August 28, 2003

NYT Says Credit Lyonnais Indicted Re Executive Life Asset Buy

Sealed Indictment Is Said to Charge Bank With Fraud (New York Times, August 28, 2003). The reported federal indictment of Credit Lyonnais in Los Angeles is the latest chapter in the 1991 collapse of Executive Life, a California insurance company that failed as the value of its junk bond portfolio dropped. The company was acquired by investors, the bond portfolio by Credit Lyonnais. At the time, the bank was owned by the French government, said the Times. Allegations later surfaced that the investors who bought the company were actually straw men for the bank, which could buy the bonds, but could not acquire the insurer due state law and the federal Glass-Steagall Act (partly repealed in 1999 by the Graham-Leach-Bliley Act). A federal investigation and a civil suit by the California Insurance Department ensued, and the indictment by the United States is the latest step in the process, indicated the Times. (more ... )

An Feb. 25, 2002 Insurance Journal article, "Decision Nears for Credit Lyonnais in Executive Life Case" includes more details about the case. In 1991, Executive Life, says the Insurance Journal, was the largest life insurer based in California, covering 340,000 insureds with $10.1 billion in assets. It also had enormous debts and went broke, in part because much of its capital was invested in "junk bonds" whose value crashed with the stock market in 1987.

On behalf of its creditors, the California Insurance Department (the statutory liquidator then under Commissioner Garamendi) accepted a bid for the company by a French firm that later turned out to be controlled through undisclosed intermediaries by French financier François Pinault. Later, some thought the price inadequate and criticized Garamendi. Garamendi failed re-election and his successor, Chuck Quackenbush, launched an investigation and lawsuit based on state law. Federal investigations also began for violation of the Glass-Steagall Act, said the Insurance Journal.

(Quackenbush resigned effective July 10, 2000, following a California Assembly investigation triggered by staff attorney disclosures that also led to changes in the California bar rules about in-house counsel's role as whistle blowers. Garamendi is once again the Insurance Commissioner of the State of California.)

Coincidentally, what book did I get from the West Hartford library yesterday? Yes, correct: Shulte, "The Fall of First Executive - An Insider's Account of the Biggest Insurance Failure in History." (1991) So much to read, so little time ...

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August 27, 2003

"Emergency" in Calif Homeowners Insurance, Says Garamendi

Atty. George Wallace in Pasadena is following John Garamendi's latest maneuvers to control homeowners insurance underwriting in California in his weblawg "Declarations and Exclusions:" Department of Insurance in Court Over Emergency Homeowners Insurance Regs. Garamendi has been enjoined by a state court from taking actions without following the A.P.A., which he has chosen to publicly characterize as barring him from enforcing state law. The story, reminiscent of insurance struggles in past years in North Carolina, Massachusetts and Maine, continues.

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Netwar Arms Locker for RIAA

Wired briefly sketches the new netwar weapons coded to counterattack MP3 file swappers: "Monsters of Rock". References codenames "Antinode", "Fester", "Freeze", "Shame", "Silence", "Suck" and "Tattle". Some of these tools mimic the tactics of Internet worms and viruses and bandwidth-draining DNS attacks. Others use "disinformation" tactics to create and direct MP3-seeking traffic to fake supernodes. Reminiscent of international netwar scenarios. Is all fair in love and war? (...More...)

RAND Corporation:
* The Advent of Netwar
* Networks and Netwars: The Future of Terror, Crime, and Militancy

Information Warfare, Cyberwar - Future of Internet & Computer Warfare (Infosyssec, current)

Bracing for guerrilla warfare in cyberspace (CNN, 1999)

The Great Cyberwar of 2002 (Wired, 1998) Fiction by John Arquilla, Pentagon advisor and professor of information warfare at Naval Postgraduate School.

CYBERWAR IS COMING! (1993) Introduction of "cyberwar" and "netwar" by John Arquilla and David Ronfeldt of RAND

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August 26, 2003

Oxford Study Shows 80/20 Distribution in Global (Re)insurance

Aon has published the report of a 2003 study by Oxford Metrica, analyzing the performance of the global (re)insurance market over the year following the World Trade Center catastrophe, using published data from the year-end 2001 annual statements. OM analyzed market value and premium writings of 484 publicly reporting insurance firms, with a combined market value of over US$1,061.3 billion. They found that 80% of the market value of the global general insurers and reinsurers lies in 20% of such companies. Shareholder Value Analysis of the Global (Re)insurance Industry (More follows)

The 53 companies that wrote global non-life insurance had a combined market value of US$542.4 billion (51% of the total value of the 484). OM focused on the 25 (with their subsidiaries) that accounted for 97% of the total value of the 53. OM's published data, for each of the 25 focus companies included:
1) Market Cap
2) Gross Written Premium
3) Total Net Premiums
4) Assets & Liabilities
5) Estimated Claims Relating to Cat 9/11
6) Cash available at 12/31/01

OM's table of market capitalization data showed, as of February 2003:
* 19% of the 53 global insurers had 83% of their combined market value;
* AIG had 28.9%, and Berkshire Hathaway had 20.4% of the combined market value of the 53.
* Number three's value was dramatically less at 6.4% of the share.

The top 25's premiums, assets and liabilities showed less market concentration:
* 20% had about 50% of the premiums
* 20% had about 70% of the assets
* 20% had about 70% of the liabilities.
(These percentages are based upon visual estimates from OM's graphical data.)

OM looked at the stock market reaction to each of the 25 following the 9/11 catastrophe, separating them into "recoverers" and "non-recoverers." OM noted that the larger firms tended to dominate the "nonrecoverers" group, compared to the smaller, "newer" firms with lower exposure to substantial historic liability claims such as asbestos.

The study provided some numerical data and views regarding insurance industry issues relating to asbestos and environmental liabilities, Enron and the expensing of stock options. It described the creation of almost 100 new (re)insurance companies in the insurance regulatory haven of Bermuda, funded with about US$13 billion of new capital since 9/11. OM also sketched Catastrophe 9/11 impacts on Lloyds of London and the Japanese insurance market, which reacted with insurance bankruptcies, mergers and alliances. OM noted that mergers of large firms in Japan have reduced 23 non-life companies to "6 mega insurance groups that would control collectively over 80% of the (Japanese) insurance industry's total premiums. * * * [T]he three top companies * * * hold 65% of the Japanese market."

