Prepared Statement
of the
Federal Trade Commission
Before the
Subcommittee on Telecommunications, Trade
and Consumer Protection
Committee on Commerce
United States House of Representatives
Concerning H.R. 1858
The "Consumer and Investor Access to Information Act of 1999"
July 1, 1999
The Federal Trade Commission is pleased to have this opportunity to offer this Statement concerning H.R. 1858, the Consumer and Investor Access to Information Act of 1999.(1) The Commission is responding to Subcommittee Chairman Tauzin's June 11, 1999 letter, requesting agency views on Title I of H.R. 1858, as an official request of a Congressional Subcommittee.(2)
H.R. 1858 has four primary objectives: (1) protecting substantial private investments in collecting and organizing original databases from certain forms of free-riding by sellers and distributors of duplicate databases; (2) permitting competition by those who independently collect and organize rival databases; (3) preserving access to information contained in databases for legitimate journalistic, law enforcement, scientific, educational and research purposes; and (4) denying protection to database owners who seek to misuse such protection for anticompetitive purposes.
Databases play an important role in promoting innovation and advancing knowledge in the information age. Further, the emergence of new digital technologies has greatly increased the accessibility and usefulness of many databases. However, these same technologies have also created opportunities for free-riding and misuse. The resulting public policy challenge is to ensure that the law continues to provide adequate incentives for database owners both to produce databases and to allow sufficient access to those databases and the information that they contain. This challenge is further complicated by the ongoing nature of innovation, which requires both protecting the incentives of those who are first to compile a particular type of database and preserving the opportunities of those who seek to transform existing databases into new, useful compilations or other products.
The Commission has experience formulating policy and remedies involving similar kinds of challenges. During the Commission's 1995 Hearings on Global and Innovation-Based Competition, industry, academia, and legal practitioners provided extensive testimony concerning the intersection of competition, intellectual property, and innovation policy. More recently, in cases such as In re Softsearch Holdings, Inc.,(3) In re Automatic Data Processing, Inc.,(4) and In re Provident Cos., Inc.,(5) the Commission has considered the potentially anticompetitive effects of the increased market power that can result from consolidation among database owners and vendors.
Drawing from such experiences, the Commission provided comments on an earlier proposal for legislative protection of databases in letters to the Chairman and the Ranking Member of the House Committee on Commerce last fall.(6) In those letters, the Commission stated that "[a]dditional legal protections for databases may well be warranted, especially in light of the ease of piracy of some databases." At the same time, the Commission highlighted several "areas of concern that may warrant further study," particularly regarding possible unintended, deleterious effects on competition and innovation that could arise from broad or ambiguous database protection legislation.
This Statement derives from the same considerations that informed the Commission's letters last year. It first provides a brief overview of H.R. 1858. It then summarizes the general issues of intellectual property and competition policy and the specific concerns raised by the Commission last year. The Statement then highlights several respects in which H.R. 1858 appears responsive to those concerns. It also, however, identifies several possible problems and ambiguities with the Bill that may warrant further examination. Finally, the Statement addresses the proposal in H.R. 1858 to assign enforcement responsibility to the Commission and notes the significant new burden it would place on the Commission's resources.
I. Overview of H.R.1858
H.R.1858 is designed to provide additional legal protections to databases that are not entitled to protection under copyright law following the Supreme Court's decision in Feist Publications v. Rural Telephone Services,(7) which abolished "sweat of the brow" copyright protection for non-creative, factual compilations. Although H.R. 1858 is based on a misappropriation model,(8) the Bill addresses core issues similar to those that arise in the context of intellectual property policy, as well as antitrust policy. These issues involve how best to protect both the ability of initial innovators to realize returns on their investments in developing a database and the ability of follow-on innovators to access databases to serve as building blocks for ongoing innovation competition.
