How To Destroy Innovation And Competition: Putting SHOP SAFE Act Into Innovation And Competition Act

from the it’s-the-opposite-of-what-it-says-on-the-tin dept

Last fall, we had three separate articles about the horrific problems of the SHOP SAFE Act — one by me, one by Cathy Gellis, and a massive one by Prof. Eric Goldman. The bill is extraordinarily bad, but it’s extraordinarily bad in a somewhat sneaky manner, which we’ll get to in a moment.

Unfortunately, we’re hearing buzz from DC that the House is thinking about shoving the SHOP SAFE Act into the massive < United States Innovation and Competition Act, also known as the Endless Frontier Act. The Endless Frontier Act/USICA has a bold and valuable goal: having the US invest in innovation, science, and technology infrastructure. This is, actually, really important, and it’s an area where the US has led in the past and has not been doing as much leading recently.

The general structure of the bill is pretty smart, and really is focused on filling important gaps that can lead to much greater innovation and commercialization of important innovations. But, with such a large bill, some are always going to see opportunities to bolt on their own pet ideas — both good and bad. And SHOP SAFE seems to be one of the potentially dangerous ideas being considered.

Again, I recommend reading Eric Goldman’s thorough takedown of the bill, but I wanted to give a brief description of why it’s so dangerous, and why it requires understanding a few different things that most people will miss. The bill is framed as a way to protect people against counterfeit goods online. And that sounds like a good thing. But there are a few major problems: first, is that the “threat” of counterfeit goods online is way, way, way overblown. Second, is the method by which this tries to attack that “problem.” And third is the wider impact that this law would then have on the internet. It’s important to understand all three of these things, so let’s break them down bit by bit.

The problem is massively exaggerated:

First up, while big brand companies like to insist that counterfeiting is a huge problem — and one that puts people at risk — there is little evidence to support this. While it’s hidden away and rarely talked about, when the Department of Homeland Security put out data on counterfeits, it could find very, very few that actually impacted health and safety. That’s not to say the number is zero, but the entire industry loves to insist that because there have been a very small number of dangerous counterfeit products out there, they can state that all counterfeiting is a health and safety issue (it gets even worse when the copyright industries like to lump “counterfeit” together with “copyright infringement” to pretend that little Bobby downloading a song is a health and safety risk).

Even outside of the question of “safety,” the simple fact is that counterfeiting is not nearly as big a problem as the industry would have you believe. A GAO report noted that the industry has massively exaggerated the amount of counterfeiting that happens. Even then, in the situations where it does happen, there’s a question of the supposed “harm” to the original producer. The general argument is that counterfeiting harms the originator’s brand by (1) tricking consumers into purchasing a non-authentic version when they would have spent money on the real version and (2) then delivering an inferior knock-off product that harms the brand, as the buyer is less-than-impressed by the quality of the knockoff.

Again, however, actual evidence suggests that this narrative is rarely true. Instead, multiple studies have shown that buyers of counterfeit goods buy them as an aspirational purchase. That is, they know that they’re buying knockoffs, but they buy it because of that fact. They can’t afford the authentic version, so couldn’t buy it at that moment (so no loss), and are buying it because they still want to connect with the brand. Indeed, that study showed that many people who buy knockoffs later buy the real thing when they can afford it. In other words, hurting the counterfeit market could actually harm the authentic market as well, as it is often a “stepping stone” purchase, allowing users to connect with the brand before they can purchase the real thing.

So, already, we’ve seen that the underlying “necessity” for a bill to attack the sales of knockoffs online is thin, at best.

The method by which SHOP SAFE works will do tremendous damage to online marketplaces and innovation:

To understand this one requires a bit of background knowledge. As you may know, Section 230 has an intellectual property exemption (section (e)(2)), which was put there at the demand of Hollywood, so that it could put in place its own, much more stringent, DMCA takedown process. Indeed, in 1996, when Section 230 became law, Hollywood was in the midst of a bit of policy laundering. The Clinton’s IP czar, Bruce Lehman, had a plan all along to force the terrible DMCA regime on the US. In the summer of 1995, he published a whitepaper with the outline of a DMCA liability regime, encouraging Congress to pass a law. Congress did introduce a law, but failed to pass it. He later flat out admit that he did an “end run around Congress” by going to Geneva in early 1996 to get WIPO to put together a treaty that more or less required all signatories to implement a DMCA-like structure. That done, he then went back to Congress, and told them it was now obligated to pass the DMCA to comply with “international obligations.”

So that process was happening just as the CDA was being crafted, and someone realized that 230 would undermine Lehman’s DMCA plans if it applied to copyright. So (e)(2) was added to exempt “intellectual property.” But no one really considered how that might impact other types of intellectual property, such as trademark. As we’ve discussed, this has lead to much mischief from companies (and mainly law firms) which look to hold third party marketplaces liable for counterfeit or trademark infringing goods on their sites. Sometimes, they’ve even sought to go after retailers for people reselling legitimate items they’ve bought, because the companies think they should be able to control every possible sale, including resales.