The study was commissioned by Aon Limited, London and performed by Oxford Metrica, Oxford.
Contact information is in the full report: Shareholder Value Analysis of the Global (Re)insurance Industry

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Schuler on Public Policy re Electrical Distribution Grid

In "Electricity Supply Organization: Which End is Up?" (Utilities Project, 2002), Cornell Prof. Richard Schuler wrote in terms of network science and law while advocating roles for federal, state and local government in improving the transmission grid: "complexity science suggests that as the number of firm interconnections increases, the probability of large cascading failures (a major, regional blackout) also increases, even though average system reliability may improve. These reliability concerns are amplified by the September 11, 2001 terrorist attacks, since decentralized systems are generally more robust and resilient in the face of simultaneous, coordinated assaults than are tightly coupled, centrally controlled networks. * * * To the extent that jurisdictional squabbles at the ISO or state borders impede power transfer, the Commerce Clause of the Constitution can be invoked to tear those barriers down, just as the anti-trust laws must be enforced to avoid self-dealing across borders."

He addresses proposals for local, distributed generation: "Advocates of choice through widespread regional markets think in terms of the traditional large-scale facility, but choice can also be offered by multiple vendors of small-scale distributed generation, and the institutional structures required to support these alternatives are quite different. So, in the quest for greater reliability and security, there is a trade-off between providing greater regional coordination and increasing susceptibility to occasional catastrophic, widespread failure. "

He closes with a clear policy position and regulatory perspective rooted in the United States Constitution: "the primary thrust of larger entities should be to facilitate transmission construction as well as to distill and disseminate the best operating and market-structure practices while alternatives are being explored among the various ISOs.".

Full article: "Electricity Supply Organization: Which End is Up?" (Utilities Project, 2002).

A registered professional engineer, Prof. Richard Schuler directs the Cornell Institute for Public Affairs, focusing on policy and economics of public infrastructure and utilities. From 1981 to 1983, he served as Commissioner and Deputy Chairman of the New York State Public Service Commission and before his graduate studies, he served as an economist with Battelle Memorial Institute, and as an engineer and manager with the Pennsylvania Power and Light Company. Dr. Schuler is a frequent contributor to scholarly journals and co-author of "The Future of Electrical Energy: A Regional Perspective of an Industry in Transition," (1986). He has served many boards and committees, including Cornell's Board of Directors and he is currently a board member of the New York State Independent System Operator (oversight of the transmission operation and electricity markets). In 1982, he was named named him one of twelve "stars of state government" by the Washington Monthly. Source.

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2003 Blackout: "Tidal Waves" of Power Overwhelmed Power-rich NY

NY Times article describes the New York portion of the cascading failure of the electrical network on August 14, 2003 that resulted in blacking out much of the New York-New Jersey-Connecticut metro region. Closure of a power plant in Ohio around 2 PM led to a chain reaction of unexpected "tidal waves" of electric power surging back and forth between Ontario and New York, finally overwhelming the transmission grid and tripping protective breakers, plunging the Northeast into darkness two hours later. 90 Seconds That Left Tens of Millions of People in the Dark.

This story illustrates the studies of Columbia's Duncan J. Watts and Notre Dame's Al Barabasi regarding the nature of cascading failures developing over time until they reach a critical threshold beyond which network collapse is unstoppable. See also review of Barabasi's book Linked: The New Science of Networks

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August 25, 2003

Reading: Barabasi, Linked: The New Science of Networks

Albert-Laszlo Barabasi, Linked: The New Science of Networks (Perseus, 2002)

Comprehensive and thought-provoking, Barabasi provides a rich yet readable source for the non-mathematician seeking to understand and apply the emerging science of self-organizing, scale-free networks. A Professor of Physics and director of the Study of Self-Organized Networks at Notre Dame, Barabasi reviews and brings together 250 years of research that has deep significance for fields as diverse as quantum physics, molecular biology, digital security, global economics and counter-terrorism. Understanding the science may be a critical skill for those involved with the law and regulation of any complex system.

His history of the science starts in 18th century Russia and leads to Random Graph Theory in the 1950's and the studies of "small world" and clustering effects in the sixties and seventies. The Internet and the Web provided an ideal test bed for the study of "hubs" and "power law" effects in what are now called "scale-free" networks. He examines the "fit-get-rich" effect and the conditions in which a network may lead to a "winner-take-all" outcome. He then warns of the Achilles Heel of scale-free networks: the innate characteristics that make them robust and resistant to random failure makes them vulnerable to targeted attacks and subject to "cascading failure," such as in electrical blackouts. He shows the scale-free networks in biological processes and how the science contributes to the fight against AIDS and cancer, and touches on the potential studies in economic networks. He closes with cautions about the scale-free nature of terrorist networks such as Al-Queda.

Read more below ...

Random Graph Theory. Barbarasi begins with a history of Random Graph Theory, beginning with Leonhard Euler in 18th century Russia, and continuing with the research of Paul Erdos and Alfred Renyi in the 20th century. Erdos and Renyi documented clustering effects that are observed and described by various names in various disciplines: the emergence of a giant component (math); percolation and phase transition (physics); the formation of a community (sociology).

Six Degrees of Separation and Small Worlds. In the 1960's and 1970's, experiments by scholars including Stanley Milgram, Mark Granoveter, Duncan J. Watts, Steven Strogatz and Barabasi demonstrated a that a variety of clustering and "small world" effects could be found and quantified in all highly connected real networks, effects not explainable by Random Graph Theory. Those effects have been found in social networks, neural paths, the World Wide Web, the physical connections of the Internet, ownership of companies, food webs and cell biology. These studies demonstrated that huge networks do not need lots of random links; just a few long-range links between clusters enable small world features.

