What’s Happening in Technology, Intellectual Property & Contracts – September 2020

September 22, 2020

Intellectual Property – Copyright

Jackson v. Roberts, United States District Court of Appeals for the Second Circuit, Docket No.19-480, decided August 19, 2020

Topics: Copyright, Right of Publicity, Preemption

This is an appeal from the United States Court for the District of Connecticut that granted summary judgment to William Leonard Roberts II’s (aka Rick Ross) on Jackson’s (aka 50 Cent) claim of violation of Connecticut’s common law right of publicity on grounds that claim is preempted by Copyright Act. This case between two well-known Hip-Hop artists, considered whether an artist can make state rights claims, such as the right of publicity, to copyright protected works subject to a label agreement.

Background

Roberts used a sample from Jackson’s song “In Da Club” in a 2-15 mixtape called Renzel Remixes released for free, before he released a commercial album, Black Market. The song was subject to a recording agreement with Jackson’s record label, Shady Records/Aftermath Records. The agreement transferred Jackson’s copyright interest in the song to the label. In addition, Jackson granted the “perpetual and exclusive rights” to his name and likeness connected to label marketing efforts during the term of the agreement and a non-exclusive right to use after the agreement’s termination. The recording agreement included language limiting the right to grant commercial sample licensing without Jackson’s consent.

In November 2015, Roberts released his mixtape for free. Both parties agreed that mixtapes, which include remixes of others’ songs are common amongst hip-hop performers often without permission from either recording artists or the copyright holder.

Robert’s mixtape was a compilation of 26 remixes where Roberts put his own lyrics over poplar audio samples by well-known artists. For this mixtape, Roberts identified the recording artists associated with the samples. Roberts did not get permission to use the samples or Jackson’s stage name.

Jackson brought his lawsuit on 12/23/2015 claiming that Robert’s use of his voice from In Da Club a cut from his debut album Get Rich or Die Tryin’ as well as his name in the title track and the use of his stage name was a violation of the right of publicity under Connecticut common law. Roberts responded that his use was protected by the First amendment, that Jackson’s claim was preempted by the Copyright Act and Jackson had no publicity rights because they were transferred to the label.

In the original complaint, Jackson claimed that Robert’s use of his voice from “In Da Club” a cut from his debut album “Get Rich or Die Tryin’” as well as his name in the title track and the use of his stage name was a violation of the right of publicity under Connecticut common law.

The lower court found that Jackson surrendered his rights to use his name, performance or likeness to the label. In addition, the right of publicity claim was preempted by copyright law and he cannot make a claim based on rights given up to the label under the contract.

Analysis

Under Section 301, the Copyright Act preempts state laws “to the extent that those laws interfere or frustrate the functioning of the regime created by the Copyright Act.”

To determine whether a claim is preempted by Section 301, the court: 1) reviews the work against which the plaintiff wants to exert a state right to see if it comes within the subject matter of copyright, in this instance claims related to Connecticut rights of publicity laws and 2) looks at the equivalence or general scope of Section 301 as it relates to the work and whether it comes within copyright subject matter representing an equivalent to a right within the scope of copyright. This court considered common practices within the hip-hop community as the relevant audience to see whether that audience thought the mixtape represented a false implication of Jackson’s endorsement or sponsorship of Roberts’ project. The court found that common practices within the hip-hop community would not find that such endorsement or sponsorship was connected to the mixtape’s use of Jackson’s voice or stage name.

The court continued that it was concerned particularly about situations when another right conflicted with the rights of a copyright holder or licensee. If it did, that right “may be” preempted. This could be overcome if the state right involved consumer deception, privacy or reputational harms like defamation.

This court found that Jackson attempted to use Connecticut’s right of publicity laws to control a work subject to copyright law over which he had no control under his label agreement. The entity with the right to claim copyright infringement and violation of rights of publicity laws was the label. The alleged infringement should have been brought by the label and the rights related to commercial sample misuse were also with the label subject to Jackson’s approval. The court said that Jackson’s direct suit interferes with the actual rights holder. Specifically:

“Roberts’s mere reproduction of a sound that can be recognized as Jackson’s voice, and his small discreet notation that correctly identifies Jackson as the artist of the sample played, do not violate any substantial state law publicity interest that Jackson possesses. To the contrary, the predominant focus of Jackson’s claim is Roberts’s unauthorized use of a copyrighted sound recording that Jackson has no legal right to control.”

And

“Jackson’s attempt though this suit to control the reproduction of “In Da Club” conflicts with and acts in derogation of the exclusive right of the rights holder to exercise such control.”

This court granted Robert’s motion for summary judgment stating that Jackson’s claim was preempted under either: 1) the doctrine of implied preemption or 2) under express terms of Section 301 of the Copyright Act.

Comments: Offering copyright protected music in a mixtape for free does not automatically protect against a copyright infringement claim, as this case confirms. Rather, if there is a common industry practice, as in the case of the Hip-Hop industry, which allows for artists using others’ works without a license or other permission, what would have been considered an infringement may not be enforced. In the absence of a common industry practice, whether the work was offered for “free” is only helpful in the damages phase of copyright infringement as it relates to actual damages (if not registered with the Copyright Office) and disgorgement of profits and other statutory damages (if the work was registered with the Copyright Office For those who are concerned about music licensing and copyright, please contact Gayton Law.

Privacy and GDPR

Data Protection Commissioner v. Facebook Ireland and Maximillian Schrems (Schrems II), Ireland High Court, July 16, 2020

Topics: GDPR, Privacy Shield, Personal Data, Privacy

This is a significant privacy case decided in Ireland on July 16, 2020 which found that the United States’ offered equivalent to the European Union’s 2016 General Data Protection Regulation (GDPR), the Privacy Shield created by the United States’ Department of Commerce, was insufficient to protect the privacy of EU citizens. Fundamentally, there is no equivalent privacy-related US law which is the equivalent of the GDPR. As a result, many organizations have entered into their own agreements in order to meet GDPR requirements. It is lengthy and complicated, so what appears below is an attempt to summarize a more than 50 page decision.

Background

This Preliminary Ruling was decided under Article 267 TFEU from Ireland’s High Court in relation to proceedings between the Data Protection Commissioner of Ireland and Facebook Ireland and Maximilian Schrems regarding a complaint brought by Schrems “concerning the transfer of his personal data by Facebook Ireland to Facebook Inc. in the United States.”

Preliminary Ruling Subject Scope

The High Court’s ruling’s scope covered:

1. The Interpretation of several articles under the EC Directive 95/46/EC regarding the “protection of individuals with regard to the processing of personal data and on the free movement of such data.”

