Global risk assets got a boost last week from news that the US and China will resume their stalled trade talks in October. The assets that benefited included oil, which rallied 6% on expectations that increased chances of a US-China trade deal will be positive for global growth, and therefore for energy prices. It is likely the oil price will now find further short term support from news at the weekend that Saudi Arabia has replaced its oil minister with a half-brother of the kingdom’s effective ruler, crown prince Mohammad bin Salman, who favors higher prices.
Given the close correlation between the oil price and inflation expectations, these developments might seem to point to higher than expected future inflation, and a reduced chance of central bank easing, which would be bearish for overpriced global bond markets.
However, other news last week can be considered bearish for both the oil price and global growth expectations. In particular, reports that China has signed a long term agreement to buy large quantities of Iranian oil in defiance of US sanctions will weigh on global crude prices and further complicate US-China talks, reducing the chances of a deal before the 2020 US election. In effect, the world is now facing a four-way tug of war over the oil price. The clearest position is that of Riyadh, which wants higher oil prices. Outgoing oil minister Khalid Al-Falih was appointed in 2016 to secure Opec production cuts and juice up prices, both to plug Saudi’s fiscal deficit and to support the planned IPO of state oil giant Aramco. However, at US$62/bbl, the price of Brent remains far below Riyadh’s near term target of US$75-80/bbl, hence Al-Falih’s replacement with a royal insider.
Washington’s position is more ambivalent. Although the US administration has repeated its determination to drive Iran’s oil exports to zero, Donald Trump’s twitter feed indicates his gasoline price pain threshold kicks in when Brent exceeds US$75/bbl.
Although obfuscated by ongoing talks with European nations and repeated threats to resume nuclear research and development, Iran’s position is also relatively straightforward: it desperately needs to sell its oil. Since the US withdrew from the Iran nuclear deal in May 2018, and following the tightening of US sanctions in May this year, Opec data shows Iranian oil production has slumped from 3.8mn bpd to 2.2mn bpd in July. Assuming domestic consumption has remained constant, this implies Iran’s exports have fallen from 2.3mn bpd to roughly 700,000 bpd.
Much of this oil is being shipped to China. Customs data shows that China imported some 220,000 bpd in July. However, the actual size of shipments is likely to be greater, given that some Iranian oil will have been transshipped at sea, likely disguising its origin, while more will have been held in bonded storage, without passing through Chinese customs. Nevertheless, the point is clear: Iran needs to ship its oil regardless of US sanctions, and China is its biggest market.
Hence the significance of reports last week that Tehran has fleshed out its 2016 “comprehensive strategic partnership” with Beijing. Under a 25-year deal reportedly sealed in August, Iran will agree to sell its oil and gas to China at a guaranteed discount to prevailing market prices of at least 12%, plus an additional discount of up to 8% to reflect risk. In addition, to bypass the US dollar-denominated international financial system, China will pay for its purchases in renminbi.
In return, China will invest some US$80bn over the next five years to upgrade Iran’s energy production facilities and infrastructure (and possibly much more over the following 20 years). And to safeguard its investments, Beijing will deploy “up to 5,000 Chinese security personnel on the ground in Iran,” as well as protecting shipments of Iranian oil from the Persian Gulf to China.
The benefits of such a deal to Tehran are manifold. It gets much-needed inward investment. It secures a market for its oil and gas. It breaks its dependence on the US dollar. It gets a deterrent against possible US or Israeli military strikes against its energy industry. And it reduces its economic dependence on powers that would otherwise insist it curtail its nuclear program. In short, it gets to thumb its nose at the West, and at Washington in particular.
This leaves China’s position. Discounted energy imports are always enticing, but in this case they come at a cost. A deal to buy Iranian oil in defiance of US sanctions is only likely to antagonize Washington, further complicating already knotty trade talks and reducing any chance of a resolution to the tariff war. On the other hand, China’s leaders may well have already concluded that the probability of an advantageous deal with the US is small, and that they are better off making the best of a bad job.
If so, a long term oil purchase and investment agreement with Tehran makes sense. Not only does China get cheap oil and further its Belt and Road ambitions. By paying for oil imports in its own currency it advances a big step towards creating a new monetary bloc centered on the renminbi, an essential move if the US is to pursue economic decoupling and strategic rivalry (and one supported by Russian plans to issue renminbi bonds in the coming months).
These are long term considerations. However, the last week’s developments have important near term implications. With the appointment of a new oil minister, Saudi is signaling that it will attempt to pursue a higher oil price. However, the reported Iranian agreement with China will weigh on the international price of oil for two reasons.
There is the prospect that Iran could quickly ramp up its oil shipments to China to as much as 2mn bpd (the volume of its global exports before sanctions kicked in). The displacement effects of selling so much oil (equivalent to 2% of global production) at a 20% discount to the market would weigh heavily on global prices.
A deal between China and Iran in defiance of US sanctions will further complicate US-China trade talks that have already been complicated by the dispute over Huawei. As a result, the chances of a deal will recede even more into the distance. That will weigh on expectations for global growth, which will further weigh on the international price of oil.
Together, these factors are likely to outweigh Riyadh’s efforts to support the oil price, given that in a fragmented market, additional Saudi production cuts are only likely to result in a further loss of market share. As a result, inflation expectations are set to remain subdued in the near to medium term. And while the longer term effect of US-China economic decoupling on inflation is debatable, so far the market clearly believes trade war escalation and economic disengagement to be disinflationary. The conclusion is that on balance the four-way fight over the international oil market will do nothing to burst the global bond bubble, and may well keep it inflated for even longer.
“A Boom In Reverse”: Southeast Asia’s Beaches Empty Out Amid Slump In Chinese Tourism
It’s hardly a surprise that China’s economic slowdown is spreading across the region, weighing on the economies of many of its neighbors and closest trading partners across Southeast Asia, according to Bloomberg.
One of the industries hardest hit by the downturn in the world’s second largest economy is tourism, and the slump is expected to endure through 2020 – that is, unless the trade war between Washington and Beijing is resolved more swiftly than anticipated.
The downturn has left beaches in Bali eerily quiet, and hotel rooms in Hanoi empty.
From quiet beaches in Bali to empty rooms in Hanoi’s hotels, pangs from China’s economic malaise and weakening yuan are being felt across Southeast Asia’s vacation belt A boom in Chinese outbound travel in recent years that stoked tourism across Southeast Asia is now in reverse gear.
The abrupt decline of Chinese travelers is becoming a painful lesson for nations such as Thailand and Indonesia that had become overly dependent on Asia’s top economy.
“The slump in Chinese arrivals and tourism spending is being felt throughout the region,” said Kampon Adireksombat, Bangkok-based head of economic and financial market research at Siam Commercial Bank Pcl. “There’s always a concentration risk when relying on one market, and many countries may not be able to find a replacement for growth fast enough.”
Climbing incomes over the past decade fueled a boom in Chinese tourism as middle-class Chinese were finally able to fulfill their wanderlust, transforming China into the world’s largest outbound market, according to a report by McKinsey.
Southeast Asian nations attracted the largest share of outbound Chinese tourists, given their proximity to the mainland and the similarities in culture and cuisine.
