September 2, 2003  ·  Lessig

Krugman is a favorite regular read. His latest is a favorite among favorites.

Apparently, the FERC has now settled with “energy companies accused of manipulating markets during the California energy crisis.” Through various price manipulations, those companies cost Californians $8.9 billion — not including the extraordinarily high prices we now face because of long-term contracts signed at the height of the crisis.

The FERC has now imposed a $1 million fine on the energy companies. As Krugman calculates, though they imposed costs of at least $250 on each Californian by their games, they’re required to pay 3 cents.

$1 million for $9 billion in real harm.

Let’s put this in some perspective.

Jesse Jordan (the RPI student who ran a search engine and was sued by the RIAA) was, the RIAA claims, liable for $15,000,000 in damages. When you add up the damages claimed against all four of these students (who again had built search engines), the RIAA was asking, on some estimates, for $100 billion dollars. That’s because, under our law as interpreted by the RIAA, downloading one song makes you liable for $150,000. Or, on the RIAA’s view of the law, cheaper to defraud Californian’s of $9 billion than download 10 songs from a p2p server.

“Oh,” you say, “but that’s unfair. You’re comparing actual fines imposed to the maximum fines that could be imposed.”

Ok, so let’s compare actual to actual.

In January, 2000, MP3.com launched a service called my.mp3.com. Using software provided by MP3.com, a user would sign into an account and then insert into her computer a CD. The software would identify the CD, and then give the user access to that content. So, for example, if you inserted a CD by Jill Sobule, then wherever you were � at work, or at home � you could get access to that music once you signed into your account. The system was therefore a kind of music-lockbox.

No doubt some could use this system to illegally copy content. But that opportunity existed with or without MP3.com. The aim of the my.mp3.com service was to give users access to their own content, and as a byproduct, by seeing the content you already owned, discover the kind of content the users liked.

To make this system function, however, MP3.COM needed to copy 50,000 CDs to a server. (In principle, it could have been the user who uploaded the music, but that would have taken a great deal of time, and would have produced a product of question-able quality.) It therefore purchased 50,000 CD from a store, and started the process of making copies of those CDs. Again, it would not serve the content from those copies to anyone except those who authenticated that they had a copy of the CD they wanted to access. So while this was 50,000 copies, it was 50,000 copies directed at giving customers something they had already bought.

Nine days after MP3.com launched its service, the five major labels, headed by the RIAA, brought a lawsuit against MP3.com. MP3.com settled with four of the five. Nine months later, a federal judge found MP3.com to have been guilty of willful infringement with respect to the fifth. The judge imposed a fine against MP3.com of $118,000,000. MP3.com then settled with the remaining plaintiff, Vivendi Universal, paying over $54 million.

So defraud Californians of $9 billion, pay $1 million. But develop a new technology to make it easier for people to get access to music that they have presumptively purchased: pay more than $54 million.

Such are the values of our time.

  • http://WeMatter.com Mike Liveright

    Good article … I am Emailing it to my representatives asking them to request the FERC to review their finding and to charge the energy companies triple damages of both the direct costs and the higher contract costs, I guess around $200B

  • Michael Ducker

    Wow. Never really thought about it that way. Every day I see more evidence that things are currupt in washington, and that somehow people have lost all sence of whats right and what’s wrong.

  • Brad Taylor

    I am occasionally accused of being too simplistic in my views on certain issues. That is probably true in this case also. I think that one of the most basic functions of government is to protect it’s citizens. The citizens of California have certainly not been protected by this decision. If a government is failing at one if it’s most basic functions, to protect it’s own citizens, then that government is not functioning properly. I’m sure that my ‘simple minded’ view doesn’t account for the many different reasons and technicalities of why something like this can happen, but that’s the way I see it.

  • Eric Anderson

    several thoughts…

    1. Nice to see Jill Sobule get a mention, in passing. She is one of the artists who kindly lets people sample her music via free MP3 downloads on her website, http://www.jillsobule.com, and also http://www.jillmedia.com. This works nicely. I bought one of her albums and intend to buy more when I have opportunity. Which leads me to believe that the RIAA war to the death against P2P is more about control than lost profits. Whichs leads me to the second item:

    2. Is it downloading a song that makes one liable for $150,000 damage? I thought RIAA was intending (at present) to sue UPloaders, not the downloaders. If you have nothing in your shared music directory on KaZaa, we have been led to believe that you are not a target. Or so I thought. Have I missed something?

    3. Who can disagree with Michael that people have lost a sense of right and wrong? I see a perfect symmetry between a government that slaps major defrauders on the wrist, and by the same token won’t allow the Decalogue posted in an AL courthouse. I agree, the society has come loose from its moorings.

    Still, deregulation has advantages and disadvantages. So does regulation. It all depends on the trade-offs one chooses. But obviously when foxes regulate and police the chicken coop, the chickens (us) are bound to get plucked and eaten. As a Christian I am more concerned that the commandments against lying and stealing be practiced in government than that they be displayed. Since Bush has made a point of his Jesus-centeredness, he really needs to focus closer attention on the moral implications of some of these regulatory decisions. “Hy-pocrisy and men-dacity,” as the line goes, doesn’t play well with me.

  • Thomas

    I hate to get all lawyerly and all, but aren’t there two questions involved here: what does the law require, and what should the law be?

    I’d hate for someone to think that there’s something wrong with the legal system (or the regulatory system) that could be fixed by actors with better character, or smarter judges (or regulators), or something like that.

