News from February 6-10, 2002

Spectrum Rebel Loses First Amendment Appeal
2/8. The U.S. Court of Appeals (DCCir) issued its opinion in Grid Radio v. FCC, a case involving an FM radio broadcaster who operated without an FCC license. The Appeals Court affirmed the FCC's cease and desist order, and fine, over a First Amendment challenge.
Background. Jerry Szoka operated Grid Radio, an unlicensed low power FM radio station in Cleveland, Ohio. He neither sought nor obtained a license from the Federal Communications Commission (FCC), as required by 47 U.S.C. § 301. The FCC ordered him to stop broadcasting. He argued, among other things, that the FCC violated his First Amendment rights. The Supreme Court has long since upheld the FCC's power to regulate broadcast speech. See, National Broadcasting Company v. United States, 319 U.S. 190 (1943) and Red Lion v. FCC, 395 U.S. 367 (1969).
Appeals Court Holding. A three judge panel of the Court of Appeals held that the FCC's cease and desist order did not violate the First Amendment, citing the Red Lion case. Judge David Tatel, writing for the Court, acknowledged briefly that the Supreme Court might some day revisit the scarcity rational for broadcast regulation. However, he added that "Absent clear congressional or judicial signals that the micro broadcasting ban was unlawful, or unequivocal evidence that Grid Radio's circumstances warranted differential application of the ban, we think the Commission could continue to enforce the ban and the chaos averting licensing regime." Judge Tatel did not specify what standard of review he applied in this case.
However, while the Court of Appeals rejected Szoka's First Amendment challenge to the spectrum licensing regime, the Court of Appeals, in a companion case, Ruggiero v. FCC, held unconstitutional the much more limited ban on former pirate broadcasters obtaining a low power FM license. The Ruggiero opinion (see following story) offers an analysis of First Amendment protections in the context of FCC regulation of speech that contains more length, but perhaps, not more clarity.
Appeals Court Overturns Ban on Licensing Former Pirate Broadcasters
2/8. The U.S. Court of Appeals (DCCir) issued its opinion in Ruggiero v. FCC, another case involving unlicensed broadcasting. The Appeals Court held unconstitutional the ban on issuance of low power FM radio broadcast licenses to anyone who has previously engaged in an unlicensed operation.
Background. The Radio Broadcasting Preservation Act of 2000 (RBPA) permanently prohibits anyone who ever "engaged in any manner in the unlicensed operation of any station in violation of ... the Communications Act of 1934" from obtaining a low power FM radio license from the Federal Communications Commission (FCC). Greg Ruggiero is a former pirate broadcaster who later sought a low power FM license from the FCC. He argues that the statute and the FCC's implementing rules violate his First and Fifth Amendment rights.
Standard of Review. The Appeals Court reviewed precedent, including FCC v. National Citizens Committee for Broadcasting, 436 U.S. 775 (1978), FCC v. League of Women Voters, 468 U.S. 364 (1984), and News America Publishing v. FCC, 844 F.2d 800 (D.C. Cir. 1988), and then concluded that it need not identify the standard of review to be applied. It wrote that "we find ourselves in a middle ground, sure only that the appropriate standard is neither NCCB's minimal scrutiny nor League of Women Voters' intermediate scrutiny."
Holding. Nevertheless, the Court held that the ban was constitutionally impermissible because of the relationship of the ban to the underlying purpose of the statute and implementing regulations. It found that the class of applicants banned from receiving low power FM licenses is under inclusive. It wrote, citing News America, that "we find the character qualification provision so poorly aimed at maximizing future compliance with broadcast laws and regulations as to ``raise[ ] a suspicion´´ that perhaps Congress's ``true´´ objective was not to increase regulatory compliance, but to penalize micro broadcasters' ``message.´´ "
The Court concluded that "we cannot sanction an automatic and permanent restriction on unlicensed broadcasters' future lawful speech without understanding why their misdeeds warrant a penalty so much more severe than that applied to any other misconduct. Yet neither the RBPA itself, nor the legislative history, nor the record in this case provides a satisfactory explanation. We thus have no choice but to declare the statute and the Commission's implementing regulation unconstitutional."
Dissent. Judge Tatel wrote the opinion for a three judge panel. Judge Rogers joined. Judge Karen Henderson wrote a dissent. She wrote: "What could be more reasonable or logical than to suspect that those who ignored the Commission's LPFM broadcast regulations in the past are likely to do so in the future and therefore to head them off. ... I see no reason the legislature cannot permissibly tackle a single part of a perceived problem (including one touching on the First Amendment) through a statute, such as the one here, which is neither overinclusive nor underinclusive."
Bush Picks Adelstein for FCC Commissioner
2/8. President Bush announced his intent to nominate Jonathan Adelstein to be a Commissioner of the Federal Communications Commission (FCC) for the remainder of a five year term expiring June 30, 2003. That Bush would nominate Adelstein has been previously reported. He will be nominated for the position left vacant by the retirement of Gloria Tristani.
