Entity Comparison Chart

By Rob Hassett

CAUTION – THIS CHECKLIST HAS BEEN PREPARED FOR GENERAL EDUCATION PURPOSES ONLY AND DOES NOT CONSTITUTE SPECIFIC LEGAL ADVICE. THERE ARE MANY EXCEPTIONS TO THE INFORMATION SET FORTH IN THIS CHART AND THEREFORE ANY READER SHOULD RELY ONLY ON THE ADVICE OF A PROFESSIONAL TAX ADVISER WITH RESPECT TO TAX RELATED MATTERS.

(1)  Applies to All Three:

CONSIDERATION

C CORP

S CORP

LIMITED LIABILITY COMPANY*

Limited Liability

Yes

Yes

Yes

(2)  Reasons to Use C:

CONSIDERATION

C CORP

S CORP

LIMITED LIABILITY COMPANY*

Number of Owners

No restrictions

1-75

No restrictions unless publicly traded

Tax Year

May be fiscal

Usually calendar

Usually calendar

Deductions for health insurance

Yes

Yes

Yes

Fed tax on income left in business

Essentially 34%

Up to 35%

Up to 35%

Qualified small business stock (10% on capital gain)

Yes

No

No

(3)  Reasons to Use C or S:

CONSIDERATION

C CORP

S CORP

LIMITED LIABILITY COMPANY*

Expenses of setup

Inexpensive w/out shareholder agreements, incentive stock options, etc.

Inexpensive w/out shareholder agreements

Usually more expensive where advantageous (to deal with allocations, capital accounts, etc.)

1244 Stock (ordinary loss on sale or liquidation)

Yes

Yes

No

Tax deferred reorganization

Yes

Yes

No

ISO’s allowed

Yes

Yes

No

Gain on redemption taxed at ordinary income rates to extent of receivables

No

No

Yes

(4)  Reasons to Use C or LLC:

CONSIDERATION

C CORP

S CORP

LIMITED LIABILITY COMPANY*

Allowed Owners

No restrictions

Individuals and Certain Trusts, or 100% by S

No restrictions

Classes of Ownership

Yes

Voting v. non-voting only

Equivalent to C available

(5)  Reasons to Use S:

CONSIDERATION

C CORP

S CORP

LIMITED LIABILITY COMPANY*

FICA including Medicare reductions

No

Yes

No

(6) Reasons to Use S or LLC:

CONSIDERATION

C CORP

S CORP

LIMITED LIABILITY COMPANY*

Levels of Federal Taxation

2

1

1

Levels of State Taxation

2

1

1 in most states

Long-Term Capital Gain

Federal Income Tax at full rate on corporation’s gains

Federal Income Tax at 15% to shareholders

Federal Income Tax at 15% to Members

Accumulated Earnings Tax

Yes

No

No

Cash method of accounting

Generally allowed if under $5 million in sales (Restrictions apply when primary business is sale of inventory)

Generally allowed (Restrictions apply when primary business is sale of inventory)

Generally allowed if not owned by particular types of C corporations (Restrictions apply when primary business is sale of inventory)

(7)  Reasons to Use LLC:

CONSIDERATION

C CORP

S CORP

LIMITED LIABILITY COMPANY*

Losses

Don’t pass through

Can’t be allocated

May be allocated

Later Conversion subject to tax on built in gains

C to S (yes ultimately)

C to LLC (yes)

S to C (no)

S to LLC (yes)

LLC to S (no)

LLC to C (no)

* The members of a limited liability company may elect that the limited liability company be treated for tax purposes as a C corporation, an S corporation or a partnership. For purposes of this checklist, it is assumed that the members have elected that the limited liability company be treated for tax purposes as a partnership.

Rob Hassett 3/15/2000 Revision.

 

Give Shareholders an Easy Way to Vote Their Minds

First Published in the Atlanta Journal-Constitution May 8, 2009

by Rob Hassett

As part of the federal stimulus package, more than 400 financial institutions will be required to hold non-binding shareholder votes this year approving or disapproving executive compensation.

Shareholders at many public companies will also be voting whether to permit shareholders to vote on non-binding resolutions on executive pay.

None of this will have much impact unless each shareholder is given the right to be notified by e-mail when a proposal is to be voted on. The e-mail should link to a clear description of the proposal and link the shareholder to a proxy or other method to vote. Most companies will only offer this convenience if required by the Securities and Exchange Commission.

Under new SEC rules, public companies are required to post information about proposals to be voted on by the shareholders on their Web sites. But the SEC does not require companies to allow shareholders to grant proxies or otherwise vote via the Internet. Most shareholders who obtain information over the Internet would probably not go to the trouble of then mailing a proxy grant. Probably for these reasons, fewer individual shareholders are voting now than in the past.

In most cases shareholders can learn what methods of receiving materials and voting are available by checking the company’s investor relations page.

Failure of shareholders to cast votes is a primary reason that challenges to managements’ positions are almost always defeated. As a result, outrageous executive pay and conflicts resulting from executives serving on the board of directors have not been curbed.

Under Delaware and Georgia corporate law, the percentage of shares needed to constitute a quorum can be set as low as one-third of the shares outstanding. In companies that set a quorum at the minimum, when most shareholders do not vote, as few as one-sixth of the shares (plus one) can block any reform. Additionally, in some corporate bylaws, a failure to cast a vote by proxy or other means results in that shareholder’s shares being deemed cast in favor of management’s position. Finally, management is often supported by managers of mutual and hedge funds who genuinely believe that executives, like themselves, are entitled to exorbitant pay for mediocre performance.

Coca-Cola recently held a shareholder vote on whether to have a shareholder advisory vote on executive compensation. Certainly most individuals holding shares would want a chance to review and give an opinion on executive pay. That said, only 36 percent of the shares were voted in favor of the proposal.

An increasing number of companies are permitting individual shareholders to grant proxies over the Internet. On May 20, Intel is set to become the first public corporation to allow shareholders to participate in the annual shareholders meeting over the Web, which will include the ability to ask questions and cast votes during the meeting.

Most executives and board members will not want shareholder input on executive pay and other sensitive issues. Many shareholders will say that they do not have the time to adequately review the materials to make an informed decision on these matters. Ten years ago these attitudes may not have made much difference. But not today. In light of recent abuses and the dismal records of executives and directors, these kinds of decisions should not be left up solely to management.

Rob Hassett is a corporate and technology lawyer with the Atlanta law firm of Casey Gilson P.C.

Copyright 2009, The Atlanta Journal-Constitution.

 

Curbing Excessive Pay, Board Clout of Executives Would Help Business


First Published in the Atlanta Journal-Constitution 2-4-2009

by Rob Hassett

Now that we taxpayers are bailing out banks and other companies that were grossly mismanaged, we should put corporations on a sounder footing and curb excessive compensation for executives of public companies.

First, no executive of a public company should be allowed to sit on the board of directors of that company. The CEO of a public company is often on the board and sometimes the chairman. Being on the board gives the CEO undue influence on the other board members regarding his or her compensation.

Second, each public company should be required to display the last three years of revenue, earnings, stock prices and executive pay in a prominent and clear format on the investor-relations page of the company’s website. Investors can obtain this information from the Security and Exchange Commission’s Website, but putting it on the investor-relations page would make it more accessible to the average investor.

Third, if despite all of the above the directors of a company still decide to provide executive compensation that is above an amount that would be set liberally by the SEC based on the size of the company and other factors, the company should be required to obtain shareholder approval.

Unfortunately, many executives have shown they are not capable of reining in excessive pay and bonuses on their own.

Merrill Lynch, a company that lost $27 billion last year, paid out billions of dollars in bonuses to many of its executives just before Bank of America’s taxpayer-backed takeover. In 2006, the highest paid executive of any public company was Stanley O’Neal, the chief executive officer of Merrill Lynch at the time, who received total compensation of $91 million.

In 2006, the CEO of Countrywide Financial Corporation, Anthony Mozilo, received total compensation of $48 million. Countrywide was teetering on the edge of bankruptcy when it was recently sold to Bank of America in a fire sale brought on by poor management.

Mel Karmazin, the founder and chief executive officer of Sirius Satellite Radio, received compensation of $32 million in 2007 even though Sirius never made a profit before merging with XM Satellite Radio in 2008.

These are not isolated instances. The problem is not just that a few rogue executives are extraordinarily greedy and have indifferent or intimidated boards. The problem is that too many executives of public companies have insatiable appetites for money and choose to use their considerable skills to increase their compensation instead of doing what’s best for their shareholders.

Some will argue that part of the compensation referred to above was in the form of incentive compensation. In other words the executives were paid a large portion of their compensation for “outstanding” performance. The problem with incentive pay is that it encourages executives to accept unreasonable long-term risks for immediate income that increases incentive pay for that year. Agreements regarding incentive pay should be monitored as tightly as any other form of compensation.

The adverse consequences of unjustifiable executive compensation add up to more than what compensation gets paid out. It puts the company at a disadvantage when negotiating with unions, it creates cynicism among the other employees of the company and it understandably causes a lack of willingness by the public to provide taxpayer-funded bailouts when the economy turns sour.

Rob Hassett is a corporate and technology lawyer with the Atlanta law firm of Casey Gilson P.C.

Five Most Common Legal Mistakes Involving Commercial Websites

July 2008 Article for Business to Business Magazine

by Rob Hassett

Do you have a privacy policy posted on your business website?  If so, did you have an attorney review it?  If the answer to this question is “no,” there is a good chance that there is a difference between what you state in your privacy policy and what your actual practices are.  If there is, you could be subject to actions by the Federal Trade Commission and by private companies and individuals for fraud.  In a recent case, a jury awarded $4.5M in damages against a company that helped students apply to colleges online, because the policy stated that personal information was not being shared, but it was.  This is an example of the type of legal mistakes that are often made in connection with commercial websites.

 The five most common legal mistakes involving commercial websites are:

             1.         The company’s privacy policy does not accurately state what the true privacy policy of the company is.  If nothing else, you should make sure that your privacy policy says that in the event of the sale of your business, you reserve the right to transfer the data you have collected from customers to the purchasers of the business, while making it clear that the new owners will continue to be subject to the commitments that you make regarding privacy.

             2.         The business is required to have a privacy policy but does not.  There are a number of laws that  require the posting of a privacy policy under certain circumstances including the Graham Leach Bliley Act (GLB), which applies only to “financial institutions,” but which defines the term “financial institutions” very broadly; the Health Insurance Portability and Accountability Act (HIPAA), which applies to health care providers, health care plans and “health care clearing houses” (i.e. companies that collect and sort health related billing data); the Children’s Online Privacy Protection Act (COPPA), which applies to websites that are directed to children under 13 or knowingly obtain data from children under 13; and the California Online Privacy Protection Act , which requires that any commercial website that collects data from individuals residing in California post their privacy policies.  The consequences of not complying with privacy laws can be very severe.  Violations of GLB can result in a bank’s loss of FDIC insurance – which would likely put the bank out of business.  Violations of HIPAA can result in criminal penalties of up to 10 years in prison and a $250,000 fine.  For violations of COPPA, Mrs. Fields Cookies paid a civil penalty of $100,000 and Hershey’s paid $85,000.  Violations of the California Online Privacy Protection Act can result in private lawsuits — possibly a business person’s worst nightmare.

             3.         Third parties are able to post materials on the website and the company fails to post a “Copyright Policy” and file a designation of a representative to receive any complaints regarding copyright infringement with the U.S. Copyright Office.  Properly posting such a policy helps to insulate the company from liability for the posting of infringing materials by third parties.

             4.         Failure to screen  all photos of individuals posted on the website.  Posting of a recognizable individual on a website without permission of that individual that is not posted for a newsworthy purpose, or other situation protected by the First Amendment freedom of speech clause, can result in liability.

