European Union (EU) regulators closed their investigation of Qualcomm Inc. after all of the companies accusing Qualcomm of charging excessive royalties on technology patents withdrew their complaints. In 2005, six technology companies filed complaints alleging that the royalties Qualcomm has charged since its patented technology became part of Europe’s 3G standard are unreasonably high. Two of the companies, Nokia and Broadcom, withdrew their complaints after reaching separate outside settlements. Ericsson said in a statement that it is withdrawing the complaint and continuing “its ongoing dialogue with competition authorities around the world in relation to Qualcomm’s licensing practices.” Since all complaints have now been withdrawn, the EU dropped its investigation and is focusing its resources elsewhere. Qualcomm still faces antitrust scrutiny elsewhere in the world. Japan’s Fair Trade Commission said in September that Qualcomm coerced Japanese mobile-phone makers into agreements that prevented them from asserting their intellectual property rights, impeding fair competition and ordered Qualcomm to rescind the restrictive provisions. Earlier this year Qualcomm was fined 260 billion Won ($220 million USD) by South Korea’s antitrust agency for deterring competition through unfair fees and is currently appealing the fine. While the EU closed its four-year old antitrust investigation without levying a fine, Qualcomm was not absolved of wronging and the investigation could be restarted if another complaint is filed.
Archive for November 2009
Consumers’ money isn’t the only thing that needs protecting, at least if you ask the new head of the Bureau of Consumer Protection at the Federal Trade Commission. David Vladeck, former Georgetown law professor and attorney with the Public Citizen Litigation Group, thinks the FTC should protect consumers’ dignity, not just their money, and he may have a good point.
In an article for the ABA Journal, Debra Cassens Weiss discusses the FTC’s complaint against Sears Holding Management Company. In the complaint, the FTC alleges that Sears disseminated software to consumers that ran in the background on the consumers’ computers and transmitted tracked information to Sears. The software, which was purported to “confidentially track [the consumers’] online browsing,” went much further than what the consumers were led to believe (at least according to the FTC).
By downloading the software, the consumers allowed Sears to collect information on the configuration of their computer hardware and software, as well as on internet browsing activity. That’s where the problem arises. The FTC says that Sears did not do a good enough job of disclosing the types of information it would be gathering, and I agree.
Sears was not just tracking which store websites consumers were choosing, or which advertisements they were clicking–it was observing “both . . . normal web browsing and the activity . . . undertake[n] during secure sessions, such as filling a shopping basket, completing an application form or checking . . . online accounts, which may include personal financial or health information.”
To be fair, consumers sign long, complicated contracts all the time, often without reading them (or at least reading them very carefully). Sears could argue that it is not doing anything new here. Courts have long considered how far companies must go in disclosing contractual provisions, and what is expected of consumers in reading and understanding them. There are many cases in which the consumers were expected to honor the contracts they signed. But I think there is a pretty big difference between adequate disclosure regarding something that might happen in the future (e.g., having to arbitrate a disagreement in Florida), which a consumer can (perhaps unhappily) choose to avoid, vs. disclosure regarding gathering private information which the consumer believes is protected.
I can imagine the arguments against the FTC action. If you don’t ever let consumers get burned by the contracts they sign without reading, they’ll never learn to be more careful. But that’s assuming consumers will ever decide that it’s in their interests to read contracts carefully before accepting them. I don’t think that’s likely, and I think to a certain degree that’s ok. Customers expect low prices, and companies continue to look for ways to provide them, and if consumers are willing to give a little on the back end to save some money on the front end then who’s to say we should stop them?
But I think this is different. My first thought upon seeing Weiss’s article was, “Is that even legal?” I consider myself pretty Internet-savvy and, though I probably wouldn’t have accepted Sears’ agreement in the first place, if I did I certainly wouldn’t have thought that Sears could gather private information from my secure browsing. I think most consumers would feel the same way, and I’m glad Vladeck is keeping an eye out for us.
