Outkicking Its Coverage: How DraftKings’s Aggressive Terms of Use May Leave It Vulnerable to Class Action

By Andrew Lewis*

Over the last 20 years, fantasy sports have evolved from a niche pastime involving a group of fans informally scoring competitions by hand to a multibillion dollar industry.  The institution of daily fantasy sports (DFS) is the most recent phenomenon involving fantasy sports.  One need only look at the money spent on advertising to recognize the prevalence of DFS. During the first nine months of 2015, industry leaders DraftKings and FanDuel spent more than $205 million on more than 60 thousand advertisements.[1]  As its popularity and bottom line have swelled, so too has the number of DFS’s legal issues.

In April 2015, DraftKings faced a false advertising claim based on its dubious “100% deposit bonus,” which required players to participate in a certain number of contests before recovering the bonus.[2]  Further, critics of DFS have voiced concerns over its status as a “game of chance” rather than a per se gambling operation subject to stringent prohibitions and regulations.[3]  In early November, New York Attorney General Eric Schneiderman sent a cease and desist letter to the two DFS companies on the grounds that their operations constituted “gambling.”[4]  In response, the companies filed suit against Schneiderman and requested a temporary restraining order.[5]  In light of the New York issues, FanDuel has paused operations in the state until the resolution of the suit.[6]  DraftKings, on the other hand, will continue its operations in New York.[7]  While these issues are certainly troubling for the DFS giants, a scandal garnering the attention of federal prosecutors is perhaps the industry’s biggest threat.

In the first week of October 2015, DraftKings and FanDuel faced allegations of impropriety, akin to an insider trading scandal.  The issue was bad publicity for the DFS giants to be sure, but without an analogous securities regulation framework, the legal ramifications of the episode were unclear.  In order to understand the nature of the scandal, one must first understand how DFS works and the strategy top players use to win the contests.

DFS is a game in which participants pay an entry fee in order to compete in daily or weekly competitions.  In a given competition, participants could compete against hundreds of other individuals for the allure of a cash prize for top performers.  DFS participants choose a different fantasy team for every competition.  Each player is assigned a dollar amount based on their expected performance, and teams must stay below a certain dollar “cap.”  The object of the game is to have the players with the best statistics on your team throughout the duration of the competition.  Thus, at its heart, DFS forces participants to make economic calculations based on the expected return on investment of the athletes: choose the best players, score the most points, win the most money.  Or so it would seem.

Some argue that a more sophisticated strategy is to attempt to take the road less traveled, and choose players that relatively few other league participants choose.[8]  DFS allows players to be chosen by multiple participants, so any number of teams could look remarkably similar.  The more similar teams look, the less variance there is among those teams’ scores, and the less likely that those participants win a top prize.  While Tom Brady might be projected to have a better week than Andy Dalton, for example, in the event Dalton outperforms Brady, Dalton owners gain an advantage over a significant portion of the market.  Meanwhile, if Brady outperforms Dalton, Brady owners only gain an advantage over a miniscule portion of the market.  To this end, the best players are those that are (1) expected to perform well, (2) are relatively cheap, and (3) are unpopular.[9]  While DFS participants can use their sports expertise and economic acumen to make wise choices based on the first two variables, they are left guessing on the relative popularity of a given player.  If a participant happened to have knowledge regarding a player’s popularity, it would give him a significant advantage over his competition. Enter the scandal.

THE SCANDAL

On October 5, DraftKings and FanDuel each released statements regarding alleged impropriety in their games.  The allegations surrounded a DraftKings employee who inadvertently released DraftKings ownership statistics on a message board prior to the third week of NFL games.[10]  That information is not available until all lineups are final.  The same employee also happened to beat 229,882 other entrants in a FanDuel competition the prior week.  Critics were suspicious of the employee’s second place finish, along with his $350,000 prize—the implication being that he used his access to DraftKings ownership statistics, unavailable to the general public, to gain an advantage over FanDuel DFS participants.  Garnering attention from the media, the FBI, and disgruntled DFS players, the episode has been compared to insider trading.  On October 8, just three days after the DFS giants released their statements, the two DFS giants faced a class action complaint.

THE COMPLAINT[11]

The class action complaint filed in the Southern District of New York is comprised of seven claims, including negligence, fraud and misrepresentation, a violation of Kentucky’s Consumer Protection Act, a violation of the New York Deceptive Acts and Practices Law, false advertising, and unjust enrichment.  A significant portion of the complaint is devoted to the arbitration provision in DraftKings’s terms of use.  The provision states:

[A]ny and all disputes, claims or controversies arising out of or relating to this Agreement, the breach thereof, or any use of the Website . . . except for claims filed in a small claims court that proceed on an individual (non-class, non-representative) basis, shall be settled by binding arbitration . . . . In agreeing to arbitrate all Claims, you and DraftKings waive all rights to a trial by jury in any action or proceeding involving any Claim.[12]

If the above arbitration provision is enforced, then the Southern District of New York will dismiss the case pursuant to the agreed-to provision.  Those DFS participants seeking redress for their losses could still bring their claims on an individual basis, but given that individual losses may be modest relative to the cost of pursuing complex litigation against large corporations, DraftKings and FanDuel’s potential liability in arbitration would be much smaller than it would be in the class action context.  Thus, the DFS giants have a strong incentive to enforce their arbitration provision.

Arbitration provisions of this kind are not uncommon and are generally enforced.  In American Express Co. v. Italian Colors Rest., merchants sued American Express over alleged violations of the Sherman Act.[13]  However, the agreement between the merchants and American Express contained an arbitration provision.[14]  Similar to the provision in DraftKings’s terms of use, the American Express agreement required disputes to be resolved through arbitration and expressly prohibited class suits.  The restaurateurs argued that the cost of litigating the claims on an individual basis would have been prohibitively high relative to their potential recovery, effectively barring the merchants from seeking vindication of their rights.[15]  Because of this, the restaurateurs claimed, an exception should be made to the Federal Arbitration Act in order to preserve access to remedies.  The Supreme Court disagreed.  In the majority opinion, Justice Scalia reasoned that “the fact that it is not worth the expense involved in proving a statutory remedy does not constitute the elimination of the right to pursue that remedy.”[16]  Essentially, then, arbitration provisions remain enforceable in situations where individual suits are economically unfeasible.  However, all is not lost for DFS participants—indeed, the perceived strength of the DFS terms of use may be their own undoing.

OVERREACHING TERMS OF USE

In light of the American Express decision, and the likely enforceability of the arbitration provision, the class action complaint advances a number of arguments claiming that DraftKings’s Terms of Use is not a valid, enforceable contract.  Among these is DraftKings’s right, “without prior notice,” to “revoke any or all of [the participants’] rights granted” under the terms of use and DraftKings’s ability to deny participants the ability to partake in its head-to-head contests.  Notably, one of the most aggressive provisions in DraftKings’s terms of use is absent from the complaint.  The DFS giant reserves for itself “the right to amend these Terms of Use at any time and without notice, and it is [the participants’] responsibility to review these Terms of Use for any changes.”[17]

A similar provision was at issue in Harris v. Blockbuster Inc.[18]  There, like in the DFS case, Blockbuster claimed the arbitration clause in its online terms and conditions protected the now-defunct company from class action exposure.[19]  The problem for Blockbuster, however, was that it reserved the right “at its sole discretion, [to] modify these Terms and Conditions of Use . . . with or without notice.  Such modifications will be effective immediately upon posting.”

The court sitting in the Northern District of Texas took issue with Blockbuster’s unfettered ability to “change the rules of the game,” especially given that there was no provision stating that once enacted, the changes would not apply to disputes arising prior to the amendment.[20]  Additionally, the Blockbuster court stated that it did not matter that a retroactive modification had not actually been attempted—the mere fact that the provision was in the contract rendered the entire contract, including the arbitration provision, illusory.  As mentioned above, DraftKings’s terms of use contains a nearly identical modification provision without any clause suggesting that modifications would only apply to subsequent disputes.  If the court determines that the modification clause renders the contract illusory, DraftKings will be vulnerable to class action litigation.

CONCLUSION

The case study provided by Blockbuster should have alerted drafters of the dangers of unilateral modification clauses.  Arbitration provisions offer a strong defense for companies hoping to avoid the liability associated with class action suits, but including a modification clause like the one at issue in Blockbuster could render the entire contract illusory. Indeed, DraftKings’s may have done just that.  Blockbuster informs that if a unilateral modification clause must be included, the clause must also provide that modifications would only apply to disputes subsequently arising.  Whether or not the class will succeed in its underlying suit remains to be seen, but because DraftKings may have effectively voided its own arbitration provision, there is a chance we will find out.

 


*Andrew Lewis. University of Illinois College of Law, Class of 2015. Practices commercial litigation in Chicago, IL. Many thanks to JLTP editor Iman Naim for her help and guidance with this article.

[1] Tom Kludt, DraftKings and FanDuel Ads Seem to Be Everywhere on TV Because They Are, CNNMoney (Oct. 8, 2015, 5:23 PM), http://money.cnn.com/2015/10/08/media/fanduel-draftkings-commercials/index.html.

[2] Dustin Gouker, Nothing but the Truth? DraftKings Faces New Class-Action Lawsuit for Alleged False Advertising, Legal Sports Report, (Apr. 28, 2015, 7:28 PM), http://www.legalsportsreport.com/1205/draftkings-faces-new-class-action-lawsuit-advertising.

[3] WKYC Staff, NE Ohio Attorney Files Lawsuit, Says Fanduel, Draftkings Violate Ohio Law, WKYC (Oct. 22, 2015, 12:38 AM), http://www.wkyc.com/story/news/local/ohio/2015/10/21/ attorney-fantasy-sports-websites- fanduel-draftkings-violate-ohio-law/74352890.

[4] Rachel Axon, DraftKings Staying Open in New York until Legal Decision in Court, USA Today Sports (Nov. 20, 2015, 7:39 PM), http://www.usatoday.com/story/sports/fantasy/2015/11/20/fanduel-continue-business-new-york-ligitation/76125684.

[5] Id.

[6] Id.

[7] Id.

[8] See Jonathan Berr, Is DraftKings’ Ethan Haskell Just a Shrewd “Investor”?, CBS Money Watch (Oct. 14, 2015, 5:15 AM) http://www.cbsnews.com/news/is-draftkings-ethan-haskell-just-a-shrewd-investor (explaining that “[i]n daily fantasy sports, as in the stock market, the most widely chosen assets—or, in this case, athletes—represent a less attractive investment because the rewards of the performance are shared among many holders. By contrast, the solitary owner of an undervalued asset would reap larger rewards than those who have opted for a more obvious choice.”).