             5.         Failure of the owner to register copyrights in the owner’s website.  If ownership of the copyrights in the website are owned by the owner of the website, but the owner of the website does not register the copyrights in the U.S. Copyright Office, the owner may still register the copyrights after an infringement and sue to stop such copying and collect damages provable (it is very difficult to prove any) but may not recover what are called statutory damages (much easier to prove) or attorney fees.

 CONCLUSION

Any business owner with a website should take steps to assure that the use of the website is not resulting in a violation of another person’s rights and is taking all steps to protect its own rights.

Rob Hassett is an attorney who practices in technology, entertainment and corporate law with Casey Gilson P.C. in Atlanta,Georgia.

This article provides general information only and does not constitute legal advice.  Any reader should consult with his or her own attorney before making any decisions regarding legal matters.

Online Contracting

by Rob Hassett

This article was prepared for the seminar on Advanced Internet and Computer Law sponsored by the National Business Institute scheduled for October 29, 1998 in Atlanta. This advanced level and lengthy article addresses legal issues relating to online contracting. (43 pages)

ACKNOWLEDGEMENTS

The writer wishes to thank Robert Port, who is of counsel to the writer’s law firm, for his help in preparing this section of these materials.

I. INTRODUCTION

Online contracting takes place over the Internet, over online services such as America Online and through private networks such as has traditionally been the case with electronic data interchange.(1) Online contracting can be broken down into four (4) categories:

(1)  The online ordering of software, books, parts and other products with shipment by common carrier;

(2)  The online ordering of digitally formatted products such as computer software and sound recordings followed by transmission of the products to the customer;

(3)  The online ordering of, followed by access to, databases, encyclopedias and other similar services; and

(4)  Any other agreements which are negotiated or confirmed online, including real estate purchases, development agreements and joint venture agreements.

The law governing online contracting is unsettled. Model acts have been proposed to clarify that law and to conform it to current commercial practices.

The subject of online contracting is addressed in this article as follows:

Section II – current and proposed laws;

Section III – requirements for a binding agreement;

Section IV – determination of terms included in any agreement

Section V – requirement that agreement be in writing and/or signed and satisfaction of those requirements; and

Section VI – applicability of implied warranties.

II.  LAW APPLICABLE

A. Current Law.

In determining what body of law governs an online transaction, the first question is whether or not the transaction is governed by Article 2 of the Uniform Commercial Code (UCC). The UCC has been adopted in every state other than Louisiana.(2) Different rules apply to transactions governed by the UCC than to those outside its scope. Differences include whether or not the parties are required to agree to all of the essential terms of the agreement in order to have a binding contract, the circumstances under which the contract is required to be in writing and what, if any, implied warranties are applicable.

Article 2 is entitled “sales” and expressly covers “transactions in goods.”(3) Determining whether some transactions are covered is easy. An online agreement for the providing of services is not governed by Article 2, whereas an online contract for the sale of hardware is governed by Article 2.

What if the transaction involves the providing of both goods and services? Most courts that have addressed the issue, including the Georgia courts, apply the “predominant nature” test. Applying this test, the courts determine whether the transaction predominantly involves goods or services. If it predominantly involves a sale of goods, Article 2 applies. If services are the predominant feature of the transaction, traditional common law rules on contract interpretation govern.(4)

What about an online contract for a license for computer software? Must the transaction be a “sale” to be governed by Article 2 or is any “transaction” covered? There is no definition of “transaction” in the Uniform Commercial Code. The Uniform Commercial Code defines “goods” in pertinent part as follows:

“Goods” means all things (including specially manufactured goods) which are movable at the time of identification to the contract for sale other than the money in which the price is to be paid, investment securities …. and things in action.(5)

Most courts that have decided the issue have held that licenses of computer software are governed by Article 2.(6) A few courts have held to the contrary.(7)

Another question is how to treat computer software, movies and music that are ordered and transmitted online. If these products were placed on a compact disk, CD ROM or tape and shipped, they would be subject to Article 2. However, when downloaded from a web site, the answer is not clear. The writer was not able to find any case on point. There are a few cases that are somewhat analogous. An Ohio court held that the sale of metered amounts of electricity was governed by Article 2.(8) A Pennsylvania court held that the supplying of water was governed by Article 2.(9)

On the other hand, a New York court held that electricity is not governed by Article 2.(10) A Pennsylvania court held that the providing of cable television programming was not governed by Article 2.(11)

Interestingly, the United States Patent & Trademark Office views a mark associated with software transmitted over the Internet as a service mark rather than a trademark. This supports the argument that products delivered by online transmission are outside Article 2. In spite of this, the writer believes that applying current law most courts would hold that such transactions were governed by Article 2. The reason is that whether transmitted or shipped, these products are still moveable and therefore constitute goods and there is no reason to apply different rules to products that provide the same function because of the manner in which they are delivered.

What law applies to the online accessing of databases and other information? Again, there are no cases directly on point. The only somewhat analogous case is one in which an Illinois court held that demographic information and mailing lists provided to a publisher of a magazine would be covered by Article 2.(12) The writer believes that most courts would not apply Article 2 to these transactions simply because accessing information from databases is just too far removed from the definition of “goods.” It does not create an inconsistency to treat accessing of databases differently from the purchase of goods as the purposes are completely different.

There is one other Georgia Act that applies. The Georgia Electronics Records and Signatures Act was enacted in 1997. This Act defines “an electronic signature” and a “record” and provides for when an “electronic signature” and/or a “record” can substitute for a signature and/or a writing.(13)

B. Proposed New Laws.

1.  Introduction. There are two model codes currently subject to review and revision which will, in some form, eventually be recommended for adoption by the states. Each would have a major impact on online contracting. One is proposed Article 2B to the UCC. The other is the Electronic Transactions Act. The scope and purpose of each are discussed below. The impact on various issues important to online contracting are discussed in later sections.

2.  Article 2B. The National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) are responsible for overseeing updates to the Uniform Commercial Code. In 1995 a committee was formed to draft a separate UCC article to specifically address software licensing and electronic commerce. Various versions have been proposed and debated. The goal is to propose a version that most, if not all, of the state legislatures will adopt. The latest version was reported on August 1, 1998, which is the version referred to in this paper.(14)

Section 2B-103 of proposed Article 2B governs the scope of the Article and reads in pertinent part:

Except as otherwise provided in Section 2B-104 on excluded transactions and in subsection (b), this article applies to:

(1)  Any transaction that creates a software contract, access contract, or license; and

(2)  Any agreement to provide support for, maintain, or modify information related to a contract within the scope of this article.

Section 2B-102 of Article 2B provides the following definitions important to Section 2B-103:

(1)  “Access contract” means a contract to electronically obtain access to, or information in electronic form from, an information processing system. ….

(24) “Information” means data, text, images, sounds, mask works, or works of authorship. (Regarding this definition, the reporter’s notes show that “works of authorship” is based on the definition set forth in Section 102 of the Copyright Act.(15) Copyright law protects work of authorship which include literary works, musical works (i.e., songs), pictorial and graphic works, motion pictures and other audiovisual works and sound recordings. Literary works have been defined to include computer programs.)

(44)  “Software” means a computer program, any informational content included in the program, and any supporting information provided by licensor as a part of an agreement.

(28) “License” means a contract that authorizes access to or use of information or of informational rights and expressly limits the contractual rights or permissions granted … “License” includes an access contract …

(27) “Informational rights” include all rights and information created under laws governing, patents, copyrights, mask works, trade secrets, trademarks, publicity rights, or any other law that permits a person, independently of contract, to control or preclude another person’s use of the information on the basis of the right holder’s interest in the information.

(25) “Information processing system” means an electronic system or facility for generating, sending, receiving, storing, displaying, or processing electronic information.

Section 2B-104 of Article 2B sets forth transactions excluded from the Article, providing in pertinent part:

This article does not apply to the extent that a transaction:

….

(8)  is a license of a linear motion picture or sound recording or of information to be included therein, except in connection with providing access to such motion picture or sound recording under an access contract covered by this article.

With respect to online transactions, to the extent Article 2B is enacted as currently configured:

(1)  The online purchase of goods (other than computer software) followed by the shipment of the goods by common carrier would not be covered;

(2)  The online placement of an order for computer software followed by a shipment or transmission of that computer software would be covered;

(3)  The online ordering of audio recordings and videos would not be covered when recorded on CD ROM or by other media and shipped by common carrier;

(4)  The online ordering of audio recordings and videos followed by transmission appears to be covered as it would be a “contract to electronically obtain …. Information” and is therefore an “access contract;”

(5)  The online ordering and transmission of any interactive media products and any licensing of interactive media products would be covered; and

(6)  The online ordering and obtaining of information over private lines, through access to web sites, through email or in any other online manner would be covered.

2. Uniform Electronic Transactions Act. In 1996 the NCCUSL approved a Drafting Committee to “draft an act consistent with but not duplicative of the Uniform Commercial Code, relating to the use of electronic communications and records in contractual transactions.”(16) The proposed Act is entitled the “Electronic Transactions Act” (ETA).

Under Section 103, the scope of the ETA would be as follows:

Except as otherwise provided in Section 104, this Act applies to electronic records and electronic signatures that relate to any transaction.

Section 104(b) provides that any transaction subject to the ETA that is also subject to the UCC or any other applicable law is to be construed consistent with that other substantive law and, where such construction is unreasonable, that the UCC or other substantive law will control.

III. WHAT CONSTITUTES AN AGREEMENT?

A. Current Law.

1.  General Law. Under common law there is no agreement, even where the parties agree that there is an agreement, unless the parties have agreed to all of the terms. Georgia has adopted this principal in O.C.G.A. §13-3-1 as follows:

Essentials of Contracts Generally.

To constitute a valid contract, there must be parties able to contract, a consideration moving to the contract, the assent of the parties to the terms of the contract, and a subject matter upon which the contract can operate. Any acceptance of an offer must be unconditional, unequivocal, and without variance of any sort.(17)

O.C.G.A. §13-3-2 reiterates the above as follows:

Contract incomplete without assent of parties to terms thereof; withdrawal of bid or proposition by party

The consent of the parties being essential to a contract, until each has assented to all the terms, there is no binding contract; until assented to, each party may withdraw his bid or proposition.

2.  Article of the Uniform Commerical Code. With regard to transactions and goods covered under the scope of Article 2 of the UCC, assent to all of the terms is not required for the parties to be bound by a contract. All that is required is that the parties agree, either expressly or by their conduct, that they have an agreement and agree to the quantity of goods being purchased. Section 204 of Article 2 of the UCC reads in pertinent part:

Formation in General

(1)  A contract for sale of goods may be made in any manner sufficient to show agreement, including conduct by both parties which recognizes the existence of such a contract.

(2)  An agreement sufficient to constitute a contract for sale may be found even though the moment of its making is undetermined.

(3)  Even though one or more terms are left open, a contract for sale does not fail for indefiniteness if the parties have intended to make a contract and there is a reasonably certain basis for giving an appropriate remedy.

B.  Proposed Laws.

1.  Article 2 B.

The currently proposed version of Section 2B – 202 is composed of five provisions, three of which are the same as the three provisions of Section 204 of Article 2 except that the first provision of Article 2B Section 202 expressly provides that a contract may be formed by the “operations of electronic agents which recognize the existence of a contract.” Section 2B – 202 goes further to provide:

(d) In the absence of conduct or performance by both parties to the contrary, a contract is not formed if there is a material disagreement about a material term, including scope.

