News from April 21-25, 2003

District Court Holds No Contributory or Vicarious Infringement by Grokster or Streamcast P2P Networks

4/25. The U.S. District Court (CDCal) issued its opinion in MGM v. Grokster, holding that Grokster's and Streamcast's peer to peer file copying networks do not contributorily or vacariously infringe the copyrights of the holders of music and movie copyrights. The holding of the District Court is inconsistent with the holding of the Court of Appeals in the case A & M Records, Inc. v. Napster, Inc., 239 F.3d 1004 (2001).

Background. Metro Goldwyn Meyer, and other movie companies, and various record companies, filed a complaint in the District Court against Grokster, Streamcast and Kazaa alleging copyright infringement, in violation of 17 U.S.C. § 501. Specifically, the plaintiffs allege contributory and vicarious infringement. The direct infringers, the users of the peer to peer networks, were not named as defendants.

In addition, professional songwriters and music publishers filed a class action complaint against the same defendants alleging contributory and vicarious infringement. The two actions were consolidated. The present opinion concerns cross motions for summary judgment involving the current versions of software provided by Grokster and Streamcast, but not by Kazaa.

Judge Stephen Wilson is presiding.

Direct Infringement. The District Court began its analysis by stating that "As a threshold matter, in order to find either contributory or vicarious infringement liability, Plaintiffs must demonstrate that Defendants' end-users are themselves engaged in direct copyright infringement." And, the District Court found, as did the Appeals Court in the Napster case, that the plaintiffs "have established direct infringement of their copyrighted works by some end-users".

However, neither the plaintiff in the present case, nor the plaintiffs in the Napster case, have pursued claims against any direct infringers.

Contributory Infringement. The District Court next analyzed the plaintiffs' claims of contributory infringement. The Court wrote that "There are two factors that come into play in determining liability for contributory infringement: (1) knowledge, and (2) material contribution." The District Court, unlike the Appeals Court in the Napster case, found that the defendants do not possess "knowledge" that their networks or being used to infringe copyrights.

The District Court found that the element of "knowledge" is lacking in this case. Citing Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984), the Court wrote that the "sale of video cassette recorders (``VCR´´s) did not subject Sony to contributory copyright liability, even though Sony knew as a general matter that the machines could be used, and were being used, to infringe the plaintiffs' copyrighted works. Because video tape recorders were capable of both infringing and ``substantial noninfringing uses,´´ generic or ``constructive´´ knowledge of infringing activity was insufficient to warrant liability based on the mere retail of Sony’s products."

The Court continued that "there are substantial noninfringing uses for Defendants’ software", such as "sharing the works of Shakespeare".

The Court wrote that "liability for contributory infringement accrues where a defendant has actual -- not merely constructive -- knowledge of the infringement at a time during which the defendant materially contributes to that infringement". Moreover, "defendants are liable for contributory infringement only if they (1) have specific knowledge of infringement at a time at which they contribute to the infringement, and (2) fail to act upon that information."

In the present case, the Court found that the defendants have knowledge that their software will be used by others to directly infringe plaintiffs' copyrights. But, this is not enough, because the software can also be used for non-infringing purposes. Moreover, the defendants have knowledge that their software is being used to infringe. And, the Court found the plaintiffs have notified defendants of specific instances of copying specific copyrighted items. But, the Court concluded, this does not constitute "knowledge" of infringement sufficient for a finding of contributory infringment.

"Here, it is undisputed that Defendants are generally aware that many of their users employ Defendants' software to infringe copyrighted works," wrote the District Court. "The question, however, is whether actual knowledge of specific infringement accrues at a time when either Defendant materially contributes to the alleged infringement, and can therefore do something about it." (Emphasis in original.)

And, since there is not actual knowledge, of specific infringement, at the time that it accrues, there is not "knowledge".

The Court of Appeals applied a less constraining interpretation of the word "knowledge" in the Napster case. It held that there is knowledge where the defendants "know or have reason to know".

Second, the District Court found that the element of "material contribution" is lacking. Here again, the District Court reached a different result from the Appeals Court in the Napster case. However, here the different outcome was based on a recitation of differing underlying facts. In the Napster case, Napster not only provided the peer-to-peer software, it controlled the software, provided support to users, and ran centralized servers.

In contrast, the Court noted that Grokster does not have access to the source code for the application, and employs a series of "supernodes" on users' computers, rather than a single "supernode" on Napsters' servers.

The District Court also noted that while Streamcast has access to its source code, it is a far more decentralized system than that of Grokster. "Instead of using supernodes, search requests ... are passed from user to user until a match is found or the search request expires." The Court called this a "true" peer to peer network.

And finally, the District Court concluded that these differences in the structure of the networks warrant the conclusion that neither Grokster and Streamcast "materially contribute" to the direct infringement by their users.

The District Court offered this concluding statement on the issue of contributory infringement. "Defendants distribute and support software, the users of which can and do choose to employ it for both lawful and unlawful ends. Grokster and StreamCast are not significantly different from companies that sell home video recorders or copy machines, both of which can be and are used to infringe copyrights. While Defendants, like Sony or Xerox, may know that their products will be used illegally by some (or even many) users, and may provide support services and refinements that indirectly support such use, liability for contributory infringement does not lie ``merely because peer-to-peer file-sharing technology may be used to infringe plaintiffs’ copyrights.´´ Napster, 239 F.3d at 1020-21 (citation omitted). Absent evidence of active and substantial contribution to the infringement itself, Defendants cannot be liable."

Vicarious Infringement. The District Court then rejected the plaintiffs' claim that Grokster and Streamcast engage in vicarious infringement. It first stated the standard: "There are two elements required for vicarious infringement: (1) financial benefit, and (2) the defendant’s right and ability to supervise the infringing conduct."

