Archive for the ‘Contracts General’ Category

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.]

What’s Happening Now in Technology, Arts, Small Business & Contracts – November 2015

November 2, 2015

Arts News

Copyrights and Fair Use: Lenz v. Universal Music Group, et. al.

In this appeal from the U.S. District Court for the Northern District of California, the U.S. Court of Appeals for Ninth Circuit’s panel held that the Digital Millennium Copyright Act (“DMCA”) requires copyright holders to consider “fair use” before sending a takedown notification. If a copyright holder fails to do this, it introduces a triable issue regarding whether the alleged infringing use was not in accordance with the law. The copyright owner’s determination whether the use is fair use or not is subjective. This subjective “good faith belief” test required under the DMCA can be determined under two analysis methods: 1) the actual knowledge theory and 2) the willful blindness doctrine, both of which the 9th Circuit held could be used under the DMCA.

Actual knowledge theory says that the there must be some actual knowledge of the misrepresentation on the part of the copyright holder. Generally, in order to be held liable for any damages due to misrepresentation, the court will look to whether the person making the statement was negligent in making false statements. The distinction between this and fraud is that to be held liable for fraud, the speaker must have intended that there be reliance on the false statement made.

The “willful blindness doctrine” means that the speaker materially misrepresented that it had a good faith belief that the offending activity was not a fair use. The plaintiff would have to show that the defendants subjectively believed that the use of the copyright protected work constituted fair use. The lower court in this case determined that Lenz could proceed under the actual knowledge theory, but not the blindness doctrine because “because she did not show that the defendants subjectively believed there was a high probability that the video constituted fair use.”

Background: On July 24, 2007, Stephanie Lenz filed a lawsuit under 17 U.S.C. § 512(f)—part of the DMCA against Universal Music Corp. (“UMG”) and its subsidiaries. She claimed that UMG misrepresented in its takedown notification that her 29 second video containing Prince’s song “Let’s Go Crazy” and to which her children danced, was not lawful. The court determined that “the statute requires copyright holders to consider fair use before sending a takedown notification, and that failure to do so raises a triable issue as to whether the copyright holder formed a subjective good faith belief that the use was not authorized by law.

Lenz uploaded her video named “Let’s Go Crazy #1” to YouTube in 2007. UMG monitors YouTube videos and one of its employees found Lenz’s video. The employee checked to see if the video “embodied a Prince composition” and made “significant use of . . . the composition, specifically if the song was recognizable, was in a significant portion of the video or was the focus of the video.” If the song is the focus of the video, UMG’s procedure required that they notify YouTube to take it down. The procedures did not explicitly say that UMG considered application of the fair use doctrine. The notice included a good faith statement which: “We have a good faith belief that the above-described activity is not authorized by the copyright owner, its agent, or the law.”

YouTube took down the video, and Lenz protested. YouTube brought the protest to UMG’s attention and UMG responded that Lenz did not acknowledge that her statement was made under penalty of perjury and that there was no record that YouTube or Lenz had licenses to use the song. Lenz protested again, and YouTube reinstated the video. Lenz brought a lawsuit regarding UMG’s alleged misrepresentation under 512(f), among other reasons, including tortuous interference. Only the misrepresentation claim was before the Ninth Circuit for this decision.

Under the Digital Millennium Copyright Act, service providers, such as YouTube, can avoid copyright infringement claims under certain conditions. Infringement liability can be avoided if the service provider disables or removes the alleged infringing content “expeditiously.” DMCA sets forth the copyright holder’s requirements to support removal: 1) identification of the copyrighted work, 2) identification of the allegedly infringing material, and, 3) a “good faith” statement regarding the copyright holder’s belief that the infringing use was not authorized by the copyright owner, an agent, or the law. If a copyright owner misuses the takedown notice requirements, the owner is subject to liability under 512(f) misrepresentation.

Fair use analysis was codified in the Copyright Act in 1976, under 17 U.S.C. § 107. Fair use considerations are:

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use upon the potential market for or value of the copyrighted work.

Universal argued that fair use is a “defense” to otherwise infringing activity, e.g., unless proven otherwise, any use of copyright protected works without permission is an infringement. This court stated that fair use is a right, and not an excuse for otherwise infringing content. However, the court quoted Bateman v. Mnemonics, Inc., 79 F.3d 1532, 1542 n.22 (11th Cir. 1996) which said: “Regardless of how fair use is viewed, it is clear that the burden of proving fair use is always on the putative infringer.”