The reporter’s note to this section states that the addition of (d) emphasizes that if there is a material disagreement about a material term, and the parties’ conduct does not indicate otherwise, there is no agreement. It is likely that if there was a material disagreement about a material term in a licensing transaction, it would involve the scope of the license and make it impossible to determine a remedy. A court construing a license under Article 2 would likely treat a disagreement about the scope of a license in the same way as Article 2 treats a disagreement about quantity — determine that there was insufficient information to fashion a remedy and therefore that there was no enforceable licensing agreement.

IV. WHAT TERMS ARE INCLUDED IN AGREEMENT?

A.  Current Law.

1.  General Law. Inasmuch as outside the UCC the parties must agree to all material terms of the agreement in order to have an agreement, if the agreement is enforceable, all the material terms have been agreed upon. These are the terms included in the agreement.

2.  Article 2. Under Article 2 of the UCC, the parties have a contract whenever they agree they have a contract or their conduct indicates that they have a contract. This is true even if they have not agreed to all the terms, provided they have agreed to sufficient terms for the court to fashion a remedy, i.e., the quantity of the goods involved. So what happens when the forms sent by each of the parties, or the parties’ conduct, show that the parties have agreed that they have a contract and agree on the quantity of goods to be purchased but have a conflict about the other terms? This is answered by Section 2-207 of the UCC. That section reads as follows:

Additional terms in acceptance or confirmation.

(1)  A definite and seasonable expression of acceptance or a written confirmation which is sent within a reasonable time operates as an acceptance even though it states terms additional to or different from those offered or agreed upon, unless acceptance is expressly made conditional on assent to the additional or different terms.

(2)  The additional terms are to be construed as proposals for addition to the contract. Between merchants such terms become part of the contract unless,

(a)  The offer expressly limits acceptance to the terms of the offer;

(b)  They materially alter it; or

(c)  Notification of objection to them has already been given or is given within a reasonable time after notice of the additional terms is received.

(3)  Conduct by both parties which recognizes the existence of a contract is sufficient to establish a contract for sale although the writings of the parties do not otherwise establish a contract. In such case the terms of the particular contract consist of those terms on which the writings of the parties agree, together with any supplementary terms incorporated under any other provisions of this title.

The terms “merchants” and “between merchants” are defined in Section 2-104 of the UCC as follows:

(1)  “Merchant” means a person who deals in goods of the kind or otherwise by his occupation holds himself out as having knowledge or skill peculiar to the practices or goods involved in the transaction or to whom such knowledge or skill may be attributed by his employment of an agent or broker or other intermediary who by his occupation holds himself out as having such knowledge or skill.

(3)  “Between merchants” means any transaction with respect to which both parties are chargeable with the knowledge or skill of merchants.

Under 2-207(2) where the transaction is “between merchants” (in other words where the online customer “is chargeable with the knowledge or skill of a merchant”) then the proposed additions by the online customer could end up being additions to the contract. To avoid this kind of situation from arising, anyone selling goods over the Internet should include a clause expressly limiting acceptance to the terms of the offer and not ship where different terms are proposed by a customer.

The more interesting provision is 2-207(3), which provides that where the parties’ conduct recognizes the existence of a contract and the parties have in fact agreed on a quantity term, the terms of the contract are those on which the parties agree “together with any supplementary terms incorporated under any other provisions of this title.” This is what as known as the “Battle of the Forms” or the “knockout” clause in that the terms on which the forms of the parties “disagree” are “knocked out.” The courts are not clear as to how the battle of the forms should apply. In American Aluminum Products Co., Inc. v. Binswanger Glass Co., 194 Ga. App. 703, 391 S.E.2d 688 (1990) regarding whether specifications in a proposal were part of the contract, the court held that the counter-proposal constituted the contract and did not apply O.C.G.A. §11-2-207(3) to knock out any conflicting terms. A New York court has also held that the terms of a counter-proposal constituted the entire contract and the “knockout” rules wouldn’t apply.(18) However, there are many situations in which the “knockout” provisions have been held to apply.(19) The trick is that the rule applies only if the forms sent by each of the parties are all part of the agreement. An example would be Party A emails its proposal with its terms and conditions to Party B. Party B emails back that the proposal is accepted including its own different terms and conditions. Then Party A ships the goods. The “knockout” rule would apply. On the other hand, if Party B does not indicate acceptance of Party A’s proposal and sends a counterproposal and then Party A ships the goods then the “knockout” rule wouldn’t apply. This is because by shipping the goods, A has accepted B’s counterproposal. As can be seen from reading the cases, the actual application of all of these rules is more difficult than the discussion of the rules themselves.

The lesson here is that for mass market online transactions, the seller should make sure that goods are shipped only following express and unqualified acceptance of the seller’s terms. Those online sellers that are not involved in mass market transactions have to make sure there is a procedure to examine all messages received to avoid a “battle of the forms” surprise. Even where a seller’s proposal provides that “no change in terms is allowed,” shipping goods in response to a counterproposal that does change the terms is going to be construed by a court either to be an acceptance of the counter-proposal or as an agreement to which the “knock out” rule should apply. Note that when warranty disclaimers are “knocked out” the agreement is going to be governed by the default terms of the code which include such terms as implied warranty provisions – in other words the buyer wins.

B. Proposed Laws.

If enacted as presently proposed, Article 2B would cover online transactions involving:

(a) The online ordering and shipment or transmission of computer software, whether copies are sold or licensed;

(b) Computer software development agreements entered into online;

(c) The online ordering of “linear” movies and sound recordings followed by transmission;

(d) The online ordering and transmission of interactive media including educational CD ROM titles and computer games; and

(e) The online access to databases and/or other information.

Where Article 2B applies the following sections would be relevant to determining the terms of the agreement:

Section 2B-203. OFFER AND ACCEPTANCE, ACCEPTANCE WITH VARYING TERMS; ACCEPTANCE OF CONDITIONAL OFFERS.

Section 2B-207. ADOPTING TERMS OF RECORD.

Section 2B-208. MASS-MARKET LICENSES.

Section 2B-209. TERMS WHEN CONTRACT FORMED BY CONDUCT.

Section 2B-111. MANIFESTING ASSENT.

Section 2B-112. OPPORTUNITY TO REVIEW; REFUND.

Section 2B-102. DEFINITIONS.

Section 33. MERCHANT

Section 11. CONSUMER

Section2B-110. UNCONSCIONABLE CONTRACT OR TERM

Applying these provisions, the terms of an agreement would be determined as follows:

(1)  If the terms proposed by each of the parties agree, the parties are governed by those terms, except to the extent that the court considers any of such terms to be unconscionable.

(2)  The new scheme will permit sellers other than in mass-market transactions to obtain an agreement that certain terms will be subject to later agreement with minimal risk if agreement is not reached, but impose substantial costs on sellers who do not provide all the terms of the agreement to mass-market purchasers prior to purchase. In any transaction, other than a mass-market transaction, where a term is to be fixed by later agreement and the parties intend not to be bound until the term is so fixed, if the parties are not able to reach agreement on that term, each party must return all copies of information and other materials already received and return any sums paid for performance which has not been received. Contractual use restrictions will continue to apply. For mass-market transactions, terms that were not available when the purchaser obtained the software or information and to which the purchaser is not willing to later agree, entitle the purchaser to a refund, reimbursement of any reasonable expenses incurred relating to the return, and compensation for any foreseeable loss caused by the installation.(20)

(3) An acceptance which contains terms that vary, but not materially, from the terms of the offer results in the terms of the contract being those of the offer except that, between merchants, the proposed non-material additional terms become part of the contract unless notice of objection has been given or is given within a reasonable time.

(4) Where the terms that vary result in a material conflict, a contract is not formed unless all of the other circumstances, including the conduct of the parties, indicate that an agreement existed. If neither party agrees to the other party’s terms and the parties go ahead and act as though they have a contract anyway, the contract is considered to be formed by “conduct” and, rather than apply the “knockout” rules of the current Article 2, the court is supposed to take into account all relevant circumstances to determine the intent of the parties.

(5) Where either of the parties to an online transaction include in their standard form language that any agreement is conditioned on acceptance of their terms, such conditional language will have no effect unless the party using such form acts in a manner consistent with the language such as refusing to perform when its terms are not accepted.

With respect to most issues, Article 2B would simply clarify ambiguities in current law by codifying the law that the courts would likely apply anyway. There are a few differences in determining what terms would apply including:

(1) The knockout rule under 2-207 would be replaced by a sort of “all of the circumstances” determination by a court of the intent of the parties;

(2) Clickwrap licenses(21) would be enforceable but only to the extent they were accepted by the purchaser after the purchaser had an opportunity to review all of the terms. However, there would not be a lack of certainty about whether they would be enforceable at all. (Clickwrap licenses in the mass-market context would require reimbursement to the purchaser of all costs and expenses associated with a purchase if the purchaser did not accept the license after having an opportunity to review all of the terms.)

(3) With regard to access to databases which is currently governed by general common and statutory law outside of the UCC, the major difference is that where the parties make it clear that they believe they have an agreement, even if they haven’t agreed to all of the terms, they would have an agreement.

Also, it should be noted that Article 2B encourages, but does not require, that the parties set up commercially reasonable procedures for determining the authenticity of orders and provides that where one of the parties requires that a procedure be followed that is not commercially reasonable, the risk of loss falls on the party requiring such unreasonable procedure.(22)

C. Clickwrap Licenses.

Except where there may be a statute of frauds issue (requirements of writings and signatures are discussed later in this paper), clickwrap licenses are as likely to be enforceable to the same extent as agreements in any other form.(23) The writer is aware of only one case that apparently involved the enforceability of clickwrap licenses.(24) In that case, the United States District Court for the Northern District of California granted a preliminary injunction relying in part upon a claim for breach of contract for the defendant’s allegedly breaching the terms of service for using its e-mail service. The court did not discuss how the agreement was entered into and just assumed it was enforceable; however, agreements with “Hotmail” are clickwrap agreements.

Although there are no cases directly addressing the issue of enforceability of clickwrap licenses, there have been cases addressing the enforceability of shrinkwrap licenses. (Shrinkwrap licenses are licenses included with computer software that provide that the purchaser manifests assent by opening the package.) The 5th Circuit, applying Louisiana law (Louisiana is the only state that has never enacted Article 2 of the UCC), in the first case considering the enforceability of a shrinkwrap license, held that it was unenforceable.(25) In that case, the Plaintiff, Vault Corporation, had developed software which Vault’s software developer customers embedded in their software to prevent their end user customers from using the software on more than one computer. When the Vault Corporation sold its software, it included a shrinkwrap license that was expressly authorized by a Louisiana statute and prohibited reverse engineering of the software. The defendant, Quaid, had purchased the software and reversed engineered it. The 5th Circuit held that the shrinkwrap license and the related statute were unenforceable because they were “preempted” by copyright law.(26)

In Step-Saver Systems v. Wyse Technology and The Software Link, 939 F.2d 91 (3rd Cir. 1991), The Software Link had provided an operating system for Step-Saver to use for its professional office customers. The operating system did not work properly. Step-Saver had ordered many copies of the package. Step-Saver would telephone The Software Link and place an order for a number of copies. The Software Link would accept the order and promise, on the telephone, to ship the goods promptly. After the telephone order, Step-Saver would send a purchase order, detailing the items to be purchased, their price and shipping and payment terms. The Software Link would ship the order promptly along with an invoice. The invoice would contain terms essentially the same as the purchase order. No reference was made during the telephone calls or on the purchase orders or in the invoices to any disclaimer of warranties. There was a shrinkwrap license enclosed with the software packages that disclaimed all warranties and limited damages. The shrinkwrap license did provide that the customer could return the software for a full refund if the customer didn’t accept the shrinkwrap license. The court applied the “battle of the forms” rules and determined that the agreement was complete with the telephone conversation when the goods were ordered coupled with the purchase order. The court held that the shrinkwrap license was sent after the fact and therefore could have no effect under the circumstances. The Software Link’s shrinkwrap license was also held unenforceable for the same reasons in Arizona Retail Systems, Inc. v. The Software Link, 831 F.Supp. 759 (D. Ariz. 1993).