Hubs and Connectors. Malcolm Gladwell, in "The Tipping Point," addressed the pivotal role of "connectors" in the sudden and dramatic spread of viruses, the success of fashion breakthroughs and other events characterized by a sudden transition to explosive spread. Throughout the world of scale-free networks, those connectors are found as hubs. Recent studies of the architecture of the World Wide Web showed it to be dominated by a few very highly connected nodes, hub Websites with many links that hold together large clusters and many unpopular and seldom-noticed nodes. Even though hubs cannot be explained by the models used by Erdos/Renyi and Watts/Strogatz, they turn out to be ubiquitous in most complex networks that scientists have studied so far.

The 80/20 Rule. The economist Vilfredo Pareto observed the principle commonly known as the "80/20 Rule," described mathematically by a "power law" distribution in a chart or histogram of values. Unlike the familiar "bell curve" characteristic of charts of random events, the power law distribution has no peak but is a curve in which a few large events coexist with many small events. The number of links in a small fraction of the nodes is "off the scale" of the large majority of nodes; such networks are called "scale-free". In 1999, Barabasi's team found that these power law curves are consistently found in numerous large networks.

Barabasi: "power laws are at the heart of some of the most stunning conceptual advances in the second half of the twentieth century, emerging in fields like chaos, fractals and phase transitions. Spotting them in networks signaled unsuspcted links to other natural phenomenon, and placed networks at the forefront of our understanding of complex systems in general." Barabasi, op cit pp. 72-73. Power laws are found at the molecular level, where the physical world is marked by "phase transitions" from states of disorder to order, such as when water freezes. Barabasi: "Nature normally hates power laws. In ordinary systems all quantities follow bell curves, and correlations decay rapidly, obeying exponential laws. But all that changes if the system is forced to undergo a phase transition. Then power laws emerge -- nature's unmistakable sign that chaos is departing in favor of order." Id. p. 77.

The Rich Get Richer. Studies of the evolution of system structures showed that hubs result from the combination of system growth and "preferential attachment" to existing nodes in a "scale-free model" described in 1999. Improvements in the model sought to include other phenomenon such as the appearance of internal links between established nodes, node disappearance and the rewiring of links due to aging or retirement of nodes.

Einstein's Legacy. The explosive success of "new kid on the block" Google could not be explained by the scale-free model until a measure of a node's ability to stay in front of the competition produced a "fitness model." Examining the fitness model data, Ginestra Bianconi was startled to find that the calculations used were very similar to those found in the formation of a Bose-Einstein condensate. The math describing the behavior of "Bose gases" (a unique creature of sub-atomic quantum mechanics) turned out to be identical to those in the network fitness model. This similarity means, according to Barabasi, that in certain circumstances, particularly fit nodes in a network did not merely get richer ... the winner could take all.

In an ordinary "fit-get-rich" network, the fittest node gets biggest, but other fit nodes are close behind, so that "the power laws and the fight for links are not antagonistic but can coexist peacefully." Id. 102. In a "winner-takes-all" system, the fittest node grabs all the links, shaping the network into a "star" or "hub and spoke" topology which is not scale free ... there is a single hub and many tiny nodes. These findings have obvious relevancy to those studying antitrust law and policy and the ongoing case of Microsoft.

Achilles Heel. Natural systems exhibit robustness, the ability to survive under a wide range of conditions, because of their interconnectivity and scale-free topology. Experiments on a model of the Internet showed that one could remove the majority, even 80%, of the nodes and the rest would hold together as long as the small minority of hubs survived. Even though they are robust in the face of failure due to random events or errors, scale-free networks have an Achilles heel: they are vulnerable to simultaneous targeted attacks on the largest hubs.

Following the 1996 Western power blackout, Duncan Watts published a study of fads and "cascading failures" in systems such as electrical power grids. Cascading failures are not unique to electrical networks. They have been observed in many complex systems, including the economy (the East Asian monetary crisis of 1997), in ecological systems, in cellular biological systems, and following the September 11 terror attacks. Watts' investigations resulted in a model he used to study such phenomenon, and found that such cascades do not occur instantaneously; failures may go unnoticed for a long time before starting a landslide. Such phenomena invite study from many disciplines.

Viruses and Fads. The spread of viruses and fads are examples of what is called diffusion in a complex network, with a calculable "spreading rate." They will die out unless that rate exceeds a critical "epidemic threshold." Random Graph Theory could not explain the persistence of certain computer viruses or the explosive spread of AIDS. When a scale-free model including highly linked hubs was used, researchers found that the epidemic threshold vanished. Thus, network science can explain the sudden explosion of the AIDS epidemic, a relatively hard-to-catch disease, due to one "hub" ... an infected and extremely promiscuous flight attendant known as "Patient Zero."

The Awakening Internet. The Internet (on which the World Wide Web runs) has grown more like an evolving ecosystem than a manufactured machine. In 1999, three Greek computer scientist brothers, found that the connectivity distribution of Internet routers followed a power law, demonstrating it to be a scale-free network, subject to the same vulnerabilities and robustness found in other such networks.

The Fragmented Web. Unlike the Internet infrastructure, the Web is a "directed" network; its many links each point only one way, shaping its topology into the form of a "bow tie" with four "continents," one being an archipelago of disconnected islands. It turns out that these same four continents are found in all "directed" networks and are predictable analytically. This topology, and its consequences for the navigability of the Web become relevant in legal and regulatory actions, such as the French court's order in 2000 that Yahoo must block French residents from navigating to neo-Nazi websites. Despite Lessig's assertions that code can enforce such legal directives, Barabasi maintains that the topology and navigability of the Web is a function of collective human actions using the code. The architecture of a scale-free, directed network represents a higher level of organization than the underlying code. As long as individuals decide to what nodes to link, the inherent topology (and navigability) survives, says Barabasi.

The Map of Life. The genome has been sequenced, but the behavior of a living system is more than its molecular components. Within each cell there is a metabolic network, a web of biochemical reactions that researchers are now mapping, revealing scale-free network topologies exhibiting "small world" properties. Understanding cellular networks advances the cause of understanding and stopping cancer, Parkinsons, AIDS and other diseases. Barabasi sees this as the most promising near-term payoff from network research.

