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Two tables show how complicated music-copyright rate-setting is

July 14, 2015, 9:11 AM

Even after you’ve learned the basics of U.S. copyright law, once you delve into music copyrights, you discover an even more complex—I like to say “fractally complex”—framework at the root of today’s music industry.

At the first level, this complex framework is grounded in the compulsory mechanical license and other compulsory licenses, which set a baseline for private negotiations among songwriters, record companies and distributors (from traditional radio to new services like Apple Music, Spotify and Pandora). You’d need to study the whole combination and interaction of mandatory licensing and private negotiations to begin to get a handle on what Taylor Swift’s polite quarrel with Apple a few weeks ago was all about.

At a second level, this combination of mandatory licenses and private negotiations had been made even more complicated because, as of 1995, copyright interests in songs also are divided between the songwriters and their publishers on the one hand (sometimes represented by performance-rights organizations like ASCAP and BMI) and the owners of “sound recordings” on the other. This division can be confusing even to juries in a copyright case. In the recent legal battle between the late Marvin Gaye’s heirs and the recording artists Pharrell Williams and Robin Thicke, the jury may have “blurred the lines,” so to speak.

Helping non-expert readers to grasp the complexity of modern music licensing with just words and sentences in a blog post is probably asking too much. So we’re going to cheat a bit here by giving you two tables that show — at a “glance” — how copyright licensing plays out among distribution platforms and among the uses music lovers put to what they buy. We thank Lydia Pallas Loren, professor at Lewis & Clark Law School, for allowing us to reproduce portions of her excellent August 2014 piece in the Houston Law Review here.

SERVICE TYPE

COPYRIGHT TYPE

REVENUE (%)

Terrestrial radio

Musical work

3.7 (2011-2016) [1]

Sound recording

0.0

TOTAL

3.7

Pre-existing satellite radio (i.e., Sirius XM)

Musical work

2.4 (2008) [2]

Sound recording

9.0-11.0 (2013-2017)

TOTAL

11.4-13.4

Pre-existing cable music service

(i.e., Music Choice)

Musical work

5.5

Sound recording

8.0-8.5 (2013-2017)

TOTAL

13.5-14.0

Noninteractive

webcasters

Musical work

4.0 (2014) [3]

Sound recording

25.0-56.0

TOTAL

29.0-60.0 [4]

Interactive

webcasters

Musical work

10.5

Sound recording

Unknown [5]

TOTAL

Unknown

 

TYPE OF COPY

PRICE

Physical phonorecords

$0.091 per song or $0.0175 per minute of playing time [6]

Digital phonorecord deliveries (DPDs)

$0.091 per song or $0.0175 per minute of playing time [7]

Limited downloads (tethered devices)

3.9 percent of revenue [8]

Ringtones

$0.24 per song [9]

 

Two things you can see instantly in these tables:

  1. New digital platforms end up paying more than traditional music-distribution platforms.
  2. It’s hard to understand immediately why, with regard to songwriting rights alone, copies of songs are charged at “penny rates” with some kinds of recordings and at percentages of total song revenue other times.

There’s a whole separate story to be told about the pricing of ringtones.

 

[1] Rate extrapolated by using the 1.7 percent rate charged by ASCAP, with a 45.6 percent PRO market share for ASCAP, resulting in an industrywide rate of 3.7 percent. See Pandora Media Inc., 6 F. Supp. 3d at 361 (45.6 percent market share; id. at 366 (1.7 percent royalty rate). [2] Determination of Rates and Terms for Preexisting Subscription Services and Satellite Digital Audio Radio Services, 73 Fed. Reg. 4,080, 4,088 (Jan. 24, 2008) (to be codified at 37 C.F.R. pt. 382); Peter DiCola, Copyright Equality: Free Speech, Efficiency, And Regulatory Parity in Distribution, 93 B.U. L. REV. 1837, 1848 (2013). [3] This rate is extrapolated by using the 1.85 percent rate set for ASCAP. Using a 45.6 percent PRO market share for ASCAP, this results in an industrywide rate of approximately 4.0 percent. Pandora Media Inc., 6 F. Supp. 3d at 361 (45.6 percent market share); see id. at 366
(1.85 percent royalty rate for noninteractive services). This 4 percent approximation was confirmed by the court’s description. Id. at 346. [4] 60 percent is used here because it has been reported that “[i]n 2013, Pandora’s content acquisition costs were…over 60 percent of its revenue for that fiscal year.” Pandora Media, Inc., 6 F. Supp. 3d at 328 [5] The arrangements between interactive webcasters and sound recording copyright owners are privately negotiated and not subject to any disclosure requirements. See 17 U.S.C. § 114(e) (2012) (providing for private negotiations). [6]Mechanical License Royalty Rates, U.S. COPYRIGHT OFF., http://www.copyright.gov/licensing/m200a.pdf (last visited July 15, 2015) [7] Ibid.  [8] This rate is arrived at by taking the 10.5 percent aggregate rate set by Copyright Office regulation and subtracting 6.6 percent as the portion to be paid for the public performance right. See infra notes 85–91 and accompanying text. 6.6 percent is arrived at by extrapolating from the 3 percent that ASCAP charges interactive webcasters, using a 45.6 percent market share for ASCAP, resulting in an industrywide rate of 6.6 percent. See Pandora Media, Inc. v. Am. Soc’y of Composers, Authors, & Publishers, 6 F. Supp. 3d 317, 351, 365 (S.D.N.Y. 2014). [9] Mechanical License Royalty Rates, supra note 6. This work is licensed under a Creative Commons Attribution-NoDerivs 3.0 Unported License.

In midst of drought, Sacramento needs to prepare for flood

July 14, 2015, 8:15 AM

In the midst of a serious drought, it’s time to become concerned about a coming flood. Orbiting high above the Pacific Ocean, a Japanese weather satellite has spied the embryonic stages of a massive El Niño weather system that, once developed, is likely bound for California.

El Niño events are characterized by a prolonged warming of waters in the Pacific and strong trade winds that lead to dry winters in much of the United States and a downright diluvial season in California. The last time this type of system struck Norther California in a meaningful way was in 1997.

