Are Your Social Media Brand Endorsements and Sponsored Ads FTC Compliant? A Guide for Proper Disclosures

by Jason W. Brooks

Endorsements from a celebrity and/or social media influencer are an important tool used by advertisers to build a brand’s image and persuade consumers. Moreover, it’s understandable that any brand ambassador would like to preserve an “organic” feel when conveying their messages. But the law, governed and enforced by the Federal Trade Commission (“FTC”) under the FTC ACT (15 U.S.C. §§ 41-58, as amended), states that “endorsements must be truthful and not misleading.” FTC relies on its recently updated Guides Concerning Use of Endorsements and Testimonials in Advertising (the “Guides”, as set forth in 16 CFR Part 255) to ensure that consumer products and services are described truthfully online, and that consumers understand what they are paying for. The Guides represent administrative interpretations of laws enforced by the FTC, and therefore failure to adhere to the voluntary compliance requirements set forth therein, may result in law enforcement actions for violations of the FTC Act.

The Guides themselves are not regulations, and so there are no civil penalties associated with them. But if advertisers don’t follow the Guides, the FTC may decide to investigate whether the practices are unfair or deceptive under the FTC Act, and may take corrective action under Section 5 of the FTC Act (15 U.S.C. 45). The following then, shall serve to advise regarding the basic legal requirements you must follow when making sponsored endorsements of any product, service or brand on any of your social media platform.

In short, in order to comply with the FTC, you must clearly and conspicuously disclose your material relationship with any brand which you are endorsing via your social media. The following will provide some guidance as to how and when you should disclose, but as a general rule of thumb, “when in doubt, disclose.”

What Is An Endorsement?

According to the FTC, an endorsement means “any advertising message that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser.” Thus, in order to be FTC compliant as the endorser of any brand’s product or service, you must ensure the following with respect to any of your endorsements:

1. The endorsement must reflect your honest opinion, belief, finding, or experience with respect to the product or service you are endorsing; and
2. You must have been a bona-fide user of the endorsed product or service at the time you made your endorsement.

[For example, you would not be permitted to tweet about how delicious you believe a particular beverage tastes, if (a) you’ve never actually tried that beverage, or (b) you don’t honestly believe the beverage is delicious].

Material Connections Must Be Disclosed.

In addition to the foregoing requirements, when there exists a connection between the endorser and the seller of the advertised product or service that might materially affect the weight or credibility of the endorsement, that connection must be fully disclosed. In other words, your endorsement of any product or service is subject to enforcement if the brand/advertiser, or someone working for the brand/advertiser, pays you or gives you something of value or provides some other incentive to mention their product on any of your social media.

Required Disclosures Must Be Clear and Conspicuous.

The hard and fast rule is, material relationships between brand and endorser on social media must be clearly and conspicuously disclosed. The FTC has provided specific guidance as to how to address these disclosures on various social media platforms, as follows:

1. On Twitter, Facebook and Instagram: While there are no specific rules as to how the disclosure needs to be stated, the FTC has taken a firm stance that the limited 140-character space available on Twitter does not change the need to disclose in an endorsement tweet. According to the FTC, “the words ‘Sponsored’ and ‘Promotion’ use only 9 characters; ‘Paid ad’ only uses 7 characters; and starting a tweet with ‘Ad:’ or ‘#ad’ takes only 3 characters” – each of these would likely be effective disclosures, per the Guides. Also note that the disclosure must be made on each and every tweet you make, even if you are tweeting the same message consecutively (i.e. minutes or even seconds apart) or if the tweet is broken up into several parts. The same rules apply to Facebook and Instagram posts, with the caveat that, because you are not limited in space on these alternative platforms, you should err on the side of making your disclosure longer and more obvious, rather than falling back on the same abbreviated text that would be appropriate for Twitter.

2. Contests & Sweepstakes Rules Need Disclosure: If you are promoting/sponsoring a contest on behalf of a brand, a disclosure is also required. Moreover, the responsibility falls on you (e.g. the contest sponsor) to make sure people entering the contest make the disclosure themselves if the contest requires them to review or promote a product/service. Again, the key is whether the gift would affect the “weight or credibility” of an endorsement, but determining where to set the bar is difficult, so it’s always safer to disclose. For example, if you, as a brand ambassador, are calling upon your social media followers to tweet about, or make an online review of the brand, in exchange for some type of gift or reward, then your call to action must also require that your followers disclose the contest/sweepstakes. Displaying a hashtag like “#contest” or “#sweepstakes” should be sufficient as a disclosure; however, using something like “#BrandXYZ_Rocks” or merely the abbreviated “#sweeps” is not sufficient because the relationship is not deemed obvious enough and people might not understand what the disclosure means.

3. Video Disclosures Must Be Made Early And Often: For any YouTube or other sponsored online video (e.g. Snapchat, Vine, etc.), it’s not enough to have a disclaimer on the details page. The FTC has stressed that proximity and placement are two determinative factors as to the conspicuousness of the disclosure. Therefore, your disclosure must be made at the beginning of the video and preferably repeated multiple times for longer-form pieces. Similarly, streaming video, such as Periscope or when making a video/mobile game review as a sponsor/ambassador of a gaming company, also needs disclosure throughout the video. As an example, stating throughout your videos or live streams language such as, “Sponsored by [name of the company],” would be sufficient as a disclosure.

4. Facebook “Likes” Might Require Disclosure: The FTC has not clearly addressed this specific issue yet, however, you should still stick to the same general rule of clearly disclosing if you are acting as a brand ambassador/sponsor to incentivize your followers to “Like” a brand on Facebook. It should be noted however that the FTC is unequivocally against the practice of “fake likes.”

Conclusion.

In summary, whenever you are acting as a Brand Ambassador or Sponsor of any product or service, you must ensure that people get the information they need to evaluate your sponsored statements. If you were given something for free or paid to promote a product or service, clearly state so. You should use clear and unambiguous language and make the disclosure stand out. Consumers (i.e. your social media followers) should be able to notice the disclosure easily and should not have to look for it. And finally, if your disclosures are hard to find, tough to understand, fleeting, or buried in unrelated details, or if other elements in your ad or message obscure or distract from the disclosures, they don’t meet the “clear and conspicuous” standard and you could find yourself the subject of an action from the FTC.

Jason W. Brooks, Esq. is an entertainment attorney and a founding partner of altView Law Group, LLP. Jason specializes in transactional business and legal affairs matters, particularly in the areas of New Media and TV production. Feel free to contact Jason via email: Jason@altviewlawgroup.com or follow him on Twitter: @Jasonbrookslaw.

Disclaimer: The information in this post is intended for general information purposes only and should not be construed as legal advice.

A Primer on Open Source Licenses & the Creative Commons

by Joseph D. Poole

In the last fifty years, with ever increasing speed, computers have changed the way we do business, listen to music, watch television, interact with each other socially, and the way we look at the world in general. At the core of this technology is code or software that tells ever more complex machines to do ever more complex things. The reason this complexity continues to increase is that none of this code is created in a vacuum.

In some cases, the code is so rudimentary that it is not protectable by copyright or patent.[1] However, just as a word or phrase is not subject to copyright, but a book or even an article in a magazine is, so too is more advanced software protected by intellectual property rights. But just as books are made of smaller chunks (i.e. words and sentences that individually may not be protected), code is often based on the code that came before it. The major difference is that code is (far more so than a book) comprised of mathematic formulas. It is more analogous to compare code to contracts, in which the language has a functional purpose.