The Bill defines a database as follows:
"a collection of discrete items of information that have been collected and organized in a single place, or in such a way as to be accessible through a single source, through the investment of substantial monetary or other resources, for the purpose of providing access to those discrete items of information by the users of the database. However, a discrete section of a database that contains multiple discrete items of information may also be treated as a database."(9)
"Information" is defined as including any intangible material capable of being thus collected and organized, except for "works of authorship."(10)
The Bill generally prohibits the selling or distributing to the public in commerce of a "duplicate" database "in competition with" an original database.(11) To be a "duplicate," the second database must be "substantially the same" as the original, and must have been made by extracting information from the original.(12) To be "in competition with" the original, the second database must "displace[] substantial sales or licenses of the original" and "significantly threaten[] the opportunity to recover a return on the investment" therein.(13)
This prohibition is subject to an exception for certain specified "permitted acts,"(14) similar to the fair use defense in existing copyright law,(15) and to exclusions that reserve to the public domain government databases and databases required by law, databases related to Internet communications, computer programs, individual facts and other individual intangibles, and telecommunications subscriber list information.(16) H.R. 1858 also exempts from liability telecommunications and information services and facilities providers who act only as conduits for the publication of duplicate databases.(17) In a provision that appears to have its origins in patent misuse and copyright misuse case law, H.R. 1858 denies database protection to those who "misuse" it.(18)
As to enforcement, the Bill vests what the Commission understands to be exclusive jurisdiction in the Commission to enforce, implement by rule-making, and seek remedies for violations of its basic prohibition.(19) The Bill also calls upon the Commission to report to Congress on its effects within three years.(20) Subject to a limited preemption of inconsistent State law,(21) the Bill preserves Federal and State antitrust, intellectual property, communications, and contract law.(22)
II. The Background to this Statement: Intellectual Property and Antitrust Policy and the Commission's Comments on
Prior Proposed Database Protection Legislation
As noted above, H.R. 1858 raises core issues of how to protect both investments in databases and access to databases similar to those at the intersection between intellectual property and antitrust policy. It is well recognized that despite the apparent tension between the antitrust and intellectual property laws, the two bodies of law share the common purpose of promoting innovation and enhancing consumer welfare.(23) Intellectual property law provides incentives for first-generation innovation by protecting innovators from unfair free-riding. Antitrust law recognizes that certain misuses of intellectual property rights may harm competition by, for example, permitting a monopolist to leverage its market power from the market covered by the patent or copyright into other markets, or to foreclose a competitor's or second-generation innovator's access to an important input.(24)
H.R. 1858 presents issues about how to strike this delicate balance. As the Commission stated in its letters last year, a legislative remedy that effectively and accurately targets free-riders on databases appears desirable. Databases play an integral role in many facets of our economy, and collecting and organizing factual data is often an expensive and complex process. Free-riding by those who merely copy and resell or give away existing databases may reduce incentives for database providers to create new databases or to introduce existing databases in new media that can more effectively deliver more information to consumers. As recent cases such as ProCD v. Zeidenberg(25) and Warren Publishing v. Microdos Data Inc.(26) show, the proliferation of digital technologies has rapidly reduced the costs and difficulty associated with copying and distributing vast amounts of data, thereby facilitating free-riding. Although it may be too early to tell, current protections and remedies for database misappropriation, such as those available under contract and copyright law, may be inadequate.
In crafting legislation to protect the incentives of first-generation database producers, however, it is important to keep in mind the need to preserve opportunities and incentives for follow-on innovators, who may need access to the initial innovation for use as a stepping stone.(27) Last year, the Commission expressed several concerns regarding the potential effects on competition of the database protection legislation then proposed, Title V of H.R. 2281 (the "Collections of Information Antipiracy Act"). The Commission highlighted the following dangers inherent in ambiguous language that could be read to preclude certain reasonable uses of existing databases to produce new products or services of value to consumers:
- 15-Year Term. The 1998 bill limited the civil and criminal liability that it created to a term of 15 years from the date of "the investment of resources that qualified the portion of the [database] for protection under this chapter that is extracted or used." The Commission questioned whether 15 years was too long a term, given that information technology product cycles are typically short and misappropriation law has typically protected only investment in gathering "hot," i.e., short-term valuable, information.(28) The Commission also highlighted the uncertainties involved, particularly for a potential defendant, in attempting to apply any fixed term that runs from the point of "investment of resources" in a database, given that such investment is often ongoing.
- Substantiality of Duplication. The 1998 bill generally prohibited the extraction of "all or a substantial part, measured either quantitatively or qualitatively, of a collection of information . . . so as to cause harm to the actual or potential market for that other person . . . ." The Commission highlighted the vagueness of a "quantitatively or qualitatively . . . substantial" test, and the chilling effect its uncertainty could have on a potential defendant. The Commission suggested that copyright precedent could not properly be applied by analogy, since such precedent is premised on the facts/expression dichotomy that is unique to copyright, typically looking for copying of expression that minimally "exceeds that necessary to disseminate the facts,"(29) or making stylistic judgments(30) that are alien to non-expressive collections of data.
- Potential Competition. The 1998 bill proposed to protect claimants of database protection against competition by duplicators not only in markets actually exploited by the claimant before entry by the duplicator, but also in "potential market[s]" that the claimant specifically planned to or might typically be expected to exploit in the future. The Commission highlighted ambiguities in this provision which could have a chilling effect on follow-on users, and noted that it appeared to provide more protection for databases than is available for works protected by existing copyright and misappropriation laws. Most importantly, the Commission expressed concern that by effectively enabling a database owner to exclude others from entering a secondary market without even entering such a market itself, the 1998 bill could conflict with a fundamental shared policy of intellectual property and antitrust policy: encouraging "the creation of transformative works."(31)
- Single-Source Databases and Anticompetitive Misuse of Database Protection. The Commission highlighted the "increased potential for anticompetitive conduct where there exists only a monopoly source for a particular type of information." The Commission noted the risk that database protections that entrench such monopolies may facilitate such anticompetitive practices as charging supracompetitive prices, restricting output, leveraging market power into other markets and denying essential inputs of information to competitors.(32) The Commission cautioned that "antitrust law cannot alleviate all of the potential competitive problems associated with sole-source databases," since antitrust law permits certain uses of lawfully acquired monopoly power and the essential facilities doctrine of antitrust law has been limited in its application thus far.(33)
The Commission's letters last year concluded by suggesting three key areas in which the 1998 bill might be improved:
-
(1) limiting the term of protection to less than 15 years and precluding perpetual protection for databases that are maintained on an ongoing basis;
-
(2) defining more clearly the degree of copying required to trigger liability; and
- (3) excluding "potential competition" protection and/or strengthening "fair use" type defenses.