According to McKinsey, the total number of outbound trips from mainland China more than doubled from 57 million in 2010 to 131 million trips in 2017.
“Southeast Asia is usually the first destination for Chinese travelers when they opt for farther destinations,” said the report. McKinsey’s 2017 China Outbound Traveler Survey had shown that the highest number of package trips were booked to Southeast Asia.
To accommodate Chinese travelers, a whole new travel industry sprung up featuring Mandarin-speaking tours, Chinese eateries and Chinese mobile payment services stretching from Danang to Yogyakarta. However, these companies are now struggling with a severe pullback after companies and local governments doubled down and poured millions of dollars into expanding resorts, hotels and travel facilities.
Chinese tourists watch a flyboard show by the beach of Hon Tam Resort in Nha Trang, Vietnam.
Some hotel companies are already seeing evidence of the pullback reflected in their results. Thailand’s Central Plaza Hotel reported a softening of its hotel business in Q2 due to decreasing Chinese demand, according to SVP Ronnachit Mahattanapruet, who spoke at an investor briefing last month.
Companies are nervously hoping for a turnaround as several new hotels are expected to open in Thailand over the next half-decade. In Singapore and the Philippines, casino operators Las Vegas Sands and Genting Singapore are planning to open new casinos and hotels.
The Thai capital is also expecting a new Ritz Carlton by 2023 as part of a $3.9 billion development, while Hilton will manage two hotels due for 2022 opening. On Phuket island, a favorite for beachfront weddings and scuba diving, there will be 18% more hotel rooms by 2024, according to consultancy C9 Hotelworks Ltd. International arrivals in Thailand this year so far have grown only 2%, data from Thai tourism ministry show.
“The supply was based on people’s unrealistic expectations,” said C9’S managing director Bill Barnett.
In Singapore, casino operators Las Vegas Sands Corp. and Genting Singapore Ltd. announced a $9 billion expansion of their resorts earlier this year after the country’s skyline was beamed across cineplexes as the setting of the Hollywood hit “Crazy Rich Asians.”
Marriott International Inc. has 140 hotels in the pipeline across the region, with plans to more than triple its portfolio by 2023 in the Philippines, whose white-sand beaches and turquoise waters are such a draw that the island of Boracay had to close last year for upgrades to its sewage system.
Here’s a breakdown of how the slowdown in Chinese tourism has impacted Thailand, Indonesia, Vietnam and Singapore, courtesy of BBG, which relied on data from Thailand’s Ministry of Tourism and Sports, Indonesia’s central statistics agency, Vietnam National Administration of Tourism’s website, Khanh Hoa province’s department of tourism website, Singapore Tourism Board.
Chinese tourists became the largest group to travel to the region in 2019, adding $403.7 billion to the region’s GDP, according to BBG estimates. This is particularly critical for Thailand and the Philippines, as tourism now accounts for over one-fifth of national GDP, twice the global average.
Looking ahead, economic contraction likely won’t be the only factor to contribute to slowing tourism: As we noted earlier, tourism and foreign business visitors to Hong Kong have severely contracted due to the protest movement in the Chinese SAR. Tensions between Beijing, Hong Kong and Taipei could intensify, creating more problems for the tourism industry in the region.
While the weakening of the yuan, falling consumer confidence and the ongoing trade war are some of the biggest issues impacting the regional tourism industry, domestic issues are also contributing to the slowdown. Among EM currencies, the Thai baht has strengthened the most vs RMB this year, making travel more expensive. Meanwhile, a boat accident that killed 47 Chinese tourists off the island of Phuket last year made travelers wary of visiting the island.
The rise in tourism from other countries like the US and India has helped offset the decline, but the hole left by Chinese consumers is too large to fill.
“Chinese tourists are the largest group of visitors by numbers,” said the Bali Promotion Board’s Wijaya. “Even the rise in holiday makers from other countries cannot compensate for their absence.”
As of April, the IMF had downgraded global growth forecast three times within the prior six months. Now, with China’s economy anticipated to grow by less than 6% this year, the damage to tourism could worsen. Going forward, the impact of this slowdown likely won’t be limited to SE Asia, as the global tourism industry contracts.
The fundamental political issue always confronting society is whether human relationships shall be based on free association and voluntary choice, or on governmental compulsion and command. Of course, in most societies there are elements of both, often called the interventionist state or the “mixed economy.” But, nonetheless, the basic institutional alternatives are liberty or coercion.
This often seems difficult for people to fully appreciate or understand. We select where we live, we accept or not accept a job offering, we decide on the furniture in our home and what (if anything) we will read in terms of books or magazines, or to watch on television. We pick our friends and choose the clubs and associations we want to join. A thousand other everyday choices and decisions reflect our freedom in still much of what we do.
Political Interference in Market Affairs
Yet, at the same time, we take for granted many aspects and facets of our lives where such decision-making is narrowed or co-opted for us by those in political authority. We are compelled to pay into the government pension system called Social Security; we are taxed to pay for types and degrees of medical and health care that we may or may not desire or consider worth what the government garnishes from our salaries to pay for it before we even see a penny of our earned incomes.
The government regulates how business is done, under what terms and conditions an employer may hire a worker, what products may be produced and with what qualities, features and characteristics, and sometimes the price at which the good or service may be sold.
These, too, are taken for granted and presumed to be the appropriate and necessary tasks of government in modern society. Indeed, in many if not most instances, the majority of Americans and the citizens of other countries, as well, don’t or rarely think twice about these roles for the political authority in our daily affairs. In fact, when they are challenged, a good number of people are shocked that it should be even questioned.
Yet, all these government activities inescapably reduce and restrict our free choices. Think of medical and health care. Increasingly government prevents people from deciding on the health insurance and medical treatment they may receive or purchase on their own. Practically all of the candidates vying for the Democratic Party presidential nomination have said they want to see implemented some form of a “single-payer” system, which, in reality, is socialized medicine under which government centrally plans all medical matters for everyone in society.
What Of Politically Mandated Euthanasia?
When friends of freedom raise serious questions about this, including government being handed control over life and death decisions for all of us, in terms of type and duration of medical treatment, they are often scoffed at. Yet, this danger has been warned about for more than a century. In 1916, in the midst of the First World War, a fairly well known British lawyer and classical liberal, E. S. P. Haynes (1877-1949), published a book called The Decline of Liberty in England. He explained how the British government had been encroaching on people’s personal, social and economic freedom in Great Britain for nearly 40 years, and the wartime emergency had merely exacerbated this trend. He wondered how much of all this could or might be reversed once the war was over.
Haynes reprinted as an appendix a brief article that had appeared in a magazine called, The Free Woman, shortly before the publication of his own book in 1916. The article was on, “Home Life in A.D 2000.” It tells the tale of an old and ill gentleman in the far off future year of 2000, who is waiting for the government to enforce mandatory euthanasia, since government planned and managed medical care dictate treatments and termination of life.
