DOJ Executes Search Warrants in Investigation of Criminal Infringement by P2P Users

8/25. The Department of Justice (DOJ) announced that it "executed six search warrants at five residences and one Internet service provider in Texas, New York, and Wisconsin, as part of an investigation into the illegal distribution of copyrighted movies, software, games, and music over peer-to-peer networks". See, DOJ release.

The DOJ also stated that this investigation, which it has named "Operation Digital Gridlock", has "targeted illegal file sharing of copyrighted materials over five Direct Connect peer-to-peer networks that belonged to a group known as The Underground Network".

Attorney General John Ashcroft (at right) stated that "P2P does not stand for ``Permission to Pilfer.´´ Illegal distribution and reproduction of copyrighted material is a serious criminal offense. Today's investigative action sends a clear message to online thieves who steal the hard work and innovation of others. And it sends a clear message to those who think nothing of downloading those stolen goods to their computers or MP3 players. You can pay the fair value for music, movies, software and games like every other consumer, or you can pay an even higher price when you are caught committing online theft." See, transcript.

The DOJ also announced that this investigation is being jointly conducted by the DOJ's Federal Bureau of Investigation (FBI), the Office of the U.S. Attorney for the District of Columbia, and the DOJ's Computer Crime and Intellectual Property Section (CCIPS).

The DOJ has not announced the execution of any arrest warrants, or the return of any indictments, in connection with Operation Digital Gridlock.

People and Appointments

8/25. Rep. Pete Hoekstra (R-MI) was named Chairman of the House Intelligence Committee. He replaces Rep. Porter Goss (R-FL), whom President Bush has nominated to be Director of the Central Intelligence Agency (CIA). See, statement [PDF] by House Speaker Denny Hastert.

More News

8/25. The Recording Industry Association of America (RIAA) announced the filing of an additional 152 lawsuits, by its member companies, against individuals, alleging copyright infringement in connection with their use of peer to peer systems. See, RIAA release.

8/25. The Department of Justice's (DOJ) Antitrust Division filed a complaint in U.S. District Court (DC) against Syngenta AG, AstraZeneca PLC, Koninklijke Cooperatie Cosun U.A., and Advanta B.V. alleging violation of U.S. antitrust laws in connection with an agreement under which Syngenta purchased all of the assets of Advanta, a seed company that sells sugar beet seeds in the U.S. The complaint alleges violation of Section 7 of the Clayton Act, which is codified at 15 U.S.C. § 18. The DOJ and the defendants simultaneously consented to the entry of a Final Judgment that requires Syngenta's divestiture of Advanta's sugar beet seed business. See also, Hold Separate Stipulation and Order. This case is United States v. Syngenta AG, AstraZeneca PLC, Koninklijke Cooperatie Cosun U.A., and Advanta B.V., U.S. District Court for the District of Columbia, D.C. No. 1:04CV01442, Judge Reggie Walton presiding.

Opponents of the Inducing Infringement of Copyrights Act Submit Alternative Proposal

8/24. Opponents of S 2560, the "Inducing Infringement of Copyrights Act of 2004", sent a proposed alternative version of S 2560 to the Senate Judiciary Committee. At the Committee's hearing on July 22, 2004, Sen. Orrin Hatch (R-UT) and Sen. Patrick Leahy (D-VT), pressured opponents and critics of the bill to submit their recommendations for how legislation should be written to deal with large scale copyright infringement over peer to peer (P2P) networks.

The opponents' proposal would nominally create a new remedy for inducement of infringement. However, it would set standards and create exceptions that would make it all but impossible for any copyright holder to obtain any meaningful relief in an action for inducement of infringement. The proposal may have been submitted with the expectation that it would serve as a first negotiating position, rather than with the expectation that it would be enacted as written.

Sen. Hatch and Sen. Leahy are the Chairman and ranking Democrat on the Senate Judiciary Committee. They are also two of the sponsors of S 2560. These two Senators and others introduced S 2560 on June 22, 2004 in reaction to infringement conducted on P2P systems, and the music industry copyright holders' failure to obtain judicial relief under the Copyright Act, based upon theories of vicarious infringement, in their cases against Grokster and Streamcast.

On April 25, 2003, the U.S. District Court (CDCal) issued its opinion in MGM v. Grokster holding that Grokster's and Streamcast's P2P systems do not contributorily or vacariously infringe the copyrights of the holders of music and movie copyrights. See also, story titled "District Court Holds No Contributory or Vicarious Infringement by Grokster or Streamcast P2P Networks" in TLJ Daily E-Mail Alert No. 650, April 28, 2003.

The Committee held its hearing on S 2560 on July 22, 2004, just before the beginning of the current recess. See, story titled "Senate Judiciary Committee Holds Hearing on Inducement Bill" in TLJ Daily E-Mail Alert No. 963, August, 20, 2004.

Also, on August 19, 2004 the U.S. Court of Appeals (9thCir) issued its opinion [26 pages in PDF] in MGM v. Grokster, affirming the District Court. See, story titled "9th Circuit Holds No Vicarious Infringement in Grokster Case" TLJ Daily E-Mail Alert No. 963, August 20, 2004.