Adelstein has been a Legislative Assistant for Sen. Tom Daschle (D-SD) since 1995. Before that, he worked for former Sen. David Pryor (D-AR). And before that, he was a Legislative Assistant to former Sen. David Riegle (D-MI). See, White House release.
NTIA Director Addresses Broadband
2/8. Nancy Victory, Director of the National Telecommunications and Information Administration (NTIA), gave a speech titled "Creation of a Broadband Universe: A Big Band Theory" at the Alliance for Public Technology Broadband Symposium in Washington DC. She repeated themes from earlier speeches, and reiterated that the Bush administration is not yet ready to announce a broadband policy.
She stated that "regulators are searching for the right regulatory mix or Big Bang to provide the foundation for the broadband universe. Though possibly only slightly less challenging than the scientists' job, our task is no less important because our work can propel broadband deployment, if we get it right, or postpone it, if we don't. We're still completing our research, and aren't yet prepared to announce the Administration's views on the government's role in ensuring that the entire nation benefits from broadband's ``big bang.´´ "
She listed several vague guidelines. She stated that "the market, not government, should drive broadband's roll-out. Government's role is to remove the regulatory roadblocks that impede efficient capital investment." However, she qualified this by adding that "the market might not always work as well or at the same pace in all areas, particularly in rural and certain urban areas."
She stated that "Facilities based competition has always been a desired means," but added that "there should be reasonable opportunities for resale competition as well".
Bush Advocates Passage of Trade Promotion Authority Bill
2/8. President Bush gave a speech to the Cattle Industry Annual Convention and Trade Show in Denver, Colorado, in which he advocated legislation granting the President trade promotion authority.
Trade promotion authority, which is also known as fast track, would give the President authority to negotiate trade agreements that could only be approved or rejected, but not amended, by the Congress. The House passed its version of the bill, HR 3005, on December 6, 2001. The Senate Finance Committee has approved a Senate version of the bill.
Bush stated that "We want to open up markets, and at the same time, we want to make sure others open up their markets for us". He added that "You can help by making sure the Senate hears that message, that the Senate passes a trade promotion bill which gives me the authority to work hard to open up markets all around the world for those who work hard. I need that authority. It's good for America to have that authority."
Treasury Official Condemns Proposed EU E-Commerce Taxes
2/8. Kenneth Dam, Deputy Treasury Secretary, released a statement explaining and condemning the European Union's (EU) proposed value added tax (VAT) on e-commerce goods and services. He stated that "The Administration has serious concerns about a European Union proposal to apply value added taxes (VAT) to imports of certain e-commerce goods and services."
Dam summarized the EU proposal: "U.S. sellers of goods or services digitally delivered to EU consumers may soon be required to register in the EU and charge EU VAT, at the VAT rate that applies in the consumer's country of residence. Conversely, EU companies that sell digitally delivered products to EU consumers would continue to charge VAT at the rate applicable in the companies' country of establishment, regardless of where in the EU the consumer is resident."
This, wrote Dam, means that "U.S. sellers may be required to charge VAT on sales to an EU consumer at a rate higher than their EU competitors would charge on sales of the same product to the same consumer."
Dam also stated that "Furthermore, EU VAT on digitally delivered products may be imposed at a rate higher than on physically delivered equivalents. For example, in many EU countries, the VAT rate applied to sales of digitally delivered books, newspapers and magazines may be higher than that applied to sales of the same books, newspapers and magazines sold in physical form."
Dam asserted in conclusion that the EU proposal "may potentially be inconsistent with international trade obligations in the World Trade Organization, in particular the commitment to accord national treatment to foreign goods and services." He did not state what actions the U.S. might take, if any, other than to "continue to work with the EU".
USTR to Contest Sanctions in WTO FSC Tax Matter
2/8. The Office of the U.S. Trade Representative (USTR) announced that it filed a submission with the World Trade Organization (WTO) stating that the U.S. would challenge the amount of trade sanctions claimed by the European Union in the Foreign Sales Corporation (FSC) dispute. See, USTR release.
Comments on the 6th Anniversary of the Telecom Act of 1996
2/8. Former President Clinton signed the Telecom Act on February 8, 1996. Many groups, companies and individuals used the occasion of the sixth anniversary of the Act to comment upon the Act, industry participants, and the state of competition and services.
Robert Sachs, P/CEO of the National Cable & Telecommunications Association (NCTA), wrote a letter [PDF] to Members of Congress. He wrote that "Since passage of the ‘96 Act, and spurred largely by the stable regulatory environment it fostered, the cable industry has invested more than $55 billion to provide consumers advanced broadband services including high speed Internet access, digital video, residential phone service, and interactive television. This amounts to an average capital expenditure of nearly $1,000 per cable customer in those cable systems which have been upgraded since the '96 Act. And to date, cable systems serving approximately 80 percent of the cable customers in the U.S. have been upgraded."
