Net Neutrality: Is the Cease Fire Over?

By Stephen Díaz Gavin  *

The way the U.S. Government regulates the Internet is back in play again. The outcome of the long running battle over “net neutrality” and regulation of the Internet – now more than 15 years old — is still uncertain. However, it is clear that the Federal Communications Commission (FCC) is stepping back from the stronger supervision of Internet Service Providers (ISPs) adopted in March 2015 under former FCC Chairman Tom Wheeler at the insistence of former President Obama.
On May 18, 2017, the FCC voted to release a Notice of Proposed Rulemaking (NPRM) to step back from the agency’s controversial March 2015 decision to treat ISPs as “common carriers” under Title II of the Communications Act. Instead, the “proposed rule,” will revert to classifying ISPs as providers of an “information service” and return jurisdiction over ISPs privacy practices to the Federal Trade Commission (FTC) – a clear indication of the direction the FCC will take under the current administration.
Law professor Tim Wu coined the term “net neutrality” in 2003.  As the FCC’s current Chairman Pai recently noted in an interview in the Wall Street Journal, the term “[i]s one of the more seductive marketing slogans that’s ever been attached to a public policy issue”.  Who can be against “leaving the Internet alone?” (“Why ‘Net Neutrality’ Drives the Left Crazy,” Wall Street Journal).   Apparently, many believe that it should not be left alone: the FCC received nearly 1.25 million comments submitted via the Internet in the three weeks following FCC Chairman Pai’s announcement that he intended to reconsider the Title II rules; nearly all opposing the proposal.
At the core of the dispute is the tension between the ISPs on the one hand, and streaming content providers like Netflix and Amazon, as well as Internet giants like Google and Facebook on the other.
Consumers fear a slowdown in service. The ISPs maintain the March 2015 common carrier regulation decision will stifle investments and ultimately produce what consumers fear:  a slower Internet.  Indeed, in the NPRM the FCC cited a decline in investment since the March 2015 Order in support of changing the rules.  The clash of interests highlights how outdated the old ways of government oversight of telecommunications have become. The Communications Act of 1934, was originally enacted to monitor the monopoly telephone provider at the time (ATT), based on the model of regulating railroad service and freight rates under the Interstate Commerce Act of 1887 – hardly a relevant basis for overseeing the backbone of 21st century technology.
The common carrier regulatory model prohibits additional charges for streaming content providers, which could be viewed as discriminatory. However, such a regulatory structure does not account for how ISPs pay for upgrades to maintain service quality as consumer demand increases for such content streaming.  Video content producers that stream large volumes of data, slow up Internet connections. Although the largest ISPs have agreed voluntarily not to charge the Netflix and Amazons of the world for doing so, where must the money come from in order to continue to upgrade capacity to maintain high speed download?  Retail consumers are concerned about higher rates, surcharges or deliberate “slowing” of service, yet these same consumers are customers of over-the-top online video gaming and streaming services that consume huge amounts of capacity.  Consumers always want more and faster service and they want it at the lowest price.
Given the current Republican majority, the FCC will likely eliminate Title II regulation of ISPs as it has proposed.  However, the decision can and will again be challenged in the courts (as has every prior rule on net neutrality).  Even if upheld by the courts, only Congress can define ‘net neutrality’ once and for all and give some degree of regulatory certainty to the regulations (which can be changed by a Democratic majority just as easily as the current Republican controlled FCC has done to the Obama era rules).
Net neutrality is now a hot political issue and despite current Republican majorities in both the House and Senate, it is uncertain whether a working majority in both exists that can adopt legislation to guide the FCC.  No matter who you are, in the debate over net neutrality, clearly nobody is neutral. Until Congress acts to give some greater definition to the term, successive FCC Chairmen will be able to reinterpret net neutrality as they see fit.

* This post was derived and adapted from a Rimon Law Client Alert “No Peace in Sight for Net Neutrality” by Stephen Díaz Gavin, who you can contact directly for more information.  

mHealth – Mobile Health Care

Last year, I was invited to participate in and present a paper at the “mHealth and the Law Workshop” in Washington, D.C. [See mHealth – The Future of Mobile Health Care].

Then last month, I was invited to participate in a panel at the Mobile FirstLook 2015 Conference in New York, and as a result of my participation, the editors of Mobile Marketer asked if they could republish (with attribution of course), the paper.

In case you missed it, you can view “Exploring legal challenges to fulfilling the potential of mHealth” online, or you can download the original from the Legal Bytes posting above.

As always, if you have questions, or need advice or guidance, just contact me, Joe Rosenbaum, or the lawyer with whom you regularly work at Rimon.

