Hail a NYC Taxicab on a Smartphone? Not Yet.

Considering that there is a smartphone application for just about everything these days, it is surprising that the New York City Taxi and Limousine Commission (TLC) did not approve a pilot program for electronic hail applications (e-hail program) until last December. However, the day before the pilot program was set to launch in NYC on February 13th, The Livery Roundtable and Black Car Assistance Corporation, among others, filed suit claiming that the program was improperly passed. The petition argued that the pilot program was invalid because the TLC failed to obtain City Council approval before starting a year long trial period for the e-hail program.

The e-hail app. would allow passengers using the application on their smartphones to identify available taxis in their area and/or hail a taxicab using the device. Alternatively, taxi drivers will be able to locate passengers in need of rides and/or receive electronic hails. Some companies with pre-existing e-hail applications such as Uber, GetTaxi, Hailo, and Flywheel were required to augment their pre-existing e-hail applications in order to conform to the TLC’s e-hail program regulations. Specifically, the TLC wanted to ensure that passengers and drivers used the application exclusively to hail, or accept hails, not bribe drivers with cash bonuses.

While the TLC was excited about the e-hail program and believed it would benefit both passengers and drivers, some companies lobbied against the program. Unsurprisingly, those in opposition of the e-hail program include the aforementioned petitioners Black Car Assistance Corporation and The Livery Roundtable, as well as other black car companies. The companies believe the e-hail system will generally hinder the livery business and negatively impact certain segments of the NYC population, specifically the elderly and the lower class. While this maybe true since yellow cab drivers and passengers will be easier to locate, there is nothing preventing black car companies from developing their own applications.

Nonetheless, the TLC and Mayor Michael Bloomberg remain unconcerned by the petitioners’ injunction and informed the public that the e-hail program was validly passed.

Carrier IQ – Has someone violated the Electronic Communications Privacy Act?

Photo Titled "Completely Taped" by Byung Kyu Park available on Flickr

141 Million handsets have a software program deployed on them which purports to only collect network diagnostic information for mobile phone service carriers. However, this software program is secretly running because is not easy for an average mobile phone user to see the program running on their phone because it does not appear as a “running application” on the applications list. Nor is there a clear disclosure of what data is being collected by the application, or a way to easily opt out of the application running on the mobile device. Nor is there any easy way to stop it from running on the Android phones. On November 28, 2011 Trevor Eckhart uploaded a seventeen minute video (shown above) exposing the extent of the data being captured by Carrier IQ, an application that mobile phone providers and/or carriers install on mobile phones. The video shows an Android developer searching his phone for privacy policy disclosures, and not finding any privacy disclosures related to the Carrier IQ program, he proceeds to show the type of data that is logged by Carrier IQ onto the phone’s debug log. For example, each time he presses a key that key press is logged, even when he enters information into a web page over his own local WiFi connection and the session is protected with SSL (which is an encrypted means of communicating between a client and host and forms the backbone of all secure communication over the Internet; as a standard and all data transferred within an SSL connection should be encrypted and protected after the SSL handshake). As of January 25, 2012, Eckhart’s video received over 1.9 Million views on YouTube.

In response, Carrier IQ sent Eckhart a letter threatening legal action unless he retracted his research, characterizing his analysis and posting of privacy policies as a breach of copyright which could expose him to an excess of $150,000 in damages. In response, Eckhart reached out to the E.F.F., who agreed to represent him; Carrier IQ has since backed off from its legal action and apologized for the cease and desist letter. The question remains now – has Carrier IQ, or the mobile phone manufacturers, or the mobile service carriers violated the E.C.P.A. by secretly running a software program on the mobile phones?

The Electronic Communications Privacy Act (E.C.P.A., 18 U.S.C.A. § 2510) was enacted to expand the scope of the Wiretap Act (which was focused on the interception of voice communication) to protect data transferred by computers. Title I of the Act protects messages that are in transit, and Title II of the Act protects messages that are in storage on a device. Within the E.C.P.A., it is unlawful for a person to distribute “any electronic, mechanical, or other device, knowing or having reason to know that the design of such device renders it primarily useful for the purpose of the surreptitious interception of wire, oral, or electronic communications” (18 U.S.C.A. § 2512(1)(a)). However carriers do have an exception, where under the normal course of their business in maintaining their communication systems, they can use devices to intercept wire communications.