As programs exponentially grew in complexity over the years, it was not feasible to recreate every aspect of code from binary or basic. “Reinventing the wheel,” as it were, was just as unrealistic and impractical in the programming sense as it is in the legal sense.[2] Thus, programmers sought ways to legitimately use libraries of code created by themselves and others and to share those libraries. In some cases, this was done within a single company, but as start-up software companies rose and fell, libraries that would survive the dangerous life cycle of the turbulent dotcom/dotbomb era were required. Software developers and designers also saw the advantages of efficient bug detection via software libraries, adhering to the mantra that “given enough eyeballs, all bugs are shallow.”[3]

Enter the open source movement: Software for everyone! However, authors of code generally do not want to give away all of their copyright to their works; they merely want to give others access to their works, and they use licenses to do so. The term “open source software” is generally used for any source code made available via license to study, change, and distribute the software at no cost to anyone and for any purpose.[4]

There are many licenses that fall within that definition. Not all of these licenses are created equally however. The largest variance between them is the degree to which they practice “copyleft” as opposed to “permissive” principles.  “Copyleft” is a term used to describe the requirement that “if changes are made to a program’s code, and the changed program is distributed outside an organization, the source code containing the changes must likewise be distributed.” Permissive licenses do not require the modified source code to be distributed or contributed back to the open-source community. Below is a discussion of some of the more common open source licenses, and how the code and the content contained in certain programs are treated differently.

OPEN SOURCE LICENSES

The most common open source licenses that this article will be examining are GPL, LGPL, BSD, Apache, and MIT. GPL is the most “copyleft,” followed by LGPL, but the others are far more permissive. Until recently, GPL was the most widely used open-source license. However, that is changing and now the open-source community has shifted largely to permissive licenses. The most popular community open source projects in recent years have used permissive licenses. Whether “copyleft” or permissive, open-source licensing does require proper attribution (showing where the code came from). How that attribution must occur depends on the license.

• GNU General Public License (“GPL”)/AGPL GPL is a “viral” license in that any source code that interacts with code distributed under a GPL license must similarly be distributed under a GPL license. A developer can copy, modify, distribute, and even sell the code. However, as they are required to offer the code for free and clearly display the GPL license permitting others to use the code for free, it is unlikely that a developer under a GPL license would ever receive an asking price for the code itself.[5] One way around this is to distribute the GPL licensed software as a service. Affero GPL or AGPL is a variation of GPL designed to shore up this loophole, making it even more “copyleft” than GPL licenses.
• GNU Lesser General Public License (“LGPL”) LGPL is usually used for software libraries. The software that uses the libraries does not need to be redistributed under the GPL or LGPL licenses, however, any changes to the software of the libraries themselves must be released under and LGPL license. This license is a key shift from the strict “copyleft” licenses AGPL and GPL to something that developers can use on commercial projects without being forced to distribute the source code of those projects under GPL licenses.
• BSD Licesnes BSD covers a family of permissive open-source licenses, but two stand out: the New BSD License/Modified BSD License, and the Simplified BSD License/FreeBSD License. Both allow developers to use the source code and distribute it without requiring them to distribute the underlying source code. The main difference between the New BSD License and the Simplified BSD License is where the attribution must occur. Both require attribution in the source code files and the documentation for the program, but the New BSD License restricts the use of contributors’ names for endorsement of the derived work without the contributors’ specific provision, and the Simplified BSD license does not. There is also a four clause BSD license that requires attribution in all marketing materials of the program (including every ad and commercial), but that license is no longer widely used.
• Apache Licenses Apache licenses are used in such open-source license projects as OpenStack, Hadoop, and Android. They are not as simple as BSD, and cover many terms that simpler licenses do not. For example, Apache licenses clearly identify a term and territory (perpetual and worldwide), identify use of the code as fee and royalty free, notify that the license is non-exclusive, and that the grant is irrevocable. Furthermore, Apache licenses attempt to address certain patent issues that other licenses do not.
• MIT License The MIT license, by contrast, is one of the shortest licenses, and consequently one of the broadest. It is used in such open-source projects as JQuery, Hudson/Jenkins, and nodejs. Essentially, as long as you give proper attribution, you can use MIT licensed code for whatever you want. This makes it a very easy license to use for developers who want to contribute code that can be used on commercial projects.

CREATIVE COMMONS

Open-source licenses are designed to address code, not media. Images, sound, and animation would not be able to properly handle the attributions required under open-source licensing. However, there are many communities that share the same open-source spirit in desiring to share their creative works with others for their use. The Creative Commons (“CC”) thus offers a variety of licenses specifically designed to allow creators to allow their creative works to be used by others. Generally all CC licenses require attribution. Additionally, there are three factors that can be modified, depending on the rights a creator wants to grant or restrict:

• Share Alike. A work with a “Share Alike” CC license allows for modification of the work and the creation of derivatives, but those derivative works must be licensed under the same license. This is a viral license that follows the work and its derivatives, akin to the “copyleft” licenses discussed above. However, as CC licenses are modular, Share Alike does not in and of itself prevent commercial use.

• Non-Commercial. A work with this restriction cannot be used for commercial purposes. The CC have attempted to define what a non-commercial use is, identifying commercial uses as those that are “primarily intended for or directed toward commercial advantage or private monetary compensation.” There is also a report published by the CC to help clarify what does and what does not count as commercial.

• No Derivative Works. This restriction prevents subsequent users from modifying, remixing, tweaking, or otherwise changing the work. If a creator is concerned that their work could be misused, then this restriction makes sense. Share Alike and No Derivative Works are mutually exclusive restrictions, as Share Alike applies exclusively to derivative works.

CC licenses are not designed for software, and generally should not be used for software. However, they do provide plain English and full legal versions of their licenses which allows them to be easily used and understood. This makes them very useful for the collaborative creative projects that have been taking the new media sphere by storm. For those who want to combine creative works and coding, proper use of creative commons licenses separate from the open-source licenses for the underlying code should allow creators to properly protect or distribute their works as they see fit.

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[1] See 17 U.S.C. § 102 (defining copyrightable subject matter); 35 U.S.C. §§ 101-103 (defining patentable subject matter as something novel, useful, and non-obvious); see also In re Comiskey, 499 F.3d 1365, 1376-77 (Fed. Cir. 2007) (identifying abstract ideas as non-patentable subject matter).

[2] The equations that make up a section of code have a specific purpose, just as legal language does. The major difference is that altering the terms of a contract is part of the nature of contract drafting (via varying levels of negotiations between two parties), whereas altering code is not as natural; code is often created by a single programmer or team with a common purpose.

[3] Raymond, Eric S., The Cathedral and the Bazaar 30 (1999) (“Linus Law”).

[4] St. Laurent, Andrew M. Understanding Open Source and Free Software Licensing 4 (O’Reilly Media 2008).

[5] See Cameron Chapman, A Short Guide to Open-Source and Similar Licenses, Smashing Magazine (March 24, 2010).

 

Joseph D. Poole is a Los Angeles based attorney working in the areas of intellectual property law and entertainment law.

Sony, Microsoft, and the Erosion of the First Sale Doctrine

by Mark Humphrey

During the Sony Corp. keynote address at the Electronic Entertainment Expo (E3) in June, the electronics giant made waves with a video clip titled “Official Playstation Used Games Instructional Video.” Created to explain how sharing games would work on the company’s forthcoming Playstation 4 (PS4) video game console, the video appeared ready to show a multi-step process. But within 22 seconds, the clip was over and the message clear – sharing games with friends on the PS4 was as simple as handing a game disc from one person to another. The crowd exploded in cheers.

