CFTC Challenge - Facts

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Challenging Government Regulation of Software and the Internet

On May 3, 1999, the Institute for Justice will go to trial in federal district court in Washington D.C. in the next case to consider whether the government can regulate software and the Internet. If the regulators prevail, development of software and online content will be dramatically curtailed as government agencies aggressively license and regulate information providers over these evolving media.

With the law on software and the Internet being made right now, jurisprudence is at a critical juncture. The Institute for Justice's case offers the first opportunity to halt an alarming trend. In January, a Texas federal district court ruled that the Quicken Family Lawyer software package amounted to the "unlicensed practice of law." As a result, the court banned the sale of the product in Texas, allegedly to protect "the uninformed and unwary from overly simplistic legal advice." The government argues that because of the interactive nature of software programs, websites and the Internet, these new media require a scrutiny and regulation to "protect the public," and they've won the first case on the issue.

Although the Quicken case dealt with legal software, other states and other federal agencies have watched its outcome and will attempt to use that precedent to require the licensing and regulation of software and online content in a wide variety of fields. Traditional "guilds" like the attorney bar and the medical establishment, as well as federal agencies like the Food and Drug Administration, the Securities and Exchange Commission and others also have a strong interest in using this precedent to expand their regulatory authority to the Internet. The Wall Street Journal last week raised the specter of further government regulation in a story on day-traders' chat rooms. While these parties consider software and the Internet a threat, consumers view these media as an opportunity, for technology allows consumers to do for themselves what formerly they had to hire someone to do for them.

With the Parsons case on appeal, all eyes are on the next case to examine the issue - the Institute for Justice litigation currently headed to trial on May 3, 1999. In this lawsuit, the Institute represents publishers of online content, websites, software, books, and newsletters designed to assist people in analyzing the commodity and futures markets, and consumers who subscribe to the sites, on-line services, and publications to find information and make their own decisions. Like most content providers, our clients do not invest customer funds; they do not give person-to-person trading advice; nor do they act on behalf of individual customers. Instead, they simply provide information and analysis to their customers.

The federal government, however, wants to establish its authority to regulate and license anyone who speaks on topics under its jurisdiction - in this case the commodity markets. The Commodity Futures Trading Commission (CFTC) claims that it, and only it, can grant the right to publish information on commodities and demands registration as a "Commodity Trading Advisor" before one can publish any information on these markets. And the government's definition of publishing extends to new media like software and the Internet.

Websites and hyperlinks feature prominently in government's prospective regulatory scope. In a series of proposed CFTC regulations, the only websites exempt from registration are those that offer "yellow pages"-type listings. But if a provider adds any commentary, including advertising, this triggers the CFTC registration requirement. If hosts provide opinions, registration is required. If a site receives compensation from any advertisers, then it must register. Even if the site provides a disclaimer, it does not matter; the CFTC demands registration. As for links, the CFTC claims that any site linked to a site providing information about commodities trading is itself providing that information and consequently must register.

Registration requires fees, fingerprinting, background checks, and perhaps most onerously, producing a list of one's subscribers and being subject to on-demand audits by the CFTC. Even after obtaining government's approval to speak, the license can be revoked if the agency believes the licensee does not operate in "the public interest." Failing to register risks $500,000 in fines and up to five years in prison.

Although these regulations were designed to license and monitor commodity traders who invest customers' money in the markets, the CFTC argues that they equally apply to individuals who simply "speak" by providing information, opinion, and analysis about the markets. This is why our clients brought suit. The Constitution has always been very clear in its prohibition on government licensing the press. That, of course, does not stop government agencies from attempting to expand their power. Clearly, the implications of this lawsuit are quite broad.

Unlike the litigation surrounding the Communications Decency Act and its progeny confronting "indecency" online, this case addresses informational and educational speech on the Internet and who is allowed to speak online. This is the next wave of government regulation ­a regime under which individuals and companies must secure government approval before developing software or publishing online.

The Institute for Justice have a strong track record of success challenging government regulation. And, we can win this case, given First Amendment jurisprudence and the sharp distinction between permissible professional licensing and impermissible speech licensing.

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