02/18/2021

Australia’s Media Bargaining Code Undercuts the Open Trading System

Chris Marchese
Chris Marchese Counsel

Australia is poised to pass a new law that not only harms the internet, but also violates well-established trade principles. Known as the “Code,” the law is written to force just two American tech businesses–Facebook and Google–to subsidize large Australian media conglomerates. While we’ve previously explained how the Code is crony capitalism disguised as protecting the free press, here we discuss the larger trade principles that the law violates.

At bottom, Australia’s approach threatens the multilateral, rules-based system of trade that liberal democracies have painstakingly developed since World War II.

Non-Discrimination & Reasonably Equal Treatment

Australia has a long history of trade relations with the US that has always rested on the bedrock principle of nondiscrimination. Just as the US won’t target Australian businesses to impose special burdens, Australia won’t target American businesses. We see this norm enshrined in the US-Australia Free Trade Agreement and in World Trade Organization rules.

But because Australia’s proposed Code violates this longstanding practice, the United States strongly opposes the law. The US Trade Representative described the Code as “an attempt, through legislation, to regulate the competitive positions of specific players in a fast-evolving digital market, to the clear detriment of two U.S. firms.”

Australia’s law will impose special, onerous obligations on American tech businesses to favor politically powerful local businesses – without any findings that the American businesses did anything wrong.

While countries can of course regulate and apply their laws to foreign businesses operating within their borders, the nondiscrimination principle obligates trading partners not to favor domestic businesses. Trade rules generally allow Australia to provide government subsidies to domestic businesses, for example. But those same rules prohibit Australia from forcing private American businesses to subsidize Australian ones. 

Even so, that’s exactly what the Code aims to do.

Indeed, as the USTR points out, the Code “explicitly and exclusively (as an initial matter) targets two U.S. companies.” Perhaps Australia could justify the law if Facebook and Google were the only two businesses that linked to third-party publications, but that’s not even close to the case. The entire internet is built around the open and free sharing of links–in emails, blogs, texts, forums, and on social media sites and search engines. 

Even worse, although Australia’s Code targets two American businesses, it’ll end up undermining a key tool of cross-border trade that many businesses rely on: the ability to link to content from businesses and users.

Competition & Fair Treatment

The Code originated with the Australian Competition and Consumer Commission (Australia’s equivalent of the US’s Federal Trade Commission), which is usually focused on enhancing competition in the market and developing horizontal rules, not stomping on specific competitors. 

And while the Code directly relates to Australia’s competition laws (what we call antitrust), it does not even allege a violation of those laws. As the USTR points out, the Code’s “highly intrusive intervention” applies “without first having established a violation of existing Australian law or a market failure.”

Perhaps that’s unsurprising given that the law isn’t about promoting competition or improving markets. After all, why else would it be written to apply to only two US businesses and not to European, Chinese, or domestic companies that are similarly situated to Facebook and Google? 

This underinclusive application is telling. If Facebook and Google “compete” with Australian news media for eyeballs, then why is Microsoft excluded from the law? Why are other news aggregators and digital news services in Australia, China, and elsewhere excluded? 

Arbitrarily targeting American tech is a form of protectionism akin to slapping massive tariffs on any other American export to Australia. But rather than filling the government’s coffers, it lines the pockets of already profitable Australian businesses with strong ties to the government. 

Consider that the law requires Facebook and Google to pay select Australian media outlets for linking to their websites. If the parties can’t agree on a price, the law requires an Australian arbiter to set it for them. The law then tilts the arbitration process in ways that drive up prices and thus advantage the media outlets. The law also requires U.S. businesses to provide links to Australian media outlets whether they want them or not. 

Taken together, these provisions guarantee that Australian media companies have a steady income stream from American businesses for selling a “product” at uncompetitive and inflated prices that American businesses may not even want to buy. These provisions leave no doubt about the law’s true purpose.

Due Process

Because the Code lacks due process protections that promote fairness and the rule of law, it also stands to violate US-Australia trade and legal principles. Both the United States and Australia share a common-law background and believe that process is generally just as important as substance. How a law operates and is enforced matters just as much as what it says. 

In fact, the US-Australia Free Trade Agreement requires both countries to provide due process and a fair hearing to foreign investors. 

