrative Law Judge.

Rep. Boucher continued that "There is a great potential for consumers to be harmed from the FCC's cursory review of the AT&T Comcast merger application, including the FCC's unwillingness to place on the record under protective order the fundamental agreement which underlies the ability of users to access content of unaffiliated ISPs through the newly merged cable companies' lines. The FCC's disparate treatment of these cable and satellite mergers demonstrates vividly that the FCC still prefers to view the digital world through antiquated separate technology lenses."

Rep. Boucher is a member of the House Commerce Committee, and its Telecom Subcommittee. He has advocated approval of the proposed satellite merger on the basis that it would facilitate the provision of broadband Internet access services in rural areas via satellite. See, story titled "EchoStar DirecTV Merger and Broadband Internet Access" in TLJ Daily E-Mail Alert No. 321, December 5, 2001. See also, October 28, 2002 letter from Rep. Boucher to Attorney General John Ashcroft regarding the DOJ's pending review of the proposed merger of Echostar and Directv.

Senate Approves Dot Kids Bill

11/13. The Senate passed HR 3833, the Dot Kids Implementation and Efficiency Act of 2002, by unanimous consent. The bill passed the House on May 26, 2002 by a vote of 406-2.

Sen. Byron Dorgan (D-ND) explained the bill on the Senate floor. He said that "the idea behind the ``dot kids创 domain is very simple -- to create a space on the web that can be a cyber sanctuary for kids. A place where parents and kids can be confident that every site on the ``dot-kids创 domain contains materials that are suitable for children under the age of thirteen."

Sen. Dorgan added that "The bill calls for the creation of a sub-domain under our Nation's country code ``.us创 called ``.kids.us创 which will only host content that is age appropriate for children. A number of safeguards were also put in this bill. ``Dot-kids-dot-us创 will be monitored for content and safety; and should objectionable material appear, it will be taken down immediately."

See also, story titled "House Passes Dot Kids Domain Bill", TLJ Daily E-Mail Alert No. 436, May 22, 2002

House Approves New Version of Homeland Security Act

11/13. The House passed HR 5710, the Homeland Security Act of 2002, by a vote of 299-121, on Wednesday night, November 13. See, Roll Call No. 477. It is a massive bill the creates a new Department of Homeland Security (DHS), creates new powers and responsibilities, among other things.

President Bush submitted his first proposal to create a new DHS in June of 2002. The House passed an earlier version of the bill, HR 5005, on July 26, 2002 by a vote of 295-132. The Democratic controlled Senate did not act quickly on the bill, as did the Republican controlled House. However, the Senate's objections were not related to the information technology and cyber security related provisions of the House bill.

Since the November 5 general election, the legislation has been revised. However, most of the key technology related provisions from HR 5005 remain in HR 5710. Nevertheless, some of these provisions have slightly different wordings, and new section or subsection numbers. Rep. Dick Armey (R-TX), the sponsor of the bill, stated on the floor on November 13 that "this bill is essentially the same bill that was passed by the House of Representatives last July".

FOIA Exemption. HR 5710 contains the Freedom of Information Act (FOIA) exemption for certain critical infrastructure information voluntarily shared with the federal government. It has been moved from Section 724 (of HR 5005) to Section 214 (in HR 5710).

Cyber Security Entities Transferred. Section 201(g) of HR 5710 (which was Section 202 of HR 5005) transfers several cyber security related entities to the new DHS. It provides that "there shall be transferred to the Secretary the functions, personnel, assets, and obligations of the following:
(1) The National Infrastructure Protection Center of the Federal Bureau of Investigation (other than the Computer Investigations and Operations Section), including the functions of the Attorney General relating thereto.
(2) The National Communications System of the Department of Defense, including the functions of the Secretary of Defense relating thereto.
(3) The Critical Infrastructure Assurance Office of the Department of Commerce, including the functions of the Secretary of Commerce relating thereto.
(4) The Energy Security and Assurance Program of the Department of Energy, including the National Infrastructure Simulation and Analysis Center and the functions of the Secretary of Energy relating thereto.
(5) The Federal Computer Incident Response Center of the General Services Administration, including the functions of the Administrator of General Services relating thereto."

Computer Security Division. The bill leaves the CSD at the NIST. President Bush's original proposal provided for the transfer of the National Institute of Standards and Technology's (NIST) Computer Security Division (CSD) to the new DHS. However, last summer, the House Science Committee, and then, the House Select Committee on Homeland Security, amended the bill to keep the CSD at NIST. Technophile Members of Congress had opposed the transfer, as did many technology groups, including the Computer & Communications Industry Association (CCIA) and Software and Information Industry Association (SIIA).