When teen pop star Justin Bieber‘s signing became a riot of teens on Friday around 2:30pm, police were called in to control the crowd. Unable to quickly contain the situation, they asked his label‘s VP, James A. Roppo, to send out a tweet to cancel the event and disperse the crowd. When Mr. Roppo failed to do so, they took him into custody, reasoning that “he put lives in danger and the public at risk.” At his arraignment on Saturday, Mr. Roppo pled not guilty to the charges of felony assault, endangering the welfare of a child, obstruction of governmental administration, reckless endangerment and criminal nuisance.
The Canadian Broadcasting Corporation (CBC) is reporting that a 29-year-old woman from Quebec has lost her health benefits due to a set of pictures posted to her Facebook account. The woman, Nathalie Blanchard, suffers from a form of depression that is so severe that she was granted leave from her job at IBM for the past year and a half. During this time, her insurance company, Manulife, continued to provide monthly sick-leave benefits. However, Manulife stopped sending these benefits when pictures of Ms. Blanchard were posted to her Facebook account showing Ms. Blanchard enjoying herself at a Chippendales bar, at the beach, and on her birthday. Manulife took these pictures as proof that Ms. Blanchard was no longer depressed.
Manulife has declined to comment, specifically, on Ms. Blanchard’s claim but they admit to using social networking sites to determine mental and physical states of policyholders. Ms. Blanchard’s attorney, Tom Levine, has stated “I don’t think for judging a mental state that Facebook is a very good tool.” Surely, a handful of pictures cannot accurately portray a person’s psychiatric state. However, a representative for the Canadian Life and Health Insurance Association has said, “We can’t ignore [social networking sites], wherever the source of information is, we can’t ignore it.” Manulife’s use of social networking sites to determine the validity of health insurance claims seems to be a new take on the increasingly common practice of employers using such sites to make hiring decisions. Companies want information on the people they do business with and they see social networking sites as a viable way of obtaining it.
Perhaps the most chilling aspect of Ms. Blanchard’s situation is her claim that Manulife found these pictures despite the fact that she utilized Facebook’s privacy features. PCWORLD notes that even if you set your privacy settings to block all third-parties from accessing your information, friends of friends can still see what you post. As long as a Manulife representative could access the Facebook account of any of Ms. Blanchard’s friends, Manulife could still easily access her photos. It seems likely that one of Ms. Blanchard’s co-workers must have granted Manulife access to Ms. Blanchard’s pictures. Facebook’s privacy settings seem to provide little more than a false sense of security.
Ultimately, the safest option is simply not to post anything online that you would not want a boss or insurance agent to see. Nothing on the internet is private. This is a sentiment that has been shared by the President, who stated, “be careful about what you post on Facebook, because in the YouTube age, whatever you do, it will be pulled up again later somewhere in your life.” Sadly, this will likely be an exceedingly difficult lesson for the current generation to learn.
“So if I know about a stock’s activity one day before it’s insider trading, but if I know about a stock’s activity one second before it’s high frequency trading?”
-Samantha Bee, The Daily Show
Ms. Bee doesn’t have it quite right, but mainstream comedy shows rarely feature such topics. The term high frequency trading (HFT) encompasses various trading methods that employ sophisticated algorithms and powerful computer hardware designed for speedy trading. Wall Street banks and investment institutions spend billions on HFT. HFT algorithms can read market data and implement market-wide strategies in milliseconds. As the name suggests, high frequency traders aren’t buy-and-hold investors. HFT profits are aggregates of small profit margins on enormous trading volume. In fact, HFT is thought to be responsible for huge increases in trading volume in recent years. Estimates vary, but algorithmic HFT accounts for as much as 70% of daily equities trading volume in all markets. The enormous profit potential of HFT has fueled competition for talent and a technology arms race. Many institutions pay exchanges monthly rental fees to “co-locate” their hardware on the exchange premises, bypassing order routing infrastructure and improving latency to get ahead of other traders.
What strategies do high frequency traders use? The answer is largely guesswork, as proprietary trading algorithms are closely-guarded secrets. Among other practices, HFT facilitates “iceberging,” or disguising large orders by parceling them out into numerous smaller orders. But critics allege that HFT is used in connection with unfair or illegal practices like flash trading, front-running (placing bets in the market based on pending client orders) and bullying other market participants into disclosing price limits and giving up profits.