The gentleman says to his son in this imagined future:
“It really seems a pity that the Medical Control Board won’t let me live a little longer. Of course, there is a good deal of pain for one hour out of the twenty-four, which requires a certain amount of medical attention, but I should not mind paying a little extra for that if the State allowed any doctor or nurse to have a private practice. (However, I daresay I should never have been born under the new Inspection of Parents Act.) The point is that I am quite interested in the morning paper and talking to all of you and seeing a friend sometimes . . . and in old days I could have gone on indefinitely.”
The son comments that, yes, some are wistful for the “anarchy” of the old days, of around 1900, when people could make those decisions for themselves. But had not his father commented about how excited people were with the Voluntary Euthanasia Act of 1940? The elderly gentleman admits that that is so, “but, of course, it had to become compulsory soon . . .The expenses of the State medical service have been considerably reduced by the power of the Local Board to decide when a patient is not worth further attention.” He then asked his son, “By the way, did you see the official form? Did it give me a week or a fortnight,” before his mandatory termination?
His son read him the official government notice that had arrived:
“I regret to inform you that my Board have decided to allow you no further medical service after a week from this date, and they are of opinion that you would save yourself and your relations much inconvenience and pain by availing yourself of Section 3 subsection (1) of the Compulsory Euthanasia Act of 1980. Everything can be done at your house, if suitable preparations are made, as our Travelling Euthanasia expert will be in London at that date. You are probably aware that in cases like yours the Board will allow a grant of five pounds towards the cremation expenses, and will accept a preliminary Probate affidavit from yourself for the purpose of assessing death duties. For your guidance I enclose a special form which you must forward within three days to the Inland Revenue Department.”
The old gentlemen tells his son that there was a time when people would have considered such a compulsory ending to human life at the command of the State as against the very idea of a society of free individuals. However, such people who believed in liberty “were all ultimately secluded under the third Mental Deficiency Act,” that is, placed in mental institutions for those with the insane idea that freedom mattered.
How long ago, he reflects, was that bygone time when people, “swore, drank alcoholic preparations at meals, married without medical permission . . . Why, they actually owned houses and land in perpetuity, and read books which were excluded from the British Museum Catalogue, and wrote quite scurrilously about the Government. Those were indeed turbulent times. Everything was so casual and unforeseen.”
Finally, the gentleman thinks that he better make sure his will is in order before his mandatory termination, and he mentions to his son that as part of any eulogy, they might mention his important work on legislation relating to the “Better Regulation of Female Underclothing Act,” of which he is clearly very proud.
British National Health Care Can be an Indirect Euthanasia
In the first decades of the 20th century, this must have seemed all a fantasyland of “reactionaries” and “anti-social,” old fashioned laissez-faire liberal types. But, in fact, in the years before the First World War, the British government introduced the first legislative elements that eventually became the “single-payer” system under the inspiration of the welfare state already established in Imperial Germany, the very country with which Great Britain was then at war. Britain’s socialized healthcare system only was fully implemented following the Second World War under a socialist government.
Under the current British system, the government may not order your death after some point due to age or illness, but the stories are notorious concerning the wait times for seriously sick individuals to have access to doctor’s appointments or to the possible treatment that could cure them or at least noticeably prolong their lives. It is merely compulsory euthanasia through indirect means.
The Friendly Societies Provided Voluntary Social Safety Nets
Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others.
A number of scholars who have devoted time to researching the lost history of the Friendly Societies estimate that by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time; precisely because of their more modest financial circumstances, the “working poor” and the lower middle class were very conscious of the need to set aside a certain sum of their limited budgets to anticipate unexpected circumstances, as well as those situations that were inescapable for anyone, such as old age.
What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role. One part of this system of freedom was charity and philanthropy; that is, the voluntary giving by those better off to assist those who were financially worse off and deserved a helping hand.
The Generosity of Private Charity was Criticized!
How pervasive was such philanthropy and charity? William Stanley Jevons (1835-1882), one of the leading British economists of the second half of the 19th century, and one of the developers of marginal utility theory, called for the end to private charity and its replacement with a fuller government system. This was not due to the paucity of private benevolence, but rather due to what he considered its excessive generosity.
At a meeting of the British Association for the Advancement of Science in September 1870, Jevons criticize the open-handedness of the wealthy and better off in voluntarily helping the poor through various philanthropic endeavors. Private charity was creating a class of permanent poor, he said, which resulted in “the casual paupers [having] their London season and their country season, following the movements of those on whom they feed.”
The government programs for caring for the poor are “frustrated by the over-abundant charity of private persons, or religious societies.” He even was critical of the over-generosity of the private sector in the voluntary funding of hospitals for the poor and less fortunate. There were so many such charity hospitals, Jevons lamented, that these private medical establishments “compete with each other in offering the freest possible medical aid to all who come.”
Here was the heart of the problem. Rather than fears that private benevolence would not be enough to assist those unable to fully pay for food or medical treatment, there was too much of it! Jevons prayed, “that we are rapidly approaching the time when the whole of these pernicious charities will be swept away.” Instead, all such charitable matters needed to be shifted to “the supervision of the [government] Poor Law Board,” so bureaucrats could make wiser decisions concerning how much assistance and support the less well off should receive, rather than the uncontrolled generosity of individuals and private associations.
According to William Stanley Jevons, Great Britain needed more government responsibility for the poor and the unfortunate to bring a halt to the excessive voluntary giving of a free people. Central planning of charity was needed to replace the spontaneous giving of non-governmental civil society. Jevons wanted government imposed welfare austerity, if you will, in place of private philanthropic abundance. So much for the constant hue and cry by those on “the left” that if not for compulsory government welfarism, “the poor” would die in the streets!
Perverse Incentives of the British Poor Law Welfare System
Of course, Great Britain had had a form of the welfare state since the time of Queen Elizabeth I (1533-1603) in the 16th century. But the excessive waste of government redistribution and its perverse incentive effects had become clearly known by the 19th century, and became a point of criticism by the classical liberals of that period, and the basis of their case for reform in the private sector instead, in spite of the type of criticisms made by someone like Jevons.
For instance, one of the last of the important British classical economists, Henry Fawcett (1833-1884), explained the perverse consequences under the government system of social safety nets in his book, Pauperism: Its Causes and Remedies (1871). Investigations were made in the first half of the 19th century concerning the impact of the Poor Laws, under which taxed wealth was redistributed through the Church of England parishes.
Fawcett pointed out that illegitimacy was fostered under the government’s welfare state, that government redistribution became viewed as an “entitlement,” and that it created an attitude that taking the money of others through the State was as honest and acceptable as wages earned from a day’s work. Explained Fawcett:
“Men were virtually told that no amount of recklessness, self-indulgence, or improvidence would in the slightest degree affect their claim to be maintained at other people’s expense. If they married when they had no reasonable chance to being able to maintain a family, they were treated as if they had performed a meritorious act, for the more children they had the greater was the amount of relief obtained. All the most evident teachings of commonsense were completely set to naught . . .
“Population was also fostered by a still more immoral stimulus. A woman obtained from the parish a larger allowance for an illegitimate than for a legitimate child. From one end of the kingdom to the other people were in fact told not only to marry with utter recklessness and let others bear the consequences, but it was also said, especially to the women of the country, the greater is your immorality the greater will be your pecuniary reward. Can it excite surprise that from such a system we should have had handed down to us a vast inheritance of vice and poverty? . . .