Senator Al Franken, who chairs the Senate Judiciary Subcommittee on Privacy, Technology and the Law, has requested more information regarding what data is being collected and where the data is being sent. Depending on the type of data that is actually collected and sent to the carriers, they may be able to claim that they were operating within their normal course of business in maintaining the stability of the wireless networks. A criminal or civil case under the E.C.P.A. may not be a guaranteed success in a court of law. However, the public surprise of the extent of data being captured, and the lack of notice and control that users are able to exercise over how much activity is being tracked has already made the carriers and Carrier IQ losers in the court of public opinion.

A Step Towards Anonymous Browsing on Mobile Devices

Photo by: jeffschuler 

As Americans we “get” our right to privacy through provisions of the 1st, 4th and 14th amendments. We have the 1st amendment right to free assembly, the 4th amendment right be free from unwarranted search and seizure and the 14th amendment right to due process. Through these provisions the Supreme Court has addressed and upheld birth control rights, abortion rights, marriage rights, and child rearing rights among other issues related to privacy.

With the surge of people using the Internet over the past 2 decades, from children to college students to baby boomers, there is endless amounts of personal information on the internet, some of it intentionally put there and some of it not intentionally publicized. It is harder to maintain ones privacy in this world of instant Facebook access and oversharing on Twitter. Adding to this dilemma is the advent of the smart phone, from Iphones to Blackberries, you can now remotely upload a picture to Facebook, you can browse the Internet on the train, and update your blog while out to dinner.

Using these devices can leave the user or others vulnerable to their privacy being invaded. Not only can others access public Facebook profiles and see content that 3rd parties in pictures or mentioned may not be aware of, but websites track browsing and respond with ads and suggestions, not to mention the dangerous problems of phishing, hacking and identity theft. For example Google scans emails and then advertises for things mentioned in “personal” emails. Anyone with access to your computer or device can check your history and see where you have been poking around on the Internet.

This week, Apple approved the use of an application that will now be offered in the App Store. This Covert Browser for Ipad will allow users to confidentially browse the Internet (a similar App is also available for the Iphone). Although there are kinks to be worked out, you can purchase the peace of mind of “completely” anonymous web browsing for just $2.99. The Covert Browser is a much more secure way to browse than other secure networks. The technology behind the application is Tor. Tor triple encrypts data and routes it through three computers whereas other secure browsing only route through one computer, leaving users vulnerable to the companies responsible for the routing. The Apple endorsed application is a much needed move towards privacy for mobile devices.

Carrier IQ, the Electronic Communications Privacy Act, and the Digital Millennium Copyright Act

Image titled Android Virus by Charliesalima

In the same week that Facebook settled its dispute with the Federal Trade Commission (“FTC”) over allegedly deceiving consumers about its privacy practices, an Android developer, Trevor Eckhart, discovered that Android phones run software that logs keystrokes and hides its presence on the phone. The discovery of Carrier IQ (CIQ) software embedded in the Android (and over the following days, other smartphones) raises legal questions that might expose both smartphone vendors and customers to liability.

The Electronic Communications Privacy Act, 18 U.S.C. 2510 et. seq. (2006)(ECPA) expanded the Federal Wiretap Act to prohibit interception of electronic communications through any “system affecting interstate or foreign commerce” without the consent of at least one of the parties to the communication. The Digital Millennium Copyright Act prohibits circumvention of effective measures designed to prevent unauthorized access to copyrighted material. 17 U.S.C.A. 1201 (2006).

Much of the analysis of Carrier IQ misunderstands the ECPA, so some discussion of what the ECPA does and does not cover is in order. The ECPA has been interpreted to allow keystroke logging which intercepted signals sent between the keyboard and the computer, because until an email or other message is actually sent, the computer is not “a system affecting interstate or foreign commerce.” U.S. v. Ropp, 347 F. Supp. 2d 831(C.D. Cal. 2004). The bulk of CIQ’s spying does not violate the ECPA. As Eckhart noted in his criticism of CIQ, when he dialed a phone number, the software logged the number before he made the call. Some states may have privacy laws prohibiting CIQ’s conduct, and certain consumers may have other claims (e.g. copyright infringement if any of their emails or texts contained material they owned a copyright to), but the ECPA does not prohibit keylogging.