2. The Interpretation and validity of Commission Decision 1010/87/CU dated February 5, 2010 regarding “standard contractual clauses for the transfer of personal data to processors established in third countries under Directive 95/46 and

3. The Interpretation and validity of Commission Implementing Decision 2016/1250 dated July 12, 2016 regarding the “adequacy of the protection provided by the EU-US Privacy Shield.

Key Ruling Provisions

Pre-GDPR Directive 95/46 Article 25 said that: “The Member States shall provide that the transfer to a third country of personal data … may take place only if … the third country in question ensures an adequate level of protection.” Whether the adequate level of protection exists is assessed “in light of all the circumstances surrounding a data transfer operation or set of data transfer operations.” However, the Commission may find “that a third country ensures an adequate level of protection … by reason of its domestic law or of the international commitments it has entered into … for the protection of the private lives and basic freedoms and rights of individuals.”  In addition, a Member State may authorize transfer to a third country which does not ensure adequate protection where “the controller adduces adequate safeguards with respect to the protection of the privacy and fundamental rights and freedoms of individuals and as regards the exercise of the corresponding rights; such safeguards may in particular result from appropriate contractual clauses.”

Pre-GDPR Directive 95/46 was replaced by GDPR Regulation 2016/679 on April 27, 2016. The new regulation stated in part that the protection levels, rights and freedoms of natural persons with regard to data processing should be equivalent in all Member States. However, Member States should be allowed to maintain or introduce national provisions and specify its own rules, including rules that set out circumstances for specific processing situations determining more precisely the conditions under which the processing of personal data is lawful. It recognizes that personal data flows to and from countries outside the Union are necessary to expand international trade and cooperation, but the data protection of natural persons should be ensured and not undermined.

Under the GDPR, the Commission can decide for the entire Union whether a third country, international organization or territory offers “an adequate level of data protection, thus providing legal certainty and uniformity throughout the Union as regards the third country or international organization which is considered to provide such level of protection.” The Commission can take into consideration “how a particular third country respects the rule of law, access to justice as well as international human rights norms and standards and its general and sectoral law, including legislation concerning public security, defense and national security as well as public order and criminal law.” To this end, the third country “should offer guarantees ensuring an adequate level of protection essentially equivalent to that ensured within the Union, in particular where personal data is processed in one or several specific sectors.” The Commission recognizes that some third countries, territories or organizations provide or ensure an adequate level of data protection which would result in the prohibition against the transfer of personal data to that entity. The Commission’s concern is that when personal data moves beyond the Union’s borders, that there is risk that the natural person will not be able to exercise data protection rights “to protect themselves from the unlawful use or disclosure of that information.”

When the Commission is charged with assessing data protection adequacy, it takes into account three features: 1) rule of law, respect for human rights and fundamental freedoms, relevant legislation, both general and sectoral including concerning public security, defense, national security and criminal law; 2) existence and effective functioning of one or more independent supervisory authorities in the third country with responsibility for ensuring and enforcing compliance with data protection rules; and 3) international commitments into which the third country has entered into including legally binding conventions or instruments. After this assessment takes place, they may decide, using an implementing act, that a third country ensures an adequate level of protection.

If there is no implementing act, the Member States may include standard contractual clauses (SCC) in data transfer agreements, approved of by the Commission are considered to be offering adequate safeguards.

Precedent

On October 6, 2015, the Ireland High Court found the Commission’s 2000 decision under 95/46/EC supporting the adequacy of US safe harbor privacy principles, invalid. However, upon accession the limitations and safeguards promulgated by the US Department of Commerce in the form of the Privacy Shield, were found adequate.

In the current case, where Schrems requested that the Commissioner prohibit or suspend personal data transfer from Facebook Ireland to Facebook Inc., it reviewed the protection adequacy in light of Schrems’ doubts regarding the adequacy of Privacy Shield protections.

Ruling

Generally, the Commission found that because the Privacy Shield enables interference “based on national security and public interest requirements or on domestic legislation of the United States, with the fundamental rights being unprotected, and that interference arising from access to or use of personal data transferred from the EU to the US by US public authorities through US law” cannot ensure adequate protection levels related to fundamental rights. For example, “It is thus apparent that Section 702 of FISA [Foreign Intelligence Surveillance Act of 1978] does not indicate any limitations on the power it confers to implement surveillance programs for the purposes of foreign intelligence or the existence of guarantees for non-US persons potentially targeted by those programs.

Comments: Since this decision, Switzerland, which was subject to a separate Privacy Shield agreement with the United States, also concluded under its own legal regime in light of the Schrems II decision that “[b]ecause there is no guarantee of rights that would afford persons concerned in Switzerland protection comparable to that afforded by [Swiss law], the FDPIC [Federal Data Protection and Information Commissioner] considers that data protection within the meaning of Art. 6 Para. 1 FADP is insufficient in the US, even for the processing of personal data by US companies that are certified under the [Swiss-US Privacy Shield] regime.”
This decision impacts data transfer and sharing between the US and the EU, now including Switzerland. If your business relies on data transfer and sharing, you may have to rely on individual contracts containing approved SCC clauses.
See article “Beyond Terrorism: data collection and responsibility for privacy, 2006, Journal of Information and knowledge management systems, volume 36, number 4. or request a copy from Gayton Law.

Bulletins

Security and Ransomware
For those of you who are Securities and Exchange Commission (SEC) registrants or registrants’ representatives, the SEC reported in July that there was an increase in ransomware attacks against broker-dealers, investment advisers, and investment companies. The SEC’s Cybersecurity: Ransomware Alert and related guidance can be found here.

Grant Scams
Several Small Business Administration- related grant and Payment Protection Program scams are making the rounds. They are in at least two flavors: 1) a telephone call or 2) a text message – both  are connected to Facebook account contacts. The scam relies on established personal relationships to socially engineer information about the target in the form of completing a loan application and returning it to the apparent requester. Please verify the purported SBA employee before sending any personally identifiable information that may be used for purposes of identity theft. See here for more information.

Publications and Education

Publications

Legal Aspects of Engineering, Design and Innovation 10th edition by Cynthia Gayton, February 2017.

This edition is available through the publisher, Kendall-Hunt publishers and on Amazon.com in paper and e-book form. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues. This new edition includes separate chapters for each intellectual property type, introduces and explanation of blockchain smart contracts, discusses trends in product liability, and has recent case law to highlight chapter topics. It also expands from a primarily engineering perspective to include design professionals and innovation-specific coverage.

Guide to Copyrights & Trademarks for CryptoCreatives by Cynthia Gayton, January 2019.

This guide is available as an e-book on Amazon.com and is intended to introduce basic contract, copyright and trademark concepts for the benefit of creatives in the crypto and digital art communities. It covers the art and music market, provides an introduction to contracts and smart contracts, and briefly explains copyright and trademarks.

