What the EU Data Safe Harbor Ruling Means for Startups

This week’s decision from the European Court of Justice (ECJ) vacating the European Commission’s “safe harbor” rule that allowed U.S. companies to quickly and easily import consumer data from European users has left many in the tech community unsure about exactly what went down and what happens next. While the ultimate impact of the ECJ’s ruling is hard to predict, the incident serves as an interesting lesson on the often poor fit between policy and technology.

What exactly happened?

Unless you’ve recently taken a course in EU civics, figuring out precisely how things got to this point and what it all means is rather difficult. To summarize: the EU’s data protection laws are more stringent than those in the much of the rest of the world—the U.S. included. Under the EU’s Data Protection Directive, data from EU citizens can only be transferred to countries that provide certain protections for said data. Recognizing that compliance with these data protection rules could create a giant bureaucratic headache for companies and countries, in 2000, the European Commission created a “safe harbor” that allowed any U.S. companies to self-certify that they complied with the Directive and thereby legally import EU consumer data into the U.S. This safe harbor rule is at the heart of the present dispute.

In 2014, an Austrian citizen filed a lawsuit in Ireland, claiming that U.S. laws permitting the NSA to surreptitiously collect and analyze vast amounts of consumer data violate the Directive. The Irish court then referred the case to the ECJ, the highest court in the EU, to consider the application of the safe harbor rule. Ultimately, this week, the ECJ held that the safe harbor doesn’t prevent individual member states from considering whether U.S. rules allowing government data collection render U.S. companies in violation of the Data Protection Directive and that the safe harbor itself fails to provide adequate data protections. With the ruling, the most commonly used legal pathway for importing EU data to the U.S. disappeared.

So what happens now?

With the rule allowing U.S. companies to import EU consumer data eviscerated, do EU-U.S. data transfers suddenly stop altogether? Did EU citizens wake up to find they couldn’t access their email accounts run by American companies? Not quite. The ruling will impact different companies in different ways.

Different legal pathways for data transfers

The safe harbor isn’t the only way that U.S. companies can import EU customer data. For example, companies can craft “binding corporate rules” (essentially, intra-company privacy policies) that, once approved by the data protection authorities in EU member states, allow for EU to U.S. data transfers outside of the safe harbor. But, since crafting such policies and getting member state approval is an arduous, time-consuming process, only large, well-funded companies can afford to explore these alternate data transfer protocols, leaving startups functionally unable to comply with data transfer rules.

Local data storage

If a company can’t legally transfer data from the EU to the U.S., the other option is to simply keep the data in Europe by building or leasing new data storage facilities overseas. Some companies, like Box and Pick1 are taking this approach, but this strategy comes at significant financial and time costs for companies, and startups operating on tight budgets may not have the resources to relocate servers or the time to develop new ways to handle foreign data.

Do nothing?

If a startup can’t find alternate legal mechanisms to import data or European data centers to handle EU data, it’s left with a difficult choice: stop handling EU customer data or continue to do so and face legal risk. The former tactic has obvious drawbacks. For one, it can be challenging to determine whether or not particular data belong to an EU-based user, rendering compliance nearly impossible. And, even if it is possible to altogether stop handling EU data, losing such a huge market will likely doom a great number of companies.

Startups could (and many probably will) simply continue business as usual and hope that they don’t get sued. A company that struggles to find the resources to establish alternative data importation frameworks or overseas servers may be too small for regulators and plaintiffs to worry about. Obviously, this isn’t a particularly comforting option for a company that wants to follow the rules. But, with such a sudden and dramatic shift in the rules, it may be the only course forward for some companies.

How long will this problem persist?

While the decision came as a surprise to many, policymakers in the EU and U.S. have been trying to shore up the safe harbor framework for a while. The ECJ’s ruling will add some urgency to their work, and U.S. and EU officials have given assurances that alternative data export pathways will soon become available. Of course, “soon” means something very different to bureaucrats than it does to entrepreneurs. And, even if the EU and U.S. can craft a new safe harbor framework, it’s unclear how these new rules will avoid the same fate as the prior safe harbor. That is, if the ECJ’s decision was predicated largely on the U.S.’s NSA-enabling legislation, any new safe harbor framework will similarly run afoul of the Data Protection Directive unless and until the U.S. passes significant surveillance reform legislation that limits the NSA’s reach. But, since a new ECJ ruling throwing out this replacement safe harbor could take several years, it may buy enough time for the U.S. or EU to craft other sensible data transfer rules.

Broader Lessons

The ECJ’s elimination of the safe harbor could pose an existential threat to some companies or it may simply end up being a temporary distraction, but it has helped crystalize a few issues facing the Internet economy. First, the notion of enforcing territorial data restrictions makes little sense in a globally interconnected digital world. Sure, national governments have an interest in making sure that their users’ data are protected, but trying to restrict the flow of information across national boundaries creates more problems than it solves, particularly for the startups that are responsible for building the global Internet. Creating insurmountable bureaucratic hurdles for companies that want to comply with their international obligations serves no one.

Second, the ruling highlights the need for surveillance reform in the U.S. Simply put, if users do not feel that their data are adequately protected, they will be less inclined to use online services—services often provided by fledgling startups. While the logic of the ECJ’s decision itself seems peculiar (if the U.S. fails to adequately protect user data because it allows the NSA to obtain authorization from FISA courts to secretly collect data, why are countries like France, Germany, and the U.K.—which do not require intelligence agencies to get court approval before collecting data for national security purposes—exempt from scrutiny? Is consumer data really any safer from NSA collection if it’s stored in the EU rather than in the U.S.?), the notion that consumer data should be protected from government surveillance is difficult to dispute.

Finally, the safe harbor fiasco is a prime example of how policy struggles to keep up with technological realities and the problems that arise when regulatory compliance becomes too complicated for otherwise upstanding companies to easily navigate. Many companies simply have no idea what they’re supposed to do while national governments try to hammer out an interim fix to data transfer rules, and even this temporary uncertainty can cause companies to go under altogether. As the Internet economy becomes ever more global, policymakers should strive to make the rules governing global commerce as frictionless as possible.

Will 2015 Be Our Last Real Best Chance for Patent Reform?

Earlier this month, the White House hosted its first ever Demo Day, inviting startups from all over the country to celebrate entrepreneurship. At that event, the President eloquently pointed out just how important the startup community is for our nation:

"Startups, young firms account for almost 40 percent of new hires.  And as we’ve fought back from the worst economic crisis of our lifetimes, those firms have helped our private sector create more than 12.8 million jobs over the last 64 straight months, which is the longest streak of private sector job growth on record."

With numbers like those, you would think all elected leaders would be racing to support pro-entrepreneurship policies. Yet Congress continually fails to move patent reform legislation, threatening the future of the startup community and the good jobs it creates.

The patent troll threat is not an abstract problem. And it’s not a problem that’s getting better. In fact, abusive patent litigation is becoming more prevalent: patent lawsuit filings are on track to break a new record this year (with a forecast of more than 6,000 suits) and 68 percent of suits so far have been filed by trolls. Furthermore, 82 percent of troll activity targets small and medium­-sized businesses, and 55 percent of troll suits are filed against companies with revenues of less than $10 million.

This fall presents an important opportunity—maybe our last—for patent reform to become law.

Where are we?

In June, the Senate Judiciary Committee voted 16-4 to move the PATENT Act to the full Senate floor; later that same month the House Judiciary Committee likewise voted, 24-8, to move the Innovation Act to the full House floor. Both bills represent comprehensive solutions that would address a dangerous patent troll problem; neither is perfect, but both would go a long way to fix a broken system. You can read more about the House bill here and the Senate bill here.

We were very excited when both bills were introduced. Since then, however, provisions in each have been watered down. Compromise and revisions are inherent to the political process, so to some extent this was expected. Questions remain, however, about how much is too much.

There are four primary issues that remain open to debate: venue, pleadings, discovery, and inter partes review (IPR). For political watchers, the last—inter partes review—is the most important. All of the other provisions of the House and Senate bills deal with litigation reforms, but inter partes review is a Patent Office procedure that allows for efficient and effective review of patents outside of federal court. That means the process is particularly good at weeding out bad patents and addressing patent quality, a huge problem that patent trolls have been able to exploit. Originally, the House and Senate bills barely addressed inter partes review, which we were glad about, since by and large the process has been quite successful.

Enter Kyle Bass. The well-known hedge fund manager’s most recent enterprise involves using the IPR process to challenge weak pharmaceutical patents and then short the stock of the company that owns the patent. The pharmaceutical industry, which relies heavily on patent rights, is far from pleased. And despite the fact that the IPR process contains significant protections for patent holders and the fact that Mr. Bass’ actions can already be addressed by the SEC, the pharmaceutical industry has been able to shoehorn its issue into the larger reform efforts.

As a practical matter, this means that long-standing Capitol Hill players, like PhRMA and BIO, are holding up patent reform efforts unless changes are made to weaken the IPR process. (We explain in more detail here why those changes are not only unnecessary, but in fact quite dangerous.) Senators Schumer, Cornyn, Grassley, and Leahy—the primary authors of the Senate bill—are still hammering out a so-called deal on IPR, details of which we should see soon. Even with such a deal, it’s unclear if PhRMA and BIO will decide to support reform efforts.