Other portions of CIQ’s data collection may violate the ECPA. CIQ apparently also intercepts incoming text messages and emails. Incoming messages satisfy the “affecting interstate or foreign commerce” standard. Whether the manufacturers or carriers who installed CIQ violated the ECPA would then depend on whether they had valid contracts which allowed them to intercept their customers’ messages, a factual question specific to each carrier. Carriers’ recent panicked statements to the media indicate that most do not, as carriers have generally claimed either that they do not collect the data Carrier IQ collects, or that they only collect some less offensive subset of it. Carriers have put themselves in a precarious position by making such assertions, which smartphone manufacturers claim are false. The claim that a carrier does not collect data is only believable if the carrier does not include a data collection provision in its contracts, or includes the provision in a manner designed to keep consumers from recognizing or understanding it. Carriers who try to avoid bad publicity now may find themselves estopped from asserting a contract defense to ECPA claims in a later lawsuit.

A lawsuit may be the only option consumers have. Self-help is available to copyright owners in many scenarios, but is denied to people who want to protect their privacy from their wireless carrier. CIQ cannot be turned off through normal means, at least on the phone Eckhart tested. It can be defeated by hacking the phone. However, because CIQ is protected by digital rights management (DRM) software, consumer attempts to turn CIQ off may violate the DMCA.

In 2010, the Librarian of Congress used its powers under the DMCA to create an exemption for “jailbreaking” smartphone handsets. However, the exemption only applies when the jailbreaking is for purposes of interoperability, offering consumers no hope for protecting their privacy.

The DRM technology in use does not need to be strong to make circumventing it illegal. In spite of the word “effective” in the statute, courts have held that the DMCA also prohibits circumvention of ineffective measures designed to protect copyrighted material, because effective measures don’t need legal restrictions on circumvention and the word “effective” would be mere surplusage if it didn’t also cover ineffective measures. See Universal City Studios v. Reimerdes, 111 F. Supp. 273 F.3d 429 (2d Cir. 2001). The DMCA applies even when no copyright is violated, and it carries criminal penalties.

The DMCA leaves customers of carriers who use CIQ no other option but to accept violations of their privacy, find a carrier which does not use CIQ, or sue. Given the number of misleading press releases put out by carriers in the last few days and the frequent use of adhesion contracts that lock customers in to long periods of service, option 2 may not be so easy. While the case for ECPA violations is not as strong as some have asserted, it is still viable, and may be consumers’ only hope.

A New Business Strategy in the Technology Industry

Photo Courtesy of Honou

Apple and Samsung have been locked in an intense patent battle for months. Following drawn out litigation, the Federal Court of Australia awarded an interlocutory injunction to Apple, keeping the Samsung Galaxy Tab 10.1 off the Australian market until a full patent trial takes place. This ruling came just before Judge Koh of the U.S. District Court for Northern California ruled that Samsung’s device does indeed violate American patents held by Apple. These rulings come on top of other major losses suffered by the company in the Netherlands and Germany, where the Galaxy Tab 10.1 has been barred from sale.

Despite these enormous setbacks, Samsung is not backing down. On October 17, just days after its debut, Samsung put Apple’s iPhone 4S squarely in its sites. The company filed an injunction request in Australia and a similar suit in Japan arguing that Apple’s iPhone 4S violates wireless and user interface patents that the company holds in those countries.

However, these are not the only technology giants who have made patent litigation a core element of their business. In August, Google spent $12.5 billion to acquire smartphone manufacturer Motorola Mobility. Google CEO and co-founder Larry Page was not shy in revealing the company’s main purpose for shelling out such a large amount of cash for a company that is already a Google customer. Page stated that the move would “strenthe[n] the company’s portfolio” and better enable the company “to protect Android from anti-competitive threats from Microsoft, Apple, and other companies.” Moves like this that have led some experts to declare the existence of an “arms race” in the technology sector with companies competing to stockpile patents as insurance against potentially costly litigation.

Over the coming decade, we will have to pay attention to see if this hostility in the industry continues to cause an increase in patent litigation or, instead, results in something more cooperative. Some have suggested that the result of the current state will be cross-licensing deals between tech companies. With more patents in their portfolios, companies will be well positioned to negotiate agreements with other companies to not sue each other in a specific field. Such deals will allow companies on both sides of the deal to concentrate more time and money on continued innovation. However, if this is not the case, there is a strong possibility that companies could bring their business overseas to avoid the particularly litigious nature of the American patent system.

Dan Ravicher, executive director of the Public Patent Foundation, rather ominously summarized the current state of affairs when he said, “With arms races, we can only have peace through a lot of fear.”

