FBI v. Apple — can doesn’t mean should obey.

FBI v. Apple — can doesn’t mean should obey.

The FBI investigates a grizzly murder. You are a bank president. The murderer stored his phone book in your bank’s safety deposit box, the code for which is encrypted with copyrighted proprietary software, before he committed the murder. The FBI demands that you provide it with the master code for the box, which can be used to unlock other boxes, too. You can give the FBI the code, but should you? Apple CEO Tim Cook is asking himself the same question, his answer is rightly “no.”

On February 14, 2016, United States Magistrate Judge Sheri Pym ordered Apple to provide the FBI the means to circumvent the iPhone 5c’s encryption technology. That way, the FBI can obtain Mr. Syed Rizwan Farook’s phone contacts to see who else, if anyone, conspired with him on the December 2, 2015 killings. So the FBI’s endgame is understandable, justified, and a matter of public safety. At the same time, Judge Pym’s February order is constitutionally questionable, for these reasons.

First, there are less invasive and more reasonable means of obtaining the evidence. While the February order is ostensibly based on the “All Writs Act,” it was issued to give effect to a warrant directing Apple to give the FBI “reasonable technical assistance.” If the February order permits the FBI to unreasonably search and seize Apple’s property, it is constitutionally defective under the Fourth Amendment. Whether the ordered search is unreasonable depends on if there are other less invasive means of gathering the evidence.

Here, there are at least three other less invasive methods. First – the FBI could back its way into Mr. Farook’s contact list by getting from Verizon, his cell phone carrier, phone calls, texts, or e-mails to or from his phone. Second — Apple can provide the FBI the desired information from the Mr. Farook’s iPhone. This would be akin to you, as the bank president, copying the murderer’s phone book and providing copies to the FBI. Third – have the court review Mr. Farook’s phone information in camera, that is behind closed doors, and cross-reference that information with the phone records around the time of the killings to determine relevance. Once that is done, some or all of the phone’s information can be produced to the FBI.

Second, there is a strong presumption in federal copyright law against allowing circumvention of encrypted copyrighted software. The Digital Millennium Copyright Act (“DMCA”) forbids devices from being made, imported, or marketed to the public which are primarily designed to circumvent technology that controls access to copyrighted content, such as Apple’s software. Because Apple manufactures the phone, and owns the copyrights to the software located within, Apple is free to circumvent it’s own technology under the DMCA. But Apple shouldn’t be forced to so by the FBI. That’s because the DMCA shows how important copyright encryption is to content creators like Apple, to Congress, and the consuming public. As a result, Apple’s interest in protecting the integrity of its iPhone 5c — and potentially other generations of iPhone – isn’t mere “marketing strategy,” as stated by the FBI.

Third, there is no telling how far the government will go if the February order stands without being overturned. According to Apple, the FBI has sought to access to 11 other iPhones since September, and states attorney generals are biting at the bit to do the same. Given this rising tide, the elephant in the room is a lack of trust in what the government will do with the new path it is foraging. While some 51% of Americans apparently side with the FBI on the unlocking of Mr. Farook’s iPhone 5c, American trust in the federal government in general is at an historical low of 19%, according to NPR.

Seen more broadly, the magistrate judge’s February order can be the first rock in an Orwellian rockslide where the government requires all phone makers to make such backdoors to the encrypted software as a matter of policy. The unstated and yet real concern with such a domino effect is that executive agencies will not only use this information for criminal investigation purposes, but to violate the Constitutional and privacy rights of Americans. These concerns aren’t academic. Nor are they paranoid. President Richard Nixon used the Internal Revenue Service go after American citizens he deemed to be his enemies, which led to his articles of impeachment. There is no telling what another Nixon would do with such unfettered power. Thus, Mr. Cook’s concern about the magistrate’s order setting “dangerous precedent” should not be taken lightly.

In the end, it is a shame that Apple and the FBI didn’t partner up outside of court to craft a mutually beneficial solution that would maintain the integrity of Apple’s iPhone 5c and also give FBI the evidence it needs. But amicable solutions like this won’t happen as long as executive agencies like the FBI downplay legitimate concerns of corporate citizens like Apple as “marketing strategy,” and then pursue heavy-handed discovery tactics not because they should and need to – but because they can. It is up the judiciary to stop them by ensuring that the government’s right to know is balanced against citizens’ legitimate intellectual property and Constitutional rights. In the meantime, just because Apple can obey the likely unconstitutional February order doesn’t mean it should. Instead, Apple should get a higher court to overturn and limit it.

Take a bite out of crime — not Apple.

Take a bite out of crime — not Apple.

