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The Internet middlemen: targeting intermediary firms as gatekeepers in the online economy
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Content
The Internet Middlemen:
Targeting Intermediary Firms as Gatekeepers in the Online Economy
by
Jaclyn Lee Selby
A Dissertation Presented to the
FACULTY OF THE USC GRADUATE SCHOOL
UNIVERSITY OF SOUTHERN CALIFORNIA
In Partial Fulfillment of the
Requirements for the Degree
DOCTOR OF PHILOSOPHY
(COMMUNICATION)
December 2014
Copyright 2014 Jaclyn Lee Selby
ii
ACKNOWLEDGMENTS
I would like to thank…
Dr. Jonathan Aronson and Dr. Kyle Mayer, my co-chairs, for advising me and guiding me
through my dissertation.
To Jonathan – the opportunity to work with you was the reason that I applied to the Anennberg
school. Thank you for making sure I kept my eyes on the prize, for demonstrating that it is ever
possible (and fun) to keep folks on their toes, and for providing invaluable advice on navigating
the policy realm and how to tell the difference between what’s important and what’s not. If there
is one thing I have learned from you, it is that a scholar must be able to communicate why their
contribution matters – and do it in a manner that is at once succinct, convincing, and suggests
one knows the difference between a hypothesis and a research question!
To Kyle – working with you is why I chose to take a leap of faith, cross the bridge between
fields, and pursue the tenure track rather than the private sector. Thank you for being not only
my mentor but truly my friend and for lending a hand as I learned to navigate the ‘strategy
jungle’ and situate myself and my work within academia. You have helped me not only to
become a better scholar but also to understand what it means to fully participate in a community
of practice and in doing so build up my alliances and social contracts . I hope you’ll continue
to work with me for a good long time!
Dr. Ernest Wilson III and Dr. François Bar for graciously serving on my dissertation committee
and providing me with invaluable feedback on my work.
To Ernie, I hope that you’ve enjoyed having me as your RA as much as I’ve had a ball working
with you – and the wonderful folks on your staff! Whether engaging with those inside or those
outside of the academy, one would be a fool to strive for anything other than to be Rigorous,
Relevant, and Responsive! Thank you for being ever candid, good-humored, always to-the-point
and overall great company. I hope my future brings me round again soon to a seat across your
desk for a chat, collaboration, or friendly debate!
To François, when I was a prospective PhD student you took the time to respond to an inquiry I
had the day you got out of the hospital. I have continued to be grateful for this spirit of kindness
and contribution. Thank you for providing guidance on an early paper that would lead to my first
journal publication. Thank you also for taking the time to issue thoughtful challenges within the
quals and dissertation processes that would help me to push myself and grow as a scholar.
Dr. Kasia Williams for her friendship and time devoted to helping me download lawsuits for my
dissertation data. Anybody who doubts the social sciences and sciences can build a bridge has
only to see that some of the fiercest support I received from a colleague was from a
mathematician!
iii
Dr. Julien Mailland, esq. for his friendship, endless support and cheerleading. You have a been a
wonderful advisee-sibling in the policy trenches and terrific guide to the mysteries of law
journals. You are the advocate who pushed me to apply to Ann-Ox, OII, and the Aspen Institute
– all opportunities that enriched this dissertation.
Dr. Sandra Evans and soon-to-be-Dr. Ritesh Mehta for making up my early ‘dissertation working
group’ and providing wonderful camaraderie, support, and feedback as I worked through my
proposal.
Dr. Glenn Hoetker for taking the time to walk a student who was neither your advisee nor
enrolled at your institution through the empirical challenges of a three-stage logistical regression
with all different flavors of logits. I will always remember your generosity and pass it forward.
Dr. Larry Gross, the Annenberg School of Communication and the USC Graduate School for
their financial support of this dissertation, for providing me innumerable opportunities, and a
stellar education. To Larry in particular, thank you for generous funding throughout my five
years at the Annenberg School and in particular helping me to purchase access to one of the
databases that was critical to my dissertation work.
The Center for Democracy and Technology (CDT) for giving me something so worthwhile to
work on it would become my dissertation. CDT alerted me to the importance of intermediary
liability and was an instrumental partner in the development of the taxonomy and scales used in
both empirical studies.
To my family, thank you for bearing with me for half a decade as I left a lucrative private sector
job to become a PhD student! Thank you for your patience and support and for making it easy
for me to remember that if there is one thing more important than research, it is relationships.
And last, but not least, Dr. W. Scott Sanders for being my partner in all things, including this
dissertation. Thank you for spending innumerable hours helping me to code lawsuits, for being
my sounding board as a I worked out the theoretical mechanisms in my head, for learning
logistical regression and STATA with me, for ordering food to be delivered to my house, for
staying up long hours to keep me company. No matter if you were thousands of miles away, I
always felt as though you were right by my side.
iv
TABLE OF CONTENTS
Acknowledgments
ii
List of Tables
v
List of Figures
vi
Chapter One: Introduction and Overview: Middlemen in the Information
Economy
1
Chapter Two: A Firm-Level Framework for Regulating Online Content:
Intermediary Litigation as a Nonmarket Strategy
18
Chapter Three: Lowering Appropriability Hazards by Raising Infringers’
Costs: Using Internet Intermediary Liability to Enforce
Property Rights
44
Chapter Four: Suing Internet Intermediary Firms to Police Online
Misconduct: An Empirical Study of Strategic Litigation by
Secondary Stakeholders
100
Chapter Five: Conclusion: Guarding the Gatekeepers
137
References
148
Appendices
Appendix A: Intermediary Taxonomy by Architecture Layer, Category,
Class, and Type
174
Appendix B: Search and Information Capabilities of Intermediaries
175
Appendix C: Representation of Intermediary Ecosystem Across Internet
Architecture Locations
176
Appendix D: Identifying Intermediary ‘Chokepoints’ in a Complex
Ecosystem
177
Appendix E: Duties of Care Scale of Operational Cost to Intermediary
178
Appendix F: Intermediary Type Definitions
179
Appendix G: Contested Content Arenas 183
v
LIST OF TABLES
Table 1: Search & Information Capabilities of Intermediaries 64
Table 2: Duties of Care (Enforcement Requests) as Proxy for Operational
Cost to Intermediary 68
Table 3: Descriptive Statistics 85
Table 4: Multinomial Logit Predicting Intermediary Category Targeted 87
Table 5: Predicting the Level of Duties of Care (Property Enforcement
Requests) 91
Table 6: Predicting the Decision to Appeal (Repeat Targeting) 94
Table 7: Duties of Care (Enforcement Requests) as Proxy for
Operational Cost to Intermediary 119
Table 8: Descriptive Statistics and Pairwise Correlations 123
Table 9: Request Granted by Objectionable Speech 124
Table 10: Predicting the Level of Duties of Care (Property Enforcement
Requests) 128
Table 11: Predicting Whether Requests are Granted (Saliency) 132
vi
LIST OF FIGURES
Figure 1: Instruments of Online Information Control
4
Figure 2: Modes of Governance for Strategies to Manage Information
Hazards
29
Figure 3: Types of Rivals in Intellectual Property Dependent Industries
51
Figure 4: Intermediaries Targeted in Contributory Liability Lawsuits
Over Time (1995-2012)
57
Figure 5: Intermediary Taxonomy by Layer and Category
60
Figure 6: Distance of Intermediary Categories from the Internet
Backbone
72
Figure 7: Intermediary Category as a Percentage of Total Copyright
and Trademark Cases
88
Figure 8: Probabilities for Level of Duty of Care Request
92
Figure 9: Intermediary Taxonomy by Layer and Category
115
Figure 10: Intermediaries Targeted in Contributory Liability Lawsuits
for Objectionable Speech (1996-2013)
125
Figure 11: Modes of Governance for Strategies to Manage Information
Hazards
129
1
Chapter 1. Introduction and Overview:
Middlemen in the Information Economy
Writing generally about governance in an era of globalization at the turn of the century,
Keohane and Nye (2000) argue that the importance of non-state actors such as firms, activists,
and NGOs cannot be understated. In the context of Internet and information governance, the
same is true. Control of the Internet is an objective shared by governments, firms, and other
public and private actors. The outcomes at stake for Internet Governance can be divided along
two dimensions, described by Bar and Sandvig: Network Access and Network Control (Bar &
Sandvig, 2008). Access to the network is defined by the ability of individual users and economic
actors to use the network to fulfill their needs. Control of the network is the ability to define the
technical and economic standards which determine what actors can use the network and what
actions are available to them. It is the latter dimension that this dissertation concerns itself with.
More specifically, I address the ability to influence the control of information within the
network, particularly that content which is contested because it presents a threat to property
rights and community morals. Other types of contested content fall into two additional categories
that are not addressed within the scope of this work but are acknowledged as important areas of
conflict in the sphere of online content control: Network and National Security Issues; Deceptive
and Nuisance Content (see Appendix G).
It is of note that there is a tendency amongst some scholars to describe all aspects of
Internet governance in largely technical, or what might be described as ‘code-driven’ terms,
focusing the discussion around the algorithmic and physical infrastructures that regulate the flow
of encoded information across the network (Deibert, Palfrey, Rohozinski, & Zittrain, 2010;
2
Drake, 2004; Mueller, 2004; Zittrain, 2009). Yet many of the most contested battle-grounds
around Internet regulation today, such as spectrum allocation, net-neutrality, broadband
infrastructure, anti-piracy measures, and domain name allocation have become central to
discussion because of their underlying social and economic consequences despite being framed
around the negotiation of technical controls. Ernest J. Wilson III makes the argument that such
technocratic outlooks have been endemic in the current literature and that inherent in the idea of
‘governance’ is a conception of human activities that is broad, multi-dimensional and less rigid
in scope (Wilson, 2005).
Responding to that call, I begin by noting that instruments for the control of online activity
and information traffic can be stratified into four categories that cut across institutions, principles
of governance, primary actors, and mechanisms for implementation: social norms, computing
code, the rule law, and market forces (see Fig 1). What all four instruments have in common is
that central to their execution are the market and technical intermediaries that operate in the
online context, those services we call Internet intermediary platforms, or “Internet middlemen.”
Internet intermediaries play an important role in the context of content control, whether
they are mechanisms for resource distribution (TLD auctions), induced to collect data for law
enforcement (PRISM), state-level information filterers (great firewall of China), or creators of
online norms enforced by infrastructure (the ‘real name’ policy on Facebook). Intermediaries
make it possible for users to find and evaluate the information, goods, and services they need and
provide platforms which establish transactional norms and codes of conduct. In the information
economy, they have nearly unparalleled power as both gatekeepers and facilitators, creating the
foundations to support a thriving economy but also able to act as ‘chokepoints,’ excluding users
3
and content from the network. Accordingly, the Internet intermediary – and its ability to both
monitor and block users and information – is increasingly a target for stakeholders that want to
exercise governance over intermediaries in order to control information flows and user behavior.
4
Figure 1. Instruments of Online Information Control
5
As governments and interest groups target intermediaries via legislation, lawsuits,
and law enforcement action, they have become increasingly central to multi-stakeholder
discussions concerning the future of Internet governance. Civil litigation to impose
requirements on intermediaries by arguing that they are liable for the actions of their
third-party users has become increasingly common and it is this lens that is adopted
throughout this dissertation. As compared to legislation and multinational agreements, the
public filings associated with civil suits offer a relatively transparent window into the
complex relationships between intermediaries and various stakeholders.
At present, much of the research on Internet intermediaries has been undertaken
by lawyers and transnational organizations. Thus, scholarship addressing the role of
intermediaries and intermediary liability often falls into one of two categories, the first
being a normative approach that argues from an ethical or value-based standpoint and the
second being narrowly focused on technicalities of the adjudicatory process.
Consequently, the complex ecosystem of intermediary service providers operating and
competing across overlapping markets is poorly understood when viewed at the
intersection of law and economics or from the point of view of strategic management
implications for firms and other stakeholders in the digital economy.
Organization of Studies
This dissertation presents a theoretical paper and two empirical studies of
intermediary liability litigation in different contexts in order to better illuminate the
strategic actions of private actors (firms and individuals) who seek to control online
content flows and to operationalize the mechanisms by which they pursue their
objectives. To support my arguments I build on theoretical mechanisms in the strategic
6
management literature, including transaction cost economics, raising rivals costs,
nonmarket strategy, and stakeholder theory. In doing so, I offer a multiplicity of
complementary approaches to explicate the easily rationalized but poorly understood
strategy of targeting an intermediary agent to act as a proxy in the protection of private
property rights and civil entitlements from online hazards.
What factors motivate the decision by plaintiffs to sue intermediaries rather than
targeting ‘bad actors’ exclusively? What is the relationship between property attributes,
the type of online misconduct, the plaintiff and the determination of intermediary targets,
the nature of requests, and adjudicatory outcomes? These are the questions under
consideration.
Study 1
The first study is a theoretical examination of the strategic drivers of Internet
intermediary liability in a nonmarket strategy context. Taking a firm-level point of view,
I posit that firms target Internet intermediaries to protect intangible assets, such as
information goods and goodwill, whose value is vulnerable to harm by the dissemination
of information. Making the argument that the difficulty of specifying and enforcing
property rights for intangible assets leads to market failure, I draw on the logic of
transaction cost economics to suggest that intermediary liability should be addressed as a
choice amongst four modes of governance for nonmarket strategies to enforce property
rights. I create a two stage framework in which firms first choose regulation or litigation
as a governance mode and then select between strategies that primarily target violators or
strategies that target intermediaries. I propose that in the face of political uncertainty,
7
firms will primarily choose between two litigation strategies (direct liability and
intermediary liability) and that the choice between these strategies depends on the degree
that offender compliance, repetition of misconduct, and systemic culpability by the
intermediary increase or decrease contractual hazards of uncertainty and opportunism.
Finally I argue that the imposition of duties of care via intermediary liability is a
mechanism that allows a firm to formalize an incomplete contract that shifts the cost of
enforcing property rights.
Study 2
In the second study I examine intermediary liability lawsuits in the empirical
setting of online copyright and trademark infringement. In this context, intellectual-
property holding firms initiate litigation in order to gain competitive advantage by using
intermediaries to exclude their property from appropriation by illicitly-operating market
competitors, which I call "infringing rivals." I frame these lawsuits as a multi-stage
raising rivals' costs strategy in which IP holders use intermediaries to lower their own
transaction costs while simultaneously raising those of infringers. I propose first that
different IP rights lead to heterogeneous selection preferences amongst potential litigation
targets. Second, the systemic importance of intermediary targets influences the magnitude
of property enforcement requests, which in turn drive the likelihood of escalated
litigation. I find that there is a significant relationship between the type of intellectual
property being enforced and the search and information capabilities of intermediary
targets (per category). Furthermore, I find that intermediary targets that are more central
to the network (ie. closer to the Internet backbone) receive smaller requests for duties of
8
care. Finally, I find that large duty of care requests increase the probability that the firm
will choose to file an appeal.
Study 3
The third study investigates intermediary liability litigation in the context of
content that is ‘objectionable’ from a social point of view. I begin by positing that
plaintiffs, who may comprise individuals or organizations, including firms, NGOs and
state actors, are all secondary stakeholders of Internet intermediaries. Drawing on the
stakeholder identification and saliency framework developed by Mitchell et al (1997) I
situate legal action targeting intermediaries in the context of stakeholder theory and
argue that attributes of stakeholders, requests, and target choices confer legitimacy and
urgency on stakeholder actions which results in increased salience, or positive responses,
from arbiters (judges). Here, litigation is motivated not by competitive advantage but as a
remedy for the negative consumption externality produced by wrongdoers who utilize
intermediary services for acts of online misconduct. In order to better explicate the
relationship between attributes of stakeholders, their requests, and the likelihood of a
positive outcome I propose a two stage framework that separates Request Development
from Salience (or litigation outcomes). I find that the criminality associated with the act
of misconduct and the choice of downstream intermediary targets contribute positively to
the size of requests. Furthermore, these two factors in conjunction with stakeholder
experience show a strong positive relationship to the likelihood of a positive response.
However, as the size of a stakeholder’s request grows, the likelihood declines that the
judge respond positively by choosing to impose it on the intermediary.
9
Background
In the following sections I define the Internet intermediary as addressed in this
dissertation, provide a context for intermediary liability protections in the United States
(the empirical setting for my analysis), detail the methodology for the qualitative
fieldwork producing items used in both studies, and present the resulting Intermediary
taxonomy and scales for measuring legal duties of care.
Defining the Internet Intermediary Platform
Online information traffic typically passes through multiple layers of
intermediation as communication flows between users. One example path for a user
might begin with an Internet Service Provider (ISP), which provides the initial gateway to
the Internet, then proceed with a visit to a search engine which in turn directs the user to
his final destination, a content-sharing site. Each of these waypoints – the ISP, the search
engine, and the content-sharing site – is a type of Internet Intermediary Platform, an
online service or provider that makes it possible for information to be accessed, shared,
indexed, and transmitted between individuals and groups.
Simply put, Internet intermediaries are services that connect third-party content
creators to content users; they are not themselves direct publishers or authors of
information although they may be connected to (or even integrated with) them. The New
York Times website, for example, is a non-intermediary publisher of content in the form
of articles written by its journalists but is also an intermediary provider of discussion
boards that allow readers to post their own comments below each article. As such,
intermediaries play significant roles within the information economy by providing a
10
range of critical functions for third party users. An intermediary service might deliver
infrastructure, enable market exchanges and transactions, facilitate social communication,
aggregate and transmit data, organize information, or provide structural credibility and
trust (Perset, 2011a, 2011c). This ecosystem of providers is comprised of both
commercial entities, such as hosting providers, and non-commercial organizations, such
as many wikis
1
. Collectively, the services intermediaries provide have drastically lowered
transaction costs, or the efforts expended in participating in market or economic
exchanges (Coase, 1937), for players in the Internet economy.
While the Internet intermediary is universally illustrated as a market middleman
for the online sphere, there has been some variation in technical definitions. The Center
for Democracy and Technology (CDT), a civil society group, emphasizes the provision of
internet access and movement of information and distinguishes ‘technological
intermediaries’ as separate from the ‘financial intermediaries’ which provide payment
services (Wong, 2010). In its legal doctrines the European Union (EU) uses the terms
“information society service provider (ISSP) and “intermediary service provider”
interchangeably, defining them as “any services normally provided for remuneration, at a
distance, by means of electronic equipment for the processing…and storage of data, and
at the individual request of a recipient of a service” defined as a natural or legal person
(Edwards, 2011). Excluded arbitrarily from this EU definition are certain types of ad-
supported services, such as search engines. This dissertation, however, opts to embrace
the definition proposed by the Organization for Economic Cooperation and Development
(OECD), which is both broadly construed and widely used:
1
Here commercial is defined as services that are monetized, or for profit.
11
“Internet intermediaries give access to, host, transmit and index content, products
and services originated by third parties on the Internet or provide Internet-based
services to third parties in order to bring together or facilitate transactions”
(Perset, 2011b).
Despite some rough consensus around the definition of an Internet intermediary,
however, the issues of governance and regulation are greatly complicated by persistent
ambiguity regarding how they are to be classified or ordered. Although broad and loose
categorizations have been suggested within specific forums, there has been no standard
classification system for intermediary platforms and new types have been rapidly
proliferating in recent years. To address this issue and meaningfully distinguish between
different groups of Internet intermediaries for the purposes of empirical research, I
develop and explicate an intermediary taxonomy (see ‘Qualitative Fieldwork’).
Intermediary Liability Protections in the United States
Historically, the legal responsibility of intermediaries for the conduct or content
of users of their platforms has been fairly limited. In the United States, three different
statutes provide a degree of immunity to Internet intermediaries for contributory liability.
First, section 230 of the Communications Decency Act (47 U.S.C. § 230) protects
internet intermediaries from legal liability for content transmitted or posted by third
parties, as well as for actions taken to regulate the content posted by their users.
Ironically, prior to the passage of section 230, intermediaries who in good faith exercised
12
editorial control to limit defamatory statements on their platforms were considered to be
publishers and found themselves with increased liability compared to intermediaries who
chose to do nothing at all (see Stratton Oakmont v Prodigy, 1995). The passage of
section 230 was explicitly intended to ensure that intermediaries, whether they are
successful in attempts to self-regulate or not, would not be held liable for speech of third
party users. CDA 230 has traditionally provided broad protections against most causes
of action with some important exceptions. Specifically, section 230 is not intended to
apply to intellectual property law nor is it designed to provide immunity from criminal
charges. Furthermore, case law has established that intermediaries can lose their
immunity if they are found to induce or facilitate illegal behaviors. Despite these
exceptions, overall CDA has provide robust protections for intermediary firms and serves
as its most important shield against liability claims.
Second, in civil suits over intellectual property infringement, internet
intermediaries are afforded conditional protection by the Online Copyright Infringement
Liability Limitation Act (OCILLA) of the Digital Millennium Copyright Act (DMCA
§ 512), which stipulates that service providers are given a ‘safe harbor’ from liability for
their users’ copyright infringement provided that they implement copyright policies and
maintain a ‘notice-and-takedown’ regime in which content is removed promptly in
response to complaints. In practice, it is the copyright holder’s responsibility to identify
specific instances of infringement and to provide notice to the intermediary for takedown.
Furthermore, when notices make the intermediary aware of specific instances of
copyright infringement, the courts have held that it does not constitute “red flag
knowledge” of widespread copyright violations and, thus, there is no shift in the
13
responsibility of monitoring and filtering for user malfeasance to intermediary. However,
if an intermediary is found to induce copyright infringement or fails to respond promptly
to take down notices they may be held liable for infringement. In short, safe-harbor as
provided by the DMCA 512 is an effective but imperfect protection for intermediaries.
Third, the Lanham Act, which governs trademark infringement, has been
interpreted to mean that intermediaries can only be found guilty of contributory liability
in instances where they can be shown to have both awareness of infringing activity and
intention to encourage its continuance by their users. It is notable that unlike DMCA 512
or CDA 230 the Lanham Act does not have language directly addressing issues of
secondary liability for infringement but has developed these protections through case law
overtime. In order to trigger secondary liability, an intermediary must provide their
service to a party they have good reason to believe was engaged in trademark
infringement or act to induce infringement.
A final legal mechanism that provides protection to intermediaries are the various
Anti-SLAPP laws enacted by state governments. Strategic Lawsuits Against Public
Participation (SLAPP) are filed in an attempt silence opponents through the threat of high
cost and the burden of presenting a legal defense. Commonly used in defamation cases,
the goal is not to win but rather to bully or threaten the defendant until they retract their
statements. Although there is no federal anti-SLAPP legislation, a number states have
enacted laws that allow for the early termination of cases deemed to be SLAPPs. These
laws provide important legal tool for intermediaries and their users but are inconsistent in
their protections.
14
What is central to the American regime, which tends to provide a baseline for
other countries establishing intermediary regulation, is that intermediaries do not have an
inherent responsibility to initiate monitoring action or to actively screen for undesirable
activity. Their obligations are primarily responsive. However, in recent years
governments and private stakeholders have increasingly sought to hold internet
intermediaries to duties of care and there have been calls for legislation that removes
limits on liability, incorporates monitoring requirements as a condition of operation, or
expands conditions for the receipt of safe harbor protection. Across the board,
intermediaries have experienced a growing pressure to act ex ante rather than ex post,
which has raised questions about civil rights, due process, fair distribution of monitoring
costs, and negative economic externalities.
Qualitative Fieldwork
While intermediaries are universally targeted for their role as gatekeepers of
online information, the intermediary ecosystem is not well defined. What are the
relationships and technical links between intermediaries who connect to move
information traffic across layers of Internet architecture? What types of content
management capabilities do various intermediaries have and what types of information
control (and disclosure) activities are requested of them through such mechanism as court
injunctions, subpoenas, law enforcement actions and government statutes? Without an
understanding of Internet intermediaries as actors with heterogeneous affordances that
operate in a particular systemic context, it is difficult – if not impossible - to study the
implications of intermediary targeting by parties interested in manipulating information
traffic without resorting to procedural arguments or normative explorations.
15
As a result, to prepare for the challenge of empirical investigation into the
phenomenon of Internet intermediary liability, my dissertation work began by conducting
fieldwork to define and map the intermediary landscape.
