The House bill was prompted by a series of embarrassing leaks of government-held data on everything from nuclear facilities to Army officers’ Social Security numbers to confidential congressional ethics investigations.  Those ethics panel leaks were labeled by the Recording Industry Association of America as “a powerful catalyst to enact real reforms to protect consumers.”  A recent report revealing the troubling degree of insecurity in federal government file transfers will probably only add urgency to the debate on the Senate bill.  The study, titled “Why Encrypt? Federal File Transfer Report,” was released on May 11, 2010 by MeriTalk, a government IT network, in conjunction with Axway, a company specializing in business-to-business integration software.  The report surveyed 200 federal IT and information security professionals.  It found that an alarming number of these personnel use unsafe file-transfer methods, including physical media (66%), FTP (60%), and personal email accounts like Gmail or Yahoo (52%).  Although 80% claimed their agency had adequate transfer-security policies, only 58% said employees were aware of those policies, and just 42% said such policies were consistently followed. 

It will be worth staying tuned to see whether these damning statistics will convince the entire Senate to bolster federal file-transfer security — and raise awareness about the issue — by passing the Secure Federal File Sharing Act.  One might also wonder whether these legislative developments would influence private-sector policymakers — in corporations and other institutions — to follow the federal government’s lead in banning P2P software use. 

In any event, P2P security initiatives in the private sector may get a direct boost from the federal government through “The P2P Cyber Protection and Informed User Act”, introduced by Senators John Thune (R-SD) and Amy Klobuchar (D-MN). 

If the Secure Federal File Sharing Act seeks to protect the government and the public alike from the dangers of data leaks within federal networks, the Thune-Klobuchar legislation seeks to protect all individual users of P2P software from inadvertently exposing their own private files to the public.  Thune saidhis bill will take aim at “the privacy and security threats associated with” P2P file-sharing.  Klobuchar explained to the Minneapolis Star Tribune that “without proper precautions, P2P software can allow anyone on the network to gain access to all the files on your computer, not just the ones you intend to share.”  She said that because such software often “allow[s] access to private financial or family records, it’s an invitation to identity thieves and sexual predators.” 

The Klobuchar-Thune bill, whose companion legislation has already been passed in the House as the “Informed P2P User Act” (H.R. 1319), includes two major components.  First, it would require all P2P software to provide a user with “clear and conspicuous” notice of the program’s function, and obtain the user’s consent, before the software is downloaded or installed.  Second, the bill would make it illegal to prevent a user from blocking, disabling, or removing P2P software.  The bill would bestow enforcement authority upon the FTC, which in February 2010 notified about 100 private and public organizations that they had suffered P2P-based data breaches.    

It would be worth speculating on whether this wider regulation of P2P software could ultimately have a chilling effect on the general public’s use of programs like uTorrent, Shareaza, Ares, Limewire, and BitComet.  If so, one might imagine that content owners may get behind the bill in an effort to stem the losses from P2P-based infringement.  The bill has received support from the RIAA, the Direct Marketing Association, Stop Child Predators, and 41 state attorneys general.     

Stay tuned.

**  Nathaniel Fintz, a summer associate with the Firm, assisted in the preparation of this post.

Among the suggested changes is FCC Chairman Genachowski’s proposal, dubbed the “Third Way,” a method that would classify only the transmission component of broadband access service as a telecommunications service.  Doing so would render the transmission component subject to Section 202(a) of the Communications Act, which forbids any common carrier to “make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services with like communication service.”  In effect, the “Third Way” would enable the FCC to implement net neutrality regulations on the transmission component of an ISP service without otherwise extending the full brunt of Title II telecommunications service regulations to the information service components of an ISP.

Since the proposal was initially released, advocates on both sides of the net-neutrality debate have voiced concerns that this reclassification may be beyond the Commission’s authority.  Just weeks ago, 171 Republican and 73 Democratic Congressmen urged the Commission not to take unilateral action in creating a new regulatory scheme by reclassifying broadband as a modified Title II telecommunications service.  Instead, they are insisting that any such classification change be implemented through legislative channels.  The FCC’s recent action appears to be a polite “No thanks” to those Members of Congress.