That year, residents throughout the region were swamped by floodwaters that broke levies and damaged infrastructure. Olivehurst, Arboga, Wilton, Manteca and Modesto all flooded to varying degrees, as the Consumnes River surged. Through sheer fortune, Sacramento itself was spared from a watery fate. There is no guarantee such luck will befall the Sacramento area again.

The “River City” rests at the confluence of the American and Sacramento Rivers, precisely where they enter the delta. The city has a history of flooding that dates back to its formation. In fact, Gov. Leland Stanford traveled to his 1862 inauguration not by horse or carriage, but rather, by boat.

While Sacramento’s geographic situation hasn’t changed since 1997, development in the area has. Sacramento proper has grown by 80,000 residents in the last 18 years. The northern Sacramento suburb of Natomas was, until a 2008 moratorium, the largest driver of the city’s growth. Much to the surprise of many of its new residents, Natomas is built – literally – in an area once designated the “Natomas flood-basin.” Meanwhile, West Sacramento has grown by 20,000 people – nearly 40 percent.

All of this growth has been a boon to the region’s economy, but left it vulnerable to extreme weather events. In spite of concerted efforts to strengthen flood-protection mechanisms, by all accounts, the frequency, intensity and severity of extreme weather events is on the rise. Barriers meant for 1-in- 500 year storms may be rendered redundant, as those storms become 1-in-100-year events. Compounding that vulnerability is the specter of a temblor of even middling severity that could breach newly bolstered defensive barriers and cause damage even without a storm.

To-date, the city has proceeded as though concern is unwarranted. In March, the City Council approved construction of 1,500 new homes in Natomas.

Residents and voters should be mindful of the fact that electoral time horizons do not correspond to natural time horizons. A politician elected today who places the city at risk for a catastrophic flood 50 years from now accrues immediate benefits without experiencing any near-term costs.

The remedy to the risks that Sacramento faces is not federally built levies, nor is it federally subsidized flood insurance. Instead, the solution is to show the restraint necessary to say no to further development in high-risk areas. When Sacramento next floods, and it will, the harm to the city could be comparable to that other seriously flood-prone metropolis: New Orleans.

 

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Should Congressional Research Service reports be public?

July 14, 2015, 7:15 AM

From Roll Call:

“Making them public would make them publicly available more equally, more equitably,” said former CRS analyst Kevin R. Kosar, who penned an essay on his decision to quit his job at the agency. “Steve Aftergood [director of the Government Secrecy Project at FAS] has so many of these reports. He may have 75 percent of the reports written. So, they’re out there, but 99 percent of Americans have no idea who Steve Aftergood is or the Federation of American Scientists or, you know, any of the other groups that have these.”

Clinton raps ‘gig’ economy as GOP rivals hail Uber

July 13, 2015, 5:30 PM

From Investor’s Business Daily:

“There is a little more of a backlash among liberals,” said Andrew Moylan, executive director of R Street Institute, a libertarian think tank. “It’s not from a customer service perspective. It’s from a labor perspective.”

Hillary Clinton, old person, does not like this newfangled Uber app

July 13, 2015, 5:00 PM

A week or so ago, my friend Lisa De Pasquale penned an article over at Breitbart about how this election cycle is shaping up to be Gen-X versus Baby Boomers. In it, she pointed out that, while Hillary Clinton might not be too old to be President (I mean, seriously, the GOP once ran John McCain, who knows so much about foreign policy because he was around with Pangea broke apart), she certainly acts old – way older than should be socially acceptable or electorally palatable.

Today, Hillary spent half her speech railing on the Wall Street banks that make up a significant part of her donor base, and the other half complaining about these young whippersnappers and their newfangled smartphones with the texting and the Facebooking and the Ubering. I mean, who do they think they are, circumventing an antiquated and burdensome, union-driven transportation boondoggle with ingenuity and common sense and a cooperative network that allows individuals to purchase products on a free market that they themselves police?

The nerve of some people’s children.

In a major campaign speech in New York City, the former secretary of state didn’t mention the ride-sharing service by name. But it was pretty clear what sort of companies she was talking about when she got to how some Americans earn money.

“Many Americans are making extra money renting out a spare room, designing websites, selling products they design themselves at home or even driving their own car,” she said at the New School.

But that sort of work comes with its own problems, she said.

“This ‘on demand’ or so-called ‘gig economy’ is creating exciting opportunities and unleashing innovation, but it’s also raising hard questions about workplace protections and what a good job will look like in the future,” Clinton added.

Mashable made a valiant attempt to come to her aid, explaining to their youthful audience that what Clinton really meant when she said Uber was “displacing…blue collar jobs” wasn’t that you should stop using Uber, but that you should want protections for Uber workers, many of whom are classified as independent contractors (even though she says that she wants to be a “small-business candidate” and there’s nothing smaller than a sole proprietorship). But that would work if she were only targeting those service-oriented programs which require a service provider. Airbnb, the other operation she mentioned, facilitates couch-surfing, not driver services, and are certainly not cruising toward a class-action lawsuit from their disgruntled apartment-renters.

So what is it then? Is it Hillary Clinton’s deep-seeded, bottom-of-her-heart compassion for the little guy? Is it her ardent belief that government can truly provide an effective service economy of its own, thus preserving her control-oriented governmental theories?

No. Hillary Clinton wants union money.

Ultimately, Uber, AirBbB and other cooperative social sharing networks and app-based service providers have sprung up in response to a corrupt establishment – a tangled web of cronyism that involves government regulators who want to tax, control and organize networks, and massive unions who seek to keep a stranglehold on jobs and industries. Uber openly subverts a scheme between local governments and labor unions to limit choice in transportation to that which is both approved by government and operated by unions. The result is inflated pricing, artificial scarcity and a market that doesn’t operate with consumers in mind. Instead of changing their system to respond to consumer needs, transportation unions would rather just shut down the subversive businesses entirely.

And that’s where Hillary Clinton comes in. As this super-helpful chart demonstrates, progressive socialist Bernie Sanders has a deadlock on union money. And while they give less, they have, ultimately, more to give overall, and plan to be aggressive in 2016. And of course they’d support Bernie: he’s as progressive as they come. The only standout is Richard Trumka, who has been trying to wave other unions off supporting Sanders because he understands that Sanders could never win in a general election, putting unions at a bargaining disadvantage. With only the AFL-CIO on her supporter list, Clinton has to move in on the other union donors.