Taxonomy and Scale Development
Initial fieldwork was conducted during a three month period of full-time
residency (May-August, 2011) at the Center for Democracy and Technology (CDT), a
non-profit think tank dedicated to issues of Internet governance. Working concurrently on
the tasks of determining 1) how many different business models existed for online
intermediary platforms and 2) how many different kinds of gatekeeping actions were
requested of them, I annotated each of CDT’s archived issues of the weekly Bloomberg
BNA Electronic Law and Commerce Reports spanning the period from 1993-2010. Each
of these reports summarized civil suits and legislative actions pertaining to
intermediaries, amongst other topics, allowing me to isolate and document unique types
of intermediary providers and instances of gatekeeping requests mentioned within the
‘duties of care’ provisions of civil suits until saturation had been reached.
In order to classify the resulting list of intermediary types, I mapped them loosely
onto a diagram of Internet architectural layers which was initially rudimentary but
developed additional stratifications as new types of intermediaries were added and
remapped in context. These evolving taxonomies were presented for two hours every
second week (a total of seven times) to a small working group at CDT of lawyers,
engineers, and computer scientists dedicated to online freedom of expression. These
sessions provided critical opportunities for debate, feedback, and revision of the
16
classifications from the previous week’s model. The resulting taxonomy of 27 different
types of business models spread across 16 classes, six categories, and three layers of
Internet architecture is the product of a consensus between the researcher and this
working group about how narrowly to specify each type of intermediary, how to define
each strata of the Internet, and in what grouping each intermediary type belonged (See
Appendix A, Appendix C, and Appendix F). Amongst other factors, we considered the
types of infrastructure and data traffic associated with each intermediary model and the
types of users (Individuals? Enterprise?) they might typically serve. Domain Registrars
and Proxy Servers are similar, for instance, in that they often deal with metadata (“data
about data”) and play an instrumental network role in the direction of traffic to web
addresses.
A second taxonomy detailing the gatekeeping requests was developed
simultaneously through the same iterative process. Because these requests occur within
the institutional context of courts of law and litigation, they are classified according to
their expression as specific ‘duties of care’ imposed upon intermediaries as a
consequence of contributory liability for the activities of their users. Although there is
much variance in the particular requests, the vast majority can be grouped into four
different sets of activities that can be conducted by any intermediary type in order to
control information authored by both users and platforms over which they have
governance: information disclosure, content blocking, content filtering, and service
discontinuation. Using these four groupings, I created an ordinal scale of operational
burdens to the intermediary associated with the different levels of duties of care (see
Appendix E).
17
Following my residency at CDT, I collaborated with two legal scholars at the
CDT working group over a period of 18 months (August 2011 to January 2013) to further
develop the taxonomies and definitions, as well as the scale of operational costs tied to
the duties of care. Clear definitions and examples were developed for each intermediary
type (see glossary of definitions in Appendix F). Additionally, I identified and classified
the search and information capabilities associated with each of the six broad categories of
intermediaries in order to better understand how capabilities tied to services and utilities
offered by intermediary platforms (See Appendix B), which are category specific, can be
distinguished from broad capabilities tied to information control (See Appendix E),
which are universal within the intermediary ecosystem. The resulting work was vetted
not only via my work with CDT but also at a two-week seminar for Internet researchers
hosted at the Oxford Internet Institute.
By providing a thorough taxonomy of the different types of platforms – and
relationships between these platforms and the Internet network - that comprise the
complex world of online intermediaries, developing classifications for the capabilities
and services they offer, and creating metrics for measuring categorizing and grouping the
operational burden posed by information gatekeeping requests, this dissertation seeks to
provide a foundation for myself and other scholars for the empirical study of “Internet
middlemen,” or online intermediaries. In doing so, it is my hope to shed some light on the
intricate and systematic relationships that define the online economy.
18
Chapter 2. A Firm-Level Framework for Regulating Online Content:
Intermediary Litigation as a Nonmarket Strategy
Introduction
In the era of the networked economy, firms face a number of threats to their
businesses from online communication practices, whether or not they have an online
commercial presence. Simply put, most firms are in possession of intangible assets whose
value has a long history of vulnerability to harm by the dissemination of information. As
in the days prior to the Internet, a firm’s reputation can be subject to damage from
consumer reviews or the unexpected disclosure of internal reports (Bell, 2001; Oster,
2011). Firms can also face a loss of revenue related to the unauthorized appropriation and
distribution of their intellectual property, such as copyrighted materials and trade secrets
(Keupp, Beckenbauer, & Gassmann, 2010). The widespread adoption of Internet usage in
the 1990s simply ensured firms would continue to be beleaguered, only now by acts of
digital copyright piracy and “cybersmearing,” defined as posting “a false and disparaging
rumor about a company, it’s management or its stock” to the Internet (Bell, 2001, p. 2).
There has, however, been a marked shift over the past ten years in online
communication norms as the Internet has shifted from a space largely driven by
information-seeking activities to a highly participatory platform where the majority of
users engage in daily ‘publication’ and curation ranging from posting online classifieds to
sharing video clips from favorite films (Benkler, 2007; Blank & Reisdorf, 2012; Castells,
2000). The Pew Research Center reports that in the United States, 87% of adults use the
Internet in 2014 (Wormald, 2014) and of that online population, 75% of young people
19
(18-29) and over half of adults post original photos and other content on the Internet
(Duggan, 2013). Consequently, in the modern-day context of electronic communications
technologies the possible harms associated with the transmission and publication of
online content, which I collectively refer to as information hazards, have increased in
salience and are explosively amplified by high broadband speeds and minimal transaction
costs.
In response, firms have unsurprisingly sought to protect their intangible assets from
perceived online misconduct by taking their woes to court to punish online “bad actors.”
However, these miscreants are not always the sole, or even primary, targets of litigation
to enforce such property rights
2
. Historically there has always been risk associated with
publishing the speech of others and this tenet is especially true of online speech, which is
characterized by a premium on near-instantaneous transmission that at times precludes
the forethought and concerns about legality, accuracy, and appropriateness that often
accompany statements made in print. Thus, as litigious efforts to address information
hazards increase there has been a corresponding rise in firms pursuing a strategy called
‘Internet intermediary liability,’ in which they file civil suits against Internet firms
providing third-party services in order to hold these platforms responsible for the
negative externalities arising from the behavior of their users.
These platforms, the Internet intermediaries, comprise a broad population of
services which provide infrastructure and market intermediation in the online context by
2
The law and economics literature tends to define property rights broadly, to include legal claims such as
reputation and privacy violations that are pursued via the law of torts, or personal injury, rather than the law
of property (Campbell & Lindberg, 1990; Edelman & Suchman, 1997).
20
creating a means for information and information services to be hosted, accessed, shared,
indexed, and transmitted between third parties. Simply put, they are “Internet
middlemen,” and they include search engines, social networks, Internet service providers
and many other types of services that focus not on content creation but rather on
connecting content creators to content users and transmitting information traffic across
the Internet. Paypal, an online payments service, is an example of an intermediary. So too
is Flickr, a photo sharing website, and GoDaddy, a domain name registrar.
Considered in isolation, the decision to target Internet intermediaries in civil actions
aimed at contested online content is unsurprising. As people shift their social and
economic activities online the practice of human interaction and communications has
become inextricably linked to the use of online intermediary platforms (Perset, 2011b).
These firms provide the services and infrastructure for third party users to publish, host,
and transmit content and information. They make up a heterogeneous community of
firms including Internet Service Providers (ISPs), discussion boards, social networks,
email providers, content-sharing sites and search engines which facilitate the sharing of
textual and audiovisual information online.
However, when considered alongside other paths available to the firm, such as
arbitration or lobbying for stricter regulation or finding a market-based solution, the use
of litigation against intermediaries raises an interesting puzzle about what form of
governance confers the strongest advantage for firms seeking to create robust protection
for intangible assets. In particular, what are the implications for a firm’s nonmarket
strategy when protecting intangible corporate assets in an online environment, where
21
exposure to electronic information and communication flows is an intrinsic characteristic
of economic activity? Is nonmarket strategy necessary? Why choose litigation over
regulation? What considerations drive the choice to target intermediaries? These are the
questions under consideration in this paper.
Beginning with the consideration of when to choose nonmarket action, I draw on
transaction cost economics to make the argument that in the event that firms strive to
establish stronger enforcement mechanisms for property vested in intangible assets, the
difficulty of ascribing external value to these types of resources creates contractual
hazards that result in market failure.
I contribute to the literature on nonmarket strategy by creating a two stage framework
in which firms acting to protect their property rights from information hazards first
choose regulation or litigation as a governance mode and then select between strategies
that primarily target violators or strategies that induce market intermediaries to police the
marketplace. I then draw on the corporate political strategy literature to make the
connection between identification of a salient nonmarket threat (information hazards) and
construction of nonmarket strategy. In doing so, I call attention to the consideration that
firms' choices amongst difference governance modes for nonmarket action must be
conditioned by the "rules of the game" that define the regulatory environment,
jurisdiction, and socio-political context surrounding the activities underlying the hazard.
I develop the argument that the uncertainty and wide-salience of information hazards
in regulatory contexts makes it difficult to pursue greater specification and enforcement
of intangible property rights via regulation. I suggest that firms will then choose between
22
two litigation strategies: direct liability and intermediary liability. I argue that the choice
between these strategies depends on the degree that offender compliance, repetition of
misconduct, and systemic culpability by the intermediary increase or decrease contractual
hazards of uncertainty and opportunism.
Finally I argue that that intermediary liability allows the firm to sustain competitive
advantage by using the legal mechanism of duties of care to formalize an incomplete
contract that shifts policing and enforcement costs from the firm to the intermediary.
Why Information Hazards Lead to Market Failure
Classic illustrations of negative spillovers often focus on costs that occur as a
direct and easily measured consequence of a firm’s activities which can then be corrected
via market-based solutions exploiting a price mechanism. In his seminal article "The
Problem of Social Cost," Ronald Coase (1960) describes a court case in which the noise
from a sweetmaker’s machinery, while somewhat intangible, is clearly connected to a
reduction in business for the home medical practice next door. Transaction costs theory
proposes that the sweetmaker and the doctor could have avoided litigation entirely
because, in the absence of significant contracting hazards the `default' market-based
solution to the problem is a simple contract (Williamson, 1991, p. 279) (Williamson,
1991, p.279). As long as one party can establish a property right, there will be a
bargaining process leading to an agreement about how to account for the externality
(Coase, 1937). Thus, legal rules and litigation are only justified if it is proven that they
would incur lower transaction costs than the option of bargaining to arrive at the most
efficient allocation of resources.
23
In contrast to Coase’s archetypal scenario, the situation in which a film studio
holding a film copyright, an intangible good, wants to negotiate with a social networking
platform to address the negative spillover caused by the dissemination and copying of the
film by its users poses a far more complicated problem. Here, the considerations put forth
by transaction cost economics are also well-known. Given the bounded rationality of
economic actors and uncertainty around the exchange, the establishment of property
rights within a contract will require that those property rights can be adequately specified,
monitored, and actually enforced through contractual terms (Williamson, 1975, 1981). In
the following section I connect the threat of information hazards to the value of intangible
assets and illustrate how the challenges of establishing property rights for intangible
assets pose obstacles to contracting under the assumptions of transaction cost economics
that encourage firms to adopt nonmarket strategies.
Intangible Assets, Information Hazards, and Property Rights
A rapidly growing body of literature has demonstrated that intangible assets are
critical to the core competencies of firms operating in the modern digital economy.
Intangible assets, or assets that are not physical in their nature, consist of the stock of
immaterial resources that is integral and necessary to the firm’s production activities and
processes (Knott 2003). They include intellectual property rights held in information
goods, such as copyrights and trademarks (Bakos & Brynjolfsson, 1998; Varian, 1998),
and more tacit assets constructed internally, such as the firm’s development of knowledge
routines and brand reputation (Amara, Landry, & Traoré, 2008; Soo, Devinney, Midgley,
& Deering, 2002). Empirical research demonstrates the economic and strategic
24
importance of accumulating intangible asset stocks to creating competitive advantage
(Harvey & Lusch, 1997; Knott, Bryce, & Posen, 2003), both in terms of intellectual
property (Arrow, 2002) and tacit assets (Boyd, Bergh, & Ketchen, 2010). Nakamura
(2003), for instance, demonstrates that intangible assets have more than doubled from
four percent to ten percent as a proportion of U.S. GDP and Corrado et al. estimated,
even ten years ago, that intangible assets were responsible for more than 75% of output
growth in the U.S. (Corrado, Hulten, & Sichel, 2006).
Nevertheless, the value of some types of intangible assets, notably information
goods and reputation, is particularly subject to information hazards. This paper proposes
that these information hazards can be divided into two categories aligned with the
mobility of an intangible asset, or its ability to be traded or transferred (Dierickx & Cool,
1989; Peteraf, 1993). The first type of information hazard is the threat of infringement
and appropriation of value underlying information-based assets, which comprises an
appropriability risk (Amara et al., 2008; Miles, 2008; Teece, 1986). Appropriability
hazards primarily affect mobile intangible assets, such as information goods. The second
type of information hazard is the risk that the spread of negative information can devalue
the firm’s reputational assets, such as brand value, brand trust, and goodwill from
customers (Boyd et al., 2010; Oster, 2011). I refer to this simply as a degradation hazard.
Intangible assets which are perfectly immobile, such as goodwill, cannot be appropriated
but are still subject to degradation hazards.
25
Property Rights and Intangible Assets
The specification of property rights in a market transaction with the goal of
protecting intangible assets from information hazards requires being able to ascertain the
value of the property to both parties in an exchange. However, the complexity and
‘tacitness’ associated with intangible assets makes it hard to ascribe value and creates
various costs associated with specifying, monitoring, or enforcing property rights for
intangible assets that may result in incomplete contracts (Teece, 1986; Williamson,
1981).
In part this is because goods that are tacit and intangible (trademarks, brand
names, good will) will tend to have high asset specificity (Williamson, 1975). Specific
investments in assets that are tailored to the particular objectives of the firm can help to
generate quasi-rents for the firm (Klein, Crawford, & Alchian, 1978), improve product
quality (Teece, 1986) help create competitive advantage by differentiating a firm’s
products from those of its competitors (Oxley, 1997; Rumelt, 1991). However, high asset
specificity implies that outside of the firm, it is hard to ascribe value to intangible assets
and their value will be low when assessed by other parties (Williamson, 1975).
In a nutshell, the asset specificity and tacit nature of intangible assets create a
market failure due to information asymmetry (Schmalensee, Armstrong, & Porter, 1989),
meaning that the film studio and the social network in our earlier example do not have
sufficient information available to come to a mutual decision about what the film’s
copyright is worth. Simply put, it is difficult to place a commercial value on information
goods because the imperfect information available to the receiving party will cause the
26
value of the good to fluctuate (Stiglitz, 2000). To illustrate, a person can know everything
there is to know about a car and still purchase it but the person who has copied a film
from a friend and seen it already is rather less likely to wish to pay for it. Thus, the
difficulties associated with defining, monitoring, and enforcing property rights will create
high bargaining costs that shift the negotiation of how (and if) the social network should
compensate the film studio for its users’ copyright infringement away from market
transactions and towards more hierarchical forms of governance.
From a normative economic standpoint, the purpose of regulation by state
agencies or courts of law is to address the failure of the market to solve certain economic
problems, such as these problems of negative externality that are associated with high
transaction costs. Consequently the question of how the firm should pursue protection of
its intangible assets from information hazards becomes a question of how it will choose
amongst nonmarket strategies.
Controlling Information Hazards via Nonmarket Strategy
In the management, economic, and political-science literatures, the nonmarket
environment encompasses the multiplicity of political, social, and regulatory institutions
and stakeholders whose interactions occur outside of, but have great influence on, the
‘rules of the game’ governing markets and private contracts (Baron, 1993). A long
tradition of research on nonmarket strategies has considered how corporate political
strategies such as lawsuits, public accusations, regulatory filings and lobbying are used
by firms to exert influence over their environments or to gain a direct competitive
advantage over a competitor by channeling their market objectives through public
27
institutions (for a review, see (Bonardi, Hillman, & Keim, 2005; Doh, Lawton, &
Rajwani, 2012; Hillman, Keim, & Schuler, 2004).
Many studies in the nonmarket literature take an issue-centered approach to
identifying socio-political issues that may have negative consequences for the firm's
activities (Ansoff, 1980; Schuler, 1996; Spulber, 2002). However, prior research has little
to say about how nonmarket strategies respond to property hazards. Outside of the
literature on nonmarket action, management research has investigated a wide range of
strategies used by firms to enforce property rights over intangible assets but the focus of
these studies has almost exclusively been on patents (for a review, see Hall, Helmers,
Rogers, & Sena, 2013; James, Leiblein, & Lu, 2013). Even so, Somaya (2012) notes that
nonmarket strategies associated with patents are an unstudied construct, although the
conferral and enforcement intellectual property rights is entirely dependent on the legal
regime.
Furthermore, while regulatory processes frequently involve complex interactions
between multiple agencies and players (Bonardi & VandenBergh, 2014), each with their
own preferences and constraints, previous research has most often been focused on
actions that highlight a specific political institution , such as a federal agency or
legislature. A burgeoning literature is emerging that focuses on strategic choices amongst
institutional locations for political activity (Hillman et al., 2004, p. 852). Prior work in
this stream on “institutional targeting” has compared policy positions (Bonardi & Keim,
2005), structural differences (Henisz & Zelner, 2004), and degree of specialization
(Somaya & McDaniel, 2012) in government institutions. In this paper I aim to extend this
28
conversation by examining how choices amongst institutional venues may be conditioned
on strategies to enforce property rights.
In the following discussion I introduce a framework for examining alternatives
amongst nonmarket strategies that target information hazards by presenting them as a
choice between four institutional modes of governance, each of which has its own
benefits and disadvantages. The first two options invoke the use of regulation, meaning
appeals to a state agent or institution to establish or enforce stronger rules to protect the
firm’s property rights than those currently in place. The other two options rely on
litigation, meaning enforcement of the firm’s existing property rights through a court of
law.
The first option is for firms to lobby the legislature to increase the responsibilities
of Internet intermediaries .The second option is for firms to appeal to state law
enforcement agencies to directly enforce their property rights against direct offenders
through seizure of online assets such as websites. A third method involves pursuing direct
offenders through litigation in a court of law. Finally, the fourth strategy is to enjoin
Internet intermediary platforms to civil suits against offenders in order to hold them
vicariously liable for harms caused by information hazards. (see Fig. 2).
29
Figure 2. Modes of Governance for Strategies to Manage Information Hazards
30
Essentially each of these four modes of governance reflects two distinct but related
decisions about the firm’s institutional choices and strategies as illustrated in Figure 2:
1) The firm must decide whether to appeal to a state agent to establish/enforce
stronger rules than those currently in place (regulation) or whether to utilize court
enforcement of its property rights (litigation).
2) The firm must decide between targeting direct offenders exclusively or targeting
market intermediaries who may be vicariously liable.
Litigate or Lobby
While strategic trade-offs between regulation and litigation are well covered in law
and economics literature, I contribute by going beyond this boundary decision and
considering the mechanism by which firms might want to pursue litigation as a way to
mitigate the threat of information hazards to their intangible asset stock. The use of
vicarious liability as a strategy to achieve competitive advantage in circumstances where
the direct liability alternative does not is an understudied strategy in the management
literature. Furthermore, in a parallel analysis I consider whether firms should litigate,
rather than lobby for regulation at all by comparing how the two litigation strategies
compare to strategies for regulation targeting intermediaries and regulation targeting
direct offenders.
In its simplest terms, the choice between regulation and litigation in the context of
enforcing property rights is a determination between ex ante rules and ex post
prosecution (Posner, 2010). Ex ante rules must be justified in that they prevent more costs
to society than their implementation would create. The state and its agents, by default, do
31
not enforce the rights or property of any particular party but rather are responsible only to
the interests of society at large.
3
In the case of regulation, the development of ex ante rules posits an emphasis on
preventative means of control, as in the case of speed limits, seat belts, and required
vaccines. Rules must be explicit, clear, and precise and offer the advantage of higher
compliance (due to higher clarity and greater punishments) but at the cost of subtlety or
contingencies (Coates, 2010; Posner, 2010). Consequently they must have widespread
applicability and created in situations where it can be argued that harm is predictable and
the cost of monitoring and assigning responsibility for misconduct is higher than the cost
of regular oversight of degrees of precaution (Shavell, 1983a, 1983b). What this does is
narrow the information base to exclude information specific to particular cases or
exceptions. To illustrate, the reasons for breaking the speed limit, however justified, do
not factor into the decision by the highway police to issue a speeding ticket. The risk of
regulation then, is two-fold: 1) to punish in circumstances without measured harm to
society and 2) to restrict some activity that is harmless by lumping it in with the
prevention of activity that is prohibited (Coates, 2010).
Both of the options for regulation (Legislative; Law Enforcement) offer options for
strong ex ante enforcement but with different compromises regarding bargaining costs
and the scope of enforcement. First, in the instance of a legislative initiative, the firm may
lobby to change ‘the rules of the game’ (Baron, 1993; McWilliams, Van Fleet, & Cory,
2002). Where property rights are clearly specified but poorly enforced, as in the case of
3
In the United States the federal judiciary and the Supreme Court have affirmed in numerous cases that in
the case of individual parties, law enforcement has no duty to act (Greenhouse, 2005).
32
information goods, a firm may bid to shape new formal monitoring requirements for
Internet intermediaries in order to improve detection of infringers. Where property rights
are not clearly specified but legal rules preclude stronger assignments, as is the case with
reputation, the firm may bid to raise the magnitude of fines associated with defamation
claims so as to increase the punishment and deterrence effect of ligitation down the line
(Kaplow, 1992; Polinsky & Shavell, 1979). However, the development of statutes is
slow, usually taking years and courting politicians typically requires large expenditures
and human resources at a high cost to the IP holding firm (McWilliams et al., 2002).
Firms may also turn to a law enforcement agency to enforce property rights. In
such cases, the mechanism is to create stronger enforcement by increase the threat of
punishment. Where law enforcement can be convinced that taking ex ante action against
offenders prevents significant social harm, existing intellectual property statutes that
permit civil forfeiture are used to authorize government agency to directly seize the
online servers of infringers before any harm is proved in court (Bloomberg Law, 2011).
However, the use of law enforcement is problematic. While costs are not high for the
firm, the use of property seizures as ex ante prevention is a short-term measure and lacks
the credibility of due process (Sell, 2010).
Litigation: Pros and Cons. Litigation on the other hand, is called upon for ex post
judgment for violations of property and contract rights (Posner, 2010). Thus harm must
precede intervention. Where regulation depends on precise rules, litigation is guided by
vague standards, designed to make it possible for judges to apply them to idiosyncratic
situations and case-specific circumstances. Litigation allows for a great amount of
33
information per case to allow for a nuanced determination of culpability (Coates, 2010).
Consequently, the cost of adjudication and determining responsibility for violations to
rights and property is high and outcomes are uncertain. The risk of litigation then is also
two-fold: 1) to fail to prevent predictable harm and 2) to exclude some harms from
correction by making the cost and reliability of adjudication higher than the cost of
prevention (Lumineau & Oxley, 2012; Priest & Klein, 1984).
Overall, regulation provides clearer and enforceable metrics for identifying
misconduct, but without room for interpretation, while litigation allows for greater
information in making an argument for prosecuting misconduct, but without certainty as
to outcome. Firms concerned with controlling information hazards must then consider the
nature of the hazard as it relates to the intangible asset at risk.
First, take the case of degradation hazards that threaten the firm’s reputation. The
activities which comprise threats to devalue reputation are idiosyncratic and various.
Defamation can occur on an online discussion board or in a video. It can take the form of
false rumor concerning the company’s stock prices or a false accusation of fraud.
Information disclosure can take the form of posting internal documents that reveal
unpleasant employment conditions to a social network or emailing them to a list-serve.
The line between fact and opinion is a blurry one and doesn’t lend itself well to guiding
rules. The embeddedness of speech in social interaction makes it difficult to evaluate the
role of context in interpretation. Is speech sarcastic? Is it provoked? Furthermore, the
identification of the activity is not synonymous with the identification of misconduct. Put
34
differently, the existence of a negative consumer review does not itself suffice to prove
that it contained any content that violated the firm’s corporate reputational rights.