Walter McCormick, P/CEO of the United States Telecom Association (USTA), used the occasion to advocate passage of the Tauzin Dingell bill. See, USTA release.
The Consumers Union and the Consumer Federation of America condemned the Act, and various industries, in a statement. They wrote that "Now, six years later, consumers are left wondering, ``Where is all the competition?´´ The vast majority of Americans continue to have only one choice of cable company and phone company. Bills are more expensive and harder to understand. Advertisements for ``cheap´´ long distance plans hide the monthly fees that erase the supposed savings for many consumers. Complaints about service problems continue to stack up. The Telecommunications Act was based on a faulty premise. It called for the deregulation of the telecommunications industry before competition existed or competitive forces had developed. It was based on the naive assumption that firms wanted to enter each other's markets and compete. Relaxing the government oversight of cable and phone monopolies has allowed them to merge, consolidate their control of core markets, and begin to expand their monopoly power into adjacent markets."
People and Appointments
2/8. The law firm of Perkins Coie announced promotions to partner and of counsel, including the following: Elizabeth Woodcock was named partner in the Denver office. Her practice includes telecommunications law. Garrett Tuttle was named of counsel in the Denver office. His practice includes intellectual property law with a focus on trademarks. Neil Nathanson was named partner in the Portland office. He focuses on corporate finance and securities law, mergers and acquisitions and computer and Internet law. Mei Yin Lim was named of counsel in the Hong Kong office. She focuses on international business transactions including PRC investment in manufacturing, service and infrastructure projects, intellectual property right counseling, prosecution and enforcement, franchising and distribution, and corporate structuring, mergers and acquisitions. Donald Walther was named partner in the Seattle office. His practice includes intellectual property enforcement, antitrust, and other litigation areas. John Clark was named of counsel in the Washington DC office. His practice includes telecommunications law, with emphasis on historic preservation law. Mark Wasden was named of counsel in the Washington DC office. His practice includes international trade, including matters involving customs, export control and antidumping. See, PC release.
More News
2/8. Federal Reserve Board Governor Mark Olson gave a speech titled "Implementing the Gramm Leach Bliley Act: Two Years Later" to the American Law Institute and American Bar Association in Washington DC.
2/8. February 8, 2002 was the 6th anniversary of former President Clinton's signing of the Telecommunications Act of 1996.
NTIA to Hold Spectrum Summit
2/7. The Department of Commerce's (DOC) National Telecommunications and Information Administration (NTIA) announced that it will host an event titled "Spectrum Summit" in Washington DC on April 4-5. The DOC stated in a release that the summit "will address spectrum allocation and efficiency, the spectrum requirements of new technologies, and regulatory processes."
The DOC stated further that "The first day of the Summit will feature industry and government spectrum users, economists, analysts and technologists; the second day will be devoted to working sessions focused on the commercial, international and federal government perspectives. Federal Communications Commission (FCC) Chairman Michael Powell is scheduled to participate, as is David Gross, Deputy Assistant Secretary of State."
Commerce Secretary Donald Evans called spectrum a "national resource".
DOJ Receives Over 30,000 Comments on Microsoft Settlement
2/7. The Department of Justice (DOJ) and Microsoft filed a Joint Status Report (JSR) with the U.S. District Court (DC) in the DOJ's antitrust case. The report summarizes the public comments on the Revised Proposed Final Judgment (RPFJ).
The JSR states that "over 30,000 public comments" were received. However, this was largely the result of e-mail campaigns waged by interested parties. The JSR states that of the 30,000 submissions, "Approximately 1,250 comments are unrelated in substance" to the RPFJ. "Roughly 2,800 comments are ``form´´ letters or emails -­ essentially identical text submitted by different persons".
The JSR continues that "Approximately 19,500 comments express an overall view of the RPFJ but do not contain any further discussion of it". In addition, "Approximately 2,900 of the comments can be characterized as containing a degree of detailed substance concerning the RPFJ. These substantive comments range from brief, one- or two-page discussions of some aspect of the RPFJ to 100- or more-page, detailed discussions of numerous of its provisions or alternatives. The essence of many of these substantive comments overlaps with other comments; that is, numerous comments address at least some of the same issues or raise similar arguments. Of the above substantive comments, approximately 45 can be characterized as ``major´´ comments based on their length and the detail with which they analyze significant issues relating to the RPFJ."
The JSR also provides a breakdown of supporters and opponents of the RPFJ. "Of the total comments received, roughly 7,500 are in favor or urge entry of the RPFJ, roughly 15,000 are opposed, and roughly 7,000 do not directly express a view in favor or against entry. For example, a significant number of comments contain opinions concerning Microsoft generally, e.g., ``I hate Microsoft,´´ or concerning this antitrust case generally, e.g., ``This case should never have been brought,´´ but do not state whether they support or oppose entry of the RPFJ."
