Archive for September, 2013

Ron Wyden’s Oregon Updates the Business Plan: Sell Electricity to Data Centers

September 29, 2013 1 comment

In case you were wondering what the deal is with Palo Alto High School alumnus and Oregon Senator Ron Wyden’s interest in Big Tech, maybe it’s this: Amazon, Rackspace, Facebook and of course Google, all have built massive data centers in Oregon that suck down Oregon’s hydroelectric power.

Yes, according to The Oregonian:

Data centers have become one of Oregon’s biggest industries, with Google, Apple, Facebook and Amazon spending billions of dollars to buy and equip online storage facilities in rural parts of the state. They’re lured primarily by tax savings, which can shave tens of millions of dollars from a server farm’s annual operating cost.

Good thing these Gang of Four members are all supporting the local tax base.  Oopsie!  Wrong!

Earlier this week, The Dalles city council and Wasco County commissioners voted to approve a package of “enterprise zone” tax breaks that exempts Google’s buildings and computers from local property taxes. The pact could save Google tens of millions of dollars or more over the 15-year life of the deal.
In exchange, Google will make an up-front payment of $1.2 million to local governments and $800,000 annually after that.
So where does this hydroelectric power come from?
In The Dalles, Oregon–Senator Wyden’s state–Google uses renewable hydropower from The Dalles Dam to run its data center. That hydropower is also relatively cheap, giving the company an economic advantage.
Wait–The Dalles Dam?  Isn’t that paid for by the federal government a/k/a The Congress?  a/k/a the US taxpayer?

Bob Jenks, director of the Citizens’ Utility Board of Oregon, estimates that Google’s hydropower costs the company a little more than half what industrial customers of PacifiCorp and Portland General Electric pay.

Google didn’t break out its energy use in The Dalles, but power usage figures provided to The Oregonian by the Northern Wasco County Public Utility District give some indication of scale.

Five years ago, before Google opened its data center in The Dalles, the PUD provided 31 million kilowatt hours to primary service customers. Today, that number has increased tenfold and makes up nearly two-thirds of all the power the PUD provides.

Google provides computing services that benefit everyone, Jenks said, so it’s hard to evaluate whether its power use in The Dalles is optimal from an economic perceptive. But he said there’s only so much cheap hydropower to go around.

“If they’re taking up more hydro,” Jenks said, “there’s less hydro available for someone else.”

Not to worry, though, the Congress can take care of that little problem given that there are 31 dams on the Columbia River–including The Dalles Dam.  And given that Senator Wyden is the chair of the Senate Energy & Natural Resources Committee.

The Dalles Dam has an interesting history with Oregon’s local Confederated Warm Springs Tribes and the Yakama Indians, too.  Thanks to the ever efficient Army Corps of Engineers and a bunch of federal taxpayer money, the Dalles Dam hoodwinked the tribes into giving up sacred land:

The gates of The Dalles Dam closed in 1957 and the waters of the Columbia River began rising to flood traditional Indian fishing sites, sacred areas, burial sites, and homes. Many Indians stood on the shore openly weeping as the river stopped flowing and began to rise. Celilo Falls, an important resource and spiritual site, disappeared beneath the rising waters. For more than 10,000 years the people had fished in the area between Celilo Falls and Threemile Rapids. The rising waters of the Columbia displaced some of the oldest continuously inhabited village sites in North America. Archaeological sites which had never been studied were destroyed.

In 1958, the Bureau of Indian Affairs (BIA) declared that all of the permanent residents of old Celilo Village in Oregon had been provided with comfortable homes at various places up and down the river and elsewhere. However, under the BIA rules only a small portion of the Indians who considered Celilo Village to be their home actually qualified as “permanent” residents. Part of the old village was given by the BIA to the state of Oregon to be used as a public park. The BIA had no concern for the possible Indian use of this land.

Oh, well.  Just didn’t update the old business model, eh?