In ProCD, Inc., v. Matthew Zeidenberg and Silken Mountain Web Services, Inc., 86 F.3rd 1447 (7th Cir. 1996), ProCD had developed and was selling copies of a CD ROM with a database of telephone numbers. Zeidenberg purchased the CD ROM at a store. The box showed that inside there was a shrinkwrap license. The shrinkwrap license provided that the purchaser was only receiving a license and that the purchaser was not to make copies of the product. Zeidenberg then made copies of the database onto his own web site and was providing access to the database to customers for a fee. There was no “battle of the forms” issue because the outside of the box gave notice to Zeidenberg at the time of purchase that the purchase would be subject to a license contained inside the box. The court rejected the preemption decision of Vault Corporation, supra, and held that the shrinkwrap license was enforceable. The court thus provided a way for database developers to protect their databases (by contract) even though the database here was probably not protectable under copyright law.(27) A district court for the Southern District of California in a case involving copying from a computer game,(28) the 7th Circuit again in a case involving a shrinkwrap license sent with a Gateway computer,(29) and an appellate court in New York state which allowed Gateway 2000 to require that any disputes be resolved by arbitration in Chicago, Illinois(30) have all approved and followed the decision in ProCD, supra.

Note that as discussed in end note 24, Article 2B, Section 2B-208 would modify the ProCD case somewhat in that where a mass-market purchaser could not view the terms of the license until the mass-market purchaser had taken the package home, the mass-market purchaser would also be entitled to reimbursement of all related expenses.

V. REQUIREMENT OF SIGNED WRITING

A. When is a writing and/or signature required?

1. Current law.

(a) General.

Every state of which the writer is aware, including Georgia, has a “statute of frauds” that requires certain agreements to be in writing and signed by the party to be charged in order to be enforceable. The Georgia statute reads in pertinent part:

To make the following obligations binding on the promisor, the promise must be in writing and signed by the party to be charged therewith or some person lawfully authorized by him:

(1) A promise by an executor, administrator, guardian, or trustee [to be personally liable for the debts of the estate, etc.];

(2) A promise to answer for the debt … of another;

(3) Any agreement made upon consideration of marriage …;

(4) Any contract for sale of lands, or any interest in, or concerning land;

(5) Any agreement that is not be performed within one year from the making thereof;

(6) Any promise to revive a debt barred by a statute of limitations; and

(7) Any commitment to lend money.(31)

Every state of which the author is aware will enforce agreements that are covered by the statute of frauds, even if not in writing or not signed, under certain specified circumstances. Those exceptions are:

(1) When the contract has been fully executed;

(2) Where there has been performance on one side, accepted by the other in accordance with the contract; or

(3) Where there has been such part performance of the contract as would render it a fraud by the party refusing to comply if the court did not compel a performance.(32)

The only sections of the general statute of frauds that are likely to have much effect on online transactions are the ones relating to sales of interests in land and to agreements not to be performed within one (1) year. Where the transaction is governed by Article 2 of the UCC, there is some controversy about whether courts would still also apply the general statute of frauds. The courts of which the writer is aware have held that if Article 2 applies, the general statute does not apply.(33) That leaves at least transactions involving an interest in land and agreements providing access to databases for more than a year subject to the general statute.

Can a transaction that takes place purely over the Internet result in a writing signed by the person to be charged? The answer to this question is likely to vary from jurisdiction to jurisdiction. In Department of Transportation v. Norris, 222 Ga. App. 361; 474 S.E.2d 216 (1996) the Georgia Court of Appeals held that the plaintiff’s claim was subject to dismissal because the plaintiff had not timely provided an “ante litem” notice. The requirement was that notice of any claim against the state must be given in writing within twelve (12) months of the date the loss was discovered or should have been discovered. The plaintiff had mailed and faxed the notice within the requisite period but the mailed notice was received after the expiration of the twelve months. The court decided that the facsimile transmission did not satisfy the statutory requirement that notice be given in writing stating in pertinent part:

Such a transmission is an audio signal via a telephone line containing information from which a writing may be accurately duplicated, but the transmission of beeps and chirps along a telephone line is not a writing, as that term is customarily used.

On certiorari, the Georgia Supreme Court reversed the Court of Appeals decision holding that the mailing of the notice was sufficient and left open the question of whether the sending of a facsimile constitutes notice in “writing.”(34)

In considering what constitutes a writing, it is also necessary to consider what constitutes a signature. In Troutt v. Nash AMC/Jeep, Inc., 157 Ga. App. 399, 278 S.E.2d 54 (1981), Troutt argued, among other things, that an automobile dealer was liable for failure to “sign the installment agreement” as required by the Georgia Motor Vehicle Sales Finance Act. The Act at that time provided in pertinent part:

A retail installment contract shall be in writing, shall be signed by both the buyer and the seller …

The installment agreement was fully typed out and filled in and the name of the dealer was on the paperwork. However, no one had signed on behalf of the dealer. Even though the Georgia Motor Vehicle Sales Finance Act is separate from the Uniform Commercial Code, the court applied the definition provided under the Uniform Commercial Code which reads:

“Signed” includes any symbol executed or adopted by a party with present intention to authenticate a writing,

in holding that the printed name of the dealership on the form was sufficient to constitute a signature. If definitions under the Uniform Commercial Code are going to be applied outside the code, then it is appropriate to apply the definition of “written” or “writing” in O.C.G.A. §11-1-201 (46) which reads:

“Written” or “writing” includes printing, typewriting, or any other intentional reduction to tangible form.

Does the completion and online transmission of an order form, or other online communication such as an email message, constitute a “reduction to tangible form”? When an order or email is transmitted with the intention of entering into an agreement, it is certainly expected that the recipient will save the order or message in some way such as on the hard drive of a server. That is sufficient to meet the definition of “fixed in a tangible medium of expression” under the Copyright Act which reads in pertinent part:

A work is “fixed” in a tangible medium of expression when its embodiment in a copy or phonorecord, by or under the authority of the author, is sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.(35)

Under this analysis, it would be helpful for the parties to an agreement subject to the general statute of frauds to type in their name next to or with the addition of language substantially the same as:

I intend this to be my signature and for this document to be considered a writing.

Even assuming the Georgia appellate courts do not resurrect the rule that electronic transmissions, such as faxes, are not writings, there is a problem with the above analysis. Since the decision in Troutt v. Nash AMC/Jeep, Inc., supra, the Georgia Legislature enacted the “Georgia Electronic Records and Signatures Act” which became effective April 22, 1997.(36) Section 10-12-4. Agreement to Electronic Record or Signature reads in pertinent part:

Any person may, but shall not be required to, accept or agree to be bound by an electronic record which is executed or adopted with an electronic signature and, where that acceptance or agreement is otherwise required to be witnessed or notarized, which is witnessed or notarized, using an electronic signature. Where a person or other entity accepts or agrees to be bound by an electronic record as provided in this Code section, then:

(1) Any rule of law which requires a record of that type to be in writing shall be deemed satisfied;

(2) Any rule of law which requires a signature shall be deemed satisfied, and

(3) Any rule of law which requires a witness or notary shall be deemed satisfied by the electronic signature of such witness or notary.

“Electronic signature” is defined as:

an electronic or digital method executed or adopted by a party with the intent to be bound by or to authenticate a record, which is unique to the person using it, is capable of verification, is under the sole control of the person using it, and is linked to data in such a manner that if the data are changed, the electronic signature is invalidated.(37)

The term “Record” is defined as:

information that is inscribed on a tangible medium or that is stored in an electronic or other medium and is retrievable in perceivable form. “Record” includes both electronic records and printed, typewritten and tangible records.(38)

Section 10-12-2 of the Act relating to construction reads:

The provisions of this chapter shall be construed to promote the development of electronic government and electronic commerce.

So here we have a statute that was designed to promote electronic commerce but seems to provide that at least where the statute of frauds is applicable to be effective an electronic signature must be “unique to the person using it,” “capable of verification,” under the “sole control” of the person using it and be “linked to data in such a manner that if the data are changed the electronic signature is invalidated.”

Although it is by no means clear, without a new statute, it was reasonably likely that a court would have held that a clickwrap agreement or email with language showing that the parties intended that what they were transmitting be a signed writing would be held to constitute a signed agreement. With this statute, that proposition is very questionable and anyone needing to meet the requirements of the statute of frauds should assure that both parties are utilizing an encryption methodology to accomplish the requirements of the statute. It should be noted that the Georgia Electronic Signature Act is as liberal as any that have been enacted and other electronic signature statutes, such the Utah statute, require that much more elaborate procedures be followed, such as requiring the use of certification authorities.(39)

B. Uniform Commercial Code.

Although the above discussion regarding what constitutes a “writing” and/or “signature” also applies to any online transactions governed by the Uniform Commercial Code, there is more to consider with respect to transactions governed by the UCC.

2-201 of the Uniform Commercial Code entitled “Formal Requirements; Statute of Frauds” reads in pertinent part:

(1) Except as otherwise provided in this Code section, a contract for the sale of goods for the price of $500 or more is not enforceable by way of action or defense unless there is some writing sufficient to indicate that a contract for sale has been made between the parties and signed by the party against whom enforcement is sought or by his authorized agent or broker. A writing is not insufficient because it omits or incorrectly states a term agreed upon but the contract is not enforceable under this paragraph beyond the quantity of goods shown in such writing.

(2) Between merchants if within a reasonable time a writing in confirmation of the contract and sufficient against the sender is received and the party receiving it has reason to know its contents, it satisfies the requirements of subsection (1) of this code section against such party unless written notice of objection to its contents is given within ten days after it is received.

(3) A contract which does not satisfy the requirements of subsection (1) of this Code section but which is valid in other respects is enforceable:

(a) If the goods are to be specially manufactured for the buyer and are not suitable for sale to others in the ordinary course of the seller’s business and the seller, before notice of repudiation is received and under circumstances which reasonably indicate the goods are for the buyer, has made either a substantial beginning of their manufacturer or commitments for their procurement; or

(b) If the party against whom enforcement is sought admits in his pleading, testimony or otherwise in court that a contract for sale was made, but the contract is not enforceable under this provision beyond the quantity of goods admitted; or

(c) With respect to goods for which payment has been received, made and accepted or which have been received and accepted.

Under the Uniform Commercial Code where the price equals or exceeds $500, a signed writing is required subject to the exceptions set forth above. However, the only term that must be in writing under Article 2 is the quantity of goods shown. Where the transaction is between merchants, all that is needed is a ” writing in confirmation” that is “sufficient against the sender” sent to the other party unless written notice of objection is given within ten (10) days after the writing is received.

When a transaction is between merchants, there still must be proof that a confirmation was sent.(40) The question remains in connection with an online transaction, even when the transaction is between merchants, whether the transmission of an order form and/or sending of an email constitutes a “writing” in Georgia unless it meets the requirements of The “Electronic Signatures Act” and, in other states, unless it meets requirements of other statutes of that nature.

C. Transfer of Copyrights

The Copyright Act provides that a voluntary “transfer of copyright ownership” is not valid unless made in a signed writing. The courts have interpreted this provision to also apply to exclusive licenses.(41) In order to protect one’s ownership of a copyright, or exclusive rights therein, it is necessary to record the transfer.(42) The words “writing” and “signed” are not defined in the Copyright Act. There is an open question whether interpretations of these terms under State law including construction under proposed acts would be accepted by Federal courts in construing the Copyright Act.