The court provided some guidance as to how a copyright holder could use computer programs to identify content which could be subject to a takedown notice and determine fair use: “For example, consideration of fair use may be sufficient if copyright holders utilize computer programs that automatically identify for takedown notifications content where: “(1) the video track matches the video track of a copyrighted work submitted by a content owner; (2) the audio track matches the audio track of that same copyrighted work; and (3) nearly the entirety . . . is comprised of a single copyrighted work.” Brief for The Org. for Transformative Works, Public Knowledge & Int’l Documentary Ass’n as Amici Curiae Supporting Appellee at 29–30 n.8 (citing the Electronic Frontier Foundation website (link unavailable)).” [CMG link here.]

The court concluded, however, that copyright holders must consider fair use before submitting takedown notices under the DMCA and that the plaintiff, Lenz, could move forward at trial under the actual knowledge theory regarding plaintiff’s misrepresentation allegation. In addition, the plaintiff could seek nominal damages for injuries due to the misrepresentation, if proved.

In my opinion, there are two things worth noting regarding this decision. First, Lenz had filed a tortuous interference claim which was dismissed. In her second amended complaint, only misrepresentation under § 512(f) was the only claim. The tortuous interference with her contract with YouTube claim suggested that the plaintiff’s insistence in reposting the video had a purpose other than making available an innocent video about her children. Indeed, how many children [49,659,075 YouTube views as of October 22, 2015] have been launched to fame after videos were posted on YouTube and subsequently interviewed by television personalities [100,795,145 YouTube views as of October 22, 2015] or had the opportunity to meet the musicians or vocalists the children were imitating? Second, M. Smith, Circuit Judge, concurring in part, dissenting in part, and concurring in the judgment, had the better analytical approach to this case: “In sum, I would hold that parties must individually consider whether a work is a fair use before representing that the work is infringing in a takedown notice. If they do not, and the work is a non-infringing fair use, they are subject to liability for knowingly misrepresenting that the work is infringing.”

If you have copyright protected work which you want to monitor online, Gayton Law can help you with developing policies and procedures for your businesses’ infringement monitoring activities.

Contracts

Terms of Use and Arbitration Clauses. Berkson,et. al. v.Gogo LLC and Gogo, Inc. This consumer fraud case came before the U.S. District Court for the Eastern District of New York. The class action plaintiffs alleged that the defendants, Gogo LLC and Gogo, Inc., fraudulently charged Wi-Fi services on air flights, specifically, that the defendants “improperly increased their sales and profits by misleading customers into purchasing a service that charged a customer’s credit card, on an automatically-renewing continuing monthly basis, without adequate notice or consent.” According to the complaint filed for this case, between 2008 and 2012, the defendants fraudulently advertised that purchasers were only buying single one month subscription to the Wi-Fi service, but the defendants were making recurring charges on the plaintiffs’ credit cards. The defendants said that the plaintiffs agreed to the recurring charges and they also agreed to a mandatory arbitration clause. The named plaintiffs, representing a nationwide class, claimed that the defendants committed “common law breach of the implied covenant of good faith and fair dealing, common law unjust enrichment, and violation of various consumer protection statutes.” On April 8, 2015, the court made decisions on defendants’ procedural motions, specifically, motions to (1) transfer venue; (2) compel arbitration; and (3) dismiss for lack of standing.

The motions to transfer venue and compel arbitration was based on Gogo’s terms of use. Plaintiffs’ claim that Gogo’s terms and conditions were hidden, and, therefore, unenforceable. Gogo is a dominant player in the in-flight Wi-Fi market, where more than 80% of North American flights use Gogo’s services. Gogo’s website advertised a daily rate of $10 and a monthly rate of about $40. Plaintiffs used Gogo’s services during air plane flights. The plaintiffs’ claimed that there was nothing to indicate that if they registered for the monthly service that they would be billed on a recurring basis. The service was only canceled once the subscribers noticed the fee and contacted Gogo.

The court determined that because the terms and conditions were hidden and users were not given sufficient notice to inquire about the terms (which included language regarding the recurring fee and the arbitration clause) the court denied the defendants’ motions to transfer venue and compel arbitration. The defendant’s motion regarding standing stated that the plaintiffs had not shown the particularized and concrete injuries required to meet the requirements to bring a lawsuit. The court found that just because one plaintiff was reimbursed by a credit card company for the charges when Gogo refused to do so and that another was reimbursed when that plaintiff informed Gogo of the class action lawsuit. The standing motion was also denied.