The FCC has explained that there is a legal basis for reclassifying broadband without legislative action.  A statement by the Commission’s General Counsel pointed out that in his dissent in National Cable and Telecommunications Association v. Brand X Internet Services, Inc., Justice Scalia said that the “computing functionality” and “broadband transmission component” of an ISP must be acknowledged as “two separate things,” the former an unregulated service under Title II and the latter a telecommunications service which could, in Scalia’s view, be a regulated Title II service.  In the FCC’s view, Scalia’s dissent is “consistent with, although not compelled by, the majority opinion in Brand X.”  The FCC is therefore confident that the Third Way approach will pass judicial scrutiny.

The reclassification of the transmission component under Title II would not place immediate restraints on ISPs, but some ISPs and analysts are concerned that this would lead to further price regulations that could potentially thwart investment opportunities in the broadband space.  AT&T explained that the Notice of Inquiry issuance is disconcerting as “it will create investment uncertainty at a time when certainty is most needed.  It will no doubt damage jobs in a period of far-too-high unemployment.”  Joining the opposition, Verizon suggested that these measures will have “negative consequences for online users and the Internet ecosystem would be severe and have ramifications for decades.”  While it is difficult to predict the precise impact additional regulations might have, the reclassification would undoubtedly extend regulatory authority to the Commission and leave ISPs susceptible to greater oversight.

In an effort to combat increased agency regulation, ISPs have suggested alternatives that allow for more flexible standards and less regulatory control of network management.  Comcast, in its reply comments, insisted that the FCC “should not adopt an absolute ban on discrimination” as this would “prohibit ‘socially beneficial discrimination’ and stifle innovation and investment.” Instead, Comcast explains that the rules should allow the Commission the power to supervise ISPs’ practices and address practices that are questionable while still giving ISPs “the flexibility to innovate and experiment with technologies and business models.”  Comcast further suggests that the regulations created by the FCC should operate in conjunction with independent third-party expert groups to “understand, refine, and address the various technical issues underlying key policy determinations.”   This would create industry-wide cooperation by integrating practical standards with current FCC policies.

Last week, in an effort to reclaim control of the network management debate, notable industry executives formed the Broadband Internet Technical Advisory Group (BITAG).  The purpose of the group is to “develop consensus on broadband network management practices or other related technical issues that can affect users’ Internet experience.”  The group is poised to inform and advise governmental agencies on technical and operational issues facing internet service and content providers that will help establish network management policies.

Regardless of the outcome of the regulatory debate, ISPs must continue managing bandwidth congestion within FCC policies and constraints.  Depending on the breadth of expansion of the regulatory controls, ISPs may seek alternative pricing structures as a way of managing network traffic without employing intense discriminatory network-management practices and running afoul of net neutrality principles or regulations.  Indeed, AT&T’s recent decision to eliminate “all you can eat” mobile data plans in favor of metered billing was intended, in part, to rein in the small number of users that consume a disproportionate amount of data.  AT&T hopes the new scheme will alleviate stress on the networks and help manage congestion.  This move may change the entire economic model for the wireless industry as other wireless providers follow suit.

Congress will obviously continue to debate the implications and necessities of having an unelected agency construct overarching broadband regulations.  However, it is clear that amending the Communications Act will take time and be especially difficult during an election year.

The FCC is accepting comments on the proposed reclassification methods through July 15th.  We’re not sure whether the coming weeks and months will provide much clarity, but we anticipate that there will be opportunities amidst the uncertainty.

**Julie Hanus, a summer associate with the Firm, assisted in the preparation of this post.

We had previously written about the original sanction order, in which the FCC found that Comcast had violated the non-binding net neutrality principles by examining users’ connections and routing them (in actuality, slowing them down) based on whether the connection was being used for P2P uploads.  In effect, Comcast was managing traffic connections not based on destination but on application.  Comcast appealed the ruling, asserting that the FCC did not have the appropriate authority to issue the sanction.