[9] Seung Lee, How to Win $350,000 on FanDuel and the Mathematics of Daily Fantasy Sites, Newsweek (Oct. 8, 2015, 2:11 PM), http://www.newsweek.com/draftkings-fanduel-mathematics-daily-fantasy-sites-381129.

[10] Joe Drape & Jacqueline Williams, Scandal Erupts in Unregulated World of Fantasy Sports, N.Y. Times (Oct. 5, 2015), http://www.nytimes.com/2015/10/06/sports/fanduel-draftkings-fantasy-employees-bet-rivals.html.

[11] Complaint, Johnson v. FanDuel, Inc., No. 15-cv-7963 (S.D.N.Y. Oct. 8, 2015).

[12] Terms of Use, DraftKings, https://www.draftkings.com/help/terms (last updated Oct. 19, 2015).

[13] American Express Co. v. Italian Colors Rest., 133 S. Ct. 2304 (2013).

[14] Id. at 2308.

[15] See Id., (“In resisting the motion, respondents submitted a declaration from an economist who estimated that the cost of an expert analysis necessary to prove the antitrust claims would be ‘at least several hundred thousand dollars, and might exceed $1 million,’ while the maximum recovery for an individual plaintiff would be $12,850, or $38,549 when trebled.”).

[16] Id. at 2311.

[17] Terms of Use, supra note 11.

[18] Harris v. Blockbuster Inc., 622 F. Supp. 2d 396 (N.D. Tex. 2009).

[19] Id. at 397.

[20] Id. at 399.

Utility Models Revisited: The Case of Investing in China

By Runhua Wang*

I. Introduction

To encourage innovation, Chinese investors increasingly invest in U.S. technology researchers.[1]  Meanwhile, U.S. investors also invest in the technology market in China. Recently, Intel Capital invested $67 million in eight Chinese startups, and Dell Inc. pledged $125 billion in investments in Chinese businesses, including technological component purchases and manufacturing expenses.[2]  When entering a market in a developing country, investors in high-technology industries must consider IP protection, especially patent protection, so they should understand what a utility model is and how that patent system can be efficiently used in the developing countries that have a utility model patent regime.[3]

This article focuses on explaining the utility model regime in China and helps investors in developed countries, especially U.S. investors whose home country does not have a parallel regime, to avoid relative legal risks in the Chinese market, so they can adjust to and survive in that market. This article includes three sections.  In this section, I will introduce the utility model patent system and compare the Chinese utility model regime to other utility model regimes, as well as general utility patent regimes, to help investors from developed countries understand the inherent characteristics in the Chinese utility model regime.  In the second section, I will analyze the efficiency of utility model regimes from economic and technological perspectives and explain why the U.S. does not have a utility model patent system.  Based on the comparative analysis of the Chinese and other utility model regimes, I will make recommendations in the last section as to how investors can avoid relative legal risks and maximize their benefits in the Chinese market through this particular regime.

II. Background

A. FDI and the Trend of Financial Globalization

Foreign Direct Investment (FDI) in China is transforming from solely manufacturing FDI to FDI in technology development.[4]  It is not difficult to recognize that, under the trend of financial globalization, the bright line between traditional FDI and international portfolio investment, which focuses more on capital mobility rather than on technology transfer,[5] diminishes.

FDI is important for technology transfers and spillovers.[6]  Most developing countries rely on inward FDI to effect technical change and structural transformation,[7] which could increase economic growth.[8]  Moreover, FDI may also directly facilitate the growth of a country’s economy in many other ways, such as creating new jobs, improving access to new and advanced technologies, increasing productivity, and strengthening management strategies.[9]

B. Concerns of the Strength of IP Regime in Developing Countries

Besides the benefits of FDI to receiving economies, the benefits to originating economies are also important in international trade and financial transactions, because levels of FDI are driven by factors in originating economies.[10]  The technology transfers and spillovers through FDI trigger concerns regarding IP protection, another factor driving the levels of FDI;[11] so, scholars and international institutions usually suggest that developing countries strengthen their IP protection to attract FDI.[12]  For example, one of the main obligations of the World Intellectual Property Organization (WIPO) is to assist developing countries in preparing IP laws and in promoting the overall protection of IP rights.[13]

Statistics of several developing countries show an uneven distribution of FDI among developing countries and among their industrial regions, but not among their IP laws.[14]  However, even though strong IP protection alone is not sufficient to attract foreign firms to invest in a country, some scholars, including Maskus, believe that a weak IP system would deter foreign firms from investing in a developing economy.[15]

Can this theory of the relationship between FDI and the strength of the IP regime in a developing country be used by developing countries to attract U.S. capital investors and technology investors if those countries strengthen their IP protections?  WIPO and the TRIPS Agreement do not require IP regimes in developing countries to be as strong as those in developed countries to avoid a “development dilemma.”[16]  Because there are no rigid restrictions on the strength of developing countries’ IP regimes, how should U.S investors evaluate the strength of an IP regime in a developing country?  Under the trend of financial globalization, what concerns would U.S. investors have regarding the patent regime and the technology market in China?

In practice, statistics show that the venture capital market could be over-developed so as to become uneven in developed countries, including the U.S, thus decreasing the incentives of investors to invest in the domestic financial market.[17]  Hence, regardless of the concerns regarding the costs of production or labor, it seems to be inevitable that there will be more U.S. investors involved in the financial and technology markets in developing countries, especially in China.

III. Understanding Utility Model

A. What is Utility Model?

“Utility model” is a generic term that refers to the subject matter falling between patent law and sui generis design law.[18]  However, there is no global consensus on the term’s meaning due to fundamentally different concepts from one country to another, such as “innovation patent” in Australia, “utility certificate” in France, “short term patent” in Belgium, and “utility innovation” in Malaysia.[19]  Thus, it is necessary to review the nature of these systems through the characteristics of some typically designed utility model regimes.

Some of these systems define utility models as intangible subject matter like technical concepts; other systems relate their definition of utility models to three-dimensional forms; still others consider utility models tantamount to utility patents without examination and for a shorter duration (usually seven to ten years).[20]  Classical utility models are usually recognized by these characteristics: cheap, quick, and easily accessible protection for inventions or innovations, many of which cannot gain protection under the utility patent regime.[21]

The earliest classical utility model regime appears to be the United Kingdom’s Utility Designs Act of 1843.[22]  It protected designs for the shape or configuration of useful articles of manufacture, which were literally remote from utility patent protection.[23]  However, because of its narrow protection only for external appearance or “form,” not for function or principle, many commentators argued to extend its scope to functional equivalents of the embodiments that the drawing illustrates.[24]  In 1919, the act was reduced to insignificance by a series of judicial and legislative actions.[25]

Germany, comparatively, introduced a utility model regime, Gebraucbsmuster, firmly and essentially remaining a creature of design protection in 1891, a prototype of classical utility model regime.[26]  It features lower standards of inventiveness, no pre-grant examination, limited subject matters only for movable articles having three dimensions, and a very short term of protection.[27]

Progressively, the utility model regime in Germany departed from the classical utility model originating in design protection concepts to a modern second-tier patent regime as a complement to its utility patent regime.[28]  In 1990, Germany enacted reforms to abolish the requirements of a three-dimensional configuration and to permit protection of electronic circuit designs, chemical substances, foodstuffs, drugs and immovables.[29]  Thus, this regime is no longer only a close cousin of design protection,[30] but has transformed into a longer and stronger regime, providing patent-like protections of small inventions generally for a relatively short period of time.[31]  The qualified protected inventions are less strictly tied to three-dimensional, functional shapes of tools or everyday implements.

Another vital characteristic of a utility model regime in many countries is the lack of substantive examination to register.[32]  The registration process hence is often significantly simpler and faster than that in a patent regime in testing for non-obviousness,[33] and it expands a temporary protection for pending applications of patents.[34]

Similar to patents but with lower standards of non-obviousness, utility models require novelty,[35] even if the level of the novelty standard could vary in different countries’ utility model regimes.  The Commission of the European Community (“The Commission”) suggests that restricting novelty to the territory of a particular Member State might run counter to the objective of a single market.[36]

Therefore, based on their common characteristics, utility models are fairly defined by Pager as subpatentable innovations combined with early disclosure of patent applications and narrow interpretation of claims to allow local firms to invent around foreign innovations.[37]  This series of rules for favoring surrounding inventions is excluded from the restriction of TRIPS Article 31 for dependency patents to favor developing countries.

B. Utility Model in China

In the law of China, utility model is defined as a type a “patent.”[38] It should be practical and have new technical solutions relating to the shape, the structure, or a combination thereof of a product.[39]  Beside the P.R.C. Patent Law (“Patent Law”), the patent regime also administers utility models through other regulations: the Rules for the Implementation of the Patent Law (“the Rules”) and the Guide of Patent Examination (“the Guide”).  Until the amendment of the “Patent Law” in 2009, utility models had not been clarified, and they were only specified by these two regulations at a lower level of authority.[40]  Functionally, these two regulations provide or emphasize the details to clearly explain the terms in “Patent Law.”

The contents of the patent laws show that utility models in China acquire a second-tier patent protection.[41]  The Guide requires that the subject matter of utility models be attached to products.[42]  Measures can only be protected under utility patents.[43] Moreover, utility patents are protected for twenty years after the filing date; utility models are protected for ten years after the filing date.[44]  In addition, the qualifications of both types of rights demand novelty, inventiveness, and utility,[45] but the standards to grant rights differ between them.[46]

The State Intellectual Property Office of the P.R.C. (SIPO) conducts a preliminary examination to determine conformity with proper procedures and qualifications for the requirements of utility and novelty.[47]  When a utility model application passes this preliminary examination, it should be published and issued on the same day.[48]  Only utility patents require a substantive examination as a condition to issue.[49]  However, for enforcement, courts or administrative authorities can ask for a patent examination report as evidence in a dispute concerning utility model infringement.  The report is made by SIPO after searching, analyzing, and judging the technology from the request of the patentee or an interest-related party.[50]

Moreover, the Rules require that the scale of protection and the remedies or punishments, such as injunctive relief, be basically similar between utility patents and utility models.  The requirement of a patent examination report for utility model disputes is the only distinctive term to regulate how utility patents and utility models get protected through litigation.  The rules of compulsory licenses and the rules of the six month grace period for utility patents and utility models are not differentiated.[51]  In addition, both of them must satisfy the same standards of novelty, which requires a “prior art” search, and have practical applicability to meet the standards of utility.[52]

The requirement of prior art for both utility patent and utility model is an important notion to judge their novelty and creation.[53]  The prior art in “Patent Law” refers to any technologies known to the public in the country or abroad before the date of filing.[54]  It should be a statement in which the knowledge and information concerned are disclosed to the public, and the technicians in the field can obtain the knowledge and information from public domains through normal channels.[55]  Thus, it includes both the local prior arts and the existing arts in any other countries.[56]