And you know what else?  Amazon, Rackspace, Facebook and of course Google are all members of the Internet Association, Big Tech’s premiere lobbying shop in Washington, DC.

Don’t break the Internet, dude.

Hotel California Meets The Trial: Pandora “Wins” Against Songwriters and Franz Kafka is So Happy About It, Part 1

September 28, 2013 3 comments

They’re talking about things of which they don’t have the slightest understanding, anyway.

Franz Kafka, The Trial

The purpose of antitrust consent decrees is to prevent monopoly behavior that is harmful–a classic definition would be behavior that would allow a monopolist to restrict output and increase price in a relevant market.  For historical reasons that make less sense every day given the democratization of the Internet, U.S. performing rights organizations that are authorized by songwriters to represent their repertoire for the public performance right have been forced to operate under an antitrust consent decree with the U.S. Government, at least in the case of ASCAP and BMI.  This means that a federal judge retains jurisdiction over the licensing practices of these PROs and dictates to songwriters what they can charge for public performance.  And now the rate court seems to trump the clear intention of Congress as expressed in the Copyright Act in its decision in the Pandora case against ASCAP.  (An interesting coincidence:  The rate court judge in Pandora was the same rate court judge who drilled songwriters in the ASCAP DMX case–DMX being the last employer of Pandora’s new in-house counsel.  But lest you think the judge is always ruling in favor of tech companies, the same judge also ruled against songwriters in the Verizon ringtone case.)

And Your Little Dog, Too!

Set aside the fact that the FTC deems unable to prosecute a real monopolist–Google, for example–for much of anything, even when they send cars into your neighborhood and snarf down your WiFi data for their own purposes (and their purposes include copying your WiFi passwords stored in Android smart phones).

No, those songwriters, they have the full weight of the US government called down on them due to their antitrust lusting.  (And the full weight of the U.S. Government weighs a lot more than a 100 gallons of tax payer subsidized jet fuel at Moffett Field.)

If the ASCAP antitrust decree is intended to do anything, it is intended to stimulate competition.  This is why the decree includes this prohibition and protection for “music users,” i.e., licensees, and songwriters who are and continue to be members of ASCAP:

IV Prohibited Conduct. ASCAP is hereby enjoined and restrained from….

(B)  Limiting, restricting, or interfering with the right of any member [writer or publisher] to issue, directly or through an agent other than a performing rights organization, non-exclusive licenses to music users for rights of public performance;

And there is the basic function of the consent decree–songwriters can join together to collectively bargain for their songs as long as they retain the right to do so directly while still remaining members of the collective.  (For MTP readers outside the US, you will recognize this as a fundamental difference between US PROs and authors’ rights societies.)

Keep this in mind, we will return to this issue.

As a threshold matter, of course, recall that copyright is, as they say, a “bundle of rights.”  That bundle can be divided up based on the exclusive right concerned.  Songwriters may authorize an agent, such as the Harry Fox Agency (or HFA), to issue mechanical royalty licenses for their exclusive right in digital and physical distributions of reproductions of recordings embodying a song.

Songwriters may authorize an agent to pitch synchronization licenses for film and television for their exclusive synchronization rights.

And of course, songwriters may authorize their exclusive public performance right to a PRO such as ASCAP, albeit on a non-exclusive basis as we have seen that the ASCAP writer always retains the right to issue direct licenses for less than all of their rights.

Less than all in each case.  In fact, ASCAP is expressly prohibited from licensing much beyond the performance right by the consent decree.  One might say that licensing a limited category of rights that have not been retained by the songwriter is the whole point of ASCAP.

Less than all.

Keep this in mind, too, we will also return to this issue.

And you’ll need to remember it because the issue is never discussed or distinguished in the ASCAP rate court edict that took away part of the bundle of rights that comprise a non-dramatic musical work, a/k/a a song, and did so without just compensation.

The Government Says Back to the Future

What is truly odd about the Pandora argument and the ASCAP rate court edict is that both elaborately ignore the fact that the consent decree dates from 1941 and even the most recent modification of the consent decree dates from 2001–eight years before Tim Westergren announced “The royalty crisis is over” and another part of the U.S. Government established the royalty that Pandora would enjoy for compulsory licenses on sound recordings.