Education

Cynthia Gayton taught a Business Entities Formation class for the Washington Area Lawyers for the Arts Creative Entrepreneurship Series on September 21, 2020.

Cynthia Gayton made two digital, blockchain, art and copyright presentations since January 2020.The first was at the Rare Art Festival in May and the CADAF event in June.

Thank you for reading and for your business!

The information contained in this post is for general guidance on matters of general interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this post should not be construed as a substitute for consultation with professional advisors. Certain links in this post connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.

© 2020 Gayton Law

What’s Happening in Technology, Intellectual Property & Contracts – August 2020

August 1, 2020

Intellectual Property – Copyright

UMG Recordings, Inc. v. Kurbanov, No. 19-1124 (4th Cir. 2020)

In this appeal from the United States District Court for the Eastern District of Virginia to the Fourth Circuit, decided on June 26, 2020, the question before the court was whether the defendant, Tofig Kurbanov, d/b/a flvto.biz, a/k/a 2conv.com , was subject to specific personal jurisdiction based on a copyright infringement claim. The district court found that he was not subject to personal jurisdiction. The Fourth Circuit disagreed and reversed the decision and remanded to the district court for further proceedings.

Background

The two websites at issue, flvto.biz and 2conv.com, offered a stream-ripping service where audio tracks were extracted from online music video provider that were converted to .MP3files. Although the extractions were made primarily from YouTube videos, the technology allowed rips from many sources, including some purposes which were not illegal, however, the technology had the ability to circumvent content access control measures put in place to prevent stream-ripping activity. Under the Kurbanov websites terms of service, the sites’ visitors agreed that they were subject to personal jurisdiction in Russia, as well as other countries, by using the service. The users did not pay to use the services. The sites make money indirectly through advertising brokers. There were at least two brokers in the United States. The product features, in which advertisers were interested, were geolocation and geotargeting. The sites’ privacy policy stated that IP addresses, countries of origin and other information may be collected. However, the court made clear that Kurbanov had no direct contractual relationship with the advertisers and the websites were not advertised in the United States or elsewhere. Even without advertising, the websites “attracted over 300 million visitors from over 200 distinct countries” including 30 million users from the US between 10/2017 and 9/2018. Over this same time period, there were almost 600,000 visitors from Virginia to both sites. The domain names are registered with GoDaddy, a US-based domain name registrar and the domain suffixes are managed by Virginia companies, Neustar and VeriSign, and have servers hosted by Amazon Web Services, which has servers in Virginia. Kurbanov conducted his work physically in Russia, and did not work on the sites in the United States. He didn’t have any employees in the US, nor a visa for US travel.

The plaintiff appellants, UMG Recordings, Capital Recordings, Warner Bros Records, Atlantic Recording, Elektra Entertainment, Fueled by Ramen, Nonesuch Records, Sony Music, Arista Records. LAFace Records and Zomba Recording claimed that the Kurbanov’s websites facilitated music piracy and asserted 5 copyright claims.

Kurbanov filed a motion to dismiss stating that the court did not have personal jurisdiction over him. The district court agreed, and granted his motion to dismiss, without deciding on the copyright claims.

Court Analysis

Whether a court in Virginia can assert personal jurisdiction, personal jurisdiction has to be consistent with constitutional due process. For Virginia, the rules are 4(k)(1) and 4(k)(2). The Fourth Circuit synthesized the specific jurisdiction rules into a 3-prong test. Specifically: 1) the extent that defendant purposefully availed itself of conducting activities in the state; 2) whether the plaintiffs’ claims arose out of the activities conducted in the state; 3) whether the exercise of personal jurisdiction was constitutionally reasonable. According to the court, interactions between Virginians and the websites was sufficient to show purposeful availment to conducting business in Virginia in the form of advertisements targeted toward Virginia customers from which it derived financial benefits. In addition, Kurbanov registered a DMCA agent with the Copyright Office which would grant his websites some safe harbor protections. This, along with domain name registrar contacts, server hosting, and US based advertising brokers supported personal jurisdiction, meeting the first prong.

The Fourth Circuit also found that Kurbanov directed activities to Virginia by having websites accessed by Virginia-based customers through location based advertising, satisfying the second prong.

Under both prongs, the Fourth Circuit found that the copyright infringement claims arose from Virginia-directed activities. Because the district court did not analyze whether the exercise of personal jurisdiction was reasonable, the Fourth Circuit remanded this issue to the district court.

Establishing personal jurisdiction related to entirely web-based services is an ongoing legal issue. Website owners would do well to pay attention to how the Fourth Circuit crafted this decision by finding several ties to the US as well as Virginia and linked advertising targeted toward Virginia residents. For those who are concerned about their own geotargeted or geolocation advertising campaigns or stream-ripping abuses, please contact Gayton Law.

Intellectual Property – Copyright and Trademark

IMAPizza, LLC v. At Pizza, Limited, No. 18-7168 (D.C. Cir. July 17, 2020)

Jurisdiction and copyright, along with trademark infringement claims, is a popular topic. This second case involves DMV local chain, &pizza, and an infringement suit against a Scotland-based restaurant, @pizza.

Background

This is an appeal from the US District Court for the District of Columbia to the US  Court of Appeals for the DC Circuit which dismissed the copyright and trademark infringement claims by &pizza against @pizza.

IMAPizza owns a restaurant chain called &pizza, which has several DC and other East Coast locations. It was considering expanding its operations to the UK. At Pizza, is a UK company operating its @pizza operation in Edinburgh, Scotland. According to IMAPizza, @pizza owners toured some &pizza restaurants and decided to copy both their operation methods and appearance. They also took photos in person and downloaded others from &pizza websites. When the @pizza owners returned to the UK, they started a business called &pizza limited, but later renamed it At Pizza. Once &pizza owners found out, they sued At Pizza for copyright infringement, trademark infringement, unfair competition, as well as trespass and passing off under UK law. At Pizza filed a motion to dismiss the case for lack of personal jurisdiction and failure to state a claim for which relief can be granted by the court.

The district court dismissed the case because &pizza failed to show with sufficient facts that the court had jurisdiction over the defendant and failed to show how the alleged infringements were within the power of the court to grant a remedy. &pizza did not show a domestic violation of its copyrights, that the trademark infringement claims were within the territorial limits of the act, and that the district court had jurisdiction regarding the UK passing off claims.

Court Analysis

Copyright – For &pizza to show copyright infringement, it had to show that there was ownership of a valid copyright and that there was copying of original elements of the copyright protected work. The Copyright Act only governs actions in the US. IMAPizza says that @pizza downloaded copyright protected images from US-based servers, so it was an act of domestic infringement. The court responded that since IMAPizza could not show that the infringing copying was fixed in the United States, the Copyright Act did not apply. Transmission of the photos over the internet was not sufficient for the Act to apply. IMAPizza also claimed that @pizza owners infringed when they took photos of &pizza locations which resulted in similar buildings. However, because the infringing result was in the UK, the Copyright Act did not apply. Also, taking photos in a place open to the public was not sufficient to prove copyright infringement.