Although this case was before a New York federal district court, the issues it addresses are nationwide. More and more transactions are being conducted online. This case is instructive with regard to providing transparency about your business’s online contract terms and conditions. Contact Gayton Law to ensure that your online agreements are in compliance with your jurisdiction’s click-wrap, sign-in-wrap and browse-wrap laws.

What’s New at Gayton Law

Posts

The FTC’s Supreme Court Victory: A Rare Win for Both Libertarians and Regulators. Guest post by Theodore A. Gebhard, J.D., Ph.D.

The Federal Trade Commission’s (FTC) recent Supreme Court victory in the North Carolina State Board of Dental Examiners (NCSB or Board) case brought together in common cause both economic libertarians and federal antitrust regulators — groups often at odds with each other respecting important philosophical and policy principles. The FTC’s win, however, gave both groups much reason to celebrate.

See the rest of the post here.

Even in a Knowledge-Driven Economy – Things are Still Kings by Cynthia M. Gayton, Esq. posted on Vienna Woods Law & Economics blog.

From September 30 – October 1 of this year, I attended a conference entitled “The IP Platform: Supporting Inspiration and Innovation” that was sponsored by George Mason University School of Law’s Center for the Protection of Intellectual Property.  The extensive and impressive speaker’s list included a keynote speech by David Kappos, law professors from around the country, and innovators of all stripes.

See the rest of the post here.

Programs and Publications

Cynthia Gayton co-created a 3-part workshop, the third of which was held on Saturday, October 24, entitled “Theseus’ Paradox” at The George Washington University’s Alexandria campus. This workshop focused on strategies to manage innovation.

Learn more about the program here.

Caroline Norbury was a featured guest speaker at the second National Creative Economy Summit. Cynthia Gayton had the distinct honor and privilege of interviewing her at DC’s own WLVS Studios on October 6, 2015. Watch the interview here.

The “Guide to Creating and Protecting Fictional Characters” Second Edition by Cynthia Gayton was released in May 2014 and is now available for the Kindle.

Legal Aspects of Engineering. 9th edition by Cynthia Gayton is available through the publisher, Kendall-Hunt publishers and on Amazon.com. 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.

The information contained in this newsletter 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 newsletter should not be construed as a substitute for consultation with professional advisors. Certain links in this newsletter 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.

© 2015 Gayton Law

New Kindle Release! Guide to Creating and Protecting Fictional Characters

June 18, 2014

The second edition of a Kindle edition publication by Cynthia Gayton entitled, “Guide to Creating and Protecting Fictional Characters“, was just released last month. 

This legal guide is intended to be used by those people interested in protecting fictional literary and illustrated characters, generally, in the comic book and graphic novel fields, specifically.

What’s Happening Now – Technology, Small Business, Contracts – June 2013

June 9, 2013

Technology News

Health Care, Privacy and Mobile Apps. New smartphone apps make it easier to collect more and more personal information from consumers, including health care related data. The National Telecommunications and Information Agency (“NTIA”), which is part of the Department of Commerce, has started a process to develop a “code of conduct” related to mobile application transparency to protect personal data privacy. According to a recent Mobile Privacy Report, the FTC recommends that app developers have a privacy policy which is easily accessible through app stores. In addition, a bill was introduced by The Honorable Hank Johnson of Georgia on May 9, 2013, entitled the “Application Privacy, Protection & Security Act of 2013” or “APPS Act of 2013” which is intended “[t]o Provide for greater transparency in and user control over the treatment of data collected by mobile applications and to enhance the security of such data” and is now being considered in Congress. The bill’s discussion draft recommends that if an app collects personal data, the user must agree to the product’s terms and conditions. Specifically, “[b]efore a mobile application collects personal data about a user of the application, the developer of the application shall – (A) provide the user with notice of the terms and conditions governing the collection, use, storage, and sharing of the personal data; and (B) obtain the consent of the user to such terms and conditions.” Rep. Johnson has demonstrated a keen interest in privacy. Please see his press release regarding the National Security Agency’s telephone surveillance program.