On the other hand, the appropriation hazards that threaten a firm’s information goods
are assessed differently. Here, the physical activities constituting online copyright and
trademark infringement are, for the most part, predictable and easily identified. One
instance of copying a file or misusing a brand logo closely resembles the others that came
before it. In part this is because the underlying property, while intangible, is fairly
discrete and can be explicitly bounded. However, while the appropriation activity itself is
homogenous, the intent that shapes conduct is not. The dissemination of film clips on a
content-sharing site by a film studio’s own public relations team is identical from a
technical standpoint to the unauthorized distribution of clips by a user. The appropriation
of a trademark for the legally sanctioned purposes of parody or criticism closely
resembles the copying of the logo by counterfeit operators. Consequently, the case-
specific information exclusion of rules makes regulation difficult.
Proposition 1: Where firms seek to address threats to their intangible assets, the
information-rich instrument of litigation is more likely to be strategically favorable
than the information-poor instrument of regulation when the prima facie identification
of online activities associated with information hazards is insufficient to prove
misconduct.
Nevertheless, the logic of the new institutional economics is not just about choosing a
way to govern transactions for economic efficiency and welfare – it’s about the
institutional environment that surrounds those transactions as well (Williamson, 1991, p.
35
287). Accordingly, the decision the firm makes about whether to pursue its objectives
under the institutional umbrella of regulation or litigation does not happen in a vacuum
but is greatly affected by a number of fluctuating elements that have been well
documented in the TCE and corporate political strategy literatures. Beyond considering
the asset’s resource attributes, the firm must also consider whether pursuing the
assignment of stronger property rights to its intangible assets in the face of information
hazard would be probable with respect to the institutional climate around the issue.
The increasingly ubiquitous role of the Internet in everyday life has caused much
uncertainty about how to regulate the digital economy as rules and standards developed
in a pre-Internet era buckle under the pressure of unexpected contingencies. The
corporate political strategy literature suggests that regulatory uncertainty creates openings
for political opportunism by making the future unpredictable (Rodrik, 1995; Williamson,
1985, p. 30). However, the implicit social contracts between political institutions and
their plurality of stakeholders also creates uncertainty about the credibility of any
commitments made as different interest groups jockey for attention (Bonardi et al., 2005;
A. K. Dixit, 1996). Consequently, although the firm faces unprecedented opportunities to
push for stronger property rights it also faces high costs and high competition associated
with competing with rivals as a demander of public policy in a crowded political
marketplace. Additionally, media attention to tensions between free speech and online
misconduct in the midst of battles over technological standards for governing network
traffic have made the control of information a widely salient issue (Hillman & Hitt, 1999;
Keim & Zeithaml, 1986). Bonardi and Keim (2005) note that firms faced with widely-
salient issues have the challenge not only of heavy competition for political access but
36
also the difficulty of shaping opinions already influenced by information cascades driven
by activists and NGOs. Taken together, all these factors also make it difficult for the firm
to align its agenda with regulators.
Choosing Between Litigation Tactics: Offender Liability and Intermediary Liability
Common to all instances in which third-party services are used to achieve
objectives contested by others is the matter of choice in who to blame. There will be, at
minimum, two actors which can be engaged in a negotiation for recompense: the offender
and the intermediary. (Pigou, 1920) offers a relevant hypothetical in which the criminal
behavior of drunkards, which is facilitated by liquor stores, necessitates an increase in
policemen – a negative consumption externality in which he argues the cost to society of
increased law enforcement is not reflected in the price of alcoholic beverages (Ayres &
Kneese, 1969). While the option exists to resolve the social ill by increasing the penalties
to drunkards who, for instance, drive while intoxicated, Pigou argues for the option that
targets the liquor stores by imposing taxes to pay for more policemen. Both solutions
arguably resolve the problem but which is better? The harm to a firm’s intangible assets
that is caused by online misconduct provides an analogous example of a negative
consumption externality in which consumption of the ICT services provided by Internet
intermediaries gives rise to social ills in the form of online defamation or intellectual
property infringement.
From the perspective of economic efficiency, the choice between the pursuit of
what we shall term 'offender liability' and 'intermediary liability' can be likened to the
choice between a spot market and a hybrid organization in transaction cost economics. As
37
in traditional decisions between market and hierarchical governance, the decision will be
contingent on contractual hazards defined by uncertainty, asset specificity, opportunism,
and the frequency of transactions at stake (Coase, 1937; Klein et al., 1978; Williamson,
1979, 1981, 1991). Thus, I propose that in order to assess contractual hazards and weigh
the transaction costs associated with pursuing liability for the market intermediary as
opposed to focusing on the offender, the firm must consider the following factors: the
feasibility of offender compliance, repetition of misconduct, and systematic culpability.
Offender Compliance. The issue of offender compliance is a driver of uncertainty
around the effectiveness of the adjudicatory process. In many cases of litigation to
prosecute online misconduct, the offender’s location and identity are unknown. Although
complaints can be filed, offenders must be identified in order to be served with court
papers. Anonymity allows the offender to behave opportunistically to create a legal
process hold-up (Buckingham & Rubin, 2001) by shielding his identity under layers of
obfuscation via technologies that reroute and decentralize his network activity.
Consequently, even if a decision in favor of the litigating firm is predictable, the
effectiveness of enforcement via injunction to have the offender remove online content is
uncertain. Firms can mitigate this risk by including the offender’s Intermediary service
providers in the civil filings in order to request a court order inducing identity and
information disclosure or content removal by the intermediary host.
Repetition of Misconduct. Ideally, ex post regulation requires only sporadic
intervention as the administrative cost per case is high for litigation (Posner, 2010).
Where firms face information hazards only rarely, it is unlikely that they will face
38
repeated instances of the same type of threat. However, a firm may face repeated
appropriation of its intellectual property or systematic attempts by individuals in the same
coalition to defame them. As the second instance is less obvious, I offer two examples. In
the first case, a law firm with a history of taking on publicly controversial clients may
find its reputation under attack by parties with an interesting in undermining its business.
In the second case, an abortion clinic finds itself the subject of false online rumors about
its clinical practice. In such instances with a pattern of repeated misconduct that is
homogenous in activity, the decision to sue an intermediary for contributory liability
affords the opportunity to combine ex post litigation with ex ante regulation. The firm
that obtains an injunction that requires an intermediary to monitor its platform is able not
only to decrease the transaction costs associated with monitoring its own property
interests but the enforcement costs associated with prosecuting violations one offender at
a time.
Where either one of these problems exist (compliance/repetition) the firm is able
to make an argument to the court that the transaction costs associated with identifying an
anonymous culprit and prosecuting the same crime over and over are much higher than
the operational burden faced by the intermediary who is held vicariously culpable. The
justification exists for invoking the intermediary’s ‘duty of care,’ which is the social
contract between economic actors and society that prudence, caution, attentiveness must
be applied to reduce the harm to others that could be caused by their activities. Although
the duty of care contract exists for all parties and is legally enforceable, prior to the
adjudicatory process it is implicit and incomplete. The intermediary may make its own
interpretation of how its responsibilities should be carried out. The process of
39
contributory liability formalizes and codifies this incomplete contract in the form of an
injunction. The authority of the court creates a credible commitment (A. Dixit &
Nalebuff, 1991) and reduces opportunism via the threat that prosecution would pose to
the intermediary’s economic activities.
Proposition 2a: Where anonymity and frequency of misconduct increase
contractual hazards associated with offender liability, the firm’s pursuit of
intermediary liability is more likely to create a competitive advantage by using a
duty of care obligation to induce the intermediary to enforce the firm’s property
rights.
As a corollary,
Proposition 2b. Where contractual hazards associated with offender liability are
low because the offender is easily identifiable and the threat of information
hazards is infrequent, the firm’s pursuit of offender liability is likely to have lower
costs than pursuing intermediary liability.
Systematic Culpability. Returning to the question of contractual hazard
associated with choices between direct liability and intermediary liability, I argue that
given the reliance of information hazards on technical and sociological architectures of
online platforms, the firm must assess the connection between misconduct and the norms
encouraged by the intermediary’s infrastructure. First, does the infrastructure and
delivery of the online service shape activities and choices in a way that encourages
appropriation or degradation hazards? For illustrative purposes consider the design choice
on Facebook’s social network to provide a ‘’like’ button to express social approval but no
40
‘dislike’ button to express negative emotions. Second, is it possible to conduct activities
on the intermediary platform for neutral or beneficial purposes? Third, what is the
relationship between the intermediary service provider and direct offenders? Are their
activities encouraged or prohibited by the platform’s norms and terms of service? Where
the firm has a reasonable case for systematic culpability, the use of intermediary liability
allows the firm the option to request an injunction against further provision of service, in
effect shutting the intermediary down. Where information hazards are frequent and the
possibility of a credible commitment from the intermediary is low, intermediary liability
cannot be used to shift long-term monitoring and enforcement costs on to the
intermediary. However, the use of litigation to remove the intermediary from the
marketplace provides the competitive advantage of temporarily disrupting online
misconduct. The size of the disruption and associated competitive advantage will be
directly proportional to the intermediary platform’s centrality to networks of online
misbehavior.
Proposition 3. Where systematic culpability precludes an ongoing relationship
with the intermediary due to contractual hazards, the use of intermediary liability
remains strategically attractive as a tactic to remove the intermediary from the
market will temporarily disrupt the threat of information hazard.
In summary, where contractual hazards are reasonably low because offenses are
infrequent or because the offender can be identified and the firm can be certain of timely
compliance to a court injunction, offender liability is likely to be the most efficient option
for firms using litigation to enforce property rights against information hazards. This
41
mode of governance resembles a spot market in that neither party (firm nor offender) has
an interest in continuing associations after their day in court. Rather, the offender makes
reparations in exchange for not being held in contempt of court and each goes on their
way. As contractual hazards associated with the offender (compliance/repetition)
increase, the strategy of pursuing intermediary liability to create a long-term alliance
(albeit one under duress) to increase property monitoring and enforcement is most likely
to confer a competitive advantage. However, where contractual hazards associated with
the intermediary rise (systematic culpability), the use of intermediary liability to create an
alliance is no longer feasible but intermediary liability can then be used to confer
competitive advantage by removing intermediaries from the marketplace to disrupt
information hazards.
Discussion and Conclusion
In this paper I began with the observation that in the context of the digital
economy, firms face increasing pressure to protect their intangible assets from the threat
of information hazards. Despite the informality of such acts of authorship and sharing,
online communications have real commercial value – both positive and negative – to
corporate interests. A study by consulting firm NetNames indicates that 327 million
unique Internet users conducted searches for infringing copyrighted content in a single
month of 2013, an almost 10% increase from two years prior (Johnson, 2013). A study of
online restaurant reviews indicated that each unit increase in ratings led to a 5 to 9
percent increase in revenue (Luca, 2011) but a study examining reviews in an online
42
auction context found that a single negative review causes an initial 13% drop in revenue
(Cabral & Hortacsu, 2010).
Despite the real threat that information hazards pose to intangible assets via the
risks of appropriability and degradation, few studies in the literature on corporate
political strategies address the protection of intangible assets, or how institutional
alternatives affect nonmarket decisions about property enforcement. In explicating the
relationship between intangible property attributes, information hazards, and modes of
governance for nonmarket action I seek to demonstrate that there is an intrinsic link
between the firm’s resource attributes, the nature of threats, and the choice of how to
enforce rights over them in a nonmarket environment.
Additionally, by developing the distinction between intermediary liability and
offender liability I hope to connect the literature on consumption externalities to the
nonmarket literature. It is a hallmark of the online environment that all almost all activity
makes use of one or more intermediary services, whether they are search engines,
payment platforms, or hosting services. Consequently, the question of intermediary
liability will become increasingly central to the litigation strategy of any firm with a
property interest that is intangible.
The framing of such questions in the context of the nonmarket environment also
draws attention to the importance of Internet intermediaries from a public perspective.
The centrality of intermediary services to freedom of speech and access to information
creates a status quo bias in favor of intermediaries. Rather than pursuing fruitlessly
43
pursuing intermediary liability in every instance where it is possible, firms must consider
the community interests of public institutions.
It is of note that the use of litigation to effect a long-term shift of policing and
enforcement costs onto intermediaries is, essentially, a form of ex ante regulation
implemented via ex post litigation (Posner, 2010). Arguably, the firm receives the same
benefit (but at lower cost!) as it would from a decision to extend further property rights or
to increase penalties for infringement that results from high investments in motivating
trade associations and interest groups to lobby Congress or an executive branch agency
(Bonardi et al., 2005; Sawant, 2012).
Kessler (2010) describes a comparable scenario from the 1990s, in which
government agencies and private actors brought civil suits against offenders that resulted
in settlements which crafted extensive rules to govern the defendant's future conduct. In
such cases, litigation and regulation are also substitutes - with difference in costs.
Notably, the use of litigation in that period to impose defacto regulation on firms outside
the bounds of the democratic political process has raised important questions about how
this mechanism might improve welfare, on the one hand, by allowing for the correction
of political market failures, or decrease welfare on the other hand by supplanting the
more egalitarian and participatory of regulation by the state.
44
Chapter 3. Lowering Appropriability Hazards by Raising Infringers’ Costs:
Using Internet Intermediary Liability to Enforce Property Rights
Introduction
In recent years there has been a steady rise in copyright and trademark infringement
lawsuits in which intellectual property (IP) owners sue Internet intermediary platforms for their
role in facilitating online intellectual property infringement. Internet intermediaries, by providing
the online platforms and services that allow third parties to publish, connect to, distribute, and
index information, may find themselves at risk of vicarious culpability when the activities that
occupy such third parties prove less than lawful. A film studio, for instance, might sue a content-
sharing site because a fraction of users have used the service to share unauthorized digital copies
of one of its films. Alternately, a manufacturer of branded home goods might bring a suit against
an online marketplace, such as Craigslist or eBay, because some users are using the service to
sell counterfeit wares under their brand name. The choice of IP holding firms to systematically
target Internet intermediaries - rather than focusing their attentions on direct infringers of their
property - raises an interesting strategic puzzle about why firms might act to protect the value of
their innovations by inducing a third party to enforce their property rights for them. On the
surface it appears that it would be simpler and cheaper to target copyright and trademark
violators directly; it would be unlikely, for instance, that IP holders would prosecute a hotel
property if it were used as a meeting place for the exchange of counterfeit goods.
However, the advent of digital technology since the 1990s has posed particular
challenges for copyright and trademark holders. Copyrighted content once tied to audiocassettes
or VHS tapes can be electronically reproduced with minimal quality loss. Similarly, the visual
45
appearance of trademarked logos once printed on packaging or signs can be replicated online.
There is relatively little skill or knowledge required to alter, duplicate, or transmit content
previously fixed to a physical medium. Consequently, while digitization has provided
tremendous opportunity for innovation, it has exacerbated appropriability hazards for creative
works by removing both the marginal costs and technical barriers to appropriation. The Internet,
however, contains a vast amount of information
4
and it can be difficult for users to find
appropriated content. Internet intermediary platforms lower these ‘search costs’ for Internet users
by aggregating vast amounts of data about the location and characteristics of items (including
content) that are available for exchange online and also providing infrastructure that facilitates
transactions by connecting buyers and sellers and establishing transactional norms and codes of
conduct (Gehrig, 1993; Rubinstein & Wolinsky, 1987; Spulber, 1996). In this context, the ability
of Internet intermediaries to control online information traffic and marketplace activities makes
them a potentially valuable resource for IP-holding firms if they can be induced to assist in
identifying and preventing instances of infringement.
In this paper, I set out to explain how copyright and trademark-dependent businesses
litigate against Internet intermediaries for the actions of third party users as a strategy to
simultaneously lower their own transaction costs while raising those of unauthorized infringers.
Few studies in the strategic management literature examine how firms might use non-market
mechanisms to restrict competition by targeting otherwise non-competitor firms whose services
significantly lower their rivals’ transaction costs. Theoretically, I build on Teece’s (1986)
conceptualization of appropriability regimes, which establishes a basis for assessing the
4
Researchers at Cisco estimate the Internet’s annual information traffic at 667 exabytes in 2013 (The Economist,
2010). In perspective, one exabyte is roughly 68,403 times the number of books in America’s Library of Congress.
46
inimitability of an intellectual-property based innovation. I propose that a strategic understanding
of how firms defend innovations against appropriability hazards must not only incorporate
competition from legitimate rivals in the marketplace but must also consider the set of
appropriability hazards that arises from illegally operating market entrants. As methods for
dealing with these infringers often turn to non-market mechanisms in practice (Shultz &
Saporito, 1996), this study bridges the literature on profiting from innovation to scholarship on
raising rivals’ costs by characterizing litigation against intermediaries as an example of what I
term ‘raising infringing rivals’ costs’ (RIRC). I make the argument that the use of intermediary
liability by firms to shift the policing and enforcing costs of their intellectual property assets is a
critical strategy for examination due to its growing practical and theoretical significance. I
frames intermediary lawsuits as a multi-stage raising rivals’ costs strategy and develop a set of
hypotheses to explain what factors motivate the selection of intermediary targets, the type of
requests made of them, and the escalation of commitment to pursue further litigation.
First, I propose that characteristics of the type of intellectual property being protected
determine the search and information costs most relevant to capturing their commercial value.
The capacity of intermediaries to control these costs guides IP holders in the choice of who to
sue. I then suggest that a different set of factors regarding an intermediary’s systemic economic
importance influences the degree of assistance that can be requested of the intermediary in
lowering the IP holder’s enforcement and policing costs. This decision about what to ask in turn
directly drives a final stage in which IP holders facing failure in an initial round of litigation
must decide whether to desist or to escalate commitment to the strategy by pursuing the
intermediary for repeat targeting in a subsequent round (or rounds) of litigation. Empirically, I
test these assumptions by building a unique hand-collected dataset of more than 450 instances of
47
targeting intermediaries for contributory liability within lawsuits filed in the United States and
spanning the time period from 1995-2013.
In aiming to expand our understanding of how firms strategically act to enforce their
property rights when faced with the threat of infringement by unauthorized market players, I
contribute to multiple literatures. In addition to advancing the literatures on appropriability
hazards and raising rivals’ costs, I also contribute to the growing empirical and theoretical
literature on intermediation in the online context. While Internet intermediaries are typically
conceived as existing to lower search costs, this study describes a condition under which
intermediaries are used to effectively raise search costs through inducement to exclude certain
parties from service. My findings have important implications for firms in intellectual-property
dependent industries, for firms operating internet intermediary platforms, and for policy-makers
with interests in both intellectual property rights and Internet governance.
Theory
Appropriability Regimes and Capturing Value From Innovation
There is a strong refrain in the strategy literature regarding the importance of being able
to capture value from innovation. The case literature is rife with examples of first mover firms
that fail to sustain any first mover advantage (R. R. Nelson & Winter, 1982). Beginning with
David Teece's seminal paper, "Profiting from Innovation," there have been almost three decades
of robust conversation highlighting critical linkages between the firm's management and
development of new ideas and strategies aimed at safeguarding its ability to benefit from such
inventions (1986). Teece’s work emphasizes the need to develop "complementary assets," or
privileged access to resources specific to the innovation, but most importantly it stresses that
48
strategic choices must be contingent on assessing the strength and other characteristics of the
appropriability regime in the external environment (p.287). It may be the case that innovations
are easy to imitate from a technological standpoint. Alternatively, a legal system in which
property rights are weakly, or rarely, enforced may also make it difficult for firms to capture all
the rents from their innovation.
Firms in information-intensive industries have the option to choose from a number of
legal instruments, including patents, trade secrets, copyrights and trademarks, to protect different
aspects of their innovations and to attempt to enforce a temporary monopoly on rents derived
from them. It is well documented, however, that intellectual property rights are not typically as
effective in practice as they are in theory (Von Hippel, 1982; Amara et al., 2008). As relayed in
the introduction, one significant technological advance that has significantly weakened the
appropriability regime for most intellectual property-dependent firms has been the advent of the
Internet and its associated technologies of reproduction.
In the Internet era copyright and trademark holders face a veritable onslaught of would-
be appropriators lured in by the ease and low costs of coopting existing IP and high profit
margins. The problem of capturing value from one’s intellectual property is also compounded by
the fact that particularly valuable intellectual property is both rare and expensive to produce
5
;
pharmaceutical manufacturers and filmmakers are similar in that it is the miracle drug or
blockbuster film that helps to offset investment into the many projects that fail in development
(Shapiro & Varian, 1998). A sustainable business then requires that rents captured from
5
The Tufts Center for the Study of Drug Development estimates that developing a new drug takes 10-15 years and
requires an R&D investment of over $800 million on average (Ilias & Fergusson, 2008). In 2007, the Motion Picture
Association of America reported that the average cost of producing a studio movie was $106.6 million and rising by
more than 5% each year (Opinion Research Corporation (ORC), 2007).
49
‘blockbusters’ must exceed the collective sunk costs of unsuccessful innovation efforts.
Furthermore, online infringement underscores the point that business strategies to capture value
from innovation must address not only the possibility of competition by imitators offering close
product substitutions but also the hazard of upstart infringers who build their business on the
illegal appropriation of IP developed by others. Consequently it becomes necessary to
characterize IP-dependent firms as facing different types of rivals in marketplace competition,
each requiring its own specific strategies for sustaining a competitive advantage.
Different Types of Rivals
Direct rivals. As this study seeks to explain how firms act to prevent rents from
appropriation of their intellectual property from accruing to illicit copiers, a distinction is
necessarily made between direct rivals and infringing rivals (see Fig. 3). Direct rivals are the
firm's primary competitors for market share in the same industry and will have comparable
products, business models and target audiences (Chen, 1996; Bergen & Peteraf, 2002). It may be
the case that direct rivals leveraging their intellectual property across several products may
compete with each other across multiple markets such as television, films or video games
(Karnani & Wernerfelt, 1985). These are rivals in the ‘classic’ sense and in information-based
industries direct rivals will compete with products that can be highly substitutable, or even
derivative of each other, but which are typically based on their own proprietary intellectual
property. Although, in some cases, as with radio stations, direct rivals may have business models
based on contracting to license the intellectual property developed by others. Furthermore, at
times direct rivals may selectively engage in unauthorized infringement, either by accident
(Ziedonis, 2004), or when they believe property rights can be challenged (Teece, 1986; Ziedonis,
50
2004), or when they believe infringing activity may go undetected. Reviews of both the
theoretical and empirical literature on formal intellectual property protections, such as patents,
and informal protections, such as product lead time or confidentiality agreements, reveal an
orientation that is almost exclusively focused on direct rivals and strictly technological
innovation (Amara et al., 2008; Hall, Helmers, Rogers, & Sena, 2013).
Infringing rivals. In stark contrast, the strategy literature remains curiously almost silent
on the topic of infringing rivals, the copyright pirates and trademark counterfeiters who compete
with firms for rents and consumers in the same market. The bulk of informal protections that
have been studied require the prevention of information disclosure to direct competitors via
technical means, human resource management, contracting or tacit knowledge (Hurmelinna &
Puumalainen, 2005); such tactics work well for codified, technologically-based innovations but
offer little protection against infringers who simply reproduce content-based innovations that are
in current commercial distribution. These market entrants may or may not be legally
incorporated; they are defined by rent-seeking activities that involve offering products that are
either completely or partially based on unauthorized appropriation of their rivals' intellectual
property. Infringing rivals may use a business model predicated on total overlap of intellectual
property, as is the case with copyright infringement where exactly reproduced content is offered
as a perfect substitute for the IP developer's own products. Alternately, infringing rivals may
adopt a business model based on partial overlap in which appropriated IP is used to add value to
products which they have manufactured or developed themselves. In the case of counterfeit
goods, for example, infringing rivals might coopt trademarks to take advantage of the IP
developer's brand reputation, customer loyalty and established customer base (Trott & Hoecht,
2007).
51
Figure 3. Types of Rivals in Intellectual Property-Dependent Industries
Source: Author
Note: This figure shows examples of firms who use the depicted business models in direct
market competition. For example, radio stations compete with each other using the legally
licensed IP developed by record companies.
52
While there is little reliable evidence regarding economic damage due to piracy
6
, it is
clear that copyright and trademark infringement are widespread. Data on customs seizures
collected by the U.S. Immigration and Customs Enforcement (ICE) agency in 2006 (Ilias &
Fergusson, 2008) and the Organization for Economic Cooperation and Development (OECD) in
2005 (OECD, 2008) respectively suggest that annual trade in counterfeit and pirated goods may
have amounted to $155 million in the U.S. and $200 billion worldwide and continues to grow.