Filing both a utility model and a utility patent for an identical invention on the same day is permitted.[57]  However, only one patent right shall be granted, so an applicant shall be granted a utility patent only if the applicant agrees to abandon the previously obtained utility model that has not ended.[58]

C. Standards of Non-Obviousness

From 2006 to 2010 in China, there were merely around 21.5 percent utility model applicants who were rejected in the preliminary examination for lacking utility, but more than 97 percent of these failed applications were individual applicants rather than “work for hire.”[59]  Hence, investors who are interested in investing in Chinese startups or established firms rather than individuals need to understand that the fundamental difference between registration of utility model and registration of a utility patent is substantive examination, the core of which in China is the standards of non-obviousness.[60]

Some European utility model regimes have no requirements of non-obviousness.  These regimes are similar to classical utility regimes and usually are called three-dimensional regimes, such as the regimes in Italy, Denmark, Finland, Greece, Portugal, and Spain,[61] and they only examine for formalities.[62]  Because of their standards of local novelty that only prohibit using local prior arts, the three-dimensional form requirement could be abolished.[63]  Some scholars, such as Janis, believe that a second-tier patent system could be a gap-filler to utility patent regimes.[64]

The U.S. has a trend of increasing the strictness of patent requirements through the standards of non-obviousness.[65]  Australia applies the same standards for obviousness to both utility patents and utility models.[66]  Comparatively, while Germany has amended its utility model regime several times, its procedure, which has a soft obviousness standard rather than requiring substantive examination, has not been changed,[67] and Germany has experienced a softening of the non-obviousness standard for patents to be less strict.[68]  Therefore, the soft obviousness standard makes the utility model regime primarily different from a utility patent regime with a shorter term.[69]  In the European Union, apart from the European Patent Convention, other conventions, such as the Strasbourg Convention on the Unification of Certain Points of Substantive Law and Patents for Inventions, left the standards of registration of utility models unclear,[70] so member countries can flexibly design and adjust a proper system for their local economy.

IV. Conclusion

Utility model regimes provide exclusive rights to inventions or innovations, similar to utility patent regimes.  Compared to utility patents, utility models usually provide a shorter duration of protection.  Utility models are cheap, quick, and easy for inventors to gain exclusive protection for their inventions.  Hence, more technologies and inventions can qualify for protection under a utility model regime than for protection under a utility patent regime.  However, examination under a utility model regime is much less strict than that under a utility patent regime.  Utility model claims do not have to meet the same non-obviousness standards as utility patents.  Therefore, it is difficult to simply conclude the utility model regime in China is weak or strong.  In the forthcoming part, I will explain the efficiency of utility models in addressing the concerns of FDI investors from developed countries, particularly U.S. investors, whose home country does not have a parallel system.

 


*Runhua Wang. University of Illinois College of Law, J.S.D Candidate, Class of 2016. Special thanks to my parents. Many thanks also to Professor Paul Heald and Professor Jay P. Kesan (University of Illinois College of Law), and JLTP editor Iman Naim (Class of 2016) for their instruction and help.

[1] See Jason Lange, Chinese Firms Pour Money into U.S. R&D in Shift to Innovation, Reuters (June 21, 2015, 9:17 AM), http://www.reuters.com/article/2015/06/21/us-usa-china-investment-insight-idUSKBN0P10KD20150621.

[2] Eva Dou, Intel Capital Invests $67 Million in Eight Chinese Startups, Wall St. J. (Sept. 17, 2015, 8:27 AM),  http://www.wsj.com/articles/intel-capital-invests-67-million-in-eight-chinese-startups-1442492847.

[3] Bob Stembridge, Chinese Utility Models – A Lesser-Known IP Strategy, Indus. Insight, July-Aug. 2010, at 9, available at http://www.iam-media.com/Magazine/Issue/42/Industry-insight/Chinese-utility-models-a-lesser-known-IP-strategy.

[4] Foreign Direct Investment – the China Story, World Bank (July 16, 2010), http://www.worldbank.org/en/news/feature/2010/07/16/foreign-direct-investment-china-story (last visited Oct. 26, 2015).

[5] Christine Greenhalgh & Mark Rogers, Innovation, IP, and Economic Growth, 258 (2010).

[6] Beata S. Javorcik, International Technology Transfer and Foreign Direct Investment, in The Evidence and Impact of Financial Globalization 311-319, (Gerard Caprio ed., 2012), available at http://www.sciencedirect.com/science/article/pii/B9780123978745000439.

[7] Carsten Fink & Keith E. Maskus, Why We Study Intellectual Property Rights and What We Have Learned, in Intellectual Property and Development: Lessons from Recent Economic Research 6 (Carsten Fink & Keith E. Maskus eds., 2005).

[8] Nagesh Kumar, Intellectual Property Rights, Technology and Economic Development: Experiences of Asian Countries, 38 Econ. & Pol. Wkly. 209, 210 (2003), available at http://citeseerx.ist.psu.edu/viewdoc/download?doi=10.1.1.469.8086&rep=rep1&type=pdf.

[9] Rami M. Olwan, Intellectual Property and Development: Theory and Practice 108, 123 (2013).

[10] Greenhalgh, supra note 5, at 257.

[11] Olwan, supra note 9, at 125.

[12] Benjamin Coriat & Luigi Orsenigo, Public Health and the Pharmaceutical Industry: Issues in the Post-2005 TRIPS Agenda, in Intellectual Property Rights: Legal and Economic Challenges for Development 227 (Mario Cimoli et al. eds., 2014).

[13] Comp. Gen., Strengthening Worldwide Protection of Intellectual Property, No.132699, at 22-25 (1987), available at http://archive.gao.gov/d2t4/132699.pdf.

[14] See Keith E. Maskus, The Role of Intellectual Property Rights in Encouraging Foreign Direct Investment and Technology, supra note 7, at 48.

[15] See Id. at 54.

[16] Pager refers to this as a “damage control” policy “that seek[s] to minimize or offset the costs of having a patent system pose significant, disproportionately burdensome obstacles to local innovation.” See Sean A. Pager, Patents on a Shoestring: Making Patent Protection Work for Developing Countries, 23 Ga. St. U. L. Rev. 755, 803-04 (2006-07); see also Jerome H. Reichman, Intellectual Property in the Twenty-First Century: Will the Developing Countries Lead or Follow? 46 Hous. L. Rev. 1116, 1119 (2009). (“‘[I]f they open their domestic markets to trade, they face political and economic pressure to protect foreign IP.’” (quoting Robert L. Ostergard, Jr.)).

[17] Josh Lerner et al., Venture Capital and Private Equity: A Casebook 242 (5th ed. 2012).

[18] Uma Suthersanen, et al., Utility Models and Other Alternatives to Patents, in Innovation Without Patents: Harnessing the Creative Spirit in a Diverse World 18 (Edward Elgar ed., 2007).

[19] Id.

[20] Id.

[21] Id.

[22] See Lionel Bently & Brad Sherman, The United Kingdom’s Forgotten Utility Model: The Utility Designs Act of 1843, 3 Intell. Prop. Q. 265 (1997); see also Tabrez Ahmad & Pratic Priyadarshi Choudhury, Law of Patents Utility Model Protection: Harnessing the Backwaters of IP, 5 (2012), http://ssrn.com/abstract=1981780.

[23] See Ahmad, supra note 22 at 6.

[24] Mark D. Janis, Second-tier Patent Protection, 40 Harv. Int’l. L.J. 151, 156 (1999).

[25] Id.

[26] See id. at 158-59.

[27] See id. at 158. The duration is three years from the application date, and it is renewable for an additional three-year term.

[28] See id. at 155, 162-63.

[29] Id. at 164.

[30] Jerome H. Reichman, Legal Hybrids Between the Patent and Copyright Paradigms, 94 Colum. L. Rev. 2432, 2457 (1994).

[31] Id. at 165 n.73; see also Jerome H. Reichman, Charting the Collapse of the Patent-Copyright Dichotomy: Premises for a Restructured International Intellectual Property System, 13 Cardozo Arts & Ent. L.J. 475, 500 (1995).

[32] Ahmad, supra note 22, at 5

[33] Janis, supra note 24, at 161.

[34] Robert Hart, The European Union’s Proposed Protection for Utility Models: The Implications for Computer Programs, 3 Int’l Intell. Prop. L. & Pol’y, 50-1, 50-1 (1998).  Hart concludes that the characteristics of a second-tier regime are quickness, simple registration, less stringent requirements than for patents, low cost, and temporary protection pending the grant of a patent, and most of these characteristics have been covered by classical utility model regimes.

[35] Heather Ann Forrest, Utility Model: Widening the Economic Divide between Legacy and New EU Member States, 32 Int’l Bus. L. 216, 217 (2004).

[36] See Hart, supra note 34, at 50-1, 50-2; see also Commission Green Paper: The Protection of Utility Models in the Single Market, COM (1995), 370 final (July 18, 1995).  The Proposed Directive in the Commission of the European Community proposed that “utility model protection is better suited than patent protection to technical inventions involving a specific level of inventiveness.”

[37] Pager, supra note 16, at 803-04.

[38] Hong Liu & Jun Wei, Technology Transfer to China: The Patent System, 5 Santa Clara Computer & High Tech. L J. 363, 373 (1989).  The authors looked at an earlier draft of China’s Patent Law that says: “‘Working a patent’ means the manufacture of the invention, utility model or design, or use of the patented process.”  Gradually, it becomes general knowledge that people in China call all three kinds of inventions patents.  The current draft of the 2009 Patent Law in China still states that “inventions-creations” means inventions, utility models and designs” in Article 2.

[39] Zhuanli Fa(专利法)[Law on Patent](promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 2 (China).

[40] Xiaoqing Feng, The Interaction Between Enhancing the Capability for Independent Innovation and Patent Protection: A Perspective on the Third Amendment to the Patent Law of the P.R. China, 9 Pitt. J. Tech. L. & Pol’y 1, 24 (2009).

[41] Mark Shiqian Zhai, The Chinese Utility Model Patent is Destroying Innovation in China, 39 Aipla Q. J. 413, 415 (2011).

[42] Zhuanli Shencha Zhinan (专利审查指南)[The Guide of Patent Examination, “the Guide”](promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) §1 ch. 2 art. 6.1 (China).

[43] Id. at art. 6.3; see also Zhuanli Fa(专利法)[Law on Patent](promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 2 (China).

[44] Zhuanli Fa(专利法)[Law on Patent](promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 42 (China).

[45] Id. at art 22.  Inventiveness is equivalent to the non-obviousness requirement of USPTO (U.S. Patent and Trademark Office) because of the difference of translation.