Gayton Law can help you develop a privacy policy, whether you are an app developer or otherwise collect personal information from customers through your website.

Small Business News

Employee Benefits and the Affordable Care Act. Employers have until October 1, 2013 to notify employees about health care coverage options available through the “Health Insurance Marketplace” established under the Patient Protection and Affordable Care Act commonly called the “Affordable Care Act.” The new Fair Labor Standards Act (“FLSA”) Section 18B requires such notice. The requirements are detailed, but in general, the notice to employees must at minimum inform the employee of 1) the existence of the Marketplace; 2) whether the employer plan’s share of the total allowed benefit costs provided under the plan is less than 60% of such costs which may make the employee eligible for a premium tax credit if the employee purchases a qualified health plan through the Marketplace; and 3) the possibility that the employee may lose the employer contribution to any health benefits plan offered by the employer if the employee purchases a qualified health plan through the Marketplace.

Please note that the law requires that the notice “must be provided in writing in a manner calculated to be understood by the average employee.” Gayton Law can help you draft an appropriate notice in compliance with the law.

Contracting News

Employment Applications. The Americans with Disabilities Act says that employers are not permitted to ask an applicant medical questions until the employer has offered a conditional offer of employment. In a recent case, decided on March 29, 2013, a 3rd Circuit Court said that because an employee made false statements on an employment application regarding drug use, an employer had legitimate and non-discriminatory grounds to fire the employee. Reilly v. Lehigh Valley Hospital, No. 12-2078, (3rd Cir. March 29, 2013). In this case, the former employee, Robert Reilly, brought a lawsuit against his former employer, Lehigh Valley Hospital (“LVH”) asserting that it violated the ADA by disclosing his medical records to the human resources (“HR”) department. Reilly was employed by LVH as a part-time Security Officer. When he was offered the job, he completed and signed an employee health information form as part of the hiring process. The form included two alcoholism and drug addiction questions. In addition to answering “no” to these questions, there was a note on the form indicating that Reilly denied drug/alcohol addiction. The form also said that falsifying information “could result in withdrawal of the employment offer or if subsequently discovered termination of [his] employment.” When Reilly was admitted to the hospital to receive treatment for a work-related injury, he disclosed to the treating doctor that he had a history of drug use and that he was a recovering drug addict. This information was included in a clinical report which was submitted to LVH’s HR department. He was fired for falsifying his employment form. Reilly brought a lawsuit against LVH for violating the ADA and a corresponding Pennsylvania law. The District Court granted summary judgment in favor of LVH regarding Reilly’s claims that LVH’s firing was discriminatory. The District Court determined that LVH’s decision to terminate Reilly was founded on a non-discriminatory reason – falsifying information on the employment form – and, and therefore, permissible. Reilly appealed the District Court’s decision to the United States Court of Appeals for the Third Circuit claiming that the District Court erred in its decision. The Third Circuit determined that the District Court did not err and affirmed its decision.

This case was decided in the Third Circuit and would not be applicable in any other jurisdiction. However, this case is instructive for purposes of advising employers that they should ensure that their employment-related forms are not discriminatory or in violation of the ADA. Please contact Gayton Law with any questions about employment application forms and employee-related documents.

Recent Publications

The “Guide to Creating and Protecting Fictional Characters” by Cynthia Gayton was released in May 2013 and is now available on Kindle. Here is an excerpt:

“This is an exciting time to be a creative in any enterprise. You can develop stories, illustrate and publish your work with great speed and minimal expense. Doing things on your own is both liberating and inhibiting. Yes, you can do it all – from start to finish, the product, distribution, display, advertising and promotion are all controlled by you. On the other hand, it could be a problem that all these things are controlled by you. Do you have the skills necessary to bring your product to market, including the knowledge to protect your creations?”

In March 2012, Kendall-Hunt publishers released the 9th edition of Legal Aspects of Engineering by Cynthia Gayton. 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.

Thank you for reading!

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 newsletter 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.