III. The Responsiveness of H.R. 1858 to the Commission's Concerns
H.R. 1858 differs significantly from the former H.R. 2281. Although the Commission notes several concerns with H.R. 1858 in the next Section, the Bill appears responsive to several of the Commission's original concerns.
(a) Substantiality of Duplication. Instead of asking whether a qualitatively or quantitatively substantial amount of data has been extracted from the original database, H.R. 1858 asks whether the two databases are "substantially the same."(34) No formulation appears possible that would exclude an element of judgment, but this new formulation appears clearer than that of the 1998 bill, and reduces the risk that data, as distinct from the database as a whole, will be protected.
The Bill further provides that "a discrete section of a database that contains multiple discrete items of information may also be treated as a database."(35) This provision also raises issues of judgment: how many is "multiple"? The closest the Bill comes to answering that question is elsewhere in its definition of "database," in which it requires that a database reflect "the investment of substantial monetary or other resources." If this is interpreted as requiring a reasonable common sense determination of substantiality, small sections of databases that lack real independent value will be excluded. Thus, the Bill appears to require that the alleged "database" be both (i) discrete and (ii) substantial in terms of what went into it. Furthermore, the "discrete section" provision does not mandate that such a section be deemed a database; instead, it "may" be treated as such. If this is interpreted to allow room for reasonable judgment as to whether the section is ultimately best characterized as a database as opposed to a mere extract, it appears that overprotection of minor elements of a database can be avoided.
(b) Potential Competition. The Bill does not expressly protect database creators with respect to markets that they might potentially enter, and requires that the duplicate database "displace[] substantial sales or licenses of the database."(36) That which does not yet exist is not normally said to be "displaced." Accordingly, this provision appears to require that there actually be "sales or licenses" of the original database in the market in which the two compete before the duplicate competes therein. In this respect, H.R. 1858 appears fully responsive to the concerns voiced by the Commission last year.
(c) Single-Source Databases and Anticompetitive Misuse of Database Protection. H.R. 1858 addresses the monopoly and misuse issues raised by the Commission last year in Section 106(b). Consistent with the general policy that factual databases should not be protected more than copyrighted and patented works, this provision looks to copyright and patent misuse precedent as a potential guide.(37) It also specifically addresses issues of monopolistic pricing and output limitations on sole source databases,(38) leveraging of monopoly power into new markets,(39) and denial of essential facilities.(40) In these respects, it appears highly responsive to the Commission's concerns. However, Section 106(b) also raises several novel issues of interpretation, discussed in the next Section, which may give rise to uncertainty and litigation.
IV. Substantive Issues Arising Under H.R. 1858
In searching for an appropriate balance between protection and access to stimulate both first- and second-generation database production and use, the substantive provisions of the Bill (Sections 101 to 106) make several choices and employ several concepts that may warrant further study. The principal areas that appear likely to give rise to concerns or ambiguities are noted below:
(a) Term of Protection. H.R. 1858 contains no term limit to database protection. This absence eliminates the ambiguities noted by the Commission in the case of ongoing database maintenance,(41) but heightens concerns regarding possible perpetual protection. If protection under the Bill were indeed perpetual, databases would in a sense be more protected than copyrighted or patented innovation, and the balance between protection and competition would be tilted against competition.
On the other hand, certain other terms, discussed further below, might operate to limit the term of protection as a practical matter. As the Commission noted in its 1998 letters, the common law of misappropriation has generally limited protection to relatively short terms despite the lack of a statutory term limit.(42) The "in competition with" requirement of Section 101(5) of H.R. 1858 limits protection to that necessary to prevent a "significant[] threat [to] the opportunity to recover a return on the investment in the collecting or organizing of the duplicated database." Under this provision, it appears that once a database creator that has already recovered its "return on investment," it is no longer entitled to the protection afforded by H.R. 1858.(43) Similarly, the misuse defense of Section 106(b), which, for sole source databases, may effectively condition protection on reasonable licensing or sale terms,(44) might provide grounds for limiting protection of old databases. Nonetheless, as drafted, the Bill provides no clear term limitation to protection on which a potential defendant could readily rely.
The perpetual protection danger and the issue of whether some form of safe harbor can be constructed to protect those seeking to duplicate old databases may merit further study.
(b) Section 101(3): Exclusion of Collections of "Works of Authorship" from Protection. Section 101(3) defines "information" as excluding "works of authorship," and thereby excludes collections of works of authorship from the Bill's database protection regime. This provision appears ambiguous as to whether the phrase "works of authorship" is intended to incorporate by reference case law under the Copyright Act, 17 U.S.C. § 102. It would be useful to clarify this ambiguity, and also to clarify the purpose of this exclusion.(45)
(c) Section 101(5): The "In Competition With" Requirement. As noted above, the requirement in H.R. 1858 that a duplicate be "in competition with" the original database to give rise to potential liability appears responsive to the Commission's concerns about prior proposals that might have protected database owners with respect to markets that they have yet to enter. The requirement that "the opportunity to recover a return on the investment in the collection or organizing of the duplicated database" be "significantly threaten[ed]"(46) also appears consistent with the underlying policy goals: the purpose of protection is to provide an appropriate incentive for database creation, not opportunities for monopoly profits over and above those necessary to stimulate production.
