News from November 6-10, 2003

7th Circuit Rules in Illinois UNE Case

11/10. The U.S. Court of Appeals (7thCir) issued its opinion [15 pages in PDF] in AT&T v. Illinois Bell, an appeal from a District Court decision that held that portions of the state of Illinois's Public Utilities Act are preempted by Section 251 of the Communications Act, pertaining to interconnection and unbundling.

Introduction. This is a dispute over the rates that competitive carriers pay incumbents for access to unbundled network elements. AT&T filed a lawsuit in federal court in Illinois alleging that a just enacted Illinois statute pertaining to rates is preempted by federal law. The District Court granted summary judgment to AT&T, held the state statute unlawful, and enjoined implementation of this state statute. The Appeals Court affirmed.

But, this is a complex case, and the Appeals Court opinion is densely packed with significant interpretations and analysis of the 1996 Act, interconnection, unbundling, total element long-run incremental cost (TELRIC) pricing, state authority, and procedure. Readers interested in this area of law will want to carefully read the entire opinion.

To start with, the case caption is confusing. The case was filed, and proceeded through the District Court, as Voices for Choices v. Illinois Bell. The Appeals Court changed the caption. It wrote in the present opinion that "AT&T tried to give the suit a public-interest patina by making ``Voices for Choices´´ -- which despite its name is a trade association rather than a consumers' group -- the lead plaintiff. The appellate brief reveals that AT&T's lawyers also represent Voices for Choices, which presents no arguments on its own behalf; we have changed the caption to reflect the real parties in interest."

This is not the first time that this Appeals Court has expressed disapproval of the posturing in this case. On August 6, Judge Richard Posner issued a solo opinion [7 pages in PDF] in which he explained his reasons for refusing to accept two amicus curiae briefs submitted by state legislators and an interest group. He wrote that individual legislators and interests groups should not attempt to lobby in the judicial process. See, story titled "Judge Posner Opines On Amicus Briefs" in TLJ Daily E-Mail Alert No. 714, August 8, 2003.

Parties and Proceedings Below. When the dispute underlying this case began, in the aftermath of the Telecommunications Act of 1996, Illinois Bell was a subsidiary of Ameritech, one of the Regional Bell Operating Companies (RBOCs). Competitive entrants AT&T and MCI both demanded access to the unbundled network element platform (UNE-P) of Illinois Bell. The companies could not agree on a price. So, in 1997, the Illinois Commerce Commission (ICC) set a price of about $5 per month per UNE-P in Chicago, and about $12 on average statewide. Retail customers pay an average of about $36 per month for the service one UNE-P creates.

Ameritech subsequently merged with SBC. Five years after the original ICC proceeding, Illinois Bell (SBC) asked the ICC to raise the rates. SBC argues that it costs it $29 per month to supply the UNE-P that fetches $36 from a retail customer but only $12 on average from AT&T or MCI.

While the ICC was considering this matter (ICC Docket 02-0864), the Illinois State Legislature enacted a statute (which the Appeals Court opinion quotes at length) regarding unbundled network element rates. It is codified at 220 ILCS 5/13-408.

The Court of Appeals summarized the statute: "In other words, within 30 days the ICC had to adjust SBC's rates using its current fill factors and depreciation schedules from its financial statements. Depreciation, like fill factor, is inversely related to price under TELRIC. If economically and technologically efficient equipment would have a useful life of five years, then the TELRIC price to rivals is greater (because cost must be covered faster) than if the life is ten years. The statute told the ICC to use the equipment life spans that SBC had adopted for purposes of financial reporting—and for that purpose firms often use lives as short as the IRS will accept, because shorter lives mean faster depreciation and lower taxes. Through 220 ILCS 5/13-408 the tax-and-accounting lives of SBC’s assets became their economic lives too. The legislation added that AT&T and SBC could not use the ensuing higher wholesale prices as justifications for increased retail rates."

Before the ICC made its decision, AT&T (Voices for Choices) filed a complaint in U.S. District Court (NDIll) against Illinois Bell alleging that the 1996 Telecom Act preempts the Illinois statute. On June 9, 2003, the District Court held that the state statute is defective because federal law makes the state regulatory commission the exclusive source of non-federal substantive rules, and because the particular statutory rules for the handling of fill factors and depreciation conflict with TELRIC.

Excerpts from the Court's Discussion of TELRIC and the Triennial Review Order. The Appeals Court wrote that "TELRIC obliges both incumbents and state regulators to set prices based on the long-run costs that would be incurred to produce the services in question using the most-efficient telecommunications technology now available, and the most efficient network configuration. Incumbents that have aging and inefficient equipment thus must sell for less than their historical cost; the old system that calculated rates based on actual cost of equipment plus a reasonable rate of return on capital is out the window."

In continued that "In Verizon Communications Inc. v. FCC, 535 U.S. 467 (2002), the Supreme Court held that TELRIC is a choice within the FCC's discretion."

"TELRIC is a framework rather than a formula; there is considerable play in the joints. See AT&T Corp. v. FCC, 220 F.3d 607, 615-16 (D.C. Cir. 2000); Sprint Communications Co. v. FCC, 274 F.3d 549, 556 (D.C. Cir. 2001). Incumbent carriers may be unable to agree with would-be entrants about what the most efficient technology is, how much it would cost to construct, and what the incremental costs of a given network element would be. Moreover, even when the parties can agree on the technology, they may be unable to agree on vital details. One such detail is the ``fill factor.´´"

The Court added that "TELRIC does not contain an algorithm for determining the fill factor. The FCC has approved several. In the Triennial Review Order the FCC explained that many issues have a range of reasonable answers for the parties—or state regulators, acting under state law -- to flesh out. See Report and Order, FCC 03-36, 68 Fed. Reg. 52,276, 52,284 (Aug. 21, 2003). Moreover, the Commission has opened an investigation of TELRIC’s operation to ensure that price does not fall below the level needed to encourage efficient investment in new facilities by both incumbents and their rivals. See Notice of Proposed Rulemaking, FCC 03-224, 68 Fed. Reg. 59,757 (issued Sept. 15, 2003, and published Oct. 17, 2003)."

See, story titled "Summary of FCC Triennial Review Order", also published in TLJ Daily E-Mail Alert No. 725, August 25, 2003. See also, story titled "FCC Releases TELRIC NPRM and Working Paper" in TLJ Daily E-Mail Alert No. 740, September 16, 2003.

Appeals Court Holding. The Appeals Court, reviewed the history of the breakup of the AT&T monopoly, passage of the 1996 Telecom Act, the nature of interconnection, and the meaning and legal status of TELRIC. The Court also addresses in detail the problems created by AT&T's procedural tactic of challenging the lawfulness of the Illinois statute, rather than the ICC's forthcoming rate ruling (which had to be made within 30 days).

In the end the Court affirmed the District Court, and offered this explanation of the consequences of its affirmance. "The injunction still bars the ICC from using 220 ILCS 5/13-408 to set rates. If the elected branches of state government want the Commission to proceed along these lines, they must enact new legislation that addresses fill factors and asset lives as elements of a comprehensive process designed to generate a rate that complies with TELRIC. The ICC also is compelled by the injunction to reinstate the proceeding in its Docket 02-0864, which the state law had terminated, and to proceed to decision as expeditiously as possible. The ICC must attempt to produce a rate that complies with TELRIC as of 2003 -- and if doing this entails use of SBC’s current fill factors, the ICC is free to use them. And it must do this speedily. A rate that is long out of date, as this 1997 rate is, frustrates the goals of TELRIC every bit as much as does a rate generated under the flawed state legislation. SBC and its rivals alike are entitled to an updated rate that comports with federal law."

Judge Frank Easterbrook wrote the opinion of the Appeals Court. Judges Dianne Wood and Bauer joined.

This case is AT&T Communications of Illinois, Inc., et al. v. Illinois Bell Telephone Co. and Ameritech Corp., U.S. Court of Appeals for the 7th Circuit, Nos. 03-2735 & 03-2766, an appeal from the U.S. District Court for the Northern District of Illinois, D.C. Nos. 03 C 3290 and 03 C 3643, Judge Charles Kocoras presiding.

Supreme Court Grants Certiorari in Intel v. AMD

11/10. The Supreme Court granted certiorari in Intel v. AMD, a case regarding the availability of a discovery order from a U.S. District Court, pursuant to 28 U.S.C. § 1782, for a complainant in an antitrust matter before the European Commission. See, Order List [8 pages in PDF] at page 2. See, full story.