In a climate of heightened public scrutiny of Wall Street, HFT made waves in the mainstream media this summer. In late July, Senator Chuck Schumer urged the SEC to address flash trading, an instance of HFT where some exchange participants view and trade on price quotes immediately before they are publicly visible. When an exchange first receives a buy/sell order, it determines whether any exchange participant has publicly displayed interest in the desired security at the stated price. If not, Rule 602 of SEC Regulation NMS requires the exchange to include the order in public consolidated quotation data, routing the order to other exchanges. However, an exception to Rule 602 allows exchanges to first “flash” the order to paying exchange participants as little as three-hundredths of a second before routing. Those exchange participants with HFT capabilities are fully capable of acting on such a short timeframe.
Why would the SEC create an exception for flash trading in the first place? When Rule 602 was enacted in 1978, it apparently didn’t consider the possibility that technological developments would eventually enable automated traders to capitalize on the “flash,” rendering an administrative convenience exception into a substantial loophole.
Prompted by Senator Schumer, the SEC issued a proposed rule in September to ban flash trading in all markets, concluding that the flash trading exception is “no longer necessary or appropriate in today’s highly automated trading environment.” The Commission found that flash trading promotes a two-tiered market where material price data is available to some traders before the general trading public. Because flash trading creates disincentives for exchange participants to publicly display interest in trading (when they can instead act in secret on flash data), the proposed rule also voiced concerns about transparency, market efficiency, and the need for publicly displayed liquidity. In addition, under the Securities Exchange Act, the SEC is required to consider whether market practices damage public confidence in the fairness of securities markets. The SEC found that long-term investors might consider flash trading an unfair practice that damages the integrity of the market. To the extent that the interests of short- and long-term investors conflict, the SEC has a “clear responsibility” to protect long-term investors.
Goldman Sachs submitted comprehensive comments to the SEC concluding that flashes should be subject to the same regulations as standards quotes. In other words, co-located high frequency traders should no longer have a head start. Of course, HFT maintains a distinct edge against less technologically sophisticated competition. To allay this concern, Goldman points out that technological developments like HFT have lowered bid-ask spreads, increased market efficiency, injected considerable liquidity into securities markets, and increased accessibility to markets via automated market makers, “primarily benefitting retail investors.” In broad strokes, Goldman cautions against throwing out the HFT technology baby with the bathwater, instead proposing better regulation at the margins, where technology has outpaced SEC oversight. Flash trading lies at the margin and is per se unfair.
But is Goldman correct that the benefits of HFT outweigh the costs? The question is difficult to answer, primarily due to a lack of empirical data.
Critics contend that HFT promotes a two-tier system – HFT-armed institutions in the first tier, retail and individual investors in the other. To some, HFT is a “sophisticated bid-rigging scheme” that amounts to a multi-billion dollar tax on unsophisticated investors, redistributing wealth to large banks with institutional savvy and the resources needed to exploit technology-capability disparities and loopholes in SEC rules. Paul Krugman came out guns blazing, arguing that HFT also fosters excessive speculation and concluding unequivocally that “what [high frequency traders] do is bad for America.” Viewing HFT through the lens of social utility, Krugman cites scholarship showing that speculation based on private information “combines private profitability with social uselessness,” wastes resources, and undermines market integrity. To the extent that HFT represents a sub-optimal level of speculation, it falls on the negative side of the ledger. The problem: we don’t have enough data on HFT to quantify the scope of these problems.
What about liquidity and pricing? There’s no denying that HFT provides liquidity, and lots of it. Liquidity – the ability to safely buy and sell an asset – is so important in financial markets that many exchanges offer rebates to liquidity providers like high frequency traders. Some markets might not even exist without HFT. Critics respond that HFT injects unhealthy, destabilizing liquidity into the financial system. HFT is also said to contribute to price discovery. One rebuttal to this claim is the argument that HFT algorithms primarily trade against each other in a game of speculation, as opposed to value investing that contributes to proper pricing of securities. Again, limited available data makes it difficult to draw solid macroeconomic conclusions on these issues.