“Pauperism often came to be regarded as a paying profession, which was followed by successive generations of the same family. Thus the Commissioners [of the Poor Laws] tell us of three generations of the same family simultaneously receiving relief . . . The feeling soon became general that pauperism was no disgrace, and that allowance which was obtained from the parish was just as much the rightful property of those who received it, as the wages of ordinary industry. Indolence was directly encouraged, and a spirit of lawlessness and discontent resulted.”
The Logic and Facts about Welfare Statism Cannot be Denied
Now, a liberal economist such as Henry Fawcett was not a proponent of strict laissez-faire in welfare matters, any more than he was in a number of other government policy issues. But logic and facts were what they are, and could not be wished away. If you pay people not to work, you have more people not working; if you do this long enough a system of intergenerational dependency emerges and recipients used to receiving such redistributed wealth start considering it a “right,” equal to a wage earned from employment in the marketplace.
Furthermore, if you reward people with larger welfare benefits for having more children including, especially, children out of wedlock, don’t be surprised if those women on welfare become less concerned about the more traditional notions of family responsibility in deciding how many children to have.
These were some of the consequences that classical liberals in 19th century Great Britain became concerned about, and wished to see alleviated and improved through the private sector alternatives to government compulsion through taxes for redistribution under the older Poor Law system.
Jevons’ Misplaced Concerns and Understandings about Welfare
In response to Jevons’ arguments, we all, no doubt, know parents who are excessively indulgent of their children’s wishes and wants. This sometimes creates an irresponsible attitude on the part of the child that they can and should have anything they want with no thought to the cost or the possibly negative impact on others. A few such children grow up thinking they can get away with murder.
But this is not generally the case in private households. Even with errors and mistakes along the way, most parents attempt to bring up their children with notions of responsibility and self-supporting habits for their later adult life. It would be absurd and dangerous for the State to declare that it will “plan” the upbringing of children within family households with schedules, detailed procedures, and surveillance of what is going on inside the family all day and night.
The same is true with private charity and philanthropy by individuals and voluntary associations. First, there is an ethical dimension not really touched upon by Jevons, and that is the morality of those who have honestly earned income and accumulated wealth being considered the rightful owners of it, and who should have the liberty to use and dispose of it as they think fit as a matter of individual right.
Second, Jevons seemed to be disturbed by the multitude of competing private charities serving the poor in the Great Britain of his time – and, by the way, this was before any notion of a charitable deduction on one’s income tax; it was guided simply by the idea that it was “the right thing to do.” What Jevons missed is that the charitable competition that he considered misplaced wasteful duplication is in fact the very avenue, like all other forms of peaceful rivalry, to discover the best and most efficient means and methods to reach an end or goal in mind.
And, third, it never seemed to enter Jevons’ mind that those who man and manage government welfare programs are not only as imperfect as the rest of us about how best to assist those in financial and other forms of need, but that those in political power in elected office and in the appointed bureaucracy have their own agendas and purposes that have nothing to do with the stated goals of any government program implemented.
The self-interests of those administering the government welfare system of that time resisted all change into a less compulsory paternalistic direction. A leading liberal reformer of the 1830s, Thomas Chalmers, pointed out the resistance to any reduction to government redistributive actions by the administrators of the relevant programs. The proponent of voluntarism, he said, “comes into collision with the prejudices and partialities of those who at present have the right and power of management” of the then-existing Poor Law system.
That is why it always comes down to that fundamental issue of voluntary choice and free association, including for purposes of social benevolence as well as decision-making in the marketplace, versus, instead, politically imposed force through taxes and compulsory redistribution and regulation of human affairs.
The tragedy of contemporary politics in America and abroad is that the debates and decisions all concern in what forms and for what purposes compulsion in social and personal affairs will be imposed. Left out of today’s public discourse is the issue that guided classical liberals in the 19th century: should people be free or shall they be coerced to do what others consider to be “the right thing”?
FBI Given Evidence Of Clinton-Linked Libya Scheme; Instead Launched Trump-Russia Quagmire
Recently made public FBI records reveal that the agency virtually ignored evidence from private GOP-backed sources about a scheme in which Hillary Clinton associates tried to exploit her position as Secretary of State in order to profit from the 2011 turmoil in Libya she helped to create, according to RealClearInvestigations.
The documents, provided to the FBI in June 2016 as the agency was kicking its Trump-Russia investigation into high gear, allege that Clinton confidant Sidney Blumenthal sent her “a series of detailed memos and reports about Libya,” which were intended as a “quid pro quo” which might help a post-Gaddafi Libya recover as much as $66 billion in offshore funds hidden by the slain strongman.
According to the private investigators funded by Judicial Watch: “Our evidence shows that Mr. Blumenthal was involved with a group of intelligence professionals seeking to repatriate asset[s] which were plundered and then exfiltrated by the [Gaddafi] family and hidden in various offshore localities.”
If successful, Blumenthal and associates “stood to gain a brokers’ cut of perhaps hundreds of millions of dollars.”
The private Libya inquiry leaves important issues unsettled. The documents do not include emails or other original source material to support the allegations within. While claiming to possess evidence that Blumenthal and his associates had contracts and offshore accounts to repatriate the money, the documents say “no concrete evidence” was found suggesting Clinton acted to support the effort.
Yet if verified, the files might shed light on why Clinton kept her emails, tens of thousands of which have gone missing, out of normal government communication channels. –RealClearInvestigations
The documents, released as part of the FBI’s case files for the Clinton email investigation, code-named “Midyear Exam,” reveal that Blumenthal was deeply involved in the Libya affair with Clinton operative Cody Shearer. The two would later join forces to proffer anti-Trump talking points similar to the largely unproven Steele Dossier.
According to the report, “The FBI’s acquisition of the Libya files made it freshly aware of Blumenthal’s possible past motives – including personal financial gain – as he spurred an investigation meant to help defeat Donald Trump and elect Clinton.“
What’s more, FBI agent Peter Strzok “plated an especially pivotal role in the bureau’s response to both sets of allegations.”
The heavily redacted files are part of a 428-page FBI document dump posted on FBI.gov in June, which can be downloaded here (relevant pages: 318-380). The documents are labeled by the FBI as having been received on June 6, 2016 – a month before the first of Comey’s two exonerations of Clinton and roughly seven weeks before the FBI opened its counterintelligence probe of the Trump campaign, relying on the Steele dossier. They are watermarked as having been declassified in December 2016, after the presidential election.
Describing the genesis of the Libya inquiry, FBI notes say its methodology was conceived by private entities with data recovery expertise and that former House Speaker Newt Gingrich referred them to the watchdog group Judicial Watch for financial support. Gingrich, a Republican, did not reply to a request for comment from RealClearInvestigations.
Tom Fitton, president of Judicial Watch, confirmed that his organization funded the freelance investigative project, including research on the encrypted “dark web,” after the work was already underway — “and then we found a key Libya-linked document suggesting Mrs. Clinton’s server was hacked by the Russians.”