No Easy Fix to Cell Phones and Warrantless Searches

Photo titled "Day 8" courtesy of Nathan Brown on Flickr

On January 3, 2011, the Supreme Court of California held that law enforcement officers did not violate a defendant’s Fourth Amendment right when they looked through his cell phone’s text message folder 90 minutes after being taken into custody for drug charges. See People v. Diaz, 51 Cal.4th 84, 93 (2011). In a reaction to the court’s decision in Diaz, the California Legislature recently passed a bill that requires law enforcement officers to obtain a warrant before searching a defendant’s cell phone. The bill passed unanimously in the State Assembly. Governor Jerry Brown has until October 9th to sign the bill into law. What makes this bill even more important is that the United States Supreme Court denied certiorari to the Diaz case for its new term that began on October 3, 2011. As such, this bill, or similar piece of legislation, represents the only potential change to California law in the near future.

The issue at hand for the Diaz court was whether the defendant’s cell phone in these circumstances was “personal property” associated with him, which would allow a warrantless search incident to the arrest, or whether the cell phone was not associated with him, which would require a search warrant absent very narrow exceptions. The court determined that the cell phone was personal property associated with the defendant because the cell phone was on his person during the arrest and administrative process at the police station, regardless of the cell phone’s ability to hold vast amounts of information.

There is no question that cell phones do much more than just facilitate phone calls – they are readily becoming the primary means that people check their e-mail, surf the internet, and communicate with one another. Moreover, cell phones now also hold a significant amount of personal information due to vastly improved capabilities, such as electronic documents, passwords, bank accounts, and even recently visited locations. Proponents of this bill and other similar legislation argue that the people of California need such an explicit limitation to protect themselves from “Big Brother.”

While this fear is not unfounded, signing such a bill into law would be a tremendous mistake, because it would effectively prevent the Fourth Amendment jurisprudence from evolving to fit the needs of developing technology. There are many questions that should be answered before the California legislature, or any state legislature for that matter, signs such a bill into law. The Diaz ruling is very fact specific and does not represent a “blank check” that allows all police officers to search any and all cell phones. The court specifically noted that the cell phone in this circumstance acted as personal property associated with the defendant because the defendant had the phone on his person during the arrest and administrative process at the police station. As such, there may be a completely different outcome if the cell phone is somewhere besides on the defendant’s person, such as in a vehicle’s glove compartment or even cup holder.

Despite the many questions and the difficulty in waiting for these answers, drastically shutting the door to any and all warrantless searches of cell phones is not wise because such legislation aims to place an absolute right of privacy in individuals’ cell phones. This attempt to grant cell phone users an absolute right against any and all warrantless searches destroys the delicate balance that Fourth Amendment jurisprudence has always aimed for. This bill effectively ignores decades of precedent in establishing exceptions to the general requirement of search warrants, such as exigent circumstances or search incident to arrest.

Although this is not the easiest answer and no doubt the least popular one, the judiciary is the government branch that should decide the Fourth Amendment’s evolution as to warrantless cell phone searches rather than politicians. Simply signing a bill that bans all warrantless searches altogether is a naïve attempt to simplify an area of law that, for better or for worse, requires constant evaluation to properly evolve and protect the delicate balance between law enforcement and individuals.

Say Cheese: Facial Recognition and Privacy Rights

Photo courtesy of Chris Seary on Flickr

What was once fantastic in the 1980’s has quickly become a reality in 2011. Technology that audiences oohed and ahhed in scenes of Robocop or The Terminator have become the technology that is currently seeking to put criminals behind bars. Full body scans at the airport represent not just a leap in x-ray tech but also a battleground of privacy and constitutional rights debates. In the fight against crime BI2 Technologies developed a product that seeks to put more power into police officers’ hands, and I’m not talking about his gun.

BI2 is currently marketing an iPhone additive that will allow police and other law enforcement officials to take pictures of peoples’ faces and link those pictures to records for identification. This MORIS technology links the iPhone to biometric databases that record facial features, iris patterns and fingerprints. This technology has the potential to allow law enforcement to take a picture of anybody walking down the street, instantly run a background check and pull their record.

While it is legal to photograph individuals in public places, this technology begs the question of whether privacy rights as protected under the Fourth Amendment will be violated. Probable cause seems to go out the widow with the realities of facial recognition technology. Similar issues have been raised when it comes to GPS tracking and whether or not the comings and goings of a person should be protected. Facial recognition is the new frontier of technology going hand in hand with law enforcement. This emerging technology, while not implemented currently, has the potential to serve the public good while simultaneously raising legal red flags.