And what better way to do that than attack the free-market scourges that threaten to make unions obsolete? In the name of social justice, of course.

The saddest part is that this is unlikely to help Clinton get union money, unless she suddenly starts believing what she’s speaking about. Even sadder is that, no matter how many tech blogs come to her defense, helping to convince their readership that Hillary Clinton is, indeed, hip and “with it” despite all evidence to the contrary, we live in a headline culture. If Hillary Clinton doesn’t get the shareable economy, Hillary Clinton is behind the times.

At least the times, however, seem to be trying to catch up with her. Just as Hillary was bemoaning that whippersnapper Uber’s apocalyptic mobile ride-sharing service, Uber was announcing a very special program for the elderly. Maybe she should look into it.

Tax pollution, not profits: a reply to Rep. John Delaney

July 13, 2015, 10:00 AM

The carbon tax is an elegant mechanism for imposing a price on carbon dioxide emissions from the energy sector, especially when compared to the alternatives.

The patchwork of federal regulations to reduce greenhouse gas emissions from the energy sector is sprawling, including standards for CAFE, renewable fuels, efficiency, building codes and drilling operations, and pending regulations for new and existing power plants under the Clean Power Plan (CPP). Taken together, these policies layer large, but attenuated, costs on the energy sector and on energy consumers. Worse, by tackling each corner of the economy differently, they fall well short of the president’s commitment to reduce emissions 26 percent below 2005 levels.

With a relatively modest carbon tax, we can wipe out existing policies and still do better at achieving emissions reductions. David Bailey and David Bookbinder use Environmental Protection Agency data to determine that an average national carbon price on the electricity sector of $27 per ton in 2020 — rising to $29 per ton in 2030— would be functionally equivalent to the CPP. The Carbon Tax Center’s carbon-pricing model suggests the price actually could start much lower, at around $2.15 in 2015, and increase to $34.40 by 2030.

The most alluring part of the carbon tax, though, is that it could open the way for conservatives to enact a host of policies they already support. Just as environmentalists have cited the threat of catastrophic climate change to solicit support for EPA overreach, agricultural interests have agitated for renewable fuel standards and business interests continue to petition for massive subsidies for renewable power, conservatives can use the threat to make the case for smaller, smarter government.

It is relatively simple to select a carbon price that will meet the carbon dioxide emissions reduction trajectory established by the suite of standards and regulations put in place by this administration. With that price established, there are plenty of policies that we can simply write off the books; we have achieved their climate targets and rendered them unnecessary.

The first place to start is EPA authority to regulate greenhouse gas reductions under the Clean Air Act (CAA). The CAA was designed to reduce the types of pollution that spawned the environmental movement of the 1970s: localized sources causing acute harm. As the CAA has been adapted to cross-state sources, low-level, long-lived pollution and climate emissions, it’s proved inadequate to the task. With a carbon tax, we can remove EPA’s regulatory authority to use the CAA for climate policy and eliminate the expensive, invasive and sprawling CPP.

Then, we must tackle the rest. The Renewable Fuel Standard is an enormous market intrusion that does a better job of supporting corn prices than reducing greenhouse gas emissions. CAFE standards for the automotive fleet are prescriptive intrusions into the automotive market that limit consumers’ ability to purchase larger, less-efficient vehicles; a carbon price could achieve those same emissions reductions without eliminating consumer choice. The Department of Energy (DOE) has released dozens of efficiency standards under this administration for everything from light bulbs to ice cream freezers, all of which are made superfluous by a price signal.

Tax incentives and subsidies also should be on the table. We spend tens of billions of dollars a year subsidizing energy sources across the board. If our aim is a diverse, lower-carbon electric supply, we can eliminate those expenditures. Loan guarantees intended to help companies commercialize technology are wasteful and unnecessary now, and would be inexcusable under a carbon-tax regime. The research and development juggernaut at DOE can be pointed to significant and meaningful advancement in energy technology, not incremental improvements in proven and commercialized technologies.

This is a short and not nearly comprehensive list of ways to shrink the footprint of government and get it out of the marketplace, all made possible by imposing a modest tax on carbon. All of this is possible before we’ve even touched the revenue.

A carbon tax raises real amounts of money. The proposal by Rep. John Delaney, D-Md., would raise more than $1 trillion in its first decade. In Washington, any purse that size will be a great temptation for special interests, so revenue treatment is enormously important. There are many options, but few winners: deficit reduction, payments to disadvantaged communities and industries, clean energy investments, climate mitigation strategies, myriad spending priorities or cuts to existing taxes.

This last priority is the most persuasive. Conservatives must insist on true revenue neutrality. Carbon policy and its resulting revenue should not be used to grow the size of government. Economists agree that cuts to existing, inefficient taxes, like the corporate income tax, will do the most to stimulate the economy at the same time that carbon policy increases energy prices. Back-of-the-envelope calculations suggest that, by imposing a relatively modest carbon tax and taxing capital gains and dividends as income, we could eliminate the corporate income tax completely.

If there are alternate priorities for spending dollars on things like research and development, innovation or other climate-related priorities, let politicians have that debate and find the money elsewhere. An effective carbon tax can only be possible with complete revenue neutrality.

Rep. Delaney has made space for an honest discussion about the direction in which we should take carbon policy. The carbon tax is an opportunity to shrink the size of government, while making real and meaningful progress on reducing carbon emissions. Dedicating the revenue to tax reduction could allow the United States to move from having the highest corporate income tax rate in the OECD to having no corporate income tax whatsoever. That’s a win-win for conservatives.

Neeley talks climate change at EarthDay Texas

July 13, 2015, 9:30 AM

R Street Texas Director Josiah Neeley sat down with Michael Quirke, executive director of the Climate Change National Forum, at the recent EarthDay Texas in Dallas to discuss how conservatives can engage on the topic of climate change. You can watch the full interview below:

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What California’s anti-SLAPP law can teach the country about free speech

July 13, 2015, 9:00 AM

Once seen as a singular source of new and useful public policy ideas, California has slowly devolved into a judicial and business hellhole, with the inevitable loss of reputation and respect that comes with that. But with any luck, the Golden State’s reputation might be burnished by the reemergence of one of its few competition-friendly laws.