In the meantime, the House originally planned to move forward with a full vote on its bill in July, but at the last minute, Republican leadership pulled it from the calendar, claiming they needed more time to get the deal done. There is no real way to sugarcoat what happened: the delay shows a slowing of support and momentum for an important bill and we were disappointed that it happened.

Is there a path forward?

There is still a path forward. In September, when Congress comes back, the Senate is slated to pick up its efforts. We understand that Senate reform champions are close to a deal on IPR and that such a deal could create a framework for the bill to pass out of the full Senate. (This would be a particularly interesting turn of events, because in 2013 a strong patent reform bill passed the House 325-91 and then languished in the Senate in 2014.)

Using the momentum from the Senate, the House would be in a good position to revive its own efforts. Given the fact that the House did pass a bill in 2013 with a wide, bipartisan majority, we are confident that the bill would make its way through that chamber easily.

The White House has made clear its support of patent reform and we have every reason to believe that President Obama would happily sign a strong piece of patent reform legislation into law.

Is that path worth it?

Probably. There are two things to watch closely: IPR (see above) and venue (see more here). Right now, the House bill includes a strong venue provision that would help prevent trolls from filing so many cases in the notoriously plaintiff-friendly Eastern District of Texas. This would in turn make it easier for patent troll targets to fight back.

So, to simplify: anything that weakens IPR is bad (this should play itself out first in the Senate bill). Efforts to fix venue are good (see the House bill for this). Some combination of the two is probably liveable, though—as always—the devil is in the details, details we will be watching very closely over the next couple of months.

We’ll continue fighting to make sure that startups and inventors see legislation that will actually protect them from patent trolls and will need to call on you to help make our case. So watch this space closely and stay tuned.

Chicago’s New “Cloud Tax” Raises Questions Around Process, Policy

It’s no secret the winters in Chicago are brutal—anyone who has lived through a January in the Windy City can attest to this fact. Long periods of Netflix-aided hibernation are common for Chicagoans in the depths of winter. This is perhaps why the news last month that city residents will begin paying a “cloud tax” on their monthly Netflix bill didn’t go over well. As more business activity migrates online and consequently outside traditional tax protocols, cities and states are being forced to modify their tax regimes to adapt to these changing circumstances. While governments are certainly justified in their concern about dwindling tax receipts, digital commerce is fundamentally different than traditional brick-and-mortar enterprise and requires a thoughtful, unique approach to taxation in order to properly protect public interests without stunting business growth. Unfortunately, Chicago’s approach to digital taxation appears to be precisely the sort of hastily considered, ad hoc policy that could end up doing serious harm to the digital economy.

The ruling from the Chicago Department of Finance imposes a 9% tax on “electronically delivered amusements,” defined as “any exhibition, performance, presentation or show for entertainment purposes.” Essentially, this means that any electronically delivered television shows, movies, or music consumed for rental by customers in the city will be taxed. Technically speaking, the tax itself isn’t “new”—rather, it’s an expansion of Chicago’s existing amusement tax which covers concerts, sporting events and other activities. The ruling requires online digital content distributors to collect amusement taxes for digital amusements. While other cities have similar amusement taxes for brick-and-mortar establishments, Chicago’s application of the tax to digital content distributors is novel.

Chicago realized the tax money it was collecting from brick-and-mortar enterprises like movie theatres and video stores was evaporating as consumers stopped frequenting such establishments in favor of Netflix and other streaming services. So what’s the problem if Chicago is merely taxing digital video rentals in the same way it had traditionally been taxing physical video rentals? For one thing, the ruling took most people by surprise because there was little if any public participation in the decision. Instead of passing a new city ordinance or going to the voters to approve a new tax—both of which would have involved robust opportunity for public comment—the Department of Finance chose to quietly broaden an existing law. It’s hard to imagine a similar tax policy with such a wide impact not being publicly debated. Sidestepping voter approval suggests (not surprisingly) that there may have been public opposition to the new tax.

Beyond the process questions this new regulation raises, it highlights a broader issue around taxation of digital commerce. While a local brick-and-mortar business only has to worry about complying with tax laws of the jurisdiction in which it operates, online businesses may be subject to taxation in any jurisdiction in which its customers reside—that is, anywhere in the US.  For larger companies like Netflix, setting up the infrastructure to comply with a variety of tax jurisdiction is possible (though still expensive and onerous). For the small businesses that have historically driven the growth of the Internet economy, such compliance obligations would be insurmountable. According to the US Census, Illinois has 6,994 separate local governments. If each one chose to implement unique taxes on various internet goods and services, compliance would be significantly convoluted. For small businesses operating in an online marketplace with limited margins, such requirements could potentially put them out of business.

It’s no surprise cities struggling with reduced tax revenue are looking for new revenue streams. Indeed, discussion and action needs to take place around fair online tax policy, but it needs to take into account the uniqueness of the online environment. Chicago’s recent action highlights the need to have these conversations soon, and at a national level. Congress has put at least some effort into addressing the problem of e-commerce taxation, introducing the Marketplace Fairness Act three times, and discussing alternate proposals from Reps. Chaffetz, Goodlatte, and Eshoo. However, the current legislative climate—coupled with opposition from large Internet businesses—makes legislative action before the 2016 election unlikely. In the interim, other cities and states may follow Chicago’s lead, attempting to raise tax revenues in the short term, while jeopardizing the long-term health of the Internet economy.

Why Broadband Competition Matters to Startups

Last week, at the annual U.S. Conference of Mayors meeting in San Francisco, Minority Leader Nancy Pelosi identified the two policy issues she most wanted the mayors in attendance to focus on: sequestration and spectrum. As Pelosi noted, issues surrounding sequestration will hopefully get sorted out relatively quickly, but adjusting our national broadband infrastructure to maximise innovation and economic growth is a far more difficult task.

In most markets in the country, consumers and businesses have access to only one or two wired Internet access providers. The situation isn’t much better in the fast-growing mobile Internet space, where the two dominant wireless companies, AT&T and Verizon, control nearly 75% of the low-band spectrum in the country—the type of spectrum most valuable for mobile Internet use. Given this concentration of key resources in the hands of a few companies, it is no surprise that the U.S. recently ranked 26th out of 29 countries in terms of wireless broadband speed.

As Leader Pelosi noted, in a country where “only 37 percent of our nation’s schools [have] enough broadband for digital learning,” increasing broadband access and affordability would help grow the economy by training a generation of entrepreneurs with the technical skills needed to thrive in the digital world. But, improving wireless broadband speed, price, and coverage through greater competition would grow the economy in myriad other ways, perhaps most profoundly through its impact on the startup sector.

We at Engine are fond of reminding policymakers that startups are responsible for virtually all new net job growth in America, and in light of this reality, policies that help increase startup activity are policies that create jobs. Simply put, actions that increase competition in broadband markets—like expanding the spectrum reserve in the upcoming low-band spectrum incentive auction—will go a long way towards spurring startup activity and the economy more generally. That’s because better competition in mobile broadband helps startups in a number of key ways:

1) A bigger customer base. At any pitch meeting, one of the first questions an entrepreneur will get from potential investors is about the size of the company’s addressable market. That is, how many consumers will your business reach? The bigger the market, the higher the company’s potential value. Citizens that are either not online at all or do not have access to broadband of adequate speed or capacity are citizens not participating in the startup economy.

According to the FCC’s Seventeenth Mobile Wireless Report, in 2014, 0.3 percent of the U.S. population “lived in census blocks that received no mobile wireless broadband coverage.” That may seem like a small percentage of the population, but it amounts to approximately one million people without any mobile wireless access. Amongst people with access to some mobile broadband coverage, a huge percentage of the population is dramatically underserved. A recent Pew study found that seven percent of the public—or more than 22 million people—have no home broadband service and have a limited number of ways to get access beyond their cell phone. Considering how poorly U.S. mobile broadband fares in terms of speed, data availability, and affordability, many if not all of these citizens likely cannot use any of the amazing technologies and services that startups provide. Giving these folks access to better, cheaper mobile broadband will greatly expand startups’ addressable market and consequently boost startup activity. And, increasing competition amongst mobile broadband providers is really the only feasible method of improving broadband penetration.

2) Lower costs for startups. The archetypal image of the startup as one or two scrappy inventors in a garage isn’t all that far from the truth for most companies. While there are a few outliers that find substantial funding early in their life cycles, most startups have to get by with minimal funding as they develop their core business. Failing to raise adequate seed funding to launch an enterprise is one of the most common pitfalls for entrepreneurs. Since every dollar counts, lowering the amount of money it takes for entrepreneurs to start businesses directly results in more startup activity. And, according to a report from the Internet Innovation Alliance, access to quality broadband can save startups an average of more than $16,000 annually—a significant number for startups trying to get off the ground. Making mobile broadband more efficient and affordable will further help drive down costs for startups and in turn improve competition in the startup sector.