FCC Releases LNP Order That Addresses Wireline to Wireless

11/10. The Federal Communications Commission (FCC) announced and released a Memorandum Opinion and Order and Further Notice of Proposed Rulemaking [35 pages in PDF] regarding local number portability (LNP).

This item states that "We find that porting from a wireline carrier to a wireless carrier is required where the requesting wireless carrier's ``coverage area´´ overlaps the geographic location in which the customer's wireline number is provisioned, provided that the porting-in carrier maintains the number’s original rate center designation following the port."

It also states that "wireline carriers may not require wireless carriers to enter into interconnection agreements as a precondition to porting between the carriers."

This item also includes a further notice of proposed rulemaking (FNPRM). It states that the FCC seeks public "comment on how to facilitate wireless-to-wireline porting if the rate center associated with the wireless number is different from the rate center in which the wireline carrier seeks to serve the customer. In addition, we seek comment on whether we should require carriers to reduce the length of the porting interval for ports between wireless and wireline carriers."

See also, FCC release [2 pages in PDF] summarizing this item. The FCC adopted this item on November 7, and released it on November 10, 2003. This is FCC 03-284 in CC Docket No. 95-116.

FCC Chairman Michael Powell wrote in a separate statement [PDF] that "After today it's easier than ever to cut the cord. By firmly endorsing a customer’s right to untether themselves from the wireline network -- and take their telephone number with them -- we act to eliminate impediments to competition between wireless and wireline services. Seamless wireline-to-wireless porting is another landmark on the path to full fledged facilities-based competition."

In addition, Commissioner Kathleen Abernathy wrote a separate statement [PDF], Commissioner Kevin Martin wrote a separate statement [PDF], Commissioner Michael Copps wrote a separate statement [PDF], and Commissioner Jonathan Adelstein wrote a separate statement [PDF].

On October 7, 2003, the FCC issued a Memorandum Opinion and Order (MOO) [PDF] in its proceeding titled "In the Matter of Telephone Number Portability -- Carrier Requests for Clarification of Wireless-Wireless Porting Issues". This MOO addressed wireless to wireless, but not wireless to wireline, LNP issues. See, story titled "FCC Issues LNP Order" in TLJ Daily E-Mail Alert No. 756, October 9, 2003. This is FCC 03-237, in CC Docket No. 95-116.

On November 10, Steve Largent, P/CEO of the Cellular Telecommunications & Internet Association (CTIA), stated in a release that "the FCC struck down a major barrier to competition in the near-monopoly landline telephone market - and consumers are the real winners. Competition has proven to be the strongest force for falling prices and increased innovation, and America's landline telephone customers will have choices like never before ... Millions of landline customers may want to take advantage of the convenience and value of wireless, by transferring their home numbers to mobile phones."

Sprint praised the FCC order in a release. It stated that "Local number portability holds the promise to enhance consumer choice and improve competition, and today’s action will ensure that the full benefits of portability will extend to landline customers as well."

Wireline companies expressed less enthusiasm.

Walter McCormick, P/CEO of the U.S. Telecommunications Association (USTA), stated in a release that "Unfortunately, with this ruling, the Commission chose not to take the time to address many critical issues for porting. As a result, instead of ensuring the benefits of a vibrant voice market, the FCC severely limited consumer choice by sharply reducing the ability of wireline providers to actively compete for customers."

Qwest SVP Gary Lytle stated in a release that "This is a one-way street that will leave millions of customers stranded without the ability to convert wireless numbers to wireline." He added that "Qwest supports wireless to wireline number portability, but once again the Federal Communications Commission is creating a regulatory scheme that picks winners and losers. Qwest supports true customer choice, which means the ability to take their telephone numbers with them to either a wireless or wireline option." He also stated that "Qwest is exploring its legal options."

BellSouth stated in a release that "There are technical as well as procedural problems here. On August 18, 1997, the FCC issued a report and order on local number portability. It was an order that dealt mostly with allowing customers to keep the same number for their wired phone when they moved within the same neighborhood. In that order, the FCC recognized -- and we quote -- `that it will probably be necessary to modify and update the local number portability standards and procedures in order to support wireless number portability.´"

"Now, more than six years after the FCC instituted their number portability regime, the commission extended the rules without any official proceeding. We think this lack of notice violates the legal standards of the Administrative Procedures Act requiring an agency to provide notice and a period for comment on its proposed actions", wrote BellSouth.

Briefs Filed With Supreme Court in Nixon v. Missouri Municipal League

11/10. Numerous briefs have been filed with the U.S. Supreme Court in Nixon v. Missouri Municipal League, a case regarding 47 U.S.C. § 253(a) and state statutes that prohibit political subdivisions from offering telecommunications services. Several amici argue that not allowing local governments to provide telecommunications services hinders the deployment of broadband services in rural and underserved areas.

Jeremiah Nixon is a party to this litigation in his capacity as Attorney General of Missouri. The state of Missouri passed a law that says that Missouri's political subdivisions (such as towns and counties) cannot offer telecommunications services. The incumbent local exchange carrier (ILEC), Southwestern Bell, does not want to compete against service providers that are subsidized and favored the local governments. It supports the Missouri legislation. The Missouri Municipal League (MML), which represents political subdivisions in Missouri, opposes the statute, and wants it preempted by federal law. The Federal Communications Commission (FCC), which has statutory authority to preempt this statute, sides with the state of Missouri and Southwestern Bell as a matter of statutory construction. It also argues that government entities cannot be both regulators and competitors. The FCC issued an order in which it declined to preempt the statute.

This case has attracted numerous amicus curiae briefs. Some amici argue, as a matter of public policy, that this case is about spurring broadband deployment. That is, they argue that in many rural areas and small towns broadband access services will not be provided by the private sector, and therefore, government entities should be allowed to provide these important services.

The Supreme Court has scheduled oral argument for Monday, January 12, 2004.

The Statutes. Missouri Statutes, Section 392.410(7), provides that, subject to certain enumerated exceptions, "No political subdivision of this state shall provide or offer for sale, either to the public or to a telecommunications provider, a telecommunications service or telecommunications facility used to provide a telecommunications service for which a certificate of service authority is required pursuant to this section."

The Communication Act, at 47 U.S.C. § 253(a), provides that "No State or local statute or regulation, or other State or local legal requirement, may prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service." (Emphasis added.)

FCC Proceedings. Various municipalities and municipal organizations filed a petition with the Federal Communications Commission (FCC) asking that it preempt the Missouri statute for being in violation of § 253(a).

The FCC denied the request to preempt by Memorandum Opinion and Order [18 pages in PDF] released on January 12, 2001. This is CC Docket No. 98-122.

The FCC wrote that "We do not preempt the enforcement of HB 620 to the extent that it limits the ability of municipalities or municipally owned utilities, acting as political subdivisions of the state of Missouri, from providing telecommunications services or facilities. As we found in the Texas Preemption Order, the term ``any entity´´ in section 253(a) of the Act was not intended to include political subdivisions of the state, but rather appears to prohibit restrictions on market entry that apply to independent entities subject to state regulation."

The FCC added that "municipal entry into telecommunications could raise issues regarding taxpayer protection from economic risks of entry, as well as questions concerning possible regulatory bias when a municipality acts as both a regulator and a competitor."

Court of Appeals. The municipal entities then filed a petition for review with the U.S. Court of Appeals (8thCir). Southwestern Bell and Nixon (Missouri) intervened in support of the FCC. The National Association of Telecommunications Officers and Advisors (NATOA) and the United Telecom Council supported the municipal parties, as amici curiae.

The Appeals Court vacated the FCC order, and remanded. It reasoned in its opinion [11 pages in PDF] that "The dispute hinges on the meaning of the phrase ``any entity´´ in § 253 of the Act. More precisely, do the words ``any entity´´ plainly include municipalities and so satisfy the Gregory plain statement rule? We hold that they do." This opinion is also published at 299 F.3d 949.

See also, story titled "8th Circuit Rules States Cannot Bar Municipalities From Providing Telecom Services" in TLJ Daily E-Mail Alert No. 492, August 15, 2002.

Petitions for Writ of Certiorari. The Supreme Court granted certiorari on June 23, 2003. The three consolidated petitions are Nixon v. Missouri Municipal League (S.C. No. 02-1238 ), FCC v. Missouri Municipal League (S.C. No. 02-1386), and Southwestern Bell v. Missouri Municipal League (S.C. No. 02-1405). See, Order List [12 pages in PDF] at page 2.