Furthermore, infringement dilutes brand value and firm reputation (Akerlof, 1970; Berger, Blind,
& Cuntz, 2012) and there is limited evidence that it may also discourage investment into
innovation (Kanwar & Evenson, 2003; Lerner, 2002). As a result, although the direct impact of
infringement on firm performance cannot be measured empirically, there is little doubt that the
prevention and control of infringement are of great importance to firms in intellectual property-
dependent industries.
Faced with unauthorized appropriation, firms who do not wish to cede the market to
infringers or accept lower profit margins must make strategic choices about how to address
market entrants who are infringing rivals. Firms might take measures to prevent IP infringement,
such as investing in technological product protections (Shultz & Saporito, 1996)
7
, educating
consumers and retailers (Chaudhry & Zimmerman, 2012; Shultz & Saporito, 1996), acquiring or
cooperating with offenders (Trott & Hoecht, 2007), or raising the degree of technological
complexity to make the product inimitable (Keupp et al., 2010). Where appropriability regimes
6
Although firms in the content industries regularly report catastrophic losses due to infringing rivals, the bulk of
these studies have been discredited due to a lack of controlled evidence (Patry, 2012) or a reliance on market models
in which consumer demand is estimated ex-ante (OECD, 2008). Losses due to infringement are measured by
comparing actual market outcomes with those of an imagined predicted market in which there is no piracy and all
potential infringers purchase the product at full price.
7
Technological product protections might include high-tech labeling schemes, tracking chips, digital rights
management, or anti-counterfeiting modifications (Chaudhry & Zimmerman, 2009).
53
are very weak and intellectual property rights cannot be enforced, these types of informal
protections may prove particularly attractive. However, they are not without drawbacks.
Technological solutions may raise R&D expenses (OECD, 2008) and can be difficult to
apply to intangible goods, particularly when solutions require labeling, physical complexity, or
tracking technologies. There is also some evidence that consumer education and cooperation
with infringers via joint ventures or acquisition are typically ineffective (Chaudhry &
Zimmerman, 2009). Under tighter appropriability regimes, as is the case in the United States,
some firms may explore preventative schemes but the dominant paradigm is to take action to
dissuade infringing rivals by employing strategies to raise their costs of appropriation.
Raising (Infringing) Rival’s Costs
The core idea of Raising Rival's Costs (RRC) is laid out in a same-titled paper by Salop
and Scheffman (1983) in which they describe a nonprice predation strategy where firms raise the
costs of a rival's inputs rather than oversupplying the market with product in order to lower the
price such that the business becomes unprofitable. They note that although an RRC strategy may
still raise the firm's own costs, it is likely to do so to a lesser degree than price predation. Salop
and Scheffman, and later Krattenmarker and Salop (1986), additionally describe broad variations
on creating exclusion or scarcity, primarily through the acquisition of exclusive rights to a
critical resource. Other scholars detail a number of specific RRC strategies including buying up a
resource (Brennan, 1988), inducing suppliers to discriminate via exclusionary contracts or
coercive behavior (Brennan, 1988; Tharp, 1989),gaining exclusive rights to access a critical
input (McWilliams et al., 2002), or lobbying for regulations or technical standards which are
exclusionary or favor the firm's own capabilities (Grossmann & Steger, 2008).
54
Although RRC analyses traditionally refer to strategies used against direct rivals and are
frequently applied to anti-trust assessments, the theory offers a useful and appropriate lens
through which to examine the strategies that might be adopted by a firm to enforce copyrights
and trademarks against infringing rivals and deter future infringement. Using evidence from the
luxury goods market, for example, Yao (2005) and Bekir et al (2012) apply RRC analyses to
cases of infringing rivals by illustrating how, in both studies, manufacturers of branded luxury
goods work through government actors to influence sanctions tied to counterfeiting activities and
thus reap additional revenue from the receipt of monetary fines from infringers. While such
empirical studies in the RRC literature are somewhat limited to date, I suggest that Internet
intermediary liability can be best understood when framed as a strategy for protecting intellectual
property by raising infringing rivals’ costs (RIRC).
Internet Intermediary Liability
The option to file a civil suit for IP infringement against an Internet intermediary has all
the property enforcement benefits of suing infringing rivals directly while also mitigating the
potential coordination and resource problems of targeting many infringing rivals at once.
Particularly in the case of copyright, IP holding firms may have many different properties subject
to simultaneous infringement by numerous parties, all of whom must be engaged. Internet
intermediaries are used by infringers as a central mechanism by which to lower search and
information costs, a specific type of transaction cost associated with locating and evaluating
specific types of information and engaging in market transactions with consumers (Dahlman,
1979; Schmalensee et al., 1989). By treating an intermediary as a middleman in the infringing
rival’s supply chain, the IP holding firm may use litigation to engage in various schemes for
55
excluding large numbers of rivals from access to a supplier that are well documented in the RRC
literature. First, IP holders may attempt to effect supplier discrimination by asking the courts to
require intermediaries to promise to discriminate against previously identified infringing rivals
by refusing to offer their services to them (Brennan, 1988; Krattenmaker & Salop, 1986). A
variation on this scheme is to require intermediaries to take ex ante monitoring action on their
platforms and report violators, increasing the probability that infringers are identified, and
subsequently refuse to offer service to those identified. In this way infringers’ costs are raised by
simultaneously increasing the likelihood of being caught and punished by the law (Becker, 1968)
and blocking access to critical resources (Tharp, 1989; Capron & Chatain, 2008). Studies of
counterfeiters indicate that encouraging middlemen to notify manufacturers about counterfeits is
a highly effective method of deterring future infringement (Chaudhry & Zimmerman, 2009).
Ambitious IP holders may foreclose supplier access entirely by attempting to have the courts
require intermediaries to discontinue all third-party services (Krattenmaker & Salop, 1986).
Furthermore, as with legal action against infringing rivals, the costs of litigation and monetary
compensation may drive intermediaries towards market exit while potentially deterring new
intermediaries of the same type from market entry. The result would be a net reduction in
intermediary resources available to infringers, although at great social cost to other Internet
users.
For all strategies involving civil action against an intermediary, the mechanism for
persuading the courts to force cooperation from the middleman is that the IP holder is already in
possession of an exclusive property right (its copyright or trademark) that hypothetically
excludes infringers from an input; the intermediary is then held liable for ‘contributing’ to
violations of these rights by its users. Any court-ordered requests will have the result of raising
56
the intermediary’s costs, as well as those of the infringing rival, and some enforcement requests
result in a much greater cost to the intermediary than others.
As compared to other nonmarket options a firm may have, such as lobbying for stricter
regulation or for seizure of assets without trial by law enforcement, intermediary litigation is an
RIRC strategy that has increasingly grown in popularity (see Fig. 4) in part because it allows
greater speed in addressing numerous infringing rivals than the legislative process and greater
control and legitimacy (from a civil rights standpoint) than a law enforcement initiative.
However, the great benefit of this strategy to the IP holder is that it simultaneously confers two
competitive advantages for profiting from innovation that arise from the intermediaries’ control
of transaction costs:
1) Increasing search and information costs for infringing rivals who can no longer rely on
intermediaries to aggregate supply and demand or facilitate transactions.
2) Lowering the policing and enforcement costs of IP holders by shifting them onto
intermediaries.
However, once a firm has opted to pursue a strategy of intermediary liability, there
remains the question of how to execute this method of raising the infringing rivals’ costs. In the
following sections I propose hypotheses about how IP holding firms select which intermediaries
to target for litigation, predictors for the selection of enforcement requests, and what drives the
selection of particular intermediary targets for repeated litigation.
57
Figure 4. Intermediaries Targeted in Contributory Liability Lawsuits Over Time (1995-2012)
Source: Author
58
Hypotheses
Differences in IP Protections and Hazards: Selecting Intermediary Targets
On its face, the IP holder’s selection of an intermediary to target for civil action in the
campaign to enforce its property rights seems simple. IP holding firms will choose the
intermediary platform which infringing rivals most frequently utilize to host the appropriated
property and make it accessible to unauthorized users. A film studio, for instance, may find that
illicit copies of files containing a feature film are hosted on a ‘cloud’ file storage service. On
closer examination, however, it becomes clear that Internet intermediaries are inextricably linked
in a complex ecosystem of services that act as hosts and conduits for information. Many different
nodes in this system may serve as appropriate gatekeeping ‘chokepoints’ to prevent unauthorized
dissemination of IP (see Appendix D). A search engine indexes hyperlinks to content on that file
storage service, a payment provider processes transactions to purchase the illicit content, and an
Internet Service Provider (ISP) facilitates the ‘downloading’ or transmission of files to the
consumer’s computing device. Furthermore, the file storage service may purchase a domain
name from a domain registry to drive more traffic to the service and physically store its files on
servers provided by an enterprise hosting service that provides storage and processing.
These various types of intermediary platforms are mapped across three broad layers of
architecture defined by the Internet’s network infrastructure and information exchange points :
Internet Service Providers (ISP), Online Infrastructure Providers (OIP), and Online Service
Providers (OSP). Hence, IP holding firms can choose to target intermediary service providers
located in the ISP layer, which directly delivers users and platforms a backbone
8
connection to
8
The ‘backbone’ refers to the principal data routes between the Internet’s core routers and networks.
59
the Internet and controls the principal routes between network nodes for information
transmission. Or they can target intermediaries in the OIP layer, which manipulates routing of
information traffic and provides essential infrastructure for hosting and processing data. Finally,
they can target intermediaries in the OSP layer, which offers users a direct interface to the
content hosted online, as well as the services that allow for user-initiated data transmission and
processing, smaller-scale hosting, and information search. The intermediaries spread across these
layers can be further grouped into six intermediary categories, according to the particular types
of services
9
they provide and the types of data they manage within the layer, as illustrated in
Figure 5.
Hence, we can conclude that IP holding firms are faced with many different options for
chokepoints where information traffic can be blocked and that these alternatives are spread
across multiple layers of the network. Realistically, IP holdings will be constrained by limits on
their resources in the form of finances, time and attention and thus cannot opt to pursue litigation
against each type of intermediary platform linked to infringement without great cost. As a result,
an effective and efficient litigation strategy will depend on targeting those intermediaries whose
services most lower the search and information costs associated with a particular type of property
infringement (ie. those intermediaries that are central to facilitating activities underlying the
unauthorized appropriation of IP).
9
There are 27 different types of intermediary service models that are distributed within these six broad categories
(see Appendix A). For a detailed mapping of these intermediary types across the Internet architectural network, see
Appendix C. For a glossary of intermediary types, with examples, see Appendix F.
60
Figure 5. Intermediary Taxonomy by Layer and Category
Source: Author
61
In order to determine the nature of these search and information costs, one then considers
the characteristics and protection mechanisms associated with an intellectual property asset in
relation to its appropriability hazards. Scholars have noted that ease of imitation is significantly
affected by the degree to which the innovation is tacit or tangible (Miles, 2008; Amara et al.,
2008). Intangible goods tend to be harder to exclude from imitation and their primary protection
mechanisms are copyrights and trademarks rather than patents (Amara et al., 2008; Howells,
Blind, Elder, & Evangelista, 2003). Surprisingly, given the hundreds of published studies that
have touched on appropriability regimes in the wake of Teece (1986), there is a dearth of
scholarship in the strategy literature exploring the use of copyright or trademark as protection
mechanisms (James, Leiblein, & Lu, 2013). The field has most often addressed the importance of
protecting innovation in the context of patents, trade-secrets and patent-based industries (Hall et
al., 2013; James et al., 2013).
The nature of the knowledge protected under different protection mechanisms varies
significantly in ways that require different strategies to protect its value from appropriation.
Patents, for instance, do not have to be exercised to confer benefits because they are blue prints
and building blocks for innovation – rather than innovations themselves. They may provide
strategic value as a negotiation tool, as a method of blocking rival innovation, or as a deterrent
against legal action from rivals (Cohen, Nelson, & Walsh, 2000; Ziedonis, 2004). Copyrights and
trademarks, on the other hand, must be commercially exercised to capture their value, meaning
that the underlying goods and services must be released into the market for economic
consumption in order for rights holders to profit (Shapiro & Varian, 1998). However, while
copyright and trademark protections may both be applied to the same asset they protect different
62
aspects of the intellectual property and thus offer differing value propositions to prospective
infringers.
Copyright protects the expression of an idea as embodied in a static
10
creative work (J.
W. Nelson, 2011). The protection applies to the content itself as opposed to ideas or
characteristics embedded in the work. Accordingly, infringers who duplicate copyrighted content
essentially appropriate its entire value and compete in the market with a good that perfectly
substitutes for the original. To maximize revenue they then focus on lowering search costs for
the content by determining the best means of online content discovery, access and dissemination
for as many consumers as possible. Following this logic, copyright infringers will be particularly
interested in intermediaries that not only have indexing and search utilities, meaning that these
platforms can be used to selectively locate, catalog and identify content according to specific
criteria, but also offer transmission utilities, meaning that the platform can enable a distribution
channel for content. As illustrated in Table 1, some but not all intermediary categories contain
service providers offering these utilities. The ‘ISPs’ category, for example, offers transmission
but not indexing and search , while the ‘Navigational Infrastructure’ category contains neither.
Trademark protection, on the other hand, requires a different approach to copyrights as
trademarks do not hold their primary value within the content of the mark itself but in the mark’s
ability to signal commercial value. The mark or symbol is a unique and often creative piece of
content that is legally tied to the IP holder’s products and services in order to improve consumer
awareness and identification of product sources and ownership (J. W. Nelson, 2011). A
trademark infringer, by appropriating the mark’s distinct content, seeks to add value to his own
10
Here static refers to the fact that the work must be ‘fixed’ in a medium to receive protection. A dance performance
cannot be copyrighted but the recording of a dance performance can.
63
products (or apparent replications of the IP holder’s products) by linking them to the trademark’s
stock of brand value and customer loyalty. Trademarks work best when highly visible, which
means that trademark infringers are likely to lower their search costs by focusing on
intermediaries that offer a publishing utility, meaning that commercial information can be made
viewable and accessible to the public, as with advertising service providers and online
marketplaces. Furthermore, while copyright infringers may rely on digital transmission,
trademark infringers often look for intermediaries that offer processing utilities, facilitating
financial exchanges of payment and information to close transactions for sales of physical goods.
As with the previous utilities, some intermediary categories offer publishing and processing
utilities while others do not (See Table 1).
64
Table 1. Search & Information Capabilities of Intermediaries
Intermediary Category Search & Information Utilities
ISP Transmission
Navigational Infrastructure Publishing Hosting
Commercial Infrastructure Publishing Hosting Processing
Search & Navigation Transmission Hosting Indexing /
Search
Utility Provider Transmission Hosting Indexing /
Search
Content & Online
Communities
Transmission Publishing Hosting Indexing /
Search
Processing
Utility
Definition of Search & Information Utilities
Indexing &
Search
To provide access to structured and catalogued information that is then filtered
according to a specified input criterion
Processing To manipulate, transform, or interpret data via an automated computing process to
achieve a specified end
Transmission To transfer content between online platforms, between Internet users and online
platforms, or between Internet users via the use of an online platform.
Hosting To store information or content that is accessible from a static online location
Publishing To make hosted content publicly available at a static online location
Source: Author’s qualitative field work at Center for Democracy and Technology
65
Mapping the capabilities of interest against the utilities listed in Table 1, it is possible to
infer that copyright infringers (and thus copyright holders) will target categories of intermediary
where it is possible to locate service providers possessing both an indexing and search utility and
a transmission utility: ‘Search & Navigation,’ ‘Utilities,’ and ‘Content & Online Communities’
categories. Trademark infringers (and trademark holders) will target categories of intermediaries
offering either a publishing or a processing utility: ‘Navigational Infrastructure,’ ‘Commercial
Infrastructure,’ and ‘Content & Online Communities’ categories. The shared preference for
‘Content & Online Communities’ is easily explained by the fact that while copyright and
trademark infringers may have heterogeneous utility preferences, intermediary categories
typically offer more than one type of utility. Furthermore, some utilities, such as hosting, are
commonly used by both types of infringers to provide access to content and are commonly
available across most categories. Consequently, significant differences in selecting targets for
civil suits should apply to categories that include utilities of interest to one type of IP holder
while lacking utilities of interest to the other. Following this logic, copyright holders will target
intermediaries in the ‘Search & Navigation’ and ‘Utility Provider’ categories while trademark
holders will focus on intermediaries in the ‘Navigational Infrastructure’ and ‘Commercial
Infrastructure’ categories.
H1a: IP holding firms enforcing copyright protections are more likely to target
intermediary firms located in the ‘Search & Navigation’ and ‘Utility Provider’
categories than IP holding firms enforcing trademark protections.
66
H1b: IP holding firms enforcing trademark protections are more likely to target
intermediaries located in the ‘Navigational Infrastructure’ and ‘Commercial
Infrastructure’ categories than IP holding firms enforcing copyright protections.
Systemic Importance in the Intermediary Ecosystem: Determining the Level of
Enforcement Activity
Once an IP holder has selected an intermediary platform against which to direct a civil
suit, the question arises as to what type of property enforcement activities should be requested of
the middleman. In each case, the IP holder must make a persuasive argument to the court that the
desired enforcement activity is part of the intermediary’s legal duty of care, which is the concept
that an organization or individual has a codified responsibility to exercise caution and prudence
to make sure its operations and conduct cause no harm to others at the risk of being held liable
for negligence (Cornell Law School, 2010). The IP holder may have already targeted the
intermediary platform whose capabilities have best positioned it to lower infringers’ search and
information costs. Nonetheless, choices remain between different degrees of enforcement which
require additional criteria for decision-making.
It was earlier established that intermediaries can be used to implement a variety of RIRC
mechanisms, ranging from increasing the probability of detecting infringement to measures that
exclude infringing rivals from a marketplace. As detailed in Table 2, these mechanisms translate
into activities tied a type of duty of care. IP holders seeking primarily to improve detection of
infringement will ask intermediaries to reveal user information that assists in the identification of
infringers. IP holders that aim to exclude rivals through supplier discrimination will ask
intermediaries to take ex post action against existing infringers by blocking their activities or to
67
take ex ante action by monitoring and filtering user activity on the platform to identify and
prevent instances of potential infringement before they occur. IP holders intent on ensuring that
no infringing rivals are able to utilize intermediary platforms to engage in illicit activity may
even ask that intermediaries cease their operations entirely.
68
Table 2. Duties of Care (Enforcement Requests) as Proxy for Operational Cost to Intermediary
Type of Duty of Care Type of
Action
Definition Operational
Cost Scale
Intermediary Service
is Discontinued
Ex Ante The plaintiff requests for the intermediary
service to be shut down. Alternately, the
intermediary platform is asked to
discontinue the "intermediary" portion of its
activities by no longer providing content
access, transmission, or sharing by third
parties.
4
Platform-Wide
Content Monitoring,
Disclosure, and
Filtering
Ex Ante The plaintiff requests the intermediary to
prevent infringing activity on its platform -
and platforms it controls - via content
monitoring, reporting of illicit activity, and
filtering of infringing content.
3
Per Instance Content
Blocking or Account
Removal
Ex Post The plaintiff requests the intermediary to
respond to instances of infringement by
specific actors by removing content,
blocking specific accounts or platforms it
controls, or removing user/platform
accounts.
2
Per Instance Identity
and Account
Information
Disclosure
Ex Post The plaintiff requests the intermediary to
respond to instances of infringement by
specific actors by disclosing their
identification, account information, or
records of their activities.
1
69
Here it becomes obvious that such schemes differ not only in their prospective benefit to
the IP holder but also in terms of outlays for the intermediary platform which result from the
difficulty and expense of integrating them into its operations. Additional costs may be incurred
in the form of damages to the intermediary’s reputation in terms of credibility or information
security. Accordingly, the duties of care are ranked on a four point scale of operational costs (see
Table 2) ranked in order from one to four (lowest to highest): 1) Per Instance Identity and
Account Information Disclosure, 2) Per Instance Content Blocking or Account Removal, 3)
Platform-Wide Content Monitoring, Disclosure, and Filtering, and 4) Discontinuation of
Intermediary Service. We conclude that factors driving the choice of what duties of care to
request cannot be limited to what an Internet intermediary is capable of doing but must
additionally take into account the magnitude of costs a judge might perceive as reasonable for
the intermediary to bear. Hypothetically, the judge - as an economically rational arbiter – seeks
to achieve an equilibrium at which the marginal cost of enforcement is equal to the marginal
social benefit of the property right offenses reduced per unit of enforcement (Bekir et al., 2012).
From a theoretical standpoint, any intermediary has the capacity to implement the range
of possible duties of care because there is a set of common policing and enforcement capabilities
which results from operational requirements, regardless of heterogeneity in utilities offered
across categories. In order to conduct business, resolve disputes, or oversee user activity,
intermediaries are likely to have some capacity to collect information about their users, monitor
information on their platforms, remove information from their platforms, or block platform
access, even if they use differing mechanisms to do so. In practice, however, the systemic
importance of an intermediary service to the larger Internet economy may greatly affect the
70
perception of costs associated with enforcement activities, reducing the power of IP holders to
convince the court to impose high duties of care.
Here, power is defined as the ability of one actor to induce a second actor to submit to its
will (Pfeffer, 1981) with a natural corollary being that factors preventing the first actor from
exercising its will have the effect of reducing its power. One of these factors is the placement of
the recipient actor (the actor receiving the request) within a network of recipient actors – and the
relationship that network has as a whole to the requesting actor (Easley & Kleinberg, 2010).
Within the U.S. economy, an institution is considered to be systemically important to the
economic network when regulators will act to shelter it because its failure would lead to an
outcome considered untenable due to financial harm caused to consumers or due to predictable
negative externalities requiring complicated collective action to correct (Breyer, 1982).
Examples of aid to U.S. firms considered “too systemic to fail” (Barth, Prabha, & Swagel, 2012;
Berg, 2011; Freixas & Rochet, 2013) include the 2008 bailout of the nation’s largest banks
(Barth et al., 2012) as well as the government assistance rendered to save Lockheed’s ailing
commercial jet program and to pull Chrysler from the brink of insolvency to protect jobs in the
domestic auto industry (Moyer & Lamy, 1992). Accordingly, where intermediaries have high
systemic importance it is unlikely, for instance, that IP holders can argue for service
discontinuation.
Borrowing from the literature on banking regulation, there are three related criteria that
provide guidance in measuring an institution’s systemic importance: the size of its assets, the
lack of substitutes for its services, and its interconnectedness as assessed by repercussions to its
business ecosystem caused by its failure or malfunction (FSB, 2009; Moyer & Lamy, 1992). In
71
the intermediary ecosystem, the network proximity of an intermediary to the Internet backbone is
a strong signal for all three factors (Maida, 2013; Weller & Woodcock, 2013). Intermediaries
that are directly, or closely, linked to these principal data routes are strongly tied to the
functioning of the Internet’s architecture and the provision of essential infrastructure for services.
They resemble public utilities in the scale of service provision to millions of people and thus
require large financial and structural resources. Furthermore, because of the higher barriers to
market entry posed by technical standards and economies of scale, there are few substitutes for
service provision. For instance, in the United States there are less than ten ISPs with the highest
rated (tier 1) provision of Internet access (Tworney, 2007). Consequently, intermediary
categories will be heterogeneous in their systemic importance to the network because they vary
in terms of their location within Internet architectural layers and , in turn, these layers differ in
their distance from the Internet backbone. Figure 6 illustrates the distribution of the six
intermediary service categories across the three Internet architecture layers. ISPs, being the
farthest ‘upstream’ category near the backbone, is the most systemically important category
while Content & Online Communities, being the farthest ‘downstream’ category away from the
backbone, contains the intermediary service types that are the least systemically important to the
network.
72
Figure 6. Distance of Intermediary Categories From the Internet Backbone
Source: Author
73
Individual service providers may appear to be exceptions to the general rule that network
location in the Internet ecosystem is a proxy for systemic importance. YouTube, a content
sharing site, has tremendous resources and serves more than one billion users each month
(YouTube, Google Inc, 2013) while Amazon, a third party marketplace, had served as the
primary business platform for more than 1.6 million active third party sellers as of 2009
(Narayan, 2013). Both intermediaries are located downstream in the Content & Online
Communities category. However, while these services possess large assets and large networks of
users, there are also competing providers able to offer close substitutes for service provision,
even at scale, because of lower barriers to entry in these markets. For the most part, it is
upstream intermediaries that most closely fit the highest criterion for systemic importance, which
is that the insolvency of the institution would substantially threaten the proper functioning of the
ecosystem (ie. the Internet) as a whole (Dombret & Ebner, 2013) and additionally generate large
social costs (Berg, 2011). Consequently one may conjecture that there is an inverse relationship
between how far 'upstream' a targeted intermediary is located in the Intermediary ecosystem and
the level of the duty of care that is requested by IP holding firms incorporating systemic
importance into their decisions.