We all know the old saying: take a bite out of crime. Unfortunately, today a New York federal court took a bite out of Apple, Inc., instead. The court found that Apple violated antitrust laws when it entered into contracts with major book publishers to distribute e-books using the agency model. The opinion is misguided in failing to see these vertical arrangements as efficient and reasonable methods of competing against and responding to Amazon’s below cost e-book pricing, which the government has to date ignored.

The opinion says that two wrongs don’t make a right. On the one hand, Amazon has overwhelming market share in the e-book market. What is more, it can subsidize losses in that product market with profits it makes in other anything but the kitchen sink markets. On the other hand, book publishers don’t have equal e-book market power — nor do they have equal ability to finance below cost pricing of e-books with profits from other diversified product markets.

Nonetheless, in the court’s view, the fact that Amazon was pricing e-books below cost didn’t justify Apple’s contracting with the settling book publishers to stabilize the price of print and e-books at above cost levels. The reason: Apple or the publishers could have either reported Amazon to the Department of Justice, or could have filed their own lawsuit.

The court’s argument assumes that the government is an impartial observer who doesn’t favor one entity over others in this grudge match. Objections to the government’s settlement with the book publishers raised concerns that the Department of Justice was and has been aware of Amazon’s below cost pricing of e-books but didn’t lift — and hasn’t lifted — a finger to address it.

Given the inability of Apple — and the publishers — to get the police officer to take action, they took matters into their own hands. As previously explained in this blog, the market should decide who wins this billion-dollar fight between Godzilla and King Kong — not one judge sitting in the Southern District of New York.

The unofficial Department of Justice guide to officiating Apple et al. (Godzilla) v. Amazon (King Kong)

The unofficial Department of Justice guide to officiating Apple et al. (Godzilla) v. Amazon (King Kong)

Wouldn’t you want to see who wins a cage match between Godzilla and King Kong? We certainly would. Until recently, that fight was under way. Major book publishers (“publishers”) and Apple, Inc. (“Apple”) (collectively “Godzilla”) were chipping way at the 90% market e-book share held by Amazon (“King Kong”). And yet on April 11, 2012, the Department of Justice (“DOJ”) sued Godzilla alleging that it violated the antitrust laws. In light of the potentially tenuous merit of the lawsuit, it seems only fair that that the DOJ would investigate potential predatory pricing of e-books by King Kong, too.

The DOJ’s lawsuit is potentially tenuous because the publishers and Apple are not garden variety horizontal competitors fixing prices, as was the case when Sotheby’s and Christie’s, the famous auction houses, agreed to fix their commissions. Instead, the contracts between the publishers and Apple (“agency agreements”) are more akin to a vertical distribution agreement between a manufacturer and a retailer. The DOJ’s allegations, even if true,support this view.

Apple separately transacted with several book publishers to distribute their titles. In exchange, Apple received a 30% commission off the price of the book, which was negotiated between the publishers and Apple. This agency model replaced the wholesale model, in which publishers would sell to Apple at half of the retail price, and then let Apple sell at whatever price it wished. As any distributor with power would do, Apple obtained assurances in the agency agreements that the publishers would not do an end run around Apple and distribute via others, including Amazon, for less.

Even though the agency agreements are vertical, the DOJ is treating the them as though they were horizontal. The characterization makes a legal difference. On the one hand, courts review agreements (and conspiracies) among horizontal competitors to fix prices under the per se illegal standard. Once the agreement is proved, it is deemed illegal, regardless of its potential pro-competitive benefits or the market power of the competitors. On the other hand, courts review vertical resale price maintenance agreements among a manufacturer and a retailer, for example, under the rule of reason. Under this test, the court weighs the pro-competitive benefits of the agreement with its anti-competitive effects. Because the agency agreements are more akin to resale price maintenance contracts, they should likely be judged under the rule of reason, which makes the DOJ’s case tougher.

But regardless of which way the court ends up characterizing the relationship between the publishers and Apple, it seems at the very least that the DOJ should have investigated King Kong — that is, Amazon — for potential predatory pricing, too. Pricing below cost is unlawful if “it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses.” This sounds very similar to what King Kong has been doing by selling major titles below cost through its Kindle device, which currently occupies roughly 90% of the distribution market for e-books. It seems that publishers felt the only way to fight back was to agree to Apple’s agency agreements, which it demands of all content providers, so that the publishers could then withhold titles from Amazon unless it agreed to the same pricing structure they gave to Apple.

In the end, it might have been wrong for Godzilla to blow fire into King Kong’s face. But then it might have been wrong for King Kong to throw acid into Godzilla’s eyes. Either both sides should be scrutinized for their potential wrongs, or the referee — the DOJ — should stay out of the match and let the market decide who to favor.