A Tennessee employee worked for a Tennessee company in Tennessee and all was right with the world. But then the company dissolved, and the individual was hired by a client of his former company—the client is a New York company. Although he traveled to New York on business (and dutifully reported the 25 percent of his time he spent in New York), the rest of his time he earned his living from Tennessee, working by computer and telephone. The individual paid the New York taxing authority (and never disputed) the pro rata portion of his income for the time he spent in New York, but the remainder of his work was done in Tennessee and not (so he thought) subject to New York tax.
A few months ago, a divided Court of Appeals in New York ruled that the 25 percent connection to New York supported the argument that this “minimal connection” allows New York to tax everything the taxpayer earns because it is earned from a New York company! “Foul,” cries the dissent—what about the secretary working in the Boston office of a New York-based law firm? A sales manager for a New York company working in California? This was a very close decision (4–3) but the court ruled that tax was payable to New York on 100 percent of the income earned from the New York company.
Literally as this issue headed to press, the Supreme Court released its unanimous decision in the case of Metro-Goldwyn-Mayer Studios v. Grokster—a decision that is likely to have monumental consequences for years to come. To summarize the basic issues, for many years peer-to-peer file-sharing networks have relied on the 1984 Sony v. Universal Studios decision (“Betamax case”) which held the distribution of a commercial product capable of substantial noninfringing use could NOT give rise to contributory liability unless the distributor had actual knowledge of specific instances of infringement and failed to act. With peer-to-peer file-sharing, the network software architecture is decentralized, making it unlikely that the provider of the file-sharing software (in this case Grokster and StreamCast) could actually know of any specific instances. Even the theories of vicarious infringement were thrown out by the lower courts because neither Grokster nor StreamCast monitored, controlled or supervised the use of the software (nor did they have an independent duty to police against infringement).
Enter the Supreme Court, which agreed to hear the case on appeal from the 9th Circuit, which held that Grokster and StreamCast could not be liable for contributory infringement because there was no ability to prove actual knowledge and the software was capable of substantial non-infringing use. To give readers context, evidence was introduced indicating that on the FastTrack and Gnutella networks, more than 100 million copies of file-sharing software had been downloaded and billions of files are shared across those networks each month! The court noted “the probable scope of copyright infringement is staggering.”
So the Supreme Court overturned the 9th Circuit decision—but not for the reasons you might think. In my view, the Supreme Court did not overturn or even modify the Betamax case. Distributors of peer-to-peer file-sharing software using a decentralized indexing system to share copyrighted songs and movies, and which is capable of substantial non-infringing use, cannot be held liable for contributory infringement absent showing the distributors had specific knowledge and made a material contribution to direct infringement. The court also confirmed that software distributors cannot be held liable for vicarious infringement without showing the ability to block direct infringement by users.
The Supreme Court went to great pains in overturning the 9th Circuit to note “this case is significantly different from Sony and reliance on that case to rule in favor of StreamCast and Grokster was error.” The Sony case applied to distribution of a product that had both lawful and unlawful uses and sought to impose liability because Sony knew some users might use the product unlawfully. That case held it is inequitable to impute fault and corresponding secondary liability based on the unlawful acts of others, where the product has substantial lawful utility.
Continue reading “Digital Music, Film, Publishing & More—-Grok This!”
In February, in the Circuit Court in Miller County, Arkansas, some plaintiffs—led by Lane’s Gifts, an Arkansas retailer—sued Google, Yahoo!, Time Warner, Disney, and Ask Jeeves, among other Internet companies, alleging that these companies knowingly overcharged for the advertising they sold and that they conspired with each other in doing so! The plaintiffs now want the suit certified as a class action which relates to the growing problem of “click fraud” a practice our very own litigator and legal guru Peter Raymond knows and has spoken about. Clicking ads or even automating the click-throughs—in some cases by competitors—can illegally run up the advertising charges, and analysts estimate these can increase by more than 15 percent because of such fraud.