This technology, outside of law enforcement, would be able to serve many functions without running into legal issues. It could be used privately as a way to keep track of employee or client data. It could also be very well used in protecting data as an alternative to alphanumerical passwords. Biometrics is the future of data protection as it is much less susceptible to hacker intrusions.

Use of this technology in law enforcement will undoubtedly be a source of debate. Critics of facial recognition will raise arguments that include probable cause requirements as well as privacy issues. The Fourth Amendment ensures the American citizen freedom from unreasonable search and seizures and that they be secure in their persons. An officer with an iPhone may be able to circumvent these constitutional protections.

Privacy rights and the debates surrounding them have been ever present in current news. Proponents of strict privacy rights have been vociferous in their condemnation of all invasive technology as well as invasive practices seeking to secure public safety. The question is going to be whether the public is willing to allow for flexibility in privacy rights in order to foster a safer living environment. Technology like biometrics has the potential to be used very effectively and for positive change, if we allow it. A firestorm from a myriad of social and legal groups will meet these technologies head on as they are slated for production and dissemination.

Future tech will continue to evolve in spite of legal debates and public opinion. If something has the potential for so much good, should we condemn it on the grounds of law and tradition?

Seven States Join the U.S. Justice Department in Federal Court, Seeking to Block the Merger of AT & T and T-Mobile

AT & T proposed its $39 billion plan to buy T-Mobile USA. The deal will give AT & T a 40.6% market share in the cell phone industry, and will concentrate 80% of U.S. wireless customers in two companies – AT & T and Verizon wireless, thus creating a duopoly in the mobile service market. Not surprisingly, the acquisition is challenged by the Department of Justice, jointed by seven states, including New York, Massachusetts and California, under the Federal Antitrust Law.

Section 7 of the Clayton Act, an anti-merger statute, prohibits mergers that may substantially stifle competition “in any line of commerce, in any section of the country.” The Act especially disfavors horizontal mergers. A horizontal merger is a merger between two direct competitors who compete with each other in the same line of business and in the same geographic market. A horizontal merger will have adverse anti-competitive effects because it will eliminate competition between two merging parties, and will likely increase market shares and assets of the merged enterprise. The merger will be illegal per se, unless the merger will not create or tend to create a monopoly. Market concentration and market shares of two merging companies are the determinative factors in a horizontal mergers analysis. High market concentration and dominant market shares will establish a prima facie violation of the Act.

The merger between AT & T and T-Mobile is a horizontal acquisition because the two companies compete directly with each other in the cell phone market, and both provide a national-wide service, with market shares of 28.5% and 12.1%, respectively. The merger will allow AT & T to dominate the market, enable it to set prices and instill a fear in the smaller competitors. Consequently, it will lessen the competition and create a prima facie case that the merger is unlawful. In addition, the merger will create an industry where the top two companies handling 80% of the service. The high concentration may encourage AT & T and Verizon to seek a deal for their mutual advantage at the cost of consumers, and discourage new enterprises from entering into the wireless service business. Before the merger, the cell phone market has been already concentrated, with Verizon and AT & T claiming over 50% of U.S. wireless consumers. In an already highly concentrated market, the courts will condemn any merger that increases concentration, even if that increase is minimal. The merger will be enjoined unless AT & T can provide clear evidence that the merger will not adversely affect the competition in the cell phone industry.

AT & T can argue that the extremely competitive wireless market will prevent the merger from substantially stifling the competition. It can point out that, despite the wireless service industry in the United State being concentrated in Verizon and AT & T, the competition between Verizon and AT & T is vigorous and it is impossible for them to reach any mutual advantage agreement. At & T can further argue that the merger will only put AT & T at a more competitive position. As a result, the merger will encourage the competition.

This pro-competitive argument will not likely survive the scrutiny. A pro-competitive effect on a horizontal merger will justify the merger only when two merging firms were weak before the merger, and will not result in a dominant market. The evidence shows that: both AT & T and T-Mobile are strong and aggressive competitors, both have a significant amount of market shares in the wireless industry, neither of them are failing, and the merger will produce a dominant market as AT & T will be the No. 1 provider of mobile services. The merger will not only effectively eliminate a competitor, but will likely force a higher price on T-Mobile customers with an inferior service, the effects of which the Act was enacted to prevent.