The Circuit Court’s decision rested, in large part, on where the regulations governing ISPs fall within the provisions of the Communications Act.  In 2002, the FCC defined ISP services as “information” carriers, subject to Title I of the Communications Act, rather than as “telecommunications” services governed by Title II.  That distinction proved fatal to its attempt to sanction Comcast. 

FCC itself conceded that it did not have the express authority under Title I to regulate an ISP’s network management practices.  The FCC was therefore compelled to rely on the broad provisions of Section 4(i) of the Act, which authorizes the Commission to “perform any and all acts, make such rules and regulations, and issue such orders, not inconsistent with this chapter, as may be necessary in the execution of its functions.”  Under prior DC Circuit precedent, this “ancillary” authority may only be used if the FCC can demonstrate that its action, is “reasonably ancillary to the effective performance of its statutorily mandated responsibilities.”  The FCC relied on several Congressional statements of policy to show that regulating Comcast and other ISPs was within its “statutorily mandated responsibilities.”  But as the appeals court decision pointed out, Supreme Court and DC Circuit case law has held on numerous occasions that such statements of policy cannot create “statutorily mandated responsibilities.”  The Court went on to reject the FCC’s claim of “ancillary authority” and vacated the sanction order against Comcast.

So where does this leave the FCC’s net neutrality initiatives?  Several proponents of expanded FCC authority have suggested that the FCC reclassify ISPs as “telecommunications” services under Title II of the Communications Act.  Title II expressly makes it unlawful for common carriers “to make any unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services for or in connection with like communication service”.  Such language would appear to provide solid footing for implementing and enforcing the net neutrality principles.

Indeed, immediately after the DC Circuit’s decision was handed down, FCC Commissioner Michael Copps released a statementurging the FCC to reverse its earlier 2002 determination and treat ISPs as telecommunications services saying “It is time that we stop doing the ‘ancillary authority’ dance and instead rely on the statute Congress gave us to stand on solid legal ground in safeguarding the benefits of the Internet for American consumers.” 

Congress may yet get into the action as well.  Last August, the Internet Freedom and Preservation Act of 2009 was introduced.  The Act expressly makes it unlawful to block, interfere with, discriminate against, impair, or degrade” access to any lawful content from any lawful application or device.”  However, no action has been taken on the bill since its introduction.

Stay tuned.

The cable providers who have invested in and implemented TV Everywhere trials deny the allegations that the initiative violates antitrust laws, and instead argue that TV Everywhere benefits consumers by making more content available on the Internet.   While advocates call it “innovative”, antagonists call it “incumbents protecting their turf,” – which as of late will ultimately boil down to a question for the Department of Justice.

Antitrust laws are meant to protect competition in the marketplace, recognizing that competition is necessary to ensure fair pricing and better quality for the consumer.  Therefore, the fundamental question from an antitrust perspective is, will TV Everywhere threaten or hinder competition in the online television content space?  The public interest groups calling for an investigation argue that it most certainly will stifle competition in the emerging market for online television programming.  They go so far as to allege collusion among the major video service providers networks, claiming that the TV Everywhere initiative rests on an illegal “horizontal” agreement among competitors.

In its complaint to the DOJ, Free Press asserts that the TV Everywhere alleged agreements amongst the cable providers are collusive horizontal agreements likely to be found illegal under the applicable per se rules governing antitrust law.  The per se rule applies only to practices that are themselves clearly unreasonable restraints of trade regardless of market facts, such as horizontal collusion, including horizontal price-fixing, market allocation, and certain group boycotts.  Additionally certain tying arrangements are also per se violations.  Antitrust case law has established each such activity as “unreasonable restraints of trade”.

Price Fixing

Price collusion among competitors has been determined by the Supreme Court to be a per se violation of Section 1 of the Sherman Act regardless of the actual impact on the market.  Typically, in order for a court to find per se illegal collusion there must be a “horizontal agreement” in place, i.e., an agreement among competitors.