The recent dust-up between Zenefits, a hungry and innovative startup, and ADP, an old-school success story and the giant of the payroll processing industry, is now playing out in the courts. The problem Zenefits faces is one shared by other emerging and small companies nationwide that confront ruin through strategically filed, anti-competition court cases.

ADP’s suit against Zenefits stems from comments made by Zenefits CEO Parker Conrad. Filed in the U.S. District Court for the Northern District of California, ADP alleges that Conrad made defamatory remarks about ADP following that company’s decision to limit the extent to which Zenefits could access its client information.

In many other states, this might mean the larger firm would be able to use a lawsuit like this to drive the smaller company to comply with its demands, or even force it out of business altogether, simply with the threat of having to mount a costly legal defense. In California, the smaller player has recourse. ADP’s decision to file suit in California has left it vulnerable to the state’s anti-SLAPP (Strategic Lawsuits against Public Participation) statute.

Anti-SLAPP motions are rooted in the First Amendment’s protection of free speech and are designed to prevent intimidation through litigation. In relevant part, California’s statute reads:

A cause of action against a person arising from any act of that person in furtherance of the person’s right of petition or free speech under the United States Constitution or the California Constitution in connection with a public issue shall be subject to a special motion to strike, unless the court determines that the plaintiff has established that there is a probability that the plaintiff will prevail on the claim.

Zenefits’ anti-SLAPP motion is based on the contention that Conrad’s comments are a subject of public interest. Using a lawsuit to stifle his speech would have a deleterious impact on civil discourse. If Zenefits’ motion succeeds, ADP’s suit will be tossed from court before the costly discovery process can begin.

Whether or not Zenefits succeeds with its motion, laws preventing powerful would-be litigants from using the courts effectively to censor speech that makes them uncomfortable are a good idea. California was one of the first states in the nation to adopt an anti-SLAPP statute, which first was passed in 1971. Since then, 28 states have chosen to adopt anti-SLAPP laws in some form or another.

In spite of broad adoption of anti-SLAPP statutes, the federal government has yet to embrace one of its own. This means that defendants across the nation are without this powerful tool to protect their speech. Fortunately, that could change this year.

Reps. Blake Farenthold, R–Texas, and Anna Eshoo, D-Calif., have introduced the extravagantly named SPEAK FREE Act. Not only would this legislation provide defendants with an opportunity to forego ruinous litigation, it also includes a fee-shifting provision that apportions the cost of litigation deemed to be a “SLAPP” suit to the plaintiff. Thus, not only would it protect free speech, but the bill also remove incentives for SLAPP suits.

In the context of a fast-moving “new” economy, one in which incumbent industries quickly are disrupted by new business models, the necessity of expanding access to anti-SLAPP motions is greater than ever. If California, in spite of its worst impulses, can recognize this, why can’t an enterprise-minded Congress?

Whether or not SPEAK FREE becomes law, California and a number of other states will still offer some organizations a legal framework that can be used to force competition out of the courts and back into the marketplace, where it belongs.

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A misguided FDA crusade

July 13, 2015, 8:00 AM

From Brussels to Chicago to the headquarters of the Food and Drug Administration in White Oak, Md., public health officials, antismoking crusaders and mayors are waging a battle against flavorings for both tobacco cigarettes and newer e-cigarettes.

Calls for an all-out ban on flavorings began as a limited fight over menthol. This minty flavor is big business. The second-most-popular cigarette in the United States, Newport, has been sold only in menthol form for most of its history. Menthol also is the second-most-popular flavor (after “tobacco”) in the fast-growing e-cigarette market.

But menthol remains in many public health officials’ sights. The European Union has voted to ban it from cigarettes starting next year. Chicago has outlawed the sale of menthol cigarettes near schools, a directive that covers most of the city, and the Baltimore City Council is considering similar regulations. The FDA, which was granted broad power to regulate cigarettes and banned flavors like clove and cherry in 2009, has been fiddling with the idea of a national ban on menthol since 2013.

In the United States, it appears that cities are cracking down on menthol to target a specific portion of the population. About 80 percent of African-American smokers prefer menthol cigarettes. Both Chicago (33 percent) and Baltimore (63 percent) have large black populations.

Despite this widespread hostility, there’s little evidence that menthol cigarettes are appreciably worse than any other kind (which is to say that they’re very unhealthy). Some research suggests menthol cigarettes are somewhat harder to quit and slightly more popular among teenage smokers. But all common nicotine products are very addictive, and most youthful smokers start with plain old tobacco flavor.

It also bears noting that, except for a few niche brands, nearly all cigarettes are flavored in one way or another, although the common flavorings tend to be subtle. First-time smokers will find any additive-free cigarette much less tolerable than the options currently on the market. But that’s the point: A menthol ban is a foot in the door to banning almost all current brands of cigarette.

Michael Siegel, a former FDA official and professor at Boston University’s School of Public Health who is among those leading the effort to ban menthol, is straightforward about the goal. If menthol is banned, he stated in an email, there will be “hardly a justification for the FDA to not simply ban all additives.”

“Since all the additives are put in with a marketing purpose in mind, banning the additives will, by definition, make it harder to sell these products, reducing sales,” Siegel wrote.

Some surveys of menthol smokers suggest many would quit smoking if menthols were pulled from the market. But empirical evidence demonstrates that smokers today have a very hard time quitting. No particular method of quitting works more than 10 percent of the time. New York City, home to the nation’s highest cigarette taxes and most concerted public health efforts, has actually seen smoking rise since 2010.

Five decades of stern public health warnings, high taxes, marketing restrictions and smoking bans brought the share of adults who smoke down from almost half to less than a quarter. But progress has largely ceased. For those who continue to smoke, all-out cessation may be nigh on impossible.

If someone like Siegel, who favors increased use of e-cigarettes to reduce the harm of tobacco, were in charge of public health policy, a ban on menthol and other flavorings might be worth further review. It almost certainly would have to be coupled with public education campaigns encouraging smokers who can’t quit to find other, safer sources of nicotine. E-cigarettes also would have to continue to be available in the very flavorings that cigarettes would then lack. Someone who enjoys “dark chocolate mint”-flavored vapor solution is unlikely to want to go back to harsh tobacco.