See also, the FCC's petition for writ of certiorari [71 pages in PDF], Nixon's petition for writ of certiorari [37 pages in PDF], and the respondents' brief in opposition [PDF] to granting certiorari. See also, story titled "Supreme Court Grants Certiorari in Nixon v. Missouri Municipal League" in TLJ Daily E-Mail Alert No. 687, June 25, 2003.

FCC Briefs on the Merits. The FCC wrote in its brief [31 pages in PDF] on the merits for the Supreme Court that § 253(a) does not preempt a state law allocating authority to the state's political subdivisions unless it can be shown that Congress's intent to preempt such laws is clear under the rule of Gregory v. Ashcroft, 501 U.S. 452 (1991). It argues that such intent is not clear, and therefore, the 8th Circuit should be reversed.

The FCC wrote that "It is common ground that 47 U.S.C. 253(a), which preempts state laws that ``prohibit or have the effect of prohibiting the ability of any entity to provide any interstate or intrastate telecommunications service,´´ applies to state laws that regulate entry by private firms into the telecommunications market. The question presented is whether it also preempts state laws that limit or prohibit the State's own political subdivisions from providing telecommunications service. The court of appeals in this case, as well as each of the other courts that has addressed that question, has concluded that it is governed by the clear statement rule of Gregory v. Ashcroft, 501 U.S. 452 (1991). That conclusion is correct."

The FCC brief continues that "If Section 253(a) were construed to preempt state laws that allocate authority to political subdivisions, it would interfere with a fundamental aspect of state sovereignty. ... Congress does not ordinarily intend to interfere with state authority in areas that are so central to state self-government. Accordingly, Section 253(a) cannot be construed to have that effect unless it can be concluded with certainty that Congress so intended."

Southwestern Bell Brief. Southwestern Bell argues in its brief [50 page PDF scan] that "Under Gregory v. Ashcroft and its progeny, section 253(a) can be interpreted to strip the States of the right to decide whether their political subdivisions offer telecommunications only if the Court were to determine that section 253(a) is unmistakably clear in compelling that interpretation. That standard is not remotely satisfied. Section 253(a) is at best ambiguous as to whether Congress intended the extreme result of freeing political subdivisions of the constraints placed upon them by state law. Accordingly, the judgment of the Eighth Circuit should be reversed."

"Congress passed the 1996 Act, and section 253(a) in particular, to overturn state exclusive-franchise laws and thus free private competitors potentially subject to state regulation from the state and local laws that would otherwise preclude their entry into local telecommunications markets. That step itself transformed traditional local telecommunications regulation. However, section 253(a) does not demonstrate -- much less demonstrate unmistakably -- that Congress went much further and forced the States to allow their own instrumentalities to offer telecommunications services even if the State has decided against that course as a matter of policy."

Southwestern Bell's brief was prepared by the law firm of Kellogg Huber.

Rep. Boucher's Brief. Rep. Rick Boucher (D-VA), who is a member of the House Commerce Committee, and its Subcommittee on Telecommunications and the Internet, submitted an amicus curiae brief [18 pages in PDF]. Rep. Boucher, who was present during the drafting of the 1996 Act, argued that "State laws prohibiting local governments from providing telecommunications services are invalid." He urges that the 8th Circuit be affirmed.

Rep. Rick BoucherFirst, Rep. Boucher (at right) argued statutory construction. "In the 1996 Telecommunications Act, the Congress provided that the states may not prohibit ``any entity´´ from providing telecommunications services. The words ``any entity´´ should be given their ordinary meaning, which certainly includes a governmental entity. Congress chose not to make the same distinction in section 253(a) between public and private entities that was made in the pole attachment section of Act, 47 U.S.C. § 224, a part of the Act on which Congressman Boucher focused specifically. The Federal Communication Commission's contrary interpretation is inconsistent with the plain meaning of the statutory language, the intent of Congress, and the policy goals of the Act. This Court should honor the intent of Congress and allow local governments to offer commercial telecommunications services, notwithstanding any barriers to market entry enacted by the States."

Next, he argued why this interpretation is vital to broadband deployment in his district -- a large, rural district in southwest Virginia. His brief states that "limitations on the availability of advanced telecommunications services have constrained the ability of Southwest Virginia to attract new employers and make the most of the region's potential for economic development. Businesses and consumers increasingly require high bandwidth connections that remain unavailable in many areas of Southwest Virginia."

The brief notes that localities in Rep. Boucher's district, including the City of Bristol, have begun telecommunications projects, and the Rep. Boucher has secured a federal grant funding for his district for fiber optic backbone projects.

The brief concludes that "The return on investment for these projects can only be measured in the economic future of the region. The policies of the Telecommunications Act are being served when local governments are allowed to proceed with these projects to provide opportunities for Southwest Virginians, opportunities without which the task of achieving growth and opportunity in this area would become far more challenging."

Rep. Boucher's brief was prepared by the law firm of Elliott Lawson & Pomrenke of Bristol, Virginia. This firm also prepared an amicus brief [17 pages in PDF] for Educause, in which it argued that "Especially where private companies have failed to meet local needs, local governments and higher education working together have pioneered efforts to solve the economic development and advanced networking needs of underserved localities, creating significant competitive advantages for communities that may otherwise lag behind on the technology adoption curve."

This firm also prepared an amicus brief [28 pages in PDF] for Virginia localities in which it argued that "In Virginia, some localities would be unserved or underserved unless local governments are considered ``entities´´ that can provide telecommunications services."

High Tech Broadband Coalition Brief. The High Tech Broadband Coalition (HTBC) and the Fiber-to-the-Home Council (FTTHC) filed a joint amicus curiae brief [PDF].

The HTBC is a group that is made up of industry groups. Its members include the Business Software Alliance (BSA), Consumer Electronics Association (CEA), National Association of Manufacturers (NAM), Semiconductor Industry Association (SIA), and Telecommunications Industry Association (TIA). See also, HTBC release. If broadband internet access is widely deployed and used, the members of these groups will sell more software, computers, electronics devices, components, fiber optic cable, telecommunications equipment, and other things.

The HTBC and FTTHC argue that "As both Congress and the FCC have repeatedly recognized, the national deployment of broadband and other advanced telecommunications services is in the Nation’s interest."

They state that "Municipal entry into the telecommunications market has been enormously valuable in countless instances of deployment in areas that are not an investment priority for private sector providers."

The conclude that "Precluding states from erecting barriers to municipal entry into the market for advanced telecommunications services is not only appropriate from a policy perspective, it is also legally the right result and consistent with Congress’s intention when it enacted the 1996 Act. The legislative history plainly demonstrates that Congress carefully selected broad language, "any entity," when it described the scope of the competition it sought to protect."

CFA Brief. The Consumer Federation of America (CFA) filed an amicus curiae brief [28 pages in PDF] in which it argued that "Bans on municipal entry protect neither consumers nor taxpayers, and inhibit the formation of much-needed competition. In many small and rural communities across the country (and even in many major markets), consumers continue to wait for benefits that such competition could bring. Instead of meaningful competition, consumers are faced with escalating prices charged by and inadequate service received from incumbent providers. In addition, the same incumbent providers resist competition by implementing monopolistic practices that make it difficult for fledgling competitors to succeed. State-imposed prohibitions on municipal entry into telecommunications may prevent residents of small and rural communities from having access to the advanced telecommunications services that are essential in order to be able to participate fully in today’s society."

And, finally, the Missouri Municipal League (MML), argues in its brief [52 pages in PDF] that the 8th Circuit should be affirmed.

The Baller Herbst Law Group, which represents the MML in this matter, has collected numerous documents from the FCC proceeding, the 8th Circuit proceeding, and the Supreme Court proceeding. As of November 10, it had collected and published 27 documents in PDF. See, Baller Herbst web page titled "Missouri Preemption Litigation".

Bush Names Patrick Hughes for Information Analysis Position at DHS

11/10. President Bush announced his intent to appoint Patrick Marshall Hughes to be Assistant Secretary for Information Analysis at the Department of Homeland Security. He is currently a consultant. Previously, he was Director of the Defense Intelligence Agency (DIA) at the Department of Defense (DOD). And before that, he was Director of Intelligence for the Joint Staff, Director of Intelligence for U.S. Central Command, and Commanding General of the U.S. Army Intelligence Agency. See, White House release. He will replace Paul Redmond, who resigned.

