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.

Congressional Hearing Highlights Troubling Practices at the Patent Office

Bad patents hurt innovation. This is especially true when they end up in the hands of patent trolls, who often use them indiscriminately to extort settlement payments. While we are glad to hear the Patent Office (PTO) has been increasing its efforts to improve the patent examination process and, in turn, patent quality, a recent government oversight hearing in Congress on telework abuse brought to light several PTO management practices that can’t help but hurt progress toward increased patent quality.

Some background on the joint House Judiciary and Oversight hearing: The PTO has long been recognized as a leader in telework, allowing employees the flexibility to work from home, and has leveraged it recruit and retain examiners. A few years ago, serious allegations surfaced regarding time and attendance fraud and ineffective oversight regarding the telework program. In response, the PTO conducted an internal investigation and issued a report in July 2013. Unfortunately, that report was considerably watered down from a more critical draft report, which—perhaps not surprisingly—was never released.

At the hearing, Oversight Chairman Issa, who has a few dozen patents of his own, emphasized the importance of patent quality; he even joked that he was sure some of his patents were invalid. Judiciary Chairman Goodlatte and Congressmen Connelly and Cummings zeroed in on PTO practices that hinder quality, and called for a reassessment of performance metrics to ensure that quality is not sacrificed to quantity. We couldn’t agree more.

Chairman Goodlatte and others expressed concerns about the examiner “count system,” which creates a series of incentives for examiners, essentially giving them credit for accomplishing certain tasks, e.g., approving a patent application. The count system is often criticized for pushing examiners to not give patent applications the time they really deserve and, as a result, issue unworthy patents. There have been efforts to reform the count system, however any real change has gotten mired in negotiations with the Patent Office Professional Association, otherwise known as the Patent Examiners Union.

Another issue that came up was "end-loading” of work by examiners at the tail end of each quarter and how that practice undermines quality. Supervisors, who have limited time to review the quarter’s work, cannot effectively monitor the quality of work submitted when it comes in a flood of end-of-quarter submissions. Apparently, the practice is rampant. At the hearing, PTO representatives reported that they were in discussions with the Union to address end-loading, but no details were provided as to how or when that would happen.

The patent system in this country is not working, and startups and small inventors, faced with a growing patent troll problem, shoulder the resulting costs. As Congress and the courts work to fix the problem, the Patent Office, too, must do its part. The mismanagement that came to light during the recent congressional hearing leads directly to more low-quality patents, which are a patent troll’s favorite weapon.

The good news is that President Obama recently nominated Michelle Lee to direct the Patent and Trademark Office. Michelle Lee, who currently acts as the agency’s deputy director, would not only be the first woman and first minority to hold that post, but she has a background rare in a long lineage of PTO directors: a patent lawyer from Silicon Valley who has worked for and at companies who operate in the software space. For all these reasons, and more, we strongly support Michelle’s nomination, and recently said so in a letter to Senators Leahy and Grassley.

We’re hopeful that under strong leadership, the PTO can clean up the problems that plague it and, in turn, return to its core mission of issuing patents that actually incentivize innovation instead of hindering it.

President Obama's Executive Order on Immigration: A Small But Important Step Towards True Reform

Tonight, President Obama announced that he will sign an Executive Order that will, among other things, expand immigration options for foreign-born entrepreneurs and make it easier for high-skilled workers awaiting Lawful Permanent Resident status to change jobs. While the President’s actions fall short of the legislation we had hoped for, we are encouraged to see some movement toward fixing a broken immigration system that plagues all aspects of our economy.

In particular, we applaud the President’s efforts to bring more high-skilled workers to the United States. As the President said, we must promote policies that allow immigrant entrepreneurs “to stay and create jobs here, create businesses here, create industries right here in America.” While the political debate on immigration has long been contentious, one thing has always been clear: there is widespread and popular support for expansion of the H1-B visa program and other efforts to bring skilled workers, particularly those skilled in technology, here.

We are simply turning away far too many talented people that want to come to the US to grow businesses. This year, more than 100,000 high-skilled workers were turned away because of limitations on the number of H1-B visas available. As studies show that immigrants are twice as likely to start businesses as native-born citizens, failing to accommodate the many immigrants that want to come to the US to start businesses unquestionably harms the American economy.

Our potential for growth is limitless when the world’s best and brightest minds are here in America, building American companies, creating American jobs, and recreating the American dream for every new generation.

We wish tonight that we could celebrate real, comprehensive legislation that would fix all facets of a broken immigration system, but policymakers have not yet been willing to take up the difficult, politically fraught task of true reform. While the President’s Executive Order is a step towards meaningful reform, some worry that the President’s actions make a bipartisan compromise harder to achieve in the short term. We remain hopeful that the enormous economic benefits that will flow from comprehensive immigration reform will encourage policymakers on both sides of the aisle can put party politics aside and take lead by finding solutions to the myriad problems with our immigration system that still remain.

Engine's Response to FCC's Reported Net Neutrality Plan

After many months of public debate, the FCC appears close to deciding on new net neutrality rules to replace those vacated earlier this year. Though the issue has to date been framed as a binary choice between the Chairman’s original proposal featuring toothless rules grounded in the Commission’s authority to encourage the deployment of broadband under section 706 of the Telecommunications Act and strong net neutrality regulations based on a full reclassification of broadband as a common carrier service, recent reports suggest that the FCC is settling on what many think of as a so-called hybrid solution.