The clip was in response to missteps made by Microsoft, Sony’s chief competitor, in unveiling its Xbox One console that same week. Microsoft announced that once a consumer purchased a game and played it on his or her console, the same copy would not be playable on a different console because it ­­would be digitally identified with the original user’s machine. The machine would also require a persistent internet connection in order to “verify” the console every 24 hours. This was to prevent consumers from selling games back to stores like Gamestop, which would then sell them at marked up but still discounted prices to other consumers – a practice that generates billions in annual revenue for these stores.

Microsoft’s gambit was a disaster. Analysts crowed that Sony “won” E3 in part because of its used games position. Many media outlets declared Xbox One dead on arrival if it featured such technology. The situation became so dire that Microsoft quickly backpedaled and scrapped the technology. It remains to be seen how damaging this will prove in the long run.

Such a situation arose because companies like Microsoft have both more and less control over their intellectual property than ever before. On one hand, IP in digital formats can be easily pirated absent protective measures. But technological and legal changes simultaneously give companies a great deal of power to control their products that didn’t exist just a few years ago.

Traditionally, the first sale doctrine has allowed someone who obtains title to a copy of a work to sell, lend, or lease it however he or she wishes, without the original copyright owner’s permission. But when the doctrine was created in 1908, it was concerned with the idea that first sale protection did not kick in until someone had obtained ownership over a physical copy. This made sense for decades, because IP was embodied in objects ranging from books and cassettes to DVDs and video game cartridges.

Yet as IP has increasingly become digitized, considerations that made sense for decades have become somewhat irrelevant. Streaming media, for instance, does not implicate first sale at all, simply because no physical copies change hands. When a movie or song ends, the consumer turns off his or her device as if he or she just watched a broadcast or listened to the radio. Any concept of “ownership,” as it is popularly understood, is not relevant in a streaming context.

Conversely, in digital downloading, the reproduction right is necessarily implicated when transferring a digital copy. First sale rights thus inescapably conflict with one of the key rights granted by copyright law. This is a twist that could not have been anticipated when the first sale doctrine was created over 100 years ago – and one that has not been completely resolved despite decades of debate and analysis.

Attempts to use contract law to limit the scope of first sale rights have also affected the doctrine’s modern applicability. In cases like Vernor v. Autodesk, courts have found that content creators can easily place restrictions on purchased products that transform outright sales into limited licenses and inhibit the consumer’s ability to freely distribute or even use something he or she purchased.

In each scenario, the first sale doctrine has limited relevance at best. As time goes on and technologies like streaming become the norm, the doctrine may be infrequently invoked, at best. It is thus the attorney’s job to properly advise clients on how best to protect IP without antagonizing consumers and making the same mistakes that Microsoft made at E3.

Just because restrictive means of protecting IP exist, that doesn’t necessarily mean that it’s in a client’s best interest to use them. For instance, if a client is selling a physical video game, the Vernor v. Autodesk decision allows it to create licensing agreements using a simple “cookbook recipe.” This test asks whether (1) the copyright owner specifies that the user is a licensee; (2) the copyright owner significantly restricts the user’s ability to transfer the software; and (3) the copyright owner imposes notable use restrictions.

Using this checklist, an attorney could draft an agreement stating that users may only install software on one computer or play a game on one machine, or could perhaps create an agreement stating that users are unable to transfer the software to anyone else, even if they have a physical copy in hand. But even though this is a potential option, is such stringent content protection really in the client’s best interest?

Consumer expectations relating to use and ownership differ widely depending on the type of media implicated. Degrees of ownership can be viewed as a sliding scale – the more tangible the media, the more of an expectation the consumer has that he or she should be able to do what he or she wants with it.

For example, if a client sells digital downloads, the consumer will most likely be receiving a revocable license with some form of digital rights management in place.  The client will be able to control use of the copy and prevent possible piracy. The client may also be able to take punitive action against consumers violating licensing agreements and terms of service, perhaps by canceling accounts and remotely wiping purchased copies from consumer devices. Indeed, companies from Amazon to Apple have such provisions written into their licensing agreements, warning consumers that their content can be remotely deleted at the company’s behest. The few times that such action has been undertaken, however, public outcry has been swift and vicious. Clients risk using such measures at substantial cost to their reputations.

However, when the item in question is a physical copy, the consumer’s expectation of ownership is at its strongest. Harkening to the origin of the first sale doctrine, the consumer traditionally expects to be able to do what he or she wants with something held in hand. In this scenario, draconian licensing restrictions must be even more carefully considered. Perhaps it’s because the consumer is suddenly holding a partially or entirely useless object due to licensing restrictions, but regardless, consumers do not take kindly to being told that they cannot use their physical property how they wish. Consumers certainly realize they can’t do certain things, like make illegal copies. But it’s news to them when they’re told they can’t lend or sell something they purchased. Microsoft’s fiasco is the paramount example of this. Consequently, an attorney should counsel a client against implementing drastic or unprecedented protections when a physical copy is involved, or at the very least, encourage the client to consider the very real cost of alienating consumers.

As mentioned earlier, none of this is implicated with streaming. And really, this appears to be where IP is headed in the next decade. Traditional notions of “sharing” and “ownership” may completely fall away in the next decade. At that point, attorneys will have new issues to deal with. The public performance right, for instance, could even replace the reproduction right as the popularly viewed linchpin of copyright law.

In the meantime, copyright is in a strange transition period where physical IP, streaming media, and downloaded content coexist in the same ecosystem. Moreover, longstanding norms like the first sale doctrine no longer uniformly apply. Ultimately, technology and the law appear headed for a convergence, giving more power than ever to content creators and distributors. Attorneys would do well to counsel their clients, in the interim, to not overreact to change and risk alienating and losing consumers.

That is certainly something that Microsoft executives and attorneys, fresh off their own overreach, ruminate about as the Xbox One’s November 22 release date approaches.

 

Mark Humphrey is a recent graduate of Southwestern Law School.

How Brands Use Trademark Law to Gain Competitive Advantage Online

by David N. Sharifi

There is a virtual war taking place in the realm of online marketing – one fueled by search queries, big data, and unprecedented levels of interactive brand engagement.  But the theater for this war is not storefronts, print ads, and billboards – it is Google, Facebook, Twitter, Amazon, mobile app stores, and many other digital platforms where consumers find their favorite brands, and advertisers hunt shoppers.

Today’s brands use a variety of creative and technical tools to identify themselves on the web, and to target, speak to, and “connect with” their loyalists online.  In cases where these digital tools – typically consisting of product names, company names, slogans, domain names, QR Codes, social media handles, search keywords, and hashtags (collectively “Digital Marketing Insignia”) – fall under trademark subject matter, brand owners can control valuable digital real estate through trademark protection and gain competitive advantage on the web.

Trademark Infringement in Digital and Social Marketing

Trademarks provide the exclusive right to promote goods and services under distinguishable words, phrases, symbols, designs or a combination thereof.  Rooted in consumer protection law, a trademark is legally a source identifier, a shortcut that communicates the source of the goods and services being promoted.  In some cases Digital Marketing Insignia such as domain names, hashtags, or even stylized QR codes contain trademark subject matter, and that’s when trademark protection is a useful weapon to help monopolize key areas on the web when a consumer is searching or shopping online.

To bring a prima facie trademark infringement case, a plaintiff must prove:

• Ownership of a valid trademark;
• Priority;
• Use in commerce in connection with the sale of goods or services; and
• Likelihood of consumer confusion.

When brands use Digital Marketing Insignia to promote their products online, trademark law can help protect valuable digital real estate where competitors may piggyback on famous marks. Vigilant trademark monitoring and enforcement can help defend against these unfair and often illegal practices.