The entities that submitted the alternative language include incumbent local exchange carriers (ILECs), and their trade group, interexchange carriers (IXCs) and groups representing internet service providers, libraries, and consumer electronics manufacturers.

The entities that signed a letter of support for the proposal include, in alphabetical order, the American Association of Law Libraries (AALL), American Library Association (ALA), Association of Research Libraries (ARL), BellSouth, Computer & Communications Industry Association (CCIA), Consumer Electronics Association (CEA), Consumer Electronics Retailers Coalition (CERC), DigitalConsumer.org, Digital Future Coalition (DFC), Home Recording Rights Coalition (HRRC), Public Knowledge, SBC, U.S. Internet Industry Association, U.S. Internet Service Provider Association, U.S. Telecom Association (USTA), Verizon, and WorldCom.

The opponents' proposal would title the bill "Discouraging Online Networked Trafficking Inducement Act of 2004". Although, except in the title, it does not use the word inducement, or any variation.

The basic clause in the opponents' proposal would provide that "Whoever actively distributes in commerce a computer program that is specifically designed for use by individuals to engage in the indiscriminate, mass infringing distribution to the public of copies or phonorecords of copyrighted works over digital networks, with the specific and actual intent to reap financial gain by encouraging such individuals to engage in such indiscriminate, mass infringing distribution, shall be liable as an infringer."

In contrast, the basic clause of S 2560 is simple, and without built in exceptions and limitations. It would provide that "Whoever intentionally induces any violation ... shall be liable as an infringer".

The opponents' proposal then provides further obstacles to copyright holders by imposing several necessary conditions for a finding of "specific and actual intent", and several exemptions. It would also limit the recovery of damages.

The group of entities that submitted this proposal do not support the notion of creating a new cause of action for inducing infringement. They were pressured into submitting an alternative proposal by the sponsors of S 2560. Hence, it is to be expected that their proposal would merely create an illusory remedy for inducement.

These entities, to varying degrees support a weakening of copyright protections, not an expansion of copyright protections. For example, on the same day that Sen. Hatch and Sen. Leahy introduced S 2560, several Representatives and entities held a press conference regarding HR 107, the "Digital Media Consumer Rights Act", a bill that would weaken the anti-circumvention provisions of the Digital Millennium Copyright Act. See, story titled "Chairman Barton Says Commerce Committee Will Mark Up Boucher Doolittle Bill in July" in TLJ Daily E-Mail Alert No. 924, June 23, 2004.

These entities organized into the group named the Personal Technology Freedom Coalition (PTFC). The list of entities that announced their support for HR 107 overlaps significantly with the entities that just submitted the alternative to S 2560. See, list of members of the PTFC.

If the Senate Judiciary Committee does pass S 2560, it is possible that it will not be in its current form. It may be amended to include definitions, limitations and exemptions. While the Committee will not pass the just submitted alternative proposal, this proposal informs the Committee of the concerns of these opponents of S 2560. Some of the concepts embodied in the proposal may be incorporated into S 2560 as it works its way through the legislative process.

Comparison of Hatch Leahy Inducement Bill and Opponents' Proposal

8/24. Numerous opponents of S 2560, the "Inducing Infringement of Copyrights Act of 2004", submitted a proposed alternative version of the bill, which they title the "Discouraging Online Networked Trafficking Inducement Act of 2004".

Currently, 17 U.S.C. § 501 defines infringement of copyrights. For example, subsection (a) provides, in part, that "Anyone who violates any of the exclusive rights of the copyright owner as provided by sections 106 through 121 or of the author as provided in section 106A(a), or who imports copies or phonorecords into the United States in violation of section 602, is an infringer of the copyright or right of the author, as the case may be."

Hatch Leahy Bill. S 2560 is a short and simple bill. It would amend § 501 by adding a new subsection (g), that would provide, in full, as follows:

  "(g)(1) In this subsection, the term `intentionally induces' means intentionally aids, abets, induces, or procures, and intent may be shown by acts from which a reasonable person would find intent to induce infringement based upon all relevant information about such acts then reasonably available to the actor, including whether the activity relies on infringement for its commercial viability.
  (2) Whoever intentionally induces any violation identified in subsection (a) shall be liable as an infringer.
  (3) Nothing in this subsection shall enlarge or diminish the doctrines of vicarious and contributory liability for copyright infringement or require any court to unjustly withhold or impose any secondary liability for copyright infringement."

The opponents' proposal is a longer bill, with many provisions, qualifications, and exceptions. It also includes undefined terms unknown to copyright law, and hence, if enacted in its current form, would add uncertainty to the law.

Opponents' Proposal. Like S 2560, the opponents' proposal would add a new subsection (g) to section 501. At the outset, it provides a new basic clause. It states, "Whoever actively distributes in commerce a computer program that is specifically designed for use by individuals to engage in the indiscriminate, mass infringing distribution to the public of copies or phonorecords of copyrighted works over digital networks, with the specific and actual intent to reap financial gain by encouraging such individuals to engage in such indiscriminate, mass infringing distribution, shall be liable as an infringer."