The Homeland Security Act of 2002, HR 5005 (107th Congress) and Public Law No. 107-296, creates, in Title II, a directorate headed by an Under Secretary named the "Directorate for Information Analysis and Infrastructure Protection". It has primary responsibility for information sharing and cyber security matters. Title II also creates the positions of Assistant Secretary for Infrastructure Protection and Assistant Secretary for Information Analysis.

President Bush named Frank Libutti to head the Title II Directorate in March of 2003. He also named Robert Liscouski and Paul Redmond for the two Title II Assistant Secretary positions earlier in March. See, story titled "Bush Fills More Tech Positions at DHS" in TLJ Daily E-Mail Alert No. 623, March 14, 2003.

Redmond is a former Central Intelligence Agency (CIA) employee. He held the positions of Associate Deputy Director for Operations for Counterintelligence, Special Assistant to the Director for Counterintelligence and Security, and Deputy Chief of the D.C.I. Counterintelligence Center. However, he resigned shortly after taking office at the DHS.

On June 5, 2003 Redmond testified before two subcommittees of the House Select Committee on Homeland Security. He candidly identified a lack of staff, lack of capability, and lack preparation at the DHS's Office of Information Analysis for assessing bioterror threats.

Democrats on the Committee publicly criticized the DHS. Rep. Jim Turner (D-TX), the ranking Democrat, wrote a letter to President Bush regarding problems at the DHS's Office of Information Analysis. See also, release of Rep. Louise Slaughter (D-NY), with a copy of Rep. Turner's letter attached, release of Rep. Nita Lowey (D-NY), and release of Rep. Jim Langevin (D-RI). Redmond then resigned.

People and Appointments

11/10. Christopher Smith was named the new Chief of Staff of the Department of the Treasury, effective December 1. He will replace Tim Adams, who resigned. Smith is currently Counselor to the Treasury Secretary. Previously, he worked for the House Ways and Means Committee from 1988 through 2000. Before that he was a budget examiner and a special assistant at the Office of Management and Budget (OMB) from 1987 through 1988, and a program evaluator at the General Accounting Office (GAO) from 1986 through 1987. See, Treasury release.

More News

11/10. The Federal Communications Commission (FCC) released its Third Memorandum Opinion and Order [59 pages in PDF] "modifying the rules that new 2 GHz Mobile-Satellite Service (MSS) licensees are to follow when relocating incumbent Broadcast Auxiliary Service (BAS) licensees in the 1990-2025 MHz band and Fixed Service (FS) microwave licensees in the 2180-2200 MHz band." The FCC adopted this MOO on November 5, and announced and released it on November 10, 2003. This is ET Docket No. 95-18, ET Docket No. 00-258, and IB Docket No. 01-185.

FCC To Consider Item Expanding Eligibility for Support for Rural Clinics

11/7. Federal Communications Commission (FCC) Chairman Michael Powell gave a speech [3 pages in PDF] at the University of Virginia's Office of Telemedicine in which he stated that the FCC will consider an item at its November 13 meeting that will expand eligibility for universal service support for rural health care facilities. See also, FCC release [PDF].

He stated that "The rural healthcare program has a $400 million annual cap, but demand in Funding Years 2000 and 2001 averaged approximately $14 million a year. Thus, in 2002, the Commission initiated a proceeding to review the rural healthcare universal service support mechanism and determine in what ways we could improve the effectiveness of the program."

Statutory authority for this program is codified at 47 U.S.C. § 254(h)(1)(A). The FCC adopted its Notice of Proposed Rulemaking (NPRM) [35 pages in PDF] in its proceeding titled "In the Matter of Notice of Proposed Rulemaking (NPRM) Regarding the Universal Service Support Mechanism for Rural Healthcare" on April 18, 2002. It released this NPRM on April 19, 2002. This is WC Docket No. 02-60.

Michael PowellChairman Powell (at right) discussed this proceeding with Rep. Rick Boucher (D-VA) at a hearing of the House Commerce Committee's Telecom and Internet Subcommittee hearing on February 26, 2003. See also, comment [8 pages in PDF] submitted by Rep. Boucher on July 31, 2002, and story titled "Hearing On Triennial Review Order Serves As Forum For Other Issues", February 26, 2003.

Powell stated in his November 7 speech that the FCC "will consider an item at its open meeting next week that will encourage the development of public/private partnerships and other creative solutions to meet the needs of rural communities and increase participation in the rural healthcare program." This item is the first on the agenda or the November 13 meeting, which will begin at 9:30 AM in the FCC's Commission Meeting Room.

Powell continued that "One of the key changes in the upcoming order is the expansion of the rural health program to include discounts on Internet access for rural health care providers. I believe such action will better enable rural health care providers to offer the types of services that we will be seeing in today's demonstration."

Powell also stated that "the order will clarify that dedicated emergency departments in for-profit rural hospitals are ``public´´ health care providers eligible for support. We conclude that emergency departments are public in nature, because they are required by other federal laws to examine and stabilize all patients who walk in the door."

Senate Fails to Pass Bill Extending Expired Net Tax Moratorium

11/7. The temporary moratorium on internet access taxes, and new and discriminatory internet taxes, expired on November 1. The House has passed legislation to permanently extend the ban. The Senate considered, but failed to pass, extending legislation during the week ending on November 7.

The House passed HR 49, the "Internet Tax Nondiscrimination Act", by voice vote on September 17, 2003. This bill would permanently extend the moratorium on internet access taxes and multiple and discriminatory internet taxes that was created by the 1998 Internet Tax Freedom Act (ITFA). It would also eliminate the grandfather provision that allows states that had taxes in 1998 to continue those taxes.

It also contains language that provides that the moratorium applies to telecommunications services, "to the extent such services are used to provide Internet access", thus clarifying that the ban on internet access taxes extends to broadband DSL and wireless services provided by phone companies or others.

The original moratorium lasted for three years. In 2001, the Congress extended the moratorium. The extended moratorium expired on November 1, 2003.

The Senate Commerce Committee passed a Senate version of the bill, S 150, also titled the "Internet Tax Non-discrimination Act", on July 31, 2003. See, story titled "Senate Commerce Committee Approves Bill to Extend Internet Tax Moratorium" in TLJ Daily E-Mail Alert No. 709, Friday, August 1. In addition, the Senate Finance Committee discharged the bill.

Sen. John McCain (R-AZ) offered a substitute amendment that would permanently extend the ban on internet access taxes and multiple and discriminatory taxes. It also contains technology neutrality language. However, this amendment would maintain the grandfather clause for three years.

Sen. McCain stated that "this bill would ensure that consumers would never have to pay a toll when they access the Information Highway. Whether consumers log onto the Internet via cable modem, DSL, dial-up, or another technology that has yet to be invented, under S. 150 they will not see any State and local taxes on their monthly Internet bill. Now would their monthly Internet bills increase because of State and local taxes on Internet access that are passed down to consumers. Plainly and simply, this is a pro-consumer, pro-innovation, and pro-technology bill."

The Bush administration supports legislation extending the ban. On November 5, Secretary of the Treasury John Snow and Secretary of Commerce Donald Evans issued a joint release in which they stated that "government should support the widespread availability and use of the Internet, including the use of broadband technology, and not discourage the Internet’s growth through new access taxes. Keeping the Internet free of multiple or discriminatory taxes will help create an environment for innovation and will help ensure that electronic commerce remains a vital, and growing, part of our economy. A permanent moratorium means a permanent victory for American consumers and businesses."

They added that "We urge the Senate to pass S. 150 as soon as possible so President Bush can sign a permanent Internet tax moratorium."

See also, Software & Information Industry Association (SIIA) release, Cellular Telecommunications & Internet Association (CTIA) release, and Information Technology Association of America (ITAA) release in support of S 150.

District Court Rules on Remand in ECPA Case Involving Web Site Monitoring

11/7. The U.S. District Court (DMass) issued its memorandum on remand [17 pages in PDF] in In re Pharmatrak Privacy Litigation. On May 9, 2003 the U.S. Court of Appeals (1stCir) issued its opinion reversing the District Court's summary judgment, and remanding. The Appeals Court held that web site monitoring can constitute a violation of the Electronic Communications Privacy Act (ECPA).

See, story titled "1st Circuit Holds Monitoring Web Site Traffic Can Violate Wiretap Act" in TLJ Daily E-Mail Alert No. 659, May 12, 2003 for a more detailed summary of the Appeals Court's opinion.

Pharmatrak sold a web site traffic monitoring service named NETcompare to pharmaceutical companies. NETcompare collected information about the web users in the course of their accessing the web sites of pharmaceutical companies that used the NETcompare service. Its parent company is Glocal Communications.