As an example, consider one of the most famous trademarks of McDonald’s Corporation, U.S. Registration No. 2035587  for BIG MAC filed under “sandwiches for consumption on or off premises” in international class 030.  As owner of the BIG MAC trademark,  McDonald’s Corp. may choose to promote its famous sandwich on the web at http://www.bigmac.com, or at  facebook.com/bigmac, or under the social media handle @bigmac (Instagram and Twitter), or in search results under Google keyword: Big Mac, or in social media search results under hashtag: Big Mac (#bigmac).

Trademark Enforcement Online

If a competing restaurant promotes its products when a user searches the web for “Big Mac,” or if a competitor hosts a twitter party under #BigMacSucks (yes there is such a thing as twitter parties), or sets up a website under the domain name http://www.BigMacSale.com, do any of these uses of Digital Marketing Insignia constitute trademark infringement?  The answer depends on whether the brand owner can prove the four elements of trademark infringement (above).  Many courts have ruled, for example, that keyword triggering fulfills the use in commerce requirement of trademark infringement, and if the other elements can be proven (such as likelihood of consumer confusion), then infringement exists. (See Buying for the Home v. Humble Abode, 459 F. Supp 2d 310 (D.N.J. Oct. 20, 2006), Edina Realty v. The MLSonline.com, 2006 WL 737064 (D. Minn. Mar. 20, 2006), Hearts on Fire Co. v. Blue Nile, Inc. 2009 WL 794482 (D. Mass., March 2009)).  Other courts have ruled to the contrary. (See Site Pro-1 v. Better Metal, 506 F. Supp 2d 123 (E.D.N.Y. May 9, 2007), and Tiffany v. eBay, 2008 WL 27557897 (S.D.N.Y. July 14, 2008)).

Therefore, at least in the area of keyword triggering, there is room for trademark enforcement, although the issue is far from settled.  From a practical standpoint, brand owners may have leverage to enforce trademark rights through a cease and desist letter and settlement agreement, avoiding costly litigation in a legal area that is currently unpredictable.  And aggressive marketers may be amenable to limiting their use of competitors’ trademarks in Digital Marketing Insignia, rather than defending their positions in costly litigation which may swing either way.  Presumably, the use of hashtags containing protected trademarks triggers a similar analysis to keyword search issues, which have been heavily litigated.  In addition, courts have long settled the issue of use of domain names containing protected trademarks in cybersquatting cases and the enactment of the Anticybersquatting Consumer Protection Act (ACPA) in the late 1990s.

Owners of registered trademarks can also work directly with websites that host infringing content.  Most popular online platforms from Google and Bing, to Twitter and YouTube, to Etsy and Amazon, have copyright and trademark complaint policies available for brand owners to pursue a take down action.  Brand owners have these options to force competitors to comply, but trademark ownership and registration is usually a necessary requisite.

Trademarks Provide Competitive Advantage Online

Today’s brands, whether on the cusp of launching their first assault, or fully engaged in the trenches of competitive warfare online, can use trademark law not only to police their marks in traditional ways, but also to monopolize an assortment of Digital Marketing Insignia and dominate the online real estate where consumers shop and engage with products.  Without having strategic trademark protection and enforcement as a major part of a marketer’s arsenal, a brand online would be fighting a losing battle.

David N. Sharifi is a Los Angeles based intellectual property and business attorney concentrating in digital media and advertising, trademarks law, startups and mobile publishing.  A version of this piece first appeared on David’s blog, The LA Tech & Media Law Blog. 

A Comparison of Fair Use in the U.S. to Fair Use in the People’s Republic of China

by Brian Hong*

When it comes to copyright infringement cases, U.S. law provides for a specific list of factors that a court should consider when determining whether a fair use defense applies.  Because the U.S. relies on a common law system, one can typically make an educated guess as to how a court will interpret and apply a statute based on controlling or persuasive precedent.  In contrast, because the People’s Republic of China (“PRC”) relies on a civil law system, there have been unpredictable outcomes when it comes to the applicability of the fair use.  Furthermore, fair use in the PRC is based on enumerated exemptions to copyright protection, but because these exemptions are somewhat vague, some Chinese courts strictly apply the listed exemptions, while others have called for a multifactor analysis similar to the U.S.’s fair use analysis.

U.S. Fair Use

In section 107 of the Copyright Act, Congress expressly recognizes the fair use defense.  When determining whether or not a fair use defense applies in copyright infringement cases, U.S. courts must consider the following four factors: (1) the purpose and character of the use; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used; and (4) the effect upon the plaintiff’s potential market.  However, Congress has not stated how much weight to afford to each factor.

The purpose and character of the use:  If the work is “transformed,” meaning that the defendant adds something or uses the work in a different manner than it was originally used, then this factor sways in favor of fair use.  Whether the work is used for a commercial purpose or for nonprofit or educational purposes is also considered.

The nature of the copyrighted work:  The second factor can refer to either the form or the content of the original work, the presumption being that some works are closer to the core intent of copyright protection than others.  For example, use of an original novel will weigh in favor of copyright protection, while use of a newscast will weigh in favor of fair use.

The amount and substantiality of the portion used:  The third factor requires a court to quantitatively and qualitatively analyze how much of the original work has been used (in relation to the copyrighted work as a whole) and whether it is reasonable.

The effect upon the plaintiff’s potential market:  For the fourth factor, the court considers whether a party’s use of a copyrighted work could cause a substantial adverse impact on the market for the original work.

Fair use has been a subject of debate in the realm of search engines that provide internet users with images of and links to original works.  In Kelly v. Arriba Soft Corp., 336 F.3d 811 (9^th Cir. 2003), the defendant’s search engine created small “thumbnail” versions of plaintiff’s photographs on its database.  The 9^th Circuit held that defendant’s use of plaintiff’s images was transformative given that they were small, lower-resolution images that were used to index images.  Further, they were not highly exploitative, given that when a user clicked on an image, it transported the user to the original webpage with the image.  The 9^th Circuit reached a similar ruling in Perfect 10 v. Amazon.com, Inc., 508 F.3d 1146 (9^th Cir. 2007).

U.S. courts have mostly denied fair use as a defense in piracy cases.  In A&M Records v. Napster, 239 F.3d 1004 (9^th Cir. 2001), the defendant claimed that users did not engage in direct infringement of works but rather that they engaged in personal use like sampling or space shifting.  In that case, the 9^th Circuit found that the four fair use factors weighed against a finding of fair use.  Most notably, the existence of free copies of a plaintiff’s work could cause a substantial impact on the market for that work (factor 4).  In BMG Music v. Gonzalez, 430 F.3d 888 (7^th Cir. 2005), the 7^th Circuit likewise found that “sampling” of copyrighted music was not eligible for fair use because it served as a direct substitute for a purchased copy and caused a substantial impact on the market for the original work.

PRC Fair Use

Article 21 of the PRC’s Implementing Regulation of Copyright Law, which went into force on September 15, 2002, states that “according to relevant provisions of the Copyright Law, use of published works without authorization of the copyright holder shall not impair the normal exploitation of such work or unreasonably prejudice the legitimate interests of the copyright holder.”  In effect, this provision is an implementation of the three-step examination under Article 13 of the Agreement on Trade Related Aspects of Intellectual Property Rights (TRIPS), which is an international agreement administered by the World Trade Organization.