There Court first concluded that the defendants meet the first part of the test, "financial benefit". It wrote that "The more individuals who download the software, the more advertising revenue Defendants collect. And because a substantial number of users download the software to acquire copyrighted material, a significant proportion of Defendants’ advertising revenue depends upon the infringement. Defendants thus derive a financial benefit from the infringement."

However, the Court concluded that the defendants do not meet the second part of the test, "right and ability to supervise the infringing conduct". The Court held that in this case, unlike the Napster case, the differences in the technologies warrant the conclusion that the defendants have no control over the end users of their software.

On the other hand, the plaintiffs might argue on appeal, that the defendants have no control, to the extent that, anticipating litigation, they constructed their product in a manner that would allow them to raise the legal argument that they lack control.

Deference to Congress. The District Court also stated that the "Plaintiffs invite this Court to expand existing copyright law beyond its well-drawn boundaries." It added that "courts must tread lightly in circumstances such as these".

The District Court also quoted from the Sony case. "The judiciary’s reluctance to expand the protections afforded by the copyright without explicit legislative guidance is a recurring theme. ... Sound policy, as well as history, supports our consistent deference to Congress when major technological innovations alter the market for copyrighted materials. Congress has the constitutional authority and the institutional ability to accommodate fully the raised permutations of competing interests that are inevitably implicated by such new technology."

The reference to deference to Congress on this issue is noteworthy because the Congress, which has long codified copyright law and remedies, and continually revised its codification, has not provided for either contributory or vicarious infringement. These are judicial inventions. If the Courts were to defer to the Congress on copyright law, they would not recognize either contributory or vicarious infringement.

Also, this is noteworthy because the Courts' record of deference to the Congress on copyright law is spotty. For example, while the Supreme Court demonstrated tremendous deference to the Congress in upholding the Copyright Term Extension Act in the Eldred case earlier this year, it demonstrated a complete lack of deference to the Congress in the Eleventh Amendment immunity cases.

See, the January 15, 2003, Supreme Court issued its opinion [89 pages in PDF] in Eldred v. Ashcroft, and TLJ story titled "Supreme Court Upholds CTEA in Eldred v. Ashcroft," January 15, 2003. See also, the opinions of the Supreme Court in Seminole Tribe of Florida v. Florida, holding that the Congress lacks authority under Article I of the Constitution to abrogate the States' 11th Amendment immunity from suit in federal courts, Florida Prepaid Postsecondary Education Expense Board v. College Savings Bank, invalidating the Patent and Plant Variety Protection Remedy Clarification Act, and College Savings Bank v. Florida Prepaid Postsecondary Education Expense Board, invalidating the Trademark Remedy Clarification Act.

Reaction. Hilary Rosen, the outgoing Ch/CEO of the Recording Industry Association of America (RIAA), stated in a release that "Businesses that intentionally facilitate massive piracy should not be able to evade responsibility for their actions. We disagree with the District Court's decision that these services are not liable for the massive illegal piracy that their systems encourage and we will immediately appeal to the 9th Circuit Court of Appeals."

Options Available to Copyright Holders. Several options are now available to the plaintiffs. First, as Rosen stated, they can appeal to the Court of Appeals. Since the District Court in this case lies in the Ninth Circuit, the appeal would be heard by the Ninth Circuit, and the law of the Ninth Circuit (including the Naptster case) would control. And, given the District Court's interpretation of precedent on the issue of contributory infringement, the prospects for reversal are good. On the other hand, it should be noted that some other federal circuits are less receptive to the claims of the copyright industries, and the Ninth Circuit has a higher rate of reversal by the Supreme Court than any of the other circuits.

Second, the plaintiffs may still pursue Kazaa, which was not covered by this opinion. It may also pursue both Grokster and Streamcast for earlier versions of their software.

Third, the District Court did offer the copyright holders one consolation. It wrote that "The Court is not blind to the possibility that Defendants may have intentionally structured their businesses to avoid secondary liability for copyright infringement, while benefitting financially from the illicit draw of their wares." Hence, while this District Court is not receptive to claims of contributory or vicarious copyright infringement, it may be more receptive to various commercial tort claims.

Finally, the plaintiffs may sue the users of peer to peer networks for direct infringement. Moreover, the rulings in January and last week by the District Court (DC) in RIAA v. Verizon increase the likelihood that copyright holders will be able to use subpoenas pursuant to Section 512(h) of the Digital Millenium Copyright Act (DMCA) to obtain information from internet service providers (ISPs). This would enable copyright holders to obtain the identities of individuals who commit direct infringement, thereby enabling them to file lawsuits against them.

See, April 24, 2003, order [3 pages in PDF] and opinion [58 pages in PDF] in RIAA v. Verizon, and TLJ story titled "District Court Rules that a DMCA § 512(h) Subpoena for the Identity of an P2P Infringer Does not Violate the Constitution", April 24, 2003. See also, January 21, 2003, opinion of the District Court, and TLJ story titled "District Court Rules DMCA Subpoenas Available for P2P Infringers", January 21, 2003.

The ISP in that case, Verizon, has stated that it too will appeal. Consumer Electronics Association (CEA) P/CEO Gary Shapiro stated in a release after the most recent ruling that "No American should live in fear that their ISP will be required to turn over their identity to any self-asserted copyright holder simply because someone claims you are doing something illegal." The CEA also called for new legislation.

FCC News

4/25. The Federal Communications Commission's (FCC) Consumer Advisory Committee (CAC) held a meeting. See, speech [2 pages in PDF] by FCC Commissioner Kathleen Abernathy.