Privacy Officer. Section 222 of HR 5710 (which is similar, but not identical, to Section 205 of HR 5005) creates a privacy officer for the new department. HR 5710 provides that "The Secretary shall appoint a senior official in the Department to assume primary responsibility for privacy policy, including (1) assuring that the use of technologies sustain, and do not erode, privacy protections relating to the use, collection, and disclosure of personal information; (2) assuring that personal information contained in Privacy Act systems of records is handled in full compliance with fair information practices as set out in the Privacy Act of 1974; (3) evaluating legislative and regulatory proposals involving collection, use, and disclosure of personal information by the Federal Government; (4) conducting a privacy impact assessment of proposed rules of the Department or that of the Department on the privacy of personal information, including the type of personal information collected and the number of people affected; and (5) preparing a report to Congress on an annual basis on activities of the Department that affect privacy, including complaints of privacy violations, implementation of the Privacy Act of 1974, internal controls, and other matters."

Under Secretary for Science and Technology. Section 301 of the HR 5005 created the position of  Under Secretary of Science and Technology, and established its responsibilities. This is now in Sections of 301 and 302 of HR 5710, with revised language.

Cyber Security Enhancement Act. HR 5710 also includes, at Section 225, the Cyber Security Enhancement Act. This section is related to HR 3482, sponsored by Rep. Lamar Smith (R-TX). It passed the House as a stand alone bill on July 15, 2002. This section contains provisions relating to sentencing guidelines for computer hacking crimes, authority of Internet service providers (ISPs) and others to voluntarily disclosure the content of communications to law enforcement and other government entities, and other topics. See also, story titled "House Passes Cyber Security Enhancement Act" in TLJ Daily E-Mail Alert No. 470, July 16, 2002.

Greenspan Testifies on Economic Outlook

11/13. Federal Reserve Board (FRB) Chairman Alan Greenspan testified before the Joint Economic Committee on the economic outlook. "A year ago, we were struggling to understand the potential economic consequences of the events of September 11", said Greenspan. "The United States economy, however, proved to be remarkably resilient: In the event, real GDP over the past four quarters grew 3 percent -- a very respectable pace given the blows that the economy endured." See, text of testimony.

  Alan Greenspan

However, he added that "several forces have continued to weigh on the economy: the lengthy adjustment of capital spending, the fallout from the revelations of corporate malfeasance, the further decline in equity values, and heightened geopolitical risks. Over the last few months, these forces have taken their toll on activity, and evidence has accumulated that the economy has hit a soft patch."

He also focused on computing and communications. He reiterated the point that "With margins under pressure, businesses have also been reallocating their capital so as to use it more productively. Moreover, for equipment with active secondary markets, such as computers and networking gear, productivity may also have been boosted by a reallocation to firms that could use the equipment more efficiently. For example, healthy firms reportedly have been buying equipment from failed dot-coms."

He also stated that "Arguably, the pickup in productivity growth since 1995 reflects largely the ongoing incorporation of innovations in computing and communications technologies into the capital stock and business practices. Indeed, the transition to the higher permanent level of productivity associated with these innovations is likely not yet completed. Once the current level of risk recedes, businesses will no doubt move to exploit the profitable investment opportunities made possible by the ongoing advances in technology."

USTR Plans FTA Negotiations with Australia

11/13. U.S. Trade Representative (USTR) Robert Zoellick notified Congressional leaders of his plans to initiate negotiations for a free trade agreement (FTA) with Australia. Among the topics to be covered are access to the telecommunications services sector, promotion of e-commerce, customs duties on electronically delivered products, and protection of intellectual property rights (IPR).

See, USTR release, letter [PDF] to Rep. Denny Hastert (R-IL), and substantially identical letter [PDF] to Sen. Robert Byrd (D-WV).

Telecommunications. He wrote that he plans to "Pursue a comprehensive approach to market access, including enhanced access for U.S. services firms to telecommunications and any other appropriate services sectors in Australia抯 market."

  Robert Zoellick

Electronic Commerce. Zoellick wrote that he plans to "Seek to affirm that Australia will allow goods and services to be delivered electronically on terms that promote the development and growth of electronic commerce." He also plans to "Seek to ensure that Australia does not apply customs duties in connection with digital products or unjustifiably discriminate among products delivered electronically."

Intellectual Property Rights. Zoellick wrote that he plans to "Seek Australia's ratification of the World Intellectual Property Organization (WIPO) Copyright Treaty and the WIPO Performances and Phonograms Treaty" and "to establish standards that build on the foundations established in the WTO Agreement on Trade-Related Aspects of Intellectual Property (TRIPs Agreement) and other international intellectual property agreements, such as the WIPO Copyright Treaty and Performances and Phonograms Treaty." (Parentheses in original.)

He also wrote that he plans to "Seek to enhance the level of Australia抯 protection for intellectual property rights beyond TRIPS in new areas of technology, such as internet service provider liability."

He also wrote that he will seek "patent protection and protection of undisclosed test data and other information" more in line with U.S. standards.

Finally, Zoellick wrote that he will "Seek to strengthen Australia's domestic enforcement procedures, such as increasing criminal penalties so that they are sufficient to have a deterrent effect on piracy and counterfeiting."

Tech Crime & Fraud Report

11/13. A trial jury of the U.S. District Court (NDCal) returned a guilty verdict against Robert Prevett on one count of insider trading in violation of 15 U.S.C. Ё 78j and 78ff. This is a case involving insider trading in the stock of Nvidia, which makes graphics processors and media communications devices. USAO release.