Under Article 22 of the PRC Copyright Law, fair use is limited to the exemptions.  Article 22 states: “In the following cases, a work may be exploited without the permission from, and without payment of remuneration to, the copyright owner, provided that the name of the author and the title of the work are mentioned and the other rights enjoyed by the copyright owner by virtue of this Law are not infringed upon.”  Article 22 provides the following list of exceptions:

1) Private use:  Allows for an individual to use a published work for one’s own private study, research, or personal entertainment.

2) Quotation:  Allows for an “appropriate” quotation from a published work for use in one’s own work.

3) Education and research:  Allows for the translation or reproduction of a work for use in classrooms or to aid in scientific research.

4) Official state use:  Allows for a state entity to utilize a work, provided that such use is for actual official use and does not interfere with the normal exploitation of the work.

5) Institute Display or Preservation:  Allows for libraries, archives, or museums to reproduce a work for display or preservation.

6) Translation into minority languages:  Allows for an original Han Chinese language work to be translated into the languages of minority nationalities for publication and dissemination.

7) Braille Transliteration:  Allows for the transliterations of published works into Braille.

8) News Reporting:  Allows for the reproduction of published works by newspapers, television shows, or other mass media for reporting on current events.

9) Re-disseminating News Articles and Speeches:  This exemption is related to the above exemption on news reporting in that it allows mass media to reproduce articles on economic, political, or religious topics already made publicly available.

10) Free Public Performance:  Allows for one to publicly perform a published work, provided that nothing is charged and no payment is made to the performers.

11) Artistic Works in Public Places:  Allows for one to reproduce, draw, photograph, or make a video recording of an artistic work on public display e.g. sculptures, paintings, and calligraphy.

12) Broadcasting of a Speech at a Public Gathering:  Provided that the author does preclude this type of publishing, Article 22 allows for the mass media to publish or broadcast a speech made at a public gathering.

As shown above, the listed exemptions do not provide much background.  For instance, what constitutes an “appropriate” quotation under exemption 2 is unclear.  Furthermore, because the PRC utilizes a civil law system, each court can come to its own understanding of the fair use standard.  This often leads to unpredictable outcomes.

In some cases, whether or not the fair use defense applies is clear.  For instance, in New Modern Chinese Dictionary v. Modern Chinese Dictionary, the defendant lifted thousands of sample sentences and numerous pages of text from the plaintiff’s copyrighted dictionary for use in its own published dictionary.  The Beijing Higher People’s Court held that the whole-scale copying of text constituted infringement and did not qualify for the education and quotation exemptions.  Obviously, such use was neither in the aid of research nor was it a “limited quotation.”

However, some courts have tweaked the standard.  For example, in Beijing Sanmian v. Hefei Bang Lue, the plaintiff sued for copyright infringement when the defendant published plaintiff’s article on mobile telephone trends in China.  The defendant argued for the news reporting exemption on current events.  The court held that in order to utilize the news reporting exception the event needed to be “timely sensitive” and “significant.”  The court ruled that although the article was timely, it was not significant enough to fall under the exemption.

Although deference is given to the listed exceptions, some courts have provided a more open-ended and detailed multifactor analysis.  In SARFT Movie Channel Production Center v. China Education TV Station, defendant CETV broadcasted plaintiff’s copyrighted film “Out to Amazon River.”  Defendant argued for fair use as a state-owned television station that broadcast the film for educational purposes.  The court first tackled the fair use exemption and held that the exemption was only limited to in-person classroom teaching and did not include remote broadcasting.  Despite the exemption, the court noted that fair use should “evolve to accommodate new development[s] and demand[s].”  The court conducted further analysis and considered: 1) the purpose of the use, and 2) the effect of the use on the market for the film, which is similar to the first and fourth factors considered under the U.S.’s fair use analysis.  Defendant inserted numerous advertisements during the broadcasting of plaintiff’s film, which the court found swayed in the plaintiff’s favor.  Because both the plaintiff and defendant were television stations with broadcasting rights the court found that the defendant’s broadcasting of plaintiff’s movie would negatively impact plaintiff’s ability to engage in normal exploitation of its work.  Like U.S. courts in online piracy cases, this particular Chinese court perceived the potential adverse impact in allowing defendant to broadcast plaintiff’s work.  As a result, the court found that the defendant had infringed upon the plaintiff’s work.

Closing Thoughts

When it comes to fair use, U.S. law is more open-ended with its multifactor analysis compared to Chinese courts’ strict deference to Article 22 exemptions.  However, as shown above, some Chinese courts have undertaken a multifactor analysis similar to U.S. courts.  Overall, with the rising in internet connectivity and technological advances, it seems that both Chinese and U.S. courts will continue to face challenges in adapting their factors and exemptions to remain relevant and applicable in this digital age.

Brian Hong is an associate attorney at Grassini & Wrinkle.  He also writes Legal Brainz, a legal blog focusing on video game developments throughout Asia. *A prior version of this piece was originally posted on Legal Brainz. 

FTC Strengthens Kids’ Privacy, Gives Parents Greater Control

by Kevin Mills

Privacy continues to evolve into one of the most important legal issues of this decade.  While we as Americans are wary of the government collecting our private information, we are comparatively complacent regarding private information collected by private businesses.  It’s a dangerous conundrum.  After all, the government is created for our benefit and is ultimately accountable to us, but private business, on the other hand, has no such inherent accountability and is dedicated to its own self-interest.

The Federal Trade Commission (“FTC”) plays an important role in protecting the privacy of persons using the internet.  The FTC has just recently adopted changes to its Children’s Online Privacy Protection Act (“COPPA”) to strengthen privacy protections for children and give parents greater control over the personal information that websites and online services may collect from children under thirteen.  The information in this article, largely taken from the FTC itself, explains these changes.

Congress passed COPPA in 1998.  It requires that operators of websites or online services that are either directed to children under thirteen or have actual knowledge that they are collecting personal information from children under thirteen give notice to parents and get their verifiable consent before collecting, using, or disclosing such personal information, and keep secure the information they collect from children.  It also prohibits these operators from conditioning children’s participation in activities on the collection of more personal information than is reasonably necessary for them to participate.  COPPA contains a “safe harbor” provision that allows industry groups or others to seek FTC approval of self-regulatory guidelines.

In 2010, the FTC initiated a review to ensure that COPPA keeps up with evolving technology and changes in the way children use and access the internet, including the increased use of mobile devices and social networking.

The final amendments:

• modify the list of “personal information” that cannot be collected without parental notice and consent, clarifying that this category includes geolocation information, photographs, and videos;
• offer companies a streamlined, voluntary, and transparent approval process for new ways of getting parental consent;
• close a loophole that allowed child-directed apps and websites to permit third parties to collect personal information from children through plug-ins without parental notice and consent;
• extend coverage in some of those cases so that the third parties doing the additional collection also have to comply with COPPA;
• extend COPPA to cover persistent identifiers that can recognize users over time and across different websites or online services, such as IP addresses and mobile device IDs;
• strengthen data security protections by requiring that covered website operators and online service providers take reasonable steps to release children’s personal information only to companies that are capable of keeping it secure and confidential;
• require that covered website operators adopt reasonable procedures for data retention and deletion; and
• strengthen the FTC’s oversight of self-regulatory safe harbor programs.