© 2013 Gayton Law

What’s Happening Now in Technology, Small Business & Contracts

March 21, 2013

Technology News

Patents

Are you a small business that considered applying for a patent, but didn’t because of costs? The America Invents Act, which went into effect in September 2011, provides some financial relief in the form of a fee reduction. However, how a small business can take advantage of the fee reduction was unclear until this month. A filing fee reduction of 75% may apply if your business qualifies as a “micro entity.” A micro entity is defined as an applicant who certifies that “that the applicant: (1) Qualifies as a small entity as defined in 37 CFR 1.27 (2) has not been named as an inventor on more than four previously filed patent applications …; (3) did not, in the calendar year preceding the calendar year in which the applicable fee is being paid, have a gross income, as defined in section 61(a) of the Internal Revenue Code of 1986 (26 U.S.C. 61(a)), exceeding three times the median household income for that preceding calendar year, as most recently reported by the Bureau of the Census; and (4) has not assigned, granted, or conveyed, and is not under an obligation by contract or law to assign, grant, or convey, a license or other ownership interest in the application concerned to an entity that, in the calendar year preceding the calendar year in which the applicable fee is being paid, had a gross income, as defined in section 61(a) of the Internal Revenue Code of 1986, exceeding three times the median household income for that preceding calendar year, as most recently reported by the Bureau of the Census.” For further information, please contact the USPTO and James Engel, Senior Legal Advisor ((571) 272–7725), Office of Patent Legal Administration, Office of the Deputy, Commissioner for Patent Examination Policy.

Social Media

Ever wonder what is and is not allowed with social media advertising? Being in compliance with the specific social media company’s rules does not guarantee that you are in compliance with the Federal Trade Commission (FTC). Among other goals, the FTC promulgates rules, monitors and enforces laws related to unfair and deceptive trade practices. As computer, smart phone and mobile device screens become smaller, some businesses are removing lengthy disclosure/disclaimer language that clutter the screens. This month, the FTC prepared some guidance for both businesses and consumers regarding advertising for online media distribution. Here is a summary of the new guidelines:

  1. The same consumer protection laws apply online as they do in print or other media. The FTC’s rules and guides are not medium specific and may apply to many online behaviors.
  2. Claim qualification should be incorporated in the advertiser’s message (when practical).
  3. Required disclosures must be clear and conspicuous.
  4. As a “sub requirement” to guideline 3, advertisers should place the disclosure as close as possible to a claim which may otherwise be deceptive.
  5. If a disclosure is necessary to prevent deceptive advertising, don’t publish the ad on that particular media platform.

Summarized from “.com Disclosures – How to Make Effective Disclosures in Digital Advertising,” Federal Trade Commission, March 2013.

Gayton Law can review your online advertising to ensure compliance with these guidelines.

Small Business News

Employee Benefits

Employee benefits and federal and state leave requirements are expensive for businesses, especially small businesses. The relationship between and employer and employee should be based on trust, and when an employee negotiates leave under the Family and Medical Leave Act (“FMLA” or “Act”), trust is paramount. Unfortunately, that trust may be abused as outlined in a recently decided case, Lineberry v. Detroit Medical Center et al., No. 11-13752 (E.D. Mich. Feb. 5, 2013), where an employee who took leave under the Act, was fired for failure to comply with company policy.

As background, Lineberry, a registered nurse, was placed on FMLA leave because she experienced excruciating back and leg pain after moving stretchers. During her FMLA leave, Lineberry posted photos on her Facebook page where she was seen drinking beer and riding a motor cycle while on vacation. Her co-workers, who saw her Facebook page, reported these activities to her boss, who initiated an investigation into possible termination. Lineberry’s employer, Detroit Medical Center (“DMC”), requires an investigation when an hourly employee is facing termination.

After the investigation, DMC’s human resources representative wrote a letter to Lineberry terminating her employment. The letter said that Lineberry was being terminated for failure to abide by DMC’s discipline policy which provided that an employee may be terminated for “[d]ishonesty, falsifying or omitting information, either verbally, in written format … on DMC records including, but not limited to payroll records, human resources records etc.”

Lineberry brought a lawsuit against DMC for “(1) interfering with and denying her right to be reinstated to her position as staff nurse with DMC upon return from her FMLA leave, and (2) retaliating against Plaintiff for taking FMLA leave” both of which are rights guaranteed by FMLA. DMC responded by filing a counter-complaint where DMC sought to recover $3,636.57 it paid Plaintiff in short-term disability benefits.

When the court reviewed the case, it noted that in Michigan, “interference with an employee’s FMLA rights does not constitute a violation if the employer has a legitimate reason unrelated to the exercise of FMLA rights for engaging in the challenged conduct.” Edgar v. JAC Products, Inc., 443 F.3d 501, 507 (6th Cir. 2006) (emphasis added). Because Lineberry was unsuccessful in proving that DMC violated the FMLA by terminating her employment, the court agreed with DMC and dismissed the case.