S 2560 would provide a new remedy against "Whoever intentionally induces" copyright infringement, while the opponents' proposal deletes the word "induces", and all of its variations. The word "inducement" is used once in the proposal -- in the title of the bill -- which has no legal effect. The opponents' proposal would not create a remedy for inducement.

Exempted Entities. The opponents' proposal contains numerous exemptions and exclusions. Some of these are contained within the basic clause. Five are recited below. Some of these are contained in an enumeration of exemptions in a separate subsection. These are recited below also.

S 2560 would apply to "whoever" induces infringement, while the opponents' proposal would only affect "whoever actively distributes" software. Thus, an entity might profit from inducing infringement via a P2P system, and yet escape any judicial sanction, by spinning off the distribution function to a separate entity, which could be a thinly capitalized corporation, with limited liability and no assets, that merely distributes.

S 2560 would apply to inducing infringement by any means, while the opponents' proposal would only affect infringement resulting from the distribution of "computer software". Thus, under the opponents' proposal if, for example, Grokster produced an electronic device, the only function of which was to serve as a node on Grokster's P2P network, this would not be prohibited, because it is not a "computer program".

S 2560 would apply to any inducement of infringement, while the opponents' proposal would only affect distribution "in commerce". Thus, under the opponents' proposal if a library, academic, religious, or non-profit entity sold P2P software that induced infringement, it might derive substantial revenues, and do substantial financial harm to the people and companies that hold copyrights. However, these activities would not be prohibited, because they are not "in commerce". Perhaps it is significant that several library and academic groups support this proposal.

S 2560 would apply to any inducement of infringement, while the opponents' proposal would only affect infringement by "distribution ... over digital networks". Sen. Hatch and Sen. Leahy state that they are concerned about the destructive effect of P2P systems on the music, movie and software industries. P2P systems involve distribution over digital networks. However, S 2560 is not limited to infringement that occurs over digital networks. Hypothetically, it could apply to devices or software that are not used in association with a digital network. The ancient Betamax, for example, did not induce infringement over a digital network. First, the alleged infringers (TV watchers) did not distribute copies over a network. Second, the network then primarily involved over the air analog (not digital) signals.

S 2560 would apply to inducing infringement by whoever, while the opponents' proposal would only affect software designed for use by "individuals". Thus, under the opponents' proposal a P2P system that induces infringement, but is designed to be distributed to a corporate market, would not be prohibited.

The opponents proposal also contains a subsection that enumerates additions exemptions.

First, it provides that "A service provider as defined in 17 U.S.C. 512(k)(1)(B) whose service is used by a third party to distribute or that facilitates a third party's distribution of a computer program shall not be liable under paragraph (1) for providing or operating such service."

Subsection 512(k)(1) provides two definitions of the term "service provider" for the purposes of Section 512, which was added to the Copyright Act in 1998 by the Digital Millennium Copyright Act (DMCA). Subsection 512(k)(1)(B) provides that "As used in this section, other than subsection (a), the term ``service provider´´ means a provider of online services or network access, or the operator of facilities therefor, and includes an entity described in subparagraph (A)." Subsection 512(k)(1)(A), in turn provides that "As used in subsection (a), the term ``service provider´´ means an entity offering the transmission, routing, or providing of connections for digital online communications, between or among points specified by a user, of material of the user's choosing, without modification to the content of the material as sent or received."

This is a broad definition contained in a provision designed to insulate ISPs from liability for the activities of direct infringers (who are not service providers) who subscribe to their services. However, in situations involving entities that vicariously infringe, or that induce of infringement, the entities may themselves be service providers. Thus, this exemption might erode the rule.

The opponents' proposal also includes a list of several other categories of entities exempted from the basic prohibition. It provides that "A person who is not a distributor of a computer program that is specifically designed for use by individuals to engage in the indiscriminate, mass infringing distribution to the public of copies or phonorecords of copyrighted works over digital networks shall not be liable under paragraph (1) notwithstanding any contribution to or benefit from such distribution. By way of example and not limitation, providing (i) venture capital, financial assistance, payment services, or financial services, (ii) advertising, advertising services, or product reviews, or (iii) information or support to users, including via manuals and user handbooks pertaining to a computer program, assistance or directions for using such a program through a company's online help system or telephone help services, and library services shall not be a basis for liability under paragraph (1)."

The opponents' proposal also includes a list of several service functions exempted from the basic prohibition. It provides that "In or as part of a consumer electronics or information technology product or service, providing navigation or access functions, recording functions, storage capacity, electronic program search and indexing functions, or an electronic program guide shall not separately or in combination be a basis for liability under this paragraph."

Finally, perhaps it is notable that the opponents' proposal makes reference to both "distribution" and "redistribution" of copyrighted works. This is pregnant with potential consequences. For example, sections of the proposal that pertain to "redistribution" may exclude works not yet distributed by the copyright holder. This might include movies, music, software, and books before their planned release dates. This might also include stolen works, not intended for distribution, such as diaries, financial records, or correspondence.