The biggest, and most important, case regarding this was one that the jeweler Tiffany filed against eBay in 2004, claiming that because users on eBay sold some infringing items, eBay should be held liable. Again, without Section 230, eBay couldn’t just get the case immediately dismissed. Instead, it went on for over six years before the judicial system established a precedent protecting online marketplaces. It’s not as strong as Section 230, but it more or less says that because eBay tries to remove infringing products, and has an active program in which it works with brands to find and remove infringing/counterfeit works, you can’t hold the company liable for missing some stuff. That ruling has been in place for over a decade now, and has served the internet well. It’s kind of like a Section 230 protection that can apply to marketplaces with regards to trademark (though it’s not as clean or clear as 230).

But the big product companies have always hated it, because they want to control everything. They want to force all unauthorized sales (including resales of authentic products) off of these marketplaces. And, if they can’t do that, they want the giant marketplaces — the Amazons and eBays of the world — to just pay them many, many millions of dollars.

So that brings us back around to the problems of SHOP SAFE. It flat out overturns the Tiffany/eBay decision, and says that unlike that precedent, online marketplaces should be considered de facto liable. There is a long, extremely onerous, and nearly impossible list of things that you need to do to get out of that default state of being liable for any infringing product on your site. Basically, the default state for all online marketplaces (and this is defined so broadly that it will sweep up tons of sites you wouldn’t think of as “marketplaces”), will be that they are “contributory” infringers.

This will wreak all sorts of havoc. First off, it will massively limit where people can buy and sell things online. Over the pandemic, I’ve become active in buying and selling used books via a couple of Facebook groups and independent forums and news groups, that focus on the buying and selling of a niche category of books. It’s been great for me, because most of the books bought and sold through these groups are unfindable anywhere else. Under this bill, it seems like those groups would all need to shut down — or face absolutely crippling liability and risk.

Basically, the only “marketplaces” that could possibly survive would be the very biggest — the eBays and Amazons of the world. And, even then, in order to avoid liability, eBay and Amazon would both significantly change how those forums operate, and they’d still face crippling liability because of the structure of the bill. I’ll quote Eric Goldman’s summary here because it’s so important:

First, it creates a new statutory contributory trademark infringement claim for selling the regulated items. Second, the bill says that the new contributory claim doesn’t preempt other plaintiff claims, so trademark owners will still bring the standard statutory direct trademark infringement claim and common law contributory trademark claims (and dilution, false designation of origin, etc.). Third, online marketplaces nominally can try to “earn” a safe harbor from the new statutory contributory liability claim (but not from the other legal claims) by jumping through an onerous gauntlet of responsibilities. Those requirements will impose huge compliance costs, but those investments won’t prevent online marketplaces from being dragged into extraordinarily expensive and high-stakes litigation over eligibility for this defense. Fourth, the law imposes a proactive screening obligation, something that Tiffany v. eBay rejected. Fifth, unlike Tiffany v. eBay, generalized knowledge can create liability, and takedown notices aren’t required as a prerequisite to liability. Sixth, in litigation over direct trademark infringement and common law contributory trademark infringement claims, trademark owners can cite compliance/non-compliance with the defense factors against the online marketplace, putting the online marketplace in a worse legal position than they currently are in.

Every single one of those things is problematic — and will massively diminish the ability of anyone to buy and sell things online, vastly cut back on the availability of online marketplaces, and just change the very nature of what can and can’t be sold online. And that’s not even getting into how much time, money and attention will be wasted on nonsense litigation enabled by this law.

The wider impact this law has on the internet will be massive.

Remember Bruce Lehman who was mentioned above? After pulling his little trick to “route around” a Congress that wouldn’t pass his law, he later became disillusioned with his own creation. It wasn’t that he recognized the myriad problems and censorship he enabled with the DMCA. He just felt that it didn’t go far enough. Over the last decade, Hollywood has been pushing for a new DMCA that will put significantly more liability on websites — including pretty much all of the stuff that we listed above about SHOP SAFE and liability around trademark: default contributory liability, expensive litigation to see if you’re even liable, no notice requirements, pro-active filtering requirements, etc.

So it’s no surprise at all that the whisper we’re hearing is that some in Congress see SHOP SAFE not just as a tool for dealing with trademark and online marketplaces, but as a model for a new DMCA. That is, once this kind of “assume liability and litigate your way out of it” setup is “proven” under SHOP SAFE, the idea is to then rewrite the DMCA under the same basic terms.

None of this will result in any more “innovation and competition.” None of this will help the internet, or help the US keep up with tech advances around the globe — which is supposedly the point of this Endless Frontiers / USICA in the first place. It will do the opposite. It will be attempting to “deal with” a problem that is barely an actual problem by effectively re-architecting how liability works. And SHOP SAFE will be a simple kind of trial balloon for an even bigger attack on the open internet.

There’s simply no reason for Congress to move forward with such a massively dangerous bill, and even less of a reason to include it in a bill that is supposed to be about innovation and competition.

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