People and Appointments

4/25. President Bush announced his intent to nominate Christopher Wray to be the Assistant Attorney General in charge of the Criminal Division. He is currently the Principal Associate Deputy Attorney General. The Criminal Division includes the Computer Crimes and Intellectual Property Section (CCIPS). Wray was previously an Assistant U.S. Attorney in the Northern District of Georgia, and an attorney at the law firm of King & Spalding. If confirmed by the Senate, he will replace Michael Chertoff, who President Bush has nominated to be a Judge of the U.S. Court of Appeals for the Third Circuit. See, White House release.

4/25. President Bush announced his intent to nominate Jack Goldsmith to be the Assistant Attorney General in charge of the Office of Legal Counsel (OLC). He is currently Special Counsel to the General Counsel of the Department of Defense. He is also a professor (on leave) at the University of Chicago Law School. He previously clerked for Supreme Court Justice Anthony Kennedy. Justices Rehnquist and Scalia are also former heads of the OLC. See, White House release.

District Court Rules That A DMCA § 512(h) Subpoena for the Identity of an P2P Infringer Does not Violate the Constitution

4/24. The U.S. District Court (DC) issued an order [3 pages in PDF] and opinion [58 pages in PDF] in RIAA v. Verizon, holding that the issuance of a subpoena by a Clerk of the District Court pursuant to 17 U.S.C. § 512(h) to obtain the identity of an anonymous peer to peer infringer from his ISP does not violate either the First Amendment of the Constitution, or the justiciability requirements of Article III. The District Court also denied Verizon's motion for stay pending appeal, but granted a 14 day stay, to enable Verizon to seek a stay from the Appeals Court.

This opinion addresses Verizon's constitutional objections. The District Court previously rejected Verizon's arguments regarding construction of § 512 of the Digital Millennium Copyright Act (DMCA). On January 21, 2003, the District Court issued its opinion, in which it held that copyright holders can obtain subpoenas pursuant to § 512(h) that require Internet Service Providers (ISPs) to reveal the identities of their customers who infringe copyrights on peer to peer filing copying systems. See also, TLJ story titled "District Court Rules DMCA Subpoenas Available for P2P Infringers", January 21, 2003. See, full story.

FRB Governor Offers Economic Analysis of Tech Investment

4/24. Federal Reserve Board Governor Ben Bernanke gave a speech titled "Will Business Investment Bounce Back?" to the Forecasters Club in New York City. He focused on, among other topics, investment in the technology and communications sectors. He concluded that "Moderately improved performance for 2003 in high-tech investment, concentrated in a pickup in the second half of the year, seems feasible and consistent with fundamentals ..."

Ben BernankeBernanke (at right) began with the observation that "a strong and well-balanced recovery will require a greater contribution from the business sector, in the form of increased capital investment and hiring". But before addressing the prospects for increased investment in the future, he reviewed in detail the boom of the 1990s and the recession that began in 2000.

1990s Tech Boom. He first noted that "a disproportionate part of the investment boom of the nineties can be attributed to investment in computers, software, and communications equipment, so that an important step toward explaining the overall boom in investment is explaining the surge in these high-tech categories."

He reviewed a paper by Stacey Tevlin and Karl Whelan titled "Explaining the Investment Boom of the 1990s". Bernanke said that it "identified two factors that gave a strong impetus particularly to investment in computers during this period. First, the costs of computing power fell sharply in the late 1990s, arguably reflecting a pickup in the pace of technological advance as well as an intensification of competition among the major chip makers. As a result, the user cost of capital for computers and related equipment declined even more rapidly than earlier in the decade. Together with strong overall business conditions, these low and falling costs of computing power induced many firms to make major investments in information technologies. Second, generally speaking, computers exhibit high rates of economic depreciation; for example, new applications requiring greater speed or more memory sometimes make existing computers effectively obsolete within a few years. High rates of economic depreciation imply rapid replacement cycles, and hence high rates of gross investment in computers. Tevlin and Whelan showed that these two factors -- low and falling prices of computing power and high economic depreciation rates -- can explain much of the high rates of gross investment in computers during the nineties; and that these high rates of investment in computers in turn help to explain a substantial part of the overall investment boom."

Bernanke also discussed the Telecommunications Act of 1996. He said that it "was intended to increase competition in the telecom sector. Many firms apparently believed that the dominant market share would go to companies with the biggest networks and the most ``cutting-edge´´ technologies; consequently, investment boomed in the telecom sector."

He added that "Outside the legislative arena, rapidly increasing access to the Internet raised the possibility of a huge new on-line demand for products and services, which spurred a wave of new dot-com startup companies hoping to be the first to meet that anticipated demand. Established firms, from booksellers to clothing retailers, responded with their own on-line marketing outlets, which further boosted the demand for servers, software, and other components. In addition, concerns about the potential effects of the Y2K date change led many firms to accelerate their replacement cycles and order new software and computing equipment."

He summed up the boom of the 1990s: "during the latter part of the nineties, strong economic fundamentals conjoined with what, in retrospect in least, seems to have been a less well grounded increase in general optimism about the long-term potential of new technologies. (I say ``seems´´ in all seriousness. We are not in the long run yet.)" (Parentheses in original.)

2000-02 Tech Recession. Then, he addressed the current recession. He said that "the year 2000 was one of re-evaluation, particularly for high-tech investment. Though the evidence is strong that high-tech investments have greatly enhanced productivity in the economy, by 2000 many managers had apparently become concerned that the long-term profit potential of their investments in computers and communications equipment was smaller than they had expected. In some cases the difficulties were technological, sometimes (as in the case of on-line retailing) the expected level of consumer demand did not materialize, sometimes the business plans were faulty, sometimes economic or regulatory conditions were not as had been expected, and sometimes the productivity enhancements were less than anticipated." (Parentheses in original.)