The JSR goes on to suggest that, contrary to the requirement of the Tunney Act, that the DOJ not be required to publish all of the comments in the Federal Register. It states that the cost would be about $4 Million, which would have to be paid for by the DOJ.
15 U.S.C. § 16(b), which is also known as the Tunney Act, requires the DOJ to publish any proposed settlement of a civil antitrust case brought by the U.S. It also requires the DOJ to file and publish a competitive impact statement. Finally, it provides for a public comment process.
FCC Releases Annual 706 Report
2/7. The Federal Communications Commission (FCC) released its third annual report [118 pages in PDF] on the "deployment of advanced telecommunications capability". It concludes that broadband is being deployed in a reasonable and timely manner.
The report states that "we will use the terms ``advanced telecommunications capability´´ and ``advanced services´´ to describe services and facilities with an upstream (customer to provider) and downstream (provider to customer) transmission speed of more than 200 kbps in this Report."
The report finds that "there has been appreciable growth in the deployment of high speed services to residential and small business consumers in the past eighteen months. Moreover, these figures reveal that high speed services are available in many parts of the country and suggest that certain factors -- such as population density and income -- continue to be highly correlated with the availability of high speed services at this time."
The report also finds that "there were a total of approximately 7.8 million high speed (including advanced services) residential and small business subscribers, as of June 2001. Approximately 4.3 million of these residential and small business customers subscribed to services that meet the Commission’s definition of advanced services."
The report concludes that "the deployment of advanced telecommunications capability to all Americans is reasonable and timely."
All four Commissioners also wrote separate statements. Chairman Michael Powell wrote in his statement that "I agree with the Report’s finding that broadband is being deployed in a reasonable and timely manner, notwithstanding my firm belief that the Commission’s central policymaking focus is and should remain the promotion of efficient broadband deployment."
Commissioner Kathleen Abernathy wrote in her statement that she concurred with the conclusion of the report. She also wrote that "I recognize that subscription rates lag far behind our estimates of infrastructure investment and facilities deployment. Many commenters are discouraged that the ``take rate´´ for broadband remains less than 10 percent, even as estimates of availability approach 80 percent. But we must keep in mind the Commission's role under the 1996 Act. Section 706 directs us to encourage the deployment of advanced telecommunications capability -- not to ensure that consumers purchase particular services."
Commissioner Kevin Martin wrote a statement in which he concurred with the result. He also commented on the minimal definition of "advanced telecommunications services" and advocated removal of regulatory barriers. He wrote that "I am concerned about the transmission speed of the services that are available to most subscribers. In making our determinations of the availability of ``advanced telecommunications capability,´´ we measure the deployment of services that offer transmission speeds of at least 200 kbps. Many argue that Internet access services at such speeds are merely transitional and that true broadband services should be defined at a much higher speed."
He also argued that "government can, and should, focus on removing barriers to infrastructure investment and eliminating disincentives to deployment, both financial and regulatory. For example, I believe the government should commit to exercising self restraint in placing financial burdens on broadband. Currently, at every level, government too often sees broadband deployment as a potential revenue stream. Telecommunications services are subject to federal and state excise taxes -- the kind of taxes traditionally reserved for decreasing demand for products such as alcohol and tobacco. New entrants to the broadband market face federal, state, and local rights of way management fees and franchise fees, which are sometimes intended to generate revenue rather than recover legitimate costs. All of these financial burdens discourage deployment and should be minimized. Government should also endeavor to remove regulatory underbrush".
Finally, Martin argued that the FCC needs to change its own regulatory environment, and that the FCC should focus on facilities based competition.
Commissioner Michael Copps wrote a dissent. He wrote that "I am unable to determine whether the deployment of advanced telecommunications capability to all Americans is or is not reasonable and timely. This is because we have not gathered data of adequate quality or granularity to fulfill our statutory responsibility under Section 706. I cannot therefore endorse the conclusions of the majority and must respectfully dissent from this Report."
Section 706. This report is required by Section 706 of the Telecom Act of 1996. See, 47 U.S.C. § 157. It provides that "The Commission and each State commission with regulatory jurisdiction over telecommunications services shall encourage the deployment on a reasonable and timely basis of advanced telecommunications capability to all Americans (including, in particular, elementary and secondary schools and classrooms) by utilizing, in a manner consistent with the public interest, convenience, and necessity, price cap regulation, regulatory forbearance, measures that promote competition in the local telecommunications market, or other regulating methods that remove barriers to infrastructure investment."
The Act also requires the FCC regular report on "whether advanced telecommunications capability is being deployed to all Americans in a reasonable and timely fashion." The Act also provided that "The term 'advanced telecommunications capability' is defined, without regard to any transmission media or technology, as high speed, switched, broadband telecommunications capability that enables users to originate and receive high-quality voice, data, graphics, and video telecommunications using any technology."