National Cable and Telecommunications Associations Chief Executive Kyle McSlarrow publicly denounced the anti-competitive allegations in a statement issued in response to the filing of the DOJ complaint.  McSlarrow asserted that TV Everywhere is the result of true market player collaboration rather than collusion.  He defends TV Everywhere noting that antitrust authorities have encouraged collaboration in the past, sometimes even among competitors, for the sake of innovation and market stimulation.  “Distributors do not have the ability to unilaterally decide how content is distributed.  Content owners, through individual business arrangements with a growing array of distributors ultimately make those decisions.  All in all, Free Press and other parties are complaining about decisions content owners make about how their content should be distributed.”

McSlarrow also argued that with respect to the various TV Everywhere initiatives being tested the relationships are purely vertical (i.e., based on arrangements between one content company and one or more individual distributors) and not horizontal (i.e. based on agreements between distributors, one the one hand, and agreements between content owners, on the other hand) in nature.   As he said, “The fact that market participants are experimenting with models in addition to fee- or advertiser-supported models is not a sign of anti-competitive conduct.”

Dividing the Market

Deliberate and strategic division or allocation of customers, territories or portions of the market between competitors, i.e., “market allocation”, has also been deemed a violation of Section 1 of the Sherman Act.  Market allocations are subject to per se illegality findings whether or not price setting is involved, and whether or not the parties involved are actual or potential competitors.  Free Press and other public interest groups assert that the TV Everywhere “horizontal” arrangement amongst the cable providers illegally allocates geographic and product markets.

While the reality is that under the TV Everywhere model, competing distributors allocate markets geographically, that allocation is not a “voluntary” one but rather the result of the fact that each major cable provider has a de-facto “monopoly” in the geographic areas in which they have been granted a franchise to operate.  The cable providers plan to continue, through TV Everywhere, to serve only those consumers within the geographic areas to which they currently provide services, rather than branching out to compete with providers in other areas.  While critics may argue that this is an unlawful “market allocation”, cable providers view this as nothing more than a continuation of servicing their current customer base by including a premium content feature in addition to the services already being provided to such customers.

Tying

Free Press and other public interest groups have also accused the cable providers offering TV Everywhere of unlawful “tying”, which the Supreme Court has held occurs when a seller enjoys a monopolistic position in the market for the tying product and a substantial volume of commerce in the “tied” product is restrained.   Free Press stated that, “by tying online television to incumbent MVPD [multichannel video programming distributors] subscriptions, TV Everywhere is designed to undermine new forms of competition and consumer choice currently emerging over the Internet.”  Free Press, among others, believes that true competitive pressure should require existing cable TV providers to meet consumer demand for online TV, rather than allow them to resist the demand by tying online programming to what is being perceived as “inflated” cable TV subscriptions.

On the other hand, some say that TV Everywhere is not only good for consumers, who can choose to legally access high quality video content they are already paying for on the Internet, but is also good for program distributors because it opens up a gateway for new content that wasn’t previously (legally) available online, and ultimately that it represents a promising initiative for bridging old and new media.

Competition

Public interest groups also claim that TV Everywhere could be a threat to competition for video start-ups such as Vuze, Roku and Hulu.  However, this may not necessarily be a true apples-to-apples comparison since these video start-ups are not traditionally considered direct competitors of major cable operators, nor would it be possible to determine that the success or failure of non-TV Everywhere online television content providers is directly attributable to the business models of the major cable providers.  Ultimately, content providers, without whom both cable providers and on-line video providers wouldn’t have much of a business, still remain free to make their content available wherever they want.  Even before TV Everywhere initiatives were rolled out, those providers sought to distribute their content on competing cable, satellite, telephone and online platforms.  TV Everywhere appears to be an extension and evolution of those existing platform distribution models.

It is unclear at this stage whether or not the assertions made by the public interest groups will gain traction with DOJ or lead to further scrutiny or regulation.  It is clear, however, that the TV Everywhere initiative reflects a “dynamic and rapidly-changing market in which  no one knows the ultimate outcome”.   As the model evolves, it is likely that we will see its impact throughout the legal and regulatory landscape, including antitrust law, policies for an open Internet (i.e., net neutrality), content providers’ and distributors’ rights and interests and demand/consumption of online and traditional television content by consumers.