As a consequence, said Bernanke, "Replacement cycles for high-tech equipment apparently slowed, as firms became more skeptical of the business case for next-generation computers and software -- particularly since they had just upgraded their information technology in preparation for the Y2K date change. Moreover no ``killer apps´´ that required further system upgrades seemed to be on the horizon. The failures of scores of dot-coms and telecom startups reduced competitive pressure and the perceived urgency of maintaining technological leadership. Both financial markets and the general economy were becoming decidedly less hospitable to firms oriented toward new technologies. In short, a major shift in management expectations about the profit potential of new investments, particularly high-tech investments, is key to explaining the investment bust of 2000-02."

Capital Overhang. Bernanke noted that "some observers have ... argued that investment during the late 1990s was so great that actual capital stocks rose substantially above long-run desired levels, creating a ``capital overhang.´´"

He conceded that "Telecommunications companies no doubt invested too much in long-haul fiber networks, as firms competed to establish the largest and most complete networks", but nevertheless argued that "For high-technology equipment, in my view, overhang effects are probably by this time not of great quantitative importance. In communications, for example, though little additional long-haul fiber is needed at this point, there is probably scope for investment in the sophisticated equipment that transmits signals over the fiber, in the ``last mile´´ of fiber network to customers' doorsteps, and in new wireless technologies and their applications."

He added that "Computer equipment purchased before the millennium date change is now four to five years old and may now or soon be in need of replacement. Indeed, investment in high-tech equipment grew at more than 8 percent in real terms in 2002; investments in computers and software led this gain, but even investment in communications contributed a small part. Continued growth in the high-tech equipment sector will be important in any investment recovery."

Prospects for Recovery. Finally, he got to the question of what may happen in 2003 and 2004. He said that "The fundamental factors affecting investment are ... broadly supportive of continuing recovery. The user cost of capital is low and, dominated by continuing reductions in the quality-adjusted prices of high-tech equipment and historically low interest rates, will likely continue to decline. The partial expensing provision passed by the Congress in 2001 provides a significant incentive for firms to purchase equipment and certain types of software before the provision expires in the third quarter of 2004."

He added that "Moderately improved performance for 2003 in high-tech investment, concentrated in a pickup in the second half of the year, seems feasible and consistent with fundamentals, particularly the continued decline in relative prices and growing replacement demand."

People and Appointments

4/24. President Bush announced his intent to appoint eight persons to the National Security Telecommunications Advisory Committee (NSTAC): James Albaugh (Boeing), Frank Ianna (AT&T), Richard Notebaert (Qwest Communications), Hector de Jesus Ruiz (Advanced Micro Devices), Patricia Russo (Lucent Technologies), Stratton Sclavos (VeriSign), Susan Spradley (Nortel Networks), and John Stanton (T-Mobile, Deutsche Telekom AG). The NSTAC was created by Executive Order 12382. See, White House release.

4/24. President Bush announced his intent to nominate Harvey Rosen to be a Member of the three person Council of Economic Advisors. He is a professor of economics at Princeton University. He is also a former Deputy Assistant Secretary of Tax Analysis at the Department of the Treasury. He is the author of a book titled Public Finance [Amazon], a textbook for college students. See, White House release.

4/24. Qwest Communications named John Richardson Controller and SVP of Finance. He will report directly to Oren Shaffer, Qwest's CFO and Vice Chairman. See, Qwest release.

More News

4/24. Secretary of Commerce Donald Evans wrote a letter to Federal Communications Commission (FCC) Chairman Michael Powell regarding the FCC's pending review of media ownership rules. He wrote, "I further commend you, Mr. Chairman, for recognizing the need to resolve the uncertainty surrounding the potential rule changes and setting June 2, 2003, as the target date for a decision in this proceeding. On behalf of the Bush Administration, I urge the Commission to adhere to the schedule you have outlined."

4/24. The Securities and Exchange Commission (SEC) adopted, but did not release, rule changes that require that reports by insiders disclosing their securities holdings be filed electronically with the SEC. The SEC stated in a release that it "voted to mandate the electronic filing of beneficial ownership reports filed by officers, directors and principal security holders under Section 16(a) of the Securities Exchange Act of 1934, and to require issuers with corporate websites to post these reports. Electronic filing and website posting of these reports will result in earlier public notification of insiders' transactions and wider public availability of information about those transactions. The new rules and amendments implement the requirements of Section 16(a)(4), as amended by Section 403 of the Sarbanes Oxley Act of 2002." The rule changes take effect on June 30, 2003.

4/24. Frits Bolkestein, the European Union's (EU) Internal Market Commissioner, issued a release in which he reiterated the EU's concern over the U.S. Public Company Accounting Oversight Board's (PCAOB) decision to require EU based audit firms with U.S. listed clients to register with the PCAOB. He stated that "Registration of EU audit firms is unnecessary, burdensome and disproportionate because the EU has already equivalent systems in place that deal with registration, oversight and external quality assurance of auditors which are continuously being improved at EU and national level". The PCAOB, which was created by the Sarbanes Oxley Act of 2002, released a document [75 pages in PDF] titled "Proposal of Registration System for Public Accounting Firms" on March 7, 2003, which requires registration by foreign public accounting firms.