See also, FCC release [PDF]. This is Docket No. CC 98-146.
PPI Advocates State Issued Smart ID Cards
2/7. The Progressive Policy Institute (PPI), a Democratic think tank, released a report [PDF] titled "Modernizing the State Identification System: An Action Agenda". It concludes that "our identification system is broken" and that Congress should require states to modernize, through such technologies as smart ID cards.
The report first identifies the problem. It states that the "Sept. 11 hijackings illuminated many holes in our domestic defense. Four of the five hijackers who crashed into the Pentagon, for example, had fraudulent ID cards obtained in Virginia." It adds that "The industries that rely on the wildly unreliable identification system we have today have watched identity theft grow into a major industry."
The report states that "If done properly, a new identification system can not only reduce the threat of terrorism as well as more common crimes, but also lead to significant economic benefits. Placing 21st century technology on our driver’s licenses and ID cards will jump start the New Economy, making offline and online transactions more convenient and more secure than ever before."
The report opposes a national ID card. Rather, it proposes "Modernizing the current system, in which the primary form of identification is issued by the Department of Motor Vehicles in each state".
The PPI report recommends that Congress "require states to issue ``smart ID cards´´ containing a standardized hologram and digitally encoded biometric data specific to each holder; set standards for initial identity verification; accelerate the linking of state DMV databases; provide grants and loans for additional state smart card applications; upgrade the system for foreign visitors to incorporate a similar ``smart visa´´ program; and create strict controls to protect privacy and prevent abuses."
The report was written by Shane Ham and Robert Atkinson. The PPI also announced that Rep. James Moran (D-VA) will introduce legislation based on the recommendations in the report. See, PPI release.
House Passes Cyber Security R&D Bill
2/7. The House passed HR 3394, Cyber Security Research and Development Act, by a vote of 400 to 12. See, Roll Call No. 13. The bill, which is sponsored by Rep. Sherwood Boehlert (R-NY) and other members of the House Science Committee, would authorize the funding of new research and education programs pertaining to cyber security.
Rep. Ralph Hall (D-TX), the ranking Democrat on the Committee, stated that this bill "will generate the basic knowledge needed to develop technologies to protect networked information systems, and will help train the kinds of computer security professionals who are in short supply today."
The money would go to a variety of research and education projects. The bill contains new or additional funding for five National Science Foundation (NSF) programs. It would authorize appropriations of $233 Million over 5 years to the NSF to make "network security research grants". It would authorize $144 Million over 5 years to the NSF to award to universities "to establish multi disciplinary Centers for Computer and Network Security Research." These programs would fund research regarding "authentication and cryptography; ... computer forensics and intrusion detection; ... reliability of computer and network applications, middleware, operating systems, and communications infrastructure; and ...privacy and confidentiality."
The bill would also authorize funding to be administered by the NSF for training undergraduate university students ($95 Million), community college students ($6 Million), and doctoral students ($90 Million) in cyber security fields.
The bill also authorizes funding for programs at the National Institute of Standards and Technology (NIST). One item authorizes $275 Million for NIST to assist universities that partner with for profit entities in long term, high risk, cyber security research. Another item authorizes $32 Million for in house research at NIST.
Rep. Boehlert stated that "I am convinced that, over time, HR 3394 will come to be seen as a fundamental turning point in the nation's approach to cyber security. This bill is the equivalent of legislation the Congress passed in the wake of the Sputnik launch in the late 1950s."
Technology industry groups supported passage of the bill. Business Software Alliance (BSA) P/CEO Robert Holleyman stated after passage that "While we cannot fully know the threats of tomorrow, we must do what we can to prepare for them through well planned basic cyber security R&D carried out in close partnership with industry. Chairman Boehlert's bill is a much needed boost in this direction". See, BSA release.
Information Technology Association of America (ITAA) P/CEO Harris Miller stated that the bill "is critical to increasing cyber security research, to building a larger base of information security professionals, and to improving information sharing and collaboration among industry, government and academic research projects. ... I urge the Senate to pass the bill soon and the Congressional Appropriators to fund the activities." See, ITAA release.
There is no companion bill now to HR 3394 in the Senate. However, there are other cyber security R&D bills. See, for example, S 1900, the Cyberterrorism Preparedness Act of 2002, and S 1901, the Cybersecurity Research and Education Act of 2002, both sponsored by Sen. John Edwards (D-NC). See also, HR 3162, the USA PATRIOT ACT, which was signed into law last year. It authorizes funding of $20 Million for the National Infrastructure Simulation and Analysis Center (NISAC). See, Section 1016. Also, Sen. Ron Wyden (D-OR) may introduce legislation soon.
OCC Closes Internet Bank
2/7. The Office of the Comptroller of the Currency (OCC) closed NextBank, an Internet bank with no branch operations that marketed credit cards over the Internet. The Federal Deposit Insurance Corporation (FDIC) was appointed receiver. The OCC, which charters, regulates and examines national banks, stated in a release that it found that NextBank "was operating in an unsafe and unsound manner and had experienced a substantial dissipation of assets and earnings through unsafe and unsound practices."