On April 28, 2005, New York’s Attorney General sued Intermix Media—a major Internet marketer based in Los Angeles, claiming “spyware” and “adware” were secretly installed, which, among other things, can redirect browsers to unwanted websites, can add toolbar functions and icons, and distribute ads that pop up on your monitor. The suit alleges violation of New York State General Business Law provisions against false advertising and deceptive business practices, and also alleges trespass under New York common law. Intermix’ software would download, install and then direct advertising to computers based on user activity—often without notice and without an uninstall application—when a user visited a website, played a game or downloaded a screen saver. The Attorney General’s office claims that the lengthy licensing agreement purporting to seek permission, even when used, is misleading or inaccurate.
In general, common sense helps when creating online contracts (hiring a knowledgeable Rimon lawyer is good common sense). Ask some simple questions: (a) is your notice of terms reasonable and conspicuous, and can it be bypassed? (b) how do you know if a customer has agreed to your terms – by browsing, by clicking a link or by entering particular words of assent? (c) do the users have a choice if they don’t want to be bound by the terms – is it clear what they should do or not do? (d) are there laws that apply to your business, your industry or in jurisdictions you do business, that relate to online contracts? (e) is there a means to modify, terminate or otherwise alter the agreement—how will the customer know? and (f) keep records.
Some simple principles, but as you can appreciate, often easier to list in an outline than carry out in practice. And there are more. The cost of failure or noncompliance is high. Need to get it right? Call Rimon—we’ll help.
Last month we reported the Ninth Circuit Court of Appeals found that Grokster and Streamcast Networks were not violating copyright laws by making software that allows people to swap digital content. Just a few days ago, over the objections from the motion picture, broadcast and professional sports industries, the FCC approved technology allowing digital recording services like TiVo to transmit television programming to subscribers over the Internet, allowing programming, for example, to be viewed anywhere an Internet connection was available. Digital recording services and streaming programs remotely threatens local advertising relevance and revenue, while still allowing viewers to edit out commercials. Advertisers are you paying attention??
On July 20, the U.S. District Court for the Southern District of New York imposed sanctions against UBS Warburg for destroying relevant e-mail messages during the course of litigation (Zubulake v. UBS Warburg LLC, et al., 2004 U.S. Dist. LEXIS (S.D.N.Y, July 20, 2004)). The Court ordered UBS to pay expenses and attorney fees incurred by the plaintiff, granted plaintiff’s request for further discovery, and agreed to instruct the jury that a negative inference may be drawn against UBS as a result of the missing evidence. The case provides important guidance for counsel on electronic discovery issues and record management, and the Court notes counsel is expected to take some affirmative steps: (1) “identify sources of discoverable information”; (2) “put in place a litigation hold and make that known to all relevant employees by communicating with them directly” and not only repeat these instructions “regularly” but also “monitor compliance”; (3) “call for employees to produce copies of relevant electronic evidence”; and (4) “safeguarding any archival media” the client must preserve. Given the notoriety of the case, these practices will likely become a de facto standard in evaluating electronic discovery issues and requests for sanctions. Got litigators? Call Rimon—we not only have knowledgeable litigators, but we also have an entire team of professionals skilled in data management, record retention, and compliance in and out of litigation. Try us, you’ll like us.