H2: The further upstream a targeted intermediary is located, the more likely that IP
holding firms will request a lower level duty of care; the further downstream a targeted
intermediary is located, the more likely that IP holding firms will request a higher level
duty of care.
74
Raising the Stakes: Targeting Intermediaries for Repeated Litigation
When an IP holding firm fails in court to prove the legal liability of a given Internet
intermediary for contributing to the infringing actions of its users, its RIRC campaign has not
necessarily come to an end. At this juncture, the firm has a choice between cutting its losses or
opting to appeal the judge’s decision so it may continue to plead its case in a court of higher
power. While the data collected on intermediary liability lawsuits for this study indicated that the
majority of cases in fact do not go on to appeal, this paper argues that the remainder are
motivated by particular circumstances in which plaintiff firms find it strategic to proceed in the
face of initial failure. To explain these instances of repeated action, I examine general conditions
for escalated commitment before proposing specific drivers behind the decision to appeal in
some intermediary cases but not in others.
The mental processes and antecedents determining escalation of commitment to
seemingly failing courses of action have been the subject of intense study by organizational and
social psychologists, as well as economists and management theorists for more than 35 years
(Arkes & Blumer, 1985; Brockner & Rubin, 1985; Garland, 1990; Staw, 1981; Teger, 1980).
Often, the decision to continue an endeavor hinges on money, time, or effort that has already
been applied to the project and cannot be recovered, known economically as “sunk costs” (Arkes
& Blumer, 1985). The idea that those who have incurred sunk costs will inflate their estimate of
a project’s likelihood of success as compared to those who have not incurred such expenses is
called a sunk cost fallacy or a sunk cost effect (Arkes & Ayton, 1999; Arkes & Blumer, 1985).
Although such behavior is considered economically ‘irrational,’ as prior expenses cannot be
recouped and should have no bearing on current decisions, examples of sunk cost effects abound.
75
Some individuals refuse to give up on ailing businesses because of the work they’ve already put
in while others remain in deteriorating romantic relationships because they feel they have
committed too much time to them to start over. Famously, the feeling of having “invested too
much to quit” (Teger, 1980) has driven such decisions as the financially ill-advised completion
of the Concorde supersonic airline or the delayed withdrawal of the U.S. from the Vietnam War
in the 1960s (Mcafee, Mialon, & Mialon, 2010).
At the point where an IP holding firm has lost with regards to the initial court decision it
finds itself in an ambiguous situation. The IP holder has received negative feedback which
suggests, at a minimum, that further investments of time and money will be required to achieve
its goals; furthermore, there is no guarantee that increased efforts will be sufficient to achieve its
goals in a subsequent round of litigation. The uncertainty of success allows the firm to interpret
the sum of allocated resources (future and sunk costs) as being simultaneously either expenses or
investments, depending on whether or not its goals are eventually achieved (Brockner, 1992).
Research suggests that the effect of sunk costs on the decision to continue is mediated by the
firm’s explicit estimates of its future returns (Tan & Yates, 1995), both in terms of the estimated
probability of goal attainment (Vroom, 1964) and the magnitude of expected benefits associated
with reaching the goal (Rubin & Brockner, 1975). Specific features of the U.S. court and appeals
system allow the IP holding firm to make inferences about the probability and magnitude of
success that can be weighed against sunk costs in making a decision about whether to commit to
further action.
Civil suits in the American legal system begin in a district court where a period of
‘discovery’ occurs in which both parties present evidence to allow the judge to determine matters
76
of fact (Federal Judiciary, n.d.-a). The role of these courts is to apply the law to a set of given
facts and appropriately respond to the plaintiff’s requests for judicial ‘relief’ in the form of
monetary compensation, requirements for conduct (including duties of care), and formal
declarations of legal rights. The court’s decision – which impacts only the parties at hand -
references both the body of statutory law, which comprises laws emerging from the
government’s legislative process, and the body of case law comprised of previous legal decisions
made by higher courts (Federal Judiciary, n.d.-a)
When a case goes to a court of appeals, known as an appellate court, the party filing the
appeal must prove to the court that the district court was erroneous in its application of the law.
No further evidence is introduced beyond the matters of fact established in the district court
discovery period but both parties have the opportunity to present written legal arguments to make
their case (Federal Judiciary, n.d.-b). The subsequent ruling is made by a panel of three judges,
rather than one, and introduces the most salient difference between district and appellate cases;
the panel’s decision sets a legal precedent that becomes part of the body of case law that must be
referenced and deferred to by all the lower courts as part of a principle called stare decisis
(Federal Judiciary, n.d.-b). Such a ruling can only be overturned by petitioning the U.S. Supreme
Court, whose ruling is binding and final, to allow a third round of arguments at its discretion
(Federal Judiciary, n.d.-b).
The opportunity to set a legal precedent with a successful case in the appellate court is
attractive to IP holders that have failed in the district court because a positive precedent may
improve the probability of future wins for firms filing similar cases in the lower courts due to the
stare decisis principle. Furthermore, empirical research by Baker and Cunningham (2006) on the
77
effect of U.S. appellate court decisions in copyright cases on the market value of firms
demonstrates that positive precedents can raise market returns to IP holders by .1 percent to 1.1
percent. In this way, the system of appeals arguably increases the potential magnitude of benefits
for all possible appellants. The degree to which the potential magnitude is changed and the
probability of goal attainment, however, is likely to be highly dependent on the duty of care
requested in the district court.
In cases where the requested duty of care is low (ie. a 1 or 2 on the Operational Costs
Scale in Table 2), it is unlikely that a plaintiff that was unable to persuade the lower court of the
validity of its request will improve its chances in a higher court.
11
Thus, it seems reasonable that
the IP holder will conclude that while the potential magnitude of benefits has marginally
increased, the probability of goal attainment has significantly decreased and even the pain of
sunk costs is not worth choosing to continue litigation. If, on the other hand, the requested duty
of care was high, the plaintiff may be more likely to believe that the potential magnitude of
benefits and the probability of success have changed for the better.
First, the value of a positive precedent will be much higher when the underlying request
being enforced is larger. Therefore, the size of the payoff associated with goal attainment grows
significantly and accordingly increases the subjective expected utility associated with investing
further resources in this course of action (Brockner, 1992). Second, it is arguable that a lower
court may be more conservative with regards to a large request than a higher court because it
11
Imagine a customer tries to return an item to a store without a receipt. The sales assistant refuses and the customer
asks for a manager. If the item is $10, it is of low risk to the assistant to approve the request and if he chooses not to,
the manager is unlikely to override his decision over such a small amount. If the item is $1000, it is likely that the
assistant will be hesitant to approve the request, knowing he must answer to the manager. The manager, on the other
hand, must more seriously consider the customer’s request because the value of the decision is so high.
78
perceives the scope of its authority to be narrower. Consequently, the IP holders who have
requested a high duty of care are more easily convinced that they have a high probability of
persuading the appellate court of the merits of their argument and therefore, that filing an appeal
will bring them closer to goal attainment (Rubin & Brockner, 1975). Furthermore, it might be
argued that for such firms, the actual experience of having failed in the district court creates an
opportunity for organizational learning about potential hurdles and contingencies that can now be
applied in future encounters with the same opposing party in a future round (or rounds) of
litigation (Mayer & Argyres, 2004; Zollo & Winter, 2002). Finally, studies imply that a firm
making large requests is likelier to be subject to a sunk cost effect because it perceives the case
may draw greater media attention and that straying from its committed course of action may
damage its reputation by signifying weakness or fallibility to observers (Brockner & Rubin,
1985; Mcafee et al., 2010; Staw, 1981). Taken together, we can conclude that IP holders are
more likely to pursue litigation efforts against an Internet intermediary in a court of appeals
when the initial request for duties of care is at a high level.
H3: The higher the level of the duties of care that are requested of an intermediary, the
more likely it is that IP holding firms will choose to target the intermediary again in the
appellate court.
DATA AND MEASURES
Empirical Context and Sample
To analyze my hypotheses, I constructed a database of instances where Internet
intermediaries were targeted for contributory liability within copyright and trademark
infringement lawsuits. Although multiple intermediary defendants can be enjoined in a single
79
case, the plaintiff’s grievances and requested duties of care are generally outlined for each named
defendant in the complaint and are typically specific to the type of intermediary involved.
Because legal regimes regarding the liability of Internet intermediaries for third party users vary
greatly from country to country, I limited my sample to the United States for comparative
purposes, specifically drawing from cases filed within the U.S. Supreme Court, the U.S. Circuit
Courts of Appeals and the Federal District Court. The American legal context is additionally a
particularly appropriate setting for this study for two reasons. First, many of the leading
copyright and trademark holding firms from both the content and manufacturing industries are
headquartered in the U.S. and my own legal research suggests that more intellectual property
infringement cases are filed annually in this country than in any other. Second, many of the
leading Internet Intermediary service providers are also headquartered in the United States and
there is an explicit body of statutory law pertaining to intermediary liability.
12
For each case, I collected the dockets, original complaints, third party legal analyses,
district court opinions and, where applicable, appellate court opinions and briefs from six legal
databases: the Bloomberg Law legal research database, the Westlaw legal research database, the
LexisNexis CourtLink database of legal dockets and documents, the Bloomberg BNA Internet
Law Resource Center database of cyberlaw-related court opinions and statutes, the Justia
database of court dockets, and the Digital Media Law Project (DMLP) Database of Online Legal
Threats. Cases were collected if the filing date for the initial complaint fell within the period
from January 1, 1995 to October 1, 2013. To find cases I limited my results to copyright and
trademark infringement cases where possible and searched using keywords including:
12
The relevant statutes are section 512 of the Digital Millennium Copyright Act (DMCA), section 230 of the
Communications Decency Act (CDA), and the Lanham Act (in reference to trademarks).
80
contributory liability, safe harbor, intermediary liability, Internet intermediary, passive conduit,
and DMCA 512. The results were carefully screened manually to exclude cases that lacked both
a record of the complaint and a court opinion, cases in which intermediaries were being sued for
direct infringement rather than contributory infringement, cases where Internet intermediary
were named but were not targeted for requests, cases tied to criminal proceedings, cases where
the primary complaint did not involve trademark or copyright infringement, and non-
intermediary defendants. Firm-level data on the plaintiffs were gathered from Standard & Poor’s
Compustat annual dataset. Litigation-related data on the plaintiffs were gathered from the
Bloomberg Law legal research database. Additional data on the intermediaries were collected
from the Organization for Economic Cooperation and Development (OECD) iLibrary.
The resulting database includes 450 instances of intermediary targeting within copyright
and trademark lawsuits. However, as coding of the data is still ongoing, I report the
characteristics of the sample used to calculate the preliminary results. The preliminary sample
includes 120 instances of targeting spread across 77 cases (89 copyright, 31 trademark) involving
62 unique plaintiffs and 89 unique intermediary defendants. Non-intermediary defendants (i.e.
those targeted for direct infringement) were excluded from the database.
Variables
The dataset was constructed by the researcher and three research assistants by cross-
referencing documents for each case, including the complaint, court opinion, docket, and third-
party legal analyses. First, objective case-level data were pulled from the court dockets and
descriptors listed in the legal databases where available then manually entered into the database.
These data included the name of the case, names of the parties, court, date of first filing, date of
81
recent decision, case status, cause of action (type of intellectual property), and the district court’s
decision regarding the liability of each defendant.
Intermediary type. Drawing on a taxonomy of intermediaries developed by the
researcher over a three-month period in conjunction with a group of engineers, computer
scientists and lawyers at the Center for Democracy and Technology (CDT), a codebook was
developed listing 27 types of intermediaries with definitions and example service providers. Two
research assistants working together identified the intermediary type for each defendant listed in
the case (“not an intermediary” was also an option). Where the research assistants could not
come to agreement, the researcher made a classification decision. For purposes of data analysis,
the intermediary type observations were collapsed down to the intermediary category level.
Duty of care. Duties of care were measured on a 4-point ordinal item created by the
researcher in conjunction with CDT to represent escalating operational costs to the intermediary
resulting from actions taken to police and enforce the plaintiff’s intellectual property rights (see
Table 2). A codebook was developed with definitions of each level and use cases for the duties
of care at each duty of care level for each intermediary category (24 examples). The researcher
and a third research assistant cross-referenced all available court documents related to each case
in order to assign a level of duty of care (1-4) to each intermediary defendant in the dataset.
Where the research assistant was unable to come to a conclusion, the researcher determined the
appropriate duty of care level.
Repeated litigation. For purposes of preliminary analysis, the initial sample was coded
as follows. Based on geographical court information drawn from the district court dockets for
each case, the appropriate appellate circuit court was identified. In instances where the district
82
court found one or more intermediary defendants to be not liable, two research assistants
searched specified appellate court dockets for the period spanning 180 days after the district
court judgment was entered
13
to identify possible appeals and then assigned a code of “appeal”
or “no appeal” to each intermediary defendant. For the purposes of future analysis, in instances
where an appellate court found one or more intermediary defendants to be not liable, the
researcher searched the U.S. Supreme Court dockets for the period spanning 180 days after the
appellate court judgment was entered in order to identify possible appeals. The researcher then
assigned a count of 0, 1, or 2 corresponding to “no appeal,” “circuit court appeal,” or “supreme
court appeal” for each intermediary defendant in the database.
Controls. The year the district case was first filed was used as a control variable due to
the possibility that unidentified events in certain years may have increased, or otherwised altered,
the litigation behavior of IP holding firms. Due to the large number of unique years relative to
the number of cases, the year the district case was first filed was dummy coded and collapsed
into three year blocks beginning with the year 1995.
Robustness Check
In order to confirm that the category membership of an intermediary and the category
location of an intermediary are separate constructs I ran an ordinal logistic regression where the
intermediary’s category location was regressed upon the type of IP infringement while
controlling for year (results not shown in this study). There was no significant relationship
between the two variables, in contrast to the significant relationship between the type of IP and
13
180 days is a period that reasonably captures all appeals filed, even under circumstances of extension (Cornell
Law School, 2012).
83
intermediary category membership, which suggests that the characteristics of an intermediary
that determine its propensity to be targeted for litigation are in fact distinct from the
characteristics that determine the duties of care requested of it.
Future Controls and Robustness Checks
Due to the manual nature of coding, the addition of future control variables to be used in
analysis of the full sample is still in progress. These include the plaintiff ID, requests for
monetary compensation, the number of intermediary defendants per case, and the plaintiff’s
propensity to engage in copyright and trademark related litigation. Since there were roughly 1.24
intermediary defendants for each plaintiff in the preliminary dataset (which is likely to be
indicative of the full sample), it is possible that there will not be independence amongst the
observations (Hosmer Jr, Lemeshow, & Sturdivant, 2013). Due to the small ratio of defendants
to plaintiffs, a fixed-effects model was not appropriate in this case (Greene, 2003). Following
other scholars (Mizruchi & Stearns, 2001) I incorporate robust standard errors adjusted for repeat
observations by plaintiff. Each case was dummy coded by a research assistant to indicate
whether monetary compensation was requested in the initial complaint in order to control for
plaintiffs motivated primarily by the revenue potential of litigation rather than duties of care. The
number of intermediary defendants (ranging from one to five) was coded for each case in the
database to control for possible differences in duties of care requests that can be attributed to a
large number of enjoined defendants. Finally, for each case, the researcher recorded the total
number of copyright and trademark infringement lawsuits filed by the primary plaintiff in the
year the case was first filed in order to control for the higher propensity of some plaintiffs to sue.
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Data Analysis and Preliminary Results
Description of the Data
The preliminary sample contained 120 cases involving Internet intermediary liability that
were filed between 1995 and 2012. As Figure 4 indicates, the number of cases was both
relatively low and stable throughout the 1990’s but increased after the turn of the century and
grew much more rapidly in the last few years. This is particularly true of copyright cases but is
also the case, to a lesser degree, with trademark lawsuits. The lawsuits were distributed among
intermediary categories with ISPs having the most cases with 27% of the preliminary sample and
utility providers the least at 4%. Descriptive statistics for the study variables can be found in
Table 3.
85
Table 3. Descriptive Statistics
Mean Mode SD Min. Max.
1. Copyright (1) or Trademark (0)
.75 1 .44 0 1
2. Appellate (1) or Trial (0)
.32 0 .47 0 1
3. Intermediary Category
-- 1 - 1 6
4. Location of Intermediary Category
-- 1 - 1 6
5. Duties of Care
-- 3 - 1 4
6. Year Case was Filed
2010 - 1995 2012
7. Intermediary Defendants*
1.16 1 * 1 5
8. Monetary Compensation Dummy*
* 1 * 0 1
9. Propensity to Sue (IP lawsuits per plaintiff per
year)
* * * * *
n=120
* data coding on these variables is still in progress
86
Hypothesis Testing
Table 4 depicts a multinomial logit model where intermediary category membership was
regressed onto the type of intellectual property plaintiff firms were defending. This tests
hypothesis one which states that firms enforcing copyrights are more likely to target
intermediaries in the ‘Search & Navigation’ and ‘Utilities’ categories as compared to firms
seeking to enforce trademark protection. In contrast, firms enforcing trademarks are most likely
to target intermediaries in the ‘Navigational Infrastructure’ and ‘Commercial Infrastructure’
categories as compared to firms seeking to protect copyrights. Comparative preferences of
different IP holders are illustrated in Figure 7. Content & Online Communities was chosen as the
reference category for this analysis as it represents the greatest number of instances of targeting
in the larger database for both types of intellectual property.
87
Table 4. Multinomial Logit Predicting Intermediary Category Targeted
Category
Membership
a
ISP Navigational
Infrastructure
Commercial Infrastructure Search Navigation
Utility Provider
Case is Copyright
Infringement
b
0.328 -2.791 ** -1.308 2.179 * 16.298 ***
(1.060) (0.986) (0.994) (1.142) (0.810)
Controls
Year: 95-97
-1.011
(1.514)
1.278
(1.421)
-19.144 ***
(1.149)
-17.192 ***
(1.355)
-18.431 ***
(1.366)
Year: 98-00 -.899 -.240 0.696 3.264 * -14.389 ***
(1.710) (1.692) (1.402) (1.681) (1.645)
Year: 01-03 -17.729 *** -0.005 -16.648 *** 1.564 -16.952 ***
(0.736) (1.368) (0.838) (1.124) (1.010)
Year: 04-06 -1.056 -14.139 *** 1.999 3.177 * -15.254 ***
(1.477) (1.875) (1.425) (1.299) (1.236)
Year: 07-09 -1.773 * -0.681 -.287 1.175 0.537
(0.811) (1.154) (0.927) (1.012) (1.089)
Year: 10-12 Omitted Omitted Omitted Omitted Omitted
Constant 0.744 0.764 0.784 -3.362 -17.472
(1.160) (1.195) (1.141) (1.388) (1.119)
Observations 108
Chi-Square 87.59
Log Pseudo-
Likelihood
-137.758
a
For the dependent variable (Targeted Intermediary Category) Online Communities serves the reference category.
b
For the independent variable (Type of IP) trademark infringement served as the reference category.
Each observation represents an instance of intermediary targeting within a legal case.
Robust standard errors are in parentheses. * p < .05; **p<.01; ***p<.001.
88
Figure 7. Intermediary Category as a Percentage of Total Copyright and Trademark Cases
89
Table 4 shows that the type of intellectual property being enforced by plaintiff firms was
a significant predictor of targeting for three out of the five intermediary categories. Specifically,
firms suing over infringement of copyrighted property were more likely to target intermediary
firms in the Search & Navigation and Utility categories. These results were expected, as these
categories contain service providers of both transmission utilities and search and indexing
utilities. Consequently, hypothesis 1a is supported. For the ‘Navigational Infrastructure’
category, in contrast, copyright protection was a strong negative predictor, meaning that
trademark holders were significantly more likely to target intermediaries in this category with
litigation due to the presence of a publishing utility.. Surprisingly, no relationship was found
between the type of intellectual property and the targeting of ‘Commercial Infrastructure’
intermediaries despite the fact that the category offers services with both publishing and
processing utilities. Thus, the results for Hypothesis 1b offer mixed support.
Model 2 of Table 5 tests hypothesis two, which posits that the further downstream an
intermediary is from the internet backbone (which is pinned to the ISP category), the higher the
level of duties of care IP holders will request of them and conversely the further upstream an
intermediary is towards the Internet backbone, the lower the level of duties of care that IP
holders will request of them. Table 5 presents an ordered logit model with the four duties of care,
which represent escalating operational costs to the intermediary, as the dependent variable. The
coefficient for location of intermediaries is both positive and significant indicating that higher
duties of care are requested from intermediaries that are further downstream from the ISP
category than those that are upstream and close to it. Specifically, for each category unit that an
intermediary is downstream from the ISP there are 1.72 greater odds that a higher duty of care
will be requested. Figure 8 illustrates this relationship by graphing the probabilities that a
90
particular level of care will be requested against an intermediary’s location. Explicitly,
intermediaries that fall close to ISP are most likely to be asked for user identification or per user
content blocking, while the intermediaries furthest downstream are more likely to be asked to
block or filter their content or to discontinue service. A likelihood ratio significance tests show
that the predicted model performs significantly better than a model solely incorporating the
control variables. In short, there is preliminary support for hypothesis two.
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Table 5. Predicting the Level of Duties of Care (Property Enforcement Requests)
Duties of Care 1 2
Location of Intermediary - 0.544 ***
- (0.122)
Controls
Year: 95-97 -0.429 -0.493
(0.470) (0.653)
Year: 98-00 1.688* 1.372
(0.665) (0.714)
Year: 01-03 2.814* 1.743
(1.415) (1.999)
Year: 04-06 1.992** 1.636*
(0.676) (0.734)
Year: 07-09 0.895* .310
(0.444) (0.501)
Year: 10-12 Omitted Omitted
Observations 111 109
Wald Chi-Square 19.23 42.15
Pseudo R
2
0.073 .153
Ordered logit specification with robust standard error in both models.
Robust standard errors are in parentheses. * p < .05; **p<.01; ***p<.001.
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Figure 8. Probabilities for Level of Duty of Care Request
Note: This graph illustrates the change in probability for each duty of care (1-4) as one moves across the intermediary ecosystem from “upstream” categories to
“downstream” categories (beginning with ISP and ending with Content & Online Communities).
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Table 6 displays a logit model predicting whether an intermediary defendant was
subjected to repeat litigation by the IP holding plaintiff. Hypothesis three holds that the greater
the duties of care requested of an intermediary, the more likely the IP holder will choose to
commit to a subsequent round of litigation by filing an appeal. Model 2 shows that the level of
the requested duties of care closely approached, but did not achieve significance. However, a
likelihood ratio test did show that model 2, the hypothesized model, provided a better fit for the
data than model, the control. Although data collection is ongoing, the preliminary results do not
currently support the hypothesis that duties of care predict the appeal status of a case.
Hypothesis three is currently unsupported.
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Table 6. Predicting the Decision to Appeal (Repeat Targeting)
Appellate Status 1 2
Duties of Care - 0.424
a
- (0.267)
Controls
Year: 95-97 Omitted Omitted
Year: 98-00 2.388** 1.648
(0.712) (0.741)
Year: 01-03 1.694* -0.369
(0.795) (1.262)
Year: 04-06 1.528** 1.140
(0.547) (0.637)
Year: 07-09 .191 -0.450
(0.533) (0.602)
Year: 10-12 Omitted Omitted
Observations 146 106
Chi-Square 20.20 17.76
Pseudo R
2
0.118 0.133
Logit specification with robust standard error in both models.
Robust standard errors are in parentheses. * p < .05; **p<.01; ***p<.001.
a
Item p value is .107.
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Future Analysis
The results presented here are preliminary and reflect calculations on an initial
sample of 120 instances of targeting comprising roughly a quarter of the full dataset.
Because the data was hand-collected and manually coded, preliminary results were
calculated while coding was ongoing. It is my expectation that when statistical tests are
performed on the total dataset of 450 instances of targeting, it is likely that support for all
hypotheses will increase due to greater statistical power and improved sensitivity in the
tests. At this juncture, the directionality of all the hypotheses is as predicted and the
results are significant or near enough to significance as to suggest they would be
sufficiently improved by a larger sample. As reflected above, additional control variables
will also be implemented into the analyses.
