Five Disruptive Trends From Trump, Fox and the Internet in This Presidential Election

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Between Donald Trump’s unexpected surge to Bernie Sanders’ surprising poll lead in New Hampshire, the politics of the 2016 U.S. presidential election are proving to be nothing like what we were told to expect. The dynastic Clinton versus Bush contest that was preordained by traditional media and the establishment wings of the major parties is looking anything but certain. This can be explained, at least partially, by Internet-powered disruption of traditional political kingmakers (i.e., media and party elders) as another DisCo commentator, Matt Schruers, has cogently observed.   

I am not talking here of disrupting the two-party system itself or making Congress a less polarized and more efficient forum, nor about red states and blue states. Instead, I will focus on five more subtle trends that are emerging in this election cycle, beginning with the rather remarkable Republican presidential debate on Fox last week.

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An Uber Victory For Consumers

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New York City officials on Wednesday abruptly abandoned plans to rein in Uber, dropping a fiercely contested proposal to cap the company’s growth in its largest market. That’s a good result, because as Mitchell Moss, director of the Rudin Center for Transportation Policy at NYU, commented, it signals “that the days of taxi industry cartels are over.”

Yet the even better lesson is that competition, if left unregulated — without political or regulatory barriers protecting incumbents — can work quickly to correct market failures. The problem in New York for decades has ben a shortage of taxi availability on rainy days and during rush times.  Here:

Consumers have become too attached to apps like Uber’s that now make ordering a car as easy as two clicks on a smartphone. That base of users has now in many cities proven more powerful than the company’s not insignificant opposition, from traditional taxi providers and labor critics.

Uber triumphs as New York City officials abandon plans to limit transportation company | WashPost

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The Disruptive Benefits of Zenefits (and Lemonade Stands)

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You may not have heard of cloud-based business HR and insurance provider Zenefits, but the folks at industry giant Automatic Data Processing Inc. (ADP) certainly have. ADP recently shut off Zenefits’ access to client information needed to run payroll, charging that the startup was gleaning this information in an unauthorized manner and posed a security risk. Zenefits countered with a blog post claiming that ADP was actually shutting off access because it had developed a competing service to Zenefits. ADP took issue with that accusation and then filed a lawsuit against both Zenefits and its CEO Parker Conrad.

The Zenefits story is fascinating, both ADP’s snarky legal reply and the unusual circumstance of a disruptive entrant challenging a de facto monopolist (or duopolist). The two largest U.S. payroll processors — ADP and Paychex — combine for some 40% of the payroll market, which indicates that their share of outsourced payroll services is probably far higher. Analysts have also noted that both firms share lock-in advantages, raising entry barriers, and enjoy what one market observer terms a “rational duopoly,” with ADP focusing on larger businesses and Paychex targeting smaller concerns. The firms are able to lock customers into long-term deals and “consistently raise prices.” And both companies have strong brand identities that help them against upstart, unproven competitors.

As a competition matter, of course, a 40% share does not qualify as monopoly power for antitrust purposes. On the other hand, when a dominant firm uses the legal process as a tool to intimidate or retard the growth of new, upstart rivals, it faces some serious antitrust risks. So while the details remain to be disclosed, the glimpse inside the dynamics of payroll processing provided by ADP’s libel litigation suggests something possibly untoward.

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The Disturbing State of Uber In California and France

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You’ve probably read news reports of two current developments that are directly threatening the continued viability of Uber’s ride-sharing service — California’s ruling that Uber drivers are “employees” of the company, and France’s decision to indict two of Uber’s top French executives on criminal charges of “enabling illegal taxi services” that could bring fines and jail time. The company called the latter “[t]otally unheard of,” and a “piece of pure calumny,” and is appealing the former.

Taxi Drivers Protest Uber. Image Credit/License: Gyrostat (Wikimedia, CC-BY-SA 4.0)

Taxi Drivers Protest Uber. Image Credit/License: Gyrostat (Wikimedia, CC-BY-SA 4.0)

These represent just the latest conflict between the sharing economy and legacy regulations, issues we have explored several times at Project DisCo. Uber, which is in talks to raise more investments at a whopping $50 billion valuation, has rapidly upended entrenched taxi and transportation industries with its model of letting people hail rides via their smartphones. Airbnb has done the same thing to hotels and motels, with similar blowback from local regulators, as in New York City. Tesla’s direct automobile sales model has been opposed at the state level by auto dealers.