Trademark-Lanham Act – IMAPizza claimed that @pizza copied its trademarks and other design features which would likely create confusion between &pizza and @pizza. According to the court, the impact of such confusion would have to be experienced in the US in order for the Lanham Act to apply. IMAPizza did not provide any evidence that US travelers going to @pizza in the UK caused it to lose US customers.

Because IMAPizza alleged, but did not adequately show how At Pizza impacted US commerce, the US Court of Appeals for the DC Circuit affirmed the US District Court for the District of Columbia decision.

To establish personal jurisdiction related to copyright, trademark and unfair competition claims to foreign entities must be firmly based on impact in the US. This was successfully shown in the UMG case, but not in this case. Because &pizza did not have a registered trademark with the USPTO, it had to rely on common law trademark and unfair competition laws which would only apply to domestic US infringement, and as a result, it could not take advantage of international trademark protection which would permit the court’s enforcement jurisdiction beyond the US. If you have questions about trademarks for your business, contact Gayton Law.

Contracts – Covid-19 and SBA

If your company has availed itself of the Paycheck Protection Program, lenders have been provided guidance by the SBA to process borrower loan forgiveness applications. There are two SBA created forms, Form 3508 and 3508EZ, although your lender may have created its own equivalent forms. Your business may apply before the end of the 8-week or 24-week covered period depending on whether you have used all of the loan proceeds for which forgiveness is being requested. The SBA Procedural Notice is quite detailed, so please review thoroughly in order to help ensure that your company is prepared. The link to the SBA Procedural Notice can be found here.

Publications and Education

Publications

Legal Aspects of Engineering, Design and Innovation 10th edition by Cynthia Gayton, February 2017.

This edition is available through the publisher, Kendall-Hunt publishers and on Amazon.com in paper and e-book form. This book is used in several engineering courses and is a useful reference for anyone interested in contracting, intellectual property, engineering practice, and other general legal issues. This new edition includes separate chapters for each intellectual property type, introduces and explanation of blockchain smart contracts, discusses trends in product liability, and has recent case law to highlight chapter topics. It also expands from a primarily engineering perspective to include design professionals and innovation-specific coverage.

Guide to Copyrights & Trademarks for CryptoCreatives by Cynthia Gayton, January 2019.

This guide is available as an e-book on Amazon.com and is intended to introduce basic contract, copyright and trademark concepts for the benefit of creatives in the crypto and digital art communities. It covers the art and music market, provides an introduction to contracts and smart contracts, and briefly explains copyright and trademarks.

Education

Cynthia Gayton made two digital, blockchain, art and copyright presentations since January 2020.The first was at the Rare Art Festival in May and the CADAF event in June.

Thank you for reading and for your business!

The information contained in this post is for general guidance on matters of general interest only. The application and impact of laws can vary widely based on specific facts. The information contained in this post should not be construed as a substitute for consultation with professional advisors. Certain links in this post connect to other websites maintained by third parties over whom Gayton Law has no control. Gayton Law makes no representations as to the accuracy or any other aspect of information contained in other websites.

© 2020 Gayton Law

Recent CADAF panel discussion

July 16, 2020

Very much enjoyed this lively panel discussion with Dominic Perini, co-founder, MoCDA, Mark Waugh, Business Development Director, DACS and moderated by Giulia Archetti, CADAF.

CADAF Panel Discussion – June 25, 2020

 

CADAF is offering very interesting complimentary virtual happy hours that you might want to check out: https://cadaf.art/happy-virtual-hour.

 

 

Thoughts on cooperative censorship, eminent domain over search engines & content aggregators as public utilities and the 5th Amendment

June 25, 2019

In 2008, at the beginning of the Financial Crisis, 3 years after the Supreme Court decision eminent domain decision, Kelo v. New London4 years after Facebook’s founding and 2 years after its availability to anyone over 13, 7 years after the DOJ antitrust-related consent decree with Microsoft regarding Internet Explorer, 7 years after the passing of the US Patriot Act, and 10 years after Google’s founding and the same year of a proposed settlementbetween Google and Authors Guild, I wrote an article on issues including cooperative censorship and the 5th amendment, while a contributing author and editor of Vine.

At the time, Google dominated my thoughts about knowledge access when a monolithic commercial entity could, within its algorithmic commercial right, control access to knowledge. For a previous paper, I used Google search to find Senate transcripts about FISA while researching NSA and the Patriot Act. The first hit was a document for which I could pay Google a fee. Senate hearing transcripts are available free of charge.

Recently, I used Google to search for Google-related AI service contracts – then it struck me, should Google make available documents/information that could be used against it? In other words, does Google have a legal duty to make available all information or data to which it has legal access for the benefit of “the public”? In addition, do other platforms, such as Facebook/Instagram and Twitter have a legal duty to cooperate with governments to pursue public policy goals when the platforms’ actions are not per se illegal and are within the platforms’ terms of use?

Here are some excerpts from an opinion articleThe top five – globalization and the law – predictions for the first half of the twenty-first century, VINE, Vol. 38 Issue: 4, pp.398-401.

Cooperative censorship

By “cooperative censorship,” I mean that business and governments will work together to limit knowledge available to the public. There is significant evidence of this trend. Some existing search engines and web sites have cooperated with governments to restrict their citizens’ and others’ access to online content which may lead to perceived incendiary conduct. As access to online resources increases and becomes available to otherwise closed governments, businesses who design search engines, as well as content aggregators for text, videos and images (“SE/CAs”) will continue to bow to international government pressure. In the past, similar cooperation was restricted to wartime. I believe, however, that businesses will work directly with governments to restrict information whether or not there is an ongoing national security assertion.

[…]

Eminent domain or public utility – the future for dominant search engines/content aggregators

The flip-side of SE/CA dominance and cooperative censorship is the possibility that SE/CAs will become public utilities, so integral will they become to our lives. A company’s service sometimes becomes a public utility once it has been established that it is a “natural monopoly” or an “essential commodity”. Once a business becomes a public utility, it is subject to government regulation. In the USA, railroads, highways,electricity, water supplies, etc., were at one time all private enterprises not subject to government regulation.

In the future, an argument may be made that dominant SE/CAs have established so much control over the SE/CA market that it has become an essential commodity that would be available for the public benefit and not for profit.