2. Proposed Laws

A. Article 2B. Section 2B-201 entitled “FORMAL REQUIREMENTS” provides that agreements requiring the payment of $5,000 or more are not enforceable unless there is a “record” which is “authenticated” by the party against which enforcement is sought or unless the contract involves a license with an agreed duration of less than one year. These requirements also do not apply if performance is provided and accepted or to the extent that the party against whom enforcement is sought admits the agreement. Additionally, like the Article 2 provision relating to “merchants,” Article 2B provides that between merchants where one merchant sends an authenticated record to the other merchant confirming an agreement and the other merchant does not respond within ten (10) days, such confirmation satisfies the statute of frauds with respect to both merchants. This section further provides that no other statute of frauds is applicable which has been assumed, but not expressly stated, with regard to the writing and signature requirements stated in Article 2.

Section 2B-113 entitled “LEGAL RECOGNITION OF ELECTRONIC RECORDS AND AUTHENTICATION” provides that a record or authentication may not be denied legal effect solely on the grounds that it is in electronic form.

So Article 2B, in order to avoid the technicalities that may be implied by the words “writing” and “signature,” uses the term “record” and “authentication” and expressly provides that electronic form is acceptable. To the extent Article 2B is enacted, it would be a simple matter to add language to order forms and emails so as to comply with the Article 2B statute of frauds. The problem is that even if enacted, Article 2B would not affect a substantial portion of online transactions including those involving the sale of goods, other than computer software, which are not transmitted in the online transaction.

In light of the requirements of the Georgia Electronic Records and Signatures Act, it is likely that even if Article 2B were enacted in Georgia, those transactions which are not covered by Article 2B would still be subject to unenforceability not expected by the parties acting in the ordinary course of business. Even if that statute were changed, the same risk would continue from similar and, in many cases, far stricter electronic signature statutes that have been enacted in many other states.

B. Electronic Transactions Act.

Under the proposed Electronic Transactions Act, if enacted in its current form, all online transactions in which the parties show that they intended the transmission to constitute a writing and to incorporate their signature would satisfy the statute of frauds in those states that passed that statute. Even if enacted in every state, the Electronic Transactions Act would not directly affect Section 204 of the Copyright Act and therefore would not directly apply to the transfer of copyrights.

VI. IMPLIED WARRANTIES

A major reason that licensees of software have tried to avoid application of the Uniform Commercial Code is to avoid imposition of implied warranties and the other warranty provisions of Article 2. Under common law, warranties were not implied. However, in light of the Uniform Commercial Code courts have, from time to time, applied Article 2 of the Uniform Commercial Code by analogy and held that implied warranties were applicable other than in connection just with the sale of goods.(43) The 5th Circuit in 1964 held that under Florida law implied warranties apply under common law.(44) On the other hand, there have been many cases in which the courts have held that implied warranties were not applicable outside of Article 2. With respect to online transactions, the implied warranties of Section 2-314 would apply to any purchases of goods and likely licenses of computer software and other goods, whether obtained through shipment or by transmissions. Although an implied warranty relating to accuracy of a database probably should not be governed by Article 2, any company offering information in a database would be taking an unreasonable risk not to include a disclaimer since, as stated above, courts might, by analogy, apply implied warranties to transactions that are not covered by Article 2. For example the Restatement of Torts 2d Section 552 provides that a provider of information is liable for failure to exercise care in obtaining or communicating information.

Proposed Article 2B-404 would provide that ordinarily there is no implied warranty of the accuracy of databases. Article 2B would apply the warranty only where the provider of information is a merchant in a “special relationship of reliance” with the purchaser of the information.(45)

ENDNOTES

1 Electronic Data Interchange (EDI) is the process whereby standardized forms or documents are transferred online for placing orders, billing, etc. See, Harry Newton, Newton’s Telecom Dictionary, Flatiron Publishing,1998. The ABA offers a form trading partner agreement for use in ongoing EDI transactions between the same parties.

2 Benjamin Wright and Jane K. Winn, The Law of Electronic Commerce, Aspen Law & Business, 3rd Ed. (1998)

3 See, e.g., O.C.G.A. §11-2-102.

4 See, Corporate Counsel’s Guide To The Uniform Commercial Code, Business Laws, Inc. at pp. 2.001 – 2.002 (1997) and J. Lee Gregory, Inc. v. Scandinavian House, L.P., 209 Ga. App. 285, 433 S.E.2d 687 (1993).

5 See, e.g., O.C.G.A. §11-2-105.

6 Validity, Construction and Application of Computer Software Licensing Agreements, 38 ALR 5th 1 and see, Schroeders, Inc. v. Hogan Systems, Inc., 522 N.Y.S.2d 404 (N.Y. Supp. Ct. 1987, Colonial Life Ins. Co. v. Electronic Data Systems Corporation, 817 F.Supp. 235 (D.N.H. 1993), Advent Systems v. Unisys Corp., 925 F.2d 670 (3rd Cir. 1991), and NMP Corporation v. Parametric Technology Corporation, 958 F.Supp. 1536 (N.D. Okla., 1997).

7 See, Michael D. Scott, Scott On Computer Law, 2nd Edition, Section 7.09[B].

8 See, Cincinnati Gas & Electric Co. v. Goebel, 28 Ohio Misc. 2d, 502 N.E.2d 713 (1986).

9 See, Gall v. Allegheny County Health Department, 555 A.2d 786 (Penn. 1989).

10 See, Farina v. Mohawk Power Corp., 438 N.Y. Sub. 2d 645 (1981).

11 See, Kaplan v. Cablevision of Pa., Inc., 671 A.2d 716 (1996).

12 See, Colonial Life Ins. Co. v. Electronic Data Systems Corporation, 817 F.Supp. 235 (D.N.H. 1993).

13 O.C.G.A. §10-12-1 et. seq.

14The latest versions may be downloaded from http://www.SoftwareIndustry.org and from http://www.law.upenn.edu/library/ulc/ulc.htm.

15 See, 17 U.S.C. §102.

16 See, Prefatory Note to Uniform Electronic Transactions Act. The Act is available at http://www.law.upenn.edu/bll/ulc/uecicta/98am.htm. Copies may also be obtained from the National Conference of Commissioners of Uniform State Laws, 211 East Ontario Street, Suite 1300, Chicago, IL 60611. The most recent draft of the Uniform Electronic Transactions Act (ETA) was prepared for the July 24-31, 1998 meeting of the National Conference of Commissioners of Uniform State laws.

17 See, Panfel v. Boyd, 187 Ga. App. 639, 371 S.E.2d 222 (1988).

18 See, CVS, Inc. v. Auburn Plastics, Inc., 67 A.D.2d 811, 413 N.Y.Supp.2d 50 (1979).

19 See, Corporate Counsel’s Guide To The Uniform Commercial Code, supra, pp. 2.088 and 2.089 and Diamond Fruit Growers, Inc., 794 F.2d at 1444 (9th Cir. 1986)

20 Contrary to ProCD, Inc. v. Zeidenberg and Silk & Mountain Web Services, Inc., 86 F.3rd 1147 (7th Cir. 1996), and other recent cases, a shrinkwrap license in connection with a license for computer software enclosed in a box in connection with a retail (mass market) sale where the purchaser is only notified that there is a license and for which the terms are not available until the purchaser has opened the box and/or installed the software would be subject, under Article 2B, not only to the right of refund; but also, to reimbursement of reasonable expenses and costs.

21 A clickwrap license is a license agreed to by a purchaser using a mouse to click an on-screen button to indicate assent to an agreement.`

22 Sections 2B-114, 2B-115 and 2B-116.

23 See, CompuServe, Inc. v. Richard S. Patterson, 89 F.3d 1257 (6th Cir. 1996). The 6th Circuit Court of Appeals held that an attorney who entered into a “shareware registration agreement” which required that the attorney type “agree” at various points in the document was bound by its terms including being subject to jurisdiction in the State of Ohio on any dispute regarding the agreement.

24 See, Hotmail Corporation v. Van Money Pie, Inc., 47 U.S.P.Q. 2nd (BNA) 1020 (1998); 1998 U.S.Dis. Lexis 10729 (April 16, 1998).

25 See, Vault Corporation v. Quaid Software Limited, 847 F.2d 255 (5th Cir. 1988).

26 Of course the court’s holding would imply that if preemption didn’t apply that the shrinkwrap license would be enforceable. Most courts that have decided the issue have held that agreements prohibiting reverse engineering and disclosure of confidential information are not preempted by the Copyright Act because they involve an agreement between consenting parties, and therefore are different from copyright which is imposed by law. See, e.g., Computer Associates v. Altai, 982 F2d 693 (2nd Cir. 1992).

27 See, e.g., Feist Publications, Inc. v. Rural Telephone Company Service, 499 U.S. 340 (1991). See also the section on copyright law being provided with this manual. For additional materials on copyright law, see the writer’s law firm web site at http://www.internetlegal.com. There is some concern among commentators that to allow unlimited use of shrinkwrap and clickwrap licenses to protect material not otherwise protected by copyright law could vitiate the copyright fair use doctrine.

28 See, Microstar v. Formgen, Inc., 942 F.Supp. 1312 (S.D. Cal. 1996).

29 See, Rich Hill and Enza Hill v. Gateway 2000, Inc., 105 F.3rd 1147 (7th Cir. 1997).

30 1998 N.Y. App. Div. Lexis 8872.

31 O.C.G.A. §13-5-30.

32 See, e.g., O.C.G.A § 13-5-31.

33 Corporate Counsel’s Guide To The Uniform Commercial Code, supra, at pp. 2.058 – 2.060.

34 See, Norris v. Department of Transportation, 268 Ga. 192, 486 S.E.2d 826 (1997).

35 See, 17 U.S.C. §101.

36 O.C.G.A. §10-12-1, et. seq.

37 See, O.C.G.A. §10-12-3.

38 O.C.G.A. §10-12-3.

39 See, Utah Digital Signatures Act, Utah Code Ann. §46-3-101, et. seq. (Supp. 1996).

40 See, Entertainment Sales Co. v. SNK, Inc., 232 Ga. App. 669, 1998 Ga. App. Lexis 641 (April 15, 1998).

41 See, 17 U.S.C.A. §§101 and 204.

42 See, 17 U.S.C.A. §205.

43 See, e.g., Holmes v. Worthey, 159 Ga. App. 262, 282 S.E.2d 919 (Ga. App. 1981) in which the court held that although ordinarily implied warranties wouldn’t apply, where a seller/builder is in direct privity with the buyer, the buyer has an implied warranty .

44 Sperry Rand Corp v. Industrial Supply Corp., 337 F.2d 363 (5th Cir. 1964).

45 Section 2B-404.

Rob Hassett is an attorney who practices in technology, entertainment and corporate law with Casey Gilson P.C. in Atlanta, Georgia.

The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.

© 1998, Rob Hassett, Atlanta, Georgia. All Right Reserved

Historical Chart of Privacy Laws in the United States

Featured

FOR GEORGIA TECH PROFESSIONAL EDUCATION PROGRAM INFORMATION SECURITY LAW  

By:  Rob Hassett

www.internetlegal.com

770-393-0990

 October 21, 2003   

LAW DESCRIPTION EFFECTIVE DATE
4th Amendment to US Constitution Prohibits unreasonable search and seizure      1791
5th Amendment to US Constitution Cannot be compelled to testify against oneself regarding criminal activities       1791
Bill of Rights Generally According to Griswold v. Connecticut – right to privacy provided in bill of rights and voided statutes that made the sale or use of contraceptives illegal       1791

Griswald v.