4/24. Standard & Poor's (S&P) placed AT&T's BBB+ long-term corporate credit on CreditWatch. S&P also affirmed AT&T's short term corporate credit and commercial paper ratings at A-2. Edward Dwyer, AT&T VP and Treasurer, stated in a release that "We understand S&P's concern about the telecom industry. However, AT&T continues to demonstrate success in executing in the marketplace, taking share and growing key areas of our business despite a difficult economic environment and a highly competitive market. We are well-positioned to benefit from any improvement in the economy. AT&T has one of the strongest balance sheets in the telecom industry, with net debt of $12 billion, net of $4.9 billion in cash. We are operating our business from a position of financial flexibility and strength."

4/24. The Internal Revenue Service (IRS) published a notice in the Federal Register announcing temporary regulations regarding the electronic filing of tax returns by tax return preparers. These regulations take effect on April 24, 2003. See, Federal Register, April 24, 2003, Vol. 68, No. 79, at Pages 20069 - 20070. The IRS simultaneously published a second notice in the Federal Register announcing a rule making proceeding in which it proposes to make permanent its temporary regulations. Comments are due by July 23, 2003. See, Federal Register, April 24, 2003, Vol. 68, No. 79, at Pages 20089 - 20090.

4/24. The U.S. Court of Appeals (11thCir) issued its per curiam order [2 pages in PDF] affirming the opinion of the District Court in Gift of Learning Foundation v. TGC.

FCC Announces Order and NPRM Regarding E-Rate Subsidies

4/23. The Federal Communications Commission (FCC) adopted, but did not release, a Second Report and Order and Further Notice of Proposed Rulemaking regarding its e-rate subsidy program, which is plagued by fraud and abuse. The FCC issued two short press releases. See, press release [2 pages in PDF] regarding this order and NPRM, and press release [PDF] regarding the e-rate program.

The e-rate program, which the FCC created in 1997 under the rubric of the universal service provisions of the Communications Act (codified at 47 U.S.C. § 254), provides funding to schools and libraries for telecommunications services, internet access and internal wiring. The program is funding by a tax on phone companies, which in turn, pass the tax on to their customers.

The FCC stated in its release, for example, that persons convicted of criminal violations arising out of participation in the e-rate program will be debarred from participation in the program for three years.

The FCC also stated that it seeks comments on "1) the feasibility of an online computerized eligible services list for telecommunications services and Internet access, 2) procedures implementing the FCC’s decision to carry forward unused funds from the program in subsequent funding years, and 3) whether to expand the circumstances under which persons may be debarred from involvement in the program, including debarment for willful or repeated violators of FCC rules."

Commissioner Jonathan Adelstein wrote a separate statement [PDF] in which he stated that "today's Order is just a first step". He continued that "I am inclined to pursue debarment for those entities that have been found guilty of civil and criminal violations beyond those associated with the Schools and Libraries Program. Moreover, I believe that we should be able to debar providers, and applicants, in the event that USAC can establish a clear pattern of abuse based on objective FCC-crafted, USAC-implemented criteria."

Adelstein also addressed the e-rate's subsidy levels. He wrote that "I believe that it is important to address the possibility of changing the discount levels for this program. Many have suggested that the 90% discount level is too high because it does not require enough of an investment by the school or library. Reducing the discount levels can introduce more accountability, and better control the costs of the program."

The FCC's release also states that the FCC's order "Clarified that requests for duplicative services -- services that deliver the same functionality to the same people during the same period of time -- will not be funded."

Jonathan AdelsteinCommissioner Adelstein (at right) added that "When private companies make decisions about their telecommunications investments, particularly when it comes to investments in equipment, they generally do not expect to replace their equipment year after year. The current rules in the Schools and Libraries program allow schools and libraries to do just that. In this Order, we have reinforced the rule disallowing the funding of duplicative services because they impact the fair distribution of discounts to schools and libraries. Similarly, perhaps we should disallow annual requests for duplicative equipment, or networking, in order to ensure that the funds are more fairly and evenly distributed among requesting users. Perhaps in this program we should consider assigning a ``service life´´ to equipment. This program specific service life would require program participants to keep the equipment for a particular period of time rather than applying annually for discounts for duplicative equipment."

See also, separate statement [PDF] of Chairman Michael Powell, separate statement [PDF] of Commissioner Kathleen Abernathy, and separate statement [PDF] of Commissioner Michael Copps. This is CC Docket No. 02-6. For more information, contact Mark Seifert at 202 418-7400 or

FCC Announces NOI Regarding Broadband Over Powerlines

4/23. The Federal Communications Commission (FCC) adopted, but did not release, a Notice of Inquiry (NOI), regarding the use of powerlines to provide internet and other applications to users, and the use of powerlines within buildings to network equipment. The FCC issued only a press release, while the five FCC Commissioners all released short statements.

Michael PowellFCC Chairman Michael Powell (at right) wrote in his statement [PDF] that broadband over powerline (BPL) "has the potential to provide consumers with a ubiquitous third broadband pipe to the home. The development of multiple broadband capable platforms -- be it power lines, Wi-Fi, satellite, laser or licensed wireless -- will transform the competitive broadband landscape and reap dramatic windfalls for American consumers and the economy. Broadband over power lines is at the cutting edge of this dramatic digital migration that will continue to free applications (e.g., voice, data, and video) from the regulatory and technological shackles that have tied them to specific platforms (e.g., voice to copper and video to coaxial cable). While this migration is well under way, our policies must be dynamic and flexible to further -- rather than frustrate -- the transition." (Parentheses in original.)

See also, separate statement [PDF] of Commissioner Kathleen Abernathy, separate statement [PDF] of Commissioner Michael Copps, separate statement [PDF] of Commissioner Jonathan Adelstein, and separate statement [PDF] of Commissioner Kevin Martin.