On March 11, 2010, the Digital HHR team is presenting “TV Everywhere–Is It Everywhere You Want to Be?”, a live, CLE-accredited Webinar exploring the legal and business issues surrounding TV Everywhere, including the antitrust issues we’ve discussed here.  We will also continue to stay abreast of these developments as an on-going effort to provide our clients with guidance to enable them to take advantage of the rapidly-changing environment in which they operate.

• Methodologies to authenticate subscribers and the technological burdens of implementing such authentication methodologies;
• Protection of personally identifiable information (PII) of subscribers and controlling access to such subscriber PII;
• Impact of the FCC’s proposed “net neutrality” rules on TV Everywhere initiatives; and
• Potential business models and revenue opportunities for stakeholders, including revenue streams from enhanced subscription fees, premium advertising fees, etc.

The one-hour Webinar will also feature “live chat” functionality to enable viewers to ask questions and comment on the presentation in real-time. Presentation materials will be available for download.

The Webinar will be held on Thursday, March 11th, 2010 from 12:30 p.m. to 1:30 p.m. EST. To register, click here.

If adopted, the new Act would bar government employees and contractors from downloading, installing or even using P2P file sharing software, such as LimeWire, without official approval.  In response to the most recent leak, the bill would also require the White House to develop rules for employees working on home or personal computers.  In order to use file sharing networks, an agency head or CIO would have to make a special request to use the P2P software.  Furthermore, agencies would be obliged to establish P2P use policies, require that employees and contractors comply with them, and then create security mechanisms to detect and remove prohibited software. 

In 2004, the White House Office of Management and Budget advised federal agencies simply not to use any P2P software.  As evidenced by the most recent embarrassment, this “advice” was not sufficient and now hopes that putting the prohibition into federal law will grant it much greater weight.  Critics of P2P software complain that personal data including social security numbers, medical records and tax returns are being shared because users are unaware of how the software operates, primarily because inadvertent filing sharing occurs (for example, when a user wants to share music or video files from a specific location or folder on his/her PC, a variety of other personal data and files, in all different formats, may also be shared). 

Security industry experts appearing at Congressional hearings earlier this year testified that file sharing software has resulted in the release of personally identifiable information associated with members of the U.S. Military, including social security number of master sergeants, medical records and even surveillance photos.  In addition, information accidentally released from a Fortune 100 company included thousands of e-mails, contact addresses, phone numbers and passcodes.  Rep. Towns’ goal is to “put a referee on the field” in terms of regulating use of such software in response to what he deems as the file-sharing industry’s unwillingness and/or inability to ensure user safety.  It appears he will also dedicate resources to encourage the government to launch a national consumer education campaign about the dangers associated with the use file-sharing software. 

Rep. Towns also proposed that the Federal Communications Commission and Federal Trade Commission look to aid in preventing this growing problem.  Right now, however, it is unclear what kind of influence is statutorily granted to the FCC, if any at all. 

Regardless, it will also be very interesting to see if or when the specter of enacting this new bill into law will affect future P2P file sharing program use in the commercial sector, or lead to additional policy and regulatory initiatives in the area.

*  Kari Hirsch, who recently joined the DigitalHHR team, contributed to the preparation of this post.

The FCC’s inquiry involves Google’s call-blocking policy.  In June, Google began noticing extremely high-cost calls to a concentrated number of rural destinations which generated vastly disproportionate costs.  Its internal investigations, using data filters to sort out call patterns, revealed that the top 10 telephone prefixes (the area code plus the first three digits of a seven digit number) to US destinations generated more than 160 times the expected amount and accounted for 26.2 percent of its monthly U.S. costs.  By August, Google began restricting calls to certain high-cost destinations.  Google’s response letter to the FCC describes the Google Voice service and explains Google’s investigation into and rationale behind its call blocking policy.  It claims that its engineers developed a “tailored solution” so that Google Voice currently restricts calls to fewer than 100 specific phone numbers, a practice which Google’s counsel believes is necessary to “prevent these schemes from exploiting the free nature of Google Voice.” 