11/13. The U.S. Court of Appeals (7thCir) issued its opinion [PDF] in USA v. Chad Hughes and Gary Bovey, appeals from sentencing in a currency counterfeiting case. The Appeals Court noted that the defendants "produced the counterfeit bills with a Hewlett Packard ink jet printer" and "bonded paper". The defendants argued for shorter sentences on the grounds that they merely photocopied bills. The District Court rejected this argument, because it found that the bills were "very realistic". The Appeals Court affirmed the District Court's sentences.

11/13. The Securities and Exchange Commission (SEC) filed a civil complaint in U.S. District Court (SDNY) against, Inc., a company that operates commercial websites and engages in e-commerce retailing, and two of its principals, alleging, among other things, fraud in violation of Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act, and Rule 10b-5. The complaint alleges that 800America "is committing an egregious financial fraud by falsifying virtually all of its reported revenues and millions in expenses and assets"; it also alleges unregistered offerings, insider trading, and misrepresentations in its public filings and to the public. The complaint seeks injunctive relief, an asset freeze, and other relief. The Court issued a temporary restraining order. See also, SEC release.

11/13. The Federal Trade Commission (FTC) announced an initiative to fight deceptive spam and Internet scams. See, FTC release.

People and Appointments

11/13. Thomas Chandler was named Chief of the Federal Communications Commission's (FCC) Consumer & Governmental Affairs Bureau's Disability Rights Office (DRO). Cheryl King was named to the new position of Deputy Chief of the Office. Former DRO Chief Pam Gregory will become a special advisor to the chief. See, FCC release (FCC).


11/13. President Bush announced his intent to appoint John Chambers and Albert Edmonds to be members of the National Infrastructure Advisory Council (NIAC). Chambers is P/CEO of Cisco Systems. Edmonds is President of US Government Solutions at EDS. See, White House release.

11/13. The Intellectual Property Owners Association (IPO) announced the appointment of several committee chairmen. Larry Welch of Eli Lilly was named chairman of the Harmonization / World Patent Committee. Lee Caffin of Aventis Pharmaceuticals was named chairman of the International Prosecution Practice Committee. Ken Stachel of PPB Industries was named chairman of the European Union Competition Regulations Committee. Richard Weiss of Nortel Networks was named chairman of the IP Licensing Committee.

11/13. The Senate confirmed Carol Chien-Hua Lam to be U.S. Attorney for the Southern District of California for the term of four years.

More News

11/13. The Federal Communications Commission (FCC) adopted a Report and Order [117 pages in PDF] amending its Broadcast Auxiliary Service (BAS) rules. The Order states that this is "to permit BAS stations to introduce new technologies and create a more efficient BAS that can more readily adapt as the broadcast industry converts to the use of digital technology, such as digital television (DTV)." See also, FCC release [PDF].

11/13. The U.S. Patent and Trademark Office (USPTO) announced that the National Intellectual Property Law Enforcement Coordination Council (NIPLECC) has released its annual report. See, USPTO release. However, the USPTO has not published the report in its web site.

Court Holds New York's Ban on Internet Wine Sales Is Unconstitutional

11/12. The U.S. District Court (SDNY) issued it opinion [32 page PDF scan] in Swedenburg v. Kelly, holding that New York state's ban on the direct shipment of out of state wine is unconstitutional. Small wineries that are prohibited from selling directly to New York customers over the Internet, or by other direct means, brought the challenge.

The Plaintiffs are small winery owners who cannot sell their wines over the Internet, or by direct mail, because of protectionist legislation in states such as New York. Juanita Swedenburg is an owner of the Swedenburg Winery in northern Virginia. David Lucas owns The Lucas Winery in California. Other plaintiffs are New York state residents and wine consumers who joined in the suit.

New York state statute prohibits Swedenburg and Lucas from selling directly to prospective customers in New York state. New York Alco. Bev. Cont. Law 102(1)(c) provides in part: "No alcoholic beverages shall be shipped into the state unless the same shall be consigned to a person duly licensed hereunder to traffic in alcoholic beverages. This prohibition shall apply to all shipments of alcoholic beverages into New York state and includes importation or distribution for commercial purposes, for personal use, or otherwise, and irrespective of whether such alcoholic beverages were purchased within or without the state ..."

New York Alco. Bev. Cont. Law 102(1)(d) provides in part: "No common carrier or other person shall bring or carry into the state any alcoholic beverages, unless the same shall be consigned to a person duly licensed hereunder to traffic in alcoholic beverages ..."

New York Alco. Bev. Cont. Law 102(1)(a) provides that: "No person shall send or cause to be sent into the state any letter, postcard, circular, newspaper, pamphlet, order kit, order form, invitation to order, price list, or publication of any kind containing an advertisement or a solicitation of any order for any alcoholic beverages, irrespective of whether the purchase is made or to be made within or without the state, or whether intended for commercial or personal use or otherwise, unless such person shall be duly licensed hereunder to traffic in alcoholic beverages."

That is, the New York system for alcohol sales requires that alcohol producers must go through licensed wholesalers and distributors who must in turn go through licensed retailers who then may sell to consumers.