3) New technologies. It’s impossible to predict precisely how the innovators that drive our startup sector will harness the power of faster broadband technologies like gigabit WiFi, but it’s a guarantee that they will find ways to generate entirely new companies and services that take advantage of whatever broadband resources are available to them. This innovation represents the real economic growth potential from increased mobile broadband competition. Just look at the value of startup products and services riding on unlicensed spectrum technologies like Bluetooth and WiFi, which are estimated to add $222 billion to the U.S. economy each year. If startups had access to ubiquitous, ultra-high speed mobile broadband, the value of the technologies and services they could create would be staggering.

The importance to the startup economy of advanced broadband infrastructure is hard to overstate, and yet opportunities to promote the type of competition necessary to spur faster and cheaper networks are in short supply. The upcoming FCC low-band spectrum incentive auction represents one such opportunity. Failure to take adequate steps to promote competition through auction safeguards will put at risk the untapped economic potential of future generations of startups and the millions of jobs they could create.

Lessons from the First Weeks of Net Neutrality

For years, opponents of net neutrality ridiculed open Internet rules as a “solution in search of a problem,” even though examples of ISPs abusing their gatekeeper power are numerous. Well, it looks like the critics have once again been proven wrong. Less than two weeks after the FCC’s Open Internet Order went into effect, these purportedly unnecessary rules have already had a major impact. Here’s a look at a few notable lessons from the first few weeks of net neutrality.

An End to Throttling?

Within a few days of the rules going live, Sprint (one of the few ISPs to claim Title II-based rules wouldn’t diminish its investment incentives) announced that it would stop throttling data speeds for its heaviest users. Sprint has said it thinks that its policy would have passed scrutiny under the new rules, but decided to end its policy in an abundance of caution. On the heels of the FCC’s announced $100m fine levied against AT&T for false representations about its own data-throttling policy, it is no surprise that Sprint is keen on making sure it's in compliance with the new rules. We’ll be watching to see if other companies follow suit.

Interconnection Challenges

While some ISPs are treading lightly around the net neutrality rules, others will almost certainly test the breadth of the FCC’s rules and the Commission’s willingness to enforce new protections. Indeed, one such dispute is already queued up: Commercial Network Services, a streaming media company, has said it will bring a complaint against Time Warner Cable for charging excessive rates to deliver video to its customers.

This challenge is particularly interesting, as it implicates the FCC’s regulation of interconnection—the protocols and agreements through which large ISP networks agree to exchange traffic with each other—which was one of the more controversial aspects of the Open Internet Order. Unlike the FCC’s ban on throttling, blocking, and paid prioritization, its regulation of interconnection agreements will be hashed out on a case-by-case basis. The outcome of the dispute between Commercial Network Services and Time Warner could set a significant precedent for future enforcement actions, including those related to zero-rating and other practices the FCC will evaluate on an ad hoc basis.

New Net Neutrality Ombudsperson

That companies are already invoking the net neutrality regime’s discretionary provisions frames an important issue for how well the Open Internet Order will work to protect startups. Throughout the FCC’s rulemaking process, we argued in favor of bright-line prohibitions on discriminatory ISP activity because the cash-strapped startups that would suffer most from anticompetitive behavior are unlikely to have the resources necessary to challenge such practices. Ultimately, the FCC’s case-by-case consideration of discriminatory interconnection deals or zero-rating practices may have no value if they are too costly for startups to initiate.

Recognizing that such costs are a real threat to the efficacy of its rules, the FCC’s net neutrality plan established an Ombudsperson to field formal and informal complaints. The FCC recently appointed its first Ombudsperson, Parul Desai, who will serve as the primary point of contact for individuals and companies seeking to challenge ISP practices. While it remains to be seen how effective the Ombudsperson program will be in addressing complaints, having a low-cost protocol for consumers and companies to help enforce the FCC’s rules is crucial if the Commission’s net neutrality regime is to have any meaningful impact. Considering a new study “found significant [data speed] degradations on the networks of the five largest internet service providers,” it seems likely that the new Ombudsperson will have her hands full in ensuring the FCC’s new rules work as intended.

Overall, it’s been an exciting time for all of us that fought for net neutrality. But, even as the rules are proving their merit, the FCC’s entire open Internet regime is under attack, both in the courts and in Congress, where House Republicans are attempting to subvert the FCC by burying a provision in a large appropriations bill that would preclude the Commission from enforcing even the most basic net neutrality rules. With opponents of net neutrality willing to resort to shadowy tactics to undermine the open Internet, it’s as important as ever to highlight when the new net neutrality rules are working to promote fairness and innovation online and why it’s so vital that we fight to keep them in effect.

CPUC Commissioner Proposes Denying Comcast Merger

On Friday, Commissioner Michael Florio of the California Public Utilities Commission issued a proposed decision rejecting Comcast’s attempted merger with Time Warner Cable—an important step towards blocking further consolidation in the broadband market. Commissioner Florio’s decision is particularly significant, as the CPUC was close to voting on an alternate proposed decision approving the merger with minimal conditions. That Commissioner Florio felt compelled to write a decision rejecting the merger speaks to how problematic it would be for California’s broadband future.

In his proposed decision, Florio writes: “There are a number of concerns about post-merger scenarios, ranging from possible to the probable or certain, that lead us to conclude that this transaction is not in the public interest. These include (but are not limited to) the potential lowering of quality of service and customer service standards to a lower common denominator, an increasing monoculture in the fixed broadband market in California, concerns about privacy, less competition in the special access market, and—most importantly—less competition in the broadband market, both the retail segment of that market and the segment that allows edge or content providers to reach retail subscribers.”

Commissioner Florio expresses specific concerns about the impact of the potential merger on California’s broadband market and it’s larger tech economy. He writes: “Were the post-merger Comcast to exploit its bottleneck position between its retail subscribers and edge providers, as it has shown the inclination to do, it would likely make broadband less attractive to a mass audience, make the investment in and provision of online services (VoIP competitors) and content (Netflix, Amazon, etc) less attractive to edge providers, and dampen the ‘virtuous cycle’ of innovation, investment, and broadband deployment.”

The proposed decision also addresses the economic harm that occurs when edge providers have fewer pathways to reach customers: “In more concrete terms, the proposed merger between Comcast and Time Warner reduces the possibilities for content providers to reach the California broadband market. Many of these content providers are located in California, and a reduction in their ability to reach their intended markets would likely to have a negative impact on the California economy. Such a negative effect on the economy is, itself, likely to discourage the deployment of broadband.”

These concerns echo many of the points raised by Engine and other organizations that support the growth of startups and entrepreneurship. As the decision explains, a post-merger Comcast would be the sole provider of 25 Mbps speed Internet access for 78% of California census blocks and would face only one competitor in the remaining areas. Putting such vast control over broadband connectivity in the hands of one company—particularly one voted the “worst company in America”—would diminish Comcast’s incentives to invest in expanding and improving its broadband infrastructure. The consolidation of mega-ISPs in a market already starved for competitive offerings will only make it less and less likely that California and the U.S more generally will catch up to international peers in terms of Internet speed and affordability. The next generation of innovative startups that depend on high-speed, low-cost Internet access to attract customers and develop innovative services will face a much more difficult competitive landscape if Comcast is allowed to swallow up all potential competitors.

Commissioner Florio concludes that the proposed merger would cause myriad competitive harms that cannot be mitigated through conditions, and therefore, the merger is antithetical to the public interest. “In sum, we find that placing conditions on the merger, even assuming that those conditions could address all of the potential harms associated with the merger, is unlikely to succeed in doing so. And based on our review, it is not clear that any conditions, however well designed, well intended, well enforced and fully implemented, could mitigate the harms associated with the merger.”

This proposed decision is big news, and not just for residents on California. Since much of the merger’s value to Comcast lies in acquiring Time Warner’s California customers, a CPUC rejection would likely kill the merger nationwide. But while Commissioner Florio’s proposal offers hope, it does not by itself spell the end of the Comcast merger. The full CPUC still has to vote, which could happen as early as May 21.

Anyone concerned about our nation’s broadband infrastructure needs to make their voices heard. The CPUC will be accepting comments on the proposed merger until April 30. If you believe that America’s broadband future is too important to be left in Comcast’s hands, send your comments to the CPUC Public Advisor at public.advisor@cpuc.ca.gov and encourage them to reject a merger that would pose an incalculable risk to innovators everywhere.

Why A Patent Verdict Against Samsung Is Bad News for Startups

Last night, I tweeted this:

 

The full story is here, which you should go ahead and read. But the gist is that Samsung lost a $15.7 million verdict in the Eastern District of Texas (the hallowed home of patent litigation) to Rembrandt, a party that claims to own the technology behind the Bluetooth 2.0 standard.

My tweet got a lot of attention (way more than my average missive), including countless replies basically calling me an idiot. Rather than engage with the twitter trolls (see what I did there? Clever, no?), I decided this would be a good time to talk about the patent troll problem and what it means for big companies and startups alike.

For starters, if you think I am particularly worried that Samsung, a huge company, lost a $15.7 million lawsuit, you don’t understand my feelings on patent reform, how the troll model works at all, or, apparently, how the patent system works. Let me tell you what I—and anyone who cares about protecting startups and innovation in this country should—care about.