House Holds Trade Hearing
2/7. The House Ways and Means Committee held a hearing on trade negotiations. See, prepared testimony of USTR Robert Zoellick. See also, prepared statements of members of the Committee: Rep. Bill Thomas (R-CA), Rep. Charles Rangel (D-NY), Rep. Sander Levin (D-MI), and Rep. Jim Ramstad (D-MN).
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2/7. Rep. David Dreier (R-CA), Chairman of the House Rules Committee, announced that the deadline for Members to offer amendments to HR 1542, the Tauzin Dingell bill, is 4:00 PM on Monday, February 25. See, Cong. Rec., Feb. 7, 2002, at H217.
2/7. The National Cyber Security Alliance (NCSA) launched a web site name Stay Safe Online that encourages PC users to undertake security measures to protect home and small business computer systems and networks. It advocates the use of firewalls and anti virus software, regular installation of patches, and not opening e-mail from unknown sources. The NCSA's membership includes the Critical Information Assurance Office (CIAO), the Federal Trade Commission (FTC), other government entities, the Information Technology Association of America (ITAA), the U.S. Chamber of Commerce, other groups, and technology and phone companies. "A key part of homeland defense is protecting every computer including home users and small business. ... Citizens don't realize how much damage can be done by people using your computers remotely without your knowing it. This campaign will enlighten and empower consumers to take action," said Dick Clarke, Special Advisor to the President for Cyberspace Security, in a release. See also, Cisco release, ITAA release, and Chamber release.
2/7. The FCC stated that it released its annual report on telephone subscribership rates. It found that 95.1% of all households in the U.S. had telephone service in July 2001, up .7% from July 2000. See, FCC release [PDF].
2/7. The Copyright Office published a notice in the Federal Register that it is issuing a Notice of Proposed Rulemaking (NPRM) on "the requirements for giving copyright owners reasonable notice of the use of their works for sound recordings under statutory license and for how records of such use shall be kept and made available to copyright owners." Comments are due by March 11, 2002. Reply comments are due by April 8, 2002. See, Federal Register, February 7, 2002, Vol. 67, No. 26, at Pages 5761 - 5767.
9th Circuit Reverses in Kelly v. Arriba
2/6. The U.S. Court of Appeals (9thCir) issued its opinion [PDF] in Kelly v. Arriba Soft, a case involving the fair use exception to copyright infringement in the context of online digital images, hyperlinking and search engines. The Appeals Court reversed in part the District Court's holding that Arriba's ('s) actions constituted fair use.
Background. Leslie Kelly is a professional photographer who has copyrighted and published many of his images of the American west. See, for example, California's Gold Rush Country. Arriba Soft, which is now known as, operates an Internet search engine for images. It placed in its web site reduced size copies of images, called thumbnails. This search engine produced thumbnail images, rather than text, in response to queries. Arriba placed thumbnail copies of Kelly's images in its web site, without permission from Kelly. It also used hyperlinks to files on the servers of others to display the full sized pictures.
Arriba operated by using a crawler that copied images from other web sites, including those of Kelly and third parties which published Kelly's pictures under license. Arriba then used these copies to generate reduced size, lower resolution, thumbnail pictures, which it kept in its database. Arriba then deleted the original, full size, images. When someone used Arriba's search engine to search for images on the Internet, Arriba served web pages that included thumbnails, which resided on its servers. Then, if the user clicked on the thumbnail image, a second page was served, which displayed the full sized image, drawn from the server of the originating web site, along with, among other things, advertisements purchased from Arriba. A hyperlink to the originating web site was also displayed. (Now, if the user clicks on a thumbnail in a results page, the original web page in the originating site is served.)
District Court. Kelly filed a complaint in U.S. District Court (CDCal) against Arriba alleging copyright infringement. Arriba asserted that its actions constituted fair use within the meaning of 17 U.S.C. § 107. The District Court held that that Kelly had established a prima facie case of copyright infringement based on Arriba's unauthorized reproduction and display of Kelly's works, but that this reproduction and display constituted a non-infringing fair use. See, opinion at 77 F. Supp.2d 1116 (C.D. Cal. 1999).
Section 107. The relevant language of the fair use exception provides: "In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include -- (1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work."
Appeals Court. The three judge panel of the Ninth Circuit reasoned that "two distinct actions by Arriba ... warrant analysis. The first action consists of the reproduction of Kelly's images to create the thumbnails and the use of those thumbnails in Arriba's search engine. The second action involves the display of Kelly's images through the inline linking and framing processes when the user clicks on the thumbnails." The Appeals Court applied the four prong analysis of Section 107 for each action.