Health Care in the Clouds: Not Always Fine on Cloud 9

Many of you are already familiar with the series of individual and topical cloud computing white papers that we launched in 2011. We spent the next months and years compiling these articles into a comprehensive work entitled, “Transcending the Cloud: A Legal Guide to the Risks and Rewards of Cloud Computing.”

The Consumer Finance Law Quarterly Report previously published two of our articles associated with “cloud-related” legal issues: The first applicable to financial services [65 Consumer Fin. L. Q. Rep. 57 (2011)] and the second related to advertising and marketing [65 Consumer Fin. L. Q. Rep 431 (2011)].

Recently, Joe Rosenbaum and Nancy Bonifant were privileged to have an article they wrote published as the third in the Consumer Finance Law Quarterly Reporter’s cloud computing series, and you can read the article right here: “Health Care in the Cloud: Think You Are Doing Fine on Cloud Nine? Think Again. Better Get Off My Cloud” [67 Consumer Fin. L. Q. Rep 367 (2013)]. The article represents an updated version of the article originally posted right here on Legal Bytes [See Transcending the Cloud – Health Care on Cloud 9? Are You Doing Fine?].

For more information about the implications of cloud computing and technology on health care, privacy compliance, and related legal matters, feel free to contact me, Joe Rosenbaum, or Nancy Bonifant or the Rimon attorney with whom you regularly work, and we can make sure you get the guidance and help you need to navigate the clouds.

Entertainment Media Crowd Funding Oscar (No, Not That One)

In 1918 there were no Academy Awards. But there was another Oscar! Oscar Micheaux, who taught us something about financing media and entertainment projects – perhaps the first crowd funding entrepreneur in the publishing and motion picture industry.

If you would like to know more about crowd funding and what’s new and what’s next (and about Oscar), you can read about it in Volume 25, Issue 3 of the Entertainment Law Review, where an article about crowd funding, authored by Joseph I. Rosenbaum, was first published by Sweet and Maxwell in London (a Thomson Reuters (Professional) UK Limited company.

You can read Joe’s entire article or download the PDF for your own personal use (i.e., not for redistribution) right here: Crowd Funding – A Funny Thing Happened on the Way to the Investment Bank. [PDF]

As always, if you want to know more about Crowd Funding (or any other matter requiring legal representation, counsel or guidance, please contact me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work.

Social & Mobile & Clouds, Oh My!

Joe Rosenbaum recently authored an article that has been published in the Small Business Journal highlighting some of the key issues that have arisen for small to medium-size businesses as a result of the emergence and convergence of these rapidly evolving technological platforms. Joe’s article, “Social & Mobile & Clouds, Oh My!” appears in the March 2014 issue of the Small Business Journal, and you can read “Social & Mobile & Clouds, Oh My!” [PDF] here as well.

If you require legal guidance, support or representation on the issues highlighted in the article, or on any other matters, you can contact Joe directly at joseph.rosenbaum@rimonlaw.com; or you should get in touch with the Rimon attorney with whom you regularly work. We are happy to help.

Crowd Funding. Apologies, William Wordsworth

“I wandered lonely as a cloud
That floats on high o’er vales and hills,
When all at once I saw a crowd,”

. . . and so begins the beautiful and timeless poem by William Wordsworth. Although Wordsworth’s crowd was a host of golden daffodils, the crowds most of us have been hearing about lately are either crowd sourcing (check out When Online Games, Health & Life Sciences and Crowd Sourcing Combine) or crowd funding – the subject of this post.

In today’s world, according to the Wikipedia definition, “crowd funding” refers to the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations.”

There remains some confusion in the marketplace as to the mechanisms by which the crowds’ funds are made available to business ventures, film promotion and production, worthy causes, and civic organizations. Contrary to what many may believe, it is currently not legal to solicit, offer or otherwise make available any form of securities or equity investment (I’m over-simplifying, but that is the net effect) through online, crowd or other web-based funding schemes. In other words, you can’t raise equity or solicit investments through crowd funding that provide the expectation of profit or the risk of loss of capital investment – in much the same way the traditional stock markets function when they allow individuals to purchase and sell securities.

It is true that the U.S. Securities Exchange Commission has been talking about promulgating regulations aimed at legitimizing, with regulation and oversight, the use of crowd funding as an investment opportunity (and the SEC has publicly announced that it hopes to have the regulations released for comment this fall). But until the regulators promulgate rules and enable it, you can’t “invest,” and businesses and other ventures can’t “raise capital,” through equity or securities offerings through crowd funding.