He said his group passed the probe’s information on to the FBI team led by Strzok, the agent in charge of the Clinton email inquiry. –RealClearInvestigations
While the FBI files don’t indicate how – if at all, the Libya allegations were pursued, it’s clear that nothing came of the ‘credible allegations’ provided to the same agency which launched the Trump-Russia probe based on a rumor seeded by a self-described member of the Clinton Foundation, Joseph Mifsud.
The head of the World Meteorological Organization (WMO) issued an unprecedented rebuke to climate alarmists in an interview published by a Finnish magazine on Sept. 6.
Petteri Taalas, the secretary-general of the WMO, told Talouselämä magazine that he called for a calm and rational approach to the climate debate, and disagreed with those who are promoting end-of-the-world scenarios.
“Now we should stay calm and ponder what is really the solution to this problem,” Taalas told Talouselämä magazine.
“It is not going to be the end of the world. The world is just becoming more challenging. In parts of the globe, living conditions are becoming worse, but people have survived in harsh conditions.”
The WMO and the United Nations Environment Programme created the Intergovernmental Panel on Climate Change (IPCC) in 1988. Since then, the IPCC has become the leading institution worldwide to promote the theory that human activity contributes to global warming.
Taalas said that while skepticism of the human-activity theory has abated in recent years, climate scientists are under increasing assault from radical climate extremists.
“While climate skepticism has become less of an issue, now we are being challenged from the other side. Climate experts have been attacked by these people and they claim that we should be much more radical. They are doomsters and extremists; they make threats,” Taalas said.
The head of the WMO noted that the media in his country are creating additional anxiety.
“The latest idea is that children are a negative thing. I am worried for young mothers, who are already under much pressure. This will only add to their burden,” Taalas said.
While Taalas limited his examples to the climate debate to Finland, some of the extremism he references is akin to the rhetoric employed by climate alarmists in the United States. Democratic socialist Rep. Alexandria Ocasio-Cortez has become the face of that movement. The New York congresswoman regularly promoted the theory that the world will end in 12 years unless the United States takes radical action to eliminate carbon dioxide emissions.
Greenpeace co-founder Patrick Moore called Talaas’s remarks the “biggest crack in the alarmist narrative for a long time.”
“The meteorologists are real scientists and probably fed up with Greta, Mann, Gore, & AOC catastrophists. Good on him,” Moore wrote on Twitter on Sept. 7.
AOC is the acronym commonly used to refer to Ocasio-Cortez. The three others named in the message are Michael Mann, a climatologist, Greta Thunberg, a 16-year-old Swedish student, and Al Gore, the former vice president.
Talaas pointed out that climate extremists are selectively picking out facts from the IPCC reports to fit their narrative. For example, Ocasio-Cortez and the movement she represents often refer to the 12-year deadline to end the use of fossil fuels. That 12-year timeline was selectively plucked from a range of 12 to 44 years in the IPCC’s special report, which states that “Global warming is likely to reach 1.5°C between 2030 and 2052 if it continues to increase at the current rate.”
“The IPCC reports have been read in a similar way to the Bible: you try to find certain pieces or sections from which you try to justify your extreme views. This resembles religious extremism,” Taalas said.
The vast majority of the climate models the IPCC uses as the basis for its predictions have repeatedly incorrectly forecast higher temperatures. According to an analysis by the Cato Institute, 105 of the 108 models predicted a higher surface temperature for the period between 1998 and 2014 than the temperature actually recorded.
As SoftBank Urges WeWork To Shelve Its IPO, It’s Time To Think The Unthinkable
Once upon a time, SoftBank was best known for making happy slides, such as the one below, which showed a variety of multi-colored unicorns jumping into the stratosphere, to summarize it investing strategy.
Those days are gone, and instead they have been replaced with very stormy weather in community-adjusted EBITDAville.
And the weather is only getting worse, because one day after the WSJ reported that in the days after WeWork decided to slash the valuation of its IPO to as low as $20 billion – a whopping 60% off the last funding round which valued the company at $47 billion – the company was contemplating further trimming its valuation to below $20 billion, the FT reported late on Monday that SoftBank, the biggest outside investor in WeWork, is now urging the lossmaking office space lessor to shelve its (not so) hotly anticipated initial public offering after its disastrous reception from investors.
While WeWork’s parent company, the We Company, whose stated aspiration is to “elevate the world’s consciousness” was to raise between $3 and $4 billion in the IPO, it has faced an unexpected backlash from investors and analysts on Wall Street over its governance, payments made to co-founder and chief executive Adam Neumann and its use of a complicated corporate structure. Also, the fact that the company has seen its loss grow as fast as its revenue has hardly ispired confidence.
WeWork’s sponsor – Masayoshi Son’s SoftBank – is facing two key problems: the first is that together with its Saudi-backed Vision Fund, it has invested $10.4 billion into the office space provider. The issue is that at a the latest valuation that is being cited of around $15-$20 billion, the Japanese venture capital conglomerate would be hopelessly underwater (it invested $2 billion this year at a $47 billion valuation), which explains SoftBank’s waning enthusiasm for a listing. Softbank’s second major problem is that its other mega-investment, Uber, is also perilously underwater, at a cost of $7.7 billion, as the stock has tumbled almost 30% since its May 10 IPO.
And just to make matters worse, both investments are 50% levered (thanks to Saudi money yielding 8%), which means that as Ian Sigalow noted, “they are going to need an incredible deal to dig out of that hole.”
Only that deal is not going to be selling the stock to greater fools in the open market as apparently such concepts as “community-adjusted” EBITDA no longer make an impression on the investing public. This is a problem, as Harris Kupperman vividly explained earlier:
Ever since this transaction was disclosed, I’ve seen people attack the absurdity of it all. In fact, I saw so much coverage that I felt that I’d let this one pass—what else did I have to add? Then they failed to find buyers for the IPO. The valuation started a few months ago at $65b, then $50b, then $40b (…still no one?), $30b (…uhh guys, think of the kegerators?), $25b (does anyone care at roughly half of what SoftBank paid?), now $20b is looking like a long-shot.
It’s like one of those charity date-auctions in college where no one wants the fat chick. The price keeps dropping and everyone is looking at each other, seeing who’ll step up. “At least it’s for a good cause, right?” Well, the WeWork IPO does nothing other than prop up a Masayoshi Scheme (which is just a sophisticated Ponzi Scheme). Letting WeWork fail would actually be the “good cause.” It would stop innocent retail investors from getting hosed—while the scam artists take the beating for a change.
It gets worse. If WeWork does follow the advice of its equity sponsor, it may soon find itself in a liquidity crisis as it will also lose access to a $6 billion loan from a group of banks, including JPMorgan Chase and Goldman Sachs, that was contingent on the IPO raising at least $3bn in new investment.
The sudden loss of more than $9 billion in new capital which had already been factored into the company’s growth trajectory, would force a dramatic change in the We Company’s corporate strategy according to the FT; it would also crippled its aggressive expansion strategy that has seen it open 528 locations in more than 110 cities.
And considering the company’s gargantuan cash burn – by the end of 2019 the company will have burned through $6 billion since 2016 – it might, as some have speculated, even lead to the company’s bankruptcy, which brings up even more pertinent questions: what happens to the US commercial real estate sector?