    Don’t like the limits on FERC? Change the (very old) law. Don’t blame the values of our time or any other.

  • Anonymous

    Well of course these are the values of our time! This is corporate America, dammit, we must protect their profits, or else it will be victory for the terrorists and IP pirates! (But I repeat myself.) What the hell are you, unpatriotic?!

  • Ed Lyons

    Well, sure the laws should be changed. But law becomes a candidate for change more quickly when it offends our values. (well… maybe the values of the powerful) Lots of things about IP law are ridiculous, but no one in power seems to mind.

    (I think that FERC could honestly say the following in their defense:

    – FERC doesn’t have the power to get the scalps of the energy companies even if they wanted to. (Not sure they do anyway)
    – The politicians in Sacramento had a huge role in making this a crisis before big energy took advantage
    – The energy companies were mostly gaming a system everyone knows to be vulnerable to this kind of thing)

    What are the value statements our leaders are making in the case of California’s power crisis and copyright law?

    When it came to California, the powerful said, “We value the market, the current system and the big companies we have enfranchised more than the consumers of California.” (But, to be fair, this point of view is made very clear in the bio of the Chairman of FERC on their website.)

    When it comes to things like copyright law, the powerful say, “We value the rights of intellectual property holders more than those who want to steal it.” (The fact that it’s even phrased that way and not “more than the society that will inherit it” is why we’re losing)

    So yes – it is about values.

  • Dennis

    What about this law:

    Amendment VIII
    Excessive bail shall not be required, nor excessive fines imposed, nor cruel and unusual punishments inflicted.

  • Anonymous

    Don’t forget about those of us in the other Western states who’ve also seen our electrical rates skyrocket because of the California debacle and its impact on the electricity market. Here in Washington state, my electrical bills are basically twice what they were three years ago.

  • Anonymous

    Professor,
    Can you or your cohorts file a class action suit for the $9 Billion on behave of California consumers? If not, why not?

  • http://shumans.com Shuman

    The problems in the industry are well-known, but few are proposing viable solutions based on consumer feedback. The Open Music Model is such a system, based on research conducted at MIT:

    http://shumans.com/musicvote/

  • steve carter

    Yes, the big energy companies are “bad.” Yes, they probably should have been fined more. The people most responsible should be jailed, too.

    But this is the bit that concerns me: �not including the extraordinarily high prices we now face because of long-term contracts signed at the height of the crisis.�

    Why the passive voice? There was someone clearly responsible for signing these long-term deals � the Governor.

    Let’s face the facts: Governor Davis sure made it pretty easy for �Big Energy� to screw California. Davis got in way over his head trying to wheel and deal in the energy market. These long-term energy deals that will cost Californians billions are deals for which he must be held accountable.

    I don’t mind piling on the big energy companies and Corporate America when they deserve it, but let�s not let the elected the officials � even the ones for whom we have political sympathies � off the hook. �The extraordinarily high prices Californian�s now face because Governor Davis signed ill-advised long-term contracts at the height of the crisis� will likely cost more than the $9 billion Big Energy is on the hook for. Why don�t we sue Governor Davis? (or at least recall him).

    Also, let�s watch our logic here, people. Yes, the $1 million fine seems small compared to the other fines cited, but the question is, was the fine just. The answer is �probably not� . But that�s not proved or disproved by the other fines.

    I don�t know exactly how much of that $9 billion should be blamed on Davis�s ineptitude or nefarious energy traders. The facts of the case have not really been considered in any of these postings.

  • Greg Powell

    A million dollar fine does seem unconscionably paltry if the price manipulations were true (perhaps the difficulty arising from estimating damages made the FERC wary–no idea). Though a Cal resident I am woefully ignorant of the issues here. Though the FERC settled, my understanding is however that Cal’s claims are still alive. (Perhaps there are some private suits still alive as well.) So not all may be lost. At a minimum those long term contracts should be voided or re-negotiated.

  • http://www.jaycurrie.com Jay Currie

    Jesse Jordan (the RPI student who ran a search engine and was sued by the RIAA) was, the RIAA claims, liable for $15,000,000 in damages. When you add up the damages claimed against all four of these students (who again had built search engines), the RIAA was asking, on some estimates, for $100 billion dollars. That�s because, under our law as interpreted by the RIAA, downloading one song makes you liable for $150,000. Or, on the RIAA�s view of the law, cheaper to defraud Californian�s of $9 billion than download 10 songs from a p2p server.

    I agree with your general point but the numbers seem wrong. The RIAA’s claim is between $750 – $150,000 per song. The lowend number would be the best they would likely do in a non-commercial case. So you would have to have around 1400 offending songs to hit the fine numbers.

    Given that the RIAA seems to be settling their claims at around $3000.00 a pop (the term nuisance suit springs to mind) the music biz seems to be gaining some sense of balance.

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  • http://www.smsbramka.pl bramka sms, dzwonki, nokia

    Well of course these are the values of our time! This is corporate America, dammit, we must protect their profits, or else it will be victory for the terrorists and IP pirates! (But I repeat myself.) What the hell are you, unpatriotic?!

  • Lawrence Leske

    As a businessman I would view the FERC fines as a clear signal to continue these price manipulations. A 0.1% legal cost overhead regarding these actions is not only incredibly cheap, but very encouraging of more such actions. Caveat emptor!