The FCC stated in its release that the NOI address both access and in-house BPL. It states that "Access BPL uses medium voltage (1,000 to 40,000 volts) power lines to bring Internet and other broadband applications to homes and offices. In-House BPL uses existing electric utility wiring to network computers and printers, as well as smart appliances, within a building."

The FCC release continued that "existing rules for unlicensed carrier current systems, which couple radio frequency (RF) energy to the alternating current (AC) electrical wiring for the purpose of communications have been successful. However, these carrier current systems have operated with relatively limited communications capability on frequencies below 2 MHz, over a narrow spectrum bandwidth. Now, the availability of faster chip sets and the development of sophisticated modulation techniques have produced new digital power line designs that use multiple carriers, spread over a wide frequency range (e.g., 2 - 80 MHz) and are capable of high data rates."

The FCC stated in its release that it seeks public comments regarding "The current state of high speed BPL technology", "The potential interference effects, if any, on authorized spectrum users", "Test results from BPL experimental sites", "The appropriate measurement procedure for testing emission characteristics for all types of carrier current systems", "Changes that may be needed in Part 15 technical rules and the equipment approval process to foster the development of BPL and to ensure that interference is not caused to other services as a result of this technology".

Commissioner Copps listed more questions in his statement, including "How do we avoid cross-subsidy from a corporation’s regulated energy businesses to its communications business and resulting price hikes for energy customers in noncompetitive markets? What are the implications of power line communications to universal service? To rural communications? Are there pole attachment or rights-of-way issues we should address?"

Nancy Victory, Director of the National Telecommunications and Information Administration (NTIA), wrote a letter to the FCC in which she said that "This nascent technology holds great promise as an additional source of innovation and competition in the broadband marketplace. I encourage the Commission to move forward expeditiously with its inquiry. I also urge the Commission to promptly adopt any subsequent rule changes that may be appropriate to facilitate broadband PLC deployment, while ensuring that those rules prevent harmful radio frequency (RF) interference to other communications mediums."

Representatives of the incumbent local exchange carriers (ILECs) used this occasion to advocate less regulation of their sector. Walter McCormick, P/CEO of the U.S. Telecom Association (USTA), stated in a release that BPL "brings even more competition into the broadband market. Consumers have many options today for broadband service, including cable modems, wireless, satellite, and now -- power lines. While these platforms all operate virtually free from federal regulation, DSL providers, which serve a smaller portion of the market than other providers, are heavily burdened by outdated rules that are indifferent to the realities of the economic marketplace."

Herschel Abbott, BellSouth VP for Governmental Affairs, stated in a release that "the FCC should deregulate telco-provided digital subscriber loop (DSL) high-speed Internet service ..."

This is ET Docket No. 03-104. For more information, contact Anh Wride at or 202 418-0577.

FCC Announces Changes to Satellite Licensing System

4/23. The Federal Communications Commission (FCC) announced, but did not release, a First Report and Order and Further Notice of Proposed Rulemaking (IB Docket No. 02-34), and a First Report and Order (IB Docket No. 02-54), both of which pertain to satellite services. The FCC did issue a short press release [2 pages in PDF].

Chairman Michael Powell wrote in a separate statement [PDF] that "The satellite industry is a vital partner in the digital migration. The fundamental changes we have made today will enhance the ability of the market to encourage competition both within the satellite industry and across technologies with other types of facilities-based providers. Today satellites provide the key facilities-based competitor to cable television. Increasingly satellite services are also playing a key role in voice and data applications."

Michael CoppsCommissioner Michael Copps wrote a concurring statement [PDF] in which he said that "we are radically changing the satellite licensing system". He elaborated that "I am concerned about trafficking and arbitrage in FCC licenses. Congress has given the Commission the responsibility to administer and protect the public spectrum. This includes defending our rules against abuse by those who wish to profit by "flipping" licenses rather than offering satellite services to Americans. Today the Commission eliminates the Anti-Trafficking Rule. Many satellite companies believe that this will lead to increased speculation. At the same time the Commission creates a first-come-first-serve system that, for all its merits, many in the satellite industry believe will lead to a gold rush for licenses."

See also, separate statement [PDF] of Commissioner Kathleen Abernathy, and separate statement [PDF] of Commissioner Jonathan Adelstein.

People and Appointments

4/23. Patrick Von Bargen was named Managing Executive for Policy and Staff at the Securities and Exchange Commission (SEC). He will assist SEC Chairman William Donaldson with the promulgation and enforcement of policies, regulations, rules and procedures governing markets and issuers. He will also be Donaldson's primary liaison with the other Commissioners' offices, and conduct the management of the Chairman's personal office. Previously, he was the Executive Director of the National Center for Regional Innovation and Competitiveness and VP of the Council on Competitiveness. From 1999 to 2002, he was the founding Executive Director of the National Commission on Entrepreneurship. From 1989 to 1999, he was Chief of Staff for Sen. Jeff Bingaman (D-NM). Before that, he worked for the law firms of Morrison & Foerster and Hutchinson Black Hill & Cook. And before that, he worked for Sequoia Funds, a Menlo Park, California, venture capital fund. See, SEC release.

4/23. Peter Derby was named Managing Executive for Operations at the Securities and Exchange Commission (SEC). He will assist SEC Chairman William Donaldson with administrative, operational and management issues. He has been an elected member of the Board of Trustees of the Village of Irvington-on-Hudson, New York, since 2002. Before that, he participated in the founding of DialogBank, a private bank in Russia, and Troika Dialog, a Russian investment firm. Before going to Russia, he worked at National Westminster Bank and Chase Manhattan Bank in New York City. See, SEC release.

