TLJ News from July 21-25, 2007

FCC to Adopt 700 MHz Band Rules at July 31 Event

7/25. The Federal Communications Commission (FCC) released the agenda [2 pages in PDF] for its event on July 31, 2007, titled "Open Meeting". The FCC is scheduled to adopt rules regarding the upcoming auction of spectrum in 700 MHz band for wireless services. It is also scheduled to adopt an order regarding roaming obligations of CMRS providers.

The FCC is scheduled to adopt a Second Report and Order that contains service rules for the 698-746,747-762 and 777-792 MHz Bands. This is WT Docket No. 06-150. This pertains to the auction of spectrum usage rights in spectrum that is currently occupied by television broadcasters in Channels 52-69.

This item also pertains to the following proceedings and docket numbers: "Revision of Commission’s Rules to Ensure Compatibility with Enhanced 911 Emergency Calling Systems" (CC Docket No. 94-102), "Section 68.4(a) of the Commission’s Rules Governing Hearing Aid-Compatible Telephones" (WT Docket No. 01-309), "Biennial Regulatory Review -- Amendment of Parts 1, 22, 24, 27, and 90 to Streamline and Harmonize Various Rules Affecting Wireless Radio Services" (WT Docket No. 03-264), "Former Nextel Communications, Inc. , Upper 700 MHz Guard Band Licenses and Revisions to Part 27 of the Commission’s Rules" (WT Docket No. 06-169), "Implementing a Nationwide, Broadband, Interoperable Public Safety Network in the 700 MHz Band" (PS Docket No. 06-229), and "Development of Operational, Technical and Spectrum Requirements for Meeting Federal, State and Local Public Safety Communications Requirements Through the Year 2010" (WT Docket No. 96-86).

The FCC is also scheduled to adopt a Report and Order (R&O) regarding roaming obligations of Commercial Mobile Radio Service (CMRS) providers.

This R&O is in the FCC's proceedings tilted "Reexamination of Roaming Obligations of Commercial Mobile Radio Service Providers" and "Automatic and Manual Roaming Obligations Pertaining to Commercial Mobile Radio Services", and numbered WT Docket No. 05-265 and WT Docket No. 00-193 respectively.

The agenda lists only these two items.

This event is scheduled for 10:00 AM on Tuesday, July 31, 2007 in the FCC's Commission Meeting Room, Room TW-C305, 445 12th Street, SW. The event will be webcast by the FCC. The FCC does not always consider all of the items on its published agenda. The FCC sometimes adds items to the agenda without providing the "one week" notice required 5 U.S.C. § 552b. The FCC does not always start its events at the scheduled time, or at all. The FCC usually does not release at its events copies of the items that it adopts at its events. The FCC has not always written the items that it adopts at its events.

4th Circuit Rules on ILEC Cash Rebates and Resale Rate Setting

7/25. The U.S. Court of Appeals (4thCir) issued its opinion [28 pages in PDF] in BellSouth v. Sanford, a case regarding Section 251 resale of telecommunications services at wholesale rates, and the effect of ILEC's offerings of gift cards and cash rebates to its customers upon public utility commission rate setting under Section 252.

The Court of Appeals held that "the value of an incumbent provider's incentive offers to subscribers, such as gift cards and cash rebates, when extended to subscribers for more than 90 days, created a promotional retail rate that must be offered to would-be competitors, less a wholesale discount."

In this case, BellSouth is an incumbent local exchange carrier (ILEC) in the state of North Carolina. (It has since merged with AT&T.)

The Telecommunications Act of 1996 imposed upon ILECs the obligation to "offer for resale at wholesale rates any telecommunications service that the carrier provides at retail to subscribers who are not telecommunications carriers" and "not to prohibit, and not to impose unreasonable or discriminatory conditions or limitations on, the resale of such telecommunications service, except that a State commission may, consistent with regulations prescribed by the Commission under this section, prohibit a reseller that obtains at wholesale rates a telecommunications service that is available at retail only to a category of subscribers from offering such service to a different category of subscribers". These obligations are codified at 47 U.S.C. § 251(c)(4).