The more difficult issue, which may merit further study, is what level of return should be protected. The insertion of the word "reasonable" before "return" may be appropriate as a start to encourage those administering the Bill to develop standards and precedents regarding what level of return is reasonable and can be expected. Precedents and principles from the utility regulation context could be consulted in this regard.(47)
(d) Sections 101(6) and 104(a): Government Databases. Following the lead of the Copyright Act,(48) the Bill appropriately avoids creating private rights that would take government-created or government-funded information and databases out of the public domain. At the same time, the Bill recognizes that private investment in compilations that include substantial government data may be worthy of protection. In Section 104(a)(3), the Bill also helpfully preserves the ability of government entities to minimize uncertainty by establishing specific rules to govern specific databases by law or by contract. It is not readily apparent why the exclusion of government information from database protection is generally limited (under the present Bill as under the Copyright Act) to federal government information; as a matter of general policy, it appears desirable to keep state, local and foreign government-created information in the public domain as well.
Under Section 104(a)(2), as under Section 105 of the Copyright Act, the most difficult issue likely to arise is the severance issue: when and how should private investment in a database containing predominantly government information be compensated? Under the Copyright Act, the copyright holder must establish "substantial similarity between those elements [excluding governmental data and organization], and only those elements, that provide copyrightability to the allegedly infringed compilation."(49) The federal courts of appeals are currently split on the application of this test to a single factual issue: the incorporation into competing databases of West Publishing Company's star pagination from its database of judicial opinions.(50) This and similar issues may be expected to arise under H.R. 1858.
(e) Section 103: Permitted Acts. Section 103 appears intended to be the Bill's equivalent to the fair use defense in copyright. Unlike Section 107 of the Copyright Act, however, Section 103 limits its permitted acts to four specific enumerations. This poses a danger that additional valuable transformative uses that might emerge in the new information economy and cannot currently be specifically anticipated might be stifled. A broader provision along the lines of Section 107 of the Copyright Act that would provide a general defense for substantially transformative uses appears to merit serious consideration;(51) such a provision could use the current enumeration in Section 103 or a similar enumeration as a non-exclusive starting point.
In addition, several aspects of the specific subsections of Section 103 raise questions. Section 103(a) usefully clarifies that the independent creation of an identical database is not prohibited.
The law enforcement exception in Section 103(c) appears plainly appropriate with respect to government officers, agents or employees. The interpretation of the phrase "lawfully authorized investigative, protective, or intelligence activities" is, however, unclear. Is it intended to be narrowly limited to governmental action for the purpose of preventing, detecting or prosecuting crime? Or does it encompass a broader array of activities, such as disseminating information to the public on the whereabouts of convicted or alleged violent sexual offenders, commercial sale of private intelligence information, or dissemination by private entities of information received from law enforcement officials?(52)
Data gathering and dissemination in many of these contexts raises significant privacy and, in some cases, First Amendment concerns. For example, in United Reporting Pub. Corp. v. California Highway Patrol,(53) the Ninth Circuit declared unconstitutional a California law(54) restricting the permitted uses of arrestee identity and address information provided by law enforcement agencies to non-commercial uses (plus media reporting). The case is now pending before the Supreme Court.(55) The effects of Section 103(c) on such First Amendment and privacy issues appear to merit further study.
The limitation of Section 103(d)'s exemption for "scientific, educational or research uses" to uses that are not "part of a consistent pattern engaged in for the purpose of direct commercial competition" with the database creator also gives rise to a potentially troublesome ambiguity: it is not clear how the undefined term "direct commercial competition" compares with the "in competition with" element of the basic prohibition, which, as discussed above, appears limited (as suggested in the Commission's 1998 letters) to actual (as distinct from potential) competition. Unless there is a specific policy goal to be served by using a different term, it would be helpful to simplify matters by using the same term in both sections.
Similarly, whereas the basic prohibition applies to "sell[ing] or distribut[ion],"(56) Section 103(d) refers instead to "duplicat[ion]" as the exempted act. This exemption could be read literally as valueless -- it exempts an activity, mere duplication, that is not prohibited -- leaving scientific, educational and research users of databases without an equivalent to the fair use protection that they enjoy with respect to copyrighted materials.(57) Clarity would be better served, and the danger of chilling legitimate scientific, educational and research activities would be lessened, by specifying the circumstances in which the prohibited acts -- selling and distributing -- are exempted.
(g) Section 106(b): Misuse Defense. As discussed above, the misuse defense created by Section 106(b) appears responsive to concerns expressed by the Commission last year regarding potential anticompetitive uses of database protection. The policy concerns underlying antitrust law suggest that misuse defenses should be no less available in response to database protection claims than they are in response to copyright and patent infringement claims. In addition, the equitable principle traditionally underlying misuse defenses, the "unclean hands" doctrine,(58) suggests that the defense could be used to deny protection to database creators who misuse their databases in other ways, such as denying consumers access to personal information about themselves contained on the database.