Market dominance by such a global entity may raise regulation beyond the laws of the business’ domicile to international regulation. If the claim is ever made that a dominant SE/CA is an international public utility, the business and related technology may become subject to an international treaty, similar to the United Nations Convention on the Law of the Sea (UNCLOS) and the Outer Space Treaty, where governments agreed to the regulation of the ocean and space “commons”. Will access to knowledge via dominant SE/CAs become an international “commons” to which everyone is entitled to access?

Another possibility is that the US government will convert dominant SE/CA businesses into public property via its eminent domain authority. Usually, eminent domain procedures are limited to the taking of private property for “legitimate public purposes” such a roads, schools, and public utilities. Permitted by the 5th Amendment, the Government may assert a right to private property, but must provide “just compensation” to the owner. The Government has asserted eminent domain over intellectual property, such as trademarks and patents, if it serves the Government’s interests. Conceivably, the Government may wield its authority to control SE/CAs in their entirety to secure public use into the future allowing the now government-owned businesses to negotiate directly with international entities.

The reason why I think either of these may be a possibility for the future is that global online search is a powerful knowledge tool. Relying on the fortunes of a for-profit business to maintain and continue such a resource may be considered ill-advised.

[…]

In light of pressing and vital conversations and claims re censorship, content and account purges, alleged denial of service based on user profiles, what are your thoughts?

Cynthia M. Gayton is an attorney, educator and speaker. She has advised small and medium sized software development companies as well as arts and entertainment businesses and individuals. She has an undergraduate degree in international affairs with a concentration in science and technology as well as a J.D. Nothing in this post is purported to be legal or financial advice. You can contact the author via email at cynthia.gayton@gayton-law.com.

First published on LinkedIn this day.

NFTs – Can they cure copyright laws’ ills?

February 22, 2019

by Cynthia M. Gayton

For much of my legal career, I have addressed intellectual property laws as they relate technology and art. Recently, I have become interested in how new technology, in the form of non-fungible tokens, can be used to further creative endeavors for software developers as well as artists and musicians.

In this presentation, made before an audience at the Non-Fungible Summit in San Francisco on October 12, 2018, I talk about how non-fungible tokens, operating in ways inconceivable by the drafters of the United States’ Constitution and enumerated Congressional powers including the power “To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries”, potentially confound the protections that copyright laws promise. While the drafters could not have anticipated NFTs specifically, their prescience regarding protection of authors’ and inventors’ works, in whatever form, remains relevant and important.

Here, I suggest a solution in the form of robust property law and licensing designed with this technology in mind if it involves creative works. Property law, including tangible and intangible property, intellectual property, related licenses and ownership, may direct how intellectual property generally and copyright in particular can be used to further Constitutional purposes in new ways that continue to reward authors and inventors for a limited time and ultimately for the benefit of the public.

Cynthia M. Gayton is an attorney, educator and speaker. She has advised small and medium sized software development companies as well as arts and entertainment businesses and individuals. Nothing in this article is purported to be legal or financial advice. You can contact the author via email at cynthia.gayton@gayton-law.com

New Release – Guide to Copyrights & Trademarks for CryptoCreatives

January 15, 2019

This guide is intended to introduce basic contract, copyright and trademark concepts for the benefit of creatives in the crypto community. It covers the art and music market, provides an introduction to contracts and smart contracts, and briefly explains copyright and trademarks.

Available on Amazon.

Technology News – Token Taxonomy Act

January 8, 2019

On December 20, 2018, Representatives Warren Davidson and Darren Soto of Ohio and Florida, respectively, introduced a bill H.R. 7356, entitled the “Token Taxonomy Act.” For those following the legal issues related to digital assets and tokens, this bill attempts to adequately distinguish digital assets commonly called “security tokens” from non-security tokens as well as provide a safe harbor for digital asset holders who find that the SEC has determined that their tokens qualify as securities.

The bill defines a digital token as follows:

(20) DIGITAL TOKEN.—The term ‘digital token’ means a digital unit that—

(A) is created—

(i) in response to the verification or collection of proposed transactions;

(ii) pursuant to rules for the digital unit’s creation and supply that cannot be altered by a single person or group of persons under common control; or

(iii) as an initial allocation of digital units that will otherwise be created in accordance with clause (i) or (ii);

(B) has a transaction history that—

(i) is recorded in a distributed, digital ledger or digital data structure in which consensus is achieved through a mathematically verifiable process; and

(ii) after consensus is reached, cannot be materially altered by a single person or group of persons under common control;

(C) is capable of being traded or transferred between persons without an intermediate custodian; and

(D) is not a representation of a financial interest in a company, including an ownership or debt interest or revenue share.

A digital unit is defined as follows:

(21) DIGITAL UNIT.—The term ‘digital unit’ means a representation of economic, proprietary, or access rights that is stored in a computer-readable format.

The proposed bill recommends gross income exemptions with regard to virtual currency transactions if the exchange is an exchange of virtual currency for something other than cash or cash equivalents so long as the exchange is valued at less than $600.

The bill recommends amendments to the Securities Act of 1933, the Securities Exchange Act of 1934 as well as the IRS Code of 1986, among others.

Nothing in this article is purported to be legal advice. You can contact me via email at cynthia.gayton@gayton-law.com.

Tokens, Branding and Digital Assets

June 19, 2017

“Art loves Chance, Chance loves Art”
Agathon

This article is about how content access cryptocurrency tokens may help diversify an artist’s branding portfolio and also raises some legal issues to consider before an artist takes the leap.

What is a token?

For purposes of this discussion, I am not going to address how people are raising money selling tokens as a crowdfunding venture (like an initial coin offering or ICO). Rather, I am going to address how artists can use tokens to sell and market existing art and music. In addition, I am going to limit my points to using a token as a “key” which permits users to access often exclusive digital content and assets.

According to Balaji S. Srinivasan, CEO of 21.co:

“[A] token is a digital asset that can be transferred (not simply copied) between two parties over the internet without requiring the consent of any other party.”

Mr. Srinivasan goes on to explain that when people purchase tokens they are purchasing the equivalent of private keys which can permit access to specified digital assets.

Private keys are part of an encryption or cryptographic strategy to ensure that information is only made available to those who have established a particular identity or permission to access that information. Private keys are intended to remain confidential to its owner. A public key is one that can be viewed on a directory or repository which lists public keys.

An application programming interface or API can be used by web developers to control an interface between an application and an operating system. As an example, mobile phone use is supported by APIs most commonly in the form of Java programming language. If you use an Android phone, you are using Java APIs. [See recent case Oracle v. Google, where a jury found that Google’s use of Java APIs was fair use under Copyright law.] Using a token can, therefore, be likened to an API when the token is designed for access to digital assets.

So what do you get when you buy a token? What your token can and cannot do is often unclear. The reason for this is because the technology and its uses are evolving minute-by-minute. How the token can be used may be defined by the platform on which it is being used. It may be defined by the artist or musician. The rights to use certain content is often fluid. The content to which the token is associated may vary from day to day.