Then, 47 U.S.C. § 252(d)(3) provides that "For the purposes of section 251(c)(4) of this title, a State commission shall determine wholesale rates on the basis of retail rates charged to subscribers for the telecommunications service requested, excluding the portion thereof attributable to any marketing, billing, collection, and other costs that will be avoided by the local exchange carrier."

In this case, the relevant "state Commission" is the North Carolina Utilities Commission (NCUC).

BellSouth proposed in a filing with the NCUC to offer its customers "a coupon for a check for $100 as an incentive to subscribe to one or more regular residence lines and two or more features." It added that it would not extend this offer to competing providers under Section 251(c)(4).

The NCUC ruled that BellSouth's incentives decreased the retail rate for the purpose of calculating the wholesale rate.

The NCUC determined that retail customers effectively paid less for their telephone service in the amount of the incentives. It concluded that BellSouth was required to pass on the value of such incentives as a price reduction when selling its services to resellers, unless it could show that such restrictions on resale were "reasonable and nondiscriminatory."

BellSouth then filed a complaint against Jo An Sanford, and the other NCUC Commissioners, and the NCUC, in U.S. District Court (WDNC) challenging the order of the NCUC.

The District Court held that the NCUC order is invalid, and further held that an ILEC's incentives to retail subscribers, other than direct reductions in price, need not be taken into account in calculating the wholesale rate to be charged would be competitors.

The NCUC brought the present appeal. The Court of Appeals reversed the District Court, and remanded, with instructions to grant summary judgment for the NCUC.

This case is BellSouth Communications, Inc. v. Jo Ann Sanford, et al., U.S. Court of Appeals for the 4th Circuit, App. Ct. No. 06-1678, an appeal from the U.S. District Court for the Western District of North Carolina, D.C. No. 3:05-cv-00345, Judge Graham Mullen presiding. Judge Niemeyer wrote the opinion of the Court of Appeals, in which Judge T.S. Ellis, sitting by designation, joined. Judge Williams wrote a concurring opinion.

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7/25. A grand jury of the U.S. District Court (SDNY) returned an indictment that charges Carole Argo, a former Chief Financial Officer of SafeNet, Inc., with violation of federal securities and other laws in connection with alleged backdating of employee stock option grants. SafeNet provides software information security products and services. The Department of Justice (DOJ) stated in a release [4 pages in PDF] that SafeNet is based in Maryland, and that Argo is "of Baltimore, Maryland". It brought this action in New York.

7/25. A grand jury of the U.S. District Court (CDCal) returned an indictment that charges Ira Isaacs with the online sale of obscene DVDs. The Department of Justice (DOJ) stated in a release that the indictment charges Isaacs, "doing business as Stolen Car Films and LA Media, with four counts of using an interactive computer service to sell and distribute obscene films on DVD, two counts of using a common carrier to distribute obscene DVDs, and two counts of failing to label sexually explicit DVDs ..." The DOJ release alleges obscenity, but does not allege the Isaacs' activities involved child pornography.

7/25. The Copyright Office (CO) published a notice in the Federal Register on July 6, 2007, that announces, describes, recites, and sets the effective date (July 6, 2007) for, its interim rules regarding online registration of copyright. The CO also announced in this notice that it seeks comments on these interim rules. The deadline to submit comments is September 4, 2007. See, Federal Register, July 6, 2007, Vol. 72, No. 129, at Pages 36883-36889. The CO published a notice in the Federal Register on July 25, 2007, that contains minor corrections to its original notices. See, Federal Register, July 25, 2007, Vol. 72, No. 142, at Pages 40745-40746.

DUSTER Bhatia Discusses Trade with Asia and Korea US FTA

7/24. Karan Bhatia, a Deputy U.S. Trade Representative (USTR), gave a speech [PDF] in Washington DC to the Washington International Trade Association (WITA) titled "U.S. Trade Relations with Asia".