Pfizer, Pharmacia (which was recently acquired by Pfizer), Smithkline Beecham (which merged with Glaxco Wellcome to form GlaxSmithKline), American Home Products (now Wyeth), and Novartis were five pharmaceutical companies that purchased the NETcompare service, from June 1998 through November 2000, for the purpose of obtaining information that would enable them to do intra-industry comparisons of web site traffic and usage.

The pharmaceutical companies did not seek personal or identifying data. However, Pharmatrak nevertheless collected some personal information on a small number of users.

The plaintiffs are individuals who visited the web sites of these pharmaceutical companies.

The Wiretap Act, as amended by the Electronic Communications Privacy Act (ECPA), provides, at 18 U.S.C. § 2511(1), a private cause of action against anyone who "intentionally intercepts, endeavors to intercept, or procures any other person to intercept or endeavor to intercept, any wire, oral, or electronic communication."

The plaintiffs alleged in this class action lawsuit that third party monitoring of web site visits, through the use of cookies, analysis of access logs, and web forms, constituted a prohibited interception of electronic communications. Previously, the District Court held that the web site visitors consented to the interception, and dismissed the claim. The Appeals Court reversed and remanded. It held that Pharmatrak had intercepted communications within the meaning of the EXPA. However, it remanded to the District Court to determine whether the interception was intentional.

The District Court held, in the present memorandum on remand, that the interception was not intentional. It granted summary judgment to defendants.

First, the District Court noted that when the plaintiffs' "computer expert conducted a thorough search of Pharmatrak's computers, as a result of this court's order to do so, he was able to assemble personal profiles on approximately 232 individuals". This was out of "roughly 18.7 million unique Web users" who visited the tracked pharmaceutical company pages.

Second, the District Court noted that "Defendants have provided undisputed descriptions of how pieces of personal information were transmitted to their servers. According to the Defendants, programming errors made by three different third parties caused these transmissions. One hundred sixty-six transmissions were the result of the inappropriate use of the GET method by two of the Defendant pharmaceutical companies, while the remaining sixty-seven occurred because of a mistake in Netscape’s Navigator browser. Because the transmissions were the result of circumstances beyond their control, Defendants argue that they could not have intended to collect the information."

Finally, the District Court noted that the defendants did not know that they had collected any personal data during the years of operation of the NETcompare program.

So, the defendants prevail -- unless this summary judgment is reversed. However, the underlying holding of the Appeals Court -- that web site monitoring can constitute a violation of the ECPA -- stands.

This case is In Re Pharmatrak Privacy Litigation, D.C. No. 00-11672-JLT, MDL Docket No. 1400, Judge Joseph Tauro presiding.

More News

11/7. The Federal Communications Commission (FCC) released a Memorandum Opinion and Order (MOO) in its proceeding titled "In the Matter of Starpower Communications LLC v. Verizon South, Inc." in which it awarded $12 Million in damages to Starpower for violation of an interconnection agreement. The FCC adopted this MOO on November 5, and released it on November 7, 2003. This MOO is FCC 03-278. See also, FCC release.

11/7. The Federal Communications Commission (FCC) published a notice in the Federal Register, on November 7, 2003, requesting comments in one of its proceedings, in which it states that "Interested parties may file comments in this proceeding on or before October 20, 2003. Reply comments may be filed on or before October 30, 2003." See, Federal Register, November 7, 2003, Vol. 68, No. 216, at Pages 63029 - 63030. This notice pertains to petitions for reconsideration, filed by AT&T and Verizon, of the FCC's order regarding telecommunications relay services (TRS) known as the "Second Improved TRS Order". An earlier FCC notice in the Federal Register described this order, and set deadlines for comments, which deadlines were subsequently extended. See, Federal Register, August 25, 2003, Vol. 68, No. 164, at Pages 50993 - 50998.

FCC to Hold Hearing and Issue NPRM on Regulation of VOIP

11/6. The Federal Communications Commission (FCC) announced that it will hold a forum on Voice over Internet Protocol (VOIP) issues on December 1, 2003, and that it will then issue a Notice of Public Rule Making (NPRM) "to inquire about the migration of voice services to IP-based networks and gather public comment on the appropriate regulatory environment for these services". See, FCC release.

The FCC Chairman Michael Powell wrote a letter [2 pages in PDF] to Sen. Ron Wyden (D-OR) regarding this issue. He wrote that the hearing "will have a wide range of witnesses from the industry and government to focus on a variety of VoIP issues. We will look at how the digital technologies are being used to provide a variety of voice services in the marketplace. We will also explore emerging regulatory issues, such as FCC precedent and the classification issues raised in the recent Minnesota District Court ruling on VoIP services. Finally, we will begin a conversation on how best to achieve important health, safety and welfare policy objectives, such as E911, universal service and securing our homeland."

October 16, 2003, the U.S. District Court (DMinn) issued its Memorandum and Order [PDF] in Vonage v. Minnesota Public Utilities Commission, holding that Vonage is an information service provider, and that the MPUC cannot apply state laws that regulate telecommunications carriers to Vonage. The Court wrote that "State regulation would effectively decimate Congress's mandate that the Internet remain unfettered by regulation." See, story titled "District Court Holds that Vonage's VOIP is an Information Service", also published in TLJ Daily E-Mail Alert No. 760, October 17, 2003.

Powell continued that "This NPRM will, in part, inquire about the migration of voice services to IP-based networks and gather public comment on the appropriate regulatory environment for VoIP services. Over the course of the next year, after full public comment and thoughtful consideration of the record, the FCC plans to follow up the NPRM with a Report and Order on the VoIP issues raised in the proceeding."

He also stated that "As new digital technologies and Internet applications, such as VOIP, challenge the established technological, market and regulatory structures of our analog past, the FCC will continue to stay at the forefront of change. The FCC has been studying VoIP issues for several years, but things have greatly accelerated over the past year and, thus, so have the FCC's actions to address the complex issues that arise. The FCC is currently considering several petitions involving different flavors of VoIP. Last month, the FCC's Technical Advisory Council held a meeting devoted solely to VoIP issues."

FCC Announces Agenda of November 13 Meeting

11/6. The Federal Communications Commission (FCC) announced the agenda for its Thursday, November 13, 2003 meeting. The agenda includes a report and order allocating an additional 255 MHz of spectrum for unlicensed devices, such as Wi-Fi and Bluetooth.

First, the FCC will consider a Report and Order (R&O) that expands the entities eligible for universal service subsidies for rural health clinics. This is WC Docket No. 02-60. See, story titled "FCC To Consider Item Expanding Eligibility for Support for Rural Clinics" in TLJ Daily E-Mail Alert No. 775, November 10, 2003.

Second, the Office of Engineering and Technology (OET) and the International Bureau will report on implementation of the results of the 2003 World Radiocommunication Conference.

Third, the FCC will consider a Notice of Proposed Rulemaking (NPRM) regarding earth stations on board vessels that are used to provide broadband telecommunications services on passenger, government, cargo, and recreational vessels. This is IB Docket No. 02-10.

Fourth, the FCC will consider a R&O to provide an additional 255 MHz of spectrum for unlicensed wireless devices operating in the 5 GHz region. This is ET Docket No. 03-122.

On May 15, 2003, the FCC announced its NPRM that proposes to nearly double the amount of spectrum for unlicensed use. The main use of this spectrum will likely be 802.11 (Wi-Fi) and Bluetooth devices. The additional spectrum will be in the 5.470-5.725 GHz band. It would be available for use by unlicensed National Information Infrastructure (U-NII) devices, including Radio Local Area Networks (RLANs), operating under Part 15 of the FCC's rules. See, story titled "FCC Adopts NPRM to Increase Unlicensed Spectrum" in TLJ Daily E-Mail Alert No. 663, May 16, 2003.

On June 4, 2003, the FCC released the text of this Notice of Proposed Rulemaking [28 pages in PDF]. See, story titled "FCC Releases NPRM Regarding Increasing Amount of Unlicensed Spectrum" in TLJ Daily E-Mail Alert No. 674, June 5, 2003. The FCC published a notice in the Federal Register (July 25, 2003, Vol. 68, No. 143, at Pages 44011 - 44020) describing this NPRM and setting comment deadlines.

Representatives and Senators have also introduced legislation that would require the FCC to allocate more spectrum for unlicensed uses. See, stories titled "FCC Unlicensed Spectrum NPRM and the Jumpstart Broadband Act" in TLJ Daily E-Mail Alert No. 663, May 16, 2003; and "Sen. Boxer and Sen. Allen Introduce WiFi Spectrum Bill", in TLJ Daily E-Mail Alert No. 586, January 20, 2003.