All of these examples share the common thread of treating innovative new services as if they were clones of traditional industries with which they compete, and thus subject to the same legal restrictions. But they are not. There’s no public policy or legal difference between asking a friend to drive you to the airport and hailing an Uber driver with the company’s smartphone app; both perform exactly the same function, and neither involves holding the driver or company out as offering “common carriage” transportation to the general public. The fact that modern technology allows on-demand ride-sharing to be organized at scale is precisely why Uber’s service is different from taxi rides. Cabs can cruise the streets, wait at hotels and airports for fares and, in many locales — like Washington’s Dulles Airport — enjoy a franchise monopoly. Uber drivers have none of those benefits, especially the municipal-sanctioned protection from new entry.

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Top 5 Technology Law Cases of 2014

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2014

New Year’s is always a time for remembrance and nostalgia, with lots of “top” lists. This is another, focused on the most important, entertaining and reverberating technology law cases of 2014.

1.  Apple’s iPod Class Action Win.  Near the end of the year, a decade-old antitrust class action against Apple Inc. finally went to trial in early December. The gist of the claim was that by reconfiguring its DRM system for the then new (now iconic) iPod MP3 players in a way that broke compatibility with RealNetworks’ protocol back in 2006, Apple monopolized the market for digital music. Although the Sherman Act theory was questionable, at best, the presiding federal judge refused to dismiss the complaint or enter summary judgment for either side. After just three hours of deliberations, the jury returned a unanimous verdict for Apple, finding that the new software was a meaningful product improvement over previous versions. (This was also the case where the late Steve Jobs testified, by way of videotaped deposition, from the grave.) Lesson: even monopolists get the blues.

2.  Software & Business Methods Patents Narrowed.  In one of several precedent-setting Supreme Court cases involving intellectual property, the Court ruled in Alice Corp. v. CLS Bank that vague or generic patents, which do little more than operate mathematical algorithms on a general purpose computer, are not “patentable subject matter.” CLS Bank has already had a profound effect on the Court of Appeals for the Federal Circuit, which for nearly the first time invalidated some business method patents on patentablity grounds in its wake, and the the U.S. Patent & Trademark Office, which was far more aggressive in rejecting patent applications during the second half of the year. The longer term consequences in the ongoing debate over patent trolls and patent reform legislation remain to be seen. Lesson: the era of easy patents may be ending.MORE »

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K-Cups, Innovation and Interoperability

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Even before the landmark United States v. Microsoft Corp. antitrust case, competition law was a bit schizophrenic when it came to the question of interoperability. Monopolists have no general duty to make their products work with those of competitors, but what about the situation where a dominant firm deliberately re-designs products to render them incompatible with others? That is the provocative question raised by several pending antitrust lawsuits filed against Green Mountain Coffee, manufacturer of the Keurig line of single-serve coffee makers and coffee “pod” products.

TreeHouse Foods alleged in a complaint last winter that after its patent on “K-Cups” expired in 2012, Green Mountain:

abused its dominance in the brewer market by coercing business partners at every level of the K-Cup distribution system to enter into anticompetitive agreements intended to unlawfully maintain Green Mountain’s monopoly over the markets in which K-Cups are sold. Even in the face of these exclusionary agreements that have unreasonably restrained competition, some companies, such as TreeHouse, have fought hard to win market share away from Green Mountain on the merits by offering innovative, quality products at substantially lower prices. In response, Green Mountain has announced a new anticompetitive plan to maintain its monopoly by redesigning its brewers to lock out competitors’ products. Such lock-out technology cannot be justified based on any purported consumer benefit, and Green Mountain itself has admitted that the lock-out technology is not essential for the new brewers’ function.

In the consolidated multi-district litigation that ensued, Green Mountain is specifically charged with designing a so-called “Keurig 2.0″ brewer which features technology that allows it to detect whether a coffee cartridge is one of Keurig’s K-Cups or is made by a third party that does not have a licensing agreement with the company. The machine will not brew unlicensed coffee pods.