Mass Indiscriminate Infringement. S 2560 would apply where someone "induces", while the opponents' proposal would only affect someone who involved "indiscriminate, mass infringing distribution". The words "indiscriminate" and "mass" raise the bar for copyright holders.

Indiscriminate infringement is not defined by the opponents' proposal, or by the Copyright Act. The concept of indiscriminate infringement does not exist in copyright law. Since this term is given no meaning, courts would have to interpret its meaning. If a court were to give it a meaning that is consistent with the common usage of the word "indiscriminate", which is likely how the court would proceed, then it would mean copying that is without discrimination, or that is conducted at random. Users of P2P systems who make available copyrighted works tend not to select copyrighted works at random, or indiscriminately. They apply criteria, such as performers, genres and works that they prefer, and that they already possess. Thus, the individuals who copy and make available on a P2P system a copyrighted work are not acting indiscriminately. Nor are the individuals who download copyrighted works. They do not copy at random. They copy the works that they prefer, based on their own criteria. Copyright holders thus might be unable to prove mass indiscriminate infringement, as required by the opponents' proposal.

Also, the word "mass" is not defined by the opponents' proposal, or by the Copyright Act. The concept of mass infringement does not exist in copyright law. Here again, copyright holders would be faced with seeking a remedy under a statute with undefined restricting terms.

Mental State. Neither S 2560 nor the opponents' proposal would impose strict liability. S 2560 contains a mental state requirement that would be substantially easier for copyright holders to meet than the mental state requirements in the opponents' proposal.

S 2560 provides that the mental state is "intentionally", and this is to be interpreted under a "reasonable person" standard. S 2560 defines "intentionally induces" as "intentionally aids, abets, induces, or procures, and intent may be shown by acts from which a reasonable person would find intent to induce infringement based upon all relevant information about such acts then reasonably available to the actor, including whether the activity relies on infringement for its commercial viability."

The opponents' proposal requires "specific and actual intent to reap financial gain by encouraging such individuals to engage in such indiscriminate, mass infringing distribution". This, of course, raises the question of just what is "specific and actual intent". The opponents' proposal does not define this phrase. It does, however, provides three minimum requirements for finding "specific and actual intent" -- predominant use, revenues predominantly derived from redistribution, and conscious, recurring, persistent, and deliberate acts of encouragement. The way it is worded, these are not elements of a definition or test. Rather, they are necessary, but not sufficient, conditions for finding "specific and actual intent".

In full, the opponents' proposal provides that "a person shall not be deemed to have such specific and actual intent unless (A) the predominant use of the computer program is the mass, indiscriminate infringing redistribution to the public of copies or phonorecords of copyrighted works; (B) the commercial viability of the computer program depends on, and the predominant revenues derived by the distributor from the computer program are derived from, its use for such mass, indiscriminate infringing redistribution; and (C) the person has undertaken conscious, recurring, persistent, and deliberate acts that encouraged another person to commit such mass, indiscriminate infringing redistribution or absent a legitimate purpose actively interfered with the ability of copyright owners to detect and prosecute such mass, indiscriminate infringing  redistribution."

Moreover, a later subsection of the bill provides that "Actual or constructive knowledge of the use of a computer program is not sufficient to demonstrate the requisite specific intent".

Collectively, all of these provisions set such a rigorous minimum standard for a finding of "specific and actual intent" that it is hard to imagine any P2P systems designed to profit by inducing infringement that would be found to satisfy this minimum standard.

Additional Obstacles. The opponents' proposal also contains two additional procedural clauses that would diminish the likelihood of copyright holders obtaining meaningful relief.

First, it would provide that in an action alleging inducement, "facts supporting such allegation must be pleaded with particularity." This may be significant because most of the relevant facts would be held by the direct infringers, their internet service providers, and the entities inducing infringement. Complaints would be plead with general allegations. The copyright holders would then conduct pretrial discovery to obtain more particular evidence. This clause would provide defendants the opportunity to have complaints dismissed prior to such discovery.

Second, it would provide a subsection limiting remedies to "an injunction against such intentional commercial activity" and "actual damages for infringement of a work for which the defendant had specific and actual knowledge the work would be infringed." Limiting the injunctive relief to the commercial activity is significant because the appropriate injunctive relief might otherwise include such things as rending a financial accounting, or providing reporting to the court of parties. Limiting damages to actual damages for infringement where "the defendant had specific and actual knowledge the work would be infringed" would impose an impossible burden upon copyright holders. The inducing defendant may know that its product is being used to infringe, and that it will be used to infringe. But, the inducing defendant does not have actual knowledge of what works will be infringed in the future.

Betamax Case. S 2560 is silent regarding the Betamax case. This is Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417 (1984). The Sony Betamax case was a contributory infringement case, not an inducement case. The Supreme Court held, in a 5-4 opinion, that Sony did not contributorily infringe with its Betamax technology.