Last week, when a jury found Samsung infringed three valid patents that supposedly cover the technology behind the Bluetooth 2.0 standard, it conferred on the patent owner, a company that neither makes nor sells anything, a monopoly on that standard. And, according to the Ars Technica article, which cites the patent owner’s complaint, Rembrandt asserts that these patents don’t just cover Samsung’s products, but “all products using Bluetooth 2.0 and later.”

So here is the problem: The inventor and the owner of the patents (two different parties) had nothing to do with the implementation of the popular Bluetooth 2.0 standards. In fact, so far as the story goes, the inventor has had no part in producing anything but 100 patents, which he sells to the current owner to use in patent litigation. Not to create new technologies (the type of progress of science and useful art the Constitution contemplated when it enacted a patent system), let alone to grow new businesses and create jobs. Instead, they serve as a tool for him and the patents’ current owner to extort money out of companies who do want to do those things.

Which is why I tweeted last night that this is very bad news for startups. Bluetooth technology is key to today’s growing technology marketplace. And it’s a market that is already regulated to some extent by the Bluetooth Special Interest Group (SIG), which maintains the technology’s standards. This is a particularly important point: tech companies rely on the concept of interoperability, meaning that anyone can use Bluetooth technology and it will work with different devices across the board. Currently, the SIG facilitates this in the Bluetooth space.

Before this verdict, a company who wanted to use Bluetooth could work with the SIG, a one-stop shop, to get access and necessary legal rights to the proper technology. But now there is a giant unknown: will Rembrandt sue? Demand a license to use Bluetooth? If a startup asks a lawyer about its new project that implements Bluetooth 2.0 or later, it’s likely to get an answer that someone else owns that technology, and it should either not work in that space or get ready to pay up.

I really am not overly concerned that Samsung finds itself on the hook for a $15.7 million verdict (though that’s not good news, either). I fundamentally care about the chilling effect that cases like these have on further innovation and—as I tweeted last night—on startups. Right now, we have a system that is, simply put, broken. We need real reform to get it back in working order, where everyone—big companies, startups, and garage tinkerers—are incentivized to innovate and create.

Startups Send Letter to FCC in Support of Title II

Today, Engine released a letter signed by over 100 startups making clear that entrepreneurs and innovators fully support Title II reclassification to preserve an open Internet. Earlier this month, FCC Chairman Tom Wheeler announced his plan to implement strong net neutrality rules. Fellow FCC Commissioner Ajit Pai—in a last ditch effort to argue against Title II reclassification—claimed in a press release that “small, independent businesses and entrepreneurs” did not support Title II. Startups from across the country, including Automattic, Dwolla, Etsy, Foursquare, Imgur, Kickstarter, Tumblr, and Yelp, wrote today to set the record straight.

Startup support for Title II and net neutrality is nothing new, as the letter notes: “Because net neutrality is such an important issue, the startup community has been engaged in the Commission’s Open Internet proceeding to an unprecedented degree. The clear, resounding message from our community has been that Title II with appropriate forbearance is the only path the FCC can take to protect the open Internet. Any claim that a net neutrality plan based in Title II would somehow burden ‘small, independent businesses and entrepreneurs with heavy-handed regulations that will push them out of the market’ is simply not true.”

These startups were built and thrived under a de facto net neutrality regime, and if the Internet economy is to continue its unparalleled growth, preserving an open playing field is crucial. Allowing ISPs to use their gatekeeper power to pick winners and losers on the Internet is the real threat to the continued viability of these startups, not a regulatory structure based in Title II.

Startups Head to DC for Final Push on Net Neutrality

Earlier this month, FCC Chairman Tom Wheeler announced a plan to reclassify broadband as a Title II common carrier service, prompting cheers from the Internet community. After a year of debate it appears that the pro-net neutrality movement has won the day. But while the Chairman has released broad outlines of his net neutrality plan, there’s no guarantee that the specific measures the FCC adopts will be sufficient to preserve an open playing field for startups.

To make sure that the FCC gets the details right, Engine and the Open Technology Institute at the New America Foundation organized a fly-in last Thursday, bringing a group of top startups to DC to make the innovator’s case for strong net neutrality rules. Representatives from Union Square Ventures, Bigger Markets, Capitol Bells, Etsy, Foursquare, Keen.io, Spend Consciously, and Vimeo spent the day at the FCC and on Capitol Hill meeting with key policymakers to discuss the future of the open Internet.

In the morning, the startups met with FCC Commissioner Jessica Rosenworcel and senior staff from Chairman Wheeler’s office to discuss the nuances of the Chairman’s proposal. We focused specifically on the need for rules that prevent ISP discrimination at interconnection points, and ensuring that the Commission’s general ban on discriminatory practices does not put an impossible burden on startups looking to challenge ISP activity.

The startups next moved on to the Hill, meeting with members of Congress and senior staff to discuss the proposed net neutrality legislation circulated in January. Pending FCC action renders legislation of any kind unnecessary, and the current draft bill fails to provide many basic net neutrality safeguards while simultaneously stripping the FCC of authority to protect against future ISP threats to the open Internet. The startups met with members of the House and Senate Commerce committees and let them know that startups did not view the bill as a good starting ground for a compromise, and that any legislation that offered weaker protections than those in the FCC plan would be viewed as a non-starter.

We are deeply grateful for the hard work of these startups and so many others, which has helped get the FCC to where it is today. It’s not easy for startups to take time away from their businesses to travel to Washington, but their efforts are paying dividends. With the FCC’s rulemaking in its final days, we must make sure the rules they issue are strong enough to keep the Internet open for generations of future innovators.

Patent Litigation and the Continuing Need for Robust Reform Legislation

Tomorrow, the House Judiciary Committee will hold a hearing to review recent Supreme Court cases in patent law. Do not let the wonky subject matter fool you—this is an important hearing that should help set the groundwork for much-needed legislation that will finally fix the patent troll problem.

To understand what’s at stake, you have to understand a bit about patent reform and why it’s become such a critical issue to the startup community. In the past decade, patent litigation initiated by non-practicing entities—so-called patent trolls—has increased tenfold. This increase has been primarily targeted at tech companies, and the data show that the smallest of those companies—most often, startups—are in fact targeted the most frequently. This led to the recent push for patent reform. And last year, we made some real progress: not only did we come close to passing legislation, but the FTC took up the issue, as did more than 20 states, who introduced or passed legislation, or whose attorney general investigated, and in some instances sued, patent trolls. Even more, the Supreme Court stepped in, deciding six cases unanimously, each of which should help fix a broken patent system.

That’s the good news. The bad news is that opponents of patent reform now claim that because of those victories at the Supreme Court, we no longer need patent reform legislation.

They couldn’t be more wrong.

First, the most important of those cases—Alice v. CLS Bank and Nautilus v. Biosig—deal with patent quality. In other words, tightening the standards around what can and can’t be patented, an update that’s critical to eliminating trolls who thrive on low-quality patents  But it will take years, if not decades, for the impact of these cases to actually be felt. Patents last for 20 years, and the Patent Office has been in the business of granting approximately 40,000 software patents annually, which means at least hundreds of thousands of them currently exist. The vast majority of these patents won’t be reevaluated under Alice and Nautilus unless someone actually challenges that patent, either in court or at the Patent Office. Those challenges can cost tens or hundreds of thousands of dollars. So we don’t expect to see the number of bad patents falling dramatically any time soon.

Second, these cases do not address the patent troll’s other most favored weapon: the outrageous costs of patent litigation. Patent litigation is notoriously expensive, costing each side easily into the millions of dollars in legal fees, not to mention other valuable lost resources, like employee time. Trolls exploit this, often successfully demanding payments to go away instead of going to court. While one important Supreme Court case, Octane Fitness v. Icon, addressed at least some of this problem, it’s so far had limited effect. The Court held that a judge could make a loser pay a winner’s legal fees in “exceptional” cases, but, unfortunately, troll cases are no longer “exceptional.”

Despite help from the Supreme Court, we still need real, robust patent reform that will give judges discretion over when to grant fees, increase transparency in lawsuits and demand letters, even out the burden of litigation on both parties, and help protect technology’s innocent end users.

We’ll be watching tomorrow’s hearing closely to make sure that opponents of patent reform—those who benefit from a broken system—don’t mislead members of Congress and the public by overstating effect of the Supreme Court’s recent docket. We are thankful the Court has stepped in and sent a strong message that the system is broken. But lasting change that repairs the patent system for good will require an act of Congress.

Patent Reform: We’re Ready for Round II

Today, a bipartisan group of House members re-introduced the Innovation Act, an important piece of legislation that would directly address a patent troll problem that has ballooned out of control, costing our economy tens of billions of dollars annually.

You might recall that last year similar efforts got incredibly close to becoming law (In fact, the last time the Innovation Act was introduced, it passed the House with a 325-91 vote!), before stalling out at the eleventh hour in the Senate. We were disappointed at the time, saying then:

"This news is devastating to the welfare of startups who will continue to face the threat of patent trolls. That no agreement could be reached, especially in light of the efforts being made across the committee to find common ground, is also bad news for the economy where annual losses from patent troll litigation are billions of dollars."