What happens to the US CRE market when We files for bankruptcy
Here is the problem: while the collapse and/or bankruptcy of WeWork would hardly lead to a personal finance disaster – SoftBank’s Masayoshi Son is already Japan’s richest man and with a net worth of over $20 billion could easily stomach losing $10 billion on WeWork – it would send shockwaves across US commercial real estate, as the company is already the single biggest tenant in New York City, as well as Chicago, Denver and central London.
In fact, with over $47 billion in lease liabilities, WeWork is already one of the world’s largest lessees, trailing only oil exploration giants Petrobras and Sinpec, an astonishing feat for the flexible office space provider “which was founded less than a decade ago, bleeds cash, and doesn’t plan to become profitable any time soon.”
As Bloomberg recently noted, “anyone weighing whether to buy shares in WeWork’s IPO cannot ignore the fact that the company will have to find $47 billion from somewhere in coming years to meet its contractual obligations – including about $10 billion in just the next five years. Right now, its own very negative cash flows won’t cut it.”
Of course, in a bankruptcy, all those obligations would be frozen and squeezed among all the other pre-petition claims, which of course means that the commercial real estate market of cities where WeWork is especially active – like New York and London – would suddenly find itself paralyzed, as a deflationary tsunami is unleashed among one of the strongest performing markets since the financial crisis.
Whether that will in fact happen remains to be seen: after all, with so much hanging on whether the WeWork lunacy can continue, one – the CEO for example – could argue that the company is too big to fail; it also remains to be seen if WeWork’s CEO Adam Neumann also trademarked the word “bankruptcy”, which he may capitalize on very soon. As is well-known by know, Neumann infamously received a $5.9 million payment from the company for his rights to the trademarked word “we.” He has since returned the money, but for his company which went from a $47 billion CRE juggernaut to the laughing stock of the bursting IPO bubble, and which at the current rate it is burning cash will be bankrupt very soon, Neumann’s act of “charity” was too little too late.
Hong Kong Tourism Plunges 40%, Most Since 2003 SARS Outbreak
As the protests in Hong Kong drag on into their fifteenth week, Bloomberg reports that the city’s tourism industry has taken its biggest hit since the 2003 SARS outbreak.
Tourist arrivals in the city declined almost 40% in August from a year earlier, according to Financial Secretary Paul Chan, who published the figures in a blog post published Sunday.
That’s the biggest yoy decrease in visitor numbers since May 2003, when arrivals sank almost 70% in the midst of the disease outbreak that ultimately claimed hundreds of lives in the city, according to data compiled by Bloomberg from the Hong Kong Tourism Board.
“Social issues in the past few months, especially the continued violent clashes and blockading of airport and roads, have seriously impacted Hong Kong’s international image as a safe city,” Chan said in his post, which was written in traditional Chinese.
“The most worrying thing is that the situation is not likely to turn around in the near future.”
The city’s tourism, retail and hotel industries have been seriously hard hit, Chan said. The occupancy rates of hotels in some districts declined by more than half, while nightly rates decreased 40% to 70%.
Many meetings and business trips have been postponed or moved to other places, he said.
The protests have already had a serious impact on Hong Kong’s economy. Retail sales by value dropped 11.4% in July, the first full month impacted by the protests, while sentiment among small businesses has hit record lows.
Meanwhile, Hong Kong’s economy contracted 0.4% during Q2 from the previous period, raising the risk of a recession.
Based on figures from August 2018, a 40% drop would mean the city received about 3.5 million visitors, the lowest level in more than seven years.
UK Parliament Rejects PM Johnson’s Early Election, Now What?
After an hour of to- and fro-ing, jeering and yelling, guffawing and gaslighting, the UK parliament has finally voted on PM Johnson’s request for an early election on October 15th.
BoJo reiterated that he’s prepared to leave the European Union without an agreement if necessary, and that he “will not ask for another delay,” enraging opposition lawmakers, who complain he’s refusing to acknowledge the legislation that passed into law earlier blocking a no-deal Brexit on Oct. 31.
Johnson lambasted the Labour Party for “preposterous cowardice” for not voting for the early election.
Opposition Labour Party leader Jeremy Corbyn responded to Johnson’s statement by accusing the prime minister of pursuing a no-deal Brexit with no mandate to do so, and calling the government’s negotiations with the European Union a “sham.”
And Liberal Democrats leader Jo Swinson said her party would revoke Article 50 – keeping the U.K. in the European Union – if it was elected to government.
It was raucous to say the least.
This is parliament at its sickening worst
From Tory benches, the braying & bullying, the shouting & jeering is just disgusting
This isn’t a game – it’s about real people’s real lives, about the rule of law & about democracy
But, after all the bluster, as expected, MPs voted against the early election. He needed two-thirds of MPs – 434 of them – to vote for this but only 293 agreed (notably less that last week when he got 298), with 46 voting against and the rest abstaining.
“Once again, the opposition think they know better,” exclaimed Johnson after the failed vote.
There is no reaction in cable to this news.
And so, what happens next?
Quite frankly, no one knows but the following flowchart from Statista is the clearest illustration of what is to come we have found so far…
I first became interested in high-profile federal impeachments in the early 1990s. I had my reasons. They eventually became a central component of my one of my first books on the significance over the course of American history of elected officials shaping the effective constitutional understandings, practices and norms that governed much of American politics. Impeachments were one way that politicians struggled to remake constitutional meaning. Impeachments were tools of constitutional construction.
That seemed like an admittedly arcane thing to study at the time, but soon enough Bill Clinton got himself impeached and suddenly esoteric knowledge seemed relevant—even as the Republican Congress did not seem to be doing a very good job of explaining why an impeachment was either necessary or useful. The question is what lessons we would learn from that experience. But as I noted in Reason at the time,
In the end, Congress seems to have stumbled to the right conclusion, and the American people appear to be making an appropriate assessment of last year’s events.
Maybe we’ll do better this time, but I wouldn’t bet on it. In any case, I’ve been writing a lot about impeachment issues over the past couple of years. They are collected here. For a deep dive into the impeachment process and the standards for assessing potentially impeachable offenses, I have posted a longer review essay here.
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The Ninth Circuit Court of Appeals has handed down a groundbreaking decision today on the federal computer hacking law, the Computer Fraud and Abuse Act (CFAA). In HiQ Labs v. LinkedIn, the court held that scraping a public website is likely not a CFAA violation.
Under the new decision, violating the CFAA requires “circumvent[ing] a computer’s generally applicable rules regarding access permissions, such as username and password requirements,” that thus “demarcate[]” the information “as private using such an authorization system.” If the data is available to the general public, the court says, it’s not an unauthorized access to view it—even when the computer owner has sent a cease-and-desist letter to the visitor telling them not to visit the website.
This is a major case that will be of interest to a lot of people and a lot of companies. But it’s also pretty complicated and easy to misunderstand. This post will go through it carefully, trying to explain what it says and what it doesn’t say.
I. The Context
To really understand the new decision, I think it helps to start with some context. The CFAA is a computer trespass statute that prohibits accessing a computer “without authorization.” It is primarily a criminal statute, but it also has civil remedies that permit private parties to bring CFAA lawsuits for damages or injunctive relief.