Think about what was happening in 2001 in the online music business–MusicNet was barely functioning, the Harry Fox Agency entered into its first rateless streaming mechanical license, and Napster was still locked into a death struggle in litigation.  iTunes didn’t exist.  Pandora hadn’t even had its first IPO.

Yet the government–the same government that lets Google buy its way out of all of its monopolist and criminal behavior–or gives it a pass outright–imposes an absurdly tortured structure on songwriters struggling to develop new business models in 2013.

And of course the only way that the government can impose its will on songwriters is to completely ignore the fundamental purpose of the ASCAP consent decree.

Think about it–why should songwriters not be able to take advantage of the clear benefits in lower transaction costs of entering into direct licenses with digital services, particularly incumbents like Pandora.  The government wants one of two things apparently: Destroy the PROs by forcing songwriters to withdraw all or none of their rights, or force songwriters to go back to the future by ignoring the efficiencies of the marketplace and keep songwriters trapped in a 2001 world.

Oh, and I forgot–by acknowledging the songwriter’s right to license less than all of their rights through ASCAP, that would get the government out of the songwriting business online.  And of course the bureaucratic imperative would steer a court away from limiting its own jurisdiction.  So three things.

Since it seems unusually sadistic for the government to desire any of these inevitable outcomes, we begin to see the rate court decision for what it is–a results oriented decision by a government representative that wanted to punish songwriters and benefit Pandora.  And preserve its own bureaucratic imperative.

This case might be a good moment to bring in the Department of Justice for some briefing on interpretation given the tectonic shifts in the relevant market in the intervening years, don’t you think?

Bundle?  We Don’t Need No Stinking Bundle!

The rate court edict simply takes away the valuable right to license the bundle of rights with the sweep of a pen (at p. 19):

ASCAP’s argument is predicated on the Copyright doctrine of “divisibility of rights” within a copyrighted work. It is true that “[t]he Copyright Act confers upon the owner of a copyright a bundle of discrete exclusive rights, each of which may be transferred or retained separately by the copyright owner.”United States v. Am. Soc. of Composers, Authors, Publishers, 627 F.3d at 71. But while the Copyright Act allows rights within works to be alienated separately in general, AFJ2 [the 2001 amended consent decree] imposes restrictions beyond those imposed by the Copyright Act on ASCAP. AFJ2 Sections VI and IX(E) deny ASCAP the power to refuse to grant public performance rights to songs to particular users while, at the same time, retaining the songs in question in its repertory.

Note that the rate court edict starts out talking about a right enjoyed by the copyright owner under the Copyright Act (and then there’s that whole Constitutional copyright clause inconvenience) then the court jumps to a conclusion regarding the 2001 consent decree imposed upon ASCAP, all without ever taking into account that the consent decree expressly contemplates–even orders ASCAP to permit–members entering into direct licenses outside of ASCAP.
A provision that arguably recognizes the Constitutional mandate expressed in the Copyright Act.

The point being–ASCAP cannot give more than it has.  That is true.  But it is not ASCAP that is limiting the scope of Pandora’s license, it is the songwriter that is limiting the scope of the license that ASCAP has the ability to issue.  The rate court edict confounds the owner of rights with the owner’s agent.  But of course it would have to in order to reach its conclusion.

The rate court makes much of the “four corners of the consent decree.”  The consent decree could not be more clear that the government clearly contemplated songwriters electing to issue direct licenses, not to mention using a different agent to give effect to this grant.

This is also known as competition.  You know–what the FTC is supposed to promote.

Another odd result is in the “all means all” assertion in the rate court edict discussing the difference between Pandora as an applicant for an ASCAP license and Pandora as a licensee (at p. 23):

Section IX(E)’s requirement that “[p]ending the completion of a [rate court proceeding], the music user shall have the right to perform any, some or all of the works in the ASCAP repertory to which its application pertains” makes clear that there could be no substantive difference relevant to this motion. “All” means all.