Network Economy. The traditional tree-shaped corporate structure, suited to mass production, is poorly suited to deal with rapid innovation and market change. The challenge of competing in such environments led to industries like pharmaceuticals and technology developing scale-free networks of alliances and outsourcers. For years, economists spoke of a standard formal model of economics, in which companies interact not with each other but with "the market," a theoretical entity mediating economic transactions. Barabasi: "In reality, the market is nothing but a directed network. The weight of the links captures the value of the transaction, and the direction points from the provider to the receiver. The structure and evolution of this weighted and directed network determine the outcome of all macro economic processes." Id. pp. 208-209.

Barabasi quotes Walter W. Powell's book "Neither Market Nor Hierarchy: Network Forms of Organization:" "in markets the standard strategy is to drive the hardest possible bargain in the immediate exchange. In networks, the preferred option is often creating indebtedness and reliance over the long haul." Id. p. 209. As a scale-free network, the economy is subject to the same vulnerabilities as are power grids and the Internet. Failures can cascade through the whole economy, as did the 1997 financial crisis that began in Thailand and cascaded across the Pacific, resulting in the stock market crash of October 27, 1997. Barabasi asserts that this is a natural consequence of network interconnectedness and interdependency and invites economic and network research in this field. Footnotes point to many such studies, and to the network economics websites of Leigh Tesfatsion and Nicholas Economides.

Web Without a Spider. Chance and randomness still play a role in the development of scale-free networks. But it is a web without a spider in the center; there is no single controller or node whose removal will break the web. The tragedy of September 11, 2001 is a dramatic example. Al Queda did not spring to life suddenly; it evolved over a period of years "into a self-organized spiderless web in which a hierarchy of hubs kept the organization together." Id. p. 222. Valdis Krebs has mapped the interconnections of the 19 highjackers and the 15 individuals connected to them based on publicly disclosed contacts. The resulting topology shows the characteristics of a self-organized, scale-free network. The developing science of such networks may provide us the clues to controlling it.

Barabasi: "Network thinking is poised to invade all domains of human activity and most fields of human inquiry. It is more than another useful perspective or tool. Networks are by their very nature the fabric of most complex systems, and nodes and links deeply infuse all strategies aimed at approaching our interlocked universe." Id. p. 222.

Albert-Laszlo Barabasi, Linked: The New Science of Networks (Perseus, 2002)

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August 20, 2003

Reading: Schneier, Secrets & Lies

Professionals using the Internet need to understand the principles and limits of cyberspace security processes as they use digital tools to communicate with clients and service providers. For the beginner and intermediate user of digital tools, a valuable book is one our friend and e-Lawyer commentator Ron Friedman recommended to me, which I just finished: Secrets & Lies: Digital Security in a Networked World, by Bruce Schneier (Wiley, 2000). Schneier is a cryptography specialist and author of "Applied Cryptography" (1993). In Secrets & Lies, he provides specific and practical guidance to maximizing the security you can obtain in your digital environment.

Read the rest of this comment on Secrets & Lies in my extended posting at: eLawyer Blog.

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August 19, 2003

Rep. Kucinich on Electric Dereg and Antitrust in Cleveland

Presidential candidate Dennis Kucinich (D-H ) was Mayor of Cleveland when he faced a "hard ball" maneuver by the predecessor of First Energy, the Ohio electric company in the current news. He writes about it in a blog posting "Lights Out on Deregulation" at Lessig's blog. It is an interesting piece of first-party history on the issues of electric power deregulation and allegations of attempted monopolization. The posting has attracted a string of comments from the public.

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August 18, 2003

Watts Illuminates Networks

Prof. Duncan Watts studies the science of networks at Columbia under a grant from the National Science Foundation. By training a sociologist who started with the "Six Degress of Separation" theory of social networks, Watts' multi-disciplinary studies extend into economic and scientific systems. At Columbia's website, Watts is quoted: "The study of social networks has a 50-year history, but the statistical analysis of large social and economic networks is only just becoming feasible," said Watts. "Furthermore, the relationship between a system's interaction structure and its functions globally has been largely overlooked both by economics and sociology." In February, he wrote a piece for The Chronicle of Higher Education Unraveling the Mysteries of the Connected Age. The article is based upon his book published this year, Six Degrees: The Science of a Connected Age. The article's final paragraph includes this: "the science of networks teaches us a third lesson: that such systems, from power grids to businesses, and even entire economies, are both more vulnerable and more robust than populations of isolated entities. Networks share resources and distribute loads, but they also spread disease and transmit failure -- they are both good and bad. But unless we can understand exactly how connected systems are connected, we cannot predict how they will behave."

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August 17, 2003

Barabasi on Networks and "Cascading Failures"

Improvement of all nodes and links is the only way to prevent "cascading failures" of the electrical grid, unless we are willing to cut the connections, according to a editorial, on page A25 of the NY Times August 16 edition, by Albert-Laszlo Barabasi. He is the author of The New Science of Networks (2002). Cascading failures are common in most complex networks, Barabasi wrote, but cutting the links would cripple the networks. Barabasi is Professor of Physics and director of the Study of Self-Organized Networks at Notre Dame at which site one can read Chapter One of the book online and examine other scholarly work and some fascinating graphics on the science of networks.

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August 16, 2003

Where Was Energy Policy When the Lights Went Out?

Political finger pointing started before the lights did, following the Great Blackout of '03. President Bush said we need to modernize the energy grid, and folks dusted off the 2001 Cheney Energy Commission Report and a 2002 House Minority Report challenging its findings. The New York Times, in "After 2 Years, Energy Bill Is Getting New Urgency in Congress" and other articles in a special Saturday August 16 section called "The Blackout," noted that both Democrats and Republicans were accusing the other party of responsibility for the problems. All before a cause of the blackout had been determined.

The Times notes renewed urgency for a federal energy bill, proposals for which grew out of the Cheney Report, but have been stalled in controversy. The Times cites controvery over proposals to require utilities to link together in national power-sharing systems. The Times quoted Howard Dean as taking credit for saving New England from the blackout by his opposition to such linking. Senator Charles E. Schumer (D., NY) was cited as urging the feds to drop the electricity parts of the energy bill until a blackout cause is determined, to avoid making matters worse.