A Utah statute, the first in the nation, entitled “The Spyware Control Act,” was originally scheduled to take effect on May 3, but has been delayed by a legal challenge brought by a New York-based company, WhenU.com. WhenU.com filed suit in Salt Lake City on April 12, seeking a declaration that Utah’s new law violates the U.S. and Utah Constitutions. WhenU.com claims the act—which targets software downloaded onto a consumer’s computer that triggers pop-up advertisements—unfairly targets online contextual advertising services that aren’t linked to websites, but instead sells ads based on consumer browsing preferences. The Utah Attorney General agreed to delay the effective date of the Act until the hearing to allow WhenU.com to seek a preliminary injunction delaying implementation of the law. WhenU.com hopes it can persuade the court to delay enforcement until a trial can be held to test WhenU.com’s claims that the law is unconstitutional. At the hearing, WhenU.com’s lawyers argued that regulation of advertising on the Internet is a matter of interstate commerce subject to federal, not state, jurisdiction. Arguing the State’s case, lawyers noted that disrupting a consumer’s browsing and highlighting competitors goods and services is the kind of consumer protection the Utah Legislature has a right to prohibit. In protecting consumers, lawyers for the State also argued that computer users are often tricked into installing such software without adequate disclosures and then find it difficult to remove when unintended or unwanted consequences arise.
WhenU.com noted its software is only installed with consumer consent and that pop-up ads offer consumers useful free features (e.g., weather, screen savers, tool bars) in exchange for allowing software that tracks browsing habits and generates related ads on the screen. With such context-based advertising software, a consumer browsing mortgage lending websites might be offered home loan information from one or more lending institutions. Stay tuned.
Last month, we brought you information about outsourcing—a topic making news daily. This month, we bring you smaller news with potentially bigger implications.
In the biblical prophecy of Isaiah, the wolf lives with the lamb, the leopard lies down with the kid and a little child shall lead them. You can draw your own conclusions as to who are lions, lambs and the little child, but a few days ago, the unthinkable occurred. Sun Microsystems and Microsoft reached peace by dropping most claims, cross-claims and the vitriolic debate raging since 1997 when Sun sued Microsoft alleging violations of its Java license terms. With a trail of litigation which includes U.S. and European antitrust regulators, the announcement is nothing short of astounding. Yes, it remains to be seen whether years of mistrust will dissipate and lead to true cooperation, but this is not simply a truce between two rivals. The Wall Street Journal quotes Tony Scott, Chief Technology Officer for General Motors, as saying “What we try to do is educate them on the real pain customers go through when you have multiple incompatible standards and technologies.” Instead of customers being forced to figure out (and pay for) solutions to interoperability and compatibility problems, vendors are now being pressured to do so. Is this the beginning of a trend? Too soon to tell, but this truce is a big deal—Mr. Scott represents a customer!
And now, number 2. Perhaps we have become less concerned about providing information to “friendly sites,” but Yahoo! has introduced a “paid inclusion” product which allows advertisers to guarantee their sites will show up in searches—although payments do not change the order in which results are displayed. Not to be outdone, Google’s new “G-mail” will have context-based advertising derived from—are you ready—a scan of key words in G-mail received by subscribers, which customizes advertising based on information in the e-mail. G-mail a friend about bowling and you may see a pop-up coupon for a local bowling alley. Marketing professionals and advertisers point to the fact that G-mail is an opt-in service and consumers have shown they are willing to give up privacy to obtain greater levels of convenience.
For the record, cookies were invented to allow you to have a shopping cart and accumulate items when going web shopping. Fast-forward past cookies to
spammers, phishing, pop-ups, invisible GIFs, web bugs, intelligent bots and spyware to this latest announcement. Google can now accumulate a detailed
dossier of individual consumer preferences and the contents of e-mails. No one is suggesting Google would abuse such information or that subscribing is not
truly voluntary, but not only do we know what you did last summer, soon we may also be able to tell you what you are planning next summer.
According to the TowerGroup (Bank Technology News, January 2004), an estimated 15 percent of the securities industry in North America uses Instant Messaging for sharing market-related data with client. As we mentioned in our July 2003 issue, the NASD is already requiring member firms to retain records of instant messages for at least three years, and is requiring them to supervise the use of instant messaging technology by their employees. It is likely that
SEC regulations will emerge specifically on the subject this year or next year at the latest.
In the meantime, most securities dealers are choosing to be safe rather than sorry, and are attempting to apply the same rules they have for e-mails to instant messages as well—although the technology isn’t going to make that chore easy. Stay tuned.