So what’s the buzz about. Well, first it combines “power to the people” with “put your money where your mouth is” in ways unheard of prior to the Internet! Second, there are still opportunities to raise capital from the public in ways that aren’t illegal and don’t involve equity or securities. Currently, there are four major categories of crowd funding activity. To wit:

I am a musician (not really, it’s just an example) and I tell you that if you pay me $1,000, I will write a song to or about you. If you pay me $5,000, I’ll not only write the song, but if I’m nominated for a major music award (e.g., Grammy, VMA, CMA), I’ll get you two tickets to the awards show. That is referred to as the ”rewards” model of crowdfunding.

Next is the ”pre-payment” model. Please send me $5 and when the song is completed, but before it’s released and available to the general public for $7, I will send you a copy. If I offer to autograph it for another $3, I’ve combined the pre-payment and rewards model.

Then there’s the cause-related model. Listen, I am talented and you love good music, but I’m starving. Please just send me $10 so I can eat, rent recording studio time, and try to publish and distribute my music. Pure online begging – there is no expectation of anything in return.

Last, but not least, the ”loan” model. Please help finance the production of my music, my tour (I’ll send you a T-shirt) and just lend me some money. I promise to pay you back when I start making money – but, WITHOUT interest. There must be no expectation that anyone who lends money will make a profit (interest) on the loan. While there may still be lending laws that apply as to how this is done, it won’t trigger the prohibitions under securities’ laws, as long as you don’t pay interest.

In conclusion, while there are some high-profile examples of projects that have raised millions through crowd funding, most do not – at least not yet. In fact, most commercial ventures raise very little through crowd funding. In the words of Wordsworth: “A poet could not but be gay, In such a jocund company. I gazed – and gazed – but little thought, What wealth the show to me had brought.”

Is Your Currency Current . . . Virtual, Digital, Crypto?

In recent months, “virtual currency” has been making headlines. Most of us don’t really think about what “virtual” currency means and often confuse it with other forms of money. That said, there is good reason for confusion and concern. Like many other technology-driven innovations, lines are blurring and we know blurring lines means opportunity and danger. So Legal Bytes will tackle this in two parts. The first (below) attempts to describe what all these new terms mean and how they are used. Legal Bytes part two (later this week) will summarize current events – the confusion and concern over exactly what all this means to our economy and why you should care.

Virtual currencies got their start in virtual economies that exist in virtual worlds. For example, in massively multi-player online role-playing games (MMORPGs) such as World of Warcraft, players “earn” credits and have the ability to exchange, use or “spend” this virtual “value” in the game environment, to acquire virtual tools, weapons, skills and game items that may be recreationally fun and integral to game play; but virtual currency never bought you food to eat or housing to shelter you in the real world. HOWEVER, what happens when real people start buying, selling and exchanging virtual currency, and create markets that interact with the real world?

First, let’s get our terms straight. Digital currency is not “virtual.” Digital currency represents a real alternative to government-issued currency. It originated with accounts or promises to pay that were used primarily online. One of the most familiar paper-based examples of a non-government promise to pay is the American Express® Travelers Cheque. More than 100 years old, these payment instruments are backed purely by the full faith and credit of American Express – and not the government of any nation. They aren’t backed by gold or silver or precious jewels or even bananas – just a corporate obligation to repay you, based on a contract (the purchase application form) you sign when they are purchased! As you might have noticed, there are multiple forms of these types of digital promises – one, like its paper-based cousin, is simply a digital promise to pay: numbers representing value backed by the issuer – electronic gift cards, a promotional advertisement that can initiate or enhance a digital music subscription, are examples. In other instances, digital money may be based on some real “deposit” (e.g., using a traditional debit or credit or checking account) in which the transferred funds are held in an electronic account, uniquely identified to the user and more closely resembling a “bank account,” with which most consumers are familiar.

In most jurisdictions, companies that issue digital versions of payment instruments (e.g., Travelers Cheques) or that hold digital financial accounts (e.g., PayPal®) often fall within some banking or financial regulation. For example, in the United States, PayPal is considered a payment intermediary, regulated as a money transmitter under the U.S. Federal Code of Regulation and the various state laws that apply to money transmitters. That said, PayPal is not technically regulated by the Truth-in-Lending Act (TILA) or its implementing Regulation Z, nor by the Electronic Funds Transfer Act, implemented by Regulation E; and although PayPal takes great pains to protect against fraud, in the United States, unless you use a credit card (or debit card) to fund a PayPal transaction, consumers have no technical legal or regulatory protection from fraud by a seller. In Europe, PayPal (Europe) Ltd., was licensed by the Financial Services Authority (FSA) as an Electronic Money Issuer, and in 2007 transferred all of its European accounts to Luxembourg to a new entity PayPal (Europe) Sàrl et Cie SC, which is regulated by the Commission de Surveillance du Secteur Financier.