While Google has only recently began blocking costly calls, the practice whereby rural telecoms charge long distance carriers exorbitant rates to connect and terminate calls from their networks is not new.  In may cases these telecoms partner and share revenue with adult chat service, conference calling centers and others to attract traffic to their networks.  AT&T, and other long-distance carriers, have long complained and sued over these so-called traffic pumping schemes.  However, as common carriers subject to FCC regulations, they were banned in 2007 from blocking calls and are required to deliver phone calls without discrimination to all numbers dialed.  AT&T’s complaint to the FCC is rooted in its contention that Google’s call blocking policy is enabling it to dance around this ban that applies to other carriers.

However, this recent skirmish over Google Voice is really part of a larger debate currently playing out in the regulatory stage over “network neutrality” rules being reexamined by the FCC and AT&T has framed Google’s actions as part of the debate. 

In its Statement on Google Voice and Net Neutrality, AT&T stated that “By openly flaunting the call blocking prohibition that applies to its competitors, Google is acting in a manner inconsistent with the spirit, if not the letter, of the FCC’s fourth principle contained in its Internet Policy Statement.“   The FCC’s fourth principle on net neutrality states that “consumers are entitled to competition among network providers, applications, and service providers, and content providers.“  

Some members of Congress are also concerned about the adverse impact on the market and support for universal service if Google is allowed to operate its telephone services outside of the rules that govern carriers.  As they stated in their letter to the FCC “[I]t is our opinion that a company should not be able to evade compliance with important principles of access and competition set forth by the FCC by simply self-declaring it is not subject to them without further investigation.”

Google responded to these charges by stating that “The FCC’s open Internet principles apply only to the behavior of broadband carriers – not the creators of Web-based software applications.” Google claims that AT&T is attempting to blur the distinction between Google Voice and traditional phone service but maintains that web applications like Google Voice and Skype shouldn’t be treated like traditional phone service.

Google distinguishes Google Voice from traditional phone carriers by explaining that unlike traditional carriers which charge users for their services, Google Voice is a free, web-based software application similar to e-mail rather than a telecom service designed to “supplement and enhance existing phone lines, not replace them” and should therefore be exempt from common carrier rules.   The service is currently available to a limited number of users on an invitation-only basis.  Users are still required to have an existing land or wireless line in order to use Google Voice and are still able to make outbound calls on any other phone device.  Therefore, because Google Voice is a software application, not a telephone company, Google believes that its service is not and should not be subject to common carrier laws or the FCC’s jurisdiction.

Distinctions aside, with nearly 1.5 million users, the increasingly popular service is viewed by some as running a rival service to traditional phone companies.  The heart of the FCC’s inquiry is whether Google Voice is a telecom service or an online software application and whether this distinction really matters.  How different is a call traveling directly over carrier lines from one that goes through software applications?  As of now, the difference appears to be the ability to block less than 100 calls, an option not available to AT&T and other carriers.

Whether the FCC agrees with Google’s characterization of its service and its interpretation of the current open Internet principles may have a dramatic impact on both the telecom and internet marketplaces.  And the FCC’s newly proposed rules on network neutrality may also play a prominent role in this debate.  We will continue to monitor the proceedings and keep you posted.

Although in general the entertainment industry’s position is that imposing responsibility on ISP’s to monitor illegal activity is about educating users and responding to a higher standard of evidence for illegal activity via their networks, ISP’s have consistently argued that it is not their job to police the Internet.  Perhaps France’s implementation of  a separate agency to work with the ISP’s in enforcing piracy policies will serve to alleviate some of the concerns of ISPs.

The new French law, which initially empowered French ISPs to terminate user accounts,  was first rejected back in April by the French Constitutional Council, which said  that free access to public communication services online was a human right that only a judge should have the power to disconnect.  Without this protection, the court said that the law would have violated free speech provisions.  The latest version was approved due to the inclusion of an amendment that requires judicial review prior to any account suspensions. 