Definitions

The Final Rule includes these modified definitions:

• The definition of an “operator” has been updated to make clear that COPPA covers a child-directed site or service that integrates outside services, such as plug-ins or advertising networks, that collect personal information from its visitors.  This definition does not extend liability to platforms, such as Google Play or the App Store, when such platforms merely offer the public access to child-directed apps.
• The definition of a “website or online service directed to children” is expanded to include plug-ins or ad networks that have actual knowledge that they are collecting personal information through a child-directed website or online service. In addition, in contrast to sites and services whose primary target audience is children, and who must presume all users are children, sites and services that target children only as a secondary audience or to a lesser degree may differentiate among users, and will be required to provide notice and obtain parental consent only for those users who identify themselves as being younger than thirteen.
• The definition of “personal information” now also includes geolocation information, as well as photos, videos, and audio files that contain a child’s image or voice.
• The definition of “personal information requiring parental notice and consent before collection” now includes “persistent identifiers” that can be used to recognize users over time and across different websites or online services. However, no parental notice and consent is required when an operator collects a persistent identifier for the sole purpose of supporting the website or online service’s internal operations, such as contextual advertising, frequency capping, legal compliance, site analysis, and network communications. Without parental consent, such information may never be used or disclosed to contact a specific individual, including through behavioral advertising, to amass a profile on a specific individual, or for any other purpose.
• The definition of “collection of personal information” has been changed so that operators may allow children to participate in interactive communities without parental consent, so long as the operators take reasonable measures to delete all or virtually all of the children’s personal information before it is made public.

Parental Notice

The amended Final Rule revises the parental notice provisions to help ensure that operators’ privacy policies, and the direct notices they must give parents before collecting children’s personal information, are concise and timely.

Parental Consent Mechanisms

The Final Rule changes add several new methods that operators can use to obtain verifiable parental consent: electronic scans of signed parental consent forms; video-conferencing; use of government-issued identification; and alternative payment systems, such as debit cards and electronic payment systems, provided they meet certain criteria.

The amendments retain email plus as an acceptable consent method for operators that collect personal information only for internal use.  Under this method, operators that collect children’s personal information for internal use only may obtain verifiable parental consent with an email from the parent, as long as the operator confirms consent by sending a delayed email confirmation to the parent, or by calling or sending a letter to the parent.

To encourage the development of new consent methods, the FTC establishes a voluntary 120-day notice and comment process so parties can seek approval of a particular consent method.  Operators participating in an FTC-approved safe-harbor program may use any consent method approved by the program.

Confidentiality and Security Requirements

COPPA requires operators to take reasonable steps to make sure that children’s personal information is released only to service providers and third parties that are capable of maintaining the confidentiality, security, and integrity of such information, and who assure that they will do so.  COPPA also requires operators to retain children’s personal information for only as long as is reasonably necessary, and to protect against unauthorized access or use while the information is being disposed of.

Safe Harbors

The FTC seeks to strengthen its oversight of the approved self-regulatory “safe harbor programs” by requiring them to audit their members and report annually to the FTC the aggregated results of those audits.

These changes will go into effect on July 1, 2013.

Kevin Mills is an owner of the law firm of Kaye & Mills where his practice focuses on advising clients with transactions across a full range of issues in entertainment, media, technology, Internet and general business. His practice encompasses copyright; trademark; trade dress; trade secret; brand protection; content creation, protection and distribution; and general corporate, organizational and business matters.

Prohibiting Employer Monitoring of Employees’ Social Networking Accounts

By Kevin Mills

It seems that in recent years, there has been an increase in the number of news reports lauding law enforcement for using social networking sites to help catch criminals.  It’s often entertaining to hear about criminals posting self-incriminating evidence online, creating “LinkedIn to locked up” scenarios.  However, when employers (or potential employers) use similar investigation tactics with regard to employees (or potential employees) it is an entirely different matter; increasingly, state and federal governments have grown alarmed with employers’ practice of requesting access to current and prospective employee social media accounts for investigative purposes, and they are moving to put an end to such practices.

In April 2012, Maryland became the first state to enact a law aimed at prohibiting employers from requiring current and prospective employees to provide employers with access to their social media accounts.  Maryland recognized the need for such laws when the ACLU filed a lawsuit after a job interviewer for the State Corrections Department asked a job applicant to provide his social network passwords and then logged on to the applicant’s Facebook account and reviewed his messages, wall posts, and photos.  The ACLU alleged that the conduct violated the Stored Communications Act, the First Amendment, and the Fourteenth Amendment, and constituted an invasion of privacy. The State defended its policy, stating that it needed to check job applicants’ Facebook pages in order to ensure that the applicants were not engaging in any gang-related activities.

In response, the Maryland legislature moved quickly and became the first state to enact a statute expressly prohibiting employers from requesting or requiring the disclosure of usernames or passwords to personal social media accounts. The statute also prohibits employers from taking (or threatening to take) any disciplinary action against employees or job applicants who refuse to disclose such information.

Over the course of the past few months, several other states, including New York, California, and Illinois (effective January 1, 2013), have followed Maryland’s lead and passed legislation similar to Maryland’s.  Additionally, Delaware, Michigan, Minnesota, New Jersey, Texas, and  Washington have all proposed similar laws.

The Federal Government has also taken steps to implement similar measures. In April 2012 the Social Networking Online Protection Act was introduced in the House. The Act would prohibit employers from requiring current or prospective employees to provide their usernames or passwords to access online content.  In the Senate, the Password Protection Act of 2012 was introduced, with provisions similar to the House bill.  In addition, Richard Blumenthal (D-CT) and Charles Schumer (D-NY) have requested that the Department of Justice and the EEOC launch a federal investigation into these practices.

Employers and business owners should remain abreast of these developments.  Even if a particular state does not affirmatively ban an employer from requesting social media passwords, employers should still proceed with caution because the practice of requesting social media passwords may give rise to liability (including a potential violation of employee Section 7 rights under the National Labor Relations Act).

Businesses will have to learn how to address these types of social media issues.  According to a recent survey by the Poneman Institute, only 35% of companies have a social media policy and only a fraction of those companies actually enforce them.  One thing is clear:  to be safe, Businesses that currently ask employees or applicants to provide them with access to social media accounts should consider ending the practice.

It should also be noted that there are other potential liabilities arising out of an employer viewing a current or prospective employee’s social media accounts and protected social media content (viewing publicly-available information is not currently prohibited by any of the pending state and federal statutes).  For example, what if an employer encounters the following when doing a background check on a prospective employee: “On the wagon, been sober for one whole month!” or “Having a bad day…looking to take it out on someone…WATCH OUT WORLD!”  Issues raised by an employer’s knowledge of these posts are beyond the scope of this piece, but they certainly do have the potential for raising important employment law issues.

 

Kevin Mills is an owner of the law firm of Kaye & Mills where his practice focuses on advising clients with transactions across a full range of issues in entertainment, media, technology, Internet and general business. His practice encompasses copyright; trademark; trade dress; trade secret; brand protection; content creation, protection and distribution; and general corporate, organizational and business matters.

Has the Seventh Circuit Gutted the Law of Contributory Copyright Infringement?

by George M. Borkowski

In an odd and sometimes intellectually frustrating opinion, the Seventh Circuit in Flava Works, Inc. v. Gunter, __ F.3d __ , 2012 WL 3124826 (7th Cir. Aug. 2, 2012), may have altered the direction of the law of contributory copyright infringement, ostensibly only as applied to websites that link to infringing content on the internet, but perhaps far more broadly.  The fallout from this opinion promises to be significant for rights holders, social media, and other web services.

In the words of the court, Flava Works “specializes in the production and distribution of videos of black men engaged in homosexual acts.”  These videos are distributed through Flava Works to its subscribers for a fee.  Users of the service must agree not to copy, transmit, or sell the videos they purchase, although a user is authorized to download them to his or her computer for “personal, noncommercial use” only.