The bills in the hopper call for boosting the power of the Federal Energy Regulatory Commission (FERC).

Electric companies in the US are overseen by the North American Electric Reliability Council (NAERC).

An electric industry lobby organization, the Electric Power Research Institute (EPRI), is based in Palo Alto.

A useful list of Energy Links

A primer on electricity, with links to deeper reading is available from The Environmental Literacy Council: Electricity. The Council also has a backgrounder on the California Energy Crisis

The California Energy Commission, in preparation for a November 2001 hearing to be facilitated by EPRI, released a collection of white papers available in a hearing handout titled “Exploring Alternative Wholesale Electricity Market Structures for California”

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August 15, 2003

Users Guide to Stored Communications Act

Orin Kerr of GWU provides us with A User's Guide to the Stored Communications Act - And a Legislator's Guide to Amending It. Protecting the privacy of Internet communications after they come to rest in a storage medium is the Stored Communications Act (SCA), 18 USC 2701-11, part of the Electronic Communications Privacy Act (ECPA). In this article, Kerr explains the basics of a complex statute and indicates needs for legislative amendment. Thanks to beSpacific for this lead.

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CDA Shields ISP from Masterson suit

Blogger Justin Levine's note in The Southern California Law Blog: 9th Circuit: Internet Protections Trump Privacy Rights reports and links to a Ninth Circuit decision that the CDA shields from a suit by an actress whose privacy was invaded as a result of a posting by an imposter. Carafano v., Inc.

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New: eLawyerBlog

Jerry Lawson has created a new blawg, eLawyer Blog, focused on helping lawyers use technology, especially the Internet, to better provide legal services to middle and low income Americans. The site advances a vision of former ABA President Bill Paul, but is independent of the ABA. Jerry has invited several prominent commentators to contribute to this group blog, including John DeBruyn, Ron Friedmann, Richard Granat and Dennis Kennedy. To show how generous he can be, he even added yours truly to his list of Commentators, for which I suggest we question his sanity.

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August 14, 2003

Manufactured Diamonds: Should De Beers and Intel be Worried?

Clayton Christensen, author of the Innovator's Dilemma, would likely chuckle over Wired 11.09: The New Diamond Age. In it, Joshua Davis reports on two start up companies, Gemesis Cultured Diamonds in Florida and Apollo Diamond in Boston. They are implementing two different forms of a disruptive technology: mass-manufacture of large, gem-quality diamonds at costs a fraction of that of mined gems. One ultimate market target is semiconductor manufacturing, where a diamond chip will sustain temperatures that would melt silicon. In the meantime, they plan to finance the build-out of their factories by making and selling large, gem-quality diamonds below the price of the De Beers - Diamond Trading Company.

The Wired story indicates that De Beers has created the "Gem Defensive Programme" to address the issue of manufactured diamonds. They have provided testing machines to large gem labs to assist detection of synthetic diamonds. However, Wired indicates that the gems now being made may not be discernable by such generally available tools.

Gemesis is the most immediate threat, already undercutting De Beers, while steadily expanding their factory. Gemesis uses technology acquired from Russia and perfected in the US, according to the article. Wired reports that the trade association Jewelers Vigilance Committee has petitioned the Federal Trade Commission to require Gemesis to label its stones as synthetic. The FTC has guides for such things, such as: In The Loupe: Advertising Diamonds, Gemstones and Pearls. Gemesis calls their stones "cultured," and in April 2001, Wired says the FTC issued an opinion on this subject, for which this humble blogger is searching.

Apollo Diamond uses a technology different from Gemesis, on which Apollo's Robert Linares received US Patent No. 6,582,513 B1 in June. Wired indicates that the Apollo stones, made using chemical vapor deposition (CVD), may be a bigger threat in the long term. Its manufactured gems may be indiscernable from natural diamonds using any foreseeable technology, suggests Wired.

As Christensen might predict, despite the known potential for manufactured diamond wafers to dramatically alter the semiconductor industry, Intel was not aware of the Apollo technology in June 2003 when interviewed, according to Wired. Wired quoted an Intel executive: "It takes us about 10 years to evaluate a new material. We have a lot of investment in silicon. We're not about to abandon that."

Christensen might chuckle and say: "And that is the needed opening ... for an innovator with no investment in the prior generation of technology ... to supplant the established player by implementing a disruptive technology."

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August 13, 2003

IPJ Pans Proposed EU Directive on IP Enforcement

In January 2003, an EU Directive was proposed to standardize enforcement of intellectual property law within the European Community. The document detailed the perceived needs for which the solutions were proposed, including the implementation of the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS Agreement). The proposal has met with criticism, most recently by IP Justice, which describes itself as "an international civil liberties organization that promotes balanced intellectual property law in a digital world. " On August 11, IP Justice released its "IPJ White Paper: Overbroad Provisions Threaten Civil Liberties, Innovation and Competition."

The IPJ paper opens with the charge that the proposal "contains a number of seriously troubling provisions that threaten innovation and competition and endanger the civil rights of all Europeans. Specifically, Article 9 creates broad and easily abused subpoena powers for intellectual property holders to obtain personal information on consumers. And Article 21 mandates a ban on technical devices that threatens innovation, competition, the fair use (fair dealing), and free of expression rights of Europeans."

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August 10, 2003

Reading: Gifford: Antitrust/Intellectual Property Interface

There is a century of history of the complex relationship between antitrust law and intellectual property law, recognized in the "Antitrust Guidelines for Licensing of Intellectual Property" (1975) of the U.S. Justice Department and Federal Trade Commission. In "The Antitrust/Intellectual Property Interface: An Emerging Solution to An Intractable Problem" 31 Hofstra Law Review 363 (2003), Daniel J. Gifford describes his view that recent decisions are shaping a new paradigm for reconciling antitrust law and intellectual property law and the concepts of "patent abuse" and "copyright abuse."