More importantly, though, we noted then that the hard work we did transformed the political framework, and said to you, our community: “you changed the conversation from a wonky, back room discussion of legal tenets, to real world examples of harm. With your continued support, and the support of our friends in Congress, we can be on the winning side.”

Well, that time is now.

Despite some important progress in the courts and from the states on patent reform, trolls continue to be a serious threat to the innovation and startup ecosystem. Which is why we need comprehensive legislation to really fix the problem.

The reason why is fairly simple. Patent trolls are “successful” because they are armed with two weapons: low-quality patents, usually covering software-type inventions, that are nearly impossible to understand; and the ballooning costs of patent litigation (it can costs each side easily into the millions of dollars to fight a patent suit in court). Most of last year’s progress, especially an important case called Alice v. CLS Bank, dealt with the first problem, trying to improve patent quality. While that’s good news, it has—at least in the short term—only limited effect.

The Alice ruling can only be helpful in three distinct circumstances: 1) for new patents being issued by the Patent Office; 2) in litigation where a defendant attempts to invalidate the patent at issue; or 3) in one very specific proceeding at the Patent Office called a covered business method review (CBM). Let’s unpack each for a second:

• It’s critically important to have better standards for patentability going forward, but currently, there are approximately 2.24 million active patents in the United States. More than a million of those represent a software-type invention. And each of those patents has a lifespan of 20 years. The potential damage from this existing world of patents alone is enough to warrant legislation.
• As mentioned above, litigation can easily cost each side millions of dollars in legal fees, not to mention years of distraction from a business’ core function. Which makes the barrier to startups essentially impossible to overcome.
• CBM review is a great program, allowing affordable and efficient review of existing patents at the Patent Office. Yet it is currently limited to patents that touch financial products or services and—unless the law changes—the entire program is set to expire in 2020.

What’s more, none of this touches the out-of-control patent litigation system. Which is precisely why we need the Innovation Act. The Innovation Act, and other comprehensive efforts like it, use a combination of provisions to level the playing field, giving defendants more affordable access to make their case in a federal court. These provisions include common-sense reforms like requiring transparency when filing a lawsuit or issuing a demand letter (who are you? what patents do you own? what product do you claim infringes those patents?); shifting fees to winners when a losing party brought a particularly baseless lawsuit; shifting some of the costs of discovery, usually the most expensive part of litigation; and creating a vehicle for suppliers and manufacturers to help protect their customers when those customers become the trolls’ target.

Of all the good work we’ve done so far, the most important piece was earning a seat at the table. For the first time the startup community has a critical voice in this important debate. It is important that we use it and let Congress know the time has come to make the Innovation Act law.

FCC Chairman Takes Steps to Undo Anti-Community Broadband Laws

Even though a favorable net neutrality ruling from the FCC appears imminent, the vibrancy of the Internet economy remains at risk so long as it’s tethered to a few, powerful oligopoly Internet Service Providers. These ISPs have tacitly divvied up geographic markets across the country, blocking competition and offering far lower speeds and higher costs to both consumers and businesses than those in peer nations. Due to aggressive ISP lobbying, nearly 20 states have laws on the books that prevent municipalities from providing broadband networks. ISPs sought these rules to prevent competition for broadband customers. Though net neutrality grabbed most of the telecom policy headlines over the past year, the FCC and the White House have both signalled an interest in overruling these anti-competitive bans on community broadband. Today, FCC Chairman Tom Wheeler decided to take action, circulating a draft decision that would preempt such laws in North Carolina and Tennessee.

We’re heartened by the FCC’s recognition that laws like these provide no public benefit and only serve to protect local cable monopolies. A lack of competition in broadband markets is one of the key reasons the U.S. ranks so poorly in global Internet affordability and speed. With the FCC having recently modified its definition of broadband to reflect the changing needs of a globally connected society, it is no surprise that the FCC would use all the tools at its disposal to promote broadband competition in order to bring U.S. speeds up to global standards.

Cities like Chattanooga, TN, Danville, VA, and Lafayette, LA are perfect examples of why communities should be given the option to build networks for their citizens. Unwilling to wait for the incumbent ISPs to upgrade their networks, these cities took it upon themselves to provide fiber infrastructure for their communities, drawing startup activity and growing the local economy, in addition to providing a much needed service to residents.

The FCC’s authority to overturn anti-community broadband laws flows from Section 706 of the Telecommunications Act, which gives the Commission authority to promulgate rules to promote the deployment of advanced broadband. Those closely following the net neutrality debate know that Section 706 is insufficient by itself to protect an open Internet, but giving the FCC the authority to prevent ISPs from using their monopoly power and lobbying might to crush potential competitors is still hugely important. The net neutrality bills discussed in Congress last month would have completely negated the Commission’s Section 706 authority, preventing it from overturning anti-community broadband laws. If the proposed legislation’s loophole-ridden net neutrality “protections” weren’t reason enough to oppose the bill, its attempt to protect ISP monopolies by preventing the FCC from addressing anti-competitive muni broadband laws surely is.

The FCC is scheduled to vote on the order at the end of the month, and while the proposal is targeted to only two states, it sends a clear message that the FCC will do what it takes to promote competition in broadband markets. Working to ensure that broadband markets feature multiple competitive providers is a daunting task, but Chairman Wheeler’s plan to preempt anti-competitive state laws banning municipal broadband is a step in the right direction.

What Startups Heard in the State of the Union

Tonight’s State of the Union proved to be something of a mixed bag for the startup community. Which was a bit surprising, because over the past few weeks President Obama has previewed a number of new tech-related proposals. This was a natural move for a President seeking to highlight the nation’s economic recovery, as the tech industry—and particularly startups—are driving our economic recovery and are responsible for all net new job growth in the United States.

The President’s speech did touch on some of those proposals, such as improving access to broadband and a highly educated workforce. But other important issues, like net neutrality, received only passing mention. And some topics, like patent reform, were missing from the speech altogether.

Here’s a look at what startups heard—or didn’t hear—in this year’s State of the Union.

Community Broadband

"21st century businesses need 21st century infrastructure — modern ports, stronger bridges, faster trains and the fastest internet.

I intend to protect a free and open internet, extend its reach to every classroom, and every community, and help folks build the fastest networks, so that the next generation of digital innovators and entrepreneurs have the platform to keep reshaping our world."

Last week the President spoke in more detail about his plans to expand high-speed internet access in communities across the country. These plans include calling on the FCC to overturn limitations on community broadband, technical support to municipalities that are interested in creating their own broadband networks, and a package of grants and loans to incentivize rural broadband providers.

This is especially exciting news for burgeoning startup communities in areas where ISPs have so far failed to invest. We’ve already seen the impact that community broadband has made in places like Chattanooga, TN, Wilson, NC, and Danville, VA. Ultra high-speed broadband networks help attract startup activity to take advantage of the fast connections, which in turn drives consumer demand and ultimately, more investment in broadband infrastructure. The better the Internet infrastructure a community has, the more attractive that community is to new startups and the good jobs they create.

Access to Talent

"That’s why I am sending this Congress a bold new plan to lower the cost of community college — to zero.

We’re connecting community colleges with local employers to train workers to fill high-paying jobs like coding, and nursing, and robotics..."

One of the greatest challenges for the startup community is accessing a steady stream of talented people with ideas for new businesses and the skills needed to grow those businesses. Improving STEM education is critical if we’re going have future generations of homegrown talent.

Last week President Obama announced a package of higher education proposals that included making community college free for students across the country, and expanding technical training programs that provide skills tailored to in demand jobs. While many of the details of these proposals are still forthcoming, we’re optimistic that they will expand both access to and quality of STEM education, and we urge the White House to include the startup community in designing the details of implementation.

"Yes, passions still fly on immigration, but surely we can all see something of ourselves in the striving young student, and agree that no one benefits when a hardworking mom is taken from her child, and that it’s possible to shape a law that upholds our tradition as a nation of laws and a nation of immigrants."

The other piece of the puzzle when it comes to accessing talent is reforming our immigration system, so that foreign born entrepreneurs can come here, start a business here, and create jobs here. We’ve heard less about immigration reform from the President in the days leading up to the State of the Union, but the Executive Order he issued in November took a number of key first steps towards reform.

Among other provisions, the Executive Order expands immigration options for foreign-born entrepreneurs and makes it easier for high-skilled workers awaiting Lawful Permanent Resident status to change jobs. While these changes are important, the executive action did not raise the visa supply, something that’s been a priority for the tech community for years and requires legislative action. We also need to establish a true founder’s visa, so that entrepreneurs can come to the United States to start new ventures, rather than being tied to a job with an existing employer.

Data and Security

"Tonight, I urge this Congress to finally pass the legislation we need to better meet the evolving threat of cyber-attacks, combat identity theft, and protect our children’s information. If we don’t act, we’ll leave our nation and our economy vulnerable. If we do, we can continue to protect the technologies that have unleashed untold opportunities for people around the globe.