Please note that this case was tried in Michigan and may not apply in your jurisdiction. Gayton Law can help you draft employment policies which may help prevent similar abuses.

Sequestration and Small Businesses

Under the Balanced Budget and Emergency Deficit Control Act of 1985, some automatic cuts became effective on March 1, 2013, including a reduction to the “refundable portion of the Small Business Health Care Tax Credit for certain small tax-exempt employers under Internal Revenue Code section 45R.” The refundable portion for these employers will be reduced by 8.7 percent and will be applied until 9/30/13, or until Congress intervenes.

Please contact your tax professional to see if this applies to you.

Contracting News

Collusion

Times are tough and many business owners spend sleepless nights trying to figure out how to make ends meet (perhaps joining with competitors to keep prices high), but the law never rests. Price-fixing is one area of antitrust law about which even small businesses should be aware. The Department of Justice (DOJ) and the Federal Trade Commission (FTC) enforce laws related to price fixing which is “is an agreement among competitors to raise, fix, or otherwise maintain the price at which their goods or services are sold”. Price fixing violations come under the Sherman Act, which was enacted into law in 1890.[i] The reason why price fixing is under tough scrutiny is because “[w]hen consumers make choices about what products and services to buy, they expect that the price has been determined freely on the basis of supply and demand, not by an agreement among competitors. When competitors agree to restrict competition, the result is often higher prices. Accordingly, price fixing is a major concern of government antitrust enforcement.” FTC Guide to Antitrust Laws. Depending on the nature of the price fixing behavior, a case may be brought by either the Department of Justice or the Federal Trade Commission.

On February 8, 2013, the DOJ settled with Holtzbrinck Publishers LLC, which does business as Macmillan. DOJ said that Apple and five publishers, including Macmillan, had conspired to “eliminate retail price competition, resulting in consumers paying millions of dollars more for their e-books.” The DOJ complaint said that Apple and the five publishers were unhappy with e-book prices and related low profit margins. The settlement requires that Macmillan immediately allow retailers to “lower the prices consumers pay for Macmillan’s e-books.” The DOJ is continuing its litigation against Apple.

Before entering into a contract with a competitor, ask Gayton Law to review the document to make sure that the agreement is not anti-competitive.

Contractor Fraud

The Justice Department announced on March 18, 2013, that executives at two Arlington, Virginia based businesses pled guilty to “fraudulently obtaining more than $31 million in government contract payments that should have gone to disadvantaged small businesses.” The court records do not identify the company names (they are identified as Company A and Company B), but the named conspirators are Keith Hedman of Arlington, Virginia and Dawn Hamilton of Brownsville, Maryland. According to the DOJ press release, Hedman formed a company with “an African-American woman who was listed as its president and CEO to enable the company to participate in the Small Business Administration’s (SBA) Section 8(a) program, which enables certain small businesses to receive sole-source and competitive-bid contracts set aside for minority-owned and disadvantaged small businesses.” He then formed another company to operate as a shell company in order to secure contracts for which the first company could not qualify. Dawn Hamilton was a “figure-head” owner who could qualify for 8(a) contracts due to her “Portuguese heritage and history of social disadvantage, when in reality the new company would be managed by Hedman and senior leadership” from Hedman’s other company. In 2011, Hedman withdrew $1 million from the second company’s account and distributed the funds in cash to co-conspirators. Hedman and Hamilton together brought in $31 million in government contracts. Hedman and Hamilton pled guilty to “major government fraud and face a maximum penalty of 10 years in prison and a multimillion-dollar fine. Hedman also pleaded guilty to conspiracy to commit bribery, which carries a maximum penalty of five years in prison. Hedman agreed to forfeit more than $6.3 million, and Hamilton agreed to forfeit more than $1.2 million.” Sentencing is scheduled for June 2013.

Have a government contract problem? Gayton Law can help!

Publications

In March 2012, Kendall-Hunt publishers released the 9th edition of Legal Aspects of Engineering by Cynthia Gayton. 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.

Thank you for reading!

The information contained in this post is for general guidance on matters of 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.

© 2013 Gayton Law


[i] Interested in the events behind the Sherman Act? Consider watching “The Men Who Built America.”