Defendant operates a website and “social bookmarking” service called myVidster that allows users who find videos on the Internet to bookmark them on the myVidster website.  Once a user does this, myVidster requests an embed code from the server that is hosting the video.  The embed code contains the location of the video in question.  myVidster then displays a thumbnail picture of the video on its website.  If a myVidster user clicks on the thumbnail, myVidster connects the user’s computer to the server that is actually hosting the video.  The video plays on the user’s computer, surrounded by a frame that myVidster puts around it that runs advertisements.  Because of this framing, the video appears to be playing from the myVidster website.  In reality, however, it is being transmitted from the host server; the bookmarked video does not reside on myVidster’s servers.  (You may recall from the Ninth Circuit’s decision in Perfect 10, Inc. v. Amazon.com, Inc., 508 F.3d 1146 (9th Cir. 2007), that this process is similar to how Google’s Image Search used to display photographs hosted on non-Google servers around the Internet that were located by Google’s search engine.)

Problems arose when some Flava Works users began to upload Flava Works videos to the internet on their computers and then bookmarked them on myVidster.  In doing so, the Flava Works users violated Flava Works’ Terms of Service, which limited the use of its videos to users’ particular computers, and which expressly prohibited their further copying and distribution – by, for example, uploading them.  The users also directly infringed Flava Works’ copyrights in those videos.

Recently, Flava Works sued myVidster on various theories, including direct, contributory, and vicarious copyright infringement and inducement of copyright infringement.  After defending against several motions to dismiss (which appear to be continuing), Flava Works moved for a preliminary injunction on the basis of contributory and vicarious copyright infringement.  The District Court for the Northern District of Illinois entered a preliminary injunction against myVidster on the contributory infringement count (not reaching the issue of vicarious infringement).  myVidster appealed to the Seventh Circuit, which vacated the injunction (it had been stayed pending appeal by the district court).

The question presented to the court of appeals was whether myVidster could be a contributory copyright infringer because some of its users had bookmarked Flava Works videos (thereby infringing upon Flava Works’ copyrights in those videos), and myVidster connected others of its users to those infringing, bookmarked videos when they clicked on the thumbnails of those videos on the myVidster site.  In an opinion by Judge Posner (author of the post-Napster opinion in In re Aimster Copyright Litigation, 334 F.3d 643 (7th Cir. 2003)), the Seventh Circuit said, “No.”

The core of the Seventh Circuit’s holding was that a website that links to infringing videos uploaded by others on the Internet is not a contributory copyright infringer, even if the website indexes and organizes links to those videos, and even if the website posts thumbnails of those videos on its site to make it easier for people to access them (it appears that, at one point, myVidster also allowed its users to store videos on it servers, but that conduct was not addressed except in passing by the parties and the court on appeal).  How the court reached that conclusion, however, is not particularly easy to understand.

The court began by rejecting as “unhelpful” the classic definition of contributory copyright infringement from Gershwin Publishing Corp. v. Columbia Artists Management, Inc., 443 F.2d 1159, 1162 (2d Cir. 1971), which defined a contributory infringer as “one who, with knowledge of the infringing activity, induces, causes or materially contributes to the infringing conduct of another.”  Instead, Judge Posner chose another Second Circuit case for the definition he preferred:  “personal conduct that encourages or assists the infringement.”  Matthew Bender & Co. v. West Publishing Co., 158 F.3d 693, 706 (2d Cir. 1998).  This definition, however, is more akin to what the Supreme Court in Metro-Goldwyn-Mayer Studios Inc. v. Grokster, Ltd, 545 U.S. 913 (2005), called inducing copyright infringement – a theory that Judge Posner later stated in his opinion that was not the basis for the preliminary injunction at issue.

Next, even though the court of appeals recognized that, by connecting to websites that infringe videos, myVidster “no doubt” was encouraging its subscribers to circumvent Flava Works’ pay wall, “thus reducing Flava’s income,” myVidster supposedly was not increasing the amount of infringement; the court analogized the viewing of bookmarked videos to sneaking into a movie theater without paying to watch a copyrighted movie, which would not constitute copyright infringement by the theater patron.  The court saw it this way even in light of section 512(d) of the Digital Millennium Copyright Act, which gives a safe harbor to internet service providers that refer or link users to an online location containing infringing material or infringing activity – but only if the service provider complies with certain requirements (such as having a policy that bans repeat infringers) and, upon obtaining knowledge of infringing material or activity, disables the links to that material or activity.

In this case, Flava Works had sent DMCA takedown notices to myVidster, informing it of links to infringing material. Flava Works contended that myVidster did not take appropriate steps in response to those notices. The court said that this was irrelevant “unless myVidster is contributing to infringement” – thereby begging the central question that was before the court.  The court rejected the notion that myVidster was an infringer “at least in the form of copying or distributing copies of copyrighted work” (which, of course, is itself irrelevant because copying and distributing would be direct copyright infringement, not contributory infringement), which was the basis for the preliminary injunction and the safe harbor of the DMCA that the court was discussing.

The court concluded its thoughts on this section by stating that there was no evidence that myVidster was “encouraging” the people who infringe by uploading videos, “which would make [myVidster] a contributory infringer.”  Thus, the Seventh Circuit both dramatically narrowed what constitutes contributory copyright infringement (one needs to “encourage” others to infringe – never mind if the person otherwise materially contributes to the infringement), and essentially read section 512(d) out of the DMCA.  This confusion was exacerbated when the court, in response to amicus briefs filed by Google and Facebook, declared out of the blue that the law doesn’t recognize “secondary” copyright infringement – a somewhat frightening thought for a plaintiff in a case involving contributory and vicarious infringement.

There is much more in this opinion than I have the space to discuss, including a long discussion of whether myVidster violates Flava Works’ public performance right in its videos (the court concluded that it does not).  I encourage you to read it and reach your own conclusions as to how broadly it sweeps.  And, in fairness, the Seventh Circuit did recognize that Flava Works might still be able to show that myVidster is a contributory infringer on a more developed record.  Nevertheless, the opinion’s loose and sometimes confused analysis of what can constitute contributory copyright infringement could have a very destabilizing effect on copyright protection for rights holders.

 

Mr. Borkowski is a partner at Freeman Freeman & Smiley LLP.  He represents major entertainment and technology clients at the intersection of content creation and protection with technology, focusing on the impact of technology on traditional intellectual property rights and business models.  Mr. Borkowski has handled the full continuum of intellectual property, technology, and entertainment litigation, as well as anti-piracy and rights enforcement, privacy, and counseling.  He can be reached at george.borkowski@ffslaw.com.

Are the Kids Alright? The FTC’s New Privacy Rules for the Protection of Children

by Kevin Mills

The Federal Trade Commission (“FTC”) has recently proposed to modify the rules for the Children’s Online Privacy Protection Act (“COPPA”).  If these modifications are implemented, it would be the first time COPPA rules were revised since 1999, a time when there was no Facebook or “an app for that” – even MySpace wasn’t founded until 2003.

Today, there are countless ad networks, third party tracking cookies, and information brokers that harvest personal data across the web and on smartphones – none of these existed when the COPPA rules were last issued.  Although COPPA was designed to protect children’s online experiences, currently, certain loopholes in COPPA allow companies to gather children’s personal information.  A 2010 Wall Street Journal report found that some popular children’s websites installed more data-gathering technology on computers than websites aimed at adults.

The FTC wants to revise COPPA rules so that they apply to third party ad networks and app and plug-in developers, and to expand the definition of “personal information.” Specifically, the revisions aim to cover plug-ins and ad networks that know or have reason to know that they are collecting personal information through child-directed websites or online services.  The revisions could affect popular website features such as Facebook’s “Like” button, as well as new social networks for playing games on smartphones.