He said that "We must work to open these fast-growing markets to U.S. goods, services and investment and we must retain the openness of our markets to theirs. We must work to promote lasting economic reform among trading partners in the region and integrate them into the multilateral rules-based system to help develop and grow their economies. We must create institutions that firmly tie Asia’s economies to ours, and we must dedicate the resources to make sure those institutions succeed."

He then focused on the Korea U.S. free trade agreement (KORUS FTA). He said that "Other than a successful conclusion to the Doha Round, enactment of the KORUS FTA may be the single most important action that can be taken today to further U.S. trade objectives in the region."

He argued that this is a "gold standard FTA that boasts state-of-the-art rights and protection for investors, landmark commitments by Korea on market access for services, substantial new protections for intellectual property rights".

"If we succumb to protectionism within our own borders, and allow KORUS to fail", said Bhatia, "the repercussions promise to be severe and enduring. If unable to effectuate a strong and comprehensive FTA that clearly benefits the United States, U.S. credibility in Asia will be dealt a serious blow as trading partners will be left to question our commitment to our vital relationships in the region."

He added that Korea is already negotiating trade agreements with the EU, Canada and India, and "may be contemplating launching with China as well".

He concluded that "I am ultimately confident that Congress will see the critical importance of KORUS, and it will be ratified." He also said that since the KORUS FTA was signed on June 30, "it qualifies to be considered by Congress in an up-or-down vote as stipulated by the Trade Promotion Authority that expired on July 1."

Moreover, he said, the Congress should renew trade promotion authority, which allows the President, through his trade representatives, to negotiate trade agreements that the Congress can approve or reject, but not amend.

FTC Releases Annual Report on HSR Merger Reviews

7/24. The Federal Trade Commission (FTC) released its 29th annual report [51 pages in PDF] to the Congress titled "Hart-Scott-Rodino Annual Report Fiscal Year 2006". This pertains to the antitrust merger reviews conducted by the FTC and the Department of Justice's (DOJ) Antitrust Division.

The report summarizes the HSR merger reviews for SBC/AT&T (see, page 11), Verizon/MCI (page 11), and Alltel/Midwest Wireless (page 14).

The report does not address the pending XM/Sirius merger review.

Section 201 of the Hart-Scott-Rodino Antitrust Improvements Act of 1976, which is now Public Law No. 94-435, amended the Clayton Act by adding a new Section 7A, which is codified at 15 U.S.C § 18a. This report does not address antitrust merger reviews conducted by the Federal Communications Commission (FCC), which are not authorized under the HSR Act.

The report also provides summary data. "In fiscal year 2006, 1,768 transactions were reported under the HSR Act, representing about a four percent increase from the 1,695 transactions reported in fiscal year 2005". The report lists 1,014 for FY 2003 and 1,454 for FY 2004.

These numbers of annual reported transactions are way down from a high of 4,926 transactions reported in FY 2000. However, that was before the Congress enacted legislation raising the reporting thresholds.

The report states that the FTC challenged 16 transactions in FY 2006, "leading to nine consent orders and seven abandoned transactions". It adds that the DOJ challenged 16, "leading to eight consent decrees, two abandoned transactions, and six other transactions that were restructured after the Division informed the parties of its antitrust concerns relating to the transaction."

FCC's McDowell Slams OECD Broadband Statistics

7/24. Robert McDowell, a Commissioner of the Federal Communications Commission (FCC), wrote an opinion piece that was published in the July 24, 2007, issue of the Wall Street Journal. It is titled "Broadband Baloney".

He stated that the Organization for Economic Cooperation and Development's (OECD) statistical report that asserts that the U.S. is 15th in the world in broadband subscribers is "seriously flawed".

Robert McDowellMcDowell (at left) pointed out that the OECD measured broadband connections per capita, which underestimates broadband penetration in countries with larger households, such as the U.S. He also pointed out that the OECD excluded data on WiFi use, in which the U.S. is a leader.

He asserted that the U.S. is not falling behind, and that these baloney statistics should not serve as the basis for "heavy-handed government mandates setting arbitrary standards, speeds, and build-out requirements that could favor some technologies over others, raise prices and degrade service".