Critics of the new law argue that it denies the accused the right to due process, pointing out that Internet subscribers will be held liable if someone uses their Internet connection to illegally download copyright works, even if the computer was under someone else’s control.  The critics further argue that the discontinuance of Internet access is an unfair penalty because of the increasing importance of the Web as a channel for expression and commerce.  It is believed that this new law could result in sanctions against 50,000 people per year.  David El Sayegh, the director general of the French music industry association,  Syndicat National de l’Edition Phonographique, counters those arguments by saying that the laws are not meant as a punishment against Internet users but instead hopes that the mandated warnings will have a strong deterrent effect, rendering termination of access a rarely invoked penalty.          

Many policy makers across Europe agree with the bill’s critics and have been apprehensive toward France’s adoption of the solution since they believe it is more important to increase broadband access, not deny citizens their rights to it.  Despite such skepticism, it appears that Britain will introduce similar legislation next month.

Dan Glickman, Chairman and CEO of the Motion Picture Association of America (MPAA), applauded the French court’s decision and said that it is an enormous victory for creators everywhere.  In addition,  Rick Cotton, Executive Vice President and General Counsel at NBC Universal and Chairman of the U.S. Chamber of Commerce-led Coalition Against Counterfeiting and Piracy (CACP), acknowledges that the new French law recognizes that jobs in the creative industries are under assault by digital theft.  Copyright piracy has taken a huge toll on the U.S. movie and music industry due to the current global economic situation.  The MPAA has determined that illegal downloads/streams are responsible for about 40 percent of the revenue the industry loses annually due to piracy.

Although the U.S. entertainment industry has not been as aggressive as the French in lobbying for a “three-strikes” law, the music and film industries are proponents of instituting a graduated-response program, which encourages the implementation of a warning system similar to the warning notices that will be issued to potential copyright infringers under the French law. In addition, the CACP is currently seeking to change federal law enforcement emphasis so that intellectual property crimes are given priority over other kinds of crime.   Although it seems unlikely that we will see a “three strikes” policy instituted in the U.S. anytime soon, the developments in this area of the law will inevitably influence the terms under which content providers distribute and protect their content as well as how consumers access such content.

*    Kari Hirsch, , who recently joined the Firm, assisted in the preparation of this article.

A testament to the significance of this concern is last week’s victory of the Office of the Privacy Commissioner of Canada.  Facebook was charged with violating Canada’s privacy laws, both with respect to the disclosure of personally identifiable information of Facebook users to over one million third party Facebook application developers, as well as keeping a user’s personal information indefinitely (including after deactivation of a user’s account).  Along with the attention of other social network providers, Canada’s investigation certainly elicited global attention, as it became the first country to legally examine Facebook’s privacy policies and procedures.  This investigation has also led the Canadian privacy commission to examine the privacy policies and practices of six other social networking sites.  The Privacy Commissioner’s chief complaint was that the way in which Facebook provides information about its privacy policies to its users is often confusing or incomplete.

As a result of the investigation, Facebook announced that it will implement new privacy safeguards and modify its privacy policy accordingly.  Among other things, Facebook has agreed to compel third-party developers to disclose to Facebook users the precise types of information they plan to access and use.  Under the current policy, users who want to utilize the third-party applications via their Facebook account are required to agree to share all of their data with such third party developers. 

The new procedures are intended to ensure that users are given the opportunity to consent to use of each type of personal information (such as date of birth, hometown, etc.), but more importantly have the ability to refrain from approving the use/disclosure of certain types of information while still being able to utilize the third party applications.  Facebook will also provide users clearer explanations and information in terms of deactivating their user accounts, specifically to make it clearer to users the difference between deactivation and deleting their information permanently.  Although Facebook plans to begin updating their privacy policy within the next month or so, implementing the technical changes will be performed over the course of the next year. 

While Facebook was the primary target of the investigation, we believe that the Canadian government’s actions, and Facebook’s response, will have a substantial ripple effect, with businesses carefully reconsidering their terms of use and privacy policies to ensure compliance with both the letter and spirit of privacy laws and regulations throughout the world. 