Importantly, the meaning of the CFAA is the same in both civil and criminal settings. This means that whatever courts say about the CFAA when a computer owner sues a user is equally applicable when the federal government arrests and prosecutes the user with substantial jail time in play.
The big question under the CFAA has long been what counts as “authorization.” Does authorization depend on how the computer architecture is designed, with users authorized to use a computer if it’s available to the public and not authorized if the access is technically blocked? Or does it depend on what the computer owners says they want, either through terms of use posted on the computer or through letters directed to potential visitors?
Courts have been all over the map, and the Ninth Circuit’s decisions have zigzagged a bit on this. There are four big Ninth Circuit precedents to consider:
(1) In LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1133 (9th Cir. 2009), the Ninth Circuit held that an employee who gathers information on a company computer for his own purposes does not violate the CFAA merely because that personal use was adverse to the interests of the employer. The parties agreed that access to the company computer would be unauthorized after the employee left the company. But when the employee was working at the company, accessing the company’s files was not made a crime simply because the employee was doing so for a secret purpose to help himself and hurt the company. (Another circuit had disagreed, but I’ll stick to Ninth Circuit caselaw in this post.)
(2) Three years later, in United States v. Nosal, 676 F.3d 854 (9th Cir. 2012) (en banc) (“NosalI“), the Ninth Circuit held that it doesn’t violate the CFAA to use a website in violation of written restrictions like employment agreements or Terms of Service posted on websites. The CFAA was designed to “punish hacking — the circumvention of technological access barriers,” the Court noted. Given that narrow focus, it was wrong to construe the statute to also encompass the very common and innocuous act of using a website or company computer in a way contrary to terms of use and employment policies. (There is a circuit split on this issue, too. But again, I’m focused on the Ninth Circuit here.)
(3) Four years later, in a follow up case, United States v. Nosal, 844 F.3d 1024 (9th Cir. 2016) (“Nosal II”), the Ninth Circuit held that it does violate the CFAA for a former employee to get a current employee’s username and password and to use their account with their permission. That’s different from violating an employment agreement or terms of use, the court held, as the former employee has no right to access the computer under Brekka. Leaving the company ended the access rights, and a former employee can’t work around that to restore those rights just because a current employee was willing to hand him her username and password.
(4) Shortly after Nosal II, the Ninth Circuit handed down Facebook v. Power Ventures, 844 F.3d 1058 (9th Cir. 2016). Power Ventures was a service that accessed users’ Facebook profiles with the users’ permission and moved the data to a different website run by Power Ventures. Power Ventures held that it’s an unauthorized access to visit a computer after receiving a cease-and-desist letter from the computer owner prohibiting the visit based on it violating terms of service. That’s like Brekka, the Ninth Circuit reasoned, because the cease-and-desist letter withdraws permission to use the computer. And it’s not like Nosal I, the court argued, because cease-and-desist letters (unlike posted terms of service) put the visitor on clear notice that the visit to the computer is prohibited by the computer owner.
II. The Facts and Procedural History of HiQ Labs
That brings us finally to the new case, HiQ Labs v. LinkedIn. HiQ Labs is a data analytics company. It scrapes information on LinkedIn profiles that LinkedIn users have set be viewable by the general public without a LinkedIn account. HiQ Labs combines that information with other information and sells it to companies.
LinkedIn wants to monetize that data itself, so it sent a cease-and-desist letter to HiQ telling it to stop accessing and copying the data publicly posted on LinkedIn. LinkedIn threatened to sue HiQ on various grounds if HiQ refused to stop. HiQ instead filed suit in federal court seeking an injunction based on state law and a declaratory judgment that its conduct was legal.
The district court granted a preliminary injunction, setting up this appeal.
That brings me to a warning: The new Ninth Circuit decision is a little bit tricky to analyze because of its procedural posture. That’s true for two reasons that are helpful to flag now.
First, at this stage of the case, HiQ is only seeking a preliminary injunction—basically, a ruling from the judge preserving the status quo so LinkedIn can’t stop HiQ in the initial period when the lawsuit is pending. The standard for a preliminary injunction considers the merits of the legal claims, but it does not make a definitive ruling about them. For that reason, the opinion’s conclusions about the CFAA are written tentatively. The court talks about what is “likely” the correct interpretation of the CFAA, what raises “serious questions,” et cetera.
Second, the CFAA issues enter the case somewhat indirectly. HiQ is seeking a preliminary injunction based on a state law claim, that LinkedIn is tortiously interfering with its business contracts by trying to block it and stop its conduct. LinkedIn is then raising the CFAA as a defense. You can’t sue us for tortiously interfering with your business contracts, LinkedIn is saying, because the entire HiQ business is illegal under federal law.
All of this means that the CFAA ruling is a bit indirect. Technically, the issue being decided is whether there’s a serious question that HiQ’s scraping complies with the CFAA, which is needed to say that LinkedIn trying to stop HiQ may be tortious interference with HiQ’s legitimate business, which is needed to know if was an abuse of discretion for the trial court to temporarily stop LinkedIn from trying to interfere with HiQ’s business.
Got it? I know, I know. Lawyers always have to make everything so complicated. (Sorry.)
III. The CFAA Ruling
That brings us to the CFAA ruling. It’s hugely important. The Ninth Circuit views the CFAA has a hacking statute (like Nosal I did), and it presumes a right to open access under the CFAA unless there is some technological measure placed on access. Because HiQ did not circumvent a technological access measure to get to the data publicly posted on LinkedIn’s website, the CFAA was not violated. (Or rather, “likely” was not violated, see the reason for the tentative language above.)
Here’s the key language, with the particularly important language in bold and a few paragraph breaks added by me for web readability:
We . . . look to whether the conduct at issue is analogous to “breaking and entering.” H.R. Rep. No. 98-894, at 20. Significantly, the version of the CFAA initially enacted in 1984 was limited to a narrow range of computers—namely, those containing national security information or financial data and those operated by or on behalf of the government. See Counterfeit Access Device and Computer Fraud and Abuse Act of 1984, Pub. L. No. 98- 473, § 2102, 98 Stat. 2190, 2190–91. None of the computers to which the CFAA initially applied were accessible to the general public; affirmative authorization of some kind was presumptively required.
When section 1030(a)(2)(c) was added in 1996 to extend the prohibition on unauthorized access to any “protected computer,” the Senate Judiciary Committee explained that the amendment was designed to “to increase protection for the privacy and confidentiality of computer information.” S. Rep. No. 104-357, at 7 (emphasis added).
The legislative history of section 1030 thus makes clear that the prohibition on unauthorized access is properly understood to apply only to private information—information delineated as private through use of a permission requirement of some sort. As one prominent commentator has put it, “an authentication requirement, such as a password gate, is needed to create the necessary barrier that divides open spaces from closed spaces on the Web.” Orin S. Kerr, Norms of Computer Trespass, 116 Colum. L. Rev. 1143, 1161 (2016). Moreover, elsewhere in the statute, password fraud is cited as a means by which a computer may be accessed without authorization, see 18 U.S.C. § 1030(a)(6), bolstering the idea that authorization is only required for password-protected sites or sites that otherwise prevent the general public from viewing the information.