The New York statutes provide several exceptions to the ban on direct sales, but they apply only to wineries located within the state of New York.

On February 3, 2000 Swedenburg, Lucas, and their prospective New York customers filed their Original Complaint in the U.S. District Court (SDNY) against Edward Kelly and other Commissioners of the New York State Liquor Authority. The state moved to dismiss. The District Court issued its Decision and Order denying that motion on September 5, 2000. See, TLJ story on the Decision and Order and TLJ story on related cases.

Following discovery, the parties filed cross motions for summary judgment. Plaintiff's asserted that the statutory scheme violates the Commerce Clause and the Privileges and Immunities Clause. New York argued that its scheme is permissible under the 21st Amendment.

The District Court granted plaintiffs' motion for summary judgment, holding that New York's ban on direct wines sales violates the dormant Commerce Clause of the U.S. Constitution. Judge Richard Berman wrote the opinion. He reviewed the legislative history of the statute, and concluded that its purpose was to protect in state wineries.

The Court did not reach the Privileges and Immunities issue. Also, the Court has yet to address remedies. It requested further briefing, and set a hearing for December 5.

Clint Bolick, VP of the Institute for Justice, counsel for the plaintiffs, stated in a release that "This is a decisive victory against the monopolists who would stand between consumers and their wine. It should have widespread ramifications not only for wine but for all Internet commerce. This is an occasion to pop some corks in celebration of an important decision for consumers."

However, the legal precedents on the constitutionality of state barriers to direct wine sales are not uniform. In particular, the U.S. Court of Appeals (7thCir) reached a different conclusion in its opinion in Bridenbaugh v. Wilson. In that case, the plaintiffs challenged the constitutionality of an Indiana statute that made it unlawful for persons in another state to ship an alcoholic beverage directly to an Indiana resident. The District Court held that the Indiana direct shipment regulation was unconstitutional under the Commerce Clause, and granted the plaintiffs' summary judgment motion (Bridenbaugh v. O'Bannon, 78 F. Supp.2d 828 (N.D. Ind. 1999)). Then, the Seventh Circuit reversed, upholding the constitutionality of the state ban.

Judge Frank Easterbrook wrote that "This case pits the twenty-first amendment, which appears in the Constitution, against the ``dormant commerce clause,创 which does not." He continued that the 21st Amendment (which repealed prohibition) "directly authorizes state control over imports, while the premise of dormant commerce clause jurisprudence is an inference that the grant of power to Congress in Art. I sec.8 cl. 3 implies a limitation on state authority over the same subject. We must decide how the combination of express grant and implied withdrawal of state power applies to" the Indiana ban on direct sales of wine. He came down on the side of the 21st Amendment.

He rejected arguments that the focus of the 21st Amendment was temperance. Instead, he concluded that the Indiana statute "has one real economic effect on out-of-state sellers who neither have nor seek Indiana permits: it channels their sales through Indiana permit-holders, enabling Indiana to collect its excise tax equally from in-state and out-of-state sellers. As the history of the twenty-first amendment confirms, this is precisely what sec.2 is for."

He also rejected the argument that there was discrimination. He noted that "Wine originating in California, France, Australia, or Indiana passes through the same three tiers and is subjected to the same taxes. Where's the functional discrimination?"

Perhaps the Swedenburg and Bridenbaugh cases are distinguishable on their underlying facts. New York exempted in state wineries from its ban on direct sales.

There are also other cases, including Bainbridge v. Bush, 148 F.Supp.2d 1306 (M.D.Fla. 2001), in which the District Court upheld Florida's ban on direct shipment of wine. However, it was vacated and remanded by the 11th Circuit earlier this month in Bainbridge v. Turner.

Clint Bolick also stated, "This is not the end of the road. We expect an appeal. We fully expect this important decision for consumer freedom will ultimately be decided by the U.S. Supreme Court."

Also, it should be noted that legal challenges to state protectionist statutes that impede electronic commerce in wine products face greater obstacles than other challenges. First, there is the 21st Amendment obstacle. Second, there is the state's interest in limiting sales to minors. As Judge Easterbrook put it, "the twenty-first amendment empowers Indiana to control alcohol in ways that it cannot control cheese".

House Approves Cyber Security R&D Act

11/12. The House approved HR 3394, the Cyber Security Research and Development Act. The Senate passed the bill on October 16. It is ready for President Bush's signature.

The bill authorizes the appropriation of $903 Million over five years for cyber security related research and education programs to be run by the National Science Foundation (NSF) and the National Institute of Standards and Technology (NIST). The bill is sponsored by Rep. Sherwood Boehlert (R-NY), the Chairman of the House Science Committee, and others. See, Science Committee summary of the bill, and funding table.

Rep. Boehlert stated in the House that "We received yet another reminder of that monumental fact last month when the servers that run the Internet in the U.S. were subject to a concerted attack from overseas. H.R. 3394 is designed quite simply, to usher in a new era in cybersecurity research. Cybersecurity research will no longer be a backwater, but rather will become a priority at two of our premier research agencies". See, floor statement.