In addition, in order to better examine hypotheses two and three I will combine
them into a single two-stage nested logit model to more accurately reflect how
intermediary location influences the duties of care, which in turn sequentially predict
repeated litigation.
Discussion and Conclusion
Over the past two decades, the importance of intermediaries to the Internet
economy has been firmly established (Gehrig, 1993; Sarkar, Butler, & Steinfield, 1998;
Spulber, 1996) and a burgeoning literature in strategic management has begun to
investigate their role in online markets (Bennett, Seamans, & Zhu, 2013; Caillaud &
Jullien, 2001; Hagiu & Jullien, 2011; Spulber, 2009) Despite this, the intermediary
ecosystem is still not well understood. Furthermore, while studies have examined how
96
relationships with advertisers and commercial interests can influence intermediaries to
raise search costs for some consumers (Hagiu & Jullien, 2011; White, 2013), as well as
considering Raising Rivals Costs mechanisms in the context of intellectual property
(Bekir et al., 2012; Yao, 2005), this is the first known study to integrate these two
streams of research by investigating how private actors use nonmarket mechanisms to
induce intermediaries to raise search costs in order to protect their intellectual property
from appropriation.
In this paper I use a multi-stage ‘raising infringing rivals’ costs’ framework to
demonstrate that copyright and trademark-dependent firms sue intermediaries for the
actions of third party users in order to raise the search costs of infringers who appropriate
their IP and simultaneously shift the costs of policing and enforcing their property rights
to intermediaries via court-ordered duties of care. I argue that intermediaries specialize in
lowering different types of search and information costs and that copyright and trademark
holders exhibit heterogeneous preferences for these search and information ‘utilities’ in
their selection of intermediary targets for litigation. I then argue that once a decision of
‘who to sue’ has been made, the IP holder’s choices amongst four magnitudes of duties of
care are strongly influenced by the intermediary’s systemic importance (ie. the potential
of its financial failure to cause significant negative externalities for the rest of the digital
economy). In short, the intermediary’s place in the ecosystem impacts the degree to
which IP holders can shift policing and enforcement costs over to them. Finally, I argue
when firms request a high duty of care and can potentially reap large benefits from a
court decision in their favor, they are much more likely to continue litigation for
subsequent rounds, even in the face of initial failure. I test and find support for these
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arguments using a dataset of U.S. lawsuits in a series of logit models. My findings
provide a critical step towards understanding the possible economic impact of
contributory liability litigation on competition in online intermediary markets. Future
researchers may want to examine whether populations of intermediary service providers
are more concentrated in categories frequently selected for litigation, or in categories
where frequently high duty of care requests raise the de facto operating costs for all
providers.
This study is subject to some limitations. As U.S. census data is only available for
limited types of intermediary service providers, determining the population of firms in
each intermediary category or type was not possible at the time of analysis. As the
prevalence of certain types of intermediaries relative to others may impact the likelihood
of selection as a litigation target, this was an important limitation. Furthermore, as
financial data was unavailable for a number of intermediary service providers it was not
possible to systematically measure whether the financial assets of particular
intermediaries factored into their selection, although I attempt to control for this factor by
collecting data on requests for monetary compensation. Another significant limitation had
to do with the visibility of certain types of intermediaries relative to others. In the
‘Utilities’ category of intermediary, for instance, it is difficult to tell whether email
service providers are not typically targeted by IP holders because they are not typically
used to infringe or because records of user activity on these services is typically hidden
from public view. Finally, although intermediary liability lawsuits do occur at a growing
rate outside of the United States, this study was limited to U.S. lawsuits and its results are
not necessarily generalizable to geographical locales with different IP regimes.
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Overall, my results have important implications for copyright and trademark
holders and policymakers. As both the population of Internet users and the population
(and variety) of Internet intermediaries continues to grow, strategies for capturing and
preserving the value of intellectual property become progressively more critical. A
balance must be struck between the property rights of intellectual property holders, the
commercial responsibilities of intermediaries, and the social and economic benefits of
intermediary services to Internet users. However, despite the prevalence of online piracy
and counterfeiting, the question of how firms respond to appropriability hazards specific
to copyright and trademark-based intellectual property has been largely a black box in the
strategic management literature. In addition to emphasizing these types of intellectual
property, I also offer a critical framework for distinguishing between “direct rivals” and
“infringing rivals” in managing appropriability concerns.
Ironically, data from the 2008 Business R&D and Innovation Survey (BRDIS)
indicates that more businesses reported trademarks and copyrights as important forms of
IP protection than reported patents as important (Jankowski, 2012). For the information
industries in particular, copyrights and trademarks were collectively reported as “very
important” by 20% of businesses
14
, a value indication that was unmatched for any other
type of IPR by businesses in any other economic sector (Jankowski, 2012). Furthermore,
while employment in patent-intensive industries has lagged due to manufacturing job
losses between 1990-2011, copyright-intensive industries boosted employment by 46.3%
in the same period (U.S. Commerce Dept, 2012). The overall value of copyrights and
14
Patents were marked as “very important” by 10% of information sector businesses.
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trademarks to industry highlights the oversight with regards to copyrights and trademarks
in the literature. Furthermore, the variance in the valuation of different IPRs across
economic sectors emphasizes the need for management scholars to recognize that
different types of IPRs offer different value propositions to different types of businesses
and require different strategies to protect their value.
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Chapter 4. Suing Internet Intermediary Firms to Police Online Misconduct:
An Empirical Study of Strategic Litigation by Secondary Stakeholders
Introduction
Stakeholder theory proposes that firms must strategically manage a set of relationships
with stakeholders beyond the shareholders who own their stock if they are to be successful
(Freeman, 1984). Per Freeman's landmark definition, these stakeholders are encompassed by
"any group or individual who can affect or is affected by" the firm's conduct in pursuit of its
business objectives (1984, p. 25). While little clarity or consensus exists about how to prioritize
stakeholders within the stakeholder literature (Laplume, Sonpar, & Litz, 2008), management
research has traditionally narrowly emphasized a firm's associations with its shareholders,
suppliers, employees and customers - those parties with whom it has direct and contractual
relationships (Friedman & Miles, 2002). Stakeholder theory invites broader focus on the critical
community outside the firm's supply chain, whose members include NGOs, religious groups,
political parties, and geographically proximate community members and organizations. Although
these 'secondary' stakeholders do not hold sway over the firm via formal or implied contractual
obligations, regulatory power, or market mechanisms, they are nevertheless capable of exercising
sometimes powerful demands upon the firm in the form of actions such as protests, lobbying, or
civil suits (Clarkson, 1995; Eesley & Lenox, 2006).
As a general supposition, secondary stakeholders will appeal to firms in response to
perceived misconduct.
15
However, stakeholders, having limited attention and being boundedly
15
Note that misconduct is from the stakeholders’ perspective. We follow Greve et al’s review of organizational
misconduct research, defining it as “behavior in or by an organization that a social-control agent judges to transgress
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rational in their choices (Cyert & March, 1963; Simon, 1955; Williamson, 1975), are thus
constrained in their ability to notice and punish misconduct (Barnett, 2014; Greve, Palmer, &
Pozner, 2010). Because people tend to perceive loss as more salient than opportunity (Kahneman
& Tverksy, 1979), secondary stakeholders may be particularly motivated to act when they feel
they are direct victims of a negative externality
16
that occurs as a result of a firm’s economic
activities and thus ‘owed’ a response (Margolis & Walsh, 2003).
One timely example comprises the growing population of individuals and organizations
who have filed civil suits to combat damage to their reputations, privacy, and other civil liberties
as a consequence of online speech, or content, that is objectionable because it is either illegal or
intended by the author to cause pain and/or offense. An auto shop, for instance, might sue in
response to an online customer review that falsely claims they use stolen car parts. Or a mother
might litigate upon finding that indecent photographs of her minor child have been posted to a
social network by the child’s classmates. In addition to taking action against the culprits who
have directly wronged them, these parties are increasingly using litigation as a tool to hold
Internet companies responsible for the actions of third-party users on their online platforms. In
this way they try to seek recompense from these intermediary firms whose services they see as
instruments of criminal facilitation.
The decision by secondary stakeholders to sue these Internet firms - who have no
contractual duty to them – draws attention to an interesting phenomenon in which civil suits, by
a line separating right from wrong; where such a line can separate legal, ethical, and socially responsible behavior”
(Greve, Palmer, & Pozner, 2010, p. 56).
16
Negative externalities, or spillovers, occur when the provision of goods and services results in a cost to a third
party that is not accounted for in the price of production (Pigou, 1920).
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bringing in an arbiter, allow secondary stakeholders to have governance over a firm by appealing
to the court system for enforcement. Accordingly, using civil filings against Internet
intermediaries by secondary stakeholders I cultivate and test a theory concerning which factors
drive a successful outcome (for the stakeholder) in instances where the outcome is determined by
adjudication. Few studies in the stakeholder literature make a distinction between firm targets
and arbiters. Theoretically, I draw on the stakeholder identification and salience framework
developed by Mitchell, Agle and Wood's (1997) and the stakeholder-request-firm triplet
framework developed by Eesley and Lenox (2006).
Mitchell et al (1997) propose that when stakeholders possess power, legitimacy, and
urgency their requests will be more salient to firms. Eesley and Lenox (2006) propose that
salience should be assessed by 'action' rather than preference and define it as the degree to which
firms respond positively to stakeholder requests. They suggest that power, legitimacy, and
urgency will arise out of stakeholder-request-firm triplets. I suggest that stakeholder-request-firm
triplets can be broken down into two stages comprised of (1) request development and (2)
salience. I advance the model by proposing that request development is driven by stakeholder
attributes and target attributes while salience is driven by stakeholder attributes, request
attributes, and target attributes. I additionally propose that a two-stage framework allows the
request-firm-triplet to be approached from the point of view of stakeholders and targets. The
nature of the request provides target firms with insights about stakeholders while the nature of
the response provides stakeholders with information about arbiters. To examine these
propositions I build a unique dataset of 359 instances of stakeholder requests contained in filings
for civil suits in the United States between1996-2014.
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This study makes both theoretical and empirical contributions to the stakeholder theory
literature. First, while much extant work in the stakeholder literature addresses the question of
firm responsiveness from the stakeholder perspective, this study looks both at request
development and arbiter response approach the stakeholder-target interaction from both sides.
Furthermore, while lawsuits are a common tactic in stakeholder actions (Eesley & Lenox, 2006;
Frooman, 2010; Kassinis & Vafeas, 2002) and the relationship between different types of
stakeholders and tactics has been often studied (Carmin & Balser, 2002; Friedman & Miles,
2002; T. I. Rowley & Moldoveanu, 2003), the relationship between stakeholders and arbiters
with governance over the target firm is an understudied construct. Empirical studies of
stakeholders are somewhat narrow in their focus around method (case studies, surveys) and
context (environmental issues). By examining actions against Internet intermediary platforms I
explore legitimacy, power, and urgency within increasingly prominent context of online
misconduct and Intermediary liability.
Theory
Mitchell et al note that Freeman, in referring to stakeholder theory as "The Principle of
Who or What Really Counts" implicitly challenges researchers to embed studies in both the
normative framework (the 'who' of stakeholders) and the descriptive tradition (the 'what really
counts'). Reviews of the literature(Donaldson & Preston, 1995; Laplume et al., 2008)
additionally highlight an instrumental tradition connecting firm responsiveness to stakeholders to
firm performance (Clarkson, 1995; Godfrey, Merrill, & Hansen, 2009). This study orients itself
within the descriptive tradition, addressing the ‘What Really Counts’ portion of Freeman’s
principle.
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Studies in the descriptive literature have examined the relationship between stakeholder
attributes and firm responses (Murillo-Luna, Garcés-Ayerbe, & Rivera-Torres, 2008; T. J.
Rowley, 1997). Prior work has also investigated the motivations that drive stakeholders to act
(Barnett, 2014; Margolis & Walsh, 2003; T. I. Rowley & Moldoveanu, 2003) and the tactics they
employ (Carmin & Balser, 2002). A recent stream of research has attempted to determine how
stakeholders define and pursue firm misconduct (Barnett, 2014; Greve et al., 2010).
Additionally, the descriptive tradition has addressed the role of cognition and sense-making in
driving salience (Bundy, Shropshire, & Buchholtz, 2013).
In the context of this study, I focus on the stakeholder identification and salience
framework proposed by Mitchell et al (1997) and the stakeholder-request-firm triplet
propounded by Eesley and Lenox (2006). I theoretically and empirically extend these models by
conceptualizing the stakeholder-request-firm triplet as a two stage framework where the
construction of the request (Request Development) is an intermediate stage before the response
by the arbiter (Saliency). In doing so, I allow that perceptions of the same stakeholder attributes
can be examined from two different points of view. In the context of objectionable content, for
instance, the nature of the misconduct that drives a stakeholder to go to court is what forms the
basis for the urgency the stakeholder feels in wanting to pursue reparations. From the point of
view of the judge, however, the nature of the misconduct creates a foundation for assessing the
issue’s legitimacy.
Furthermore, I propose that this model makes it possible to investigate how the outcome
of the intermediate stage (expressed by the Size of the Request) influences the outcome of the
final stage (Salience) via a mechanism that is distinct from the elements attributed to the
105
stakeholder and the target firm. Within Mitchell et al’s model, the elements of stakeholder
power, legitimacy, and urgency are all drivers of salience. The stronger the presence of these
attributes, the higher the salience of the stakeholder request. The three elements within this
model have proven robust to testing within other empirical studies. A survey of American CEOs,
for instance, found that power, legitimacy, and urgency influenced the reported saliency of
primary stakeholders such as customers, employees and stakeholders (Agle, Mitchell, &
Sonnenfeld, 1999). While in a Spanish context, a survey of manufacturing firms also found the
three elements to be positively correlated with stakeholder salience to managers (Gago and
Antolin, 2004).
Within the context of civil litigation, I drop the element of power from my analysis,
making the argument that to a neutral third-party arbiter whose duty is to community interests
(the judge) the characteristic of stakeholder power is unlikely to have a bearing on salience in the
same way as legitimacy and urgency. Neither the Weberian definition used by Mitchell et al
(1997), where power is defined as the ability of one actor within a social relationship to get
another actor to do something (Weber, 1947), or the resource dependency based definition used
by Eesley and Lenox, where a target’s power is measured by its resources relative to
stakeholders, is appropriate in this context.
Salience
Mitchell et al (1997) define salience in terms of the importance and prioritization of the
request by managers, when assessing the claim against others. As claims in this study are all
assessed individually within the context of the adjudication process in torts litigation, we adopt
the definition of salience used by Eesley and Lenox. Eesley and Lenox (2006) propose that the
106
interaction between stakeholder and firm can be framed as a stakeholder-request-firm triplet, out
of which develops salience. Arguing that saliency should be measured “by action rather than
preference” (2006, p. 767) in order to avoid the bias of well-meaning but little acting managers,
their definition holds that saliency is determined by the degree of positive response to a
stakeholder’s request. I adopt Eesley and Lenox’s definition but modify it for my empirical
context so that salience is defined as a positive response to the stakeholder’s request by the
arbiter.
In the following discussion I define legitimacy and urgency within the context of this
study. I then address the stakeholder-request-firm triplet in two stages (Request Development,
Saliency) in which I consider the role of Mitchell et al’s three elements, power, legitimacy, and
urgency as they relate to stakeholder, request, and target characteristics. I propose that different
elements play a larger role at different stages, depending on their relevance as attributes of
stakeholder or target, with legitimacy playing a critical role in both stages. I propose a set of
hypotheses for each stage that tests the relationships between Mitchell et al’s three elements
when applied to my two-stage framework for the stakeholder-request-firm triplet.
Legitimacy
The definition of legitimacy used by Mitchell et al (1997) proposes that it is ‘a
generalized perception or assumption that the actions of an entity are desirable, proper, or
appropriate within some socially constructed system of norms, values, beliefs, and definitions’
(Edelman & Suchman, 1997). Legitimacy, as characterized by Mitchell et al, is an attribute of
the stakeholder. Greater legitimacy suggests that the stakeholder’s threat to the targeted firm is
107
justified by community standards. We contribute to empirical tests of legitimacy as an attribute
by extending it to targets and issues within this study.
Urgency
Urgency, the third and final element in Mitchell et al’s framework, is defined as ‘the
degree to which stakeholder claims call for immediate attention.’ The concept is made up of two
dimensions which are time sensitivity (the degree to which delay is unacceptable) and criticality
(the importance of the claim to the stakeholder). Following Mitchell, I address urgency as an
attribute of the stakeholder but not the request, theorizing that it is people – not requests – that
feel urgency.
Request Development
In this two stage conceptualization of the stakeholder-request-firm triplet, Request
Development is the stage in which the stakeholder, driven by how greatly they are affected by the
issue (Issue Urgency) and how justified they feel in their choice of target (Target Legitimacy),
determines how large a request to make of the target firm. In the situation where a stakeholder
has sued an Internet intermediary firm to hold them responsible for enabling the spread of
objectionable content, the stakeholder’s overarching goal is to have the intermediary take action
to repair the damage wrought by the wrongdoer. The action associated with the stakeholder’s
request may be small, such as requiring the intermediary to disclose the identity of the
wrongdoer. Or it may be large, such as asking that the intermediary be forced to shut down its
service. Typically, the stakeholder requests directed at targeted intermediary firms can be
assigned to one of four actions related to rectifying the objectionable content: disclosure of the
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wrongdoer’s identity, removal of the offending content, monitoring for future offending content,
and discontinuation of services entirely.
The issue urgency of the stakeholder is associated with the type of misconduct that is
behind their grievance. The target firms themselves are always targeted via civil suits, as they are
not directly responsible for more than facilitation. However, the suit against the intermediary will
be linked to a civil or criminal trial that prosecutes the misconduct directly, which may be either
a tort or a crime. The difference between a crime and a tort is that a crime is a breach of the law
that is associated with actions held as offensive to community standards while a tort is a breach
of the law that is associated with harm primarily to the plaintiff (Dyson, 2013). In the case of a
crime, the act of misconduct is associated with a violation of widely held morals. Crimes are
punished by the state and simply attempting to accomplish such an act is punishable by law (Carl
Vinson Institute, 2004). A tort, on the other hand, is not necessarily a breach of morality, as well
as law, and to in order to receive compensation the victim must establish that loss has been
suffered for which reparations are necessary (Carl Vinson Institute, 2004). Consequently I argue
that a stakeholder whose grievance is usually held to be a tort, such as defamation of reputation,
will feel less urgency than a stakeholder whose grievance is tied to conduct typically associated
with a crime, such as the posting to a website of pornography that depicts their minor child. It is
arguable that grievances that are tied to issues that are nearer to crimes than torts will feel greater
urgency to seek recompense and, as a result, ask for larger requests for action from the
intermediary.
H4a: The greater the criminality of the objectionable content (Issue Urgency), the greater
the likelihood that the stakeholder asks for higher duties of care (Size of Request).
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The Internet intermediary firms targeted by stakeholders are located in different areas of
the Internet architecture. Those that are located farther “upstream,” meaning that they are closer
to the Internet backbone, are often providers of infrastructure and less visible to Internet users.
Intermediary platforms that are located farther “downstream,” or father from the Internet
backbone, provide direct connections between users and content, such as discussion boards and
social networks. Because these firms are highly visible and have greater interaction with Internet
users, stakeholders may feel that they are more legitimate targets (Brammer & Millington, 2006;
Lenox & Eesley, 2009; Rehbein, Waddock, & Graves, 2004), resulting in larger requests, than
firms that are located ‘upstream.’
H4b: The farther 'downstream' the intermediary firm target is located (Target
Legitimacy), the greater the likelihood that the stakeholder requests higher duties of care
(Size of Request).
Salience
Although legitimacy and urgency are both assumed to have positive relationships with
salience, the size of the request may create a negative response, even if it is perceived to be
justified or appropriate. In a marketing study, Mowen and Cialdini (1980) find that people
respond best to very small initial requests and that they are most likely to respond to large
requests when receiving a very small request first. First requests that were perceived as
disproportionately large received what they termed a ‘door in the face’ response. It is also
possible that such an effect may be increased when an arbiter must choose to commit to a request
that will be fulfilled by the firm. Consequently, the larger the request by the stakeholder, the
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more likely that the arbiter will respond poorly, especially if it is disproportionate to the
legitimacy of the issue, stakeholder, or target.
H5a: The higher the duties of care (Size of Request) requested by the stakeholder, the
smaller the likelihood that the arbiter grants the stakeholder's requests (Saliency).
As described previously, the acts of misconduct associated with each stakeholder action
tend to be characterized as either crimes or torts. Arbiters are unlikely to be deeply affected by
the stakeholder’s urgency, as the stakeholder has few means by which to pressure them and it is
likely that all those they encounter in their position as arbiters will feel that their needs are
urgent. The relationship of criminality to issue legitimacy, on the other hand, is an area where a
judge might be affected. With respect to the target firms, the Internet intermediaries, the law
holds that the attribution of responsibility for third party acts does not change regardless of
whether wrongdoing is tied to a criminal act (DMLP, 2007). However, studies show that judges
and other regulators may at times be influenced by personal and political preferences to
manipulate their interpretation of the law to effect decisions that they perceive as more ‘fair’ (de
Figueiredo, 2005; Yates & Coggins, 2008)
H5b: The greater the criminality of the objectionable content (Issue Legitimacy), the
greater the likelihood that the arbitr grants the stakeholder's requests (Saliency).
Like the stakeholder, arbiters will be more familiar with Intermediary platforms that are
located ‘downstream’ and have higher visibility. However, they may also consider that
Intermediary platforms that are closer to user interfaces can more easily identify and address
misconduct than the upstream platforms (MacCarthy, 2010), such as hosting services and domain
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name registrars who may provide the infrastructure used by wrongdoers to disseminate speech
but are more isolated from its actual content.
H5c: The farther 'downstream' the intermediary firm target is located (Target
Legitimacy), the greater the likelihood that the arbiter grants the stakeholder's requests
(Saliency).
Finally, research indicates that the more experience a stakeholder has the more legitimate
they will be perceived, and furthermore, that organizations tend to have more experience than
individuals (Galanter, 1974; Songer, Sheehan, & Haire, 1999; Wanner, 1975). Following this
basic logic I conclude that organizations, having more experience, will be more likely to receive
positive responses from arbiters than individuals.
H5d: The more experience that the stakeholder has (Stakeholder legitimacy), the greater
the likelihood that the arbiter grants the stakeholder's requests (Saliency).
Data and Measures
In order to test my hypotheses, I built a database of instances in which Internet
intermediaries were targeted for contributory liability in civil suits. In order to avoid issues of
comparative law, the database is constrained to state and federal civil filings in the United States
that address conflicts over objectionable online speech (defined in 'variables' under
‘objectionable speech’). The American legal context provides a particularly suitable setting in
which to study these phenomena as the regulatory status quo does not compel stakeholders to
litigate over speech issues or to target intermediary platforms as a matter of routine convention –
although the practice is certainly growing . While there are restrictions and exceptions to free
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speech in the United States they are relatively few, as compared to other nations (Eule & Varat,
1998) , and the principle has historically enjoyed fierce and consistent protection by the state
(Von Blum, 2010) which extends to the online environment (Worona & Hodges, 1997). Thus,
the judicial climate affecting various types of objectionable content has remained comparatively
stable over the period covered in our data. Furthermore, many of the most visible Internet
Intermediary platforms operate from within United States and there is an explicit body of
statutory law pertaining to intermediary liability.
17
Data Collection and Sample
The data for this study were hand collected from public and private data sources which
included seven legal databases: the Public Access to Court Electronic Records (PACER)
database, the Bloomberg Law legal research database, the Westlaw legal research database, the
LexisNexis CourtLink database of legal dockets and documents, the Bloomberg BNA Internet
Law Resource Center (ILRC) database of cyberlaw-related court opinions and statutes, the Justia
database of court dockets, and the Digital Media Law Project (DMLP) Database of Online Legal
Threats. As in the previous study, the dataset for this study was hand-collected over a three-year
period (2011-2014) by collating information for each case that included public court filings, such
as court dockets, orders, complaints and opinions. Where necessary to fill in information,
relevant documents such as third-party legal analyses and amicus briefs were collected using a
google custom search engine (see Appendix D) I constructed to perform domain-restricted
searches on a carefully selected subset of legal blogs.