While some have moved on from the debates over our surveillance programs, I haven’t. As promised, our intelligence agencies have worked hard, with the recommendations of privacy advocates, to increase transparency and build more safeguards against potential abuse. And next month, we’ll issue a report on how we’re keeping our promise to keep our country safe while strengthening privacy."

The President has announced a package of proposals around data and security, including legislation that would enhance information sharing between the private sector and government agencies, expanded powers for law enforcement to combat data theft, and expanded reporting requirements around data breaches.

As more and more business migrates to the Internet, it is vitally important that consumers have confidence that the information they are sharing with online businesses is secure and private while the regulatory climate also remains ripe for innovation. Revelations about the NSA’s surveillance activity may cost the cloud computing industry billions of dollars as consumers refrain from using services they perceive to be unsecure. There is, of course, a balance that must be achieved between rules that adequately safeguard consumer information and those that impose unduly burdensome obligations on startups without providing any meaningful security or privacy benefit for users.

The startup community looks forward to being part of this ongoing conversation, and working towards smart, manageable regulation that allows for both strong consumer protections and continued business expansion and job growth.

Other Proposals

"My plan will make quality childcare more available, and more affordable, for every middle-class and low-income family with young children in America — by creating more slots and a new tax cut of up to $3,000 per child, per year.

So I’ll be taking new action to help states adopt paid leave laws of their own. And since paid sick leave won where it was on the ballot last November, let’s put it to a vote right here in Washington. Send me a bill that gives every worker in America the opportunity to earn seven days of paid sick leave. It’s the right thing to do."

While access to affordable childcare and parental leave may not sound like tech policies, they are in fact critical to creating an environment where Americans of any age and background have the ability to take a chance on a new idea or a new startup. They’ll also help make sure that a diverse cross section of Americans has the opportunity to go to work, which will in turn help spur much needed diversity within job sectors like tech.

What Was Left Unsaid

Net Neutrality

President Obama has been a vocal supporter of reclassifying broadband Internet under Title II of the Communications Act. However, tonight’s speech featured just a passing hat tip to protecting an open Internet.

Strong net neutrality rules are essential for the future of entrepreneurship in this country. If ISPs are allowed to extract fees from companies that can afford to pay for faster delivery of their content, it would create a nearly insurmountable disadvantage for the new startups that are driving new job growth.

Tonight’s speech comes less than 24 hours before major Congressional hearings on net neutrality, and just a few short weeks before the FCC is set to introduce new rules on the subject. Opponents of an open Internet are mobilizing for a last ditch effort to undermine meaningful net neutrality. That’s why in the days ahead you’ll see the startup community continue to rally against proposed legislation that would provide net neutrality in name only, and work to ensure the FCC takes action that will preserve an open Internet for generations to come. We hope we’ll continue to see more leadership from the President on this issue.

Patent Reform

Patent trolls remain one of the biggest threats to startups, forcing many growing companies to choose between hefty legal fees or baseless settlements. It’s a problem President Obama acknowledged in last year’s State of the Union when he said, “Let’s pass a patent reform bill that allows our businesses to stay focused on innovation, not costly, needless litigation.” That reform legislation came very close to passing last session before ultimately dying in the Senate.

With a change in Senate leadership, many of us in the startup community are optimistic about significant movement on patent reform. So we were disappointed to see the President avoid the topic entirely in this year’s speech. While we’re confident that he remains committed to reform, we hope to see him more aggressively pushing for legislation in the weeks to come.

Looking Ahead

"Some of our bedrock sectors, like our auto industry, are booming. But there are also millions of Americans who work in jobs that didn’t even exist ten or twenty years ago — jobs at companies like Google, and eBay, and Tesla."

Overall, the President clearly acknowledged the growing importance of the tech industry to both our economic recovery and to the daily lives of every American. But while he shouted out some of the biggest success stories in the tech community, he failed to mention that not that many years ago, these companies were all startups. And the startups of today will be the success stories and the job creators of tomorrow.

Overall, compared to some previous years, tonight’s State of the Union was a bit light on tech policy. But considering the President’s recent leadership—along with the leadership from members of both parties on the Hill—on a number of issues critical to the future of the tech industry, it’s easy to remain optimistic about our potential for real victories this year.

With FCC action on the horizon, the startup community will be focused intensely on net neutrality in the weeks ahead. At the same time, we’ll be working to make sure that startup voices are heard on topics ranging from immigration to patent reform. And we’ll maintain pressure on the President and on lawmakers in both parties to support innovation and opportunity for everyone.

Net Neutrality Shake Up: Sprint Endorses Title II, GOP Introduces Legislation

Today marked something of a sea change in the net neutrality debate that has gripped the country for the past year. The reclassification of broadband as a common carrier service under Title II seemed all but dead on arrival just a few short months ago. This cast real doubt on the future of startups in this country, and the jobs and economic opportunities that they create.

Now, groups that once bristled at the mere mention of strong net neutrality rules are publicly embracing the tenets of an open Internet. Perhaps most exciting is Sprint declaring their support for Title II reclassification, making them the first national mobile carrier to do so. Sprint’s announcement is further evidence that reclassification would do nothing to chill investment in the expansion of broadband infrastructure.

The other big news of the day was the release of a net neutrality bill from House Republicans. This bill includes some encouraging provisions, including rules that prevent ISPs from blocking, throttling, or charging edge providers for preferential access to customers—the cornerstones of any strong net neutrality rules—and applies these rules to both wireless and wireline broadband. Of course the devil is in the details, and upon closer examination it is clear that the proposed legislation would do much to undermine the future of an open Internet.

For one thing, the bill appears to apply to only customer-facing prioritization, meaning that the rules will not prevent ISPs from using their gatekeeper power to extort money from edge providers at the peering/interconnection level. Since some of the most notable net neutrality violations in recent history involved interconnection, this loophole may be large enough to swallow the rules altogether. And, since the proposed legislation would prohibit the FCC from addressing any future avenues for discrimination, ISPs would simply have to be more creative in how they extract rents from edge providers.

The bill would also rescind an important tool that allows the FCC and state agencies to ensure broadband competition and deployment—Section 706. While 706 by itself is an insufficient grant of authority to effectively ensure an open Internet, it still has an important role in policing ISP malfeasance. As President Obama discussed earlier this week, the FCC can and should use its 706 authority to overturn laws (passed at the behest of large ISPs) that prevent municipalities from providing broadband for their citizens. Under the proposed House bill, the FCC will lose its ability to vacate these anti-competitive handouts to ISPs. Similarly, invalidating 706 as a grant of authority could diminish the role of the FCC and similar state agencies in reviewing harmful broadband consolidation, like the proposed merger between Comcast and Time Warner.

While it’s encouraging to see those once opposed to net neutrality start talking about rules that would protect an open Internet, it would be naive to think that the proposed legislation is anything other than an attempt by ISPs and their supporters to squeeze whatever benefit they can from what they see as a bad development: the FCC’s impending decision to reclassify broadband under Title II. The proposed legislation fails to offer the same strong net neutrality rules that the FCC can provide under Title II, and instead would make it impossible for the FCC to act in the future to protect a vibrant Internet.

The legislation as drafted seems to be little more than a last ditch effort by the opponents of net neutrality to prevent a reclassification that seems increasingly inevitable. Those of us in the startup community who have been fighting for an open Internet must continue to make a clear case to legislators, the FCC, and members of the public: Title II reclassification is the best way to guarantee net neutrality, not just in the short term, but for generations to come.

President Obama Outlines Plan for Competitive Networks, Muni Broadband

The President’s speech yesterday in Cedar Rapids, IA called needed attention to the nation’s serious broadband problem—namely, that little to no competition exists when it comes to broadband networks. Even with a favorable net neutrality ruling from the FCC seeming imminent, the vibrancy of the Internet economy remains at risk, tethered to a few oligopoly Internet Service Providers. These ISPs have tacitly divvied up geographic markets across the country, blocking competition and offering lower speeds and higher costs than those in peer nations. Increasing competition in broadband markets won’t be accomplished overnight, but the plan the President has outlined offers some key strategies for getting competitive broadband options to cities throughout the country.

Echoing sentiments from FCC Chairman Tom Wheeler earlier this year, the President called on the FCC to overrule anti-competitive laws on the books in 19 states that prevent municipalities from providing broadband networks for their citizens. These laws—typically enacted at the behest of large ISPs—provide no public benefit, instead merely shielding ISPs from competition at the expense of local choice. As cities like Chattanooga, TN, Danville, VA, and Lafayette, LA have shown, building next-generation networks helps draw startup activity and grow the local economy, in addition to providing a much needed service to residents. Free from competitive pressures, ISPs have shown little interest in building the high-speed networks that will soon be necessary to compete internationally. The President’s plan to free cities from ISP-driven bans on municipal broadband is a long-overdue step towards getting the U.S. back on track with peer nations.

The President outlined other creative measures to prompt broadband infrastructure investment, including grants for rural areas to build high-speed networks, and a program to remove regulatory red tape that slows down broadband investment. All in all, it’s heartening for the startup community to hear concrete policy proposals to fix a broadband competition problem that is getting increasingly hard to ignore. The President’s plan is a strong step towards making the U.S. a leader in broadband innovation and ensuring that entrepreneurs can continue to create good tech jobs in cities and towns across the country.