Both Sen. Hatch and Sen. Leahy stated at the July 22, 2004 hearing that their bill does not affect the Betamax decision. Marybeth Peters, the Register of Copyrights, who testified at the hearing, said the same. However, S 2560 does not expressly state this.

Gary Shapiro, the P/CEO of the Consumer Electronics Association (CEA), argued at the July 22 hearing that S 2560 would "reverse and rewind" the Betamax decision. He elaborated in his written statement that "Because it is so doctrinally different, and relies on a fundamentally different test -- intention vs. capability of product -- there is no way that S. 2560, if applicable to staple hardware and software products, can or will be read by potential plaintiffs, and by courts, as anything other than a frontal attack on the holding of the Supreme Court in the Betamax case."

The CEA now supports the opponents' proposal. See, CEA release.

The opponents' proposal does contain language that is related to the Betamax case. Section 4 of the proposal, which is titled "Codification of Supreme Court Precedent", provides that "Except as provided under section 501(g)(1), it shall not be a violation of the Copyright Act to manufacture or distribute a hardware or software product that is capable of commercially significant noninfringing use."

This is not a codification of the Supreme Court's decision. Rather, it is the codification of a six word phrase from that decision.

The majority in Sony wrote that "We recognize there are substantial differences between the patent and copyright laws. But in both areas the contributory infringement doctrine is grounded on the recognition that adequate protection of a monopoly may require the courts to look beyond actual duplication of a device or publication to the products or activities that make such duplication possible. The staple article of commerce doctrine must strike a balance between a copyright holder‘s legitimate demand for effective -- not merely symbolic -- protection of the statutory monopoly, and the rights of others freely to engage in substantially unrelated areas of commerce. Accordingly, the sale of copying equipment, like the sale of other articles of commerce, does not constitute contributory infringement if the product is widely used for legitimate, unobjectionable purposes. Indeed, it need merely be capable of substantial noninfringing uses. ... The question is thus whether the Betamax is capable of commercially significant noninfringing uses."

The Court went on to find that the Betamax was capable of commercially significant noninfringing uses because consumers used it for time shifting, which is a fair use.

By codifying merely the six word phrase, "capable of commercially significant noninfringing use", the opponents' proposal might preclude giving effect to the entirety of the Sony opinion, and the application that other courts, such as the 7th Circuit, have given to it in the context of P2P systems.

For example, on June 30, 2003, the U.S. Court of Appeals (7thCir) issued its opinion [23 pages in PDF] in In Re Aimster Copyright Litigation. Judge Richard Posner discussed the Sony Betamax case at length. He wrote, for example, that "We also do not buy Aimster's argument that since the Supreme Court distinguished ... between actual and potential noninfringing uses, all Aimster has to show in order to escape liability for contributory infringement is that its file-sharing system could be used in noninfringing ways, which obviously it could be. Were that the law, the seller of a product or service used solely to facilitate copyright infringement, though it was capable in principle of noninfringing uses, would be immune from liability for contributory infringement. That would be an extreme result, and one not envisaged by the Sony majority."

People and Appointments

8/24. Timothy Young was named Associate Administrator of E-Government and Information Technology at the Executive Office of the President's (EOP) Office of Management and Budget (OMB). See, OMB release.

8/24. Mark Adler was named Deputy Chief Litigation Counsel in the Securities and Exchange Commission's (SEC) Division of Enforcement. He was previously the Assistant Chief Litigation Counsel. He replaces Peter Bresnan, who was named Associate Director of the Division of Enforcement in April of this year. David Kornblau remains the Chief Litigation Counsel. See, SEC release.

10th Circuit Upholds Oklahoma Statute that Discriminates Against Electronic Commerce

8/23. The U.S. Court of Appeals (10thCir) issued its opinion in Powers v. Harris, upholding the constitutionality of a protectionist state statute that has the effect of preventing certain sales of caskets over the internet. Two individuals who own a business named Memorial Concepts Online challenged, on 14th Amendment grounds, an Oklahoma statute that requires that in most circumstances one must be a licensed funeral director operating out of a funeral establishment to sell caskets. The Appeals Court upheld the statute.

This is a 14th Amendment (due process, equal protection and privileges and immunities) case, rather than a commerce clause case. The Appeals Court held that the statute is an economic regulation, and that therefore, the rational basis test applies. It held that the state has a legitimate state interest -- intrastate protectionism -- and that protecting state funeral directors from competition is rationally related to this interest.

This opinion is inconsistent with the opinion of the U.S. Court of Appeals (6thCir) in Craigmiles v. Giles, which struck down a very similar Tennessee statute on due process and equal protection grounds. It too applied the rational basis test, but found that statute lacking. It held that economic protectionism is not a legitimate state interest. See, story titled "6th Circuit Buries Protectionist Statute in Tennessee Casket Case" in TLJ Daily E-Mail Alert No. 563, December 9, 2003.

These cases both deal with the regulation of funerals, funeral directors, and funerary sales. However, the analyses contained in these opinions ares applicable to other protectionist state statutes that impede electronic commerce.