He concluded, "When it comes to broadband policy, let's put aside flawed studies and rankings, and reject the road of regulatory stagnation. In the next few years, we will witness a tremendous explosion of entrepreneurial brilliance in the broadband market, if the government doesn't micromanage. Belief in entrepreneurs and a light regulatory touch is the right broadband policy for America."

McDowell, and the other FCC Commissioners, are scheduled to testify before the House Commerce Committee's (HCC) Subcommittee on Telecommunications and the Internet at 9:30 AM on Tuesday, July 24.

People and Appointments

7/24. The National Cable and Telecommunications Association (NCTA) gave its Consumer Champion Award to Rep. Rick Boucher (D-VA) and Rep. Greg Walden (R-OR). Both are members of the House Commerce Committee (HCC) and its Subcommittee on Telecommunications and the Internet. See, NCTA release.

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7/24. The Department of the Treasury (DOT) announced that Henry Paulson (Secretary of the Treasury) will travel to the People's Republic of China on July 30-31 to discuss the U.S.-China Strategic Economic Dialogue (SED). He will meet with President Hu and Vice Premier Wu Yi in Beijing. See, DOT release. The U.S. and the PRC established the SED in September of 2006 to address intellectual property rights, market access, and other issues. See, story titled "US and PRC Announce Strategic Economic Dialogue" in TLJ Daily E-Mail Alert No. 1,455, September 25, 2007.

7/24. The Center for Democracy and Technology (CDT) released a paper [10 pages in PDF] that summarizes, analyzes, and comments upon the June 18, 2007, opinion [20 pages in PDF] of the U.S. Court of Appeals (6thCir) in Warshak v. U.S., a case regarding the 4th Amendment, the Stored Communications Act (SCA), and government access to e-mail held by internet service providers (ISPs). The Court of Appeals held that "individuals maintain a reasonable expectation of privacy in e-mails that are stored with, or sent or received through, a commercial ISP". Hence, the 4th Amendment's requirement that the government must obtain a warrant based upon probable cause applies to certain stored e-mail. The Court of Appeals added that alternatively the government can give prior notice to the targeted individual. The government cannot merely rely upon the statutory procedure set out in the SCA to seize stored e-mail. See also, story titled "6th Circuit Holds That People Have a Reasonable Expectation of Privacy in E-Mail Stored With, or Sent or Received Through, an ISP" in TLJ Daily E-Mail Alert No. 1,597, June 19, 2007. The CDT wrote that this case is a victory for internet users, and "brings a long-overdue measure of constitutional clarity to an area critical to privacy in the digital age". It added that "From a corporate perspective, the ruling brings some needed simplicity to the rules governing disclosure of stored email. The ruling should be welcome to email providers for another reason: as Internet users remain acutely sensitive to privacy, this case gives them some measure of confidence by specifying that online communications enjoy constitutional protection."

7/24. America Online (AOL) announced in a release that "it has entered into a definitive agreement to acquire TACODA, an online behavioral targeting advertising network."

Sen. Lautenberg Again Introduces Community Broadband Act

7/23. Sen. Frank Lautenberg (D-NJ) and others introduced S __, the "Community Broadband Act of 2007". Sen Lautenberg stated in a release that this bill would provide that "no state regulation or requirement shall prevent a public provider from offering broadband services" and prohibit "a municipality from discriminating against competing private providers".

Sen. Lautenberg also sponsored a stand alone bill in the 109th Congress, S 1294, the "Community Broadband Act", which did not become law.

In addition, the Senate Commerce Committee (SCC) approved a huge communications bill on June 28, 2006, that included similar language in Title V. See, stories titled "Senate Commerce Committee Marks Up Communications Bill" and "Mark Up of Title V -- Municipal Broadband" in TLJ Daily E-Mail Alert No. 1,404, July 5, 2007. The full Senate did not take up that bill, and its lapsed at the end of the 109th Congress.