Connecticut   (1965)

14th Amendment to US Constitution All individuals born in the U.S. are citizens of state where they reside and no state shall make or enforce laws which abridge privileges or immunities and no state shall deprive any person of life, liberty or property without due process nor deny equal protection of the law

1868 (In Roe v. Wade, the U.S. Supreme Court held that state laws that made abortion a crime were unconstitutional 410 U.S. 959, 35 Lawyers Ed. 2nd 694 (1973)) (Court held that state could exercise some regulation after the first trimester and much more after the second trimester)

General state based laws regarding privacy and publicity rights

Based on article that appeared in the Harvard Law Review and one of the first cases was a Georgia case; wrongful intrusion, wrongful disclosure of embarrassing private facts; wrongful appropriation and false light

Article 1890; Ga. Case 1905

Federal wire tap statutes 18 USC §2510 and 47 USC §605, FCC Rule 47 CFER 164.501 Restricts listening to telephone conversations

1934

O.C.G.A. §31-12-2 Government agencies are prohibited from identifying people with sexually transmitted diseases

1964

United States Privacy Act5 USC §552.a Prohibits federal agency from disclosing personal data except for publicly announced purposes and requires agencies to keep an account of all disclosures

1966

Mail Privacy Statute, 39 U.S.C. §3623 Prohibits opening of mail without search warrant or consent

1971

Family Education Rights & Privacy Act, 20 U.S.C.  §1232 Restricts disclosures of educational records

1974

The Right to Financial Privacy Act, 12 U.S.C. §3401-3403 Restricts disclosure to government of financial records of banks and similar financial institutions

1978

O.C.G.A. §33-21-23 HMO’s may not disclose any information pertaining to diagnosis without express consent of patient with some exceptions

1979

Identity Theft and Deterrence Act, 18 U.S.C. §1028 Prohibits identity theft

1982

Computer Fraud and Abuse Act, 18 U.S.C. §1030 Prohibits unauthorized access together with either obtaining financial information, causing damage, obtaining something of value or affecting medical records

1984

Cable Communications Privacy Act, 47 U.S.C. §551 Requires notice and consent before cable service provider may collect data of viewing habits

1984

O.C.G.A. §33-39-1, et. seq. Insurance companies are required to keep personal health information confidential with exceptions

1984

Electronic Communications Privacy Act, 18 U.S.C. §2701 Restrictions on accessing another person’s electronic mail

1986

O.C.G.A. §24-9-47 Information about AIDS is confidential

1987

Video Privacy Protection Act, 18 U.S.C. §2710 Prohibits video tape sale and rental companies from disclosing data

1988

Employee Polygraph Protection Act, 29 U.S.C. §2001 Imposes restrictions on employer use of polygraph testing employees

1988

Driver’s Privacy Protection Act, 18 U.S.C.  §2721-2725 Restricts states from disclosing state drivers’ license and motor vehicle records (held constitutional by U.S. Supreme Court)

1994

O.C.G.A. §33-54-3 Information derived from genetic testing is confidential

7/1/1995

The Telecommunications Act , 47 U.S.C. §222 Imposes privacy protection on information held by telecommunications companies

1996

The Children’s’ Online Privacy Protection Act, 15 U.S.C. §6501 Restricts collection of data from children under 13 over Internet

2000

O.C.G.A. §31-33-2, et seq. Requires healthcare providers to provide copies of medical records to patients when requested

7/1/2001

Gramm-Leach-Bliley Act Restricts disclosure of personally identifiable information by financial institutions (broadly defined)

Privacy rules effective 7/1/2001; security rules FTC effective 5/23/2003; security rules for FDIC, Federal Reserve System, Etc. effective 7/1/2001

Georgia – Title 10, Chapter 15 Requires shredding, erasure, making unreadable or other reasonable action regarding medical information, customer accounts or identification numbers, account balances and the like

7/1/03

Health Insurance Portability & Accountability Act

Privacy rules effective 4/14/2003; security rules effective 4/20/2005

 

 

Film & Television 101: Acquiring Life Story, Publishing & Other Related Rights

For:  Fourth Annual Entertainment and Sports Law: A Basics Boot Camp

Friday, September 26, 2003

Grand Hyatt Hotel, Atlanta

 

By Rob Hassett[1], Casey Gilson Leibel P.C., Atlanta, Georgia.

TABLE OF CONTENTS

I. INTRODUCTION ……………………………………………..…………………..

II. PROTECTING IDEAS ………………………………………………………….

III. LEGAL ISSUES RELATING TO DISTRIBUTION ………..…………………

IV. LIFE STORY RIGHTS …………………………………………………………

V. AUDIOVISUAL RIGHTS IN LITERARY MATERIALS ……………………..

VI. NEGOTIATIONS AND ACQUIRING RIGHTS ……….…………………….

VII. RECORDING EXCLUSIVE LICENSES …………………………………….

VIII. CONCLUSION ……………………………………….……………………….

I.          INTRODUCTION

An individual with an idea for a film or television program (hereinafter referred to as a “Filmmaker”) will want to reduce the likelihood that:

1.         his or her idea will be stolen; and

2.         legal concerns or uncertainties will make it difficult for the Filmmaker to obtain a distribution deal.

Obtaining life story rights, audiovisual rights to a pre-existing literary work, or other exclusive rights can reduce or eliminate these concerns.

II.        PROTECTING IDEAS

A well-established Filmmaker can generally discuss their ideas with actors, studios and potential distributors with little fear of the idea being stolen. This is because it is likely that people with whom the established Filmmaker discusses the deal:

1.         Would not want to cross the Filmmaker and face the consequences of making an enemy of someone with connections in the business; and

2.         Would prefer to work with that proven Filmmaker if only to avoid competing with someone that is likely to complete production long before that actor, distributor, etc. could complete a competitive film or program.

This is not the case with a new Filmmaker. Ideas of new Filmmakers are frequently stolen. Of course, a new Filmmaker can have a non-disclosure agreement prepared which service providers (production companies, less well-known actors, etc.) would probably sign. However, the film studios and networks will not be willing to sign non-disclosures. In fact, they will require that the Filmmaker sign a submission release before submitting the idea. The submission release will usually provide that unless the studio or network violates the Filmmaker’s copyrights, the Filmmaker has no claim against the studio or network. So the Filmmaker should try to develop assets that are connected with the film or series that the studio would want. Assets could include an exceptionally well written script, audiovisual rights in a novel or other book, special skills, such as, if the film will involve underwater photography, talent as an underwater photographer, or if the film involves esoteric knowledge, exclusive agreements with a particular professor in the field. If the film involves a person’s life, exclusive rights to personal interviews, documentation and old footage would be helpful. The objective is to make it so that the studio wants something that the studio can get only if it works with the Filmmaker. Exclusive rights to base a film on a novel and exclusive life story rights are excellent ways for a Filmmaker to try to protect his or her idea.

III.       LEGAL ISSUES RELATING TO DISTRIBUTION

A distributor of a film or series does not want to be concerned about lawsuits. Lawsuits relating to a film or program may be brought on a variety of grounds including:

1.         Violation of privacy and publicity rights of an individual who is a subject of the film or program including:

(a)        Wrongful appropriation of identity, likeness, image or name (this form of the right of privacy, with minor differences, also constitutes the right of publicity);

(b)        Wrongful intrusion (peeping Tom scenario);

(c)        Wrongful disclosure of embarrassing private facts; and

(d)        False light;

2.         Defamation, libel or slander of an individual who is a subject of the film or program; or

3.         Copyright infringement of an underlying work such as a book.

Each of the above rights, except for copyrights, are governed by state, rather than federal, law and therefore vary from state to state. However, the statutes, in those states with statutes that concern privacy and publicity rights, tend to be similar. In those states, such as Georgia, where the rights are based on case law, the principles applied are generally similar both to other states where the rights are based on case law and those where the rights are set forth in statutes. Additionally, application of these laws is subject to the free speech clause of the first amendment, which curbs the impact that privacy and publicity rights can have on films and television programs. Of course, because of the differences that still exist, it is necessary to specifically check the law of each state that may be relevant. Likewise, most states have enacted statutes relating to defamation that are generally similar and their impact is subject to the free speech clause of the first amendment.

Wrongful appropriation and wrongful disclosure of embarrassing private facts are the areas of privacy law most likely to be violated by Filmmakers. Both are addressed in detail in the author’s article on privacy and publicity rights provided with this paper.

The type of wrongful intrusion that constitutes a violation of the right of privacy is wrongful intrusion into private activities in such a manner as to outrage or cause mental suffering, shame, or humiliation to a person of ordinary sensibilities. To constitute a violation of the right of privacy an intrusion must occur in a situation where there is first a reasonable expectation of privacy.

False light invasion of privacy is the same as defamation except that the false statement need not be disparaging. For instance, if you say that a person went to Harvard when that person did not, you have not defamed that person, but you may have violated that person’s false light version of the right of privacy.

Often the subject of a biography or other work based on historical events will have created paintings, writings, photographs or other materials protected by copyright which could be useful in a film or series. Obtaining copies without cooperation of the subject of the film or series may not be possible. Use without authorization of the author will often constitute copyright infringement.

Films and television programs are also often based on literary works such as books and screenplays. These works are also usually protected by copyright law (unless because of the length of time since the author died or other reasons they are in the public domain) and therefore use as the basis of a film or program would constitute copyright infringement.

IV.       LIFE STORY RIGHTS

Drafting and negotiating agreements is much more than a logical exercise where the attorney throws in every term favorable to his or her client. The attorney also has to try to determine in the particular circumstances what the client can live with and reasonably expect to obtain and help guide the client in determining what can be asked for without destroying any chance of obtaining the rights that are needed. Generally, for a first time Filmmaker who is not paying a substantial sum to the subject of a film or program, it is probably best to seek:

(a)        Exclusive rights to interviews for any audiovisual work for a period of time (obviously the longer the better);

(b)        A release from all privacy and publicity rights; and

(c)        An exclusive right to use any documents, film footage or other materials that may pertain to the matter, especially photographs and audiovisual materials, for a period of time (at least 5 years).

For a first time Filmmaker who is not paying a substantial sum for the grant of rights, it is probably better not to seek a release of claims for libel and/or slander since this tends to cause the subject to reject the entire proposal. Producers, writers and directors should always be warned not to defame anyone in their works and have their productions reviewed by a qualified lawyer at each level (scripts, first cuts and final cuts) to flag potential problems.

V.        AUDIOVISUAL RIGHTS IN LITERARY MATERIALS

Because of the great quantity of nonfiction books, novels and short stories published each year, and those that have been published in the past and not been used as the basis for audiovisual works, literary materials can be a great resource for Filmmakers. Many writers are as eager to see a film made based on their books as Filmmakers are to make one. A good approach is to find a terrific book that was popular many years ago, has since been forgotten, and has never been used as the basis for a movie or television program. A typical arrangement is to obtain either an agreement for exclusive rights or an option. Typically for a low option price (such as $1,000 to $5,000), the option can be extended from year to year for a similar low payment for up to 5 years. Exclusive rights can be exercised, for a much higher payment( $100,000 or more), at any time during the option period. Once exercised, the Filmmaker would have the exclusive right to make an audiovisual work based on that book for the life of the copyright subject to any applicable right of reversion, such as, for grants of exclusive rights by an individual author on or after January 1, 1978, the right of reversion set forth in 17 U.S.C. §203 of the United States Copyright Act.

VI.       NEGOTIATIONS AND ACQUIRING RIGHTS

Acquiring Life Story and Audiovisual rights in literary works is usually not easy. It often takes many months and requires a great deal of energy, persistence, and patience. Expressing frustration is a sure fire way to kill any chance of putting the deal together.