Also, the WRC-03 conference in Geneva, Switzerland from June 9 through July 4, 2003 adopted a resolution pertaining to spectrum for unlicensed devices. It provides "that this Conference has allocated the bands 5 150-5 350 MHz and 5 470-5 725 MHz on a primary basis to the mobile service for the implementation of wireless access systems (WAS), including radio local area networks (RLANs)". See also, story titled "Delegates Discuss World Radiocommunications Conference" in TLJ Daily E-Mail Alert No. 703, July 22, 2003.

Currently, there is a total of 300 megahertz of spectrum allocated for U-NII devices, in the 5.150-5.250 GHz, 5.250-5.350 GHz and 5.725-5.825 GHz bands.

Fifth, the FCC will consider a Notice of Inquiry (NOI) and NPRM regarding the "development and use of the interference temperature metric and for managing the transition from the current transmitter-based approach for interference management to the new interference temperature paradigm".

Sixth, the FCC's Spectrum Policy Task Force (SPTF) will report on "accomplishments and status of the implementation of recommendations in the Task Force Report one year after its release and will highlight ongoing and future spectrum policy reform initiatives".

Chairman Michael Powell formed a SPTF in June of 2002. It solicited comments and held hearings, outside of the context of a rule making proceeding. See, story titled "Powell Creates Task Force to Conduct Spectrum Inquiry" in TLJ Daily E-Mail Alert No. 446, June 7, 2002.

The FCC announced this report on November 7, 2002. See, story titled "FCC Announces Report on Spectrum Policy" in TLJ Daily E-Mail Alert No. 545, November 8, 2002.

The SPTF released its Report [73 pages in PDF] on November 15, 2002. One of the many topics addressed by the report is moving towards markets. The report recommends that "spectrum policy must evolve towards more flexible and market oriented regulatory models."

Seventh, the FCC will consider a R&O and Second Further NPRM regarding the scope of its enhanced 911 rules. This is CC Docket No. 94-102 and IB Docket No. 99-67.

House Subcommittee Holds Hearing on Computer Viruses

11/6. The House Commerce Committee's Subcommittee on Telecommunications and the Internet held a hearing titled "Computer Viruses: The Disease, the Detection and the Prescription for Protection".

See, prepared testimony of Richard Pethia (CERT Coordination Center), Ken Silva (VeriSign), Bill Hancock (Internet Security Alliance), John Thompson (Symantec Corporation), and Robert Holleyman (Business Software Alliance).

The BSA's Holleyman advocated "enhancing law enforcement's capabilities to treat destructive virus attacks as serious crimes". He added that "we need to ensure that law enforcement has the resources it needs -- personnel, training, and equipment". He also said that "we need to ensure greater cross-jurisdictional cooperation in investigating cyber attacks".

VeriSign's Silva wrote that "we must provide government at the national and international levels with both forensic tools and investigative training and powers to reach those who are attacking our networks".

Hancock opined that "Government is a critical partner, but, ultimately, the industry must shoulder a substantial responsibility and demonstrate leadership in this field if we are to eventually succeed".

Rep. Billy Tauzin (R-LA), the Chairman of the full Committee, wrote in a prepared statement that cyber attacks "can shut down facilities like airports, bridges, electrical grids, nuclear plants, and air traffic control -- posing enormous public safety risks. It is only a matter of time before Internet worms and viruses are used to attack infrastructure that will result in more than just financial losses. For this reason, cyber security must be at the forefront of the minds of those in business and government."

He wrote that "Businesses need to ramp up their cyber security, consumers need to be vigilant, and Congress must continue to ensure our computer and technology networks are safe."

1st Circuit Upholds Constitutionality of Electronic Highway Toll Collection System

11/6. The U.S. Court of Appeals (1stCir) issued its opinion in Doran v. Massachusetts Turnpike Authority upholding the constitutionality of Massachusetts' automatic electronic toll road payment system.

The dormant Commerce Clause is frequently asserted to challenge state protectionists laws, on the basis that these laws discriminate against interstate commerce. Recently, the dormant Commerce Clause has been raised in many cases where state laws discriminate against electronic commerce, in favor of face to face transactions.

For example, small wineries in California and elsewhere suffer from protectionists legislation in many states that effectively bars internet wine sales. Some of these wineries have challenged these statutes under the dormant Commerce Clause.

However, in this case, the plaintiffs attempted to turn the Commerce Clause on its head. They asserted that a state law that allows for electronic transactions discriminates against interstate commerce. The District Court rejected the plaintiffs' argument, and the Court of Appeals affirmed.

Electronic commerce remains constitutional in the First Circuit.

The Massachusetts Turnpike Authority (MTA) builds roads. It also collects tolls from drivers who use roads to fund the construction of more roads.

Pursuant to state statutory authority, the MTA established program titled "FAST LANE Discount Program" or "FLDP". The Appeals Court described this program as follows: it "allows vehicles equipped with a transponder to pass through toll plazas without having to stop and pay. Participants must purchase a transponder from MTA for $27.50. The transponder is a small plastic device attached to the windshield. It signals the car's identity to an MTA facility which automatically charges the toll to the driver's account. Drivers generally assign their account to their credit card which is billed $20 at the outset; thereafter, tolls are deducted until $10 remains, at which point an additional $10 is billed to replenish the account. Cars equipped with transponders used in other cities that -- like the E-Z Pass system -- are interoperable, may drive through FAST LANE toll gates without stopping, but do not receive discounts." Anyone is allowed to participate in the program, regardless of their state of residence.

Peter Doran and Wendy Saunders are two out of state drivers who paid the full toll to the MTA in face to face cash transactions.

Doran and Saunders filed a complaint in U.S. District Court (DMass) against the MTA under 42 U.S.C. § 1983 alleging that their rights under the dormant Commerce Clause were violation by the MTA's FLDP program.

The plaintiffs' argument was that out of state drivers tend to use MTA roads less than Massachusetts drivers, and are therefore less likely to find it advantageous to purchase the transponder, and take advantage of the discounts.  District Court dismissed for failure to state a claim. The Plaintiffs appealed.

The Appeals Court affirmed. It first reviewed the appropriate Commerce Clause analysis. It wrote that "The Commerce Clause of the United States Constitution grants Congress the power to ``regulate Commerce ... among the several States.´´ U.S. Const. art. I, § 8, cl. 3. The Commerce Clause ``not only grants Congress the authority to regulate commerce among the States, but also directly limits the power of the States to discriminate against interstate commerce.´´ New Energy Co. v. Limbach, 486 U.S. 269, 273 (1988). This ``dormant´´ Commerce Clause ``prohibits economic protectionism -- that is, regulatory measures designed to benefit in-state economic interests by burdening out-of-state competitors.´´"

The Appeals Court wrote that "The FLDP is available on identical terms to drivers without regard to their residence; the program incorporates no distinctions or classifications based on residence and participation is open to anyone. The benefits of the discount program accrue simply on account of a driver's frequency of use. The frequent driver will receive a greater amount of discounts than the infrequent driver, but he or she will, of course, also pay a correspondingly greater amount in tolls."

The Court added that "It is true that to participate in the FLDP, a driver must purchase a transponder for $27.50. The right to purchase is not restricted to residents, but is open to all. The decision whether to do so turns on one's anticipated frequency of use. The distance a driver lives from Boston will be a factor, but not the only factor, affecting the frequency with which he or she is likely to drive through the toll plazas or the tunnels. But the frequency calculus creates no resident versus nonresident classification."

Notably, the opinion was written, not by a First Circuit Judge, but rather by Senior Judge William Schwarzer of the U.S. District Court for the Northern District of California. He sat by designation. First Circuit Judges Torruella and Howard joined.

This case is Peter Doran and Wendy Saunders v. Massachusetts Turnpike Authority, et al., U.S. Court of Appeals for the 1st Circuit, No. 03-1312, an appeal from the U.S. District Court for the District of Massachusetts, Judge Nancy Gertner presiding.

FTC Files Complaint Against Company Exploiting Microsoft Messenger to Display Pop Up Ads

11/6. The Federal Trade Commission (FTC) filed a complaint [11 pages in PDF] in U.S. District Court (DMd) against D Squared Solutions LLC and others alleging unfair trade practices in violation of the Federal Trade Commission Act (FTCA) in connection with the exploitation of the Microsoft Windows Messenger Service to send to computers frequent and unwarranted pop up ads that offered for sale software that stops the ads. See also, FTC release. See, full story.