Parties. The plaintiffs in this case are Kim Powers, Dennis Bridges, and Memorial Concepts Online, Inc. (MCAI). MCAI is an Oklahoma corporation owned by Power and Bridges.

They sell burial caskets over the internet. They do not provide any embalming, funeral or burial services. They only sell products. None of the plaintiffs holds an Oklahoma funeral director's license. However, Bridges holds a Tennessee funeral director's license. Tennessee has a very similar licensing statute.

The defendants are Joe Harris, and other individuals, who are sued in their capacity as members of the Oklahoma State Board of Embalmers and Funeral Directors.

There is also interest group involvement in this case. The plaintiffs were represented by the Institute for Justice (IJ), which is making a practice of representing plaintiffs who challenge the constitutionality of protectionist state laws that discriminate against electronic commerce. The IJ also represented the plaintiffs in Craigmiles v. Giles. The IJ is also representing the plaintiffs in Swedenburg v. Kelly, a dormant commerce clause challenge to a New York state law that regulates internet sales, and other direct sales, of alcoholic beverages under the 21st Amendment. Juanita Swedenburg, is a Virginia wine seller who is prohibited from making direct sales over the internet to New York residents. She prevailed in the District Court; the U.S. Court of Appeals (2ndCir) reversed; the Supreme Court has granted certiorari. See, story titled "Supreme Court Grants Certiorari in Internet Wine Sales Cases" in TLJ Daily E-Mail Alert No. 905, May 26, 2004.

The Pacific Legal Foundation and the Claremont Institute's Center for Constitutional Jurisprudence both filed amicus curiae briefs in support of Powers, Bridges and MCAI.

Oklahoma Statute. The Oklahoma Funeral Services Licensing Act (FSLA), which is codified at Okla. Stat. tit. 59, § 395.1 et seq., and the rules promulgated thereunder, require that any person engaged in the sale of funeral service merchandise, including caskets, must be a licensed funeral director operating out of a funeral establishment.

The requirements for obtaining a license include having a fixed physical location, that must include a preparation room that meets the requirements for embalming bodies, and an on site inventory of caskets.

Also, the FSLA limits its enforcement to intrastate casket sales only. For example, an unlicensed Oklahoma casket seller may sell casket to customers outside of the state of Oklahoma.

The Court of Appeals also noted that the Oklahoma Board does not apply this licensing requirement to those who sell pre-paid sales (as opposed to time of need sales), provided that the person is acting as an agent of a licensed funeral director.

U.S. Constitution. The 14th Amendment provides, in part, that "No State shall make or enforce any law which shall abridge the privileges or immunities of citizens of the United States; nor shall any State deprive any person of life, liberty, or property, without due process of law; nor deny to any person within its jurisdiction the equal protection of the laws."

District Court. Powers, Bridges and Memorial Concepts Online filed a complaint in U.S. District Court (WDOkla) against Harris and the other members of the Oklahoma State Board of Embalmers and Funeral Directors seeking a declaration that the Oklahoma statute violates the equal protection, due process and privileges and immunities clauses of the 14th Amendment of the U.S. Constitution, as well as the dormant commerce clause.

The District Court held that Oklahoma's FSLA licensing regime does not violate either the equal protection, due process and privileges and immunities clauses of the 14th Amendment, or the dormant commerce clause.

Powers, Bridges and MCAI appealed the 14th Amendment claims, but not the dormant commerce clause claim.

Court of Appeals Holding. The Appeals Court affirmed.

The Court first addressed the privileges and immunities clause claim in a single paragraph. It wrote that if the clause is to be revived from its post Slaughter-House Cases, 83 U.S. (16 Wall.) 36 (1872), status, that will be the responsibility of the Supreme Court, not the 10th Circuit.

The Court then addressed the difference between due process and equal protection. It wrote that the substantive component of the due process clause provides heightened protection against governmental interference with certain fundamental rights and liberty interests, even when the challenged statute affects all persons equally, while the equal protection clause requires that states treat similarly situated persons similarly. The Court further stated that this appeal "is most properly presented as an equal protection claim", and "In any event, because a substantive due process analysis proceeds along the same lines as an equal protection analysis, our equal protection discussion sufficiently addresses both claims".

Thus, the bulk of the opinion then addresses the equal protection claim.

The Court followed the New Deal era method of analysis that distinguishes between individual and economic rights, and applies a lower standard, the rational basis test, to its review of statutes that affect economic rights.

The state of Oklahoma argued that its statute serves the purpose of protecting consumers. However, the Appeals Court did not indulge in any hypocrisy about the statute serving any public health, safety or welfare purpose. It wrote that it did not doubt that the FSLA exacts "needless" and "wasteful" requirements. It concluded that it is a statute that protects funeral directors from intrastate competition in the sale of caskets.

The plaintiffs argued that the FSLA is "a classic piece of special interest legislation designed to extract monopoly rents from consumers' pockets and funnel them into the coffers of a small but politically influential group of business people -- namely, Oklahoma funeral directors". The Court of Appeals did not refute this characterization. Rather, it concluded that intrastate economic protectionism is itself a legitimate state interest.