According to the Wall Street Journal (sub req’d), the FCC is leaning towards adopting a framework that treats all Internet communications as the product of two separate and distinct relationships: 1) a relationship between an end user and an Internet service provider (ISP); and 2) a relationship between an edge provider (i.e. an Internet content provider like Netflix or Amazon) and an ISP. These separate relationships would get different regulatory treatment, but in theory, the plan could support non-discrimination rules that protect both sides of the communication.

The biggest problem with the plan outlined in the Wall Street Journal article is not the authority the FCC may invoke to justify the rules it wants to create (more on that below), but rather the proposed rules themselves. According to the article, the Commission will not ban paid prioritization but will instead allow priority deals so long as they are offered equally to all comers.

In this sense, the FCC’s proposed plan as reported in the Journal is an abandonment of net neutrality principles and will put startups at an enormous economic disadvantage. Enacting net neutrality rules is a two step process—first creating a workable framework for agency authority and then using that authority to create meaningful rules—and the FCC’s proposed plan appears to fail miserably at this second step.

Now for the really wonky part: Under a so-called hybrid proposal, the FCC would regulate these two separate relationships—ISP/end user and ISP/edge provider—differently. The relationship between an ISP and end user will keep its current classification under rules that have been in place since 2002, while the FCC will recognize a new relationship between an ISP and edge provider and classify it as a common carrier service, meaning that the FCC could then impose strong net neutrality rules on ISP/edge provider activities, such as a ban on ISPs charging edge providers for access to Internet fast lanes. According to proponents of hybrid rules, because every Internet transaction necessarily involves an interaction between an ISP and an edge provider, regulating only the ISP/edge provider relationship under Title II is more or less the same as regulating all broadband under Title II.

If this all sounds hopelessly convoluted, that’s because in many ways it is. The legal approach that the FCC is considering is novel, untested, and conceptually complicated. The plan carries significant legal risk and could end up getting thrown out in court.

But, putting aside for a moment concerns about the legal viability of hybrid approaches, it’s important to recognize how far we’ve come in getting the FCC to this point. Hybrid rules are, after all, grounded in Title II and would likely give the FCC authority to block paid prioritization arrangements. Though full Title II reclassification would be a far easier and simpler way to preserve an open Internet, hybrid rules could offer functionally similar protections.

Any net neutrality rules absolutely must prevent ISPs from extracting rents from edge providers and creating Internet slow lanes. While we’re encouraged that the FCC is moving in the right direction in considering rules grounded in Title II authority, the FCC’s consideration of actions that do not include banning paid prioritization deals renders its move towards Title II meaningless. Whether the FCC opts for full reclassification or a hybrid approach, it must use its authority to establish rules that protect startups and consumers or its efforts will have been in vain.

FCC Pauses Review of Comcast - Time Warner Merger

The FCC once again slowed down its review of the proposed merger between Comcast and Time Warner Cable, indefinitely pausing the comment period because certain content companies—including CBS, Disney, Time Warner, and Viacom—refused to allow commenters to access information they deemed “Highly Confidential.” Most of the information that the content companies refused to disclose relates to agreements pursuant to which Comcast gets distribution rights for their content.

This is not the first time the Commission extended the review period for the mega-merger due to poor information disclosure by the companies at issue. In the beginning of October, the FCC pushed back its deadline for accepting public comments on the merger because Comcast dumped 850 pages of long-overdue data about the merger, but somehow still failed to include adequate responses to many FCC information requests.

These tactics should come as no surprise. Comcast—the “worst company in America”—is facing significant public opposition to its proposed merger, which would make Comcast-TWC the only provider of high-speed broadband service available to nearly 40 percent of current subscribers. The combined company’s monopoly power would be even greater in the market for truly high-speed broadband (>50 Mbps download speed). Giving a single company terminating access monopoly power over half of the country’s Internet users is an obvious problem that startups and consumers both recognize.

And yet, even as Comcast continues to obfuscate and intentionally conceal important information about the merger, it boldly argues that the merger should be approved because opposing commenters “don’t cite any credible, specific facts that refute the extensive evidence” Comcast has put forward. Withholding information while chiding opponents for not citing enough information is the definition of chutzpah.

Beyond engaging in shenanigans with its information production, Comcast’s case in favor of the merger is rather weak, claiming that the combination wouldn’t be anticompetitive because Comcast and Time Warner don’t currently compete in any single market, so merging the two companies won’t give consumers any less choice. Of course, this is really just a concession that the high-speed broadband market is already anticompetitive; Comcast is essentially claiming that competition won’t decrease because there isn’t any competition. Twisted logic aside, several of the country’s leading antitrust experts wrote a letter to the FCC cogently outlining the merger's anticompetitive impact and arguing that the merger “should be blocked in its entirety because it would substantially lessen competition...and is not in the public interest.”

Even with minimal information available to evaluate the merger, it is clearly a bad deal for startups, consumers, and the economy. Allowing Comcast and Time Warner to merge would greatly decrease their incentives to build faster networks and would give the combined company immense power to discriminate against startups offering competing services. The merger is a significant threat to the continued viability of the Internet economy and should be stopped at all costs.