Section 106(b)(6) assists in the interpretation of the misuse provision as a whole by directing attention to patent and copyright misuse precedents. In addition, three of the factors identified by the Bill as relevant to a determination of misuse -- the reasonableness of sale or licensing terms for sole source databases,(59) tying of database licensing or sale with other products or services,(60) and prevention of access to necessary information(61) -- correspond to three established concerns of antitrust policy identified in the Commission's letters last year: monopolistic pricing and output limitation, leveraging of monopoly power, and denial of access to essential facilities. These provisions are far from self-executing: for example, the question of what licensing or sale terms are "reasonable" under Section 106(b)(2) raises issues similar to those discussed above in relation to Section 101(5)(B)'s "return on investment" criterion. But case law exists in most of these areas that might be useful in developing appropriate principles to guide application of these provisions.(62)
In other respects, however, the misuse provision appears novel and potentially ambiguous. First, its subsections merely list factors to be considered in making the ultimate determination of whether "misuse" has occurred. "Misuse" itself is not defined, and the intent of Section 106(b)(6)'s instruction to consider copyright and patent misuse doctrine to "the extent to which [it] may appropriately be extended to the case or controversy" is unclear. It may be useful to clarify whether it is intended as an open-ended delegation to consider whether databases should be more or less protected than copyrights or patents and to adjust misuse precedents from those contexts accordingly, or whether the intention is to mandate consistency with those precedents unless specific factual issues render them inapplicable in the particular case. If the former, a determination of "misuse" threatens to become highly subjective: the whole point of the basic prohibition is to create a degree of exclusivity that the database creator can exploit for profit, but how much exploitation is too much? If the latter, significant distinctions between the misappropriation-style database rule and the intellectual property regimes of patent and copyright law may be neglected. For example, the filing of an infringement action can never be misuse under patent law precedent, while the filing of database protection lawsuits that assert claims that cannot be readily verified at the Patent and Trademark Office (since databases do not have to be registered) could be a highly effective and anticompetitive way of erecting barriers to entry in the database industry.
The role of the six enumerated factors is also unclear. Read literally, Section 106(b) consigns them to be considered "among other factors" in determining the ultimate issue of misuse, but can any one of them suffice alone? For example, can perfectly lawful "technological measures" taken to prevent unlawful copying, which then have the side-effect of frustrating permitted research or news media uses, constitute "misuse" pursuant to Section 106(b)(1), or does the term "misuse" itself entail some notion of wrong-doing?(63) By its nature, an assertion of database protection may well raise barriers to entry in a relevant database market; under what circumstances might the "manner of asserting" data protection rights amount to misuse pursuant to Section 106(b)(5)?
Also, when must the misuse occur? Is the determination to be made in the individual case, i.e., whether the database protection claimant has injured the alleged violator by misuse, or over the whole course of the claimant's conduct, such that, for example, improper frustration of the ability of researchers to engage in permitted acts could result in forfeiture of protection as against all-comers, including direct commercial competitors? The latter alternative, which may be suggested by the text of Section 106(b)(1), could potentially provide an effective incentive to ensure access to databases for non-profit and other permitted users who might not themselves be in a position to complain of misuse or risk litigation. Existing copyright and patent misuse doctrine generally denies all enforcement against infringement while misuse persists, but allows the intellectual property owner to revive its rights by purging itself of the misuse.(64)
V. The Commission's Proposed Role Under H.R. 1858
The most noteworthy remaining feature of the Bill, and one that distinguishes it from all other proposals that the Commission has reviewed and from existing intellectual property and misappropriation laws, is that it assigns enforcement authority to the Commission.(65) This proposed assignment raises several issues.
(a) Absence of criminal liability. Unlike the 1998 bill, H.R. 1858 does not create any new criminal liability. Although willful copyright infringers can incur criminal liability,(66) misappropriation and other laws concerning the copying and dissemination of factual information have traditionally been purely civil. This tradition reflects First Amendment concerns and a salutary general policy favoring freedom of information. Moreover, the interpretive issues noted in Section V above and the residual ambiguities that are inherent in the enterprise of crafting a new legal regime to protect formerly unprotected works raise the concern that the threat of criminal liability could chill innovation and competition as a result of uncertainties in the law. It therefore appears appropriate to exclude criminal liability from the Bill.
(b) Is a private civil right of action excluded? Section 107 of H.R. 1858 confers jurisdiction on the FTC, but it does not expressly address whether a private right of action may be maintained to enforce the basic prohibition of Section 102. The Commission tentatively interprets the Bill, in the light of Supreme Court precedent on implied rights of action,(67) as excluding any private civil right of action: the Bill appears to intend that database owners harmed by duplicates address their complaints to the Commission instead of the courts. However, the Bill is also somewhat ambiguous: Section 106(b) directs "a court," rather than the Commission, to consider a list of factors in determining the merits of a misuse defense. Express clarification of legislative intent in this regard could avert future litigation.
(c) FTC Enforcement. The Bill would entrust the Commission with its enforcement. The Commission appreciates the confidence of Congress and the recognition of the Commission's experience with the underlying policy issues that this appears to reflect. The Commission also appreciates that the threat of private actions could be used by market incumbents to threaten potential entrants, potentially raising difficult issues for courts called upon to interpret the misuse defense in Section 106(b).
However, the enforcement burden would appear to be considerable, particularly if the Commission were the sole statutory enforcer.(68) No federal administrative agency has previously had jurisdiction over claims of misappropriation or infringement of intellectual property-type rights, and the scope of issues that might arise in the emerging information economy under such a new legal regime is not easy to forecast. As noted above, the Bill would raise several complex rule-making and adjudicative issues, including assessing substantiality of investment, degree of copying, disaggregation of governmental and private content in databases, what constitutes misuse, and the effects of the duplicate database on the original database creator's market and returns to investment.