Gifford reviews Supreme Court decisions in the early 20th century applying Section 3 of the Clayton Act, up to the Mercoid v. Mid-Continent and Mercoid v. Minneapolis-Honeywell decisions in 1944 that subordinated patent law to antitrust law and substantially limited the doctrine of contributory infringement. Changes in the Patent Law overruled the Court's Mercoid decisions, but the Court went on reducing the degree of market power needed to define an antitrust violation in the context of tying sales of patented products. This reflected the Court's view that tying sales served little purpose other than the suppression of competition, expressed in the 1949 Standard Oil of California decision.

In the 1950's, scholars such as R.A. Posner and R.H. Bork maintained that tying was principally used for price discrimination, an analyis reflected in the "Chicago School" of antitrust analysis. Recent studies have looked at uses of tying and price discrimination to impede the entry of new market competitors, a technique scholars have compared to "limit pricing."

As these studies emerged, Gifford maintains, the Court and Congress increased the liberty of patentees to tie sales involving intellectual property without committing "patent abuse." The Jefferson Parish decision in 1983 found that a 30% market share was not sufficient to support an antitrust violation for a tie-in sale. Congress added clauses to Section 271(d) of the Patent Act that Gifford describes as allowing patentees to tie a patent license to a specially made component, but prohibited a tie to an unrelated product if the patentee had market power.

Gifford describes and critiques the contributions in this field of four commentators, Louis Kaplow, Mark Patterson, Michael A. Carrier and David McGowan. Gifford found that all four identify transactions in which core intellectual property concerns are triggered and in such cases give intellectual property law precedence over antitrust law. Gifford sees various court decisions following a similar approach.

Concepts of copyright abuse were similarly shaped by the Lasercomb decision and later cases such as Kodak and the Congressional amendments of the Copyright Act in the Digital Millenium Copyright Act (DMCA).

Appellate decisions in recent years have developed a theme of primacy of intellectual property law over antitrust law with certain exceptions, according to Gifford. He points to the Federal and D.C. Circuit's decisions in Xerox, Alcatel and Microsoft that apply objective criteria, and the 9th Circuit's Kodak decision applying a "pretext" criteria. Gifford expresses his favor for the first approach, citing the Supreme Court's preference for objective criteria as expressed in the 1993 Professional Real Estate Investors decision.

Gifford closes by describing the synthesis he perceives to be developing: "The courts, through lines of superficially conflicting cases, are in fact evolving a new synthesis of antitrust law with patent and copyright law. This new synthesis gives priority to the incentive structure of the two intellectual property laws, but recognizes the lawfulness of a range of behavior protected by patents that has no protected analogue under copyright law."

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August 08, 2003

Odlyzko: Net and DRM Enable Price Discrimination

A.P. reports in Digitally informed: Is price discrimination the next big trend in e-commerce? that recent studies by U. Minn. Professor Andrew Odlyzko suggest that digital rights management (DRM) may enable increasing price discrimination among customers using the Net for purchases. Professor Odlyzko, a mathematician formerly with Bell Labs, has been publishing scholarly articles about electronic publishing, e-commerce and security issues of the Internet for many years. His "Privacy, Economics, and Price Discrimination on the Internet,"(A. M. Odlyzko. Proc. ICEC03, ACM, 2003) is available at his page at the Digital Technology Center, where he is Assistant Vice President for Research, and DTC Director.

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New: Blawg Review

New on the web: The Blawg Review ("Reviewing the Law Reviews") is a group blog providing pointers to new law review articles, scholarly opinions, summaries of articles and announcements of symposia and paper calls. They presently have eight contributing writers, with a diversity of interests including antitrust, intellectual property, bioethics, and more. Several have their own blogs, including Gary O'Connor's Statutory Construction Zone, and Frank Pasquale's What Really Matters. Frank also was co-author of "Beyond Napster: Using Antitrust Law to Advance and Enhance Online Music Distribution." (8 B.U. Sci. L. Tech 451 (2002). Other contributors include Andrew B. Loewensten, Carlton Larson, David Dudley, Stephanie Tai, and two contributors so far identified only as "michele" and "simon."

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August 07, 2003 offers RIAA targets public forum

Volunteers, including some from the MIT Media Lab, have created a new community web site "" that describes itself as a "clearinghouse and connection point for individuals who are the subjects of P2P-related copyright enforcement actions. We will do our best to provide services that help this large and growing body of people find one another, while working together to increase public understanding of how their lives have been affected by this unprecedented wave of drastic legal action." The site is inviting those who have received NIAA subpoenas to create individual blogs (anonymously, if they choose) at the site in order to share their experiences in a public forum.

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August 06, 2003

EU Charges MSFT with Monopoly, Tying

An A.P. story, EU Officials Accuse Microsoft of Monopoly reports that Microsoft was charged Wednesday of antitrust violations with regard to its media player and server software. The story reports that this culminates a four-year investigation into activities that are alleged to be still ongoing.

In Mario Monti Messing With Microsoft, Dan Ackman reports that the EU complaint is that "Microsoft is leveraging its monopoly of the personal-computer operating-systems market to dominate the market for low-end servers and media players. It says that Microsoft's 'tying' of its server and media-player products to the Windows operating system 'weakens competition on the merits, stifles product innovation and ultimately reduces consumer choice.'" Ackman suggests that the existence of Microsoft's dominance in the Windows operating system means that it will always face such legal issues when it adds products to Windows.

BBC: "EU gives 'last chance' to Microsoft"

In a release on its own website, the European Commission stated: "This Statement of Objections, which includes the identification of appropriate remedies, gives Microsoft a last opportunity to comment before the Commission concludes the case. We are determined to ensure that the final outcome of this case is to the benefit of innovation and consumers alike."

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US Dept. of Ed. Discovering ESIGN

The Chronicle reports that US Dept of Ed may allow transcript release on E-signatures. The article discusses reluctance of some schools to accept anything but student's handwritten signatures for transcript release and other official business. The Dept. of Ed. has proposed a revision to rules under the Family Educational Rights and Privacy Act (FERPA) to reflect acceptance of the ESIGN law passed two years ago. The proposed rule change would allow procedures like those already approved for federal student loan programs.