FTC Action Creates Uncertainty Regarding Application of FTCA to Internet Communications and Advertising

11/6. The Federal Trade Commission's (FTC) filed a complaint [11 pages in PDF] against D Squared Solutions alleging unfair trade practices in violation of the Federal Trade Commission Act (FTCA) in connection with the exploitation of the Microsoft Windows Messenger Service to send to computers pop up ads. This complaint does not provide clear guidance regarding what other non-fraudulent, but "unfair", internet communications and advertising practices may subject businesses to FTC enforcement actions.

The FTC brought the action against D Squared under Section 5 of the FTCA, which is codified at 5 U.S.C. § 45(a). This is broad and vague statute. The operative language provides only that "Unfair methods of competition in or affecting commerce, and unfair or deceptive acts or practices in or affecting commerce, are hereby declared unlawful."

The statute does not address spam, messaging, or pop up ads. Nor has the FTC promulgated implementing regulations that address spam, messaging or pop up ads.

The FTC has brought many actions under Section 5 for internet related practices. However, while the language is vague, the FTC heretofore has usually, but not always, applied it against internet based activity only in conjunction with precise statements of policy that make it clear to businesses whether their conduct may subject them to an FTC enforcement action.

For example, the FTC has used Section 5 of the FTCA against web site operators in the context of online privacy. However, rather than enforcing some collection of vague and unenumerated privacy practices, the FTC has stated (through speeches, Congressional testimony, and elsewhere) that it will only apply the FTCA when a web site operator violates its own privacy policy. Web site operators can know if they are risking action by the FTC simply by reading their own privacy policies.

As another example, the FTC has brought many actions against e-mail spammers under the Section 5 of the FTCA. But these cases have generally involved fraudulent conduct, such as non-delivery of goods paid for by consumers, or goods that do not perform as promised. Businesses know whether or not they are lying to their customers.

The FTC has not been bringing actions against businesses based on the notion, for example, that they are sending bulk unsolicited e-mail. This would entail application of undefined concepts of what constitutes "bulk" e-mail, and what constitutes "unsolicited".

In the D Squared action, the FTC is not operating under any precise statement of policy that makes it clear to businesses whether or not they too risk an enforcement action by the FTC.

In the D Squared case, fraud is not alleged. D Squared offered for sale a software product. There is no allegation in the complaint that it failed to deliver the product, that it overcharged for the product, or that the product failed to work as promised.

Of course, the FTC can argue, with solid basis, that the conduct of D Squared is unfair, but the notion of what is unfair is fair less clear than the notion of what is fraudulent or deceptive.

On November 6 Howard Beales, Director of the FTC's Bureau of Consumer Protection, and others, held a press conference to announce and discuss the D Squared litigation. Beales explained that the defendants have "a fundamentally unfair business model". However, Beales said little to provide clear guidance as to what is an unfair business model in the context of internet ads and communications. Although, he took several stabs at it.

First, Beales described the conduct of the defendants as "extortion". For example, he said, "'I'll beat you, and I'll stop beating you if you pay. We call that extortion; and it is not any different in the high tech world".

This explanation only confuses the matter. Extortion is a term that has specific legal meaning within the context of criminal law. For example, Title 18, Chapter 41 of the federal criminal code, addresses extortion and threats. However, it uses the term extortion in the context of threats of kidnapping, injury or death of persons. At minimum, extortion entails a threat to commit an illegal act. D Squared did not threaten any person. At most it threatened computers -- that is, until the users turned off Messenger Service. In addition, the FTC has alleged no underlying illegal act in the complaint. Moreover, the FTC has no authority to bring criminal actions.

Hence, Beales use of the term "extortion" is at best a metaphor. And, metaphorically speaking, there is much extortion online. For example, spammers send unsolicited e-mail advertising anti-spam software.

Second, Beales offered the explanation that there is a distinction between the exploitation of e-mail and the exploitation of Messenger Service. He said that "e-mail is a legitimate and widely used method of communication". But, Beales did not go so far as to say either that the FTC considers that all use of Messenger Service for ads is an unfair practice, or that the FTC considers that no use of e-mail for ads is an unfair practice.

Beales was asked, "would they have been on safer ground if they had advertised pormography?" He suggested that it would not, but he did not give a clear cut answer. He added that "we would review the frequency and the nature". So, here again, the explanation offers little guidance to other businesses.

Third, Beales offered the explanation that "they are creating a problem and then trying to charge consumers for the solution". What then, would be the legal meaning of "creating a problem". Does a software company that sells products with defects or vulnerabilities "create a problem"? If these companies then charge for upgrades that eliminate the defect or vulnerability, or charge for telephone help in dealing with the defect or vulnerability, is this "unfair".

Whatever the Court ultimately orders D Squared and its owners to do will be just and deserved. But, until the FTC provides more information as to what sort of internet communications and advertising might constitute "unfair" practices, this cases creates uncertainty for some businesses that make use of the internet.

This case is FTC v. D Squared Solutions LLC, Dinesh Dhingra and Jeffrey Davis, U.S. District Court for the District of Maryland, Baltimore Division, D.C. No. AMD 03 CV 3108.

FRB Governor Says Info Tech Is One Reason for Jobless Recovery

11/6. Federal Reserve Board (FRB) Governor Ben Bernanke gave a speech at Carnegie Mellon University in Pittsburgh, Pennsylvania, titled "The Jobless Recovery". He offered several explanations for why the economy is growing so fast, but the recovery in the labor market is so slow. One of his explanations is that corporate managers are finally figuring out how to put to good use the high tech equipment that they bought in the late 1990s.

Ben Bernanke

Bernanke (at right) stated that "the economic slowdown that began in the United States in late 2000 has been relatively mild" and "lasted only eight months, from March to November of 2001."

"Nevertheless, in one key aspect, namely, the performance of the labor market, the downturn was severe and the recovery has been exceptionally slow", said Bernanke.

He offered several explanations for why this is the case. One explanation is "the remarkable increase in labor productivity we have seen in recent years, not only in manufacturing but in the economy as a whole. Since the trough of the recession in the fourth quarter of 2001, productivity in the nonfarm business sector has risen at an annual average rate of 4-1/2 percent, compared with average annual increases of 2-1/2 percent in the late 1990s, itself a period of strong productivity growth."

He continued that "This surprising productivity performance probably reflects both some increase in the long-run rate of productivity growth as well as unmeasured increases in the work effort of employees. However, in my view, neither of these factors can fully account for the increase in productivity growth, particularly some of the recent quarterly numbers."

He said that "I suspect that some of the recent expansion in productivity is instead the delayed result of firms' heavy investment in high-technology equipment in the latter part of the 1990s. Only over time have managers learned how to reorganize their production and distribution so as to take full advantage of these new technologies and thus enhance the productivity of capital and workers."

He concluded that "Strong productivity growth provides major benefits to the economy in the longer term, including higher real incomes and more efficient and competitive industries. But in the past couple of years, given erratic growth in final demand, it has also enabled firms to meet the demand for their output without hiring new workers."

9th Circuit Applies Four Part Fair Use Test in Elvis Video Case

11/6. The U.S. Court of Appeals (9thCir) issued its split opinion [22 pages in PDF] in Elvis Pressley v. Passport Video, a copyright infringement case involving application of the four prong fair use test of 17 U.S.C. § 107.

Defendant incorporated video clips, photographs, and music into a 16 hour video biography about Elvis Presley without permission from the copyright owners. The clips range in length from a few seconds to over one minute, and in some cases comprise a substantial part of copyrighted appearances on TV shows by Elvis Presley. The plaintiffs, who hold the copyrights, filed a complaint in U.S. District Court (CDCal) alleging copyright infringement. The District Court rejected the fair use defense, and issued an injunction.

The Appeals Court affirmed. Judge Richard Tallman wrote the opinion of the court. Judge Johnnie Rawlinson joined. Judge John Noonan wrote a dissent.

This case is Elvis Pressley Enterprises, et al. v. Passport Video, et al., U.S. Court of Appeals for the 9th Circuit, No. 02-57011, an appeal from the U.S. District Court for the Central District of California, Judge Ronald Lew presiding, D.C. No. CV-02-07042-RSL.

Sen. Leahy Discusses Criminal Spam Act

11/6. Sen. Patrick Leahy (D-VT) spoke in the Senate about S 1293, the "Criminal Spam Act". He said the bill is being held up by an anonymous Republican Senator.