The Court is clearly telling songwriters that once you are in an ASCAP membership, even if the Copyright Act allows you to license parts of your rights in the copyright bundle–the very theory on which PROs exist in the first place–and even though the consent decree clearly says you can issue direct licenses while remaining a member of ASCAP–and even though Sony/ATV and other publishers actually negotiated and entered into such a direct license with Pandora–you shall not escape the long arm of the rate court.  Because even though the Copyright Act allows you to control parts of your copyright, the United States Department of Justice trumps the intent of Congress and the rate court will make it so.  Or the court thinks they would if they were asked.  Which they weren’t.

Yes, the rate court chose to ignore the fact that Sony/ATV and other publishers had fully negotiated licenses outside of the rate court’s authority and jurisdiction…sorry, I meant direct licenses mandated by the consent decree…why?

Because the publishers are not a party to the consent decree.  Of course, how did I miss that.

And if you thought that perhaps the Department of Justice might be helpful to the court in illuminating the consent decree, not to worry.  The rate court refused to invite the DOJ to even brief the issues.

[Editor Charlie sez: If you’d like to support ASCAP, you can sign the petition by clicking here!]

Continued in Part 2

Getting the Government Out of Songwriting: Voluntary Licenses Should Replace Consent Decrees or Compulsory Licenses

September 28, 2013 4 comments

[Editor Charlie sez, this article originally appeared in the Huffington Post.]

Chairman Bob Goodlatte (R-VA) is holding a useful series of thought provoking hearings before the House Subcommittee on Courts, Intellectual Property and the Internet reviewing the current state of the U.S. Copyright Act. The most recent hearing in this series was on September 18, entitled “The Role of Voluntary Agreements in the U.S. Intellectual Property System“.

This is a very important subject to songwriters. It is not widely known that songwriters are highly regulated by the government through two primary mechanisms — the ASCAP and BMI consent decrees dating from the middle of the last century and the compulsory mechanical license dating from 1909. The Congress should consider abandoning both in favor of voluntary licenses.

Terminate the ASCAP and BMI Consent Decrees

ASCAP and BMI each grant blanket licenses for the exclusive right to publicly perform the millions of songs each represents. The licensee is often a large commercial entity such as a broadcaster network or a media company like Google. Hence, ASCAP and BMI are called “performing rights organizations” or PROs. U.S. songwriters contract with either ASCAP or BMI (or a third non-regulated organization called SESAC). Songwriters authorize their PRO to bargain collectively to license their songs.

The biggest problem for songwriters with the consent decrees is setting the royalty rate. Rates are privately negotiated by the PROs and licensees in the first instance. But if a PRO cannot make a deal with a well-funded licensee, that licensee (such as Pandora, most recently) can go to a “rate court”, a U.S. District Court sitting in New York that conducts an expensive hearing to approximate a market rate. At that point, things start to get very expensive for songwriters, compounded by the fact that the licensee can continue to use the songs under essentially a rateless license pending the court’s decision.

An example of the tortured morass of rate courts is the current Pandora case: The rate court judge has stated that she may ask the U.S. Department of Justice for advice in determining whether Pandora has the right to force a songwriter to license her songs in a particular medium under ASCAP’s otherwise voluntary collective licensing. It’s comforting to know that the DOJ has the resources to devote to this pressing issue!

Rate courts are extraordinarily antiquated and increase both moral hazard and unfair bargaining position. Given the high cost of rate courts, their rates are arguably more a product of who can afford to sustain the litigation rather than fairness for songwriters.

Songwriters find themselves in a rate court proceeding with public companies that are willing to outspend them following a negotiation of dubious bona fides — all to determine a market rate that the government prohibits the market from determining.

Terminating consent decrees would be a big step toward reintroducing market forces while preserving the songwriter’s right to negotiate directly or collectively.