VII.     RECORDING EXCLUSIVE LICENSES

No one would think of purchasing a house without first assuring that a chain of title to the property is established in the courthouse. A transfer of the property is obtained in writing and that transfer is then recorded in the courthouse of the county in which the property is located. However, acquirers of exclusive licenses to literary works frequently fail to take the analogous steps provided for under the Copyright Act. This is detrimental because grants of copyrights and exclusive rights in copyrights are not valid unless they are in writing, and are subject to loss due to bankruptcy of the grantor or unscrupulous conduct of the grantor who resells the rights (even though the acquirer would have a right to sue such unscrupulous grantor for damages) if the grant is not recorded in the U.S. Copyright Office. The copyright of the original author should be registered in the name of the original author and each grant of an assignment or exclusive license should be recorded. Rather than record the entire agreement, the parties will often sign a short form exclusive license that sets forth the terms of the license to be recorded. This maintains the confidentiality of the overall deal while still meeting the requirements of the Copyright Act.

VIII.    CONCLUSION

Life story and audiovisual rights in literary works can be extremely valuable, especially for a new Filmmaker. Acquiring such rights can mean the difference between having an idea stolen and making one’s own film or program. These rights can also increase the chances that the Filmmaker can obtain distribution of his or her film or proposed program.


© 2003 Rob Hassett, All Rights Reserved.


[1] The writer wishes to thank Laura Hassett for her help in preparing this paper.

The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.

Will Internet Radio Stations That Stream Music Have to Shut Down?

First Published in the Atlanta Lawyer March 2009

by Rob Hassett

Introduction
Creative and adventurous entrepreneurs, who could never afford to buy a broadcast radio station, have set up many internet radio stations that stream music and offer features that could only be made available over the internet. www.live365.com allows you to find stations that play almost  any type of music imaginable. Yahoo’s Launchcast, (http://music.-yahoo.com/launchcast/), now  managed by CBS Radio, (http://yahoo.client.shareholder.com/) and Pandora, (http://www.pandora.com/) allow you to type in names of favorite artists or songs and will then play songs, based upon those choices. With Pandora you can set up as many “channels” as you want, with each based on a different artist or set of artists (i.e. with each song by the artist selected or an artist with a similar sound). Although Congress has passed laws to promote experimentation, growth and development on the internet by limiting liability exposure of the owners of commercial websites, Congress has also  passed laws that have put internet radio, and all that it offers, on the verge of extinction.

Background
In the United States, songwriters (and publishers for songwriters) have traditionally received “public performance” royalties when their songs were played on broadcast radio and in other public forums. Royalties for songs are collected by ASCAP, BMI and SESAC and, for internet radio, total royalties have been in the range of 3.5 – 5% of gross income derived from the broadcast of the music. Owners of the copyrights in sound recordings have traditionally received  no royalties for public performances in the United States. This continued to be the case until enactment of the Digital Performance Right in Sound Recordings Act of 1995. This Act provided that copyright owners of sound recordings would have a public performance right in  audio recordings that were transmitted by a station requiring a subscription, such as satellite radio, and in any digital transmission that was “interactive.”  In 1998, the Digital Millennium Copyright Act was enacted, which, among other things, included provisions, codified in 17 USC § 106(6) and §114, that expanded performing rights of  the owners of sound recordings to include sound recordings transmitted digitally over the internet (i.e. via internet radio). In connection with this right, Congress also provided for a set  (“statutory”) royalty rate to be established for non-interactive internet radio stations that met  certain other criteria. If not decided by negotiation among stakeholders, it provided that the royalty rate would be determined by an ad hoc Copyright Arbitration Royalty Panel.  The statutory rates would only apply if the webcast was not “interactive” and other criteria were met, such as, limiting notice of when songs would be played, to make it unlikely that webcast streaming would become a substitute for music downloads.

2 Problems
There were two problems with Congress’ approach. First, to benefit from a set royalty rate (which would be better for each station than having to negotiate separately with each record label), the station could not be “interactive.” Unfortunately, Congress defined “interactive” broadly and ambiguously so many stations do not know whether they are interactive or not.  Second, Congress’ wording of the standard the arbitrators were to use for determining the statutory rates encouraged the arbitrators to impose unreasonably high royalties.

Determining Whether a Station Is Interactive
The definition of “interactive” set forth in the Digital Millennium Copyright Act reads, in pertinent part, as follows:

An “interactive service” is one that enables a member of the public to receive a transmission of a program specially created for the recipient, or on request, a transmission of a particular sound recording, whether or not as part of a program, which is selected by or on behalf of the recipient.  17 USC § 114(j)(7).

The phrase “a program specially created for the recipient” is ambiguous. As referred to in the above Introduction, using advanced techniques, some of the most popular internet radio stations utilize input from the listener to create a “personalized station.” So does that result in programs that are “specially created for the listener”?

In 2001, Sony BMG, and other record labels, filed a lawsuit against Launchcast internet radio for copyright infringement, claiming Launchcast was an “interactive” radio station and had no right to stream music under the statutory license granted to non-interactive radio stations. On November 3, 2005, the United States District Court for the Southern District of New York held that whether or not Launchcast was “interactive” was a jury question. Arista Records, Inc. v.  Launch Media, Inc., 2005 WL 2898735 (S.D.N.Y.), and on April 27, 2007, a jury found that Launchcast was not interactive. Sony BMG said it would appeal. As of this writing, the author has not seen any order relating to the appeal of that decision.

Statutory (Set) Rates
For reasons that are likely related to which groups had the more effective lobbyists, the standard for determining statutory rates as provided for in the acts referred to above, was made much more favorable to existing satellite radio, than to webcasters. The Digital Performance Right in Sound Recordings Act of 1995, in a provision codified at 17 USC § 801(b), directed ad hoc Copyright Arbitration Panels to set royalty rates for pre-existing satellite radio that are reasonable and are calculated to maximize the availability of creative works to the public, to afford the copyright owner a fair return on his or her investment and the copyright user a fair income, to consider the contributions and risks taken by each party and to minimize any disruptive impact on the industries involved. The Digital Millennium Copyright Act, in a provision codified at 17 USC §§ 114(f) (2) (A), directed the Copyright Arbitration Royalty Panels to set royalty rates for webcasters (as well as others including new, i.e. not  preexisting, satellite radio stations) “that would have been negotiated between a willing buyer and a willing seller.” No language indicated that the Panels should be concerned about maximizing the availability of creative works or the disruptive impact on internet radio.  As a result, in 2002, royalties for internet radio were set at an amount that would put many internet radio stations, already earning little if any money, out of business. Webcasters appealed the decision to the D.C. Circuit Court of Appeals. The D.C. Circuit Court of Appeals affirmed the decision. See, Beethoven.com LLC v. Library of Congress, 394 F.3d 939 (D.C. Cir. 2005); and See generally, Melville B. Nimmer and David Nimmer, Nimmer on Copyright 8-352.  (Rel.61-8/2003).  In 2002, partly because of concerns over the adverse effects of the high rates, Congress passed  the Small Webcaster Settlement Act of 2002. The new Act led to an agreement among the participating stake holders of an alternative rate equal to 5% of expenses or 8% of gross revenues, depending on which is greater, through 2002 for “small webcasters,” with increases scheduled for 2003 and 2004. See, Nimmer on Copyright, 8-352.12 (Rel.61-8/2003).

Current Royalties for Webcasting
On March 7, 2007, the Copyright Royalty Judges, who had replaced the ad hoc Copyright  Arbitration Panels and are sometimes referred to as the Copyright Royalty Board, set the rates for webcasting beginning at .08 cents per performance for 2006 with yearly increases reaching  .19 cents per performance for 2010, with a minimum fee of $500 per channel per year. The $500 per channel fee could be interpreted to require the payment of much more than the rates per song for stations like Pandora, that permit each user to set up multiple “stations.” Daniel McSwain, Radio and Internet Newsletter, “CRB Coverage,” March 2, 2008.  http://textpattern.kurthanson.com/crb/58/webcast-royalty-rate-decision-announced; See also, “free103point9 Newsroom,” tp://blog.free103point-9.org/labels/internet%20radio.html. On  April 17, 2007, the Copyright Royalty Board rejected an appeal. David DeJean, Information Week, April 17, 2007. “Copyright Royalty Board Puts Internet Radio On Death Watch,”  http://www.informationweek.com/blog/main/archives/2007/04/copyright_royal.html; See also,  “free103point9 Newsroom”, http://blog.free103point9.org/labels/internet%20radio.html.

In contrast, based on the differences in the statutory formulas for setting royalties for webcasters versus pre-existing satellite radio, in 2006, the Copyright Royalty Judges set royalty rates for  pre-existing satellite radio that were much more favorable to the owners of the radio stations, resulting in fees of anywhere between 6.0% to 8.0% of gross income. Most internet radio stations would much prefer having their royalties based on their revenue rather than on the number of times songs are played.
An appeal from the order setting the rates for webcasters was filed in the US Court of Appeals for the District of Columbia. No court decision has been published to date. David Oxenford, Broadcast Law Blog, http://www.broadcastlaw-g.com/archives/internet-radio-nab-joins-thefray-on-internet-radio-appeals-and-a-request-for-stay-are-filed-and-a-settlement-offer-is-madeto-noncommercial-webcasters.html; See also, “free103point9 Newsroom”  http://blog.free103point9.org/labels/internet%20radio.html.

Finally, on October 1, 2008, Congress enacted the Webcaster Settlement Act that permits the 4 webcasters and SoundExchange (the collecting agency for the record labels and performers) to negotiate rates lower than the statutory rates, which helps only to the extent the record labels recognize that internet radio can promote the sale of records and be another source of revenue.

Conclusion
The law relating to internet radio is still evolving, but up to now fails to support internet radio as it has other web based businesses. The royalty payments required for internet radio have been set at levels so high that they could cause many popular webcasters to shut down. As Congress did with pre-existing satellite radio, to “unleash the power of the internet,” with respect to internet radio, Congress should set standards for maximum royalties that do not exceed 8% of a radio station’s gross income.

Rob Hassett is an attorney with Casey Gilson P.C. in Atlanta and focuses on technology, entertainment and corporate law.

The Fair Use Doctrine and New Media Technology

By:  Rob Hassett

Casey Gilson P.C.

Atlanta, Georgia

770-512-0300 Ext. 557

http://www.internetlegal.com/

           and

Adam H. Alexander

In-House/Corporate Counsel

Sammons Corporation

Dallas, Texas

 

Background and Summary

An earlier version of this article first appeared in the program materials for the conference sponsored by the Entertainment & Sports Law Sections of the Georgia, Florida & Tennessee Bar Associations which was held in Dana Point, California from November 6 through November 8, 1997. This advanced level article addresses the subject of copyright fair use on the Internet. (12 Pages)

The law of copyright has evolved with technological change, with each new technological advancement creating complicated questions of copyright interpretation and application. Nevertheless, the new technologies . . . have been made to fit within the overall scheme of copyright law and to serve ends which copyright was intended to promote. The Internet is no exception; . . . it must be judged in reference to the already flexible considerations which fair use affords.(1)

 

I. COPYRIGHT & DEVELOPMENT OF THE FAIR USE DOCTRINE

The policy goals of the Copyright Act are found in the Constitution. The progress of science and the useful arts is fostered by granting the individual who has expressed his or her idea the limited monopoly to profit from its dissemination.(2) This limited grant is “intended to motivate the creative activity of authors and inventors by the provision of a special reward, and to allow the public access to the products of their genius after the limited period of exclusive control has expired.”(3) In this way, the Copyright Act rewards the author and benefits the public.

An important outgrowth of this policy is the idea/expression dichotomy. This concept insures that no author can protect his or her idea; only his or her expression of that idea.(4) For reasons that will become apparent, this concept is instrumental in protecting First Amendment rights and in helping one recognize some of the goals of fair use under the Copyright Act.