17
The relevant statutes are section 512 of the Digital Millennium Copyright Act (DMCA), section 230 of the
Communications Decency Act (CDA), and the Lanham Act (in reference to trademarks).
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Cases were collected if the filing date for the initial complaint fell with within the two-
decade period from January 1, 1995 to August 1st, 2014. To identify cases, search results were
limited to civil filings related to torts claims, where possible, and keyword searches were
conducted including: CDA 230, Internet intermediary, contributory liability, intermediary
liability, and internet service provider. The resulting records were carefully screened manually to
exclude cases which lacked electronic records of complaints, cases in which intermediaries were
being sued for direct liability rather than contributory liability, cases where the primary
complaint did not involve objectionable speech (defined in 'variables'), and cases in which no
intermediary was identified.
The resulting database includes 354 instances of intermediary targeting within 244 civil
suits filed over online speech-related issues. Non-intermediary defendants (direct offenders)
were excluded from the database.
Variables
The dataset was constructed by the researcher and two trained paralegal assistants who
cross-referenced court dockets, complaints and complaints in order to hand code these
documents for descriptive information including the case name, the names of plaintiffs, the filing
dates of the complaint and final decision, the court abbreviation, the jurisdiction of the court
(trial, appellate, or U.S. supreme), and the judge authoring the decision. The variables which
were not directly reported by the court were coded as follows.
Instance of Intermediary Targeting. The unit of observation used in this database was
an instance of intermediary targeting, defined as the naming of an Internet intermediary platform
as a formal defendant, or more informally within the complaint, when combined with a request
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for injunctive relief to be enforced by a court order. Instances where stakeholders asked only for
monetary damages without a request for action by the intermediary firm were excluded from
analysis. Note that although multiple intermediary defendants can be enjoined in a single filing,
the stakeholder's grievances and requested duties of care are outlined for each defendant in a
claim.
Type of Intermediary (Upstream/Downstream). In our analysis, the location of the
intermediary in the online ecosystem is used as a measure of its visibility and network centrality.
Using the intermediary taxonomy developed by the researcher (see Appendix A), a codebook
was developed listing 27 types of intermediaries with definitions and example service providers.
Two paralegal assistants working together first identified the intermediary type for each
intermediary target. Where the research assistants could not come to agreement, the researcher
made a classification decision. For purposes of data analysis, the intermediary type observations
were collapsed down to the intermediary category level (see Figure 9). Also based on the
intermediary taxonomy, the intermediary categories were ranked on a 6-point ordinal item
measuring the category's distance (in an engineering context) from the Internet 'backbone,' or
how 'downstream' it is, as a proxy for its location in the ecosystem. The farther downstream a
category is, the less central it is to the network and the more visible it is to the end user.
Categories were ordered such that ISP is coded as a one, Navigational Infrastructure is coded as
a two, Commercial Infrastructure is coded as a three, Search and Navigation is coded as a four,
Utility Provider is coded as a five, and Online Content and Communities is coded as a six.
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Figure 9. Intermediary Taxonomy by Layer and Category
116
Type of Plaintiff (Stakeholder legitimacy). This study proposes that whether the
stakeholder is an individual or an organization is a strong proxy for their experience in filing
civil suits (McIntosh, 1985; Songer et al., 1999) and that experience has a bearing on Saliency
(Galanter, 1974; Songer et al., 1999). The researcher and two paralegal assistants used court
dockets and complaints to make independent classifications of plaintiffs and coded them as a
binary variable, where organizations were coded as a one and individuals were coded as a zero.
In each complaint, the organizational status and business of each party is clearly stated. Where
court documents described plaintiffs as firms, government agencies, or other types of nonmarket
institutions (churches, schools, non-profits etc.), they were categorized as organizations.
Individuals were coded as such.
Objectionable Content (Issue Criminality). With respect to objectionable content, we
focus on the legitimacy and urgency of the misconduct (of the content author) underlying the
issue of the stakeholder's claim. The database includes four major categories of objectionable
speech representing the primary reason a case was filed: defamation/reputation concerns, threats
to privacy and dignity, culturally insensitive speech, and obscenity and incitement to
lawlessness. Defamation/Reputation concerns comprised speech regarded as defamatory or
meant to hold the victim in a false light. Threats to privacy and dignity included speech that used
information about the plaintiff or the plaintiff's likeness to disclose private information or
otherwise intrude into the plaintiff's privacy. Culturally insensitive speech was comprised of
"hate speech" that discriminated against the plaintiff, as well as implied threats or incitement to
"hate crimes" on the basis of gender, race, religion, sexual orientation, and national origin.
Speech categorized under obscenity and incitement to lawlessness was defined as speech found
to be offensive and immoral to community standards as outlined in the 'Miller Test' (Reinhart,
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1999) used in case law, as well as "criminally instructional speech" (Kendrick, 2005) which
incites others to acts prosecuted under criminal law (and thus is also abhorrent to community
standards). Cases in this category were predominantly related to online dissemination of child
pornography but also included incitement to stalking, drug trafficking, murder, and illegal use of
firearms.
Based on the degree to which the underlying misconduct corresponds to actions typically
prosecuted as a tort (under civil law) or a crime (under criminal law) in the United States,
defamation/reputation cases were coded as a one (mostly tort), threats to privacy and dignity
were coded as a two (leans to tort), culturally insensitive speech was coded as a three (leans to
crime), and obscenity and incitement to crime was coded as a four (mostly crime). When
disagreement among the coders occurred the researcher would make the final determination
concerning classification.
It is critical to note that regardless of whether misconduct by the content author is
prosecuted under civil or criminal law, the liability case against the intermediary is a tort and
thus always adjudicated under civil law. Furthermore, the federal judiciary clarified in Doe v.
Bates that liability protections for Internet intermediaries are not lost when the conduct in
question is criminal, rather than tortious (DMLP, 2007). Consequently, the type of misconduct
has no formal bearing on the intermediary's liability although we argue in this study that it may
impact the salience of the stakeholders request to the judge.
Duties of Care (Size of Request). The dependent variable for our analysis in the first
model is the size of the stakeholder's request (in terms of its burden to the intermediary) as
measured by the legal duties of care requested of the target firm. Duties of care is gauged by a 4-
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point ordinal item developed by the researcher (see Table 7) representing the type of action a
plaintiff requested and the corresponding burden to the intermediary that is associated with its
implementation. Based on this scale, the researcher and two paralegals cross-referenced court
filings to determine what requests plaintiffs had made and coded them from lowest to highest
with respect to relative operational cost, such that one equals user identity and account
information disclosure, two equals content blocking and removal, three equals continuous
monitoring of content, and four equals discontinuation of intermediary service.
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Table 7. Duties of Care (Size of Stakeholder Request) as Proxy for Operational Cost to Intermediary
Type of Duty of Care Type of
Action
Definition Operational
Cost Scale
Intermediary Service
is Discontinued
Ex Ante The plaintiff requests for the intermediary
service to be shut down. Alternately, the
intermediary platform is asked to
discontinue the "intermediary" portion of its
activities by no longer providing content
access, transmission, or sharing by third
parties.
4
Platform-Wide
Content Monitoring,
Disclosure, and
Filtering
Ex Ante The plaintiff requests the intermediary to
prevent infringing activity on its platform -
and platforms it controls - via content
monitoring, reporting of illicit activity, and
filtering of infringing content.
3
Per Instance Content
Blocking or Account
Removal
Ex Post The plaintiff requests the intermediary to
respond to instances of infringement by
specific actors by removing content,
blocking specific accounts or platforms it
controls, or removing user/platform
accounts.
2
Per Instance Identity
and Account
Information
Disclosure
Ex Post The plaintiff requests the intermediary to
respond to instances of infringement by
specific actors by disclosing their
identification, account information, or
records of their activities.
1
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Target Firm Liability Decision (Saliency). The dependent variable for our analysis in
the second model is the Saliency of the stakeholder's request. As described previously, we adopt
the definition of saliency outlined by Eesley and Lenox, where saliency is measured by whether
or not the firm (or in this case, the arbiter with governance over the firm) complies with the
stakeholder's demands (Eeesley and Lenox, 2006). Saliency is coded as a one if the judge issues
either a court order or a formal opinion that includes an injunction requiring the intermediary
firm to grant the stakeholder's request. Note that in some cases, the judge may issue a court order
to the intermediary firm, based on assessment of early evidence, which is fulfilled before the rest
of the case against the direct offender is subsequently dismissed or settled without a formal
opinion. In these cases, we argue that the court order requiring compliance from the
intermediary is a decision to fulfill the stakeholder's request, regardless of independent outcomes
for other defendants formally named in the suit. We code Saliency as a zero in cases where the
judge issues an opinion that the intermediary is not liable or where there are no court orders
issued against the intermediary.
Controls
Year Filed. We attempt to control for unobserved heterogeneity through the inclusion of
dummy variables representing the year that cases were originally filed. Specifically, we are
trying to institute control for events within the socio-political and regulatory environment that
may result in changes in the litigation practices, the propensity to litigate, and adjudicatory
decisions. For instance, the recent trend of state legislatures to criminalize "revenge"
pornography, where spurned former romantic partners post amateur pornographic images to the
internet, may ultimately result in increasing numbers of cases filed as victims perceived a
121
legitimate legal avenue. Furthermore, we try to account for external regulatory shock by
bounding the dataset to after 1996 when the CDA was passed to account for differences in
internet intermediary provisions that were in place at the time. For example, Stratton Oakmont
v. Prodigy in 1995 resulted in Prodigy, the internet service provider, being held liable for the
defamatory speech of one of its users on the grounds that it exercised editorial control and, thus,
was a distributor and publisher of the sites content (Stratton Oakmont v Prodigy, 1995). This
ruling would have been precluded by the CDA and was cited by congress as exactly the sort of
case the CDA was intended to preempt.
Jurisdiction of Court (Trial, Appellate, Supreme). We consider the type of court in an
effort to account for differences in the adjudication process. Appellate courts differ from trial
courts in that they do not allow for the introduction of new evidence that was not presented at
trial. Rather their focus is on the application of law instead of the immediate circumstances of a
particular case. Additionally, a single judge oversees a case during a trial while some appellate
cases have multiple judges. Given the differences in scope and processes between trial and
appellate we have chosen to control for the jurisdiction of a court.
Future controls
Frequent Judges. Given the large number of unique judges that appear in the dataset it
is infeasible to control for individual judges without running out of degrees of freedom.
However, it is possible to control for judges who have previously overseen cases involving
intermediary firm liability. Future analyses will incorporate a dummy variable for judges
indicating if they have previously considered cases involving internet intermediaries to control
for judges' familiarity with the issues.
122
Geographical Regions. We control for the geographic location of courts that appear in
the dataset in order to account for variations in state law. States courts will be clustered by
geographical location by based on how they correspond to existing federal circuits. Federal
circuit courts, which have their own established case law, are already grouped geographically
and provide a convenient and logical unit for clustering.
Analysis and Results
Descriptive statistics and pairwise correlations for each of the study's variables can be
found in Table 8. It is notable that intermediary cases based on objectionable content grew
precipitously between 2002 and 2010 (see Figure 10) and that overall, intermediaries were only
made to comply with the stakeholder’s request 15% of the time despite being frequent targets for
litigation (see Table 9). The most frequent observed domain of objectionable content was
defamatory statements (59%), followed by obscenity/incitement to crime (18%), privacy &
dignity violations (15%), and culturally sensitive speech (9%). Content websites and online
communities (63%) represented the most frequently targeted intermediary type followed by
commercial infrastructure (15%), ISPs (10%) and the intermediaries least likely to be targeted
were search and navigation (5%), navigational infrastructure (4%), and utility providers (3.3%).
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Table 8. Descriptive Statistics and Pairwise Correlations
Variable Mean S.D. Min Max 1 2 3 4 5 6 7
1. Duties of Care
(Size of Request)
2.17 .713 1 4 1.00
2. Target Liability Decision
(Saliency)
.13 .333 0 1 -.08 1.00
3. Objectionable Content
(Issue Criminality)
1.90 1.162 1 4 .50** .17** 1.00
4. Intermediary Category
(Upstream\Downstream)
4.77 1.778 1 6 .01 .09 -.12 1.00
5. Jurisdiction of Court 1.23 .421 1 3 -.12 -.06 -.13* .00 1.00
6. Year Filed 2007 4.249 1996 2014 .02 .13* .19* .10 -.17** 1.00
7. Type of Plaintiff
(Stakeholder Legitimacy)
.27 .445 0 1 .01 .16* -.04 -.06 -.05 -.04 1.00
Spearman’s Rho, n= 245, two tailed
* p < .05; **p<.01
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Table 9. Liability Decision for Target Firm by Type of Objectionable Speech
Defamation &
Reputation
Privacy & Dignity Culturally Sensitive
Speech
Obscenity /
Incitement
Total
Not Liable 159 31 19 42 251
Liable 14 12 7 11 44
Total 173 (8%) 43 (30%) 26 (27%) 53 (21 %) 295 (15%)
Percent liable in parentheses
125
Figure 10. Intermediaries Targeted in Contributory Liability Lawsuits for Objectionable Speech
(1996-2013)
126
Hypothesis Testing
Size of the request. Table 10 presents a set of models predicting our first dependent
variable, duties of care (Size of the request), defined as the operational burden that corresponds
to the legal duties of care that are requested of the intermediary firms. The sample is constructed
such that each intermediary firm targeted within a civil suit represents a unique observation
18
. An
ordered logit specification has been adopted for these models to reflect the rank-ordered
operational costs to the target firm as the size of the request is increased. Thus, each model in
this set of hypotheses predicts the likelihood that stakeholders will make larger requests, with
correspondingly larger burdens for the target firm.
Model 1 presents coefficient estimates for the independent variables, objectionable
speech (issue urgency) and intermediary type (target legitimacy), without the inclusion of any of
the potential control variables. Model 2 includes the type of court as a control variable to control
for differences in the adjudication process found in appeals courts. Type of court was found to
be marginally significant but overall measures of fit, such as pseudo R
2
, were minimally different
from model 1. Finally, model 3 adds dummies representing the year cases were filed to control
socio-political and regulatory shock that could result in differences in the propensity to litigate.
Several of the year dummies are significant and their inclusion improves the pseudo R
2
of the
model.
Hypothesis 4a (issue urgency) posited that objectionable speech that tended towards
classification as a crime would result in greater requested duties of care (size of the request) than
objectionable speech that tended to be prosecuted as a tort. Indeed, the positive significant
18
We are aware that the inclusion of multiple intermediaries in a single civil suit may cause a potential issue with
heteroskedasticity arising from the fact that observations are independent across cases but not necessarily within
cases. Our dataset contains 354 instances of targeting spread across 244 civil suits, meaning that the modal number
of intermediaries targeted per case was one.
127
coefficient shows a strong relationship exists between the degree of criminality attributed to the
objectionable speech and the size of the request made by the stakeholder. The graphed
probabilities for each type of objectionable speech as they relate to various duties of care can be
found in Figure 11. This graph demonstrates that lower duties of care become less probable and
higher duties of care become more probable as objectionable speech becomes more criminal in
nature.
Hypothesis 4b (target legitimacy) held that the farther ‘downstream’ an intermediary is
located in relation to the Internet backbone, the greater the likelihood that large duties of care
will be requested (size of the request). Positive, marginally significant coefficients for
intermediary type provide some support for the hypothesis 4b. Both model 1 and model 3 show
that the further an intermediary was from the internet backbone and the more closely
objectionable speech resembled a crime, the greater likelihood that more expensive or onerous
duties of care would be requested of the intermediary. In short, there is strong and moderate
support for hypotheses 1a and 1b respectively.
128
Table 10. Predicting Duties of Care (Size of Request)
Duties of Care
(Size of Request)
1 2 3
Objectionable Speech .971*** .969 .984***
(Issue Urgency) (.135) (.135) (.143)
Type of Intermediary .10† .097† .148*
(Target Legitimacy) (.07) (.067) (.077)
Controls
Jurisdiction of Court - -.317† -.23
(.248) (.266)
Year: 96-98 - - Omitted
Year: 99-01 - - -1.511**
(.609)
Year: 02-04 - - -.090
(.225)
Year: 05-07 - - -.462*
(.219)
Year: 08-10 - - -.423
(.376)
Year: 11-13 - - -.664*
(.340)
Year: 14- - - -.640
(.546)
Observations 268 268 261
Wald Chi-Square 60.75 65.88 73.12***
Pseudo R
2
.13 .13 0.152
Ordered logit specification with robust standard error in both models.
Robust standard errors are in parentheses. * p < .05; **p<.01; ***p<.001.
† p < .1.
129
Figure 11. Duties of Care x Objectionable Speech
130
Given that multiple models were estimated for the hypotheses it is necessary to assess
model fit to choose between them. The Bayesian information criterion (BIC) is a well
established means for comparing the relative fit of multiple models when working with
categorical and ordinal data (Raftery, 1995). BIC values help select statistical models that are
most likely to generate the observed data and can be applied to both nested and non-nested
models. In general, smaller values are preferred with differences greater than 2, 6, and 10
equating to moderate, strong, and very strong support for model preference respectively. The
BIC for models hypotheses 4a and 4b suggest that the simpler model 1 (BIC=510.32), without
any covariates, is to be moderately preferred to model 2 (BIC=514.84) and strongly preferred to
the more complicated model 3 (BIC=520.31).
Salience. The models in Table 11 predicts the likelihood that an arbiter would grant a
stakeholders request (Saliency). The binary nature of the success or failure of requests lends
itself to a logit model specification. As a result, the models represented here reflect sets of
hypotheses concerning the likelihood of a successful request.
Model 1 presents coefficient estimates for the independent variables, duties of care (size
of the request), objectionable speech (Issue Legitimacy), intermediary type (Target legitimacy),
and stakeholder legitimacy (Stakeholder legitimacy) without the inclusion of any of the potential
control variables. Model 2 introduces type of court to control for differences in the adjudication
process. This factor was non-significant and did not produce meaningful changes in the
coefficients of the independent variables or from the pseudo R
2
from model 1. Model 3 included
the independent variables, type of court, and dummy variables for the year that cases were first
filed. In regards to the independent variables, the inclusion of the dummies for year helped
achieve significance for duties of care.
131
Two of the independent variables, objectionable speech and stakeholder legitimacy, have
positive, significant coefficients while a third, intermediary type, has a positive, marginally
significant coefficient. Thus, arbiters are most likely to grant plaintiff requests when
objectionable speech (Issue Legitimacy) is more like a crime than a tort (Hypothesis 5b), when
stakeholders have greater experience (Hypothesis 5d) and when intermediary firms are further
downstream (Target Legitimacy; Hypothesis 5c). Furthermore, a marginally significant,
negative coefficient was found for duties of care, or the size of the request, such that as plaintiffs
asked for larger concessions on the part of intermediaries their requests were less likely to be
granted (Hypothesis 5a). Both the direction and overall significance of terms persisted
regardless of model tested providing strong support for hypotheses 5b and 5d and moderate
support for hypotheses 5a and 5c.
Next we consider which of the three models exhibits the best fit for replicating the
observed. In general, measures of model fit show model 3 as having a slightly higher pseudo R
2
than either model 1 or model 2. However, when the BIC is consulted there is strong evidence
that model 1 (BIC= 181.77) is more likely to replicate the dataset than model 3 (BIC = 204.55)
and moderately more likely than model 2 (BIC =186.73). In sum, for hypothesis 5 a
parsimonious model without covariates is preferred.
132
Table 11. Predicting Whether Requests are Granted (Saliency)
Requests Granted
(Saliency)
1 2 3
Objectionable Speech .556*** .553*** .529**
(Issue Legitimacy) (.177) (.178) (.183)
Type of Plaintiff 1.14** 1.13** 1.144**
(Stakeholder Legitimacy) (.403) (.404) (.431)
Type of Intermediary .167† .169† .16†
(Target Legitimacy) (.111) (.111) (.121)
Duties of Care -.647† -.648† -.667*
(Size of the Requests) (.402) (.400) (.374)
Controls
Jurisdiction of Court - -.078 -.197
(.463) (.557)
Year: 96-98 - - Omitted
Year: 99-01 - - -.53
(.183)
Year: 02-04 - - _
Year: 05-07 - - -.699
(.825)
Year: 08-10 - - -.475
(.771)
Year: 11-13 - - .249
(.804)
Year: 14- - - -
Observations 252 252 194
Wald Chi-Square 19.24 19.34 20.94*
Pseudo R
2
.0931 .093 0.109
Logit specification with robust standard error in both models.
Robust standard errors are in parentheses. * p < .05; **p<.01; ***p<.001.
† p < .1.
133
Discussion and Conclusion
Consistent with the results of previous empirical research that draws on Mitchell
et al’s framework (Agle et al., 1999; Eesley & Lenox, 2006), we find strong support for
the positive relationship between stakeholder legitimacy and salience. We find also that
legitimacy as a construct is robust and also serves as a driver of salience when it is a
characteristic of targets and issues associated with the stakeholder’s claim, as well as an
attribute of the stakeholder themselves. Although all three of Mitchell et al’s elements
(power, urgency, legitimacy) are conceptualized to positively increase the likelihood that
firms will respond positively to stakeholders (salience), the inclusion in this study of the
size of the request brought by stakeholders allows us to see that while issue legitimacy,
stakeholder legitimacy, and target legitimacy all drive salience up, those positive effects
are moderated by the size of the stakeholder’s request, which drives salience back down
the larger it grows.
In practical terms, we conclude that though an experienced stakeholder who
targets a downstream Internet intermediary to request remedial action for objectionable
content that is obscene in nature improves their likelihood of a positive response
(salience) from a judge who perceives them as highly legitimate, the filing of a large
request that imposes a significant operating burden on the intermediary target will
somewhat reduce the chance of a positive outcome. It is worth noting here that on
average, requests were granted in less than one out of every five cases, suggesting that
judges do not lightly decide to burden Internet intermediaries in their role as third-party
arbiters. However, that proportion shifts from a positive outcome in less than one out of
134
ten defamation-related filings to a positive outcome in one out of every four requests for
obscenity-related filings.
The separation of the stakeholder-request-firm triplet into two separate stages also
makes it possible to see observe that ironically, while the criminality of the issue behind
the stakeholder’s request and the legitimate choice of target act in concert to drive up the
likelihood of saliency, at the request development stage these same factors also result in
an increased likelihood of the large requests that drag salience down. One may speculate
that the public condemnation of a crime that helps to make the stakeholder legitimate in
the judge’s eyes also creates a sense of outrage in stakeholders that distorts their
assessment of what is appropriate to ask for.
It is also important to consider that the assessment of legitimacy always implies a
point of view. In this study we use visibility and experience as constructs that help to
establish legitimacy as a driver of salience. While organizational visibility confers
legitimacy onto the choice of target, whether it would operate the same way for a
stakeholder is hard to say. The use of different types of proxies for legitimacy in this,
and other stakeholder studies, is a contribution to the stakeholder theory discussion that
suggests constructs beyond legitimacy, urgency, and power may play a critical role in
driving positive responses from arbiters.
While other empirical work on stakeholders incorporates civil suits as an action
taken to exert pressure on target firms, the distinction between firm salience and arbiter
salience is not made clear. This study, in looking exclusively at civil suits targeting
Internet intermediaries is subject both to interesting insights and restricting limitations.
135
While the context of torts litigation against Internet intermediary platforms allows
the relationship between stakeholder , request, and firm to be examined in terms of the
interplay between stakeholder attributes and the choice of firm targets it does not tell us
much about the responses of the firm itself. Salience in this context, due to the arbiter’s
perfect governance over the firm, tells us more about what characteristics of the
stakeholder-request-firm triplet will allow the stakeholder to achieve a positive outcome
than it does about the salience of the stakeholder to the intermediary itself. To the
stakeholder, the intermediary is a critical supplier of possible remedies. However, from
the intermediary’s point of view we don’t learn much about whether plaintiffs are framed
as stakeholders.
What we do learn from this particular context is that many of the same factors
which lead to salience in requests made directly of firms will also drive salience when an
arbiter must make an enforceable decision on the target firm’s behalf. The robustness of
this result suggests that comparisons between manager decisions and arbiter decisions
may be a critical avenue for future research in empirical contexts where stakeholders use
a variety of tactics to achieve their objectives.