But the prevailing tilt of public-health policy has been away from this tobacco harm reduction approach. Major cities like New York, Chicago and Los Angeles already have banned vaping in most indoor public places. Sen. Richard Blumenthal, D-Conn., has launched an effort to ban flavored e-cigarettes nationally. In California, the Sonoma City Council has voted to ban e-cigarette flavorings and other municipalities are considering the same.

The confluence of these trends in public health—toward banning flavorings and treating e-cigarettes the same as their deadlier combustible cousins—could get ugly fast. It could herald a new Prohibition. It would be Prohibition in all but name for cigarettes, as the law would allow few attractive alternatives for those who crave nicotine.

This policy probably would reduce smoking at least a little, saving some lives. But with thousands of smokers still craving a nicotine fix, an already-ample black market for cigarettes would explode. According to the Tax Foundation, the black market for cigarettes has already surpassed the legitimate market in two states (New York and Arizona). And at least one cigarette-smuggling ring has been linked to international terrorism: In 2005, Buffalo businessman Aref Ahmed was convicted of smuggling cigarettes and funneling his profits to terrorist training camps.

When the FDA last held public hearings to consider banning menthol, many of the objections and calls for reconsideration came from law-enforcement groups like the National Troopers Coalition and the National Black Police Association. Most cigarette smugglers doubtless won’t fund terrorism, but a ban on menthol or flavorings generally could amount to handing a sizable portion of the tobacco industry’s more than $30 billion in 2014 U.S. revenues over to criminal gangs.

In the right context, more stringent regulation of cigarette flavorings could make sense. But the preponderance of evidence indicates that banning menthol and other additives would have uncertain benefits and significant costs. A ban on flavorings for e-cigarettes might actually increase the number of people who smoke and discourage would-be vapers from quitting combustible cigarettes altogether. For now, governments concerned about cigarette additives and e-cigarette flavors are best off leaving things alone.

The latest First Amendment fun

July 13, 2015, 7:08 AM

From Ann C. Logue:

The power of California’s anti-SLAPP statute, which my lawyers used in my free speech defense against convicted felon Keith Gilabert’s suit. Full disclosure: I occasionally contribute to R Street, but I had no involvement in this story.

Texas’ risky decision on multiproperty insurance

July 13, 2015, 7:00 AM

Fifteen years ago, Texas faced a mold crisis. The crisis was caused not just by the fungus itself, but by ambiguous provisions in many homeowners insurance contracts that were held by Texas courts to increase insurer liability far beyond what it was in other states. The losses from mold claims helped make the years 2001 and 2002 some of the most costly to the state’s insurers, surpassed only by Hurricanes Ike and Dolly in 2008.

In response, rates spiked, many insurers stopped writing new homeowners business and at least one major insurer threatened to leave the state entirely. Ultimately, the Texas Department of Insurance adopted a revised set of forms that brought Texas back in line with nationwide liability standards.

Texas may be tempting fate again, albeit on a smaller scale. In RSUI Indemnity v. Lynd Co., the Texas Supreme Court has interpreted standard language in a multiproperty insurance contract in a way that could greatly increase insurer liability for multiproperty policies.

The case involved a dispute over an excess insurance policy that Lynd had taken out on more than 100 properties in 11 different states. Under its terms, Lynd was required to list values for each of the covered properties. Premiums were based on a percentage of the total value of the listed properties and liability was limited the least of (a) the adjusted loss, (b) “115 percent of the individually stated value for each scheduled item of property” or (c) the policy limit of $480 million.

At issue in the case was whether the 115 percent limit applied to each property individually, or whether it applied to the total value of all damaged properties. Applying the limits in the aggregate allowed Lynd to recover a substantially larger amount, because it could use the value of properties that were only slightly damaged to effectively raise the limit for properties where damages were more than 115 percent of the value stated in the policy.

Most other jurisdictions have found that this contractual language imposes separate liability limits for each property. A majority of the Texas Supreme Court, however, concluded that the provision was ambiguous, and so construed the provision in the manner most favorable to the policyholder (which is a longstanding legal practice).

Yet as Chief Justice Nathan Hetch noted in his dissenting opinion, the court’s decision leads to the highly peculiar result that the policy “pays more of the losses for one property if others are damaged at the same time.” The court’s interpretation also creates an incentive for policyholders to strategically undervalue some of their properties (and hence lower their premiums) because they can still recover the full amount based on the value of other properties.

Several amici in the case have argued that imposing this blanket liability on insurers could make multiproperty policies unaffordable in Texas. Given the more limited scope of this market, the ramifications of the decision aren’t going to be as big as with the mold crisis. But it is still odd that the court would choose to go down this road again.

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The Dodd-Frankenstein monster

July 10, 2015, 3:08 PM

The Dodd-Frank Wall Street Reform and Consumer Protection Act was passed in 2010 as Congress’ response to the 2007-2009 financial crisis, with a goal of reducing financial risks and creating safeguards against future economic collapses.

Yet on the eve of the bill’s fifth anniversary, even more assets are in the hands of big banks and little has been done to ensure consumers still have access to the kinds of financial products they actually want.

Having established new government agencies, such as the Consumer Financial Protection Bureau and the Financial Stability Oversight Council, one of Dodd-Frank’s initial purposes was to monitor the performance of big banks deemed vital to the performance of the U.S. economy. Some claimed these organizations were “too big to fail”.

Five years later, the law’s effectiveness in this regard has been a demonstrable failure, as some now question whether those same institutions have simply become “too big to regulate.”

Led by Chairman Jeb Hensarling, R-Texas, the House Financial Services Committee yesterday held a hearing yesterday on the status of U.S. financial markets five years after Dodd-Frank. Hensarling’s opening statement took a strong stance on the matter — Dodd-Frank has seemingly been a catalyst, not an inhibitor, of financial instability.

What is undebatable is the fact that since the passage of Dodd-Frank, the big banks are now bigger; the small banks are now fewer. In other words, even more banking assets are now concentrated in the so-called ‘Too Big to Fail’ firms. Pray tell, how does this improve financial stability?

Hensarling expressed similar sentiments during a June 9 conversation with the Wall Street Journal’s Mary Kissel, characterizing the act as an “avalanche of regulation” similar to Obamacare and oppressive regulatory agencies like the Environmental Protection Agency. He points to this regulatory burden as one of the reasons the biggest banks have been able to grow disproportionately large, while smaller institutions struggle with enormous compliance burdens.