The original cosponsors of the just introduced bill are Sen. Ted Stevens (R-AK), Sen. Gordon Smith (R-OR), Sen. John Kerry (D-MA), Sen. John McCain (R-AZ), Sen. Claire McCaskill (D-MO), and Sen. Olympia Snowe (R-ME). All are members of the SCC.

Sen. Stevens stated in a release that "This measure will encourage public-private partnerships to make it easier for municipalities, cities, and towns across the nation to offer affordable broadband access to their residents."

GAO Releases Report on Cybercrime

7/23. The Government Accountability Office (GAO) released a report [59 pages in PDF] titled "Cybercrime: Public and Private Entities Face Challenges in Addressing Cyber Threats".

It states that "Cybercrime is a threat to U.S. national economic and security interests."

The report states that the FBI estimated in 2005 that the "annual loss due to computer crime" was $67.2 Billion for U.S. organizations. It adds that these "losses are based on direct and indirect costs that may include actual money stolen, estimated cost of intellectual property stolen, and recovery cost of repairing or replacing damaged networks and equipment".

The report adds that "there is concern about threats that nation-states and terrorists pose to our national security through attacks on our computer-reliant critical infrastructures and theft of our sensitive information."

In particular, "Chinese military strategists write openly about exploiting the vulnerabilities created by the U.S. military’s reliance on advanced technologies and the extensive infrastructure used to conduct operations".

It also states that "terrorist organizations have used cybercrime to raise money to fund their activities."

Treasury Paper Addresses R&D Tax Credit, Depreciation of IT Assets, and International Tax Regime

7/23. The Department of the Treasury (DOT) released a paper [PDF] titled "Treasury Conference on Business Taxation and Global Competitiveness: Background Paper" in advance of its conference on Thursday, July 26 titled "Business Taxation and Global Competitiveness". The paper addresses several tax issues that affect information technology (IT) and innovation.

Depreciation. The paper covers depreciation, including the U.S. tax law's tendency to provide depreciation schedules for computers and other IT equipment that is longer than the useful lives of the assets.

It states that "The current system of tax depreciation does not ensure that capital income is taxed properly. One problem is that depreciation might not be sufficiently generous to promote desired capital investment for economic growth."

It continues that "Some have suggested that depreciation might be an especially large problem for high-technology, ``new-economy´´ assets. Allegedly, new economic assets wear out much faster than assumed in determining allowable tax depreciation deductions. It is quite plausible that the somewhat dated tax depreciation system gives inappropriate deductions to new technology assets such as computers."

"It is not clear, however, that inappropriate depreciation deductions are a larger problem for new economy assets than for old economy assets", the paper adds.

It adds that "Several factors limit the degree to which current tax allowances are inadequate to compensate for the decline in the value of new economy assets. First, even if valuation declines have been rapid in the past, they may not remain rapid in the future. Much of the rapid decline in value appears to have been caused by technological obsolescence, and the rate of technical advance could slow. Second, some of the anecdotal evidence in support of rapid depreciation is based on the relatively short period of time that new technology assets are held by their initial purchaser rather than on estimates of the actual economic life of the asset, including use by subsequent owners. Third, the tax code allows an asset to be fully written off when scrapped, regardless of the asset’s tax life."

R&D Tax Credit. The DOT paper notes that "Income from investment in intangible assets (e.g., R&D and advertising) generally receives more favorable tax treatment than does income from investment in tangible assets (e.g., plant and machinery)." (Parentheses in original.)

It argues that "Investment in intangibles might be excessively encouraged by the tax system, relative to investment in tangible assets."

The paper elaborates that "Some R&D spending also is eligible for a tax credit, which can reduce its effective tax rate below zero; that is, taxes actually reduce the cost of making such an investment below what it would have been in a world without taxes."

"It sometimes is argued that R&D should enjoy a tax advantage to compensate for ``spillover´´ benefits it generates. The argument is that in many cases it is difficult for those investing in R&D to reap the full benefits of their investments. Some of the benefits accrue free of charge; they ``spill over´´ to others who can use the invention without compensating the inventor."