And yet, Australia’s Code violates these established norms by stripping Facebook and Google of a fair enforcement process. 

First, rather than use a style of arbitration common in business disputes, the Code requires a unique form of “baseball-style arbitration,” never before required under any other Australian law. Under this approach, the arbiter’s discretion is significantly limited and he or she must usually accept a proposal set forth by one party. Perhaps that wouldn’t be a problem by itself, but the law stacks the deck so that arbiters must all but adopt the media outlets’ proposals without giving a fair shake to US companies and their proposals.

Arbiters will be also appointed by the Australian government in individual cases. And they’ll be required to assume that a “bargaining power imbalance” between Facebook and Google and publishers exists, despite the facts showing otherwise. To make matters worse, the arbiters are also free to ignore evidence that weighs in Facebook and Google’s favor. 

Respect for Proprietary Information

Businesses understandably worry about intellectual property and proprietary information theft. Countries with innovative businesses worry about this too. 

That’s why trade agreements, including the US-Australia Agreement, prohibit a member country from requiring a foreign investor to “transfer a particular technology, a production process, or other proprietary knowledge to a person in its territory.”

Australia’s Code shreds this promise to pieces. It requires Facebook and Google to transfer sensitive proprietary information about their algorithms to Australian media outlets. If they don’t, they can’t compete in Australia’s market. 

This forced disclosure is unprecedented. Not only must Facebook and Google give their secret recipes to Australian media outlets, but they must also keep them in the loop about any product improvements or innovations. 

At best, Australian companies will use this information to game the system so their links outrank everyone else’s. At worst, the information will fall into the wrong hands and make it harder for Facebook and Google to combat harmful content. In competitors’ hands, the information could allow them to improve their search rankings without having to compete on their own merits. In the hands of foreign adversaries, the information could be used to harm American and Australian consumers. 

Even worse, the Code will tie Facebook and Google’s hands. Neither will be able to respond to urgent and unforeseen crises quickly, or to rapidly address new forms of spam and abuse. And if those crises stem from the initial forced disclosure, they’ll be unable to respond adequately because the same bad actors will be privy to it all. 

Precedent

Perhaps most concerning, Australia’s Code is already attracting copy-cat attention from other US trade partners. If Australia can extract benefits from American businesses and help its own businesses in the process, what’s to stop Canada, France, Germany, or the United Kingdom from doing the same? If Australia can violate trade commitments with impunity, what’s stopping China? 

Australia’s Code is a dangerous precedent that risks undermining free trade across other industries too. It violates so many established trade norms that it can’t be anything but an unmitigated disaster for the US and for consumers. 

In fact, Australia’s action may encourage other foreign countries to view American businesses as piggy banks to be targeted and tapped for wealth transfers to local industries, especially during hard economic times. 

And if American businesses do remain in foreign markets, foreign governments will grow emboldened to pass even more laws to extract even more. Relations between the US and its trade partners, including those who are vital allies, will grow frosty as each acts to further erode the multilateral system of rules-based trade built up over decades. 

Conflicts with U.S. law

As for those who’d ignore all these trade violations and push for the US to adopt a similar Code, it’s worth remembering that US law would not permit any of what Australia has proposed. 

First, the First Amendment prohibits the government from imposing must-carry content requirements on US businesses like those in the Code’s non-differentiation clause. The First Amendment also prohibits the government from penalizing search and news services for showing news from willing providers, and from privileging certain types of speakers over others.

Second, the Code also conflicts with the nondelegation doctrine, a key US constitutional principle that prevents an administrative body from making certain determinations (i.e., the determination that certain companies are subject to the Code) in a way that is insulated from judicial review.

Beyond constitutional law, the Code’s forced disclosure provisions also violate US copyright law. To incentivize innovation and creativity, US law provides strong legal protections for users and companies that are engaged in “fair use” of content, including by sharing links and snippets of content. 

It has been an overarching US policy objective since the Clinton administration to promote the free flow of data and open internet principles. Australia’s regime is a direct attack on those foundational and technical standards. As the inventor of the World Wide Web, Sir Tim Berners-Lee, said about the Australian Code: “If this precedent were followed elsewhere, it could make the web unworkable around the world.”

Australia’s approach is nothing but harmful to free trade, to consumers, and to the open internet. Other countries should follow the US’s lead and oppose the law too.

 

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