Some of you history buffs will remember DigiCash (originated by David Chaum in 1990), which sought to anonymize financial transactions using cryptography. Well over the past few years, a company named BitCoin (and others such as Litecoin and PPCoin, which are to a greater or lesser extent based on, inspired by, or technically comparable to BitCoin), have launched and popularized a form of digital currency that is often confused with and referred to as “virtual.” This form of digital currency is referred to by financial and security experts as “cryptocurrency.” Cryptocurrency is a digital currency that uses encryption technology to create and manage the digital currency. They are peer-to-peer and decentralized in nature and, at least for now, all are pseudonymous.

As you can guess, all of these confusing terms and the fact that virtual currency in games, gaming, online social media and networking platforms, and virtual world environments began interacting with the real world, has become not merely confusing but alarming. Look at Second Life, a virtual world that allows the purchase and sale of “Linden Dollars,” the in-world official currency, in exchange for real money through third-party websites. Second Life accords both virtual “real estate” and intellectual property real value in its virtual environment; enables “residents” (avatars) to creatively enhance and customize the resources available in-world; allows some property rights to be exclusive or limited (think supply and demand); and permits the exchange and purchase and sale of virtual property rights in-world; and one’s property remains one’s property (and one retains Linden Dollars until spent or given away or used) throughout the life of one’s avatar – at least as long as Linden Laboratories continues to maintain the Second Life virtual world environment.

These are many of the same conditions that affect real financial systems. No wonder that what started as a curiosity – online digital playgrounds with no real money or value being exchanged – have become complex economic environments that financially interact with real world economic systems and are causing concern among legislators, regulators and courts around the world. In part two, Legal Bytes will review recent developments and try to describe the challenges facing legal, financial, security and business professionals.

…And Now a Word from Your Hedge Fund

This post was written by Frederick Lah.

This past Wednesday (July 10), the SEC voted 4-1 to approve amendments to Rule 506, lifting the 80-year ban on advertising for hedge funds and certain other investments (See, SEC Votes to Ease 80-Year-Old Ban on Private-Investment Ads.) Rimon previously reported these amendments when they were initially proposed in August 2012, and you can read our earlier analysis, SEC Regs Amended To Allow Hedge Funds To Advertise: Potential Data Privacy Implications.

Under the revised Rule 506, hedge funds and other issuers seeking to conduct private offers may now use general solicitation and advertising to offer their securities, provided that: (1) the issuer takes reasonable steps to verify that the purchasers are accredited investors; and (2) all purchases of the securities fall within one of the categories of persons who are accredited investors, or the issuer must reasonably believe that the investors fall within one of the categories at the time of the sale.

To be an accredited investor, the individual’s net worth must exceed $1 million, excluding the value of a primary residence, or the individual’s annual income must exceed $200,000. According to the SEC, the determination of the reasonableness of the steps taken to verify that the investors are accredited is an “objective assessment” by an issuer. An issuer is required to consider the facts and circumstances of each investor and the transaction. The final rule provides a non-exhaustive list of methods that an issuer may employ for verification.

As noted in our previous analysis, it is unlikely we’ll see hedge funds competing with large consumer brands for prime advertising space. Instead, given the target audience, we’ll likely see more tailored efforts, such as email marketing campaigns, direct phone marketing, and targeted online advertising. We are also likely to see new strategies from issuers such as speaking about funds in public and posting details on websites (which may represent quite a change considering many issuers don’t even have websites). As issuers enter into the world of marketing, they will also have to deal with the reality that the SEC is not the only regulatory agency on their radar; these issuers will need to make sure that they’re not engaging in unfair or deceptive marketing practices and drawing the ire (and an investigation or enforcement action) of the FTC.

The amendments become effective 60 days after publication in the Federal Register. For more information on this issue, please contact Frederick H. Lah, the author, or Joseph I. Rosenbaum, editor and publisher of Legal Bytes.

WOMD. Now Available at Your Nearby Staples!

I read with interest, recent reports of a 3-D printed hand gun, created by Defense Distributed, being test-fired at a gun range just south of Austin, Texas. Defense Distributed, whose website bills itself as “The Home of the Wiki Weapons Project,” fired the gun in front of an observer from Forbes, and you can view the gun, named The Liberator, being test-fired in a video taken during the test and posted on YouTube. Defense Distributed also announced it would post the gun’s blueprints and construction details on the company’s own DefCAD design site. For you history buffs, the “Liberator” was also the name of a single-shot pistol designed to be distributed by dropping them from airplanes flying over France during World War II.