Copying of Images, and Reproduction of Thumbnails. The Appeals Court held that Arriba's copying of copyrighted images, and creation and use of thumbnails, constituted fair use. On the first factor of fair use, the Appeals Court analyzed the commercial nature of the use, and the transformativeness. It found that "Because the use of Kelly's images was not highly exploitative, the commercial nature of the use only slightly weighs against a finding of fair use." It also found that "Arriba's use of Kelly's images for its thumbnails was transformative." That is, "the thumbnails were much smaller, lower resolution images that served an entirely different function than Kelly's original images." Moreover, the Appeals Court found that there was a "public benefit of the search engine and the minimal loss of integrity to Kelly's images." Hence, the first factor weighs in Arriba's favor.
The Appeals Court found that the second factor -- nature of the copyrighted work -- weighed slightly in favor of Kelly. It held that the third factor was neutral. It wrote that "This factor will neither weigh for nor against either party because, although Arriba did copy each of Kelly's images as a whole, it was reasonable to do so in light of Arriba's use of the images. It was necessary for Arriba to copy the entire image to allow users to recognize the image and decide whether to pursue more information about the image or the originating web site." Finally, the Appeals Court found that the fourth factor weighed in favor of Arriba, because "Kelly's images in its thumbnails does not harm the market for Kelly's images or the value of his images." In conclusion, the Appeals Court found that the four factor test weighed in favor of Arriba.
Hyperlinking. On the hyperlinking analysis, the Appeals Court easily found that all four fair use factors weighed in favor of Kelly. However, the real issue here was whether there was an infringement in the first place. The Appeals Court began by stating that "This use of Kelly's images does not entail copying them but, rather, importing them directly from Kelly's web site. Therefore, it cannot be copyright infringement based on the reproduction of copyrighted works as in the previous discussion. Instead, this use of Kelly's images infringes upon Kelly's exclusive right to ``display the copyrighted work publicly.´´"
The Court acknowledged that "No cases have addressed the issue of whether inline linking or framing violates a copyright owner's public display rights." The Court analyzed the language of the statute, its legislative history, and related cases. It concluded that "Arriba is directly liable for infringement. Arriba actively participated in displaying Kelly's images by trolling the web, finding Kelly's images, and then having its program inline link and frame those images within its own web site. Without this program, users would not have been able to view Kelly's images within the context of Arriba's site. Arriba acted as more than a passive conduit of the images by establishing a direct link to the copyrighted images. Therefore, Arriba is liable for publicly displaying Kelly's copyrighted images without his permission."
The Appeals Court then applied the four factor fair use analysis to Arriba's linking to and framing of Kelly's full sized images. On the first factor, the Court found that full sized exact copies of photos are not transformative, and hence, this factor favors Kelly. On the second factor, the Court found again that Kelly was favored. On the third factor -- the amount and substantiality factor -- the Court easily concluded that full sized copying was substantial. On the fourth factor -- effect on the potential market -- the Court also found that this factor favors Kelly. Hence, all four factors favored Kelly, and the use was not fair use.
Conclusion. The Appeals Court concluded: "We hold that Arriba's reproduction of Kelly's images for use as thumbnails in Arriba's search engine is a fair use under the Copyright Act. We also hold that Arriba's display of Kelly's full sized images is not a fair use and thus violates Kelly's exclusive right to publicly display his copyrighted works. The district court's opinion is affirmed as to the thumbnails and reversed as to the display of the full sized images. We remand with instructions to determine damages for the copyright infringement and the necessity for an injunction."
Rogan Speaks on Capitol Hill
2/6. James Rogan, the new Director of the U.S. Patent and Trademark Office (USPTO), spoke at a luncheon on Capitol Hill hosted by the Congressional Economic Leadership Institute. He stated that patent pendency and quality is going to be his primary focus. Intellectual property, said Rogan, "is the number one export of the United States economy."
He stated that currently there are about 3,200 patent examiners to handle about 300,000 applications per year. "Trying to just move through the technical backlog in that area presents a real challenge. Now, right now we don't have a problem on the trademark side. We do have a big problem on the patent side. Much of that is a result of our technological increase in know how."
He pointed out that many early patent applications were one page long, but that has changed. "Particularly, in the biotechnology area, in computer software, and so forth, the patents that we get are so sophisticated and so complex that we sometimes get them on CD-ROM. We got one recently that came in on six CD-ROMs that has the equivalent of twelve million pages of data."
He also addressed funding. "As Chairman Coble said, funding becomes an important issue in all of that because the fees, theoretically, for the PTO are adjusted so that we are a performance based organization. Ideally, I think that what the Chairman was trying to say is he has been a supporter, and many in Congress have been supporters, of the notion that the PTO would be run by the user community through its fees, and that we would set the fees according to our needs. And that has been what we have tried to do over the last several years. But when those monies are diverted, it precludes us from being able to do things, such as be able to hire examiners, and make the changes that we need. The good news ... is that in the President's budget, that he just sent up to Congress, there is a whopping 21% increase in the PTO's budget for the purpose, almost exclusively for the purpose, of hiring new examiners." He said that the increase, if approved by the Congress, would enable the USPTO to hire 950 additional patent examiners.