Let Songwriters Opt Out of the 1909 Compulsory Mechanical License

The 1909 mechanical license covers the exclusive reproduction right of songwriters, or the “mechanical reproduction”. Mechanical licenses were first for piano rolls, but now cover both physical and digital records, including on-demand streaming in some cases.

The mechanical license is compulsory in the U.S. After a song is used once (essentially one commercial use), songwriters cannot never stop its subsequent use.

In addition to requiring the mechanical license, the government also sets the “minimum” rate through another extraordinarily expensive rate setting proceeding where the government tries to approximate a market rate. Sound familiar?

To be clear, there are a variety of voluntary mechanical licenses with negotiated terms — other than the rate. In practice, mechanical royalties never exceed the government’s “minimum” royalty rate. Any “voluntary” rate negotiation is usually to drive rates below the government’s “minimum” — more accurately the “maximum”.

Why can’t a market rate be established by the market?

By allowing songwriters to opt out of the compulsory license and negotiate voluntary licenses, Congress could preserve the current regime for those who prefer it, but allow those who do not to enjoy market freedom. It is relatively simple to notify the world that a songwriter opted out of the regime. Songwriters can record a notice with the Copyright Office, or the databases of the PROs as is the longstanding commercial practice for copyright ownership transfers.

Songwriters watch huge public companies essentially given a pass on mergers and other anticompetitive activities that have a profound effect on the U.S. consumers. It’s hard to understand why the government feels the need to continue to protect dominant companies like Google and Pandora from the monopolistic lusting of songwriters.

If YouTube is the New College Radio, Can YouTube Keep the Hate Group Playlists?

September 26, 2013 1 comment

Google is making a big push to get colleges and universities to take their various Google Apps for Education

For “free”, of course.  And we all know who the product is on a “free” Google app, right?

The product is you.

These education apps appear to link the user to Google’s entire suite of products, including YouTube.  And of course as soon as you leave the education environment and go to say YouTube, what happens to the privacy policy and terms of use?  It grows up to the same privacy policy that applies to everyone inside or outside of the Education environment.  And in the case of Google’s case study clients, the New York State K-12 Schools, the Maine Township High School District and the Edmonton Public Schools (in Edmonton, Canada), that includes grades K-12, not just college-age adults.


And there’s the real story behind the “free” education apps–these apps are honeypots for data and in the case of education apps driving traffic to Google’s YouTube monopoly, the apps are honeypots for some very young users particularly in the K-12 school systems using Google Apps for Education.  (See also “Google Apps for the Common Core” which seems to be a major focus of use cases for Google Apps for Education integrated into Common Core data collection mandates and testing.)

So from a programming point of view, YouTube appears to position itself as a substitute for college radio or college television.  Google Apps for Education drive YouTube’s scalability on campus–with one big exception.

Do Google’s Hate Group Playlists Violate Campus Hate Speech Policies?

johnny rebel youtube mix

Google has been trying to tell advertisers that YouTube is the replacement for television, and I’m sure if you asked them. Google would also tell you that given the vast presence of music videos including official clips, user generated and cover videos, YouTube is also a replacement for radio.

If Google is pitching its Google education apps to colleges and universities and promoting its YouTube product on those apps, then Google is backdooring a competitor to thinly financed college radio stations in the form of its monopoly YouTube product.

Accion Radical

With one big difference–YouTube can broadcast brand sponsored hate speech videos all the live long day, all of which would violate the university hate speech policies.  And Google profits from hate by selling advertising against these videos, particularly on the lucrative search pages of YouTube–where there is no revenue split.

Bully Boys Google Ad

So what does this tell you?  It seems pretty obvious that nobody is bothering for one second to filter any of this content and that it is intended to take advantage of the YouTube platform to scale the audience for hate.  These groups even have their own cover videos:

Bully Boys Cover Video

And it’s not just the “bigots who rock” who Google education apps drive traffic to–there’s also many films of the well-known Holocaust denier David Irving:

David Irving

Google will say what they always say about YouTube–they respond to “flagging” from the YouTube community to take down videos that offend “the community.”  That is–if enough people–that is, the majority–don’t like the offensive stuff, they’ll take it down.  This is, of course, why universities have hate speech rules in the first place and why “the majority” can no longer require segregated lunch counters.  To protect the minority from the tyranny of the majority.