District Court Enters Final Judgment in Microsoft Case

11/12. The U.S. District Court (DC) entered Final Judgment in USA v. Microsoft. The Court also issued an Order in which it stated summarized the final disposition of this case: "On November 1, 2002, this Court entered a conditional approval of the settlement agreed to by the parties in this case. On November 8, 2002, pursuant to that decision, the United States submitted a Third Revised Proposed Final Judgment (揟RPFJ) which includes jurisdiction for the Court to act sua sponte in its retention of jurisdiction in this case. The United States also submitted a stipulation executed by the United States, the States of New York, Ohio, Illinois, Kentucky, Louisiana, Maryland, Michigan, North Carolina and Wisconsin, and Microsoft Corporation, agreeing to the filing and entry of the TRPFJ. Therefore, it is this 12th day of November, hereby ORDERED that as the Court has accepted the Third Revised Proposed Final Judgment submitted on November 8, 2002, a separate judgment shall be issued this same day adopting it as the final judgment in this case."

Ballmer Speaks in Washington DC

11/12. Microsoft CEO Steve Ballmer gave a speech at the Brookings Institution in Washington DC. He gave a glowing and optimistic speech about technology, innovation, and the future of Microsoft. He also spoke about Microsoft's commitment to abide by the terms of the settlement in the government's antitrust case, which was finalized on the day of his speech.

He was received warmly. Robert Litan introduced him. Litan prosecuted Microsoft before joining Brookings, and advocated its breakup thereafter. Reporters and others in the audience tossed him softball questions.


Settlement of Antitrust Case. Ballmer stated that "The settlement with the Department of Justice and the states upheld two weeks ago is a fundamental part of what's different and new at Microsoft. This is a fair settlement, achieved through professional mediation with the Department of Justice and the state attorneys general. It was given the full scrutiny of a fair and impartial trial, based on a trial on remedies as well."

He continued that "The settlement contains new obligations, responsibilities, and regulations on our company. We fully accept them and we're fully committed to complying with them. We've already made many of the necessary changes, and we are dedicated, from the top down, to really living those obligations. We've taken a number of steps to disclose additional technical details about Windows, and to make the design and contractual changes required by the decree."

He next addressed Microsoft's antitrust compliance committee. He said that it "will be chaired by Dr. James Cash of the Harvard Business School. The Committee also has two others members Ann Korologos, a former Secretary of Labor who lives here in Washington, and is seated up here in the front, and Ray Gilmartin, the CEO of Merck Company."

He added that "As CEO of Microsoft, I can personally assure you that we will commit all the time, all the energy, and all the resources to follow through on our responsibilities under the decree."

He also commented on how Microsoft has changed during the course of the antitrust lawsuit. He said that "There's no question that when the lawsuit started, most of our industry did not race to support us. We went out and tried to listen, both to our supports and to our critics. We learned that we needed to take a different perspective on being a good industry leader."

"Even five years ago, I think we still tended to think of ourselves as kind of a small company that was just getting started. If you think about where we came from, that makes some sense. Today, though, we clearly recognize we are an important industry leader, whose decisions have an impact on other companies, large and small. We have an important leadership role to play, and there are new rules that apply, both legally and in terms of the needs and dictates that come from our industry," said Ballmer.

Ballmer also stated that Microsoft would be working more closely with other companies and with governments. He said, "Working better with our industry is one change. Working more closely with governments is yet another. We're working hard to reach out to cooperate with local, national, and global governments. In fact, I think we're really on the verge of a new era of partnership for our industry with government."

Settlement of FTC Privacy Complaint. He cited as an example Microsoft's quick settlement of the administrative complaint [6 pages in PDF] brought by the Federal Trade Commission (FTC) on August 8, 2002. It alleged violation of Section 5(a) of the Federal Trade Commission Act (FTCA) in connection with Microsoft's privacy and security practices. It focused on Microsoft's sign-on and online wallet services named Passport and Passport Express Purchase. See also, story titled "FTC Files and Settles Complaint Against Microsoft Regarding Privacy and Security" in TLJ Daily E-Mail Alert No. 488, August 9, 2002.

Ballmer said that "we reached an agreement with the FTC on security and privacy issues an agreement under which the federal government sets certain standards but permits us to continue to develop new and better technologies and operating approaches to meet these obligations. What could have been years of wrangling, frankly, became an agreement that I think will help create a more secure computing environment. Technology brings a host of wonders and conveniences, but it also brings with it new problems and challenges."

Security. He concluded that "Our industry can't solve all these problems alone, and we don't think governments often cannot solve them alone, either. We need to work together, on a global basis."

He also went into detail on computer and network security. He said that "Security is fundamentally an issue about a community of criminals looking to steal people's identities, break into banks, even terrorize the Internet. Last month we saw a concerted attack on the DNS servers designed to bring down the entire Internet. It failed, thank goodness, but people will try again and again."

"Identity theft alone last year cost consumers over $1 billion, and it's one of the fastest-growing crimes in the world. Too often when we all hear the word ``hackers创 we think of teenagers trying to do something cute. In fact, with more and more critical business transactions done on the Internet, hacking is a big-time crime. And so we are stepping up our cooperation with law enforcement at all levels, helping to track down and identify thieves, and working with the Office of Cyber Terrorism", said Ballmer.