Several Representatives attended, including Rep. Howard Coble (R-NC), the Chairman of the House Courts, Internet and Intellectual Property Subcommittee, who asked Rogan about consolidation of the USPTO from 19 buildings to one building. Rogan said that "we are spread all over Timbuktu out there," but should be moved into the Old Towne Alexandria facility by the end of 2003. Rep. Sam Farr (D-CA) pressed Rogan about protecting intellectual property rights in Columbia. Rep. Ron Kind (D-WI) asked Rogan about China. Rogan acknowledged that "piracy has been a longstanding problem in the People's Republic of China".
Rep. Lamar Smith (R-TX) asked if the President's budget request would enable the USPTO to reduce patent pendency. Smith added that "a lot of patents are out of date by the time they are approved." Rogan responded that he hoped that it would reduce pendency, but added, "I don't know." Rogan elaborated that "there are some things that are out of our control." For example, he said that pharmaceutical companies are not in hurry, because of delays in obtaining other government permits. He added that "the real problem right now is in the engineering arts" because the USPTO has to compete with the private sector to hire from a small pool of graduates.
Rep. Bob Goodlatte (R-VA), Rep. Vernon Ehlers (R-MI), and Rep. Jim Kolbe (R-AZ) also attended. Tech Law Journal spoke with Rep. Kolbe after the luncheon about the House Appropriations Committee and the President's proposed budget for FY 2003 for the USPTO. Rep. Kolbe is a member of the Committee, and its Subcommittee on Commerce, Justice, State and the Judiciary. He stated "I think that there is general support", but added that it is a "tough budget year" because of national defense and homeland security needs. He added that the USPTO may not get everything that it wants.
House Committee Holds Hearing on Abusive Class Action Litigation
2/6. The House Judiciary Committee held a hearing on HR 2341, the Class Action Fairness Act of 2001, sponsored by Rep. Bob Goodlatte (R-VA). See, prepared statements of Rep. James Sensenbrenner (R-WI), Hilda Bankston (former small business owner), John Beisner (O’Melveny & Myers), Peter Detkin (Intel), Andrew Friedman (Bonnett  Fairbourn).
Peter Detkin, Assistant General Counsel of Intel, testified on behalf of the Semiconductor Industry Association (SIA). He stated that "Intel, the SIA, and much of the rest of the technology community are hopeful that you will act during this Congress to address a growing problem in our legal system: abusive class action litigation." He said that "we are seeing an aggressive move by a limited number of plaintiffs’ attorneys to file class actions against technology companies in areas such as allegedly defective products. It is obvious that many of these suits are brought as class actions because the injury alleged is either trivial, highly speculative, or wholly nonexistent."
He added that there has been a shift to filing class actions in the state courts. He recited the consequent problems: "increased forum shopping; manipulation of procedural rules to avoid federal diversity jurisdiction; displacement of the laws of some states by local judges in other states; the resolution of class action cases by ill-equipped state courts; “strike” suits intended to coerce quick settlements from defendants; collusive settlements, where plaintiffs’ lawyers receive large fees while accepting settlements of little or no value to class members; and grossly inflated “bounties” being paid to lead plaintiffs."
Senate Holds Trade Heaing
2/6. The Senate Finance Committee held a hearing on trade negotiations. See, prepared testimony [PDF] of USTR Robert Zoellick. See also, prepared testimony [PDF] of other witnesses: George Scalise (President of the Semiconductor Industry Association), Gary Broyles (Nat. Assoc. of Wheatgrowers), Arthur Wainwright (National Association of Manufacturers), Barb Determan (National Pork Producers Council). See also, opening statement of Sen. Max Baucus (D-MT) and opening statement of Sen. Charles Grassley (R-IA).
People and Appointments
2/6. Gregory Gundlach, a professor of marketing at the University of Notre Dame, was named a Senior Research Fellow of the American Antitrust Institute.
More News
2/6. The FCC released its Notice of Proposed Rule Making [77 pages in PDF] regarding licensing a total of 27 megahertz of spectrum from the 216-220 MHz, 1390-1395 MHz, 1427-1429.5 MHz, 1429.5-1432 MHz, 1432-1435 MHz, 1670-1675 MHz, and 2385-2390 MHz bands.
2/6. Sen. George Voinovich (R-OH) introduced S 1913, a bill to establish an exchange program between the Federal government and the private sector to develop expertise in information technology management. It was referred to the Senate Committee on Governmental Affairs.
2/6. Mitch Daniels, Director of the Office of Management and Budget, testified before the House Ways and Means Committee regarding the President's proposed FY 2003 budget.

Go to News Briefs from February 1-5, 2002.