In May, the Mercatus Center’s Margaret Pierce published a critique laying out the law’s principal problem – its failure to recognize that regulators, not just markets, can also fail:

This macroprudential approach places too much confidence in the regulators to always get things right, and it inhibits market mechanisms from responding organically to problems as they arise. The last crisis taught us that regulators do not always get things right, and markets absorbed in regulatory compliance are very poor at disciplining themselves. The result is a less stable financial system.

During Thursday’s hearing, the committee heard testimony from, among others, Pierce’s Mercatus Center colleague Todd Zywicki and Mark Calabria of the Cato Institute. Zywicki explained how the bill has resulted in higher prices and limited consumer choice through its inherent disregard for consumer interests. Among its specific effects has been a marked decrease in the percentage of banks offering free checking accounts, as exhibited by the graphic below.

Calabria noted that key ingredients of the financial crisis were exceptionally loose monetary policy and supply rigidities in U.S. property markets, things that Dodd-Frank simply did nothing to address. “It is not enough to just ‘do something’ – we must do the correct things,” Calabria said.

Whether the Dodd-Frank Act is reformed, replaced or phased out, it will be crucial for the future of the U.S economy to address its significant flaws. Overregulating the financial markets has proven through extensive failures to have been nothing but disastrous.

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Alabama Legislature to put Bentley’s special session on ice

July 10, 2015, 10:36 AM

An email sent to members of the Alabama House of Representatives from Speaker Mike Hubbard reveals plans to thwart Gov. Robert Bentley’s abrupt call for a special session.

The email shares plans by Speaker Hubbard and Senate Pro Temp Del Marsh to convene as called by Bentley Monday, then immediately adjourn until Aug. 3.

The adjournment is significant, because it keeps the 30-day special session clock running and gives the Legislature flexibility to address the General Fund budget on their timeline, rather than Bentley’s. The Legislature will have about a week remaining in the special session should it come back into session Aug. 3.

Bentley’s call Thursday for a special session came as a surprise to legislative leaders, who believed Bentley had agreed not to call them back into session until mid-August, at the earliest.

Bentley’s veto of a General Fund budget that he called “unworkable” made a special session necessary. He favors new taxes to reconcile the state’s “budget crisis,” Marsh touts a gambling package and many legislators feel budgets cuts are in order.

All of that was in the mix when the regular session ended, and Bentley promised he’d call a special session.

But the abrupt timing is nothing short of bizarre.

Legislators on both sides of the aisle are expressing dismay, and many have scattered for the summer based on the perceived agreement with Bentley. While some have been meeting to look at possible solutions, none were prepared to introduce fully formed legislation.

Given Bentley’s opposition to gambling, the only cursory justification floated about is that this timing might prevent the pro-gaming lobby from being able to develop any serious influence in the General Fund budget discussions.

The announcement caused a mad scramble and will do little to improve relations between the governor and legislators. In fact, Bentley’s actions may have ensured that his call for the special session might be his only role in developing a General Fund budget solution for the state.

(Some) Republicans get religion on climate

July 10, 2015, 10:07 AM

From Bloomberg Politics:

His timing may be good. Two-thirds of Americans say they think the world would benefit from reducing carbon emissions, according to a March poll by Yale and George Mason University. “The first collapse is the tendency on the right to say that climate change is not a problem,” says Eli Lehrer, president and co-founder of R Street Institute, a think tank in Washington that promotes policies encouraging free enterprise. “The equally strong collapse is the tendency on the left to say that only our way of solving it is workable.”

Airbnb faces trouble at home

July 10, 2015, 7:00 AM

Airbnb’s fate in San Francisco may soon be up for a vote. While the village that raised the 7-year-old company is not yet ready to abolish it completely, many citizens are hoping to use a ballot initiative this November to curb its reach significantly.

A petition with 15,983 supporters calling for further restrictions on short-term rentals has been dropped off at San Francisco City Hall. If the city can confirm at least 9,700 of the signatures are authentic, a vote will be held Nov. 3. Before analyzing the new petition, let’s look at the current situation:

What is home sharing? Home sharing allows property owners to provide short-term rentals to vacationers, travelers and business people in much the same way hotels provide lodging. The experience is often a unique one, in which guests get to see a part of town they otherwise would not, visit restaurants off the beaten path and often get free Wi-Fi, laundry and breakfast. Platforms like Airbnb, HomeAway and VRBO help match those looking to rent space with property owners who have space to rent. Airbnb is unique in that it always collects payment, provides insurance and remits taxes on behalf of owners in certain cities. Investors value the company at more than $25 billion.

Short-term rentals are often categorized into two different groups: owner-occupied and non-owner-occupied. The former describes an owner who is present for the duration of the guest’s stay, with space offered to the guest typically in a spare bedroom, on the couch or sometimes on the floor. A hallmark of the sharing economy, this type of rental allows property occupants to leverage unused space in order to make a little extra cash. In non-owner-occupied rentals, keys are turned over to the tenant for a set number of days, after which a new tenant is likely to occupy the property. The distinction is important. Across the country, non-owner-occupied rentals are usually met with more resistance. Concern over non-owner-occupied rentals also can lead to unwarranted legislation against owner-occupied rentals.

What are the current regulations? Last October, San Francisco passed an ordinance, dubbed the “Airbnb law,” making short-term rentals legal for the first time. The law required operators to register with the city—paying both a $90 business license fee and a $50 rental registration fee—before opening their doors to guests. The law also requires owners to pay the same taxes hotels and motels do. Airbnb has agreed to collect and remit these taxes and paid $25 million in back taxes this February

Perhaps most contentiously, the ordinance capped the period that non-owner-occupied spaces may be rented at 90 days annually. Essentially, this rule is supposed to make it impossible for homeowners to profitably rent out a non-owner-occupied home. That is, if you live in New York but own a vacation home in San Francisco, you would not be able to cover your mortgage payment only renting out just 90 days. However, it does allow someone going on vacation for a couple of weeks a year to rent out their home while they are away.