He also added that "Internally, we've adopted trustworthy computing standards that put security, privacy, and reliability really in at the ground floor, at the forefront of everything that we build. We're sending out security updates to make our products safer from those criminals. But no matter how high we all in our industry build the walls, we also have to work with government on an effective program to deter cyber-crime at its source and make sure that those who commit it are caught and convicted. Working together, industry and government can and will build a secure digital future."

Questions and Answer Session. Ballmer asked himself, rhetorically, "But what did you learn from all of this?" He responded that "I think we've learned a great deal from our experience in the last few years about our own responsibility in this context, as an industry leader." During the question and answer session a reporter asked Ballmer, what did you teach them? Ballmer was taken aback, but responded that "we haven't taught anything to anybody".

Ballmer was asked about whether Microsoft is working with or against the entertainment industry on copyright issues. He responded that "we are both producers of intellectual property" and that their "disagreements are about the hows, not the whethers".

He was also asked why Microsoft does not sell a stripped down version of Windows. He offered several reasons, including that a "junior product" does not sell, that "customers get confused by the distinction", and that "it is not what the real consumer wants".

He was also asked about Microsoft's views on proposed privacy legislation. He did not offer any expressions of support or opposition to any specific bills. However, he stated that "there does need to be a level of government involvement".

DOJ and EU Grant Antitrust Clearance to 3G Patent Platforms

11/12. The Department of Justice's (DOJ) Antitrust Division and the European Commission announced that both entities have granted antitrust clearance for five patent platforms for third generation (3G) wireless services.

Assistant Attorney General Charles James wrote a letter to Ky Ewing of the law firm of Vinson & Elkins, counsel for the 3G Patent Platform Partnership (3GPPP), explaining the DOJ's decision.

James reviewed the technologies involved. He wrote that "There are two generations of wireless communications systems in use today in the United States and other nations. The first uses analog transmission technology, while the second generation ("2G") uses various digital transmission technologies and makes possible the provision of some additional services along with voice telephony. The third generation ("3G") of wireless communication systems, also involving the use of digital transmission technologies, will enable not only wireless voice telephony, but also the transmission of data at rates much higher than those of the second generation systems, making additional applications possible. As with the second generation, there will not be a single global 3G radio interface technology. Pursuant to its International Mobile Telephony-2000 ("IMT-2000") project, the International Telecommunication Union ("ITU") has approved five different radio interface technologies for use in 3G systems, which determine how a signal travels over the air from a user's handset to an operator's terrestrial network ..." (Footnote omitted.)

James also reviewed the role of patents in 3G standards. He wrote that "As with most standardized technology, utilization of any of the interface standards may implicate the patent rights of numerous entities. As of June 2000, a total of 45 firms had claimed ownership of at least one patent essential to compliance with one or more of the 3G radio interface standards to at least one standards-related body. Consequently, it appears likely that any operator of a 3G wireless system and any manufacturer of 3G equipment, whether handsets or network infrastructure, regardless of the particular radio interface technology it adopts, will need to acquire licenses from multiple patent holders, and for some standards may need licenses for a large number of patents. Each such patent owner could exclude an operator or manufacturer from the use of a 3G technology by denying it a license." (Footnote omitted.)

James noted that the 3GPPP had originally proposed a single patent platform, but has since agreed to the separation into five largely independent platforms, one for each competing 3G wireless technology.

James concluded that "it appears likely that the Platform arrangements described are not likely to impede competition and could offer some integrative efficiencies for users of the various 3G interface standards. ... For these reasons, the Department is not presently inclined to initiate antitrust enforcement action against the conduct you have described."

See also, DOJ release and EU release.

FRB Governors Address Technology and Economy

11/12. Federal Reserve Board (FRB) Vice Chairman Roger Ferguson gave a speech titled "Recent Experience and Economic Outlook" at the Carnegie Mellon University in Pittsburgh, Pennsylvania. Also on November 12, FRB Governor Mark Olson gave a speech to the Ohio Bankers titled "The Banking Industry in 2002 after a Decade of Change". Both addressed the role of technology and communications in the economy.

Ferguson stated that "Like its predecessor in 1990-91, the most recent recession was relatively mild; and the current recovery, compared with previous recoveries, has similarly been restrained." He added that "the 2001 downturn was led by a collapse in business spending, especially for equipment and software."


He explained that "In retrospect, this downturn in investment seems to have been caused by an overbuilding of capital stocks in the late 1990s, especially in high-tech equipment. The boom in high-tech spending appears to have been sparked by the confluence of three key trends: the rapid growth in computing power generated by dramatic advances in semiconductor technology; the advent of new networking technologies that permitted computers to communicate more easily with each other in private networks and through the public Internet; and the development of software programs that facilitated these interactions and greatly expanded the use of personal computers. During this period of rapid change, the rate of return to investing in these new technologies and applications looked to be very high. These perceived high rates of return encouraged new firms, supported by investors eager for windfall financial gains, to enter these markets, and induced a record setting expansion of capital spending."