The Court wrote that very few court opinions have found intrastate protectionism not to be a legitimate state interest. One of these few cases is Craigmiles, which this Court concluded was wrongly decided.

This Court also distinguished H.P. Hood & Sons, Inc., v. DuMond, 336 U.S. 525 (1949) on the basis that it involved interstate economic protectionism, not intrastate economic protectionism. It also distinguished other cases that struck down economic regulations as interstate regulation cases involving the dormant commerce clause, which was not raised on appeal in this case.

The Court wrapped itself in the Supreme Court's antique cases that applied New Deal era regulatory logic to constitutional analysis. The Court relied upon U.S. v. Carolene Products, 304 U.S. 144 (1938), Williamson v. Lee Optical, 348 U.S. 483 (1955) and Ferguson v. Skrupa, 372 U.S. 726 (1963). Indeed, the Court cited Skrupa in its first paragraph.

The Court concluded that "intrastate economic protectionism, absent a violation of a specific federal statutory or constitutional provision, is a legitimate state interest and that the FSLA is rationally related to this legitimate end".

The Court added that "Our country's constitutionally enshrined policy favoring a national marketplace is simply irrelevant as to whether a state may legitimately protect one intrastate industry as against another when the challenge to the statute is purely one of equal protection."

Concurring Opinion. Judge Tymkovich wrote a concurring opinion. It concurs in the result, but it disputes the key parts of Judge Tacha's analysis. It reads more like a dissent.

He wrote that "Where I part company with the majority is its unconstrained view of economic protectionism as a ``legitimate state interest.´´ The majority is correct that courts have upheld regulatory schemes that favor some economic interests over others. Many state classifications subsidize or promote particular industries or discrete economic actors. And it is significant here that Oklahoma's licensing scheme only covered intrastate sales of caskets. But all of the cases rest on a fundamental foundation: the discriminatory legislation arguably advances either the general welfare or a public interest."

He reviewed Supreme Court precedent in this area, and concluded that "Contrary to the majority, however, whenever courts have upheld legislation that might otherwise appear protectionist, as shown above, courts have always found that they could also rationally advance a non-protectionist public good." He would have upheld the statute on the grounds that "the funeral licensing scheme here furthers, however imperfectly, an element of consumer protection".

He wrote that "Consumer interests appear to be harmed rather than protected by the limitation of choice and price encouraged by the licensing restrictions on intrastate casket sales", but still, this is a matter to be decided by the state legislature, not the courts.

He opposed Judge Tacha's "almost per se rule upholding intrastate protectionist legislation".

Conflict Between Circuits. The Court of Appeals wrote that "we part company with the Sixth Circuit's Craigmiles decision, which struck a nearly identical Tennessee statute as violating the Equal Protection Clause and substantive due process."

There now exists a conflict between different circuits. The two statutes are very similar. Both cases raised 14th Amendment issues. In both cases the plaintiffs sold caskets. In both cases the plaintiffs are represented by the same attorneys, and supported by the same amici. Yet, the two Courts reached different results.

Both began with the traditional, economic regulation, rational basis test, method of analysis. But, arguably, both departed from precedent, albeit in opposite directions.

The Court in Craigmiles added new meaning to the rationale basis test. It made it a more rigorous standard. It interpreted it as a ban on economic protectionism that harms consumers.

In contrast, the Court in Powers revised the rationale basis test to make it an even less exacting standard. It interpreted it to allow economic protectionism in the absence of the independent advancement of any public good. It also read into the equal protection clause an interstate versus intrastate distinction.

Consequences for E-Commerce. This is not merely arcane constitutional analysis. Nor will the impact of these cases be limited to casket sellers.

Traditional brick and mortar businesses that have been threatened by competition from internet based businesses have often obtained protection from state legislatures. See, for example, the Progressive Policy Institute (PPI) study titled "Revenge of the Disintermediated: How the Middleman is Fighting E-Commerce and Hurting American Consumers", authored by Robert Atkinson, and dated January 26, 2001.

Atkinson testified before a House Commerce Subcommittee hearing on September 26, 2002 regarding this report. He wrote in his prepared statement that "incumbent producers in a wide range of industries, including wine and beer wholesalers, auto dealers, travel agents, pharmacies, mortgage brokers, and others, are fighting against robust e-commerce competitors. The growth of laws and regulations many at the state level, that protect incumbent ``bricks and mortar´´ companies from e-commerce competitors is a major threat to the growth of e-commerce." See also, story titled "House Subcommittee Holds Hearing on State Impediments to E-Commerce" in TLJ Daily E-Mail Alert No. 518, September 27, 2002.