Will The Real "App Store" Please Stand Up?

On March 18, 2011 Apple commenced a lawsuit against Amazon for Amazon’s use of the word “appstore” (Apple Inc. v. Amazon.com Inc., 11-1327, U.S. District Court, Northern District of California). Bloomberg news broke the story on March 22, 2011. Apple had filed the term “App Store” as a service mark in 2008 in conjunction with its release of the iPhone 3G. A few days before the release of the Amazon Appstore for Android, Apple filed a claim that Amazon’s use of the name “Amazon Appstore” would mislead customers. The question before the court will be whether an “app store” is a generic term commonly used in trade and cannot be trademarked.

Trademarks include symbols that are used in commerce to indicate the source of goods and services,

Back on January 10, 2011 Microsoft filed a motion with the USPTO to refuse registration of the term “app store”. Microsoft argued that the term “app” by itself is a generic term for a product that is in common usage and used in several dictionaries as a short hand way of saying “application”. Further, Microsoft argued that a generic name for a product followed by the word “store” is itself a generic way of describing a store that sells that product. In several previous cases, the USPTO had held that these types of marks were generic, such as “The Computer Store” or the “Shoe Warehouse.” Microsoft notes that CEO of Apple Steve Jobs himself has used the term “app store” generically, such as in Apple’s October 2010 earnings call where Jobs said:

In addition to Google's own app marketplace, Amazon, Verizon, and Vodafone have all announced that they are creating their own app stores for Android -- so there will be at least four app stores on Android, which customers must search among to find the app they want.

Of course, many are puzzled by the fact that Microsoft is arguing that Apple should not be able to trademark “app store”, especially in light of the fact that Microsoft itself has stringently defended its trademark of the term “Windows”.

One thing is certain – regardless of what you call them, a new breed of stores has risen in the marketplace and will continue to flourish as long as people want to buy “apps”.

On March 18, 2011 Apple commenced a lawsuit against Amazon for Amazon’s use of the word “appstore” (Apple Inc. v. Amazon.com Inc., 11-1327, U.S. District Court, Northern District of California). Bloomberg news broke the story on March 22, 2011. Apple had filed the term “App Store” as a service mark in 2008 in conjunction with its release of the iPhone 3G. A few days before the release of the Amazon Appstore for Android, Apple filed a claim that Amazon’s use of the name “Amazon Appstore” would mislead customers. The question before the court will be whether an “app store” is a generic term commonly used in trade and cannot be trademarked.

Trademarks include symbols that are used in commerce to indicate the source of goods and services,

Back on January 10, 2011 Microsoft filed a motion with the USPTO to refuse registration of the term “app store”. Microsoft argued that the term “app” by itself is a generic term for a product that is in common usage and used in several dictionaries as a short hand way of saying “application”. Further, Microsoft argued that a generic name for a product followed by the word “store” is itself a generic way of describing a store that sells that product. In several previous cases, the USPTO had held that these types of marks were generic, such as “The Computer Store” or the “Shoe Warehouse.” Microsoft notes that CEO of Apple Steve Jobs himself has used the term “app store” generically, such as in Apple’s October 2010 earnings call where Jobs said:

In addition to Google's own app marketplace, Amazon, Verizon, and Vodafone have all announced that they are creating their own app stores for Android -- so there will be at least four app stores on Android, which customers must search among to find the app they want.

Of course, many are puzzled by the fact that Microsoft is arguing that Apple should not be able to trademark “app store”, especially in light of the fact that Microsoft itself has stringently defended its trademark of the term “Windows”.

One thing is certain – regardless of what you call them, a new breed of stores has risen in the marketplace and will continue to flourish as long as people want to buy “apps”.

The Merger between AT & T and T-Mobile: Will it Go Through?

AT & T announced its $39 billion plan to buy T-Mobile USA. The deal, if approved by regulators, will give AT & T a 40.6% market share in the cell phone industry, and will concentrate 80% of U.S. wireless customers in two companies – AT & T and Verizon wireless, thus create a duopoly in the mobile service market. Despite AT & T’s likely argument that the cell phone market is intensely competitive and the deal will not easy the competition, the merger will have a hard time to pass the justice department’s scrutiny under the federal antitrust law.