The federal court overseeing the MDL cases denied the plaintiffs’ motion for an injunction on procedural grounds in September, issuing an opinion which reasoned that commercial success of the “2.0” brewers was uncertain and that coffee competitors would still have open access to some 26 million Keurig “1.0” machines for several years. In other words, the court did not reach the merits of the monopolization claim against Green Mountain.

keurig_2color_corporate_logo-copy

So where does that leave Keurig? As Ali Sternburg observed before revelations of its new 2.0 technology, Green Mountain’s prior 20 years of patent protection allowed the company to build a competitive advantage by “cultivating its brand (which likely involves trademark protection), honing its supply chain efficiencies, and generally maintaining its dominance due to having the first-mover advantage.” More than ten years before those patents first issued, moreover, the federal courts had ruled that new product introductions by monopoly firms — in one well-known instance, Kodak — would not be considered an antitrust violation because “a firm that pioneers new technology will often introduce the first of a new product type along with related, ancillary products that can only be utilized effectively with the newly developed technology.”

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Apple’s Cable Set-Top Box and Interoperability

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Nearly six months before this week’s reveal of iPhone 6 and the Apple Watch, the Wall Street Journal reported that Apple was in talks with Comcast Corp. about “teaming up for a streaming-television service that would use an Apple set-top box and get special treatment on Comcast’s cables to ensure it bypasses congestion on the Web.” For content, the product reportedly would not only offer users access to on-demand movies, TV programs and other apps, including games, but also live Comcast cable programming. This raises a serious question whether such an arrangement would represent a procompetitive development or instead further delay a languishing 20-year federal effort to create a commercially viable retail market for cable set-top boxes (“STBs”).

There are three sets of obstacles potentially standing in the way of this initiative. First are business issues associated with customer control. As commentary noted at the time:

Back in February it seemed both Comcast and DirecTV were reluctant to allow Apple to develop a system where customers logged in using their Apple credentials instead of their pay-TV accounts. The fundamental question of who gets to have the primary relationship with the customer has played prominently in Apple’s negotiations with magazine and newspaper publishers in the past, so it makes sense that the issue would pop up again in a different medium. Given that Comcast has been investing in its own advanced set-top boxes, the cable giant is probably not ready to cede too much ground too quickly.

The second set of issues relates to whether Apple, or any content provider, should be permitted to pay for routing of its IPTV traffic as a managed service, receiving priority handling for the packets involved, from ISPs. That is a subset of the network neutrality debate, commonly referred to as “paid prioritization,” that continues to rage before the FCC and Congress.MORE »

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There Go The French Again On Competition

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Last month a Paris appeals court annulled some €3.9 million (US$5.2M) in fines imposed on endive producers and their trade associations by the French Competition Authority (the Autorité de la concurrence). Not dissuaded, that French competition agency just slapped a €1.6M (US$2.1M) fine on Caribbean yogurt maker Societe Nouvelle des Yaourts de Littee (SNYL) for falsely questioning the safety and quality of a rival brand in Martinique and Guadeloupe, characterizing the practice as “abuse of dominance” in the marketplace. SNYL

This epitomizes a fundamental disconnect between antitrust law and competition policy in the U.S. and that of many other nations. (No, the French are not alone…) American antitrust principles and decisions generally limit the reach of competition law — aside from competitor collision like price-fixing cartels — to business conduct that uses market power in an exclusionary manner. As the Supreme Court emphasized in 1993, “[e]ven an act of pure malice by one business competitor against another does not, without more, state a claim under the federal antitrust laws; those laws do not create a federal law of unfair competition or ‘purport to afford remedies for all torts committed by or against persons engaged in interstate commerce.'” In sharp contrast, the FCA reasoned about yogurt that “the dissemination of misleading and disparaging remarks by a dominant operator against one of its competitors is a serious practice with regard to competition rules.”

“Between December 2007 and December 2009, SNYL broadcast information discrediting the sanitary quality of Laiterie de Saint-Malo products using the questionable results of bacteriological tests and questioning the irregular consumption deadlines affixed to its products,” the FCA reported in a (translated) statement. This led a number of retailers to pull Malo products from shelves for an extended period. “This behavior had the effect of limiting product sales of Laiterie de Saint-Malo in Martinique and Guadeloupe — an abuse of dominant position prohibited by Article L 420-2 of the Commercial Code,” the FCA concluded.