Finally, Section 108 would create a further, reporting responsibility for the Commission. Under the jurisdiction conferred by Section 6 of the Federal Trade Commission Act, the Commission has substantial experience with gathering information, holding hearings and issuing reports on important matters of competition and consumer protection policy. The importance of the issues dealt with in the Bill, and the policy questions regarding the optimal balancing of access and protection that it raises, suggest that ongoing study could be valuable.
Conclusion
H.R. 1858 strives to strike a balance between protecting database producers from unfair free-riding and preserving factual information in the public domain and allowing transformative uses of databases and fair competition. Like traditional antitrust and intellectual property policy, it aims to stimulate both first- and second-generation innovation in the interests of consumers.
The Bill demonstrates a responsiveness to competition concerns raised by the Commission last year in its definitions of the basic prohibition, permitted uses and exclusions, and the misuse defense. However, each of these definitions also gives rise to ambiguities and potential concerns, and the differences between the permitted uses under the Bill and the fair use defense in copyright may also warrant further examination.
The Bill's omission of criminal liability appears appropriate, given its potential chilling effects on speech, innovation and competition in this context. Its assignment of authority to the Commission would impose a significant new burden on the Commission's resources.
In sum, the Bill's approach to database protection applies sound general principles underlying antitrust and intellectual property policy to difficult issues raised by the emerging information economy, but raises several issues that may warrant further examination. The Commission stands ready to assist the Subcommittee or the full House Committee on Commerce in that examination if called upon.
1. Although this Statement makes general reference to "H.R. 1858," it is directed solely to Title I of the Bill. Title II of the Bill is directed to securities market information.
2. See Commission Rule 4.11(b), 16 C.F.R. § 4.11(b).
3. 5 Trade Reg. Rep. (CCH) ¶ 24,171 (F.T.C. July 28, 1997) (consent decree) (as condition to merger of only two databases with certain oil production data, merged firm required to lease data at reasonable rates to establish a competitor as a second source).
4. 5 Trade Reg. Rep. (CCH) ¶ 24,006 (F.T.C. March 27, 1996) (consent decree) (as condition to settling charges that the defendant's acquisition of a rival provider of information services to salvage yards was intended to monopolize various markets within the salvage yard information management industry, defendant required to divest the computer systems and salvage yard parts trading network it acquired in order to establish a competitor as a second source).
5. No. 991-0101, 64 Fed. Reg. 27,991 (F.T.C. May 24, 1999) (proposed consent decree, subject to public comment) (as condition to merger of two disability insurance companies, merged firm would be required to continue to submit insurance data to an independent entity responsible for aggregating and disseminating industry-wide actuarial information, with the goal of ensuring that adequate data would be available to existing competitors and to new entrants).
6. Identical letters from Federal Trade Commission to House Committee on Commerce Chairman Tom Bliley and Ranking Member John D. Dingell, dated September 28, 1998. The letter to Chairman Bliley is attached.
8. The Supreme Court has described the tort of misappropriation as taking material that has been acquired as the result of organization and the expenditure of labor, skill, and money, and then appropriating that material and selling it as one's own. International News Serv. v. Associated Press, 248 U.S. 215, 239 (1918). Although state law varies, a plaintiff asserting a misappropriation claim has generally been required to prove five elements: (i) the plaintiff generates or gathers information at a cost; (ii) the information is time-sensitive; (iii) a defendant's use of the information constitutes free-riding on the plaintiff's efforts; (iv) the defendant is in direct competition with a product or service offered by the plaintiffs; and (v) the availability of other parties to free-ride on the efforts of the plaintiff or others would so reduce the incentive to produce the product or service that its existence or quality would be threatened. National Basketball Ass'n v. Motorola, Inc., 105 F.3d 841, 845 (2d Cir. 1997).
16. H.R. 1858, § 104. The exclusion of protection for databases required for Internet communications is essential to maintain the open networking practices that have facilitated the dramatic growth of electronic commerce in recent years. Computer programs may be protected by copyright, and otherwise protectable databases are not denied protection merely because they are included in computer programs. Telecommunications subscriber list information remains subject to FCC regulation under the Communications Act of 1934.
23. Atari Games Corp. v. Nintendo of America, Inc., 897 F.2d 1572, 1576 (Fed. Cir. 1990); United States Department of Justice & Federal Trade Commission, Antitrust Guidelines for the Licensing of Intellectual Property § 1.0 (1995).
24. See generally Antitrust Law Developments (Fourth) at 282-85, 953-81 (1997).
25. 86 F.3d 1447 (7th Cir. 1996) (holding that the defendant's copying of the contents of a CD-ROM database of 3,000 telephone directories and resale of it in an online format violated the licensing agreement accompanying the CD-ROM).
26. 115 F.3d 1509 (11th Cir.) (en banc), cert. denied, 522 U.S. 963 (1997) (holding that the defendant's copying of a cable system directory and reselling of it in a software format did not constitute a copyright violation because of the uncreative nature of the directory).
27. See generally Federal Trade Commission Staff, Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace, vol. I, ch. 6 (May 1996).
28.See, e.g., National Basketball,105 F.3d at 845 ("the surviving `hot-news' INS-like claim is limited to cases where [inter alia] the information is time-sensitive").