2014 Year in Review - Small Steps Towards an Immigration Fix

This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community’s voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world’s policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

There’s widespread agreement among policymakers and citizens alike that our immigration system is broken. But, despite this near-universal recognition that bringing foreign entrepreneurs to the U.S. to start businesses will improve our economy and create jobs, immigration reform remains elusive. Though the House has staunchly refused to consider moving immigration reform legislation, the President took action in November, issuing an Executive Order that takes small but important steps in the right direction. The President’s Executive Order expands immigration options for foreign-born entrepreneurs and makes it easier for high-skilled workers awaiting Lawful Permanent Resident status to change jobs. While these changes are important, the kind of reform that will more fully address the challenges of our country’s immigrant system remains within the purview of Congress.

Until Congress takes on the issue, an outdated immigration system continues to be one of the greatest threats to American entrepreneurship and business growth. Demand for high-skilled employees in the tech industry remains higher than ever and continues to build. And while American universities educate thousands of foreign-born students in STEM fields every year, these students often have few legal employment options in the U.S. and end up returning to their home countries. The President’s plan addresses this problem by seeking to expand the Optional Practical Training program, which permits foreign-born STEM graduates to stay and work in the U.S. Ultimately, however, the OPT program is temporary, and more action needs to be taken in order to allow these talented, U.S. educated STEM graduates to work and build companies in the U.S.

Those high-skilled workers who are eligible to stay in the U.S. often do so through H-1B visas, which have myriad complications and limitations. For one, the supply pool is capped at 85,000, and they’re only issued once a year via lottery. Companies simply can’t rely on winning this lottery, especially startups that “live and die by speed,” as the CTO of Zenefits explained. Further, visa-holders are barred from switching employers, even if they’re afforded better opportunity at another company. This particular restriction was addressed in the President’s recent executive action, which plans to allow highly skilled workers and their spouses to obtain a portable work authorization as they wait to acquire more permanent residential status. However, the executive action did not raise the visa supply, a policy request that’s been a priority for the tech community for years. Only legislative reform will increase the woefully inadequate supply of visas for high-skilled foreign workers.

When it comes to high-skilled workers, our immigration system’s shortcomings may be most devastating for the aspiring entrepreneurs it impedes. The economic case for creating opportunities for immigrant entrepreneurs couldn’t be clearer: a Kauffman study found that immigrants are nearly twice as likely to start a business than native-born Americans.

Yet, under the current rules, a potential founder cannot leave her company in pursuit of starting her own business. The President’s Executive Order also proposes to mitigate this deficiency by creating special immigration rules for founders who can prove they’ve created jobs, attained investment, or generated revenue. We’re excited to see the details of this new immigration pathway released in the next year and hope promising entrepreneurs can take advantage of the opportunity. Nonetheless, the plan falls short of establishing a true founder’s visa.

More countries around the globe are creating attractive opportunities for entrepreneurs seeking a home to build their businesses. Canada, Chile, and New Zealand are just a few of the places welcoming entrepreneurs with legal residency status and even funding through “startup visas.” While the United States Congress stands idle, entrepreneurs are packing up and moving elsewhere. As Reddit founder Alexis Ohanian told CNNMoney, “The next Stripe, or the next Google is one annoying visa application away from just starting in Canada.”

Looking to 2015, the new Republican Congress seems eager to undo the President’s Executive Order, but whether lawmakers will simply attempt to reverse the President’s actions or actually work to fix the many flaws with our immigration system remains to be seen. While comprehensive immigration reform remains a political third rail among Republicans—particularly in light of the 2016 presidential election—it is possible that lawmakers may attempt a piecemeal approach to immigration reform that addresses problems with the high-skilled immigration system, leaving more politically fraught questions relating to undocumented immigrants untouched. Whether comprehensive reform or an issue-specific approach is more achievable, immigration reform must be a policy priority for all members of Congress in 2015 if we are to maintain our position as the best place in the world for entrepreneurs to start new and innovative businesses.

2014 Year in Review - Copyright in the Courts, Legislation on the Horizon

This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community’s voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world’s policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

As is only fitting in a policy area where the law consistently fails to keep pace with technological developments, we are not much closer at the end of 2014 to an overhaul of the nation’s copyright laws than we were in the spring of 2013 when Register of Copyrights Maria Pallante asked Congress to begin work on the “Next Great Copyright Act.” Despite the lack of large-scale reform efforts, 2014 was a fascinating year in copyright issues, with hints at prolonged policy debates to come.

Perhaps chastened by the SOPA/PIPA debacle, Washington took a cautious, deliberate approach to copyright reform efforts this year, getting a lay of the land from a multitude of stakeholders in a series of hearings, roundtable discussions, and panels hosted by the Judiciary Committee, the Copyright Office, and the USPTO. These fact-finding missions covered everything from the DMCA notice and takedown process to the application of the first sale doctrine in digital media. In July, we participated in one of the USPTO multi-stakeholder panels to discuss how massive statutory penalties for secondary copyright infringement can chill innovation and encourage copyright trolls. That policymakers took such a keen interest in soliciting opinions from interested parties about how copyright law needs to change in the coming years suggests that the contours of new copyright legislation will start to take shape in 2015.

While legislators pondered potential reforms, the judiciary was hard at work dealing with cutting edge copyright cases (and, unfortunately, coming to some troubling conclusions). In April, we filed an amicus brief with the Supreme Court in its review of Aereo’s TV streaming business. The Court ultimately ruled that by distributing free over-the-air broadcasts to Internet subscribers via dedicated miniature antennas, Aereo was infringing broadcaster copyrights. In doing so, the Court ignored the plain text of the statutes at issue, employing what amounted to a smell test: Aereo looked like a cable TV service, so it should be governed as one, subject to a compulsory license regime. The ruling injected even more uncertainty into a notoriously vague body of law, opening up avenues for idiosyncratic judicial opinions to shut down new technologies that are in textual compliance with existing statutes.

Even more concerning for startups everywhere, the Federal Circuit in May issued its opinion in the Oracle v. Google case, holding that software APIs—bits of code that allow different applications to communicate and work together—are copyrightable. The implications of this decision are far-ranging, threatening to undermine the competition and open exchange of ideas that helped drive the rapid growth of software and applications. Requiring entrepreneurs to enter into licenses in order to use common APIs will make it significantly more difficult to create widely compatible applications, leading to an increased balkanization of software services and applications. As interoperability decreases, so too does application innovation and consumer choice. Google has appealed to the Supreme Court, and we joined an amicus brief urging the Court to take the case, arguing that allowing companies to claim copyrights on APIs would greatly harm software innovation.

Recent weeks have seen even more salacious copyright news, with leaked documents from the MPAA suggesting that the so-called “copyright wars” of a few years back may return in a big way. The MPAA has apparently been working on reinterpreting the DMCA to accomplish some of the same nefarious goals that SOPA was meant to facilitate (e.g., DNS site blocking), and it has roped several state Attorneys General into taking up its cause of holding content-neutral websites accountable for copyright infringement rather than the folks actually engaging in the “piracy” the content industry so detests. As the SOPA/PIPA fight showed and these leaked documents confirm, the content industry has little regard for the collateral damage its anti-piracy efforts would do to non-infringing activities.

In light of these reports, it seems more and more likely that Congress will begin putting pen to paper on a Copyright Act update in 2015, and it’s crucial that the technology and startup communities help set the agenda, rather than merely reacting to the demands of the content industries. Key on that agenda is restoring sanity to the copyright damages regime, strengthening and clarifying safe harbors for companies that aren’t engaging in direct infringement, and ensuring that the costs of complying with secondary liability rules aren’t prohibitively expensive for startups. The SOPA/PIPA debate showed that the Internet community is paying attention to changes in copyright policy; the next great copyright debate must show that the tech world is ready and willing to advance a proactive agenda that fosters the next wave of innovative technologies.

2014 Year in Review — Net Neutrality: Where We've Been, and Where We're Going

This post is one in a series of reports on significant issues for startups in 2014. In the past year, the startup community's voice helped drive notable debates in tech and entrepreneurship policy, but many of the tech world's policy goals in 2014, from net neutrality to patent reform, remain unfulfilled. Stay tuned for more year-end updates and continue to watch this space in 2015 as we follow the policy issues most affecting the startup community.

Of all the tech policy issues that got major airtime in 2014, few resonated so deeply with the general public as the fight over net neutrality. The net neutrality debate highlighted both the strength of the Internet community’s voice and the ample work we must still do to make sure Washington heeds our message. Thousands of companies that depend on the Internet’s open playing field and millions of Americans who recognize the threat posed by unchecked ISP gatekeepers mounted a sustained and effective campaign throughout the year to influence the FCC’s net neutrality rulemaking. While these efforts have been enormously successful in getting the FCC to take net neutrality seriously, the task is not yet finished.