[46] Feng, supra note 40, at 52

[47] Liu & Wei, supra note 38, at 367; see also Zhuanli Shencha Zhinan (专利审查指南) [The Guide of Patent Examination] (promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) §1 ch. 2 art. 7.4 (China).

[48] Zhuanli Fa (专利法)[Law on Patent] (promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 40 (China).

[49] Id. at art. 35.

[50] Id. at art. 61; see also Zhuanli Fa Shishi Xize (专利法实施细则) [The Rules for the Implementation of the Patent Law (“the Rules”)] (promulgated by St. Council, 2010) P.R.C. Laws, Jan. 22, 2010, art. 56 (China); see also, Zhuanli Shencha Zhinan (专利审查指南) [The Guide of Patent Examination] (promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) § 5 ch. 5 art. 2.3 (China).

[51] Zhuanli Fa Shishi Xize (专利法实施细则) [The Rules for the Implementation of the Patent Law, “the Rules”] (promulgated by St. Council, 2010) P.R.C. Laws, art. 24, 51 (China); see also Zhuanli Shencha Zhinan (专利审查指南) [The Guide of Patent Examination] (promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) §1 ch. 2 art. 7.3 (China).

[52] Zhuanli Fa Shishi Xize (专利法实施细则) [The Rules for the Implementation of the Patent Law (“the Rules”)] (promulgated by St. Council, 2010) P.R.C. Laws, Jan. 22, 2010, art. 22 (China); see also Liu & Wei, supra note 38, at 364; see also Zhuanli Shencha Zhinan (专利审查指南) [The Guide of Patent Examination, “the Guide”] (promulgated by SIPO., Jan. 21, 2010, effective Feb. 1, 2010) § 5 ch. 5 art. 2.3 (China). The novelty requirement of utility models could be softer than that of utility patents in the detail regulation of “the Guide.”

[53] Feng, supra note 40, at 55.

[54] Zhuanli Fa (专利法) [Law on Patent] (promulgated by the Standing Comm. Nat’l People’s Cong., Dec. 27, 2008, effective Oct. 1, 2009) P.R.C. Laws, Dec. 27, 2008, art. 22 (China).

[55] Feng, supra note 40, at 55.

[56] Edward W. Tracy, et al., A Practical Patent Strategy for U.S. Companies Doing Business in China, 3 Landslide 14, 15 (2010-2011).

[57] Id.

[58] Id. See also Fa, supra note 54, at art. 9.

[59] Hui Lian (廉惠), Shiyong Xinxing Bohui Anjian Shizheng Fenxi (实用新型驳回案件实证分析) [An Empirical Study of Rejected Applications of Utility Models], 8 Intell Prop. 77, 78-79 (2011).

[60] “The Guide” includes the search of both local and international prior arts in the process of preliminary examination for utility models, but excludes the process of testing non-obviousness, which is required only in the pending of an application of a utility patent.  “The Guide” shows the three types of preliminary examination for the three types of patent filing separately in Part I, and mentions less about the search for novelty in the same part.  However, even though it expresses the details of examination of novelty of utility models in Part II, “The Substantive Examination,” the Patent Law of China only requires this procedure in Article 35.  Therefore, because the test of utility is a forward step of testing novelty, which is defined in Part 2.3, Article 3 of “the Guide,” we learn that the nature of the substantive examination is to test non-obviousness of an invention.

[61] See Suthersanen, supra note 18, at 12.  Suthersanen separates the classical utility model regime from second-tier protection, like in Germany, Austria, and the proposal from the EU Commission, and the type of utility model regimes which are closest to the utility patent regime.  She calls these types “Three Dimensional Regime,” “German Regime,” and “Patent Regime.”

[62] Id. at 13.  The formalities include correct documentation, name, and address of applicant and agent.

[63] See Hart, supra note 34, at 50-52.

[64] See Janis, supra note 24, at 191.

[65] Id. at 161.  Janis shows the pattern for the PTO and judicial system to emphasize the inventive step requirement for patents since the mid-twentieth century in the U.S.

[66] Id. at 166.

[67] Ruifang Chen, The Utility Model System and Its Benefits for China—Some Deliberations Based on German and Japanese Legislation, 14 IIC: Int’l Rev. Intell. & Competition L. 493, 505 (1983).

[68] Id. at 162-63. (“In order to comply with the European Patent Convention of 1978, Germany abolished its relatively strict ‘technical step forward’ standard for inventiveness, replacing it with the less rigorous erfinderische Tdtigkeit standard . . . . The inventiveness standard for utility models . . . was adjusted to erfinderischer Schritt . . . to correspond to an even lower standard.”)

[69] Janis, supra note 24, at 168.

[70] Rudolf Krasser, Developments in Utility Model Law, 26 IIC: Int’l Rev. Intell. & Competition L. 950, 951 (1995).

Net Neutrality: An Overview and Current Developments

By Martin Vigodnier*

I. INTRODUCTION

The Internet plays a prominent role in our daily lives.[1]  Recently, news regarding the importance of the Internet’s influence has been tailored around network neutrality (“net-neutrality”) and the ongoing debate with respect to the government’s role in regulating the Internet.  This article will provide the reader with three things: a primer on net-neutrality, analysis of arguments for and against net-neutrality, and where net-neutrality stands today.

II. PRIMER ON NET-NEUTRALITY

A. What is Net-Neutrality?

The term net-neutrality was first coined by Professor Tim Wu[2] in 2003[3] and is a theory that holds that broadband providers should treat all Internet traffic equally, regardless of source.[4]  “Source” is essential to understanding net-neutrality, because data can come from multiple sources and in various forms.[5]  For example, data can come in the form of an email attachment, and video streaming data can identify Netflix as its source.[6]  Since broadband providers supply consumers with Internet access, they have the prerogative to either “block” certain data from reaching the consumer, or “throttle” the speed at which data reaches consumers.  Under a net-neutrality regulatory regime, however, broadband providers are forced to remain data-neutral when servicing their customers: i.e., they cannot discriminate based on the type of data[7] or the identity of its transmitter or recipient.[8]

B. The Government’s Role

The Federal Communications Commission (“FCC”) has attempted to regulate the Internet for about thirty years[9] and has asserted its legal authority to do so under the Communications Act of 1934[10] and the Telecommunications Act of 1996.[11]

The FCC’s role in net-neutrality began in their 1980s Second Computer Inquiry decision.[12]  In Second Computer Inquiry, the FCC created a regulatory regime[13] that divided services into “basic” and “enhanced.”[14]  The difference between the two was the extent to which they involved processing information, rather than simply transmitting it.[15]  Basically, the easier it was for the service to process or transmit information, the more likely the service would be classified as basic.[16]  Services that involved “computer processing applications . . . used to act on the content, code, protocol, and other aspects of the subscriber’s information,”[17] however, were classified as enhanced.[18]  If a service is classified as basic, then it is subject to FCC regulation under Title II of the Communications Act of 1934 as a “common carrier”[19]—which has the duty to “furnish . . . communication service upon reasonable request,”[20] engage in no “unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services,”[21] and charge “just and reasonable” rates.[22]  If classified as enhanced, it would be exempt from Title II regulation.[23]  The FCC did, however, impose certain limitations upon enhanced services, such as requiring enhanced service providers to offer their transmissions facilities to other enhanced service providers on a common carrier basis.[24]

In determining whether the Internet constituted a basic or enhanced service, the FCC eventually ruled that the services needed to connect an end-user—a consumer—to the Internet constituted enhanced services,[25] and were thus exempted from Title II regulation.  The FCC applied this regime to Internet services offered over telephone lines—predominantly through 56K modem[26]—for over twenty years.[27]

Notwithstanding the Internet’s Title II exemption, the FCC still imposed its enhanced services regulations on the Internet.  For example, telephone companies that provided the wireline facilities that transmitted data to and from consumers were limited in how they could provide the enhanced services necessary for consumers to access the Internet,[28] and were also required to permit third-party Internet Service Providers (“ISPs”), such as America Online, to access their wireline transmission facilities on a common carrier basis.[29]

It was against this background that Congress passed the Telecommunications Act of 1996.[30]  Similar to the Second Computer Inquiry regime, the Telecommunications Act of 1996 defined two categories: telecommunications carriers—the equivalent of basic services—and ISPs—the equivalent of enhanced services.[31]  Similar to the Second Computer Inquiry regime, telecommunications carriers were subjected to Title II regulations[32] while ISPs were exempt.[33]

The FCC subsequently classified Digital Subscriber Line (“DSL”) broadband Internet services[34] as telecommunications services[35] subject to Title II regulation,[36] while ruling that broadband Internet provided by cable companies (“cable-modem”) were ISPs[37] exempted from Title II regulation.[38]  This ruling was eventually upheld by the Supreme Court in Brand X.[39]  After Brand X, the FCC changed its course on DSL and not only re-classified DSL as ISPs,[40] but classified “mobile” broadband[41] as ISPs as well.[42]

Nevertheless, the FCC has a history of imposing regulations on ISPs.  In 2008, for example, upon discovering that Comcast was throttling the data traffic of cable-modem subscribers attempting to use certain “peer-to-peer” networking applications,[43] the FCC issued its Comcast Order decision, demanding Comcast adhere to several disclosure and compliance requirements.[44]  Comcast Order was later vacated by the D.C. Circuit because the FCC failed to demonstrate that it possessed statutory authority to regulate broadband providers’ network management practices.[45]

In response to the D.C. Circuit’s decision, the FCC adopted the Open Internet Order,[46] which established rules requiring transparency and prohibiting broadband providers from blocking or discriminating against data due to its form or source,[47] each of which lies at the heart of net-neutrality theory.[48]

This too was subsequently vacated by the D.C. Circuit, because the FCC imposed impermissible per se common carrier obligations, even though the FCC did not classify them as such.[49]  The D.C. Circuit did, however, provide the FCC with some flexibility by agreeing that Section 706 of the Telecommunications Act of 1996[50] “empower[s] [the FCC] to promulgate rules governing broadband providers’ treatment of Internet traffic”[51] in order to “preserve and facilitate the . . . innovation that has driven the explosive growth of the Internet[,]”[52] so long as the rules justified by Section 706 are not identical to common carrier rules.[53]

III. IS NET-NEUTRALITY DESIRABLE?

A. Those Who Say Yes

The arguments in favor of net-neutrality can be boiled down to three main concerns: innovation, competition, and consumer protection.