4/23. Laura Cox was named Managing Executive for External Affairs at the Securities and Exchange Commission (SEC). She will assist SEC Chairman William Donaldson with the oversight of the SEC's legislative affairs, public affairs, intergovernmental affairs and investor education efforts. She is currently a Deputy Assistant Secretary for Banking and Finance in the Office of Legislative Affairs at the Department of the Treasury. Before that, she was VP for Strategic Policy Communications, Government and Regulatory Affairs at Instinet. And before that, she worked on Capitol Hill, for Sen. Richard C. Shelby (R-AL), former Sen. Paul Coverdell (R-GA), and Rep. Charles Stenholm (D-TX). See, SEC release.

4/23. Chris Sprigman was named a partner in the antitrust section in the Washington DC office of the law firm of King & Spalding. He focuses on focuses on the intersection of antitrust law, intellectual property and competition policy. He previously worked for the Antitrust Division of the Department of Justice. See, release.

More News

4/23. The Federal Communications Commission (FCC) adopted, but did not release, a Memorandum Opinion and Order and Third Report and Order establishing licensing and service rules for 4940-4990 MHz band. The FCC issued a short press release [PDF] in which it stated that the adopted rules "are intended to promote spectrum access for a variety of new broadband applications such as high-speed digital technologies and wireless local area networks for incident scene management, dispatch operations and vehicular operations. This action also promotes interoperability by providing a regulatory framework in which traditional public safety entities can pursue strategic partnerships with both traditional public safety entities, such as the Federal Government, and non-traditional public safety entities, such as utilities and commercial entities, in support of their missions regarding homeland security and protection of life and property." See also, separate statement [PDF] by Chairman Michael Powell, separate statement by Commissioner Michael Copps, and separate statement [PDF] by Commissioner Kevin Martin. This is WT Docket No. 00-32. For more information, contact Genevieve Augustin at 202 418-1305 or or Tim Maguire at 202 418-2155 or

4/23. The Federal Communications Commission (FCC) released a Memorandum Opinion and Order (MOO) in which it granted in substantial part a complaint brought by Core Communications, Inc. against Verizon Maryland Inc. alleging that Verizon had violated 47 U.S.C. § 251(c)(2)(D) and FCC rules by failing to interconnect with Core on reasonable terms. The FCC concluded that "Verizon acted unreasonably by taking too long to complete interconnection with Core and by failing to promptly notify Core of the likelihood and extent of the interconnection delay." This is the proceeding titled "In the Matter of Core Communications, Inc. v. Verizon Maryland Inc." and numbered EB-01-MD-007. See also, FCC release.

4/23. The Copyright Office (CO) published a notice in the Federal Register that revises the schedule for its hearings regarding the exemption of certain classes of works from the Digital Millennium Copyright Act's (DMCA) prohibition against circumvention of technological measures that control access to copyrighted works. See, original notice in the Federal Register, March 20, 2003, Vol. 68, No. 54, at Pages 13652 - 13653, and revised notice in the Federal Register, April 23, 2003, Vol. 68, No. 78, at Pages 19966 - 19967 (changing the dates, times and locations). See also, CO web page on rulemakings on anticircumvention, the relevant statutory sections at 17 U.S.C. §§ 2101-2105, and story titled "Copyright Office to Hold Hearings on DMCA Anti Circumvention Exemptions", TLJ Daily E-Mail Alert No. 628, March 21, 2003. There will be three hearings at the Postal Rate Commission, 1333 H Street, NW., Third Floor on May 1 at 2:00 PM, May 2 at 9:30 AM, and May 9 at 9:30 AM. There will also be one hearing at the UCLA School of Law in Los Angeles, California on May 14-15 at 9:00 AM.

10th Circuit Rules on Civil Liability for Violation of Wiretap Act

4/22. The U.S. Court of Appeals (10thCir) issued its opinion in Quigley v. Rosenthal, a civil case involving application of the federal wiretap act to the monitoring of cordless telephone conversations, as well as defamation, invasion of privacy by intrusion, and false light invasion of privacy. The case addresses who can be held liable for illegal interception of wire or electronic communications, and when the First Amendment offers protection to those who make use of such intercepted communications.

The Appeals Court affirmed a District Court civil judgment against the Anti-Defamation League (ADL) for violation of the Wiretap Act, when it had not conducted the monitoring, but rather, had conspired with others who recorded the cordless telephone conversations, and then made use of the recordings.

The Appeals Court also rejected the ADL's argument that its use of the recordings was protected by the First Amendment. The Appeals Court distinguished the Supreme Court's recent opinion in Bartnicki v. Vopper, which held that a radio host who disclosed an illegally recorded cell phone conversation was protected by the First Amendment.

Also, while the facts of this case involve cordless phones, the underlying statute regulates the interception of many forms of communication, including wireline phones, cellular phones, and internet communications. See, full story.

EPIC Asserts Amazon Product Reviews Violate COPPA

4/22. The Electronic Privacy Information Center (EPIC), and other groups, submitted a complaint to the Federal Trade Commission (FTC) alleging that Amazon has violated the Children's Online Privacy Protection Act (COPPA). The COPPA, which is codified at 15 U.S.C. § 6501 through § 6506, assigns authority to promulgate regulations, and enforcement authority, to the FTC. The COPPA, and FTC rules, bar the operators of web sites that are targeted at children from collecting personally identifiable information from children under 13 without parental consent.

The complaint asserts that Amazon is targeted at children. The information collected by Amazon that the complaint alleges violates the statute is online product reviews that are authored by children.

The complaint requests that the FTC conduct an investigation, and order Amazon to delete information, destroy records, and comply with the COPPA.

The EPIC and others will hold a press teleconference at 11:00 AM on Tuesday, April 22, to announce and discuss this complaint. See, calendar.