Some have suggested that HFT poses a systemic risk to financial markets and the broader economy. An HFT algorithm with free reign could transform into a “rogue algorithm” that inflicts extreme market fluctuations. Extraordinary events could trigger a chain-reaction of massive unloading by HFT algorithms, a not-so-far-fetched scenario given one likely cause of the 1987 stock market crash. HFT may have contributed to excessive volatility during the oil spike of 2008 and the recent market-wide collapse. The presence of substantial systemic risk may delineate a line of optimal technological innovation in the financial markets. A public policy discussion of HFT should at least consider the possibility that we have crossed this line.
Proposed approaches to the HFT problem range from laissez-faire attitudes, an armistice in the technology arms-race, investing in new technology (e.g., anti-HFT algorithms), fiscal policy measures (e.g., a tax on all trading, aiming at HFT speculation), and, most helpfully, enhanced regulatory oversight. The necessary starting point for more regulation, however, is properly measuring and quantifying the effects of the HFT “problem.” This means more transparency, and the SEC’s approach, focusing on greater disclosure and reporting requirements, is right on track.
First, on October 21 the SEC voted to draft a proposed rule concerning dark pools, largely unregulated private exchanges that implicate many of the same issues as HFT. Second, the SEC is planning a reporting system for HFT firms. After the 1987 market crash, Congress enacted the Market Reform Act of 1990, amending the Securities Exchange Act. Under Section 13(h), the SEC may require persons meeting the Act’s definition of “large trader” to file with the SEC and self-identify when they trade. The prospective reporting system will gather information to enable the SEC to determine the impact of HFT on the marketplace, with special interest in the possibility of harm to long-term investors, disparities of market access and speed, and market efficiency.
At a recent Senate committee hearing on HFT, flash trading, and dark pools, Senator Edward Kaufman articulated widespread concerns about systemic risk and a two-tiered “trader’s market” where retail investors are at a substantial disadvantage. The CFTC has also expressed concerns on the impact of HFT in the energy futures market. Coordinated regulatory action – and possibly new legislation – will be necessary to the extent that loopholes, concessions and limited statutory authority restrict the scope of SEC regulation. A comprehensive effort to achieve transparency is essential to understanding the full impact of HFT technology in the financial markets.
Given investor reliance on highly beneficial liquidity, it’s unlikely that HFT is on its way out. But valid concerns about the impact of HFT have been raised, and regulators need to learn more about what they’re dealing with. In light of recent market failures and inadequate regulatory oversight of financial markets, it would be unwise to give the market free reign on HFT technology.
The New York Times reported Wednesday that a man arrested in connection with a robbery got the charges against him dropped by proving that a status updated was posted to his Facebook account at the time. Rodney Bradford, 19, hired a criminal defense attorney who informed the Brooklyn DA that Mr. Bradford had posted an update stating “on the phone with this fat chick… where’s my i hop.” at the time of the robbery; the DA then subpoenaed Facebook and determined that the update was posted from Mr. Bradford’s father’s apartment at the time in question.
While in the abstract this might seem like a great idea for defendants, Facebook’s quick acquiescence to a prosecutorial subpoena without judicial review raises troubling questions. User privacy continues to be an issue for Facebook, which has faced criticism from multiple groups about its poor record on protecting its users’ privacy from data mining, government intervention, and other sources. Even if Facebook’s overly lax policies are now benefiting defendants rather than just plaintiffs or the government, it may not be something to celebrate.
One of the most prominent copyright/fair use cases over the last year has been artist Shepard Fairey‘s dispute with the Associated Press (AP) over his famous poster of now-President Obama during the 2008 Presidential Campaign. The poster, which featured a stylized portrait of Obama with the word “Hope” underneath, was supposedly based off of an AP photograph taken of Obama at a 2006 event organized by George Clooney on Darfur, which Fairey then modified to create the now-iconic HOPE poster. The AP claimed that because Fairey’s work for based off an AP photograph to which the AP owned the copyright, Fairey was required under copyright law to apply for permission for use of the photograph. Fairey consistently claimed that he did not profit from the poster, but instead used the proceeds to produce additional prints, and disputed the AP’s identification of the original photo as a closeup of Obama rather than a photo of both Obama and Clooney.