29.See, e.g., Harper & Row Pub., Inc. v. National Enter., 471 U.S. 539, 564 (1985); Salinger v. Random House, 811 F.2d 90, 98 (2d Cir. 1987); see also Iowa State Univ. Research Found. Inc. v. American Broadcasting Co., 621 F.2d 57, 61-62 (2d Cir. 1980) (use involving 8% of a videotape held to be substantial).
30. See, e.g., New Era Pubs. Int'l v. Carol Pub. Group, 904 F.2d 152, 158 (2d Cir. 1990).
31. Luther R. Campbell, aka Luke Skywalker v. Acuff-Rose Music, Inc., 510 U.S. 569, 579 (1994) (finding a transformative work to be a fair use under copyright law); see also Restatement (Third) of Unfair Competition, § 38, cmt. c, at 412-13 (noting general limitation of misappropriation law to the originator's primary market).
32. Sole source databases have been the subject of substantial litigation concerning allegations of anticompetitive conduct by a monopolist. In its 1998 letters, the Commission cited two examples involving telephone directories: Great Western Directories v. Southwestern Bell Tel. Co., 63 F.3d 1378 (5th Cir. 1995), modified, 74 F.3d 613 (1996), and Direct Media Corp. v. Camden Tel. and Telegraph Co., 989 F. Supp. 1211 (S.D. Ga. 1997).
33. For discussion of the essential facilities doctrine, see, e.g., MCI Communs. Corp. v. AT&T, 708 F.2d 1081, 1132 (7th Cir.), cert. denied, 464 U.S. 891 (1983). For extensive discussion of whether, when, and how to mandate access to competitively significant inputs, see Federal Trade Commission Staff, Anticipating the 21st Century: Competition Policy in the New High-Tech, Global Marketplace, vol. I, ch. 9 (May 1996).
41. A similar ambiguity may remain: Section 109, the effective date provision, provides that the Bill applies to the sale and distribution after its enactment of a database collected and organized thereafter. Whether databases initially created before the effective date but updated thereafter will be grandfathered is unclear.
43. As noted below, determining what constitutes a "return on investment" within Section 101(5)(B) will require interpretation and judgment.
44. See H.R. 1858, § 106(b)(2).
45. Under existing copyright law, no such distinction is made between compilations of works of authorship and other compilations. For each, Feist denies protection based on the "sweat of the brow," but there may be protection if the work involved in compilation meets the statutory requirement of originality. See, e.g., Publications Int'l Ltd. v. Meredith Corp., 88 F.3d 473, 480 (7th Cir. 1996) ("The creative energies that an author may independently devote to the arrangement or compilation of facts may warrant copyright protection for that particular compilation. This also extends to the compilation of preexisting materials that is the work product of others. There is no dilution of the originality requirement, for a compilation's originality flows from the efforts of 'industrious collection' by its author.") (citations omitted). See also 17 U.S.C. § 101 ("The term 'compilation' includes collective works.").
47. Similar criteria have been used in the regulated utility context. Experience in that context indicates that determining what is a reasonable return on investment requires judgments concerning the appropriateness of the utility's valuation of its assets, appropriate rates of depreciation and the appropriate rate of return to compensate for the level of business risk in the market concerned. Since Federal Power Commission v. Hope Natural Gas Co., 320 U.S. 591 (1944), in which the Supreme Court described the rate-setting process as one of "pragmatic adjustments," id., at 602, and "balancing of the investor and the consumer interests," id., at 603, courts have generally been highly deferential to regulators in this area, recognizing that "[t]he economic judgments required in rate proceedings are often hopelessly complex and do not admit of a single correct result." Duquesne Light Co. v. Barasch, 488 U.S. 299, 314 (1989).
49. Matthew Bender & Co., Inc. v. Hyperlaw, Inc., 158 F.3d 693, 704 (2d Cir. 1998) (citation and quotation marks omitted), cert. denied, 522 U.S. 3732 (1999).
50. Compare id. (finding insufficient similarity and denying infringement) with West Pub. Co. v. Mead Data Central, Inc., 799 F.2d 1219 (8th Cir. 1986), cert. denied, 479 U.S. 1070 (1987); see also Oasis Pub. Co. v. West Pub. Co., 924 F. Supp. 918, 922-25 (D. Minn. 1996) (maintaining that the Eighth Circuit case remains good law after Feist).
51. The Copyright Act provision cannot provide a complete model for the Bill, since it builds into the affirmative fair use defense considerations of substantiality of copying and displacement of sales of the copyrighted work that have their analogs in Sections 101 and 102 of the Bill. However, its open-ended approach, citing a non-exclusive list of permissible "purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research," 17 U.S.C. § 107, enables courts to focus on the underlying policy of "balancing the need to provide individuals sufficient incentives to create public works with the public's interest in the dissemination of information," Hustler Magazine Inc. v. Moral Majority Inc., 796 F.2d 1148, 1151 (9th Cir. 1986), rather than focusing on specific categories.