More News

4/22. The Center for Democracy and Technology (CDT) sent a letter [7 pages in PDF] to the state of Pennsylvania's Office of the Attorney General (OAG) appealing its denial, in part, of the CDT's request, pursuant to the Pennsylvania Right to Know statute, that the OAG disclose the uniform resource locators (URLs) of internet web sites that the OAG has directed internet service providers (ISPs) to block on the grounds that they contain child pormography in violation of Pennsylvania law. The CDT wrote that "we fully appreciate the potential sensitivity of the requested records, but nevertheless believe that Pennsylvania law gives its citizens the right to know about the specific actions of state officials. Under the relevant case law applicable to the Right to Know statute, the requested documents are public records that cannot be withheld based on any of the enumerated statutory exemptions." The CDT further stated that it wants to "determine what innocent web sites have been blocked."

Microsoft to Revise Licensing Terms for Server Operating System Products

4/21. The Antitrust Division of the Department of Justice (DOJ) released a document titled "Microsoft Consent Decree Compliance Advisory" which pertains to revisions made to licenses Microsoft is offering for server software under the terms of the U.S. District Court's (DC) November 12, 2002, Final Judgment. See also, DOJ release.

The advisory states that "Section III.E. of the Final Judgment requires Microsoft to make available for use by third parties on reasonable and non-discriminatory terms certain technology used by Microsoft server operating system products to interoperate with Windows operating system products. Microsoft began to offer this technology for license on or about August 6, 2002."

The advisory continues that the DOJ "has undertaken a careful and thorough review and evaluation of the terms of the licenses offered by Microsoft. As part of that review, the Department has consulted with various parties likely to be interested in the licenses, as well as with Microsoft. The Department has also analyzed complaints regarding Microsoft's compliance with Section III.E. during this time period. In response to comments from the Department and other antitrust enforcement agencies, Microsoft agreed to substantially revise the terms of the licenses that it initially offered on August 6, 2002, as well as to eliminate the non-disclosure agreement covering the terms of those licenses that Microsoft had originally imposed. The revised licenses will be available for review on Microsoft's website within the next several days."

Microsoft stated in a release that as a part of the settlement and final judgment, "Microsoft has made available for license elements of its Windows client/server intellectual property -- called protocols -- to other companies for use in their server products to interoperate with certain Windows clients. The Microsoft Communications Protocol Program (MCPP) was released in August 2002, and several companies have licensed various protocols since that time. ... In the coming weeks, Microsoft will announce and implement an additional set of proposed changes that will further simplify entry to, and participation in, the program."

Supreme Court News

4/21. The Supreme Court granted, without opinion, a petition for writ of certiorari in DeKalb Genetics v. Bayer CropScience, No. 02-130. The Court wrote, "The petition for a writ of certiorari is granted. 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 State Farm v. Campbell, 538 U.S. ___ (2003)." The Court also granted certiorari, vacated, and remanded in four other cases in light of State Farm v. Campbell. See, Order List [17 pages in PDF] at page 1. On April 7, 2003, the Supreme Court issued its opinion [35 pages in PDF] in State Farm v. Campbell, holding that an award of $145 Million in punitive damages, based on an award of $1 Million in compensatory damages, is excessive and violates the due process and equal protection clauses. In DeKalb Genetics v. Bayer CropScience, a patent and fraud case, the jury awarded $65 Million in damages, $50 Million of which were punitive damages.

4/21. The Supreme Court denied certiorari, without opinion, in Time Warner Entertainment v. Six Flags Over Georgia, No. 02-978. See, Order List [17 pages in PDF] at page 5. This lets stand an award of $197.3 Million in compensatory damages and $257 Million in punitive damages against TWE in this breach of fiduciary duty case. See also, Time Warner Entertainment v. Six Flags Over Georgia, 245 Ga. App.334, 537 S.E.2d 397 (2000).

4/21. The Supreme Court denied certiorari, without opinion, in CECG v. Magic Software Enterprises, No. 02-1219. See, Order List [17 pages in PDF] at page 5. This case involves a contract dispute regarding the sale and licensing of a computer software program. See, October 8, 2002 opinion [14 pages in PDF] of the U.S. Court of Appeals (3rdCir).

People and Appointments

4/21. Howard Schmidt announced that he will resign from his position as cyber security advisor to the Bush administration. The Information Technology Association of America (ITAA) took the occasion to praise Schmidt's work, and to urge the President to appoint a "cyber czar". See, ITAA release.

More News

4/21. The Federal Trade Commission (FTC) announced that it will hold a public workshop on June 18, 2003, on the costs and benefits to consumers and businesses of the collection and use of consumer information. May 9 is the deadline to submit requests to the FTC to participate as panelists. See, FTC release.

4/21. The Copyright Office (CO) published a notice of proposed rulemaking in the Federal Register. The CO wrote that the proposed rules would "govern SoundExchange, an unincorporated division of the Recording Industry Association of America, Inc., when it functions as the designated agent for the purpose of receiving royalty payments and statements of accounts from nonexempt subscription digital transmission services which make digital transmissions of sound recordings under a statutory license." Public comments are due by May 21, 2003. See, Federal Register, April 21, 2003, Vol. 68, No. 76, at Pages 19482 - 19485.

4/21. The Universal Music Group and EMI Recorded Music filed a complaint in U.S. District Court (CDCal) against Hummer Winblad Venture Partners. Hummer Winblad is a venture capital firm focused exclusively on software. The dispute arises out of Hummer Winblad's financing of Napster, the bankrupt peer to peer file copying company, which infringed the copyrights of Universal and EMI.

Go to News from April 16-20, 2003.