"As it turned out, however, some of these investments were overly optimistic and capital markets were not sufficiently discriminating. The expected returns to the new equipment did not materialize, and many of the new high-tech start-ups went bankrupt. As a result, the economy was left with a bulge in corporate defaults for investors to absorb, and an overhang of high tech capital, which has subsequently exerted a substantial drag on business spending and economic activity", said Ferguson.

Olson stated that the prosperity of the last decade "was fueled significantly by capital investment in information technology and in telecommunications capabilities. Ongoing advances in technology, related in part to this investment, further supported the level of economic activity. The resulting structural improvements in productivity allowed for significant growth both in output and in compensation to workers, who in turn could acquire consumer goods and make financial investments in debt and equity markets."

Supreme Court Vacates Judgment in Intermatic v. Lamson & Sessions

11/12. The Supreme Court granted certiorari in Intermatic v. Lamson and Sessions, a patent infringement case involving the doctrine of equivalents. The Court also ordered that "The judgment is vacated and the case is remanded to the United States Court of Appeals for the Federal Circuit for further consideration in light of Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki Co." This is No. 02-193. See, Order List [PDF], at page 1. However, the Supreme Court issued no opinion.

The U.S. Court of Appeals (FedCir) issued its opinion on December 17, 2001, three weeks before the Supreme Court heard oral argument in the Festo case. The Supreme Court issued its opinion [21 pages in PDF] in Festo on May 28, 2002. See, story titled "Supreme Court Vacates in Festo", TLJ Daily E-Mail Alert No. 439, May 29, 2002.

Intermatic holds U.S. Patent No. 5,280,135, titled "Outdoor Electrical Outlet Cover". It filed a complaint in U.S. District Court (NDIll) against Lamson & Sessions alleging patent infringement. The jury returned a verdict in favor of Intermatic. The Appeals Court addressed the issues of claim construction, literal infringement, the doctrine of equivalents, and invalidity. The Appeals Court affirmed in part and reversed in part. Judge Pauline Newman dissented in part, regarding the doctrine of equivalents.

Supreme Court to Hear CIPA Case

11/12. The Supreme Court noted probable jurisdiction in U.S. v. American Library Association, No. 02-361. See, Order List [PDF], at page 2.

On May 31, 2002, a A three judge panel of the U.S. District Court (EDPenn) issued its opinion in American Library Association v. U.S., finding unconstitutional the library related provisions of the Children's Internet Protection Act (CIPA).

This matter is before the Supreme Court as an appeal, rather than on writ of certiorari, because the CIPA provides for this procedure. Section 1741 of the CIPA provides that any challenge to the statute be heard on an expedited basis by a three judge panel of the U.S. District Court. The plaintiffs filed a complaint in the U.S. District Court for the Eastern District of Pennsylvania, a venue disposed to finding Congressional statutes unconstitutional on First Amendment grounds.

The CIPA also provides that a holding by the three judge panel that any part of the CIPA is unconstitutional "shall be reviewable as a matter of right by direct appeal to the Supreme Court". So, the US skipped an appeal to the U.S. Court of Appeals, and appealed directly to the Supreme Court.

The CIPA requires, among other things, that schools and libraries receiving e-rate subsidies certify that they are using a "technology protection measure" that prevents library users from accessing "visual depictions" that are "obscene," "child pormography," and in the case of minors, "harmful to minors." The Court, applying strict scrutiny First Amendment free speech analysis, held that the portion of the statute affecting libraries receiving e-rate subsidies is unconstitutional. However, the CIPA, as it applies to schools, remains unaffected by this opinion.

The e-rate is a two and a half billion dollar per year program controlled by the Federal Communications Commission (FCC) under its universal service mandate. See, 47 U.S.C. 254, and the FCC's schools and libraries web page. As implemented by the FCC, the e-rate program provides subsidies to schools, libraries and rural health clinics for telecommunications services, Internet access, and internal connections. The CIPA conditions receipt of e-rate subsidies on efforts to restrict access to Internet porm.

See also, story titled "District Court Holds Part of Children's Internet Protection Act Unconstitutional", TLJ Daily E-Mail Alert No. 442, June 3, 2002.

DOT's Proposed Rule Changes Do Not Include Regulation of Internet Sales of Airline Tickets

11/12. The Department of Transportation (DOT) adopted a notice of proposed rulemaking (NPRM) that proposes revisions to its regulations governing the computer reservation system (CRS) industry.

The DOT stated in a release that this NPRM "would, if made final, eliminate several provisions of the existing rules. One of these is the requirement that each airline with an ownership interest in a CRS participate in competing systems at the same level at which it participates in its own, if the terms are commercially reasonable. Another is the rule prohibiting discriminatory booking fees. The department has tentatively concluded that these two rules may unduly limit the ability of airlines to bargain for better terms with the systems, and that ending them could allow market forces to provide better terms for carriers than they now have."

The DOT continued that "The NPRM would maintain the existing requirement that information in the systems be organized in an objective and unbiased manner. There may be a risk that systems, whether or not owned by airlines, would engage in display bias if not prohibited from doing so, the proposal said. In addition, DOT proposes to continue the equal-functionality requirement."