What changes have lawmakers proposed? Even though the ordinance only went in effect Feb. 1, lawmakers already have both proposed and made changes. Just last week, Mayor Ed Lee announced creation of the Office of Short Term Rental Administration and Enforcement to help enforce the new laws. The six-person team will seek to increase legal compliance because, according to the city, less than 15 percent of rental properties in San Francisco operate legally. Additional changes, like making business licenses available online and allowing owners to register without an appointment, aim to boost registration.

Lee and Supervisor Mark Farrell also have proposed capping all rental properties, including owner-occupied ones, at 120 days per year. Other council members propose a cap of 60 days per year, a proposal the council was supposed to hear later this month. However, if the ballot initiative is a go, it is likely the council will likely not weigh in on the matter until after November.

What does the petition say? Written by a coalition called ShareBetterSF, the petition aims to limit the number of days any property can be rented short-term to 75 days, regardless of whether or not it is owner-occupied. It also requires owners to notify their neighbors when a guest will be in town, mandates that platforms not list unregistered properties and demands quarterly reports from property owners.

Advocates for the sharing economy in San Francisco contend these new regulations infringe their rights, hurt the middle class and give preference to incumbent industry players, most notably hotels. They are not wrong.

Why should a local government be able to tell a property owner how he or may or may not use his or her own property? Private contracts between homeowner associations, landlords and neighbors can limit short-term rentals without government intervention. The middle class in San Francisco, which is fighting hikes in rental costs, use Airbnb to rent out spare rooms and couches to pay the bills. In fact, two of Airbnb’s three founders (Joe and Brian) started the company because they could not pay their rent. Guess where? In San Francisco!

Finally, these new platforms help keep hotel costs in check, even where their rates are rising. Studies have shown that, as Airbnb has become more popular, hotel rate increases have leveled off. This is a good sign. Despite the entrance of home-sharing platforms, hotels are doing better than they ever have. In San Francisco, average prices for a night’s stay increased 10.9 percent in 2014 and occupancy rates hit a record 84.1 percent.

Opponents of home-sharing argue that residential units have been taken off the market by landlords, who now seek to rent to travelers instead of long-time city dwellers. They, also, are not wrong. Some landlords have evicted tenants and instead turned to renting out their properties short-term. When these homes are taken off the normal rental market, prices do go up. In response, the city has contacted 15 hosts who are operating multiple homes illegally. By targeting non-owner-occupied properties, the city hopes to protect residents.

But what Airbnb naysayers often fail to acknowledge is just how few homeowners are using these new platforms. Estimates range, but at most, short-term rentals make up less than 5 percent of the housing stock; Airbnb lists about 10,000 properties in a city with 379,579 residential units. When you consider that some properties are likely cross-listed on multiple sites and that many rentals are owner-occupied, the impact is further diminished. In San Francisco, critics also fail to mention that costs were skyrocketing well before Airbnb was born. Consider this graph, with data from 1994 to 2009, from Liberty Hill Development LLC:

The growth of the Silicon Valley has increased salaries for almost everyone in the technology industry. This is not a bad thing! But what it means is that newcomers to the city are simply able to pay more for rent than current residents. It is the large increase in demand for housing caused by the booming tech industry—not a small decrease in the supply of housing caused by the rise of Airbnb—forcing the city’s rental rates up. In fact, allowing short-term rentals in the city makes building housing more profitable, and in the long-run, should lead to increased construction. This graph, comparing population and housing growth over the 15 years before Airbnb, proves our point:

In addition, even if a small amount of short-term rentals pressure rental rates higher, rent controls likely play a much larger role. Only slightly more than 10 percent of the city’s housing stock is available to rent through anything like an open market. According to TechCrunch, about 50 percent of homes in San Francisco are rent-controlled and another third are owner-occupied. We have already explained some of the perverse impacts of rent control, including: less quality housing, more government spending, more inequality, black markets and shockingly, less housing.

So, the problem is not with existing housing. The problem is that new housing is not being built at the rate the city needs it. The reason is that San Francisco has incredibly strict zoning laws, lengthy application and wait times and tough rent-control legislation.

It’s easy for local politicians to point their fingers at brave entrepreneurs that no one denies are disrupting the market. What would be braver still, and more beneficial to their citizens, would be to acknowledge all the areas where government intervention already has fallen short in the San Francisco housing market.

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15 sheep explain the Chinese stock market crash

July 09, 2015, 3:37 PM

In the Chinese lunar calendar, 2015 is the Year of the Sheep. Thus, what better animal to guide us through the market panic that has seen China’s stock markets lose 30 percent of their value over the past month?

In 2014, after decades of staggering rates of growth, China’s economy began to falter, slowing to 7.3 percent growth, its lowest rate in 24 years. For the first time since 1999, the economy failed to hit its government-set annual growth target.

The slowdown forced China’s central bank in November to cut interest rates for the first time in two years. Combined with the launch that same month of the Shanghai-Hong Kong Stock Connect – a new investment channel linking the nation’s two largest stock markets – equity prices in the fourth quarter once again began to rise.

Stocks continued to rally through most of 2015, with many traders buying on margins enabled by the lower borrowing rates from the central bank and with support provided to the brokerages by the government-run China Securities Finance Corp. The Shanghai Index hit a June 12 peak of 5178.19, a seven-year high that was up more than 162 percent from its 2014 low. Together, at their peak, the Shanghai and Hong Kong exchanges had a combined value of more than $10 trillion. Some thought it would go on indefinitely.

With margin financing having grown fivefold, to about $434 billion, from June 2014 to June 2015, the China Securities Regulatory Commission on June 13 introduced rules capping the amount of margin trading a securities brokerage could do at four times its net capital. The CSRC also announced it would be investigating the huge market of investment finance used to trade stocks outside of the brokerage system. This brought the bull market to a screeching halt.

Investor reaction was nearly instantaneous. With these tighter leverage restrictions and a lack of guidance about whether the central bank would extend any further liquidity, China’s stock market saw its biggest two-week plunge since December 1996. There was a massive round of profit-taking as investors headed for the exits.

By June 26, the Shanghai Index had fallen 19 percent from its June 12 high, including a 7.4 percent drop on that Friday alone. The People’s Bank of China responded June 28 with its fourth rate cut since the November cut that started the rally, cutting the one-year lending rate by 25 basis points to a record-low 4.85 percent. It did little to calm the market’s jitters.