In addition, access to particular content may not be guaranteed since it depends on the arrangements with the token issuer and the artist or musician. It could be possible, for example, that a content owner could add or remove content, block individual or blanket access to content as well as delete the content entirely.

In other words, it is an ongoing and living experiment.

I can’t emphasize enough that artists, musicians and fans understand the relationships between the art, the technology, and the token terms. There are powerful uses for this technology and it could bring significant income to artists as well as developers.

But first, it is necessary to look at the kind of assets an artist is likely to use in a token-enabled environment and how to incorporate those assets into a brand.

Branding

Brands are comprised of reputation, trademarks, copyrights, and other elements of “goodwill” that are often difficult to define. Most brands are recognizable due to their trademarks which are:

“[A]ny word, name, symbol or device or any combination of them that serves to identify and distinguish the source of one party’s goods or services from those of another party.”

Trademarks can be brand names, such as Coca-Cola® brand soft drink, a service mark, a certification mark or a collective mark. Superman® is a registered trademark of DC Comics covering several goods and services.

Several million dollars in revenue come from licensing brands in the form of trademarks. Trademarks rights are the exclusive rights to use a mark in commerce to distinguish your goods and services from another. Whether a product can be protected depends on whether the work has the qualities that would entitle it to trademark protection. However, you will not obtain trademark protection is your mark is “generic” or incapable of becoming a trademark.

Copyrights and trademarks are distinct intellectual property types, even though there are often design or illustrative elements in each. Copyrights protect original work of authorship that are:

“[F]ixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device.”

So, even a work in digital or electronic form which can be communicated via a machine or device would qualify as being “fixed in any tangible medium of expression” and potentially entitled to copyright protection. A scanned image of your work or a digital rendering of any component, would be a sufficiently tangible medium if it can be communicated with the aid of a machine and otherwise capable of being protected by copyright laws.

The works which could be potentially covered by copyright include: literary, musical and dramatic works; pantomimes and choreographic works’ pictorial, graphic and sculptural works; motion pictures; computer programs and compilations of works or derivative works.

What is crucial to remember is that copyright only protects the expression of ideas – not the ideas themselves – this is called the idea-expression dichotomy. Why is this important to understand? Because perhaps the most litigated aspect of copyright law is determining whether an author is trying to protect the expression of an idea (a thing fixed) or the idea itself.

The rights received, once copyright has been asserted, include the exclusive rights to reproduce, prepare derivative works, distribute, display and perform publicly and authorize others to do these things.

Once you have created and fixed a work in a tangible medium of expression, the work you created automatically enjoys federal copyright protection. If you register (submit an application) your work with the Copyright Office, in the event of an infringement on your work, you will be able to ask for actual damages, statutory damages, treble damages, profit, attorneys’ fees, and an injunction. If the work is not registered, and your work has been infringed upon, you will only be able to seek actual damages, which are those losses you can prove were the result of an infringement.

Another element of personal branding is the “right of publicity” which may be the subject of trademark protection, but usually is a right enforced by state courts where misuse of someone’s identity is an unfair trade practice or fraud. According to International Trademark Association (INTA):

“The “right of publicity” is a form of intellectual property right that protects against the misappropriation of a person’s name, likeness and perhaps other indicia of personal identity for commercial benefit. In the United States, the right of publicity has not been recognized at the federal level by statute or case law, although a related statutory right to protection against false endorsement, association or affiliation is recognized under federal unfair competition law.”

 The combination of intellectual property types, as well as the right of publicity, form the elements of successful personal and corporate branding. Below is a discussion combining tokens and copyrights as digital asset forms.

First Sale Doctrine and Digital Assets

In a nutshell, in order to prevent copyright owners from having an interest in subsequent sales of physical objects where the copyright is manifested, and where the rights holders could control all secondary markets of these goods, the first sale doctrine was adopted. This doctrine was originally explained in the Supreme Court case Bobbs-Merrill Co. v. Straus, 210 US 339 (1908) and was later codified in the Copyright Act of 1909 which said:

“[T]he copyright is distinct from the property in the material object copyrighted, and the sale or conveyance, by gift or otherwise, of the material object shall not of itself constitute a transfer of the copyright, … but nothing in this Act shall be deemed to forbid, prevent, or restrict the transfer of any of a copyrighted work the possession of which has been lawfully obtained.”

Under the first sale doctrine, when a consumer buys a physical book, for example, the consumer cannot copy the book and sell the copies without violating U.S. copyright laws. [See the recent Supreme Court case Impression Products, Inc. v. Lexmark International, Inc., 581 U.S. ____ (2017) regarding “patent exhaustion” and compare the similarities to the “first sale doctrine” for copyrights which may be instructive:  “The Patent Act grants patentees the “right to exclude others from making, using, offering for sale, or selling [their] invention[s].” 35 U. S. C. §154(a). For over 160 years, the doctrine of patent exhaustion has imposed a limit on that right to exclude: When a patentee sells an item, that product “is no longer within the limits of the [patent] monopoly” and instead becomes the “private, individual property” of the purchaser. Bloomer v. McQuewan, 14 How. 539. If the patentee negotiates a contract restricting the purchaser’s right to use or resell the item, it may be able to enforce that restriction as a matter of contract law, but may not do so through a patent infringement lawsuit.” [Emphasis added.] Syllabus] However, the consumer has a personal property interest in the book itself and can sell the physical copy without worrying about the copyright owner alleging that the consumer has violated the author’s rights to the book.

Once computer programs were covered under copyright law in 1980 and where those who bought physical copies of computer programs could make an archival or electronic copy of the program without violating copyright law, an unanticipated problem of digital downloads was ushered into the music industry as well as the software industry.

The most recent version of the Copyright Act under 17 USC 109 (b)(1)(A) says:

“[U]nless authorized by the owners of copyright in the sound recording or the owner of copyright in a computer program (including any tape, disk, or other medium embodying such program), and in the case of a sound recording in the musical works embodied therein, neither the owner of a particular phonorecord nor any person in possession of a particular copy of a computer program (including any tape, disk, or other medium embodying such program), may, for the purposes of direct or indirect commercial advantage, dispose of, or authorize the disposal of, the possession of that phonorecord or computer program (including any tape, disk, or other medium embodying such program) by rental, lease, or lending, or by any other act or practice in the nature of rental, lease, or lending. Nothing in the preceding sentence shall apply to the rental, lease, or lending of a phonorecord for nonprofit purposes by a nonprofit library or nonprofit educational institution… .”

As a result, rights owners have updated the terms and conditions related to digital downloads and sales (whether music or software) and called such sales “licenses to use” which circumvents the first sale doctrine permitted for physical personal property. In this way, most rights to downloaded digital assets are retained by the copyright owner, since consumers are buying licenses.