Fairey, who was then represented by Anthony Falzone, Executive Director of Stanford Law School’s Fair Use Project, claimed that his use of the photograph came under the “fair use” exception and thus permission was not required. Fair use hasn’t often been applied to photographs, so the issue seemed likely to become a fascinating test case, especially after Fairey filed for declaratory judgment against the AP in February 2009 seeking a determination that his use came under the doctrine of fair use.
The case was further complicated by the claims of the original photographer, Mannie Garcia, who was working under contract for the AP when he took the photograph; Garcia claimed that the copyright for the photo belonged to him, not to the AP. Garcia’s latest position in the legal skirmish is as a defendant, counterclaim plaintiff, and cross-claim plaintiff/defendant.
- the purpose and character of the use
- the nature of the copyrighted work
- the amount and substantiality of the portion taken, and
- the effect of the use upon the potential market.
The first factor relates to the use of the original material; by cropping, colorizing, and reorienting Obama’s posture from the original photograph, as Fairey claimed he’d done, it’s probable that a court would have deemed Fairey’s use sufficiently transformative to satisfy that factor.
The second factor concerns the distinction between fiction and fact; since Fairey copied from something factual (a photograph from a news event) rather than something fictional (for example, a novel), it’s possible that he would have succeeded on this factor as well, since only fictional works can be copyrighted. However, the Supreme Court ruled in Feist Publications, Inc. v. Rural Telephone Service, Co., 499 U.S. 340 (1991), that only a “spark” of originality was required in order for something to come under copyright protection, it seems probable that the original photograph would have been protected by copyright. Fairey would thus have faced a tougher battle on the second factor compared to the first.
The third factor presents one of the most interesting elements of the case. The less someone uses of the original work, the better case they have for fair use. For example, if a musician copies only a few seconds from six minute song into a remix, she’ll have a stronger basis for fair use than if she uses five minutes. Since Fairey supposedly cropped out George Clooney from the original photograph, he had a fairly good position on this factor. As the LA Times noted, how often does George Clooney get cropped out of a photograph? The fourth and final factor also seemed to weigh in Fairey’s favor. Fairey’s poster did not impede the AP from selling the rights to the original photograph to newspapers and other media outlets, especially given that the photograph was over two years old by the time Fairey began selling prints of it.
Last month, the entire case took on a dramatic twist when it came to light that Fairey had lied about which photograph he’d used for the HOPE poster. Instead of using a photo of Clooney and Obama, Fairey admitted that he had used the photograph that the AP had always claimed he’d used (a closeup of Obama) and that he had deleted images and submitted false ones in connection with the lawsuit. As a result, Falzone and the Fair Use Project declared their intention to withdraw from the case, as they couldn’t ethically represent Fairey after his lies came to light. Falzone noted that he still believed in the merits of Fairey’s case; the AP, however, countered that Fairey’s admission undermined his fair use argument and that they would block the withdrawal of Falzone and the Fair Use Project. The Fair Use Project’s proposed replacements are Geoffrey Stewart, a partner at Jones Day, and William Fisher and John Palfrey of Harvard’s Berkman Center for Law and Society.
Crucially, Fairey’s admission impedes his claims under the third factor of fair use, as he did not modify the original photograph as much as he claimed and took a larger proportion of the original work. Still, Falzone’s support of Fairey’s claims even after exiting the case doesn’t seem naive; it’s conceivable that a court could still find fair use. But as many have noted, it’s hard to seek a defense that uses the word “fair” when you’ve lied about the case. The case is still going forward, but Fairey’s position is far weaker than it was a few weeks ago, though the LA Times ran an editorial this week that supports Fairey’s claims on the merits. But what could have been a fascinating test case for the status of fair use in copyright law has been muddled as a result of Fairey’s deception, and it remains unclear what this could mean for other artists working in similar ways.