In the United States, legal standards for proving antitrust claims are rightly rigorous; they are strict in order to reduce the risk that enforcement of the antitrust laws may chill the very sort of vigorous, competitive conduct they are intended to encourage. It’s been true for at least 35 years that the Sherman Act “is not a panacea for all evils that may infect business life.” Legendary antitrust law scholars Phillip Areeda and Herbert Hovenkamp have advocated a nearly insurmountable presumption against deception and fraud serving as the basis for a monopolization claim, a presumption most courts have readily embraced. As one court of appeals cogently explained, “[i]solated tortious activity alone does not constitute exclusionary conduct for purposes of a [Sherman Act] § 2 violation, absent a significant and more than a temporary effect on competition, and not merely on a competitor or customer…. Business torts will be violative of § 2 only in ‘rare gross cases.’”

The difference is that between competition and consumer protection, which are quite distinct concepts in American jurisprudence. If a firm uses a monopoly to harm competition without business justification, that’s an antitrust violation. If a firm lies about a competitor’s products or runs false advertising, that’s a deceptive business practice. The two legal regimes are directed at different constituencies and conduct, which is why the Federal Trade Commission Act was amended in the 1930s to add a separate provision (Section 5) for “unfair or deceptive” business practices, and why the FTC accordingly is separated into its two principal divisions: the Bureau of Competition and the Bureau of Consumer Protection. Likewise, the Lanham Act specifically prohibits false advertising and provides a damages remedy for injured companies. Thus, false representations around a firm’s own, or it’s competitor’s, products can be legally actionable, as the Supreme Court again ruled this year in a case about beverage labeling (Pom Wonderful v. Coca-Cola). They’re just not an antitrust violation in the United States.

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Legal Disruptions Redux

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There’s been much press coverage of the travails of the AmLaw 100 — America’s largest law firms. Clients are aggressively pushing back against ever-increasing hourly rates and significant inefficiencies. Storied firms have been foldingmerging and laying off staff and even attorneys at unprecedented levels. Electronic discovery specialists and legal outsourcing are compressing margins for the litigation work that historically fueled big firm profits. Non-traditional legal providers are hardly faring better. Clearspire, a much-heralded pioneer of the virtual law firm concept, closed shop in June.

Yet at the same time — and perhaps as a consequence — the market for legal startups is booming. VentureBeat commented that the profession’s ongoing transition is “fueling innovation throughout the entire industry.” In 2009, just 15 legal services startups were listed on AngelList. There are now more than 400 startups and almost 1,000 investors. A whopping $458 million was invested into legal startups last year, a remarkable increase from the $66 million that went into the space in 2012. Legal entrepreneurs are focused on two different objectives: helping lawyers do their work better, faster and cheaper, and making the law more accessible, sometimes eliminating the need for lawyers altogether.

Law

It is the second, consumer-facing portion of this trend that portends a fundamental change in the legal market. By giving both individual and corporate consumers the resources to do it yourself, today’s crop of disruptive legal startups is laying the groundwork for an era in which software tools, social sharing and document comparison-assembly programs are positioned to replace attorneys’ stock in trade, namely reuse of contracts and other legal “forms.”

A century ago the bar protected itself with arcane Latin phrases and obscure judicial reporters. Two decades ago, it used the expense of private legal research databases like LexisNexis, an information barrier that is increasingly archaic in today’s era of Web-enabled courts and Google Scholar. With the present challenge to the largest traditional domain of legal practice — creation, revision and execution of legally binding documents — technology is breaking down walls that made have legal U.S. services unaffordable, and thus essentially unavailable, to many except the wealthy those at the opposite end of the economic spectrum who qualify for free and pro bono legal services.

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Music Licensing—La Plus Ça Change?

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The French have a wonderful saying, la plus ça change, plus c’est la même chose, which roughly translates to “the more things change, the more they remain the same.” That’s an apt description of current, high-profile wrangling in the United States about music licensing under federal copyright law. Despite all the jarring changes to the recording industry over the past decade — remember Tower Records? — it’s the same issues and (mostly) the same players as always, arguing over a Rube Goldberg-like system of arcane complexity.

Tomorrow the House of Representatives (specifically the Judiciary Committee’s Subcommittee on Courts, Intellectual Property and the Internet) will hold a second round of hearings on music licensing. This inquiry coincides with a recent announcement by the Justice Department that it will review — and solicit public feedback on — the 73-year-old antitrust decrees that govern ASCAP and BMI, two groups which act as licensing clearinghouses for a range of outlets that use music, including radio stations, websites and even restaurants and doctors’ offices. As the New York Times has observed, “billions of dollars in royalties are at stake, and the lobbying fight that is very likely to unfold would pit Silicon Valley giants like Pandora and Google against music companies and songwriter groups.”MORE »

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