The ruling came in a class-action against Simon & Schuster.  Laci Satterfield, the class representative, claimed that an unsolicited text message sent by Simon & Schuster to her son’s cell phone, which promoted the Stephen King novel, appropriately entitled Cell, violated the TCPA, which prohibits individuals from making calls using any automatic telephone dialing system (”ATDS”).

Back in 2004, Satterfield signed up for a free ringtone from Nextones.com, at the request of her six-year old son. In order to receive the ringtone, Satterfield had to click through many sign-in pages and consent to a general terms of use agreement, and ultimately opted-in to receive promotions from Nextones and its “affiliates” and “brands” (next to the opt-in box was a “warning” that the free ringtone may not be available if the user did not opt in to such promotions).  However, Satterfield claimed she did not believe she was consenting to receive text messages by agreeing to receive promotions from Nextones or its affiliates.  A year later, Satterfield received a text message from Simon & Schuster, advertising its publication of Stephen King’s novel. 

The District Court, without ruling on whether a text message constitutes a “call” under the TCPA, initially granted summary judgment for Simon & Schuster, holding that it had not used an ATDS and that Satterfield had consented to the message.  On appeal, the Court of Appeals reversed and remanded the District Court’s decision in a three part holding which concluded that (1) there was a genuine issue of material fact as to whether the system used by defendants constituted an ATDS, (2) text messages fall within the scope of TCPA’s regulation of “calls” and (3) Satterfield had not provided express consent to receive the promotional text messages. 

The primary focus of the Court’s decision was the one issue the District Court did not address, namely, whether a text message constitutes a call under the TCPA. The Ninth Circuit first noted that TCPA was designed to “regulate the use of an ATDS to communicate or try to get in communication with any person by telephone.”  The purpose was to protect the privacy of individuals from the invasion posed by an ATDS.  The FCC had previously stated that text messages did fall within the purview of the TCPA’s wording “to make any call.” Since the FCC inclusion of text messages was a reasonably included within a regulation of telephone communication, and was not contrary to the purpose of the statute, the Court deferred to the FCC’s decision (as well as examined the broadest dictionary definition of the word “call”). 

The Court also held that Satterfield had not expressly consented to receive the text message when she consented to receive promotions from Nextone affiliates and brands.  The Court noted that express consent must be “clearly and unmistakably stated,” which it found was not the case here, given that Satterfield agreed to receive promotions from Nextones, not Simon & Schuster.  The Court determined that Simon & Schuster was not an “affiliate” of Nextones, since Nextones neither owned nor controlled Simon & Schuster, and did not consider them a subsidiary. 

Given that text messages fell within the TCPA and Satterfield had not consented to the text, the case was remanded for consideration whether the equipment used by Simon & Schuster had the requisite capacity to be considered an ATDS.    

While this ruling is not a final determination of this issue, and the battle in court will continue, it raises quite a few interesting issues and questions to navigate.  Notably, this ruling will have a significant impact on any business that plans to run a promotional campaign via text messaging – such entities must ensure that any such promotion will be compliant with all applicable laws and regulations, including the consistently evolving standards that favor consumer protection and privacy.

In addition, Simon & Schuster’s exposure is noteworthy.  While the Court ruled that Simon & Schuster could not take advantage of Nextone’s defense based on “consent”, it may still be liable as the source of the text, sent via Nextone’s marketing partner, which was also named as a defendant.

The lesson for entities like Simon & Schuster seems to be that they must take heed when entering into similar types of arrangements to ensure that agreements with marketing companies include the appropriate protections (e.g., representations and warranties, indemnity obligations, etc.) to avoid financial exposure.  The ever-evolving interpretation of existing statutory and regulatory schemes makes such prudence vital, especially when launching initiatives involving new technologies or existing technologies in a new way.

We will keep an eye on the progress of this and similar cases to keep our clients informed and protected.

*Special thanks to Kathleen O’Donnell for her assistance in preparing this article.