The central bank, which previously had cut banks’ required reserve ratio by 50 basis points in February and 100 basis points in April, also stepped in with a contingent 50 basis point cut in the reserve ratio, which for some banks – particularly those lending to farmers and small businesses – would now be just 18 percent. This news was treated as ho-hum.

Instead, the crash began to accelerate, with a 3.3 percent fall in the Shanghai Index on June 29 being called China’s “Black Monday.” Though the CSF (the government’s margin-financing provider) reassured markets that margin calls were manageable and the CSRC urged calm, investors remained jumpy.

Things briefly looked brighter on June 30. The Hang Seng Index in Hong Kong finished up 1.09 percent; the Shanghai Composite Index was up 5.5 percent; the Shenzhen Component Index was up 5.7 percent and the tech-heavy ChiNext Index was up 6.3 percent. This may partially have been a reaction to the announcement that local government-managed pension funds would be allowed to invest in the stock market for the first time, offering the possibility of $161 billion in fresh capital.

But the good news didn’t last long. When trading closed on the first day of July, stocks were down 5 percent for the day and total shareholder wealth lost since the sell-off began hit $2 trillion.

On July 2, the CSRC walked back the margin-trading requirements that had sparked the sell-off, ending compulsory sell-offs. The China Securities Finance Corp. also announced it would boost its support of brokers’ margin-lending services from 24 billion yuan to 100 billion yuan. The markets nonetheless fell another 3.5 percent, as investors let everyone know what they thought of this belated plan to undo the damage.

The China Financial Futures Exchange reportedly imposed a one-month suspension of short-selling by 19 accounts and the country’s 21 largest brokerages pledged to invest $19.3 billion into the markets. Nonetheless, the slide continued, as the Shanghai Index lost 29 percent from its peak through July 3. Investors remained spooked.

Through the sell-off, public anger about short selling continued to fester in some quarters. Rumors spread through the Wechat messaging service that the market’s crash was the result of foreign actors like Morgan Stanley or George Soros, with the CSRC at one point specifically having to quell a charge that Goldman Sachs was responsible.

Nonetheless, on July 5, the China Financial Futures Exchange moved to halt short selling through index-futures contracts, capping the number of new contracts an investor could buy or sell daily at 1,200. What’s more, the country has halted all initial public offerings and more than half the country’s stocks have suspended trading altogether.

But there are signs the worst may be over. The CSF announced July 8 that it would lend 260 billion yuan (about $42 billion) to the 21 largest brokers to buy shares of blue chip stocks. The country’s main stock indexes have had a bumpy few days, trading gains and losses. Today, the market enjoyed its biggest gains in six years. The Shanghai Composite closed up 5.8 percent, the Shenzhen Composite was up 3.8 percent and the Hang Seng was up 3.9 percent. Nonetheless, it’s likely to be a while before it’s once again smooth sailing in Chinese markets.

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C.A. blasts lawyer over ‘Nazi’ references, overturns verdict

July 09, 2015, 9:53 AM

From the Metropolitan News-Enterprise:

Bilotti not only violated the in limine orders, she also broke “Godwin’s Law,” the Internet adage invented by attorney and author Mike Godwin, Bedsworth went on to say.  

“Broadly speaking, Godwin’s law is that the first side in an argument to compare the other side to Hitler or the Nazis loses,” the justice wrote. “Apparently unaware of this rule, Bilotti used Martinez’s damaged motorcycle to make a gratuitous, out-of-the-blue attempt to link Martinez to Nazis.”

Vox Sentences: South Carolina waves the white flag

July 09, 2015, 9:23 AM

Feds spent $2 million to have wives nag men about chewing tobacco

July 09, 2015, 9:21 AM

From the Washington Times:

“This is big government intervention for a small-risk lifestyle choice,” said Brad Rodu, a professor of medicine at the University of Louisville.

Mr. Rodu, who has been studying the effects of smokeless tobacco and smoking for over 20 years, said that there is substantial scientific evidence demonstrating that the risks of using smokeless tobacco are so small they can’t even be measured.

Procedural quagmire dooms California vaping ban, for now

July 09, 2015, 9:00 AM

In a victory for commonsense, the California Assembly’s Governmental Organization Committee has voted to amend a bill that would have classified vapor products as tobacco products. As a result, the author of S.B. 140, state Sen. Mark Leno, D-San Francisco, has removed his sponsorship of the bill, leaving it to languish in committee.

The committee’s refusal to pass S.B. 140 as presented stands in stark contrast with the treatment that bill received in previous committees. Unchecked by serious scrutiny, S.B. 140’s structural infirmities were overlooked in favor of a breathless desire to demonstrate concern for public health.

At the core of the bill was a false equivalence between vapor products and traditional cigarettes. Playing on a paucity of information, proponents of S.B. 140 spoke with authority about the consequences of tobacco use, while nuancing the extent to which vapor products present anything like a comparable threat.

Thus, for the throngs of passive participants in the legislative process who came to voice their opposition to the bill, the committee’s path to shelving it must have been confusing. For those more familiar with the process, it was a classic example of hostile amendments.

Here’s how it went. Sen. Leno brought the bill forward to the committee with knowledge of four amendments that would be suggested by the chairman. Of those amendments, he found three palatable. But one amendment, concerning the application of the definition of “tobacco product” to vaping systems, he refused to compromise on.

When the committee’s chairman, Assemblyman Adam Gray, D-Merced, put forward a motion for adoption of the full slate of four committee amendments, Sen. Leno expressed his intention to remove his support for the bill if the motion should pass. Gray noted Leno’s admonition and attempted to move forward with the vote, only to be stifled by a subsequent motion on the original motion.

At that point, not only was the audience confused, the members were too.

After taking time to confer with staff, Gray chose to proceed with the motion on his motion, which was to adopt only the amendments that Leno approved. That motion failed. Immediately following that vote, Gray held a vote on his original motion, which passed. Asked if he would support the amended bill, Leno stated that he would not, because the bill was now “very dangerous.”

Sponsorless, S.B. 140 is now held in committee and will move no further in its current form. But, no doubt, the Legislature will have an opportunity to revisit the vaping question soon. Perhaps it will now once more fall to the Assembly Governmental Organization Committee to disabuse the rest of the Legislature of its persistent confusion, but I wouldn’t lay money on that prospect.

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