In addition, the paper comments that "It is unclear, however, that the existing research credit is targeted to investments with large spillover benefits or that in general the tax code is the most effective way to encourage economically desirable R&D spending."

U.S. International Tax System. Finally, the paper addresses taxation of international income. It states that the U.S. has a "hybrid system for taxing international income with elements of both a worldwide and territorial system. Generally, domestic corporations are taxed on their income whether earned in the United States or abroad; that is, corporations are taxed on their income on a worldwide basis. However, U.S. parent corporations with foreign subsidiaries are generally not taxed in the United States on the active business income of their foreign subsidiaries until such income is repatriated and distributed as a dividend. Until that income is repatriated, tax is generally deferred."

Among the consequences of the U.S. system is a "tax incentive to exploit intellectual property such as a patent for a new computer chip abroad rather than in the United States because the returns will escape U.S. taxation."

The paper also states that "Tax provisions affecting royalties and the income from intangible assets in general are particularly important because they have become a significant source of foreign direct investment income. The exploitation of parent ``know-how´´ is an important motivation for foreign investment."

Microsoft Addresses Data Collection, Retention, and Privacy

7/23. Microsoft announced in a release that it has revised its privacy related policies affecting its Live Search, online advertising data collection, and personalization of online services. Microsoft also released a document [3 pages in PDF] titled "Microsoft’s Privacy Principles for Live Search and Online Ad Targeting". Microsoft announced that it will retain search query data for 18 months.

Microsoft stated in its release that it "will make all Live Search query data anonymous after 18 months, unless the company receives user consent for a longer time period. This policy will apply retroactively and worldwide, and will include permanently removing the entirety of the IP address and all other cross-session identifiers, such as cookie IDs and other machine identifiers, from the search terms."

It added that it will "store Live Search service search terms separately from account information that personally and directly identifies the person, such as name, e-mail address and phone numbers."

Microsoft also wrote that it will "follow all applicable legal requirements". The Department of Justice (DOJ) has long sought from the Congress, but not yet obtained, a statutory data retention mandate.

Microsoft also stated that when it "begins to offer advertising services to third-party Web sites, it will offer customers the ability to opt out of the behavioral ad targeting by Microsoft’s network-advertising service on those Web sites. Microsoft also will continue to develop new user controls that will enhance privacy, such as letting people search and surf its sites without being associated with a personal and unique identifier used for behavioral ad targeting, and allowing signed-in users to control the personalization of the services they receive."

People and Appointments

7/23. President Bush named Ann Johnston to be Special Assistant to the President for Legislative Affairs. She was Johnston was previously SVP of Capitol Hill Consulting Group. See, White House release.

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7/23. Hewlett Packard (HP) announced in a release that "it has signed a definitive agreement to purchase Opsware Inc. ... through a cash tender offer for $14.25 per share, or an enterprise value (net of existing cash and debt) of approximately $1.6 billion on a fully diluted basis." (Parentheses in original.) Opsware, which provides data center management software, stated in a substantially identical release that "The acquisition of Opsware is intended to extend HP Software's capabilities to automate the entire data center -- from initial provisioning of servers, networks and storage devices to managing ongoing changes and compliance requirements -- with integrated process automation, removing the latency inherent in today's IT environments." This transaction requires approvals by government regulators.

7/23. The Government Accountability Office (GAO) released a report [64 pages in PDF] titled "Information Technology: Treasury Needs to Strengthen Its Investment Board Operations and Oversight". The report finds that while the Department of the Treasury "has established many of the capabilities needed to select, control, and evaluate its IT investments, the department has significant weaknesses that hamper its ability to effectively manage its investments."

7/23. The Progress and Freedom Foundation (PFF) announced that Eric Schmidt, CEO of Google, will be the keynote speaker at its "Aspen Summit", to be held at the St. Regis Hotel in Aspen, Colorado, on August 19-21, 2007. Other speakers will include David Gross (Department of State), Robert McDowell (FCC Commissioner), and William Kovacic (FTC Commissioner). See, PFF release and event agenda.

Go to News from July 16-20, 2007.