Licenses are personal property under U.S. law, but the license terms are usually unknown or unread by consumers. As compared to the Napster days when peer-to-peer distribution was frowned upon, successful and legitimate business models have been built around licensing instead of sales, which is reflected in the proliferation of music streaming services. Unknown to most users is the multi-layered licensing terms services such as Spotify and iTunes have to navigate before music or podcasts reach consumer eyes and ears.  According to Anthony C. Eichler:

“Most people probably assume that when they “purchase” a song on iTunes, they “own” it. Of the roughly 800 Million iTunes accounts, it is likely that very few consumers actually took the time to sit down and read the daunting and lengthy Terms & Conditions that they agree to with the click of a button. [Footnote omitted.] This agreement, however, states that they do not actually own anything they pay for via iTunes. [Footnote omitted.]  To the contrary, they have been granted a limited license to access the digital asset only on their account, and only on a limited number of devices linked to the account. [Footnote omitted.] Further, the limited license granted by the User Agreement is non-transferrable in nature.”

Any consumer transparency in this industry is an astounding marketing and sales feat. For a typical song advertised, sold and performed on a music website, there are publicity rights (if you use a photo of an artist, for example, you have to have permission from the photographer as well as the artist to post the artist’s image); music rights (both performing and mechanical licensing rights have to be negotiated); cross-platform playing permissions if the player is using proprietary technology; the list goes on.

Although there is no nationwide definition of a digital asset, for purposes of comparison, here is the Delaware Code’s definition:

(7) “Digital asset” means data, text, emails, documents, audio, video, images, sounds, social media content, social networking content, codes, health care records, health insurance records, computer source codes, computer programs, software, software licenses, databases, or the like, including the usernames and passwords, created, generated, sent, communicated, shared, received, or stored by electronic means on a digital device. “Digital asset” does not include an underlying asset or liability that is governed under other provisions of this title.

Unfortunately, the Delaware Code’s definition appears under Title 12, Decedents’ Estates and Fiduciary Relations, Chapter 50. Fiduciary Access to Digital Assets and Digital Accounts. In other words, the definition only applies if the digital asset owner is dead.

In the case Capitol Records v. ReDigi, the court made it clear that the first sale doctrine does not include digital assets when a company is attempting to purchase and resell them on a digital domain. In its conclusion, the United States District Court for the Southern District of New York said:

“At base, ReDigi seeks judicial amendment of the Copyright Act to reach its desired policy outcome. However, ‘[s]ound policy, as well as history, supports [the Court’s] consistent deference to Congress when major technological innovations alter the market for copyrighted materials. Congress has the constitutional authority and the institutional ability to accommodate fully the varied permutations of competing interests that are inevitably implicated by such new technology.’ Sony, 464 U.S. at 431, 104 S.Ct. 774. Such defense often counsels for a limited interpretation of copyright protection. However, here, the Court cannot of its own accord condone the wholesale application of the first sale defense to the digital sphere, particularly when Congress itself has declined to take that step.”

It may be worth considering a few things regarding artists using tokens for branding and work distribution. Specifically, whether:

  1. The token itself, if used to access existing content, may be considered a digital asset;
  2. If token access is to copyright protected material, whether that copyright protected material may be sold depends on how and what rights the artist chooses to sell, e.g., whether the artist is granting rights to use in the form of a license; and
  3. Whether the token or key can be sold or made available separately from the copyright or other intellectual property protected work.

To be a successful artist, whether a visual artist or a musician, requires an increasingly complex array of knowledge that was just not the case when you had a friend design your mixtape sleeve to sell at shows.

My prediction:  Token use as described above may become a threshold test case for establishing digital assets as a federally permitted statutory exception to the “first sale” doctrine under copyright law.

Thank you for reading.

[This article is derived in substantial part from a booklet prepared for an “Art on the Blockchain” MeetUp event I co-hosted with Jeff Clarkin held on June 13, 2017 at The Black Cat in Washington, DC. It is intended for educational and informational purposes only and is not intended to substitute for legal advice.]

Art on the Blockchain (AOTB™)

June 8, 2017

It has been quite some time since a post appeared on this blog. Over the course of a year, I have been following with some enthusiasm the developments of blockchain and its related technology as well as cryptocurrency. In April of this year, I co-founded an Art on the Blockchain Meetup group with Jeff “DJ J Scrilla” Clarkin a local producer, illustrator, mixtape DJ, writer and even a podcast host. Hopefully, we will be able to help navigate the spaces between the law and art using this potentially new business and music distribution model. If you are the DC area, please come by one of our events.

Marriage in Ethereum – A Cautionary Tale

June 24, 2016

In May 2016, a couple who intend to get married in December 2016 created a prenuptial smart contract agreement on Ethereum in blockchain. Ethereum is not a honeymoon resort, but provides a unique way to create, enter into, execute, pay for, secure, and enforce, contracts. The preparation of a prenuptial agreement in this manner heralds an evolution of contracts and contract management. What follows is my take on the legal intersection of autonomous contracting software and human relationships – specifically, a self-executing prenuptial agreement.

Prenuptial agreements are nothing new. Neither are virtual contracts. What is new is how this contracting process runs without human intervention based on a sequence of coded events monitored and executed by a virtual distributed transaction-based and encrypted system. What began as a transparent and public peer-to-peer financial ledger using bitcoin cryptocurrency, is now on the verge of managing personal lives as well.

I have watched bitcoin cryptocurrency and the underlying transaction software which supports the blockchain infrastructure for some time. Cryptocurrency evolved from the current fiat monetary system and has been compared to the gold standard. These monetary forms rely on a belief that the currency (in whatever form) has an agreed upon, or market created, value. Similarly, consideration, a necessary legal contract element, relies upon the parties agreeing that the value exchanged (the consideration – whether money or promises) is sufficient for an enforceable contract.

Blockchain is often described as an online decentralized ledger of financial transactions, the nature of which is transparent to others on the blockchain.  Ethereum is a blockchain platform over which cryptocurrency can be exchanged as well as smart contracts formed.

Co-founder, Vitalik Buterin, described Ethereum as “a “world computer”: a place where anyone can upload and run programs that are guaranteed to be executed exactly as written on a highly robust and decentralized consensus network consisting of thousands of computers around the world.” The Ethereum platform uses “ether” cryptocurrency, a competitor to the more familiar bitcoin. The smart contract manages a series of mini transactions (with the colloquial meaning, not the Ethereum definition), each of which build the agreement whole. Along the way, “fees” are paid for each interaction along the blockchain process. The fees pay the “miners” who process each transaction.

Now back to the marriage!