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August 05, 2003

"Copyright and Digital Media in a Post-Napster World"

GartnerG2 and The Berkman Center for Internet & Society at Harvard Law School released "Copyright and Digital Media in a Post-Napster World". This 45-page white paper reviews basics of US and EU copyright law, the impact of digital technologies on the business models for music, movies, television and books. It includes briefs of cases dealing with fair use, the DMCA, constitutional issues, e-publishing rights and non-copyright laws protecting creative control or distribution, as well as sketches of pending legislation.

It includes a description of various forms of Digital Rights Management (DRM) tools that embody a rights model, such as Open Digital Rights Language (ODRL), extensible rights markup language (XrML), content scrambling system (CSS) and Johansen's DeCSS program, the Secure Digital Music Initiative (SDMI) and Macrovision's CDS-300.

The authors suggest that the history of "launch and crack" associated with DRM systems will continue, and "points to a longer-term requirement for media companies and copyright holders to shift away from a mindset of absolute control over every piece of content." (white paper, p. 38). The authors also suggest that using technology to enforce copyright rights cannot map the evolving doctrine of fair use, pointing to Prof. Lessig's writings on code as law. Further, they say, such control stifles or penalizes innovation. They close the DRM section by introducing GartnerG2's concept of "perfectly portable content," described in the paper.

The paper closes with some editorial remarks and a promise of another publication to be released addressing five scenarios of possible outcomes under different assumptions of the playout of tech, business, legislative and legal developments.

Source: "Unintended Consequences" at

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Reading: Boyle: Shamans, Software and Spleens

James Boyle's book Shamans, Software and Spleens (1996) was a reference in Lessig's Code, and attempts to construct a social theory of the information society. He addresses international policy considerations of current intellectual property law and theory, conflicts between incentives and monopolies, efficiency and property. James Boyle is Professor of Law at the American University.

Boyle utilizes four "puzzles" to illustrate the issues he sees: 1) conflicts between copyright and free speech, 2) the prohibition of blackmail, 3) the prohibition of insider trading, 4) the patenting of biologicals obtained from human and native sources, as addressed in Moore v. The Regents of the University of California, 793 P.2d 479 (Cal. 1990), cert denied, 111 S.Ct. 1388 (1991).

He finds that what he calls "a romantic vision of authorship" can explain the outcome of many controversial issues in the realm of intellectual property and privacy, when combined with "the theme of originality, and the conceptual distinction between idea and expression." Id. p. 98.

He raises doubt that such theories will always result in optimal solutions, and that the trend is toward increasing rights for those seen as "authors" at the cost of free speech, the public domain and the interests of indigenous populations and biospheres. His conclusions in this 1996 book are an expansion upon a manifesto published in 1993 called the "Bellagio Declaration"

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Critique of DRM Proposal for Recordings

Swedish attorney and writer Mikael Pawlo, in Professor Fisher and the Red Eye, comments on the news of the professor's proposal of a system where "the creator of a recording would register it with the U.S. Copyright Office and would receive, in return, a unique file name, which would be used to track Internet transmissions of the work. The government would tax devices and services used to gain access to digital entertainment. The primary target of such a tax would be ISP access." The professor's own draft explication of his proposal is online at Berkman Center.

Pawlo warns that a Digital Rights Management (DRM) scheme and prohibition of copying for what would otherwise be "fair use" is implied in the proposal. He argues that such DRM would sacrifice privacy in favor of copyright protection. Pawlo argues instead for levies on recordable media, such as blank CD-Rs, with the resulting revenue being distributed to copyright proprietors by the collecting societies based upon statistical measures comparable to Nielsen ratings. Conceding that levies are less efficient than a DRM system, he favors their greater protection of individual privacy rights.

William Fisher is a professor at Harvard Law School and the director of the Berkman Center for Internet & Society.

From "Unintended Consequences" at

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August 03, 2003

Supremes: Calif's Holocaust Victim Insurance Relief Act Struck Down

California's HVIRA, aggressively pressed by Insurance Commissioner Garamendi, interferes with POTUS' conduct of foreign policy and the McCarran-Ferguson Act does not save it from preemption. Reversing the Ninth Circuit Court of Appeals. AMERICAN INS. ASSN. V. GARAMENDI.
4 dissents, for whom J. Ginsburg wrote an opinion.

From the syllabus of the June 23, 2003 decision:

    "[T]he consistent Presidential foreign policy has been to encourage European governments and companies to volunteer settlement funds and disclosure of policy information, in preference to litigation or coercive sanctions. California has taken a different tack: HVIRA’s economic compulsion to make public disclosure, of far more information about far more policies than ICHEIC rules require, employs “a different, state system of economic pressure,” and in doing so undercuts the President’s diplomatic discretion and the choice he has made exercising it. Crosby v. National Foreign Trade Council, 530 U.S. 363, 376. * * * Pp. 21—26."

    "The Court rejects the State’s submission that even if HVIRA does interfere with Executive Branch foreign policy, Congress authorized state law of this sort in the McCarran-Ferguson Act and the U.S. Holocaust Assets Commission Act of 1998." * * * Pp. 29—31."

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ACM "White Paper on Internet Governance"

ACM has released its "White Paper on Internet Governance: A View From the Trenches. It "discusses ICANN's history, structure, and scope and focuses on the ability of ICANN to create private rules and regulations that impact free speech and robust use of the Internet by noncommercial communities and individuals," according to a cover letter which also says that it discusses "barriers to participation in ICANN for the noncommercial community" and identifies tasks for the noncommercial community to improve its voice. The report was prepared through a grant from the Ford Foundation's Media Arts and Culture unit.
Thanks to BeSpacific for the word on this resource.

ICANNWatch has noted that the major foundations have pulled back from funding public involvement in ICANN governance, in "Will the Foundations Regain Interest in the Public Interest in ICANN?" posted 8/7/03.