Similarly, Tod Cohen of eBay also testified at this hearing. He wrote in his prepared statement "price competition is great for consumers, but troubling to the entrenched monopolists and oligopolists that have been able to set prices unfairly for years without repercussion. E-commerce forces them to face an unpleasant prospect: competition. In order to prevent or ``manage´´ competition, these ``middlemen´´ have used their allies in state and local government to apply existing laws and regulations to Internet companies in a discriminatory manner and to enact laws and regulations that treat interstate e-commerce companies differently from offline intrastate companies. They justify these new, discriminatory barriers with spurious claims that e-commerce may harm consumers. Far too often, though, these claims simply seek to mask the fact that the middlemen are just trying to protect their ``turf.´´"

E-commerce proponents are often unsuccessful in persuading state legislatures not to impose discriminatory barriers upon e-commerce. Moreover, the Congress has only rarely passed statutes that effectively preempt state discriminatory barriers. Hence, e-commerce proponents have turned to the courts in numerous instances, and attempted to have various discriminatory burdens struck down for violating the U.S. Constitution. The commerce clause, and the doctrine of the dormant commerce clause, is the most common type of challenge. The Craigmiles and Powers cases are unusual in the sense that the plaintiffs have relied upon the 14th Amendment. Nevertheless, these cases are part of a larger collection of Constitutional challenges to protectionist state statutes.

The 6th Circuit's approach in Craigmiles, if it were to become the national standard, would advance the cause of e-commerce interests seeking to block discriminatory barriers from being imposed by protectionist state legislatures. The 10th Circuit's approach in Powers, if it were to become the national standard, would be a setback for e-commerce interests.

Judges. Judge Deanell Tacha wrote the opinion of the Court, in which Judges Monroe McKay and Timothy Tymkovich joined. Judge Tacha, a Kansan, is the Chief Judge of the 10th Circuit. She was appointed by former President Reagan. Although, her nomination was primarily the result of efforts of former Sen. Bob Dole (R-KS), who was then a senior member of the Senate. In 1996 there was speculation that she might be nominated for a seat on the Supreme Court. However, Bob Dole lost the Presidential election to Bill Clinton, and no seats on the Court opened.

Judge Tacha discussed her judicial philosophy in a written interview by Howard Basham, that was published in the web site titled "How Appealling" on January 5, 2004. She wrote that "In my view, if judges are doing their jobs appropriately, they adhere with careful precision to the law and facts of the case before them. They do not stray into policy or what should be. They stick with the text of the Constitution, statute, or regulation that they are interpreting. Judges quite simply cannot fix problems in our country. Judges can only decide the controversies in front of them. I have found very few cases in which I thought there was ever the legitimate flexibility in the applicable law to bring to bear anything other than that law itself."

She also commented in the Powers opinion that "There simply is no constitutional or Platonic form against which we can (or could) judge the wisdom of economic regulation".

Senior Judge McKay was appointed by President Carter. Judge Tymkovich, who wrote the separate opinion, was appointed in 2003 by President Bush.

Judge Danny Boggs, an outspoken, free market, Federalist Society, conservative, wrote the opinion in the Craigmiles case.

This case is Kim Powers, et al. v. Joe Harris, et al., U.S. Court of Appeals for the 10th Circuit, App. No. 03-6014, an appeal from the U.S. District Court of the Western District of Oklahoma, D.C. No. CIV-01-445-F, Judge Stephen Friot presiding.

The Craigmiles case is Nathaniel Craigmiles, et al. v. Arthur Giles, et al., U.S. Court of Appeals for the 6th Circuit, App. Ct. No. 00-6281, an appeal from the U.S. District Court for the Eastern District of Tennessee, at Chattanooga, D.C. No. 99-00304, Judge Allan Edgar presiding.

9th Circuit Reverses in Yahoo v. LICRA

8/23. The U.S. Court of Appeals (9thCir) issued its split opinion [34 pages in PDF] in Yahoo v. LICRA, holding that the U.S. District Court lacks personal jurisdiction over the French defendants.

Previously, the French defendants, LICRA and UEJF, sued Yahoo in a French court, and obtained a judgment ordering Yahoo to stop publishing certain material in its web site located in the U.S. In the present action, Yahoo sued the French defendants in U.S. District Court seeking a declaratory judgment that the French judgment is unenforceable in the U.S. because it violates the First Amendment. The District Court held that it does have personal jurisdiction over the French defendants, and that the French judgment violates the free speech rights of Yahoo. In the present opinion, the Appeals Court reversed the District Court. It held that the District Court lacks personal jurisdiction because the French defendants have not purposely availed themselves of the benefits of the forum.  See, full story.

More News

8/23. The Federal Communications Commission's (FCC) Spectrum Policy Task Force (SPTF) published a web page titled "Proceedings and Initiatives" that summarizes open FCC proceedings related to FCC regulation of the use of spectrum.

8/23. The U.S. Court of Appeals (8thCir) issued its opinion [13 pages in PDF] in Qwest v. Worldcom, an appeal from a District Court permanent injunction barring the Minnesota Public Utilities Commission (MPUC) from requiring Qwest to provide WorldCom with reports regarding the provision of certain telecommunications services. The Appeals Court reversed on the basis that the Federal Communications Commission (FCC) has not preempted the authority of the MPUC in this area.

8/23. Hewitt Pate, Assistant Attorney General in charge of the Department of Justice's (DOJ) Antitrust Division gave a speech titled "Competition and the End of Geography".

Go to News from August 16-20, 2004.