1. Net-Neutrality Fosters Innovation

A network that is as neutral as possible is predictable: all applications are treated alike.[54]  Since the FCC has it as their objective to maximize the incentives to invest in broadband applications,[55] proponents of net-neutrality argue the FCC should act to eliminate the unpredictability created by potential future restrictions on network usage.[56]

An example of this unpredictability and its hindrance on innovation can be seen in the bans over Virtual Private Networks (“VPNs”) that cable companies enacted some years ago.  Generally speaking, VPNs are a type of productivity-enhancing application that allows employees to work more efficiently from home.[57]  Indeed, VPNs are a good illustration of the kind of innovation that broadband application makes possible.[58]  However, when ISPs became aware of the usage of VPNs, the results were messy.[59]  Some ISPs decided to ban their usage outright, or demand additional fees, others banned them without any enforcement, and some allowed VPNs without comment.[60]  The unpredictability and variance in these restrictions was expensive as it imposed unnecessary costs on innovators of VPN technology—i.e., the developers of VPN technology and the companies who might benefit from VPN technology—in addition to placing costs on the employers of those employees toward whom the usage of VPN was targeted.[61]

Thus, this VPN episode is generally indicative of a problematic tendency: the restriction of new and innovative applications that ISPs see as unimportant, a competitive threat, or a chance to make money.[62]  The effects of these usage restrictions fall hardest on small and startup developers, who already have diminished resources.[63]  By definition, startup application developers push the envelope of what is possible under the Internet’s current architecture.[64]  Their funding depends on the existence of a stable, addressable market for their products.[65]  Such developers would benefit the most from knowing that they can rely on a broadband network that is consistent—that is, neutral—throughout homes and businesses.[66]

2. Net-Neutrality Fosters Competition

As a corollary to the innovation arguments illustrated above[67], proponents argue net-neutrality promotes innovation through competition.[68]

i. The Evolutionary Model of Innovation

The arguments in favor of net-neutrality as a means to foster competition are best understood as a theory of competition whereby innovation is its primary objective.[69]  Though this theory goes by many names[70], it is commonly known as the “evolutionary model”[71] of innovation.[72]

   a. Definition of Evolutionary Model of Innovation

Adherents to the evolutionary model view the innovation process as a survival-of-the-fittest competition between developers of new technologies and are suspicious of models of development that might vest power—namely, the power to direct the optimal path of innovation—in any initial prospect-holder, private or public, because they may have an incentive to minimize the degree of innovative competition.[73]  The suspicion arises from the belief that the most promising path of development is difficult to predict in advance and that any single prospect holder will suffer from cognitive biases,[74] preventing him or her from coming to the right decisions, even if he or she means well.[75]

   b. The Evolutionary Model of Innovation as it Relates to Net-Neutrality

The Internet can be seen as a platform for a competition among application developers.[76]  Indeed, email and streaming applications like Netflix, for example, battle for the attention and interest of consumers.[77]  Thus, to these “Internet Darwinians,”[78] it is important that the platform be neutral “to ensure the competition remains meritocratic.”[79]

For these reasons, Internet Darwinians argue that their innovation theory is embodied in the “end-to-end” design argument: “The End-to-End argument says ‘don’t force any service, feature, or restriction on the end-user; his application knows best what features it needs, and whether or not to provide those features itself.’”[80]  In other words, the Internet should be controlled by the producer and the end-user, not the intermediary network provider that provides them with access to it.[81]  Further, backers of the evolutionary approach to innovation take the Internet itself and the creativity that entailed its invention as examples of the superiority of a system designed along their evolutionary principles.[82]

Moreover, this theory of innovation through competition is a policy that the FCC has repeatedly endorsed.[83]  For example, in the FCC’s broadband infrastructure inquiries, the FCC has favored “multiple platform competition,” promoting a fair fight between DSL, cable, and other broadband access infrastructures.[84]  Proponents, thus, argue the same underlying principles—namely, an evolutionary model of technological innovation—favor the promotion of net-neutrality today.[85]

ii. Net-Neutrality Fosters Competition in the Global Economy

Proponents also argue that net-neutrality is critical to our nation’s competitiveness.  Indeed, as Google Vice President, Vinton Cerf, stated, “in places like Japan, Korea, Singapore, and the United Kingdom, higher-bandwidth and neutral broadband platforms are unleashing waves of innovation that threaten to leave the [United States] further and further behind in the global economy” because those nations have endorsed net-neutrality and their regulations reflect it.[86]

3. Net-Neutrality Protects Consumers

Finally, proponents argue net-neutrality is critical for consumers.  For example, most Americans today have few choices for broadband service.  Indeed, the FCC’s 2014 Report on consumer fixed broadband performance[87] notes that, of the four ISP broadband technologies examined[88], the fourteen largest broadband providers account for over eighty percent of the market.[89]  Further, the seventeen largest phone and cable operators control ninety-three percent of the broadband market[90], and only about half of consumers actually have a choice between even two providers.[91]  Unfortunately, there appears to be little near-term prospect for meaningful competition from alternative platforms and, as a result, the incumbent broadband providers are in a position to dictate how consumers and producers can use the on-ramps to the Internet.[92]

Further, as it relates to the innovation theory above, proponents stand for the principle that consumers “should be able to use the Internet connections that they pay for the way that they want.”[93]  Indeed, this principle—that users pick winners and losers in the Internet marketplace, not carriers—is an architectural and policy choice critical to innovation online.[94]  In the absence of any meaningful competition in the consumer broadband market, and without the net-neutrality tailored safeguards, one would expect carriers to have an economic incentive—and the opportunity—to control users’ online activity, thereby diminishing competition due to lack of consumer free choice.[95]

B. Those Who Say No

Opponents, on the other hand, argue that net-neutrality is not desirable based on a deep-seeded suspicion parallel to that held by proponents to the evolutionary model of innovation—namely, suspicious of the government’s general aptitude, or, rather, inaptitude, when it comes to regulating economic markets.  In general, opponents argue that the solution is not not-neutrality, which unacceptably entails promulgation of a new regulatory regime, but, instead, to do nothing and stick to the oft-repeated libertarian maxim: “let the free markets decide.”[96]

1. Net-Neutrality Hinders Competition, Innovation, and Consumer Welfare

Opponents argue that, in reality, net-neutrality hinders competition because the government has repeatedly shown that it is, one, inherently inefficient in regulating private economic markets[97], two, open to corruption,[98] and, three, regulations are more costly than an economic system premised on competitive markets, even when regulation’s aims are venerable.[99]

i. The Government is Inherently Inefficient in Regulating Private Economic Markets

Proponents say net-neutrality is essential because broadband providers, currently, enjoy too much power.[100]  Opponents like, Joshua Steimle, a self-described “tech-addicted entrepreneur,”[101] agree, noting that the power they enjoy is almost monopoly-level and that he would prefer a system with more competition in place.[102]  However, he disagrees with proponents in that the best way to ensure net-neutrality is through the FCC—i.e., the government—because the government is “the largest, most powerful monopoly in the world[.]”[103]  Thus, it is implied that Steimle is arguing that the case for net-neutrality seems hypocritical since proponents desire to eliminate monopolistic broadband providers by seeking the aid of what he calls the largest monopoly in the world: the government.

Further, Steimle also argues that the government’s history of regulating economic markets has been, and continues to be, markedly unsuccessful,[104] and, as such, is destined to fail when it comes to promulgating net-neutrality regulations.  Steimle adds that the same result is to be expected when it comes to the government promulgating regulations to ensure net-neutrality because, “This is by design.”

ii. The Threat of “Crony-Capitalism”

Furthermore, opponents argue that the current political climate regarding governmental regulations can be summarized as corrupt and an illustration of the modern trend known as “crony-capitalism.”[105]  As it applies to net-neutrality, opponents argue that this corrupt crony-capitalism would manifest itself in net-neutrality regulations and, consequently, hinder competition because most government regulations are written by large corporate interest, in collusion with officials in government, and are “designed to prevent small entrepreneurs from becoming real threats to large corporations.”[106]  Thus, as Steimle notes, “If [net-neutrality] comes to pass how can we trust it will not be written in a way that will make it harder for new companies to offer Internet services?  If anything, we’re likely to end up even more beholden to the large [broadband providers] than before.”[107]

iii. The Costs of Governmental Regulations are Unacceptably Large

Opponents also argue that even if the government’s goal is a well-intentioned one, such as preventing monopolies from forming, the use of regulations as a means to achieve that goal is more costly than a system that makes no pretense of putting in place the elaborate scheme of regulation that now applies to common carriers.[108]  Indeed, as noted opponent Professor Richard Epstein notes, the promulgation of a regulatory regime to ensure net-neutrality not only “leaves too much space for destructive political manipulation,”[109] but the FCC’s efforts in reclassifying broadband providers as common carriers may result in “millions of dollars [being] wasted in trying to shift . . . from one regime to another.”[110]

In order to prevent the costs associated with FCC regulations reclassifying broadband providers as common carriers, Professor Epstein argues the FCC should instead promulgate regulations premised on a strong system of property rights.[111]  The advantage of this property rights regime is that the concerns over political manipulation and costs associated with regulations are minimized because the government’s role is “limited to enforcing the exclusivity of the property rights, so that millions of dollars are not wasted in trying to shift ceaselessly from one regime to another.”[112]  More specifically, the property regime that Professor Epstein argues in favor for is based upon common law principles of common carrier regulation.[113]

Ideally, consumers would have a choice between broadband providers: “In competitive markets, a refusal to deal is what makes the economy work, because it prevents any forced interactions that could prove disastrous for one side or the other—hence the sensible rule that the customer who was refused service from one merchant could just do business with another.”[114]  But, if the market is not competitive but rather dominated by monopolies, similar to those seen in the net-neutrality context, then, under the common law principles of common carrier regulation, rate regulations would apply because “there is no other rival merchant next door.”[115]  Indeed, rate regulations in this context are promulgated in order to reduce monopoly rates to competitive levels.[116]

There are, nevertheless, risks associated with these common law rate regulations in the monopoly context.  Indeed, the enterprise of rate regulations in the monopoly setting “poses serious compensation risks [such that courts have,] for close to 125 years, imposed judicial review to see that the rates imposed allow the merchant in question to make a reasonable return on invested capital.”[117]  Thus, to ameliorate such concerns, Professor Epstein argues that “with the first whiff of competition[,] a strong case arises for dispensing with the rate regulation process altogether.”[118]  Professor Epstein admits that, in the short run, this might lead to higher rates, but in the long-run, “innovation from new entrants will tend to drive rates down to a competitive level that is likely unattainable under sclerotic rate regulation systems.”[119]

As this rule applies to net-neutrality, Professor Epstein argues the following:

So in the end, the key substantive decision should not turn on whether broadband providers: transmit or create information.  It should turn on whether or not they can exert any form of monopoly power in some relevant market.  As a general matter, the faster the technological transformation, the less desirable the monopoly regulation.  Firms like AOL and Blackberry, once thought to possess monopoly power are now footnotes in modern policy debates.  The great danger of regulation is that those intended to foster competition will further entrench the position of incumbent players.
. . . .