First, the proposed revised rules would require sites with content designed to appeal to both young children and others (including parents) to be able to “age-screen all visitors in order to provide COPPA’s protections only to users under age 13.”  These sites would not be allowed to collect any personal information without first obtaining parental consent.  Currently, many websites secure consent by sending an email to an address provided by the child.

Second, the proposed revised rules would create co-responsibility between companies that furnish apps or plug-ins and those that operate the platforms where the apps or plug-ins run.  The FTC states that “an operator of a child-directed site or service that chooses to integrate the services of others that collect personal information from its visitors should itself be considered a covered ‘operator’ under the Rule.”  The revised rules would not only hold third parties responsible for any unlawful data collection, but would also make the host website responsible for those infractions.

Third, the proposed revised rules would expand the definition of “personal information” to include “‘persistent identifiers’ that recognize a user over a period of time which are used for purposes other than ‘support for internal operations.’”  This revision is aimed at “tracking cookies” that are capable of delivering advertising within a single site and also of tracking people across sites to deliver targeted information.  In other words, the revised rules would restrict or prohibit advertising to children based on their previous online behavior.

Fourth, the proposed revised rules would prohibit smartphone apps from collecting geolocation data (defined as “a home or other physical address including street name and name of a city or town”), which they often collect along with phone numbers.

Another important change, especially for many mobile apps, is that personal information now includes “a home or other physical address including street name and name of a city or town.” Such geolocation data is often collected by smart phone apps along with phone numbers, which will now be prohibited by the proposed rules.

It is also important to take a look at what is not covered in the new rules; these rules would apply to information that is being collected for the purposes of advertising or marketing — not information necessary to maintain a network or offer a service.

The revised rules are not aimed at sites that don’t allow children.  This is true even though children do in fact use such sites.  Facebook, for example, requires users to state their date of birth and does not allow users under thirteen to use the site.  Of course, it is possible to lie about one’s age (Consumer Reports estimates that 5.6 million of Facebook’s users are under thirteen).  And it’s worth noting that any site that requires a user to sign in via Facebook is certifying that that person claims to be thirteen or older based on Facebook’s terms of service.

Of course, when considering new rules, one must consider their effectiveness.  Privacy advocates are concerned that the FTC lacks the resources to vigorously enforce the law.  And given the FTC’s history of lax enforcement of COPPA, that is a valid concern.

 

Kevin Mills is an owner of the law firm of Kaye & Mills where his practice focuses on advising clients with transactions across a full range of issues in entertainment, media, technology, Internet and general business. His practice encompasses copyright; trademark; trade dress; trade secret; brand protection; content creation, protection and distribution; and general corporate, organizational and business matters.

Taxing Digital Transactions and Virtual Goods

by Joseph D. Poole

In the last few years, an ever-increasing number of states have sought to tax internet-based transactions.  Generally, a company that has a “brick and mortar” presence in a state must withhold sales tax from all purchases that residents of that state make, whether those purchases are made in a store or online.  However, a state cannot require a company to withhold taxes when there is no such “brick and mortar” presence in the state.  This rule can be and generally is applied to digital downloads.  However, new legislation in the U.S. Senate could enable states to impose an obligation to withhold sales tax on companies that don’t have any physical presence in the states.

Background

In 1992, the US Supreme Court held that a state could not require a company to withhold sales or use taxes if the company did not have a physical “nexus” with the state.  Generally, in these instances, the residents of a state are supposed to declare the goods they purchased from out of state and (depending on the tax) pay the tax to the state themselves.  Most states are highly skeptical regarding whether or not their residents comply with such requirements.

In Quill Corp. v. North Dakota, North Dakota tried to impose a use tax on Quill Corp. (“Quill”), a seller of office equipment and supplies.  Quill had no physical presence in North Dakota but sold more than a million dollars a year in office equipment in the state via mail order catalogs.

The Supreme Court noted that while Quill benefited from the economic climate that North Dakota fostered, these actions did not justify North Dakota burdening interstate commerce in violation of the Commerce Clause of the U.S. Constitution.

Generally, the Supreme Court will find that a tax is not in violation of the Commerce Clause so long as the tax “(1) is applied to an activity with a substantial nexus with the taxing State, (2) is fairly apportioned, (3) does not discriminate against interstate commerce, and (4) is fairly related to the services provided by the State.”  The nexus requirement is a “means for limiting state burdens on interstate commerce” and thus requires a physical presence within the state.

Some states have gotten around the nexus requirement by pursuing online retailers that pay state residents commissions – however, this has led to tensions between online retailers and states, with some retailers threatening to eliminate those contacts that create the nexuses.

Proposed Legislation

Because the basis for the limitation on sales and use tax comes from the Commerce Clause, an act of the U.S. Congress could remove said limitation.  Within the past year, two such bills have been introduced in Congress:  the Marketplace Fairness Act proposes to permit states to collect taxes from online retailers that gross $500,000 or more in annual sales, and the Marketplace Equity Act proposes to permit the same but only for businesses that gross up to $1,000,000.

Stores that have “brick and mortar” presences in every state while simultaneously doing significant online sales have lobbied hard for legislation like the Marketplace Fairness Act.  Companies like Wal-Mart, Best Buy, and Home Depot argue that taxing their online sales while not taxing the online sales of Amazon, Overstock.com, and eBay place them at a significant disadvantage in the online marketplace and that this unreasonably deprives states of revenues.  While “brick and mortar” stores acknowledge that they use more of a state’s infrastructure (police, fire, etc.) than online stores and that they enjoy certain substantial advantages over online stores (such as community presence, immediate stock, and easy returns), they maintain that treating them differently than online-only stores in the virtual marketplace is unfair.

Traditionally, online retailers have fought efforts to impose on them obligations to collect sales and use taxes.  Most of the major online retailers have come out against the Marketplace Fairness Act and the Marketplace Equity Act.  They point out that, given the burdens involved in observing the various tax laws of fifty different states, at the very least, the cutoff for applicability of such legislation should be $10,000,000 in gross revenue.

Amazon, on the other hand, uses a commission system that creates a nexus sufficient to satisfy the Quill standard, and thus has been struggling with various states regarding its online transactions for some time now.  As a result, Amazon now supports the Marketplace Fairness Act, but only if all smaller retailers will be held to the same standards.

The Effect of Proposed Legislation on Digital Transactions

Digital transactions include anything from digital downloads of movies and music, to microtransactions in video games.  Many of these purchases are already being taxed in some states.  However, one of the limits on the taxation of such purchases has been the lack of a nexus for companies with no physical presence in a state.

Should the Marketplace Fairness Act become law, companies that deal strictly in direct digital media (e.g., music, movies, downloadable content) could be taxed in a new way.  This added burden could be highly problematic for independent developers and could limit distribution paths to only those capable of handling the overhead associated with dealing with the various tax systems of different states.

Furthermore, if digital transactions become taxable, interesting questions will arise with regard to the taxation of microtransactions such as those that are common in video games. Nowadays, most video games utilize microtransactions whereby players can pay actual money for virtual items within the games.  Without Quill, it seems solely up to the individual states to determine which digital products they will tax and which they will exempt.  However, in an age of microtransactions, where game developers are making money from selling virtual goods, it may be only a matter of time before people will be required to pay real taxes for virtual items that they are purchasing with real money.

Whether or not the Marketplace Fairness Act or the Marketplace Equity Act become law, no one disputes the fact that the marketplace is changing.  States will continue to try to collect revenues from any possible source – even more so in these difficult economic times.

Joseph D. Poole is an associate at Pierce Law Group LLP and works in the areas of entertainment law and intellectual property law.