We therefore conclude that hiQ has raised a serious question as to whether the reference to access “without authorization” limits the scope of the statutory coverage to computer information for which authorization or access permission, such as password authentication, is generally required.
Put differently, the CFAA contemplates the existence of three kinds of computer information: (1) information for which access is open to the general public and permission is not required, (2) information for which authorization is required and has been given, and (3) information for which authorization is required but has not been given (or, in the case of the prohibition on exceeding authorized access, has not been given for the part of the system accessed).
Public LinkedIn profiles, available to anyone with an Internet connection, fall into the first category. With regard to such information, the “breaking and entering” analogue invoked so frequently during congressional consideration has no application, and the concept of “without authorization” is inapt.
Neither of the cases LinkedIn principally relies upon is to the contrary. LinkedIn first cites Nosal II, 844 F.3d 1024 (9th Cir. 2016). As we have already stated, Nosal II held that a former employee who used current employees’ login credentials to access company computers and collect confidential information had acted “‘without authorization’ in violation of the CFAA.” Nosal II, 844 F.3d at 1038. The computer information the defendant accessed in Nosal II was thus plainly one which no one could access without authorization.
So too with regard to the system at issue in Power Ventures, 844 F.3d 1058 (9th Cir. 2016), the other precedent upon which LinkedIn relies. In that case, Facebook sued Power Ventures, a social networking website that aggregated social networking information from multiple platforms, for accessing Facebook users’ data and using that data to send mass messages as part of a promotional campaign. Id. at 1062–63. After Facebook sent a cease-and-desist letter, Power Ventures continued to circumvent IP barriers and gain access to password-protected Facebook member profiles. Id. at 1063.
We held that after receiving an individualized cease-and-desist letter, Power Ventures had accessed Facebook computers “without authorization” and was therefore liable under the CFAA. Id. at 1067–68. But we specifically recognized that “Facebook has tried to limit and control access to its website” as to the purposes for which Power Ventures sought to use it. Id. at 1063. Indeed, Facebook requires its users to register with a unique username and password, and Power Ventures required that Facebook users provide their Facebook username and password to access their Facebook data on Power Ventures’ platform. Facebook, Inc. v. Power Ventures, Inc., 844 F. Supp. 2d 1025, 1028 (N.D. Cal. 2012). While Power Ventures was gathering user data that was protected by Facebook’s username and password authentication system, the data hiQ was scraping was available to anyone with a web browser.
In sum, Nosal II and Power Ventures control situations in which authorization generally is required and has either never been given or has been revoked. As Power Ventures indicated, the two cases do not control the situation present here, in which information is “presumptively open to all comers.” Power Ventures, 844 F.3d at 1067 n.2.
. . . Both the legislative history of section 1030 of the CFAA and the legislative history of section 2701 of the SCA, with its similar “without authorization” provision, then, support the district court’s distinction between “private” computer networks and websites, protected by a password authentication system and “not visible to the public,” and websites that are accessible to the general public.
Finally, the rule of lenity favors our narrow interpretation of the “without authorization” provision in the CFAA. The statutory prohibition on unauthorized access applies both to civil actions and to criminal prosecutions— indeed, “§ 1030 is primarily a criminal statute.” LVRC Holdings LLC v. Brekka, 581 F.3d 1127, 1134 (9th Cir. 2009). “Because we must interpret the statute consistently, whether we encounter its application in a criminal or noncriminal context, the rule of lenity applies.” Leocal v. Ashcroft, 543 U.S. 1, 11 n.8 (2004). As we explained in Nosal I, we therefore favor a narrow interpretation of the CFAA’s “without authorization” provision so as not to turn a criminal hacking statute into a “sweeping Internet-policing mandate.” Nosal I, 676 F.3d at 858; see also id. at 863.
For all these reasons, it appears that the CFAA’s prohibition on accessing a computer “without authorization” is violated when a person circumvents a computer’s generally applicable rules regarding access permissions, such as username and password requirements, to gain access to a computer. It is likely that when a computer network generally permits public access to its data, a user’s accessing that publicly available data will not constitute access without authorization under the CFAA. The data hiQ seeks to access is not owned by LinkedIn and has not been demarcated by LinkedIn as private using such an authorization system. HiQ has therefore raised serious questions about whether LinkedIn may invoke the CFAA to preempt hiQ’s possibly meritorious tortious interference claim.
The court goes on to note that website owners have other legal options and causes of action outside the CFAA. First, the court suggests that website scraping might violate the common law tort of trespass to chattels, “at least when it causes demonstrable harm.” Second, depending on the case, there may also be civil causes of action for “copyright infringement, misappropriation, unjust enrichment, conversion, breach of contract, or breach of privacy.” But not the combined civil/criminal provisions of the CFAA.
IV. A Few Reactions
What do I make of the new decision?
On the substance of the reasoning, I’m delighted. Of course, that’s easy for me to say. Given my prior writing on this topic, including writing that the court very graciously cited, the decision seems quite brilliant to me.
More seriously, this is a really important decision that embraces the open presumption of the Internet far more clearly and directly than prior cases. The Ninth Circuit’s approach to the CFAA has zigzagged a bit over time. Some cases have embraced a more open Internet, and others have been quick to say that computer owners can close it easily. This is a big step in the direction of openness.
I also think this decision renders Power Ventures an outlier. I may be biased, as I thought Power Ventures was wrong. As regular readers may remember, I represented Power Ventures on the petition for rehearing to try to get the panel decision overturned. But Power Ventures seemed to give cease-and-desist letters magical powers given their clarity and notice. It was possible to read Power Ventures broadly as saying that as long as the computer owner sends the cease-and-desist letter, the computer owner’s written directive controls the CFAA question—the recipient is sent into Brekka-land where their access rights were withdrawn.
HiQ Labs now places a critical limit on Power Ventures. Under HiQ Labs, the cease-and-desist letter only controls access rights to non-public data. That seems to reduce Power Ventures to a limited application of Nosal II. Under both Nosal II and Power Ventures-as-construed-in-HiQ, once a computer owner tells you to go away, you can’t then rely on a current legitimate user’s permission to let you back in.
Putting the cases together, the Ninth Circuit law right now seems to go like this. You can scrape a public website, and you can violate terms of service, without violating the CFAA. However, you can only access non-public areas of a computer if you haven’t had your access rights canceled before, either through a cease-and-desist letter or through the relationship ending that had granted you access rights.
It’s worth stressing that all of this is only the law in the Ninth Circuit. There are clear circuit splits on how the CFAA has been interpreted that only the U.S. Supreme Court can resolve. I suspect some of that resolution will happen pretty soon. When it happens, the Supreme Court’s guidance will of course mean much more than the view of one court of appeals. But the Ninth Circuit has handed down significantly more CFAA caselaw than any other circuit court. In the interim, before the Supreme Court takes a look at these issues, HiQ Labs is a really big deal.
One last point: There’s more in the new decision on issues beyond the CFAA that is worth checking out. The whole opinion is worth a read.
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