The gun isn’t completely plastic – the firing pin is a common metal nail that can be purchased at a hardware store and can be detected by metal detectors – and that single metal nail apparently makes it legal under U.S. law (the Undetectable Firearms Act of 1988; Pub.L. 100–649, H.R. 4445, 102 Stat. 3816). The 3-D printer used to make the rest of the plastic components is a Dimension SST 3D printer made by Stratasys, which apparently now has a U.S. federal license to manufacture firearms.

Continue reading “WOMD. Now Available at Your Nearby Staples!”

New York E-Retail Ruling May Tax the Supreme Court

This post was written by Kelley C. Miller and Daniel M. Dixon.

On March 21, we posted Clouds Continue To Rain State Tax On Retailers, the most recent in a series of blog posts related to the U.S. state tax implications of cloud computing, e-Commerce and retailing. To keep the thread going, this past Thursday (March 28), the New York Court of Appeals, the highest state court thus far to consider the issue, issued a much-anticipated ruling in Overstock.com v. New York Department of Taxation and Finance (combining two similar cases brought by e-retailers Overstock.com and Amazon.com. At issue is the New York statute that requires the collection of sales or use tax from an e-retailer (a remote vendor) with no physical presence in the state, if, as part of its business model, it pays in-state residents to assist in business solicitation; and the question being litigated is whether that statute violates the Due Process Clause or Commerce Clause of the U.S. Constitution. The Trial Court—and now the Court of Appeals—have upheld the law.

Significant to the Court of Appeals’ decision is its deference to the bright-line requirement of physical presence necessary for a state to require sales or use tax collection. This standard was set forth by the United States Supreme Court in Quill v. North Dakota (504 U.S. 298; 1992). Although the Court of Appeals acknowledged that Quill is still applicable even though the “world has changed dramatically in the last two decades,” it nonetheless noted that changing the physical-presence requirement in light of the way e-retailers now conduct their business, “would be something for the United States Supreme Court to consider.” A key issue in the case was whether the in-state residents hired or engaged by Overstock and Amazon, and who were involved in soliciting business – they are often referred to as “affiliates” – were actively soliciting customers in the state or whether their actions were more akin to that of an advertiser seeking to influence buying patterns – conduct that might be seen as more passive and, accordingly, would not meet Quill’s physical presence standard.

Despite hopes that the Court of Appeals might address this issue in its decision, the majority deferred discussion of this important distinction in lieu of a more focused analysis of whether the New York statute was unconstitutional on its face. The court held that a discussion of the affiliates’ activities was not warranted as neither Overstock.com nor Amazon.com could prove there were no circumstances under which the statute could be constitutionally applied: “The bottom line is that if a vendor is paying New York residents to actively solicit business in this state, there is no reason why that vendor should not shoulder the appropriate tax burden.”

The dissenting opinion, however, does address the possibility that there could be significant distinctions between those who act as sales agents for a company and those who place advertisements for a company on websites. The dissent noted that mere advertising by a remote seller, through use of an in-state affiliate that might place advertisements on websites, does not meet the Quill test for physical presence. Placing links on websites from within the state to e retailers are advertisements and not solicitations.

Reacting to the decision, Overstock.com indicated that it may ask the United States Supreme Court to review the issue. In a press release issued yesterday by Overstock.com, Acting Chief Executive Officer Jonathan Johnson noted, “Given that courts in other states have upheld U.S. Supreme Court precedent, and struck down similar laws, the matter appears ripe for resolution by the U.S. Supreme Court.” To ask the Supreme Court to review the ruling in the case, a petition for writ of certiorari would be due on or before June 26.

The Rimon State Tax Team will be closely following developments in this case, including not only the possibility of an appeal to the United States Supreme Court, but also the status of The Main Street Fairness Act of 2013 – U.S. federal legislation currently pending in the House of Representatives (and recently given symbolic approval in the Senate) that would allow states to impose sales and use tax requirements on e-retailers (presumably engaged in inter-state commerce) even if the e-retailer does not have a physical presence in a state.

For more information regarding these developments and to stay on top of the legal wrangling in state taxation related to e-Commerce, contact Kelley C. Miller or Daniel M. Dixon directly. Of course, you can always find out more about our Cloud Computing initiative or get the assistance you need by contacting me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work.