Section 7 of the Clayton Act, an anti-merger statute, prohibits mergers that may substantially stiff competition “in any line of commerce, in any section of the country.” The Act especially disfavors a horizontal merger. A horizontal merger is a merger between two direct competitors who compete with each other in the same line of business and the same geographic market. A horizontal merger will have adverse anti-competitive effects because it will eliminate a competition between two merging parties, and will likely increase market shares and assets of the merged enterprise. Unless it will not create or tend to create a monopoly, the merge would be illegal per se. Market concentration and Market shares of two merging companies are the determinative factors in horizontal mergers analysis, and high market concentration and dominant market shares will establish a prima facie violation of the Act.

The merger between AT & T and T-Mobile is a horizontal acquisition because the two companies compete directly with each other in the cell phone market, and both provide a national-wide service, with market shares of 28.5% and 12.1%, respectively. The merger will give AT & T a dominant market, enable it to set prices and instill a fear in the smaller competitors. Consequently, it will lessen the competition and create a prima facie case that the merger is unlawful. In addition, the merger will create an industry with the top two companies handling 80% of the service. The high concentration may encourage AT & T and Verizon seeking a deal for their mutual advantage at the cost of consumers, and discourage new enterprises from entering into wireless service business. Before the merger, the cell phone market has been already concentrated with Verizon and AT & T taking more than 50% of U.S. wireless consumers. In an already highly concentrated market, the courts will condemn any merger that increases concentration, even if that increase is minimal. The merger will be enjoined unless AT & T can provide a clear evidence that the merger will not adversely affect the competition in the cell phone industry.

AT & T can argue that the extremely competitive wireless market will prevent the merger from substantially stiffing the competition. It can point out that despite the wireless service in the United State being concentrated in Verizon and AT & T, the competition between them is vigorous, it is not possible for them to reach an mutual advantage agreement, and the merger will only put AT & T at a more competitive position. As a result, the merger will encourage the competition.

This pro-competitive argument will not likely survive the scrutiny. A pro-competitive effect in a horizontal merger will justify the merger only when two merging firms were weak before the merger, and will not result in a dominant market. The evidence shows that both AT & T and T-Mobile are strong and aggressive competitors, both have significant amount of market shares in the wireless industry, neither of them is failing, and the merger will produce a dominant market as AT & T will be the No. 1 in the mobile service. The merger will not only effectively eliminate a competitor, but also likely force a higher price on T-Mobile customers with an inferior service, the effects that the Act was enacted to prevent.

The Technologically Challenged Tax Code

(Photo by: Ambimb)

While operating a cell phone has become so simple that it seems like every ten-year-old has one, dissecting your cell’s bill has become so confusing it almost requires the use of the Rosetta Stone. Anyone who has had the joy of questioning a cell phone bill knows how hard it is to decipher what fee is for what and which charge goes to what line. It has come to the point where it is more efficient to just pay the bill rather than waste half the day waiting on hold to try to correct the discrepancy with technical support. Over the last few years, it seems like every month there is a new “regulatory fee” or tax increase. For those of us locked into two year contracts so we could afford to buy the newest Blackberry Apocalypse or iPhone 12, what choice do we have but pay it? Luckily the end is in sight, at least partially.

Last year the Cell Tax Fairness Act was introduced, a bill which, if enacted, would ban any new state or local taxes imposed on mobile phones. Currently, taxes on cell phones are twice that of other goods and services. In recent years, these taxes increase four times faster than similar taxes on other goods and services, according to a study by the National Taxpayers Union. While the Act would not repeal any existing state or local taxes, it would prevent further taxation from being enacted.

While it might not result in significant savings, the Act would be a welcome relief for taxpayers who have little recourse against the recent tax hikes in an increasingly cell phone driven world. Not only will it prevent state and local governments from increasing our tax bill, but it will prevent wireless companies from increasing fees and dressing them up as mandatory taxes. Every cell phone bill is riddled with various fees and charges that are passed off as mandatory and presented as if they are imposed by the government. With the enactment of the Cell Tax Fairness Act, consumers can be certain that any new “fee” imposed by their specific carrier, could possibly be avoided on another network. If nothing else, this will give the public back some of the bargaining power and clarity when analyzing their next bill.

Congress has already passed another measure to repeal a provision in the tax code which currently treats personal use of an employer provided cell phone as taxable income to the employee. This legislation, coupled with the Cell Tax Fairness Act, demonstrate a few small steps toward tax reform. There are countless areas of the tax code in great need of an overhaul due to the ever-changing technological world. Every step toward reform is a welcome shift from the outdated, archaic rules that were enacted decades before the Internet existed.