IV. THE STATUS OF NET-NEUTRALITY TODAY

After much public debate and political discourse, on February 26, 2015, the FCC sided with the proponents of net-neutrality by reclassifying broadband providers as common carriers such that Title II regulations apply.[120]  In general, the FCC now prohibits blocking, throttling, and paid prioritization[121] to both fixed and mobile broadband for smartphones.[122]  Further, the FCC will not get involved in pricing decisions or the engineering decisions companies make in managing their networks.[123]

In response, however, both USTelecom—a group that includes some of the nation’s largest Internet providers—and Alamo Broadband sued the FCC in the D.C. Circuit and Fifth Circuit, respectively, challenging the FCC’s authority to pass their net-neutrality rules.[124]  Both lawsuits were recently filed in March 23, 2015,[125] so time will only tell what happens next to the future of net-neutrality.

 


*Martin Vigodnier. University of Illinois College of Law, Class of 2015. Incoming Associate Attorney at Littler Mendelson, P.C., San Francisco, CA. Special thanks to my family: Stella, Norberto, David, and Dale Canalla. Many thanks also to JLTP Editors Iman Naim (Class of 2016) and Andrew Lewis (Class of 2015) for their help and guidance.

[1] See, e.g., Larry Magid, Ubiquitous Internet Approaching but Not Here Yet, Huffington Post (July 6, 2010, 12:34 AM), http://www.huffingtonpost.com/larry-magid/ubiquitous-internet-appro_b_635850.html (“The era of ubiquitous Internet access is fast approaching . . . . [For example,] I’m writing this column from 35,000 feet on a flight from Washington, D.C., to San Francisco aboard Virgin America, which has Gogo Internet access on all of its flights.”).

[2] Tim Wu, Network Neutrality, Broadband Discrimination, 2 J. on Telecomm & High Tech. L. 141 (2003). See also Jeff Sommer, Defending the Open Internet, N.Y. Times (May 10, 2014), http://www.nytimes.com/2014/05/11/ business/defending-the-open-internet.html?_r=0 (“A dozen years ago, . . . Mr. Wu developed a concept . . . [c]alled “net neutrality,” short for network neutrality, [and] it is essentially this: The cable and telephone companies that control important parts of the plumbing of the Internet shouldn’t restrict how the rest of us use it.”).

[3] Sommer, supra note 2.

[4] See Verizon v. FCC, 740 F.3d 623, 628 (D.C. Cir 2014) (noting the FCC’s “effort to compel broadband providers to treat all Internet traffic the same regardless of source—or to require . . . ‘net neutrality.’”).

[5] See, e.g., Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 145 (“So what is attractive about a neutral network—that is, an Internet that does not favor one application (say, the world wide web), over others (say, email)?”); Brian Bergstein, Q&A: Lawrence Lessig, MIT Tech. Rev. (Oct. 27, 2010) http://www.technologyreview. com/qa/421384/qa-lawrence-lessig/ (noting that, under net-neutrality, “the networks that deliver the Internet to consumers must be equally open to all data packets, no matter whether these are part of an e-mail from your mother or a video from Hulu.”).

[6] Id.

[7] For example, blocking data via online video games, but allowing data via email attachment.

[8] See, e.g., Richard A. Epstein, The Problem With Net Neutrality, Hoover Institution (Jan. 20, 2014), http://www.hoover.org/research/problem-net-neutrality (“Many proponents of net neutrality argue that the power to exclude is fraught with the risk of abuse. Writing on Slate, Marvin Ammori raises this concern to a fever pitch, by insisting that only net neutrality prevents Comcast from blocking Facebook or Bing, or Verizon from offering better terms of service to the Huffington Post than Slate.” (citing Marvin Ammori, The Net Neutrality Battle Has Been Lost, Slate (Jan. 14, 2014 2:45 PM), http://www.slate.com/articles/technology/future_tense/2014/01/ net_neutrality_d_c_circuit_court_ruling_the_battle_s_been_lost_but_we_can.html)).

[9] See Verizon v. FCC, 740 F.3d 623, 629 (D.C. Cir 2014) (noting that one of the FCC’s early efforts to regulate the internet “occurred in 1980, when it adopted what is known as the Computer II regime.”).

[10] Communications Act of 1934, Pub.L. 73–416, 48 Stat. 1064.

[11] Telecommunications Act of 1996, Pub. L. 104–104, 110 Stat. 56.

[12] In re Amendment of Section 64.702 of the Comm’ns Rules & Regulations, 77 F.C.C.2d 384 (1980) (“Second Computer Inquiry”).

[13] Verizon, 740 F.3d at 630 (citing Second Computer Inquiry, 77 F.C.C.2d at 420).

[14] Second Computer Inquiry, 77 F.C.C.2d at 387 ¶ 5 (“Based on the voluminous record compiled in this proceeding, we adopt a regulatory scheme that distinguishes between the common carrier offering of basic transmission services and the offering of enhanced services.”).

[15] Verizon, 740 F.3d at 629.

[16] See, e.g., id. (“For example, the FCC characterized telephone service as a ‘basic’ service . . . because it involved a ‘pure’ transmission that was ‘virtually transparent in terms of its interaction with customer supplied information.’”) (citing Second Computer Inquiry, 77 F.C.C.2d at 419–20).

[17] Second Computer Inquiry, 77 F.C.C.2d at 420 ¶ 97.

[18] Id.

[19] Verizon, 740 F.3d at 629.

[20] 47 U.S.C. § 201(a) (2012).

[21] Id. at § 202(a)

[22] Id. at § 201(b).

[23] Id.

[24] Verizon, 740 F.3d at 630. (citing Second Computer Inquiry, 77 F.C.C.2d at 473–74).

[25] Id.

[26] Nat’l Cable & Telecomm. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 976–77 (2005) (“Consumers traditionally access the Internet through ‘dial-up’ connections provided via local telephone lines. Internet service providers (ISPs), in turn, link those calls to the Internet network, not only by providing a physical connection, but also by offering consumers the ability to translate raw data into information they may both view on their own computers and transmit to others connected to the Internet.”).

[27] Verizon, 740 F.3d at 630.

[28] Id. (citing Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, 17 F.C.C.R. 3019, 3040 (2002)).

[29] Id.

[30] Verizon, 740 F.3d at 630.

[31] 47 U.S.C. §§ 153(24), (50), (51), (53) (2012). See also Brand X, 545 U.S. at 976–77 (reviewing the FCC’s declaratory ruling that cable companies providing broadband Internet access did not provide “telecommunications service,” and hence were exempt from mandatory regulation under Title II of the Communications Act and holding that the FCC’s ruling was lawful construction of Communications Act under Chevron U.S.A. Inc. v. Natural Res. Def. Council, Inc., 467 U.S. 837 (1984), and the FCC’s ruling was not arbitrary or capricious under the Administrative Procedure Act of 1946, Pub.L. 79–404, 60 Stat. 237).

[32] 47 U.S.C. § 153(53) (2012).

[33] Brand X, 545 U.S. at 975–76.

[34] There are various forms of broadband Internet services. DSL is a form of broadband Internet service that is furnished over telephone lines. Verizon, 740 F.3d at 630. Other pre-dominant broadband Internet services include cable-modem, satellite, and fiber. Fed. Commc’n Comm., 2014 Measuring Broadband America Fixed Broadband Report 5 (2014), available at http://data.fcc.gov/ download/measuring-broadband-america/2014/2014-Fixed-Measuring-Broadband-America-Report.pdf. See also Press Release, Fed. Commc’ns Comm’n, FCC Finds U.S. Broadband Deployment Not Keeping Pace (Jan. 29, 2015), available at https://apps.fcc. gov/edocs_public/attachmatch/DOC-331760A1.pdf (defining broadband Internet as “benchmark speeds [of at least] 25 megabits per second (Mbps) for downloads and 3 Mbps for uploads.”).

[35] Deployment of Wireline Servs. Offering Advanced Telecomms. Capability, 13 F.C.C.R. 24012, 24014, 24029–30 (1998) (“Advanced Services Order”) (classifying DSL as telecommunications carriers because they involved pure transmission technologies).

[36] Id. at 24030–31.

[37] Inquiry Concerning High–Speed Access to the Internet over Cable and Other Facilities, 17 F.C.C.R. 4798, 4824 (2002) (“Cable Broadband Order”) (classifying cable-modems as ISPs because cable-modem providers provide a “single, integrated information service.”).

[38] Id. at 4802 ¶ 7.

[39] Brand X, 545 U.S. at 991–92.

[40] Marguerite Reardon, FCC Changes DSL Classification, CNET (Aug. 5, 2005, 12:54 PM), http://news.cnet.com/ FCC-changes-DSL-classification/2100-1034_3-5820713.html (“The [FCC] . . . voted to reclassify DSL broadband service, thus freeing phone companies of regulations that require them to share their infrastructure with Internet service providers. DSL will now be considered an [ISP] instead of a ‘telecommunications service,’ a distinction that puts DSL in line with the classification of cable modem services.”).

[41] I.e., those serving end-users—consumers—using mobile cellular phone stations to access the Internet, such as smart phones. Definition of: Wireless Broadband, PCMag, http://www.pcmag.com/encyclopedia/term/54763/ wireless-broadband (last visited Mar. 30, 2015).

[42] Verizon, 740 F.3d at 631 (citing Appropriate Framework for Broadband Access to the Internet Over Wireline Facilities, 20 F.C.C.R. 14853, 14862 (2005) (“2005 Wireline Broadband Order”); Appropriate Regulatory Treatment for Broadband Access to the Internet Over Wireless Networks, 22 F.C.C.R. 5901, 5901–02 (2007) (“Wireless Broadband Order”); United Power Line Council’s Petition for Declaratory Ruling, 21 F.C.C.R. 13281, 13281 (2006)).

More specifically, the peer-to-peer networking applications in question were file-sharing applications such as BitTorrent and Gnutella. Brad Stone, Comcast: We’re Delaying, Not Blocking, BitTorrent Traffic, N.Y. Times (Oct. 22, 2007, 9:41 PM), http://bits.blogs.nytimes.com/2007/10/22/comcast-were-delaying-not-blocking-bittorrent-traffic/?_php=true &_type=blogs&_r=0. These applications are often used, perhaps notoriously, for downloading illegally pirated material.See, e.g., BitTorrent Combats Piracy Shadow with Coder Tools, SFGate (Nov. 5, 2013 9:36 AM), http://www. sfgate.com/technology/article/BitTorrent-combats-piracy-shadow-with-coder-tools-4956271.php#photo-5414730 (“When most people hear the word “bittorrent” they think of illegal downloads, which is not a great situation for BitTorrent, the San Francisco company that launched the movement.”).