So how’s that flagging working out on the David Irving video:

David Irving Flags

So under Google’s rules, this video stays up and hate speech policies–not to mention laws–be damned.

Now if the same university’s college radio or television station were to establish a “bigots who rock” playlist, what do you suppose would happen?

So why should YouTube be treated any differently–particularly when the same university is driving traffic to YouTube through Google’s “free” education apps?  The point being that if Google is going to push YouTube to colleges and universities, YouTube should comply with the same rules applicable to college radio and television.  If they can’t come up with a better reason, like say human decency.  Of course that might break the Internet.

johnny rebel youtube

Judges Take Note: MacArthur Foundation Declines Facebook Loophole Settlment

September 23, 2013 Comments off

As Judge Jon Tigar recently held in another Northern District of California case, 9th Circuit judges must follow precedent on class action settlements (even in San Jose).  When it comes to the shady business of using class actions to funnel money to the defendant’s favorite charity/lobbying group/alumni organization (aka the cy pres loophole), the rule is as cited by Judge Tigar in rejecting the proposed cy pres payouts (at page 12):

“A cy pres award must be guided by (1) the objectives of the underlying statute(s) and (2) the interests of the silent class members, and must not benefit a group too remote from the plaintiff class.” Dennis v. Kellogg Co. 697 F.3d 858, 865 (9th Cir. 2012) (citation and internal quotation marks omitted). “To ensure that the settlement retains some connection to the plaintiff class and the underlying claims . . . a cy pres award must qualify as the next best distribution to giving the funds directly to class members.” Id. (citation and internal quotation marks omitted).

Another step that 9th Circuit judges (really all judges) ruling on these sketchy class action loophole settlements may want to take is to be sure that even if they think the cy pres award is proper that the recipient thinks so, too.  And even if the Court doesn’t feel it appropriate to reach out to make that confirmation, it certainly would be appropriate for the Court to require counsel to do so–and you have to ask yourself what in the world counsel was thinking to present a cy pres loophole award to an entity that wanted no part of it.

MTP readers will recall that in the controversial Facebook “Sponsored Stories” class action (Fraley v. Facebook) the “usual suspects” got most of the money: Electronic Frontier Foundation, Berkman Center, Stanford Center for Internet and Society, Center for Democracy and Technology, etc., etc.

And the MacArthur Foundation.  I have to admit I was somewhat surprised to find that name listed there.  And sure enough, that name shouldn’t have been there.  Which presumably anyone who bothered to check could have found out before putting the Court in the embarrassing position of having a cy pres loophole award rejected. 

When we contacted the MacArthur Foundation’s very courteous press office, this is the comment we got about the $500,000 cy pres loophole payment tagged to the Foundation in the settlement:

September 10, 2013

“The John D. and Catherine T. MacArthur Foundation is identified in the settlement of the lawsuit related to Facebook’s ‘sponsored stories’ advertising program as one of several organizations that might receive distributions from the settlement fund. MacArthur did not ask to participate. The Foundation has informed lawyers representing both parties in the settlement that we respectfully decline to accept any settlement funds.  Instead, in this case, we have suggested those funds be redirected to other non-profit organizations engaged in the underlying issues and identified in the settlement as possible recipients. These non-profit organizations can apply the funds directly toward their missions, whereas MacArthur is a grantmaking institution and does not ordinarily make grants directly related to consumer privacy.”

But even if the the cy pres recipients otherwise complied with the rule, if they don’t want the money, they are not required to take it.  Which is the kind of thing you might want to know in advance.  Unless maybe you needed some window dressing and you thought that if you offered anyone $500,000, they’d just play ball and take it.