Overall, this study makes an important empirical contribution to both the
literatures on stakeholder theory and the study of Internet intermediary liability. Much of
the empirical work in the stakeholder literature is reliant on case studies and surveys. In
contrast, the reliability of data about court room decisions and other filings allows us to
be sure that the identification of salience in our results is consistent by real action by the
target firm. Finally, while this study is one of the only empirical investigations into
136
Internet intermediary liability, there is much advantage to the framing of plaintiffs as
secondary stakeholders who use litigation tactics as a way to get firms to make
recompense for perceived misconduct. In this way we can compare intermediary liability
litigation not only to the actions by corporations and governments that are usually
associated with the phenomenon but also draw comparisons to the literature on
stakeholders and environmental issues in order to draw parallels about how stakeholders
define responsibility, misconduct, and culpability for target firms.
137
Chapter 5. Conclusion: Guarding the Gatekeepers
In the first years of the emerging digital economy, the drastically reduced cost of
searching for information and resulting high market transparency led many to think that
the Internet would increasingly destroy ‘middlemen’ as electronic commerce and
navigation infrastructures became more sophisticated. And it did. Market intermediaries
such as travel agencies, classifieds, bookstores, and real-estate agencies were among the
businesses that experienced a sharp decline. In physical supply chain terms, the Internet
has truly been a catalyst for disintermediation. In the information economy, however, the
middleman is alive and well. In the modern digital economy Internet intermediaries play
a larger role than ever before, providing services that underlie every aspect of online
activity (Cotter, 2005).
Beyond their social importance, the significance of Internet intermediary
platforms to economic growth in a knowledge economy has been firmly established
(Caillaud & Jullien, 2001; Gehrig, 1993; Spulber, 1996, 2009) and particularly in the
U.S. their services are an important source of GDP added value (U.S. Census Bureau,
2012). Simply put, the future of Internet intermediary platforms cannot be divorced from
the future of socioeconomic development in the modern digital era. Growing in parallel
are the legislative investments of countries in information control. At this time, 23
different countries have passed defining responsibilities in some fashion for Internet
intermediaries and 13 countries have pursued law enforcement action against
intermediaries over reported intellectual property violations. Consequently, the use of
contributory liability standards in civil suits to compel Internet intermediaries to disclose
information, remove content, monitor activity and shut down service is an important
138
locus for attention from scholars of law, policy, economics, and management.
Furthermore, it is important to note that increasingly there are cases where intermediary
liability is not an option because activity takes place in a highly decentralized network,
such as Tor. Such instances give rise to a slippery slope that may eventually give rise to
tactics that target network technologies for liability and control.
It is of note that much scholarship on intermediaries and online content control
has focused on the role of nation-states. For instance, while not specifically highlighting
intermediaries, The Master Switch (2010) by Columbia Law Professor Tim Wu
emphasizes the increasingly active role of governments in Internet regulation in recent
years and points to China as an example of a country using internet service providers to
restrict the activities of its citizens. Milton Mueller, a professor of information studies at
Syracuse University, similarly emphasizes the role of nation-states in Internet governance
(2010) but specifically considers the ramifications of government use of intermediaries as
de facto law enforcement, noting problems that might arise with transparency,
accountability, conflicting objectives, and cost distribution. Others have also described
intermediary deputization as creating social costs (Morozov, 2011;Szoka & Marcus,
2010). Seton Hall law professor Frank Pasquale, as part of a section on intermediaries in
a book published by Techfreedom, proposes that Google is an example of online
intermediaries that police the Internet even when not required to do so by governments
(Pasquale, MacCarthy, & Szynol, 2011). Pasquale suggests the establishment of a
government-based ‘Internet Intermediary Regulatory Council’ with adjudicatory powers
and a mandate to monitor the behavior of intermediaries. Beyond the role of
governments, Mueller details the contributing factors behind increased pressures from
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private actors for intermediaries to take on duties of care, describing them as an effort by
copyright and trademark stakeholders to replicate the bottlenecked distribution points in
the traditional media environment (2010). closely controlling Internet content, these
stakeholders have tried to shift costs to Internet intermediaries.
While the deputization of intermediaries by governments and the aggressiveness
of nation-states in seeking to control online content, behavior, and access to information
is pivotal to understanding the future of the Internet and possibilities for fragmentation,
this dissertation seeks to draw attention to mechanisms for controlling intermediaries via
civl law that, while subtle, are just as important to discussions about freedom of
expression, human rights, and corporate responsibility.
Given the need for empirical research in an area saturated by ethical and morally
situated arguments by NGOs, activists, and multi-lateral institutions my research has
sought to take a descriptive approach that orients itself within the strategic management
field to investigate the use of intermediary liability to handicap competitors, enforce
property rights, correct negative externalities, and uphold social norms without judgment.
Intermediary liability is a mechanism that has been used by individuals, firms, and
organizations in situations that range from identifying child pornographers to censoring
racist speech in the workplace to silencing consumer reviews to monitoring trademark
infringements on ebay. Its uses and means challenge political affiliations at both ends of
the spectrum. On the subject of Internet governance, however, the use of Internet
intermediary liability sends a clear message about the absence of due process and citizen
participation in the development of metrics for information control.
140
Isolated from its technological context, the simple use of torts litigation to impose
defacto regulation on firms and their stakeholders falls outside the bounds of the political
process. In particular, when used to ask intermediaries to specifically to monitor
information for online misconduct, litigation becomes a way to effect ex ante regulation
without the need for statutes, oversight, or arbitration. Whether this mechanism might
improve welfare, on the one hand, by allowing for the correction of political market
failures, or decrease welfare on the other hand is a supplanted by the question of what the
role of the state should be?
In the sections below I summarize the results of my two empirical studies and the
arguments of my theory paper. I discuss limitations to the empirical context that affect
findings across both studies. Additionally, I offer some broad conclusions and highlight
directions for future research.
Summary of Studies
Study 1: Intermediary Litigation as a Nonmarket Strategy
The first study is a theoretical examination of the strategic drivers of Internet
intermediary liability in a nonmarket strategy context. I posit that firms target Internet
intermediaries to protect intangible assets whose value is vulnerable to appropriability
hazards and degradation risks posed by online offenders. I argue that the difficulty of
specifying and enforcing property rights for intangible assets leads to market failure and
draw on the logic of transaction cost economics to suggest that intermediary liability
should be addressed as a choice amongst four modes of governance for nonmarket
strategies to enforce property rights: legislative action, law enforcement, offender liability
and intermediary liability.
141
I propose that:
In the face of political uncertainty, firms will primarily shift away from regulatory
strategies and choose between two litigation strategies (direct liability and
intermediary liability).
Strategic choices between intermediary liability and offender liability are
conditioned by uncertainty about offender compliance and repetition of
misconduct.
Systemic culpability by the intermediary raises contractual hazards associated
with intermediary liability
The imposition of duties of care via intermediary liability formalizes an
incomplete contract in order to shift the monitoring and enforcing costs of
protecting intangible goods.
Study 2: Using Internet Intermediary Liability to Enforce Property Rights
In the second study I examine intermediary liability lawsuits in the empirical
setting of online copyright and trademark infringement. In this context, intellectual-
property holding firms initiate litigation in order to gain competitive advantage by using
intermediaries to exclude their property from appropriation by illicitly-operating market
competitors, which I call "infringing rivals.
I find:
142
There is a significant relationship between the type of intellectual property being
enforced and the search and information capabilities of intermediary targets.
Intermediary targets that are more central to the network (ie. closer to the Internet
backbone) receive smaller requests for duties of care.
Large duty of care requests increase the probability that the firm will choose to
file an appeal.
Study 3: Suing Internet Intermediary Firms to Police Online Misconduct
In the third study I investigate intermediary liability litigation in the context of
content that is ‘objectionable’ from a societal point of view. I situate legal action
targeting intermediaries in the context of stakeholder theory and argue that attributes of
stakeholders, requests, and target choices confer legitimacy and urgency which results in
increased salience, or positive responses, from arbiters (judges). Here, litigation is
motivated not by competitive advantage but as a remedy for the negative consumption
externality produced by wrongdoers who utilize intermediary services for acts of online
misconduct.
I find:
The degree of criminality associated with the act of misconduct and visibility of
intermediary target categories is positively associated with the size of requests, or
duties of care.
143
The degree of criminality associated with the act of misconduct, the visibility of
intermediary target categories, and measures of stakeholder experience are
positively associated with the likelihood of a favorable response from the arbiter.
As the size of a stakeholder’s request grows, the likelihood of a positive response
declines.
Descriptive Statistics Compared Across Studies
Although both of the empirical studies related here concerned intermediary
liability, a quick comparison of descriptive statistics on key variables belies some
important differences. First, when considering the distribution of instances of targeting
among cases, there was a much more uniform distribution for cases dealing with
intellectual property than for cases about objectionable speech. For instance, among the
intellectual property cases ISP’s, content and online communities, search and navigation,
and commercial infrastructure categories accounted for 27.1%, 21.25%, 21.2% , and
17.8% of targeted intermediaries respectively. In contrast, content and online
communities accounted for 61% of all instances of targeting in cases concerning
objectionable speech. This difference is likely due to the large number of defamation
cases within the objectionable speech dataset where people sue the platforms that host
defamatory speech.
Another key difference between the datasets regards the requested duties of care.
The most commonly requested duty of care for intellectual property cases was for
platform wide content monitoring and filtering (41.7%) followed by case-by-case
content blocking and removal. This makes sense as plaintiffs in intellectual property
144
cases are motivated to shift the burden of policing online intellectual property violations
to the intermediary. When we consider objectionable speech cases we find that 60% of
requests simply ask for content removal or blocking with only 18.5% of cases requesting
monitoring or filtering of content.
Finally, intermediaries in intellectual property cases (38%) were far more likely to
be found liable than those in objectionable speech cases (18%). Although why this is the
case is not immediately clear, it seems plausible that objectionable speech is afforded
greater protection by the courts. CDA 230 was explicitly designed to address
intermediary liability in instances of users’ defamatory speech. Furthermore, anti-SLAPP
laws provide a means for dismissing objectionable speech cases that are determined to be
filed in bad faith. In turn, the ease of monetizing intellectual property may lead to more
intermediaries to act in bad faith
Limitations
The limitations of this dissertation across both empirical studies fall primarily into
three categories. First, although intermediary liability is a global phenomenon I limit my
dataset to civil suits filed in the United States. The problems of analysis posed by
comparative legal contexts are difficult to control for empirically or to properly assess.
As such, the findings of these studies are specific to U.S. context, as these civil filings
occur against an institutional and regulatory background that provides stronger explicit
protections for freedom of expression and for intermediaries than any other nation.
Some aspects of civil procedure and state legislation pose problems that are hard
to control for. Particularly when it comes to rules governing privacy, hate speech,
145
obscenity and child safety, differences across states are fairly idiosyncratic, with hate
crime statutes in particular varying wildly from state to state. Shifts to community norms
have altered standards for defamation. Allegations of homosexuality, for instance, are no
longer prosecuted as defamation per se.
Broad Conclusions and Avenues for Future Research
The central problem of using intermediaries, or any other mechanism, to control
information is how to manage the tenuous balance between regulating harm and stunting
innovation. Within the United States, the topic of intermediary liability has been
relatively well explored by the legal community, but few studies have offered data
analytics or an economic cost-benefit analysis as a foundation for evidence-based
policymaking. Rather, arguments are proposed on the basis of moral persuasion,
constitutional theory, or metaphorical comparisons to other situations for which the law is
more clearly and consistently applied. Furthermore, international studies and comparative
legal studies are relatively few in number because many countries have only begun to
establish regulatory regimes specific to intermediary platforms and in others, the law is
rapidly undergoing revision. There is a critical opportunity for academics to engage this
topic in a manner that links such legal perspectives to more expansive economic, social,
and technological dimensions.
Across all three papers I seek to institute a more complex understanding of the
strategic behavior of economic actors in the online economy by underscoring the targeted
use of intermediary firms to control marketplace information flows and
transactional/behavioral norms. Based on this research I argue that it is more important
than ever that we extend our theoretical frameworks within the management and strategy
146
literature to encompass strategic behavior in which actors target intermediaries in order to
leverage them in pursuit of competitive advantage. Too often in the management
literature we see transactions characterized between two parties, when there are many
instances in which intermediaries (licensing agencies, certifying agencies, two sided
markets, interest groups) play a critical role in advancing goals. Furthermore, in cases
where firms seek to protect intangible goods, as is the case with most firms pursuing
intermediaries, management research has too often sought to draw broad conclusions
from patenting data. I propose that we must extend our empirical analyses to the rich but
largely unstructured data offered by public legal processes such as civil litigation.
A primary lesson offered by research into intermediary liability is that the
strategic advantage of intermediary liability and the probability of a firm’s success in
pursuing it is highly contextual. First, the nature of perceived online misconduct comes
into play. The homogeneity, frequency, criminality and observability of online
misconduct all play important roles in the ability to address it via standards for
information traffic imposed by intermediary platforms. Second, the nature of assets
comes into play. How tacit or explicit is their value? In the event of harm, can it be
measured?
What is the relationship between the plaintiff and the bad actor? Are they
marketplace rivals? Is it social? Or are they unknown to each other. What characteristics
of the plaintiff affect the probability of liability? Are they a repeat litigant? Are they a
state actor, NGO, firm, or individual? Although this dissertation does not test for
differences ascribed to organizational affiliation, I observe anecdotally that there are
strong difference in preferences amongst organizations about what intermediaries to
147
target. To wit, in light of these idiosyncrasies I conclude that policy-makers in the area of
Internet intermediaries must pay special attention to the role of context. Coase (1960)
notes that a focus on regulation to remove harm, rather than to balance interests, can
cause harm. Thus, we must be careful not to create "chilling effects" such that in our
efforts to control speech, we unintentionally curtail it.
148
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http://www.youtube.com/yt/press/statistics.html
Ziedonis, R. H. (2004). Don’t Fence Me In: Fragmented Markets for Technology and
the Patent Acquisition Strategies of Firms. Management Science, 50(6), 804–
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Zittrain, J. (2009). The Future of the Internet--And How to Stop It. Yale University
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174
Appendix A: Intermediary Taxonomy by Architecture Layer, Category, Class and Type
175
Appendix B: Search and Information Capabilities of Intermediaries
176
Appendix C: Representation of Intermediary Ecosystem Across Internet Architecture Locations
ONLINE SERVICE PROVIDERS:
(direct interface to
hosted content)
ONLINE INFRASTRUCTURE PROVIDERS:
(services platforms/
hosting infrastructure)
INTERNET SERVICE PROVIDERS:
(backbone connection to the
Internet)
CONTENT & ONLINE
COMMUNITIES
UTILITY PROVIDERS SEARCH &
NAVIGATION
COMMERCIAL
INFRASTRUCTUR
E
NAVIGATIONAL
INFRASTRUCTURE
User Generated Content
Site
Social Network
Wiki
Content/Media Sharing
Site
Online Review Site
Virtual World
Email Service Provider P2P Network Ad Service
Provider
Domain Registrars
& Registries
3
rd
Party Marketplace
3
rd
party marketplace
3
rd
party auction
Individual Cloud
Service
Backup Service
File Storage
(Cyberlocker)
Blogging Platform
RSS/Feed Reader
Search Engine or
Directory
Search Engine
Hyperlink Directory
Payment Provider
Proxy Providers
Automated Content
Aggregator
Site w/ 3
rd
Party
Commentary
Blog
Online
Newspaper/Magazine
Discussion Board/Forum
VoIP
URL Redirection &
Tracking
Enterprise
Hosting Service
177
Appendix D: Identifying Intermediary ‘Chokepoints’ in a Complex Ecosystem
178
Appendix E: Duties of Care Scale of Operational Cost to Intermediary
Type of Duty of Care Type of
Action
Definition Operational
Cost Scale
Intermediary Service on
Platform is Discontinued
Ex Ante The plaintiff requests for the
intermediary service to be shut
down. Alternately, the intermediary
platform is asked to discontinue the
"intermediary" portion of its
activities by no longer providing
content access, transmission, or
sharing by third parties.
4
Platform Content
Monitoring, Disclosure
and Filtering
Ex Ante The plaintiff requests the
intermediary to prevent infringing
activity on its platform - and
platforms it controls - via content
monitoring, reporting of illicit
activity, and filtering of infringing
content.
3
Content Blocking or
Account Removal
Ex Poste The plaintiff requests the
intermediary to respond to instances
of infringement by specific actors by
removing content, blocking specific
accounts or platforms it controls, or
removing user/platform accounts.
2
Identity and Account
Information Disclosure
Ex Poste The plaintiff requests the
intermediary to respond to instances
of infringement by specific actors by
disclosing their identification,
account information, or records of
their activities.
1
Note: Duties of care are from the intermediary’s point of view. If a third party marketplace
receives a request to discontinue intermediary services (ie. to shut down) and the service
provider that is hosting the marketplace receives a request to shut it down, we code the request
as a four (4) for the marketplace and a (2) for the enterprise hosting provider.
179
Appendix F: Intermediary Type Definitions
Intermediary Type Description Example
Internet Service Providers
An Internet Service Provider is the party that provides you with access to the Internet. Typically this
is a company that sells internet connection services, such as a cable company.
Time Warner
Domain Registrar & Registry
A registry provides what's called a Top Level Domain (TLD), such as .com or .org or net. You
cannot buy a domain directly from a Registry; they just operate the central database of domains. A
Registrar is where you go to buy a Domain Name. The registrar has a contract with the registry in
order to be allowed to sell .com or .net names to consumers.
GoDaddy.com
Proxy Services
A proxy service is a type of intermediary that reroutes information between two points (typically the
user and a website). A proxy has two primary purposes; first, anonymous proxy services allow you to
access websites while hiding your IP address and second, a proxy server that allows people to access
resources that are actually hosted somewhere else but are restricted to your IP address.
BTguard.com
Ad Service Provider
An ad service provider is an intermediary that places ads on a website or alongside search results.
Google Adwords
Payment Provider
A payment service provider is an intermediary that makes it possible for financial capital (i.e.
monetary payments) to be transferred online.
Paypal
Hosting Service or Platform
Hosting services and platforms can be thought of as the space where websites live and are usually
purchased from a domain registrar. On a larger scale, it might be purchased from a company that
offers cloud infrastructure services.
Amazon Web
Services (AWS)
P2P Network
A peer-to-peer (P2P) network is a decentralized system for sharing files. Instead of 'living' on a server
pieces of the files are stored locally on different users’ machines. The P2P network creates a system
for aggregating these file pieces into one cohesive piece (e.g. one video file or song) and sending
them to the users making requests.
BitTorrent
Search Engine
A search engine is a service that indexes websites on the world wide web and makes it possible for
people to search for them. It provides both a list of links and often additional services including
related advertisements.
Bing
Hyperlink Directory
A hyperlink directory is a website that provides a list of links to other websites. Prior to search
engines, web directories were carefully curated lists of websites arranged by category. Today,
Sidereel.com
180
hyperlink directories might be a simple web page containing a list of links to illegal URLs for movies
or television shows.
URL Redirection
This category includes both URL tracking services and URL shortening services. URL shortening
services create shortened versions of URLs which - when clicked - will redirect the user to another
location. A URL tracking service creates a URL, or link, that tracks the number of people who click
on it and collects information about their IP addresses.
Bit.ly
Email Service Provider
An online service used to access email.
Google Gmail
Backup Service
A backup service is a method of off-site data storage where the contents of your hard drive are
automatically backed up to a remote server on the cloud.
Apple Icloud
File Storage (Cyberlocker)
A cyberlocker is a service that lets you store your files online. It may also allow you to sync your
files between different local hosts. Unlike a content/media sharing sites, file storage sites are for
individual access rather than for several people to share things in one place
Dropbox
Blogging Platform
A blogging platform provides the infrastructure for a whole group of blogs. Think of it as a
community of blogs that are all hosted by the same provider. It might include storage for files and
media such as pictures or video.
Wordpress
RSS/Feed Reader
An RSS reader is a service that allows people to subscribe to many different blogs or website updates
and read them all in one place. When a user visits the webpage where his/her RSS reader is hosted, it
is automatically filled with updated material from selected blogs and websites that he/she follows.
Feedly
Social Network
A social network is an online platform where networks of people can come together to connect to
each other and exchange information such as messages, photos, or links to external content (e.g.
articles and videos). The primary purpose of social networks is connecting you to people you know
or share interests with.
Facebook
Wiki
A wiki is a platform that allows people to create and edit content on shared webpage. Wiki pages
often contain text, audio, and images similar to traditional webpages. However, they differ from
traditional webpages because they have allow users to add, delete, and edit content.
Wikipedia
Content/Media Sharing Site A content/media sharing site is an online platform where users come together to find, share, and YouTube
181
distribute content. Often this content is user-generated. Much of the time these sites are focused
around a particular type of content, such as music, photos, videos, or PDF documents.
Online Review Site
Online review sites are websites where the primary focus is on evaluating products and services.
Many online review sites allow users to provide a numerical rating of a product or service (e.g. Yelp
stars) and provide a short description of their experience.
Yelp!
Virtual World
A virtual world is an online fantasy environment, such as a game or imaginary place. It might have a
theme or several specific worlds contained inside it. Typically it will have many user generated
elements and users may even exchange in e-commerce exchanges by selling in-game accessories
such as weapons, costumes, or properties to each other for real money.
Second Life
3rd Party Marketplace/Auction
A third-party marketplace or auction site is an internet platform that facilitates the exchange of goods
and services by outside users, rather than selling anything itself. Online marketplaces have largely
taken the place of classified ads.
Ebay
Content Aggregator
A content aggregator is any website that automatically aggregates media from lots of different
sources.
RottenTomatoes
Blog
A blog, short for “weblog”, is an online publication comprised of short posts of text and images.
Blogs are typically updated over time and organized in reverse chronological order with newer posts
appearing at the top of the page. Although individual posts are typically composed by a single
individual, blogs may contain posts by multiple people writing about a common theme. Most
importantly, blogs are intermediaries because they host third party commentary
Lifehacker
Newspaper/ Magazine
An online newspaper or magazine is typically the online presence of a print publication, such as The
Economist or the New York Times. One of the differences between the online version of a
publication and its print counterpart is that under each article it is typically possible for users to post
comments.
.
NY Times
182
Discussion Board/ Forum Discussion boards are virtual spaces where individuals who share a common purpose or interest can
communicate. Communication does not occur in real time. Rather, individuals post to the discussion
board and must wait for other people to respond. The initial post and its subsequent responses often
share a common theme and are collectively referred to as a “thread”. Threads are typically archived
to provide a record of communication and are often searchable.
BikeForums.net
183
Appendix G: Contested Content Arenas
Intellectual
Property
Infringement
Objectionable
Content
Deceptive or
Nuisance
Content
Network and
National Security
Issues
Copyright
Infringement
Defamation &
Reputation Concerns
Spam & Direct
Marketing
Malware
Trademark
infringement
Privacy & Dignity
Online or
Email
Chain Letters
State Secret
Disclosure
Data Breaches
Culturally Sensitive
Speech (Hate
Speech, Lese
Majeste)
Phishing
Content
Cybercrime
Obscenity &
Incitement to
Lawlessness
Click
Fraud
Illicit Third Party
Marketplaces
Abstract (if available)
Abstract
Online information traffic passes through multiple layers of intermediation as communication flows between users. Each of these waypoints is a type of Internet Intermediary Platform, an online service or Internet provider that facilitates transactions by providing a means for information and information services to be hosted, accessed, shared, indexed, and transmitted between third parties on the Internet. ❧ Intermediaries lower transaction costs in the Internet economy by making it possible for users to find and evaluate the information, goods, and services they need and also providing forums which establish transactional norms and codes of conduct. Consequently they have tremendous power as both gatekeepers and facilitators. Accordingly, the internet intermediary is increasingly a target for stakeholders that want to exercise control over information flows and user behavior. One way to do this is to impose requirements upon intermediaries by holding them legally responsible for user actions. ❧ My dissertation examines third party liability lawsuits brought against internet intermediaries across using data from two empirical contexts: intellectual property violations and objectionable content suits. In doing so, I seek to examine how differences in the frequency of targeting by plaintiffs and variation in the proposed gatekeeping costs imposed on intermediaries might have implications for competitive dynamics within this population of firms.
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Core Title
The Internet middlemen: targeting intermediary firms as gatekeepers in the online economy
School
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Degree Program
Communication
Publication Date
11/11/2016
Defense Date
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