This year’s net neutrality fight was not the first time the FCC grappled with these questions. Though the FCC in 2002 (wrongly, we believe) classified broadband Internet as an “information service” under the Communications Act of 1934, rather than a “telecommunications service,” broadband Internet has always been governed by net neutrality principles. Under such principles, ISPs are obligated to treat all sources of data equally and not block or degrade traffic from particular edge providers. The FCC enshrined these principles as enforceable rules in its 2010 Open Internet Order, which established regulations against ISP discrimination.

Earlier this year, an appellate court in D.C. threw out out these 2010 rules not because of any inherent infirmity with the logic of net neutrality itself but on something of a legal technicality: only “common carrier” services could be subject to bright line rules against discrimination, and since the FCC neglected to classify broadband as a common carrier telecommunications service, it could not now bar ISP discrimination. The court held that any rules issued pursuant to the FCC’s section 706 authority—a statutory mandate to enact policies that promote the adoption of broadband—could not include a ban on paid prioritization arrangements or other forms of access fees unless the FCC first reclassified broadband as a common carrier service under Title II of the Communications Act. Faced with this rejection of its 2010 rules, the FCC was asked yet again to reconsider how and whether to protect a neutral Internet.

Reports earlier this spring suggested that the FCC was not considering any plan involving reclassification, which signaled to the Internet community that the FCC was essentially turning its back on net neutrality altogether. The reaction to these reports was swift and effective. Engine, along with the Open Technology Institute at the New America Foundation  sent a letter to the FCC with nearly 200 major Internet company signatories demanding that the Commission issue rules sufficient to block discrimination and paid prioritization. The FCC got the message, and its notice of proposed rulemaking solicited comments on whether to reclassify broadband under Title II in order to establish meaningful net neutrality rules.

Even as the FCC discussed the possibility of reclassification in its proposed rules, few believed that reclassification had any chance of going forward. Unwilling to accept a world in which ISPs could abuse their gatekeeper power to impose rent-seeking access fees, the Internet community got to work. The path from toothless rules under section 706 to the imminent possibility of full-fledged net neutrality regulations under Title II was paved most visibly by a stunningly large public response. Nearly 4 million commenters wrote to the FCC about its consideration of new net neutrality rules, a majority of whom supported calls for stronger regulations to prevent ISP misconduct. Recognizing that the high cost of access fees that ISPs could charge edge providers would ultimately get passed on to consumers, citizens fought back against allowing ISPs to serve as gatekeepers to the Internet.

Startups also played a key role in shifting the FCC’s consideration of net neutrality rules towards more meaningful regulations under Title II. Despite having limited resources and time to devote to challenging the lobbying might of cable companies, startups from across the country worked hard to keep the Internet open for permissionless innovation, filing comments with the FCC, participating in an Internet-wide protest, and flying to Washington, D.C. to gin up political support for real net neutrality. As the dire consequences of abandoning net neutrality would be felt more deeply by smaller companies rather than larger, more established tech firms, startups took on an outsized role in the net neutrality fight.

In the face of this massive popular response, the FCC moved haltingly towards a Title II-based solution, leaking news that it was considering a so-called “hybrid” net neutrality proposal that relied in part on Title II authority, but would have entailed significant risk of being rejected again in court. Under such hybrid proposals, the FCC would divide every Internet communications into two distinct components—a communication between an end user and her ISP and a communication between the ISP and the edge provider the user wants to access—and regulating only this second communication under Title II. While news that the FCC was finally considering Title II in some form was encouraging, the Commission’s failure to recognize that full-fledged Title II reclassification represented a far cleaner path to strong net neutrality was frustrating.

With the FCC expected to circulate a final draft rule only weeks after news of the “hybrid” plans leaked, the time for action appeared to be running out. And then, almost overnight, the conversation changed when President Obama called on the FCC to use Title II reclassification to protect an open Internet. The President’s announcement was game-changing; the once-impossible prospect that the FCC would invoke full Title II reclassification became plausible, perhaps even likely. Politicians rallied behind the President’s plan in droves, and many of the largest tech companies in the country vocally supported the President’s call for full Title II. Even conservatives, often assumed to be opposed to net neutrality, overwhelmingly supported real net neutrality.

But, despite the FCC’s apparent shift from weak net neutrality under 706 to full-fledged Title II reclassification, the net neutrality fight is not yet over. All indications from the FCC suggest that it will circulate its proposed rule this spring. Though most believe that the FCC will propose reclassification (and apply net neutrality principles to mobile broadband—an important protection omitted from the 2010 rules), there is no concrete proof that the FCC will follow the clear will of the people and the Internet economy to enact real net neutrality. While it is crucial that the FCC makes sure that its new rules are strong and sufficient to withstand the inevitable legal challenge from ISPs, we must continue to pressure the FCC to do what’s right and do it promptly, lest carriers use the delay to sap the FCC’s courage to stand up to ISP malfeasance and protect the open Internet.

And, even if the FCC reclassifies broadband in order to craft strong net neutrality rules, the debate will likely continue in the new Republican Congress, which has already signalled its opposition to meaningful net neutrality. Whether Republican opposition is genuine or a knee-jerk reaction to the President’s statements remains to be seen. In the next year, we will keep the pressure on policymakers, reminding them of how crucial net neutrality has been to the momentous growth of the Internet economy and how the millions of Americans who have benefitted from the Internet’s prosperity are fully engaged and ready to fight to preserve the neutral Internet they know and love.

Utah v. Zenefits: The Case for Smart Disruption

“Disruption” is a word that’s thrown around often and without consequence, but when you take a second to think about what it really means—upending the status quo—you can understand why it’s so important that we encourage responsible disruption. Because, quite often, doing away with the status quo also means progress.

The latest battle that has our attention is in Utah: there, Zenefits is under fire from the state Insurance Department for offering free software from which people can obtain insurance and other HR-related services. The state claims that offering the free software violates state laws regulating insurance brokers. Yet, we find it hard to come up with any rationale for this decision, other than the fact that Zenefits’ product makes it harder for long-time insurance brokers to compete. (For what it’s worth, Utah’s Lt. Governor publicly stated last week that Zenefits has not been banned from the state, but it’s fair to say Utah is not a hospitable place for the growing startup right now.)

Here’s the thing about Zenefits: It provides an incredibly useful service. (We at Engine should know, since we use if for our own team.) Through an easy-to-use UI and streamlined process, Zenefits makes it significantly easier for startups and small businesses to navigate the HR and insurance process, which—as anyone who has tried to do that before can tell you—is a beast. This is a good thing for at least two very important reasons: 1) it allows small businesses to more easily give their employees access to not just health insurance, but other HR benefits (like FSAs, commuter benefits, etc.); and 2) it frees up valuable resources, primarily time, so that a business can get back to the hard work of building a company.

As we see it, Zenefits and other companies simplifying the HR process are good for just about everyone, except for those who benefit from a messy and expensive system that requires incumbents with entrenched market power to navigate. Which is why we’re so concerned about what’s going on in Utah.

This is not to say that the insurance industry should not be regulated, or that Zenefits should be able to compete without following smart regulations that exist to protect consumers. It is to say, however, that relying on antiquated regulation to stymie innovation—what the Utah Insurance Department seems to be up to here—sets dangerous precedent that will only harm our startup ecosystem and recovering economy.

Success of FCC Spectrum Auction Reflects Boom in Mobile Internet Market

The FCC’s auction of new wireless spectrum—the biggest auction of its kind since 2008 —has vastly exceeded revenue expectations, surpassing $40 billion in bids as of Wednesday morning. Considering most analysts predicted that the auction would fetch somewhere between the FCC’s reserve price of $10 billion and $15 billion, the auction appears to be a resounding success.  The auction is for mid-band spectrum that carriers can use to help deploy 4G LTE networks. The success of the spectrum auction is particularly notable in light of arguments from wireless carriers in recent months that the application of net neutrality rules to wireless broadband would diminish their incentives to invest in infrastructure. Although the FCC has indicated that it is considering applying net neutrality rules to both wireless and wired broadband, carrier interest in bidding on the available spectrum surpassed all expectations.

The reason carriers are scrambling to buy up available spectrum is quite simple: consumer demand for wireless data has exploded in recent years, due to a robust market for mobile applications and services. The global market for mobile apps and advertising was worth $38 billion in 2013, up from about $6.8 billion in 2010. This latest spectrum auction shows what the FCC has described as the “virtuous cycle of innovation” at work: the more and better wireless services and applications are available to customers, the more consumers will demand sufficient capacity to use these services, and the more incentive carriers have to invest and expand their networks. Startups and entrepreneurs always find creative ways to make use of greater bandwidth and faster speeds, creating new applications to harness advances in infrastructure, further increasing consumer demand for more applications and more network capacity.

The key to all this innovation growth, of course, is robust competition and sound policy managing the finite public resource that is wireless spectrum. To ensure that the the wireless market remains competitive and innovative, the FCC and other regulators must work to promote policies that encourage wireless providers to use their spectrum efficiently and fairly, including taking steps to protect Open Internet principles in wireless networks and preserving spectrum for unlicensed use. The success of the auction is an encouraging sign for the future prospects of the US wireless market, but regulators should continue to work to ensure that sufficient spectrum is preserved for unlicensed use and not exclusively controlled by a few carriers.