When I learned about this prenuptial agreement, I was intrigued. Initially, I wondered why anyone would want to do such a thing. Then I thought this experiment was a disaster waiting to happen. Finally, I realized that this could be awesome!

A prenuptial agreement is a promise in consideration of marriage which has to be in writing in most, if not all, 50 U.S. states and the District of Columbia. This writing requirement comes to the U.S. via the British “Act for the prevention of Frauds and Perjuryes,” which required some transactions to be in writing, whereas many oral agreements remained as enforceable as written ones. A promise in consideration of marriage is one example among many.

A case that I used in my Engineering Law class for several years was Curtis v. Anderson, where Curtis wanted Anderson to return an engagement ring when he broke off the engagement.  Anderson refused. Curtis brought a lawsuit which claimed that he gave her the ring in consideration of marriage and that she agreed to return the ring if they did not get married. In the alternative, the ring was a conditional gift.

If the ring was a promise in consideration of marriage, the promise would have to be writing under the statute of frauds.

If a ring is presented upon acceptance of a marriage proposal (the promises have already been exchanged in advance of the ring giving), it may be viewed as a conditional gift under Texas law. As a conditional gift, the gift’s terms don’t have to be in writing. The conditional gift rule only works, however, if the person who accepted the ring/gift broke the engagement.

Did Curtis get back the ring?

The court determined that the statutes related to prenuptial agreements and the statute of frauds applied. There was no writing, so whatever the parties said either before or after the engagement, did not create an enforceable prenuptial agreement. In addition, since Curtis broke off the engagement, the ring did not qualify as a conditional gift. Therefore, Anderson didn’t have to return the ring.

For my students, this was a much discussed result. Happily for me, the case was an opportunity to talk about the difference between ethics and law, as well as the difference between an engagement (which does not have to be in writing) and a promise in consideration of marriage (which does).

Which leads to the Ethereum prenuptial agreement and whether its terms would be enforceable. Generally, a contract in the U.S. is enforceable if: 1) the parties can legally enter into the contract; 2) there is an offer and acceptance; 3) there is consideration; and 4) the subject matter/form is legal.

Let’s look at each contract element in the Ethereum prenuptial agreement.

Parties and legality.  I don’t know how old the parties are or whether they may legally agree to marry. But, there is a clue – the prenuptial agreement is related to an anticipated marriage in India. If the parties entered into this agreement in India, it may not stand. Nonetheless, a dispute involving the prenuptial agreement may be resolved based on British common law which may apply in India via the Indian Contract Act of 1872.

Offer and acceptance. The parties’ acceptance may be indicated by their seemingly independent interactions with the smart contract.

Consideration.  The consideration in the prenuptial agreement is the exchange of promises to do or not do an enumerated list of things. In addition, there is consideration in the form of ether, which pays for the transactions in blockchain and which, in turn, creates the prenuptial agreement. The fees appear to have been paid and the parties appear to have agreed to its value and therefore have agreed to the prenuptial agreement’s terms.

Subject matter/form.  Let’s assume there are no statutory impediments to prenuptial agreements – could this version be enforceable if the parties live and marry in the U.S.? Prenuptial agreements are legal in the U.S. In the agreement, the magic words required for an enforceable prenuptial agreement are in writing: “in consideration of the marriage about to be solemnized between the parties.” The agreement also makes references to date nights, television viewing rules, insult restraint, etc. But to qualify as enforceable agreement, there would have to be acts that the parties have the legal rights to do, and in exchange for not exercising those rights, agree to be bound by the contract.

An example is the “dollar bill” clause of the prenuptial agreement, where the parties agree that “shopping sprees” are only permitted every fortnight, with the exception of food purchases, which have no monetary limit. If the parties do marry and one of the parties violates the $$ clause with daily shopping sprees using a joint bank account from which the shopping sprees are financed, could this violation be used as a reason to file for divorce? Maybe. Would it matter that the contract was entered into on the Ethereum platform? I do not believe so. The final written document can presumably be understood by both parties, even if they did not write the underlying code responsible for its formation. In addition, each phase of the transaction may be considered a separate agreement and further evidence of the parties’ consent to its terms. Absent fraud or duress, the agreement may be enforceable in the U.S.

There have been posts that say that smart contracts may not be legally enforceable. I was unable to discern the single element that would render them illegal. There are contracts that are illegal because of its purpose, e.g., a smart contract to commit fraud is illegal, and therefore unenforceable. Ultimately, the legal problems may be based on the blockchain code itself. If that is the case, I would suggest that each step be analyzed as a separate contract (because consideration is exchanged at every stage in Ethereum) to determine whether each transaction is legally enforceable, e.g., is there offer and acceptance? consideration? legal parties? proper form/legal? All would have to exist for a legally enforceable contract in the U.S.

This troubling issue was explained further in an article by an attorney, Stephen D. Palley. In summary, he suggests that since the nodes through which transactions pass are decentralized, there is no one entity responsible when the transaction fails due to a problem with the software. Once launched, a smart contract does not require or rely on human intervention and is managed by a decentralized autonomous organization or “DAO.” The inevitable legal problem a DAO faces, however, is who to sue if something goes wrong.

This issue is precisely what arose recently when unknown (as of June 23, 2016) Ethereum developers siphoned money from one decentralized autonomous organization’s (called The DAO) account. That smart contract was created using the Solidity programming language which operates in the Ethereum environment. The DAO was recently formed as a business entity similar to an LLC in Switzerland, perhaps in response to Mr. Palley’s articles and other calls to create a formal business entity. Within a year, liability risk went from non-existent to reality for The DAO investors.

Thus, there are two legal landscapes over which a potential user must navigate – the umbrella contract itself as well as the individual transactions over the blockchain.

Where do I see additional problems? The Ethereum platform uses language that is defined differently from legal terms of art. There are centuries of legal precedent that will not be overturned by code. That fact, however, does not mean that such a lexicon cannot be developed. Indeed, PAX has come up with a legal scripting language for Ethereum.

Upon my cursory review of this subject and applying it to a prenuptial agreement, Ethereum or something similar may make legal contractual transactions streamlined, transparent, and verifiable, especially with regard to simple purchases and template driven services.

Also, promoting something similar to a prenuptial agreement that is available for anyone to use without a disclaimer – e.g., this agreement may not be valid in your jurisdiction, or please consult local laws or we are not providing legal advice – should not be encouraged, even if intended to be humorous.

It is with both enthusiasm and caution that I look forward to what smart contracting, DAO, and cryptocurrency will become. I hope that the programmers recognize that the people with whom these systems interact are rarely streamlined, transparent or verifiable. I also hope that ethical, fiduciary, and social concerns are not abandoned as developers design automated contracts for some of the most intimate of human relationships.

Nothing in this article is purported to be legal advice. You can contact me via email at cynthia.gayton@gayton-law.com.