[44] Formal Complaint of Free Press and Public Knowledge Against Comcast Corp. for Secretly Degrading Peer–to–Peer Applications, 23 F.C.C.R. 13028, 13052–60 (2008) (“Comcast Order”) (finding that Comcast’s impairment of these applications “contravene[d] . . . federal policy,” and ordering Comcast to submit the following disclosure and compliance forms “(1) disclose to the [FCC] the precise contours of the network management practices at issue here, including what equipment has been utilized, when it began to be employed, when and under what circumstances it has been used, how it has been configured, what protocols have been affected, and where it has been deployed; (2) submit a compliance plan to the [FCC] with interim benchmarks that describes how it intends to transition from discriminatory to nondiscriminatory network management practices by the end of the year; and (3) disclose to the [FCC] and the public the details of the network management practices that it intends to deploy following the termination of its current practices, including the thresholds that will trigger any limits on customers’ access to bandwidth.”).

[45] Comcast Corp. v. FCC, 600 F.3d 642, 644, 661 (D.C. Cir. 2010) (holding that the FCC had identified no grant of statutory authority to which the Comcast Order, 23 F.C.C.R. at 13028, was reasonably ancillary).

[46] Preserving the Open Internet, 25 F.C.C.R. 17905 (2010) (“Open Internet Order”).

[47] See id. at 17906 (“i. Transparency. Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services; ii. No blocking. Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful websites, or block applications that compete with their voice or video telephony services; and iii. No unreasonable discrimination. Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.”). However, while all three of the rules applied to “fixed” broadband providers—i.e., those furnishing residential broadband service and, more generally, Internet access to end users “primarily at fixed end points using stationary equipment”—only two applied to mobile broadband providers—i.e., those “serv[ing] end users primarily using mobile stations,” such as smart phones. Id. at 17934.

[48] See Section II.a., supra.

[49] See Verizon v. FCC, 740 F.3d 623, 628 (D.C. Cir 2014) (“Because the [FCC] has failed to establish that the anti-discrimination and anti-blocking rules do not impose per se common carrier obligations, we vacate those portions of the Open Internet Order[.] [25 F.C.C.R. at 17906].”); id. (“Given that the [FCC] has chosen to classify broadband providers in a manner that exempts them from treatment as common carriers, the Communications Act [of 1934] expressly prohibits the commission from nonetheless regulating them as such.”).

[50] See 5 U.S.C. § 706 (2012).

[51] Verizon, 740 F.3d at 628.

[52] Id.

[53] See Jon Brodkin, FCC Won’t Appeal Verizon Ruling, Will Regulate ’Net on “Case-By-Case Basis,” Ars Technica (Feb. 19, 2014, 11:44 AM), http://arstechnica.com/tech-policy/2014/02/fcc-wont-appeal-verizon-ruling-will-regulate-net-on-case-by-case-basis (“[T]he court decision affirmed the [FCC’s] belief that Section 706 of the Telecommunications Act of 1996 should ‘empower it to promulgate rules governing broadband providers’ treatment of Internet traffic.’ However, rules justified by Section 706 can’t be identical to common carriage rules.”).

[54] Letter from Tim Wu, Assoc. Professor, Univ. of Va. Sch. of Law, & Lawrence Lessig, Professor of Law, Stanford Law Sch., FCC Ex Parte Letter, to Marlene H. Dortch, Sec’y, Fed. Commc’n Comm’n 3 (Aug. 23, 2003), available at http://www.timwu.org/wu_lessig_fcc.pdf.

[55] Id. Again, in this context, “applications” means, for example, the world wide web, email, or mass online gaming. Id. at 2–3.

[56] Id. at 3.

[57] Id. at 4.

[58] Id.

[59] Id.

[60] Id.

[61] Id.

[62] Id. See also Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 153 (listing the competitive reasons why ISPs would price discriminate on VPNs).

[63] Wu & Lessig, supra note 54, at 4.

[64] Id. (citing Clay Christiansen, The Innovator’s Dilemma (reprt. ed. 2011) (suggesting that large firms, focused on consumers’ present needs, will be unlikely to develop the products of the future)).

[65] Wu & Lessig, supra note 54, at 4.

[66] Id. See also Network Neutrality: Hearing on “Network Neutrality” Before the S. Comm. on Commerce, Sci, & Transp., 109th Cong. 1 (2006) (statement of Vinton G. Cerf, Vice President and Chief Internet Evangelist, Google Inc.) [hereinafter Cerf Statement] (“The Internet’s open, neutral architecture has proven to be an enormous engine for market innovation, economic growth, social discourse, and the free flow of ideas . . . . This ‘neutral’ network has supported an explosion of innovation at the edges of the network, and the growth of companies like Google, Yahoo, eBay, Amazon, and many others. Because the network is neutral, the creators of new Internet content and services need not seek permission from carriers or pay special fees to be seen online. As a result, we have seen an array of unpredictable new offerings – from Voice-over-IP to wireless home networks to blogging – that might never have evolved had central control of the network been required by design . . . . Google looks forward to working with this Committee to fashion carefully-tailored legislative language that protects the legitimate interests of America’s Internet users. And that includes the future interests of the next Google, just waiting to be born in someone’s dorm room or garage.”) (emphasis added).

[67] See Section III.a.i. titled “Innovation,” supra.

[68] Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 145.

[69] Id.

[70] As Professor Wu stated, “a full treatment of the names given to evolutionary theories of innovation is beyond the scope of this [article].” Id. at 145, n.10. Nevertheless, “[s]ome adherents would ascribe such theories to economist Joseph Schumpeter, while in recent legal work the argument is stated as an argument over what should be owned and what should be free.” Id. at 145, n.10 (citing Lawrence Lessig, The Future of Ideas 3-17 (2001)).

[71] See, e.g., Joel Mokyr, Evolution and Technological Change: A New Metaphor for Economic History?, in Technological Change 63, 64 (Robert Fox, ed., 1996) (“The evolutionary method in technological change is not so much an analogy with biology as another application of Darwininan logic . . . .”) (emphasis in original).

[72] Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 145.

[73] Id. at 146.

[74] For example, a predisposition to continue with current ways of doing business. Id.

[75] Id.

[76] Id.

[77] Id.

[78] Id.

[79] Id.

[80] Jerome H. Salinger, “Open Access” is Just the Tip of the Iceberg, Mass. Inst. Tech. (Oct. 22, 1999), http://web. mit.edu/saltzer/www/publications/openaccess.html. For a more in-depth discussion on what end-to-end arguments entail, see generally Jerome H. Salinger, David Reed, & David Clark, End-To-End Arguments in System Design, 2 ACM Transactions Computer Sys. 277 (1984). Additionally, the Internet Protocol suite (“IP”) upon which the Internet is founded was designed to follow the end-to-end principle, and is famously indifferent both to the physical communications medium “below” it, and the applications running “above” it. Cerf Statement, supra note 66 at 2 (“The use of . . . end-to-end design . . . and the ubiquitous Internet Protocol standard . . . together allow for the decentralized and open Internet that we have come to expect.”) (emphasis added). As Professor Wu states, “The metaphors of ‘above’ and ‘below’ come from the fact that in a layered model of the Internet’s design[:] the application layers are ‘above’ the TCP/IP layers, while the physical layers are ‘below.’” Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 146 n.15. Data from the Internet runs over glass and copper, ATM and Ethernet, carrying, for example, .mp3 files, bits of web pages, and snippets of emails from one end (for example, a content provider such as a website) to the end-user (for example, a visitor on a website). Wu, Network Neutrality, Broadband Discrimination, supra note 2, at 146. As an explanatory note, ATM stands for “Asynchronous Transfer Mode,” Asynchronous Transfer Mode, Wikipedia, http://en.wikipedia. org/wiki/Asynchronous_Transfer_Mode (last visited Mar. 24, 2015), and, generally speaking, “is a cell-switching and multiplexing technology which combines the benefits of circuit-switching and packet-switching.” Tomi Mickelsson, ATM Versus Ethernet, Dep’t Electrical & Comm. Engineering, Helsinki Univ. Tech. (May 18, 1999), http://www.tml.tkk.fi/Opinnot/Tik-110.551/1999/papers/07ATMvsEthernet/iworkpaper.html.

[81] Ray Lin, Network Neutrality, Univ. Cal. Berkeley, https://www.ocf.berkeley.edu/~raylin/tieredinternet.html (last visited Mar. 24, 2015). See also Arshad Mohammed, Verizon Executive Calls for End to Google’s “Free Lunch”, Wash. Post (Feb. 7, 2006), http://www.washingtonpost.com/wp-dyn/content/article/2006/02/06/ AR2006020601624.html (“Vinton G. Cerf, a vice president . . . at Google, said in an interview that his company is worried that if net neutrality protections are not enacted, the Internet’s freedom could be compromised, limiting consumer choice, economic growth, technological innovation and U.S. global competitiveness. ‘In the Internet world, both ends essentially pay for access to the Internet system, and so the providers of access get compensated by the users at each end,’ said Cerf, who helped develop the Internet’s basic communications protocol. ‘My big concern is that suddenly access providers want to step in the middle and create a toll road to limit customers’ ability to get access to services of their choice even though they have paid for access to the network in the first place.’”).

[82] Id. at 146–47. See also Lessig, supra note 70, at 14–15 (“No modern phenomenon better demonstrates the importance of free resources to innovation and creativity than the Internet. To those who argue that control is necessary if innovation is to occur, and that more control will yield more innovation, the Internet is the simplest and most direct reply . . . . [T]he defining feature of the Internet is that it leaves resources free. The Internet has provided for much of the world the greatest demonstration of the power of freedom—and its lesson is one we must learn if its benefits are to be preserved.”).

[83] Wu & Lessig, supra note 54, at 5.

[84] Id. (citing Appropriate Framework for Broadband Access to the Internet over Wireline Facilities, Universal Service Obligations of Broadband Providers, CC Docket No. 02-33, Notice of Proposed Rulemaking (“Wireline Broadband NPRM”) ¶ 4 (rel. Feb. 15, 2002)). Additionally, as Professors Wu and Lawrence Lessig note, academic literature also provides evidence that the FCC has endorsed the evolutionary model of innovation. Wu & Lessig, supra note 54, at 5 (citing John Ziman, Evolutionary Models for Technological Change, in Technological Innovation as an Evolutionary Process 3 (John Ziman ed., 2000); Richard Nelson, Understanding Technical Change as an Evolutionary Process (1987)).

[85] Wu & Lessig, supra note 54, at 5.