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August 02, 2003

Supremes: Dastar Copy of "Crusade" Not Lanham Act Violation

Limiting its decision to construction of the phrase "origin of goods," the Court found that no Lanham Act violation occurred when Dastar edited and republished much of the content of out-of-copyright tapes of the "Crusade in Europe" video. Dastar v. Twentieth Century Foxfilm Corp.(2003) The Ninth Circuit Court of Appeals had found Dastar had "bodily appropriated" the series and engaged in "reverse passing off," affirming an award of twice Dastar's profits to Twentieth Century Fox. The Court reversed, cautioning against misuse or over-extension of trademark and related protections into areas traditionally occupied by patent or copyright.

The Lanham Act, 15 U.S.C. §1125(a), allows a tort action to a person injured by another's "false designation of origin" in connection with any goods or services. The Dastar Court found that "the phrase 'origin of goods' is in our view incapable of connoting the person or entity that originated the ideas or communications that 'goods' embody or contain." They dismissed arguments for a different outcome for a "communicative product" valued for its intellectual content rather than physical characteristics, on the grounds that such would cause the Lanham Act to conflict with the law of copyright.

Prior to the June 2 decision in Dastar, Professor Samuelson referenced the case as an opportunity for the Court to add to the constitutional significance of the public domain, on which the Eldred decision was silent, as mentioned in the Unintended Consequences Note: Samuelson: Con Law of IP after Eldred. The Dastar Court referenced Eldred as support for its summation:

    "In sum, reading the phrase “origin of goods” in the Lanham Act in accordance with the Act’s common-law foundations (which were not designed to protect originality or creativity), and in light of the copyright and patent laws (which were), we conclude that the phrase refers to the producer of the tangible goods that are offered for sale, and not to the author of any idea, concept, or communication embodied in those goods. * * * To hold otherwise would be akin to finding that §43(a) created a species of perpetual patent and copyright, which Congress may not do. See Eldred v. Ashcroft, 537 U.S. 186, 208 (2003)."

From a note at the weblog "Unintended Consequences" at

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August 01, 2003

9th Cir: Tort of Conversion Applies to Domain Name Under California Law

In Kremen v. Online Classifieds, Inc. and Network Solutions, Inc. (9th Cir 2003) the Ninth Circuit Court of Appeals found that a domain name is intangible property to which the tort of conversion applies under California law, reversing the contrary decision of the District Court and opening Network Solutions to a multi-million dollar liability.
Thanks to

Gary Kremen registered the domain name "" in 1994. Subsequently, Network Solutions transferred the name to Stephen Cohen, on the strength of a forged letter from Cohen, described by the Court of Appeals as a "con man." Cohen profitably exploited the domain name until ordered to return it to Kremen and to pay $65 million in damages. Rather than pay the judgment, Cohen went to Mexico with the fruits of his misdeeds, leading to a fugitive warrant for his arrest and a $50,000 bounty posted by Mr. Kremen.

Mr. Kremen turned his attentions to collecting his damages from Network Solutions, which was both solvent and subject to service. The parties and the District Court had no trouble agreeing that the domain name constituted property, but Network Solutions persuaded the District Court that such intangible property was not the proper subject for the tort of conversion.

The Court of Appeals discussed the Second Restatement of Torts §242 and various decisions of the courts of the State of California (in which the case arose) which found subject to the tort of conversion such intangible property as corporate stock, a customer list carried on index cards and unauthorized sale of bootleg recordings. The Court also pointed to a federal decision applying California law to domain names when the issue of jurisdiction depended upon finding the name had been converted. The Court rejected a contention that Network Solutions ought not to be be held liable in the absence of negligence, saying:

    "Exposing Network Solutions to liability when it gives away a registrant's domain name on the basis of a forged letter is no different from holding a corporation liable when it gives away someone's shares under the same circumstances. * * * We have not 'creat[ed] new tort duties' in reaching this result. * * * We have only applied settled principles of conversion law to what the parties and the district court all agree is a species of property."

The Court remanded for further consideration of Kremen's damages claim against Network Solutions. Stephen Cohen, through his attorney, denies that he is a fugitive, contending that he is a Mexican resident under house arrest who would be imperiled by gunfights between lawmen and bounty hunters responding to a $50,000 bounty offered by Mr. Kremen.

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9th Cir: Thumbnailing "Fair Use" in case

EFF: Web Linking Need Not Cause Copyright Liability. The Ninth Circuit has revised an earlier opinion regarding a search engine provider's use of low-res 'thumbnail' versions of others' full-sized images. The thumbnails were made and stored by the search engine provider for such purposes. The Court found such to be "fair use," after applying a balancing test of factors described in the opinion issued July 7, 2003.

The so-called "" case has been closely followed by the IP and Internet law bar since the 2002 ruling that such thumbnail use was not within the "fair use" exception. The Court remanded for further consideration the question whether the framing of a full-sized display of an image selected from the thumbnail was or was not a fair use.

The Ninth Circuit's revised ruling in Kelly v. Arriba Soft case (PDF)

Another PDF of the decision.

The Court cited as the four factors to consider in determining "fair use:"

    " 1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;
    2) the nature of the copyrighted work;
    3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and
    4) the effect of the use upon the potential market for or value of the copyrighted work. 17 U.S.C. §107"

Commercial use does not end the consideration under the first factor, according to Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994), where the Supreme Court said:

    "[t]he central purpose of this investigation is to see . . . whether the new work merely supersede[s] the objects of the original creation, or instead adds something new, with a further purpose or different character, altering the first with new expression, meaning or message; it asks, in other words, whether and to what extent the new work is transformative." Id. at 579.

The Court of Appeals found that Arriba's use of the thumbnails of artist Leslie Kelly's artworks was transformative because they served an entirely different function than Kelly's original images. The Court compared the use to the finding of a transformative use in Nunez v. Caribbean International News Corp, 235 F.3d 18 (1st Cir. 2000), where a copy of a photo intended for use in a modelling portfolio was used in a news article.

The Court found the second and third factors more evenly balanced. As to the fourth factor, the Court again cited Campbell, saying that a "transformative work is less likely to have an adverse impact on the market of the original than a work that merely supercedes the copyrighted work."

The Court held the use of the thumbnails "fair use" under the Copyright Act, but remanded the case for further consideration on the use of the full-size images.

A note in the weblog "Unintended Consequences" at

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