The DOT also stated that it "is not proposing to regulate the sale of airline tickets over the Internet, similar to its past decision that the CRS rules should not cover ``brick and mortar创 travel agencies. The department will continue to address on a case by case basis any competition concerns raised by Internet travel services, such as in its ongoing informal investigation of Orbitz, the on-line agency created by the five largest airlines."

People and Appointments

11/12. William Webster resigned as chairman of the Public Company Accounting Oversight Board. Outgoing Securities and Exchange Commission (SEC) Chairman Harvey Pitt announced Webster's appointment last month. See, SEC release.

11/12. Jackson Day was named Acting Chief Accountant of the Securities and Exchange Commission (SEC). Day has been Deputy Chief Accountant since September 2000. Prior to that, he was a partner in Ernst & Young's National Office of Professional Practice in New York. He replaces Robert Herdman, who just resigned. See, SEC release.

11/12. The Business Software Alliance (BSA) presented its Cyber Champion Award to Prime Minister Costas Simitis of Greece, Vice President Carlos Quintanilla Schmidt of El Salvador, and Henry Tang, Secretary for Commerce, Industry and Technology of Hong Kong. See, BSA release.

More News

11/12. The Supreme Court denied certiorari in Donna Vizcaino v. Jon Waite, No. 02-252. See, Order List [PDF], at page3.

11/12. The Supreme Court heard oral argument in Moseley v. V. Secret Catalogue, No. 01-1015. This is a trademark case in which the issue is whether the plaintiff in a lawsuit for violation of the Federal Trademark Dilution Act (FTDA) must show actual economic loss. See, story titled "Supreme Court Grants Certiorari in Trademark Case" in TLJ Daily E-Mail Alert No. 416, April 16, 2002, and story titled "INTA Files Amicus Brief in Trademark Dilution Case" in TLJ Daily E-Mail Alert No. 501, September 4, 2002. See, also International Trademark Association's (INTA) amicus curiae brief [39 pages in PDF], and Intellectual Property Owners Association (IPO) amicus curiae brief [18 pages in PDF].

11/12. The Federal Communications Commission (FCC) published a notice in the Federal Register announcing the release of FCC Forms 470 and 471 and accompanying instructions, to be used by applicants seeking e-rate subsidies under the schools and libraries universal service support mechanism. For more information, contact Narda Jones in the FCC's Wireline Competition Bureau at 202 418-7400.

11/12. The U.S. Court of Appeals (1stCir) issued its opinion in In Re Cabletron, a class action securities case involving the pleading standards of the Private Securities Litigation Reform Act of 1995 (PSLRA).

11/12. A grand jury of the U.S. District Court (EDVa) returned a seven count indictment [14 pages in PDF] of Gary McKinnon alleging computer fraud in violation of 18 U.S.C. 1030. McKinnon, an unemployed computer system engineer residing in London, England, is alleged to have accessed and damaged without authorization computers belonging to the U.S. Army, Navy, Air Force, Department of Defense and NASA, as well a private businesses. The indictment stated that McKinnon used a "software program that provides a remote access and remote administration package for computers on the Internet ..." Then, for example, he "accessed a computer belonging to and used exclusively by the United States Army, Fort Myer, Virginia, ...  The defendant then obtained administrator privileges and transmitted codes, information and commands that: (1) deleted approximately 1300 user accounts; (2) installed [the software program]; (3) deleted critical system files necessary for the operation of the computer; (4) copied a file containing usernames and encrypted passwords for the computer; and (5) installed tools used for obtaining unauthorized access to computers. As a result of such conduct, the defendant intentionally caused damage without authorization by impairing the integrity and availability of data, programs, a system and information ..." (Brackets added by TLJ. See indictment for name of program.)

Steve Ballmer to Speak Today at Brookings Institute

11/11. Microsoft CEO Steve Ballmer will speak at a Brookings Institution event on Tuesday, November 12. Brookings stated in a release that he will discuss "his views on the settlement, the industry, and Microsoft moving forward."

He will also discuss "Microsoft's plans for the future, particularly where it plans to focus its innovation. He is also expected to outline the company's future relationships with its customers, the government, and other players in the software and computer industries."

The event is scheduled for 11:30 AM through 1:00 PM at the Brookings Institute at 1775 Massachusetts Avenue, NW. The event will also be webcast. See also, Microsoft release.

People and Appointments

11/11. Hewlett Packard (HP) announced that Michael Capellas will leave his positions as President and member of the Board of Directors. See, HP release.

11/11. BT named Alison Ritchie Chief Broadband Officer. See, BT release.

11/11. William Esrey, Ch/CEO of Sprint, has been diagnosed with lymphoma, a cancer of the lymphatic system, and will begin chemotherapy to treat the disease. Sprint stated in a release that "Doctors ... have informed him that the lymphoma is considered highly treatable and they anticipate a full recovery. ... Esrey will continue to handle his full day-to-day responsibilities as chairman and chief executive officer while undergoing treatment."

Go to News from November 6-10, 2002.