Recently, the Washington Lawyer ran a great piece called Net Neutrality: Who Should Be Minding Online Traffic? The article goes back and forth between the extremes of: (1) heavy handed Orwellian like regulation of the Internet by the Federal Communications Commission (“FCC”), and (2) self-regulation and content discrimination by greedy Internet Service Providers (“ISP”). This seems to be a false dichotomy. Even in the absence of heavy handed FCC regulation, which can crush innovation, the Sherman Act (“Act”) is an available tool to punish unlawful Internet hogging or collusion by ISPs.
The Internet is a public good. It was created by the government. Before, it was called ARPANET. It was a tool of the military. As a result, the Internet is akin to a public park. At the same time, there are now Internet Service Providers (“ISP”) who provide Internet users with differentiated access to this public good. Think of the ISPs as competing private tour guides in Central Park. Some tours will be faster but more pricey than other slower tours.
The net neutrality debate wrongly omits how the Sherman Act can help police the ISP market without the need for heavy handed regulation by the FCC. To the extent an ISP has market power and tries to keep competing companies out of the market, the essential facilities doctrine would likely apply. To the extent that there is an oligopoly of price fixing ISPs, then there will be claims under Section 1 of the Act. If an ISP tries to obtain too much market power through a merger, the government can oppose it. The problem with too much regulation by the FCC is that it discourages technological innovation by ISPs who compete for customers by providing better service at a lower price. If the FCC requires such companies to take a one size fits all approach to every customer, competitive innovation will likely suffer. So, too, will consumers seeking faster rides through the Central Park that is the Internet.
Recently, Mr. Raj Rajaratnam was found guilty of violating insider trading laws, which seek to ensure that all members of the trading public, regardless if they are large or small, rich or poor, receive exactly the same information. The goal is worthy, but is it realistic? Whether we like it or not, connected people get better information, just as super connected legacy children get into Harvard. At the very least, the government should make insider trading rules less ambiguous so as to not make every aggressive trader, like Mr. Rajaratnam, into a potential poster child of the new Gordon Gekko.
Various scholars, including Yale Law School’s Jonathan Macey in Deconstructing the Galleon Insider Trading Case, point out that the Securities Exchange Commission (“SEC”) has a more expansive and ambiguous view of insider trading than the U.S. Supreme Court. On the one hand, the SEC takes the view that everyone in the marketplace should have access to the same information, regardless of the effort they take to obtain it. As a result, non-public information should never be traded upon, regardless of how you get. On the other hand, the Supreme Court says having special access to non-public information is legal so long as you didn’t commit a crime to get it, such as when your lawyer steals your confidential information and trades on it. The SEC’s ambiguous insider trading rules have given it more unfettered discretion as to when to lower the gauntlet, and on whom. This is dangerous. As Mr. Macey points out in his article, much of what companies disclose in their filings is so watered down because of regulatory concerns that they leave you wanting to know the “real story” via other means. Like a good reporter, you may be able to get your hands on the scoop by interviews, or otherwise, whereas others are not. While the efficient market hypothesis posits market prices reflect all available material information, we all know this is not reality. Until that happens, which may be never, the SEC should develop a bright line rule more in accordance with the Court’s rulings so that folks can be aggressive in making good connections for much needed information without ending up in jail.