The bill was introduced on June 19, 2003 by Sen. Orrin Hatch (R-UT), Sen. Leahy and others. The Senate Judiciary Committee amended and approved the bill on September 25, 2003. The committee report was released on October 22, 2003. See, Senate Report 108-170.

Also on October 22, 2003 the Senate amended and passed S 877, the "Controlling the Assault of Non-Solicited Pormography and Marketing Act of 2003'", also known as the "CAN-SPAM Act of 2003", by a vote of 97-0. See, Roll Call No. 404. See, story titled "Senate Passes Burns Wyden Spam Bill" in TLJ Daily E-Mail Alert No. 765, October 24, 2003. This bill was a product of the Senate Commerce Committee.

S 1293 only contains criminal provisions. The bill would amend Title 18 to criminalize (1) knowingly accessing a protected computer to send spam ("multiple commercial electronic mail messages"), (2) knowingly using a protected computer to relay or retransmit spam with intent to deceive either recipients or ISPs, (3) knowingly falsifying header information in spam, (4) knowingly registering multiple e-mail accounts or domain names to send spam and then intentionally sending spam from those accounts or domain names, and (5) knowingly falsely representing the right to use 5 or more IP addresses and then sending spam from such addresses.

See also, story titled "Senators Hatch & Leahy Introduce Spam Crime Bill" in TLJ Daily E-Mail Alert No. 686, June 24, 2003.

Sen. Leahy stated that "Two weeks ago, the Senate adopted portions of the bill as an amendment to S. 877, the CAN SPAM Act. The bill has been cleared from the Democratic cloakroom for weeks. Unfortunately, this important measure is hung up on the Republican side because of an anonymous ``hold´´ by some Republican Senator." See, Congressional Record, November 6, 2003, at S14172.

Sen. Leahy continued that "The Criminal Spam Act targets the most pernicious and unscrupulous spammers -- those who use trickery and deception to induce others to relay and view their messages. Ridding America's inboxes of deceptively delivered spam will significantly advance our fight against junk e-mail."

He asked "Why would anyone want to prevent passage of this important legislation? It is bipartisan. It is non-controversial. It enjoys broad support from businesses, consumer groups, and civil liberties groups alike. The administration has only good things to say about it, and I know of no individual or organization that opposes it."

He concluded that "The answer must be that someone on the other side of the aisle is playing politics with this bill, holding it up for some reason that has nothing to do with it -- or for no reason at all."

Commissioner Adelstein and Sen. McCain Address Payola and Pay for Play

11/6. Federal Communications Commission (FCC) Commissioner Jonathan Adelstein gave a speech at a Federal Communications Bar Association (FCBA) luncheon. He spoke almost entirely about broadcast radio and television.

He addressed media consolidation, the radio industry's music promotion practices, allegations of payola, and the consequences for artists, musicians, consumers and others. He also addressed "broadcast news programs that sell segments which appear to be part of their regular news coverage".

Jonathan AdelsteinAdelstein (at right) also quipped about the FCC's out of Washington hearings on localism: "It’s always refreshing to get away from DC lobbyists -- and instead hear directly from people organized by DC lobbyists."

He advocated FCC action to deal with payola. He stated that "It's been 40 years since enactment of the payola statutes. It's time for the FCC to probe whether our rules adequately deter potentially new forms of payola. If the practices are still occurring, we have direct statutory authority, as well as an overall charge to regulate radio communications. So there is a real need for the FCC to review its sponsorship identification rules to make sure we are addressing modern day pay-for-play practices in the most effective way possible given our clear responsibility under the law."

He also said that "That's what Senator Feingold suggested last year." Sen. Russ Feingold (D-WI) introduced S 221, the "Competition in Radio and Concert Industries Act of 2003", on January 28, 2003. He sponsored an earlier version in the 107th Congress, S 2691.

Adelstein also stated that "An FCC review has also been urged by a broad coalition of artists and music industry groups in a joint statement last month. And just this week, Senate Commerce Committee Chairman McCain is questioning payola and paid-for-journalism as a sham on the American public."

Sen. John McCain (R-AZ) wrote a letter to FCC Chairman Michael Powell on November 3, 2003, regarding "alleged ``pay for play´´ on both television and radio broadcasts, which call into question the adequacy of the Federal Communications Commission's (``Commission´´) regulations on broadcast sponsorship and identification."

Sen. John McCainSen. McCain (at left) continued that "Last month, The Washington Post detailed the practices of WFLA-TV in Tampa, Florida. The station airs a local morning show, ``Daytime,´´ with NBC's peacock logo and WFLA-TV's ``News Channel 8´´ insignia at the bottom of the screen. Segments of the program, however, are actually paid advertisements. The program's anchors interview guests who pay $2,500 to appear on the program. According to the article, the only mention of payment is at the end of the program when the words ``the following segments were paid advertisements´´ appear in small type on the screen for about four seconds."

Sen. McCain also asked "whether you believe the Commission's rules on sponsorship identification and ``payola´´ are adequate" and "whether you believe Congressional action is necessary to ensure broadcasters do not continue to deceive viewers through such ``sham´´ television programs as ``Daytime,´´ or to preclude radio stations from demanding performances from musicians as compensation for air time."

People and Appointments

11/6. The Senate Judiciary Committee approved the nomination of California Supreme Court Justice Janice Brown to be a Judge of the U.S. Court of Appeals for the Ninth Circuit. Democrats will oppose confirmation in the full Senate.

11/6. President Bush nominated Lawrence Stengel to be a Judge of the U.S. District Court for the Eastern District of Pennsylvania. See, White House release.

11/6. The Federal Communications Commission (FCC) announced several appointments, effective November 3, 2003. Jacqueline Ponti was named Associate Bureau Chief for Licensing and Operations in the FCC's International Bureau (IB). The FCC stated in a release that she will "oversee long-term International Bureau licensing and operations activities, and focus on information technology initiatives." She has worked for the IB since 1994.

The FCC announced that Jacquelynn Ruff was named Chief of Staff and Associate Bureau Chief of the IB. She will "oversee short and medium-term strategic planning and development for the Bureau as well as agency-wide coordination of Bureau items and initiatives. She also will continue to oversee Bureau work on international trade issues". She has worked for the IB since 1999.

The FCC announced that John Giusti was named an Assistant Bureau Chief of the IB. He will "oversee Bureau policy and activity regarding international outreach, including International Telecommunication Union matters, regulator-to-regulator dialogues and cross-border issues". He has worked for the IB since 1996.

The FCC announced that Linda Dubroof and Julie Barrie were named Deputy Division Chiefs of the IB's Strategic Analysis & Negotiations Division (SAND).

The FCC announced that Christopher Murphy was named Chief of the SAND's International Telecommunications & Development Branch. He will "oversee the Division's work with the ITU Telecommunications Standardization Sector and the ITU Development Sector, as well as participation in major ITU conferences and meetings. He has worked for the IB since 1996.

11/6. Karen Buchholz was named VP of Administration at Comcast. She was previously VP of Corporate Communications. D'Arcy Rudnay was named VP of Corporate Communications. See, Comcast release.

More News

11/6. Microsoft announced that it has reached a settlement of the class action lawsuit against Microsoft alleging violation of the state of North Carolina's antitrust and unfair competition laws. See, Microsoft release.

11/6. Counsel for both the government and defendants submitted to the U.S. District Court (DC) a Jointly Proposed Protective Order [15 pages in PDF] in USA v. First Data & Concord EFS, Inc., D.C. No. 03-2169 (RMC). See also, story titled "DOJ Sues to Stop Merger of PIN Debit Networks", also published in TLJ Daily E-Mail Alert No. 765, October 24, 2003.

11/6. The Federal Communications Commission's (FCC) Media Security and Reliability Council (MRSC) held a meeting. See, FCC release [PDF].

11/6. The Federal Election Commission (FEC) assessed a civil money penalty of $1,800 against the Political Action Committee of Focal Communications Corporation for the non filing of a year end 2002 report. Focal Communications Corp. is a voice and data services provider. See, FEC release.

11/6. The Department of the Treasury announced that Treasury Secretary John Snow will tour the Intel Corporation facility in Rio Rancho, New Mexico.

11/6. Two of the House Government Reform Committee's subcommittees held a joint hearing titled "Public Safety Interoperability". See, prepared testimony [21 pages in PDF] of William Jenkins, Director of the General Accounting Office's (GAO) Homeland Security and Justice Issues.

Go to News from November 1-5, 2003.