[86] Cerf Statement, supra note 66, at 1, 6–7 (“[W]e would do well to take important lessons from other countries. Whatever metric one uses, the United States lags behind other developed countries in the deployment and use of high-speed connections to the Internet. Ironically, many such countries employ the same principles of network openness and nondiscrimination that helped shape our own experience of the Internet. Certainly the incumbent providers in those countries do not appear to suffer from any lack of incentives under those principles. For example, in the United Kingdom, British Telecom has agreed to split itself into a retail arm and a wholesale business, with a fundamental policy of nondiscriminatory treatment governing the relationship between them and other providers. In a number of Asian countries, both incumbent and competitive providers operating in an unbundled environment sell huge amounts of bandwidth—100 Megabits or more per second—at a fraction of U.S. prices. By abandoning the principles that helped foster user choice and innovation, the United States risks falling further behind in the global economy.”).

[87] Fed. Commc’n Comm., supra note 34.

[88] That is, DSL, cable, fiber, and satellite.

[89] Id. at 5, 63 n.9 (listing the fourteen participating ISPs as the following: AT&T (DSL); Cablevision (cable); CenturyLink (DSL); Charter (cable); Comcast (cable); Cox (cable); Frontier (DSL/fiber); Insight (cable); Mediacom (cable); Qwest (DSL); TimeWarner Cable (TWC) (cable); Verizon (DSL and fiber-to-thehome); Windstream (DSL); and ViaSat (satellite)).

[90] Leichtman Research Grp., Nearly 1.2 Million Add Broadband in the First Quarter of 2014 1 (2014), available at http://www.leichtmanresearch.com/press/052014release.pdf. See also Leichtman Research Grp., 2.6 Million Added Broadband from Top Cable and Telephone Companies in 2013 1 (2014), available at http://www.leichtmanresearch.com/press/031714release.pdf (noting that the phone companies “AT&T and Verizon added 3.3 million fiber [broadband] subscribers (via U-verse and FiOS) in 2013 . . . .”) (emphasis added).

[91] Cerf Statement, supra note 66, at 2.

[92] Id.

[93] Id.

[94] Id.

[95] See id. at 5 (“Not surprisingly, this incentive is already manifesting itself. [For example, during the] spring [of 2005], the FCC found that the Madison River Telephone Company was blocking ports used by its DSL customers to access competing [Voice Over Internet Protocol (“VoIP”)] services . . . . More revealingly, . . . senior executives of major U.S. carriers have indicated publicly that they intend to force competing services and content providers to pay to be seen online. Together, these examples show that carrier discrimination is not a hypothetical concern.”) (citing Madison River Comm’cn, 20 FCC Rcd. 4295 (2005) (order adopting consent decree)). See also Cerf Statement, supra note 66, at 5 n.3 (“Just three months ago, AT&T CEO Edward Whitacre observed that only telephone carriers and cable companies have broadband pipes to customers. He insisted that Google and other companies ‘use my lines for free, and that’s bull.’ He then warned that ‘I ain’t going to let them do that’ because ‘there’s going to have to be some mechanism for these people who use these pipes to pay for the portion they’re using.’” (citing Spencer E. Ante & Roger O. Crockett, Rewired and Ready for Combat, Bloomberg Bus. (Nov. 6, 2005), http://www.bloomberg. com/bw/stories/2005-11-06/rewired-and-ready-for-combat; Online Extra: At SBC, It’s All About “Scale and Scope”, Bloomberg Bus. (Nov. 6, 2005), http://www.bloomberg.com/bw/stories/2005-11-06/online-extra-at-sbc-its-all-about-scale-and-scope)).

[96] See, e.g., Joshua Steimle, Am I The Only Techie Against Net Neutrality?, Forbes (May 14, 2014 10:09 AM), http://www.forbes.com/sites/joshsteimle/2014/05/14/am-i-the-only-techie-against-net-neutrality/ (“Internet bandwidth is, at least currently, a finite resource and has to be allocated somehow. We can let politicians decide, or we can let you and me decide by leaving it up to the free market. If we choose politicians, we will see the Internet become another mismanaged public monopoly, subject to political whims . . . . If we leave it up to the free market we will, in time, receive more of what we want at a lower price. It may not be a perfect process, but it will be better than the alternative.”).

[97] Id. (“The U.S. government has shown time after time that it is ineffective at managing much of anything. This is by design. The Founders intentionally created a government that was slow, inefficient, and plagued by gridlock, because they knew the greatest danger to individual freedom came from a government that could move quickly–too quickly for the people to react in time to protect themselves. If we value our freedom, we need government to be slow. But if government is slow, we shouldn’t rely on it to provide us with products and services we want in a timely manner at a high level of quality. The [broadband providers] may be bad, but everything that makes them bad is what the government is by definition.”).

[98] Id.

[99] Epstein, supra note 8 (“But in the monopoly setting, there is no other rival merchant next door; rate regulation was intended to reduce monopoly rates to competitive levels.”).

[100] See, e.g., Cerf Statement, supra note 66, at 5 (noting that net-neutrality is essential “In the absence of any meaningful competition in the consumer broadband market[.]”).

[101] Steimle, supra note 96.

[102] Id. (“Proponents of Net Neutrality say the [broadband providers] have too much power. I agree. Everyone seems to agree that monopolies are bad and competition is good, and just like you, I would like to see more competition.”).

[103] Id.

[104] Id. (“We’re talking about the same organization that spent an amount equal to Facebook’s first six years of operating costs to build a health care website that doesn’t work, the same organization that can’t keep the country’s bridges from falling down, and the same organization that spends 320 times what private industry spends to send a rocket into space. Think of an industry that has major problems. Public schools? Health care? How about higher education, student loans, housing, banking, physical infrastructure, immigration, the space program, the military, the police, or the post office? What do all these industries and/or organizations have in common? They are all heavily regulated or controlled by the government. On the other hand we see that where deregulation has occurred, innovation has bloomed, such as with telephony services. Do you think we’d all be walking around with smartphones today if the government still ran the phone system?”) (citing Andrew Couts, We Paid over $500 Million for the Obamacare Sites and All We Got Was This Lousy 404, Digital Trends (Oct. 8, 2013), http://www.digitaltrends.com/opinion/obamacare-healthcare-gov-website-cost/; Mike Baker & Joan Lowy, Bridge Safety: Many U.S. Spans Are Old, Risky And Rundown, Associated Press (Sep. 16, 2013, 5:56 AM), available at http://www.huffingtonpost.com/2013/09/16/bridge-safety_n_3933317.html; Phoenix McLaughlin, SpaceX Spends 320 Times Less on Building the Dragon than NASA Does on the Orion, Mic (July 19, 2012), http://www.mic.com/articles/11354/spacex-spends-320-times-less-on-building-the-dragon-than-nasa-does-on-the-orion). Steimle further adds that the same result is to be expected when it comes to the government promulgating regulations to ensure net-neutrality because “This is by design”: “The Founders intentionally created a government that was slow, inefficient, and plagued by gridlock, because they knew the greatest danger to individual freedom came from a government that could move quickly–too quickly for the people to react in time to protect themselves. If we value our freedom, we need government to be slow. But if government is slow, we shouldn’t rely on it to provide us with products and services we want in a timely manner at a high level of quality. The [broadband providers] may be bad, but everything that makes them bad is what the government is by definition. Can we put ‘bad’ and ‘worse’ together and end up with ‘better’?” Steimle, supra note 96.

[105] Id. (“Government regulations are written by large corporate interests which collude with officials in government. The image of government being full of people on a mission to protect the little guy from predatory corporate behemoths is an illusion fostered by politicians and corporate interests alike. [Thus,] [m]any, if not most, government regulations are the product of crony capitalism . . . .”).

[106] Id. See also Epstein, supra note 8 (noting that the FCC’s prerogative on whether to classify broadband providers as common carriers subject to Title II regulation is ripe for political manipulation: “[P]olitical pressures currently are mounting on all sides of [the FCC’s] reclassification effort . . . . This unfolding spectacle is in itself a strong condemnation of the entire system of telecom regulation, which leaves too much space for destructive political manipulation.”) (emphasis added).

[107] Steimle, supra note 96.

[108] Epstein, supra note 8.

[109] Id.

[110] Id.

[111] Id.

[112] Id.

[113] Id. (“Under the banner of businesses ‘affected with the public interest,’ [the] venerable [common law] authorities held that a requirement that a party provide services, to use the modern phrase, on reasonable and nondiscriminatory terms, worked as an offset to monopoly power that arose for some ‘essential facility’ that has no close substitutes.”) (emphasis added) (citing Allnut v. Inglis, 104 E. R. 206, 209 (K.B. 1810) (relying on the earlier work of Sir Matthew Hale, De Portis Maribus, cited therein)).

[114] Epstein, supra note 8 (emphasis added).

[115] Id.

[116] Id.

[117] Id. (citing Fed. Power Comm’n v. Hope Nat. Gas Co., 320 U.S. 591 (1944)).

[118] Epstein, supra note 8.

[119] Id.

[120] Protecting and Promoting the Open Internet, GN Docket No. 14-28, FCC 15-24 (Feb. 26, 2015), available at http://transition.fcc.gov/Daily_Releases/Daily_Business/2015/db0312/FCC-15-24A1.pdf.

[121] Id. at 7 ¶ 14. See id. at ¶ 15 (listing the anti-blocking order as follows: “A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not block lawful content, applications, services, or nonharmful devices, subject to reasonable network management.”); id. at ¶ 16 (listing the anti-throttling order as follows: “A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not impair or degrade lawful Internet traffic on the basis of Internet content, application, or service, or use of a non-harmful device, subject to reasonable network management.”); id. at 7–8 ¶ 18 (listing the anti-paid prioritization order as follows: “A person engaged in the provision of broadband Internet access service, insofar as such person is so engaged, shall not engage in paid prioritization. ‘Paid prioritization’ refers to the management of a broadband provider’s network to directly or indirectly favor some traffic over other traffic, including through use of techniques such as traffic shaping, prioritization, resource reservation, or other forms of preferential traffic management, either (a) in exchange for consideration (monetary or otherwise) from a third party, or (b) to benefit an affiliated entity.”). See also id. at 8 n.18 (“Unlike the no-blocking and no-throttling rules, there is no “reasonable network management” exception to the paid prioritization rule because paid prioritization is inherently a business practice rather than a network management practice.”).

[122] Id. at 9 ¶ 25 (“The open Internet rules described above apply to both fixed and mobile broadband Internet access service.”) (emphasis added).

[123] Rebecca R. Ruiz & Steve Lohr, F.C.C. Approves Net Neutrality Rules, Classifying Broadband Internet Service as a Utility, N.Y. Times (Feb. 26, 2015), http://www.nytimes.com/2015/02/27/technology/net-neutrality-fcc-vote-internet-utility.html.

[124] Brian Fung, Here Are the First Lawsuits to Challenge the FCC’s Net Neutrality Rules, Wash. Post (Mar. 23, 2015), http://www.washingtonpost.com/blogs/the-switch/wp/2015/03/23/the-first-of-the-net-neutrality-lawsuits-has-now-been-filed.

[125] Id.