So now–all eyes on the court to see how that $500,000 that was to go to the MacArthur Foundation will be allocated.  One way might be to distribute it out to the class members.  Oh, no, wait–can’t do that.

Here’s a tip for the class counsel–when did Noah build the Ark?

Before the rain.

Pandora Announces Old Testament Branding: Let There Be Money…uh…Music!

September 23, 2013 Comments off

Spoken like a compulsory licensee–according to FMQB:

Pandora has announced a new brand identity, using the slogan “Let There Be Music,” which the digital service says will reflect “the company’s mission to cultivate a better musical future for artists and listeners alike.”

Whether the artists like it or not.

This rebranding was launched the same week that Pandora raised another $450 million in their second IPO.

Yes, this branding has that certain Old Testament ring, don’t it?  You know when you get to be one of the Most Influential People In The World, you get enthusiasms.

Yes, Tim said, “Let there be music.”  And there was music.  And he divided the music into pre-72 and post-72.  And it was so.

And he saw that it was good.

For Tim.

The Class Action Scam Continues with Facebook Sponsored Stories

September 22, 2013 Comments off

Here’s the way it looks like it works:  Google or Facebook overreach in a way that allows them to be sued for potentially billions in a class action that has yet to be filed, but could be.  Friendly lawyers come forward and offer a deal–we represent the class, we will do a settlement that pays the lawyers a bunch of money and eliminates the company’s liability for everyone except those who affirmatively opt out of the class.  And then the company gets to siphon cash into their favorite lobbying groups and a handful of real foundations thrown in for window dressing through a loophole called “cy pres“.

Lots of cash.

And, oh, yes–pays the class as close to nothing as they can get away with.

Three big settlements in the last few years that take on this appearance including the cy pres loophole are the Google Buzz settlement, the recently concluded Facebook “Sponsored Stories” settlement and the Facebook “Beacon” settlement.  MTP readers will recall we’ve written about this before as has Andrew Orlowski in The Register and Roger Parloff in Fortune.  Facebook has an earlier rather dubious class action regarding its controversial “Beacon” advertising tool that was the subject of excellent reporting by Adam Liptak in the New York Times.  An appeal from the grotesque Beacon class action settlement is on appeal to the U.S. Supreme Court and we should know any minute now whether the SCOTUS will hear the appeal.

As Adam Liptak explains in the New York Times:

Class-action lawyers call the diversion of settlement money from victims to other uses “cy pres.” The fancy-sounding term is derived from a French legal expression, “cy pres comme possible,” or “as near as possible.”

The Beacon Dissent and Appeal

The Beacon class action against Facebook featured a highly innovative technique:  Give the class members nothing and set up a toothless watchdog group foundation controlled by Facebook (which included tech journalist Larry Magid as a board member–his name also appears in a different class action against Facebook for Sponsored Stories because his group gets money from Facebook in another innovative cy pres loophole settlement.  We tried contacting Magid for a comment a couple times over the last year, but got no reply.)

As Mr. Liptak tells us:

The settlement’s central innovation [in the Beacon settlement] was to cut [the class members] out of the deal.

The class members would get nothing. The plaintiffs’ lawyers would get about $2.3 million. Facebook would make a roughly $6.5 million payment — to a new foundation it would partly control.

The appeals court upheld the settlement last year by a 2-to-1 vote, with the majority saying it was “fair, adequate and free from collusion”….

“[The class members] do not get one cent,” Judge Andrew J. Kleinfeld wrote in dissent. “They do not even get an injunction against Facebook doing exactly the same thing to them again.”

In exchange for nothing, the plaintiffs gave up their right to sue Facebook and its partners in [the Beacon] program….The program has been shuttered, but its legal legacy lives on.

“This settlement perverts the class action into a device for depriving victims of remedies for wrongs,” Judge Kleinfeld wrote, “while enriching both the wrongdoers and the lawyers purporting to represent the class.”

You get the idea.