52. For example, Section 6254(f)(3) of the California Government Code requires that law enforcement agencies publish upon request "the current address of every individual arrested by the agency and the current address of the victim of a crime, where the register declares under penalties of perjury that the request is made for a scholarly, journalistic, political, or governmental purpose, or that the request is made for investigation purposes by a licensed private investigator . . . ." Does Section 103(c) exempt from liability private entities who receive databases under this provision and then publish them, or is the exception limited to law enforcement officials? Also, is the law enforcement officials' compliance with the California statute itself a "lawfully authorized investigative, protective, or intelligence activit[y]"?
53. 146 F.3d 1133 (9th Cir. 1998).
54. Cal. Gov. Code § 6254(f)(3), supra, note 52.
55.See Los Angeles Police Dep't v. United Reporting Pub. Corp.,119 S. Ct. 901 (1999) (granting a writ of certiorari to review the Ninth Circuit's decision).
57. See, e.g., 17 U.S.C. § 107's inclusion of the duplication and distribution of "multiple copies for classroom use" within its partial enumeration of fair uses.
58. See, e.g., Alcatel USA, Inc. v. DGI Techs., Inc., 166 F.3d 772, 792 (5th Cir. 1999).
62. See, e.g., Morton Salt Co. v. G.S. Suppiger, 314 U.S. 488 (1942) (patent misuse: where a patent is used, by means of tying, to secure monopoly power over products or services outside the scope of the patent's protection, a court will not enforce the patent in such a way as to assist such efforts); B.B. Chem. Co. v. Ellis, 314 U.S. 495, 498 (1942) (patent misuse: same, and all infringement suits will be denied until patent misuse is "fully abandoned"); Alcatel, 166 F.3d at 793 (copyright misuse: where a plaintiff "has used its copyrights to indirectly gain commercial control over products [the plaintiff] does not have copyrighted, then copyright misuse may be present"); Practice Mgmt. Information Corp. v. American Medical Ass'n, 121 F.3d 516, 521 (9th Cir. 1997) (copyright misuse: conditioning a copyright license on the licensee's promise not to use a competitor's products constituted misuse), modified on other grounds, 133 F.3d 1140 (1998); Triad Sys. Corp. v. Southeastern Express Co., 64 F.3d 1330, 1337 (9th Cir. 1995) (copyright misuse: where a plaintiff merely forbids outright copying of its copyrighted software, and does not attempt to prohibit legitimate reverse engineering of competing software, there is no copyright misuse).
63. In last year's Digital Millennium Copyright Act, Congress addressed the use of technological measures to control access to copyrighted works. The new 17 U.S.C. § 1201 attempts to balance protection against infringement with access for legitimate uses by (1) prohibiting "circumvention" (e.g., descrambling or decryption) of technological access control measures, and (2) instructing the Librarian of Congress to exclude from that prohibition, and to publish, works whose protection thereby would adversely affect noninfringing uses.
64. See, e.g., B.B. Chem. Co., 314 U.S. at 498 (patent misuse: "It will be appropriate to consider [the patentee's] right to relief when it is able to show that it has fully abandoned its present method of restraining competition in the sale of unpatented articles and that the consequences of that practice have been fully dissipated."); Alcatel, 166 F.3d at 792, n. 81 (copyright misuse: "A finding of misuse does not . . . invalidate plaintiff's copyright. Indeed, . . . '[plaintiff] is free to bring a suit for infringement once it has purged itself of the misuse.'") (citation omitted).
67. See, e.g., Meghrig v. KFC Western, Inc., 516 U.S. 479, 487-88 (1996) ("where Congress has provided 'elaborate enforcement provisions' for remedying the violation of a federal statute, . . . 'it cannot be assumed that Congress intended to authorize by implication additional judicial remedies for private citizens suing under' the statute.") (citation omitted).
68. If, as the Commission understands, state common law misappropriation suits involving databases will generally be preempted under Section 105(b), such cases would be effectively federalized and further add to the enforcement burden.
If called upon to enforce the legislation, the Commission would, of course, exercise its best judgment as to enforcement priorities. Section 107(d) provides that the Commission "shall prevent" violations "in the same manner, by the same means, and with the same jurisdiction, powers and duties as though all applicable terms and provisions of the Federal Trade Commission Act (15 U.S.C. 41 et seq.) were incorporated into and made a part of this title." This appears to incorporate by reference the Commission's enforcement discretion under Section 5(b) of the FTC Act, which instructs the Commission to issue a complaint respecting a violation "if it shall appear to the Commission that a proceeding by it in respect [of the violation] would be to the interest of the public." It is well established that this standard gives the Commission wide latitude in the allocation of its scarce enforcement resources. See, e.g., Federal Trade Commission v. Universal-Rundle Corp., 387 U.S. 244 (1967); Encyclopedia-Britannica, Inc. v. Federal Trade Commission, 605 F.2d 964 (7th Cir. 1979), cert. denied, 445 U.S. 934 (1980); see also Montgomery Ward & Co. v. Federal Trade Commission, 379 F.2d 666 (7th Cir. 1967) (court of appeals has no general authority to second-guess Commission's determination of what is in the public interest); Action on Safety and Health v. Federal Trade Commission, 498 F.2d 757 (D.C. Cir. 1974) (Commission's decision to deny intervention to consumer protection organization was an agency action committed to agency discretion and therefore exempt from judicial review). Although the factors enumerated in Section 106(b) are addressed to "a court" rather than the Commission, the potential for misuse and competitive implications more generally would appear to be appropriate considerations in this context.