The Beacon case (Marek v. Lane) gives the U.S. Supreme Court the chance to review this cy pres loophole that Silicon Valley uses to funnel money to its lobbying and litigation machine outside of disclosure requirements.  (The EFF, for example, is a 501(c)(3) tax exempt organization–if the SCOTUS was feeling ambitious, a little choice dicta calling into question the propriety of allowing the EFF to function at the taxpayers expense could be quite helpful.)

Constitutional Issues

We make fun of these absurd cases that are mostly thinly disguised payoffs to “advocates” for the company line, but there are serious Constitutional issues involved as well.  Cato Institute has filed an amicus brief in the Beacon case that we hope will be heard by the SCOTUS.  This excerpt from Cato sums up the issues pretty well:

Cato filed an amicus brief arguing that the use of cy pres awards in class actions violates the Fifth Amendment’s Due Process Clause and the First Amendment’s Free Speech Clause. Specifically, due process requires — at a minimum — an opportunity for an absent plaintiff to remove himself, or “opt out,” from the class. Class members have little incentive or opportunity to learn of the existence of a class action in which they may have a legal interest, while class counsel is able to make settlement agreements that are unencumbered by an informed and participating class. In addition, when a court approves a cy pres award as part of a class action settlement, it forces class members to endorse certain ideas, compelling speech in violation of the First Amendment. When Facebook receives money — essentially from itself — to create a privacy-oriented charity, the victim class members surrender the value of their legal claims in support of a charity controlled by the defendant. Class members are left uncompensated, while Facebook is shielded from any future claims of liability.

How do you think Google and Facebook respond?  After all, we’re just talking about the Constitution, the founding document of a mere nation state.  Should something as trivial as the Constitution hold back permissionless innovation?  That might break the Internet.

They’re Not All Bad

Fans of class actions will be pleased to know that there are judges out there who are not fooled by these scams (or who don’t approve payments to their own law schools, like Judge Ware did in the Google Buzz settlement when he approved a $500,000 payment to Santa Clara University–right before he took early retirement to lecture at…Santa Clara University’s law school).

In the Custom LED v. eBay class action, another Northern District of California class action against a tech company, Judge Jon Tigar recently denied approval to the class settlement and highlighted  “obvious deficiencies” in the deal for the class that benefited eBay including that the proposed cy pres award recipients, the National Cyber-Forensics & Training Alliance and the National Consumer Law Center did not have “a nexus to the putative class members and their claims. Accordingly, the Court cannot conclude that the parties’ proposed cy pres award complies with the Ninth Circuit’s standard for such distributions didn’t have a sufficient nexus to the class members and their claims.”

So at least there’s some hope in San Jose federal courts for class members.

Facebook Says, “Me, too!”

Just so you get the idea, here’s a chart that compares the Buzz and Sponsored Stories lucky winners.  Not that there’s a pattern there or anything:


Sponsored Stories Settlement

Google Buzz Settlement

American Civil Liberties Union $    700,000
Berkley Center for Law and Technology $  300,000 $    500,000
Samuelson Law, Technology and Public Policy Clinic $    200,000
Berkman Center $  300,000 $    500,000
Brookings Insitution $    165,000
Carnegie Mellon Privacy & Security Lab $    350,00
Center for Democracy & Technology $   500,000 $    500,000
Electronic Frontier Foundation $   500,000 $ 1,000,000
MacArthur Foundation $   500,000
Indiana University $    300,000
Stanford Center for Internet and Society (founded by Lessig with $2,000,000 from Google) $   300,000 $    500,000
YMCA of Greater Long Beach $    300,000
Electronic Privacy Information Center $    500,000
Santa Clara University $  300,000 $    500,000
Youth Radio $      50,000
Joan Ganz Cooney Center $  500,000
NYU Information Law Institute $  300,000
Campaign for Commercial Free Childhood $  300,000
Consumers Federation of America $  300,000
Rose Foundation $  300,000 (Larry Magid/Facebook) $  300,000 $  300,000
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