With respect to the First Amendment, the idea/expression dichotomy “[strikes] a definitional balance between the First Amendment and the Copyright Act by permitting free communication of facts while still protecting an author’s expression.”(5) Because of this balance, “[c]opyright laws are not restrictions on freedom of speech [because] copyright protects only the form of expression and not the ideas expressed.”(6) An example of this idea can be found in the balance between copyright and the First Amendment rights of disseminating the news. The news element is the “history of the day” and is thus entitled to very little copyright protection.(7) However, “copyright assures those who write and publish factual narratives . . .that they may at least enjoy the right to market the original expression contained therein as just compensation for their investment.”(8)

In addition to the idea/expression dichotomy, the fair use doctrine assists in allowing others to build upon the ideas contained within copyrighted works without eliminating copyrights.(9) The fair use doctrine is an old common law idea that was not a part of original the Copyright Act in 1790. Something akin to the fair use doctrine existed in England as far back as 1710, and appeared in the States compliments of Justice Story as a judicially created doctrine in Folsom v. Marsh in 1841.(10) As Justice Story would later explain,

in truth, in literature, in science, and in art, there are, and can be, few, if any, things, which in an abstract sense, are strictly new and original throughout. Every book in literature, science and art, borrows, and must necessarily borrow, and use much which was well known and used before.(11)

 

Fair use remained a judge-made doctrine until the passage of the 1976 Copyright Act,(12) yet to this day remains an equitable doctrine.

II. FAIR USE DOCTRINE BASICS

The fair use doctrine is now set out in §107 of the Copyright Act and reads as follows:

Notwithstanding the provisions of sections 106 and 106A, the fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include —

(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.(13)

The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

Section III of this article will discuss the manner in which a court determines each of these factors as well as how they are weighed together. Fair use is an affirmative defense which is raised after a prima facie case of copyright infringement has been established.(14)

When Congress incorporated fair use into the Copyright Act, it intended §107 “‘to restate the present judicial doctrine of fair use, not to change, narrow, or enlarge it in any way and intended that courts [would] continue the common law tradition of fair use adjudication.”(15) This intent, together with the language of the statute, “permits [and requires] courts to avoid rigid application of the copyright statute when, on occasion, it would stifle the very creativity which that law is designed to foster.”(16)

The application sought by Congress has been recognized and affirmed time and again by the Supreme Court. The case by case analysis is required by statute and there are no bright-line rules or short cuts.(17) Accordingly, all four factors are to be explored and weighed together in light of the purposes of copyright and never to be treated in isolation.(18) As a means of guidance, Congress provided examples of the types of uses which are generally considered fair uses. These examples are meant to be illustrative and not limiting; indeed, “whether a use referred to [as an illustration] is a fair use in a particular case will depend upon the application of the [four] determinative factors.”(19)

Case by case analysis has resulted in inconsistent, sometimes conflicting decisions in cases with similar fact patterns. Identical cases have found courts reversing each other as a case works its way through the appellate process. For example, in Michigan Document Services v. Princeton University Press, the district court found “willful” infringement and no application of the fair use doctrine.(20) A three-judge panel of the 6th Circuit Court of Appeals reversed the district court, finding that the copying was permissible fair use.(21) A rehearing en banc resulted in another reversal, with a slight majority of the active 6th Circuit judges finding that the copying in question was not a fair use.(22) These reversals and re-reversals serve not as an example of how a court misapplied the fair use analysis, but are simply illustrative of how difficult the issues can be and how “reasonable minds can differ” on close questions of judgment as different individuals weigh the different factors.(23)

Problems of analysis and precedent are often compounded by technology. The development of modern technology and communications has radically changed the way in which the public perceives copyrighted material.

The fortunes of the law of copyright have always been closely connected with freedom of expression on the one hand, and with technological improvements in the means of dissemination, on the other. Successive ages have drawn different balances among the interest of the writer in the control and exploitation of his intellectual property, the related interest of the publisher, and the competing interest of society in the untrammeled dissemination of ideas.(24)

The radio, cassette recorders, photocopiers, VCRs, and computer have all been initially thought to render the fair use doctrine obsolete.(25) However, the doctrine has remained unchanged and continues to apply successfully to new technologies. The Internet will be no different. All that will be required, as in the past, is creative thinking and logical application of the four factors while keeping in mind the goals of copyright.

III. FAIR USE ANALYSIS – STATUTORY EXAMPLES AND FACTORS

A. Statutory Examples:

Congress provided examples of the types of uses that might constitute fair use. Examples cited that may constitute fair use are those “for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research. . .”(26) It is important to realize that this list does not create a presumption of fair use, and indeed many uses that might at first seem to be included within the list have been found unfair. For example, in American Geophysical Union v. Texaco, the Second Circuit found that photocopying articles from a scholarly journal (to which Texaco subscribed) for use by Texaco researchers was not a fair use.(27) Likewise, in Los Angeles News Service v. KCAL-TV Channel 9, the Ninth Circuit held that a television news program’s use of a videotape of the Reginald Denny beating during the L.A. riots was not fair use.(28) These are just two of the numerous examples of uses that are named in the statute (research, news-reporting), yet were nevertheless found to be infringing.(29)

B. §107(1) Factor One – The Purpose and Character of the Use:

The first determination that must be made under factor one is the nature and objectives of the user.(30) Invariably, this boils down to whether the use is commercial in nature. Prior to Luther K. Campbell v. Acuff-Rose Music (the case involving 2 Live Crew’s recording of a parody version of Roy Orbison’s “Oh Pretty Woman“), it was widely believed that a commercial use by the alleged infringer created a presumption against fair use. Indeed, the Supreme Court itself had held in Harper & Row v. Nation Enterprises (where The Nation magazine had included unauthorized excerpts of former President Gerald Ford’s unpublished memoirs before authorized excerpts were to be published in Time magazine) that “[every] commercial use of copyrighted material is presumptively an unfair exploitation of the monopoly privilege that belongs to the owner of the copyright.”(31) However, in Campbell, the Court explicitly reversed itself, noting that for commercial uses to be presumptively unfair would swallow the permitted uses if they were for profit.(32)

The other side of the question regarding purpose and character of the use is whether the use is transformative. The Supreme Court described a transformative work as one which “supersedes the objects of the original,” or adds something new, with a further purpose or different character, altering the copyrighted work with new expression, meaning or message.(33) Justice Souter has suggested that using an original “to get attention or to avoid the drudgery in working up something fresh” indicates non-transformative use. The transformative nature of the new work will be considered together with the issue of whether the work is commercial. In Campbell, the Supreme Court noted that while

transformative use is not absolutely necessary for a finding of fair use, the goal of copyright, to promote science and the arts, is generally furthered by the creation of transformative works. Such works lie at the heart of the fair use doctrine’s guarantee of breathing space within the confines of copyright, and the more transformative the new work, the less will be the significance of other factors, like commercialism, that may weigh against a finding of fair use.(34)

When analyzing the commercial nature of a work with its transformative nature, a sliding scale is created. The closer the new work is to direct copy, the smaller the range of permitted commercial uses. The more transformative the new work, the greater the range of allowed commercial uses. Weighing all of these factors together, a trial court will articulate the “winner” on this factor, and to what extent that party prevailed. A finding on this first factor is not dispositive however, for all four factors must be considered together.

C. §107(2) Factor Two – The Nature of the Copyrighted Work:

This analysis focuses exclusively on the copyrighted work that has been infringed. It is made up of two major determinations: how close the original is to the “core of copyright protection” and whether the original is published. First, a court must determine what level of protection should be accorded the copyrighted work. This is achieved by determining how close the original is to the core of copyright protection – how creative or highly expressive a work is versus its being factual in nature. Copyright provides higher protections to creative works, but also “recognizes a greater need to disseminate factual works than works of fantasy or fiction.”(35) While it is obvious that a news broadcast would receive less protection than a science fiction motion picture, courts must often make difficult decisions under this factor, and reasonable people can differ as to how a work should be characterized.

[Even] within the field of fact works, there are gradations as to the relative proportion of fact and fancy. One may move from sparsely embellished maps and directories to elegantly written biography. The extent to which one must permit expressive language to be copied, in order to assure dissemination of the underlying facts, will thus vary from case to case.(36)

For example, in numerous cases in different courts over the same copyrighted material, different determinations were reached regarding the nature of the works of L. Ron Hubbard, the founder of the Church of Scientology.(37) While some judges found Hubbard’s works to be very creative and imaginative,(38) others found Hubbard’s writings more factual and informative.(39)

Second, a court will determine whether or not a work is published. While this is ordinarily a relatively easy finding, the implications are great. The scope of fair use is narrower with respect to unpublished works.(40) Again, policy goals of the Copyright Act are at work. The Supreme Court said it best in Harper & Row:

While even substantial quotations might qualify as fair use in a review of a published work or a news account of a speech that had been delivered to the public or disseminated to the press, the author’s right to control the first public appearance of his expression weighs against such use of the work before its release. The right of first publication encompasses not only the choice whether to publish at all, but also the choices of when, where, and in what form to publish a work.(41)

Thus, published works, while still protected, are nevertheless available to be transformed into new works, commented upon, criticized, or utilized in teaching or research. An example of the published/unpublished determination can be found in yet another Church of Scientology case where the court ultimately found fair use of published works, but against fair use with respect to unpublished works posted on the Internet.(42)

D. §107(3) Factor Three – The Amount and Substantiality of the Portion Used:

This factor is also made up of two elements: a quantitative analysis and a qualitative analysis. With respect to the quantitative element, the extent of the permissible copying varies with the purpose and character of the use as determined in factor one as well as foreshadowing the fourth statutory factor by revealing the degree to which the new work may serve as a market substitute for the original or its potentially licensed derivatives.(43) For example, in Harper & Row, the Court said that substantial quotations of Ford’s memoirs would have been permissible had Nation not “scooped” Time, thus destroying the commercial value of the serialization rights (factor four).

When measuring this factor, courts often use percentages to express the amount of copying that has taken place. However, because no percentage can be called a bright line, courts also will simply characterize the amount of copied material. Some will do both.(44) Because “no plagiarist can excuse the wrong by showing how much of his work he did not pirate,”(45) a second analysis is warranted.

The second portion of this analysis measures the qualitative element of the copied work. The closer the copied material comes to the “heart” of the original work, the less fair use is allowed. In Harper & Row, Nation had taken only 300 words from Ford’s entire manuscript. However, those words constituted “the heart of the book” as they dealt with Nixon’s pardon. As one editor testified at the trial, the chapter on the pardon was “the most interesting and moving part of the entire manuscript.”(46) Likewise, the Court in Campbell found that the use of the opening guitar riff from Roy Orbison’s Oh Pretty Woman, was the heart of that work. It too was the portion taken by 2 Live Crew and incorporated into the new work.(47) A problem under this determination is deciding who measures the “heart” of the work. In many cases, it is the portion taken by defendant that is deemed the “heart” of the work. In one case involving raw video news footage, the Ninth Circuit held this factor against the defendant who had taken only several seconds of footage for use on the evening news. The court reasoned that in preparing a newscast, editors selected the most effective and illustrative scenes from the raw footage available.(48) The analysis was similar in Michigan Document Services v. Princeton University Press where an 8-5 split full panel of the Sixth Circuit held that a commercial copyshop’s reproduction of substantial segments of copyrighted works of scholarship was not fair use when bound into “coursepacks” and sold to students for use in fulfilling reading assignments given by university professors.(49) The panel noted that the excerpts were selected by the professors, and that alone could serve as an indicia of the heart or “value” of the copied work.

Balancing these two determinations together provides another opportunity for courts and reasonable people to differ. While copying of entire works generally causes this factor to tilt toward the original author, other cases are not so clear cut. Courts have had to consider the amount and substantiality of portions taken from photographs(50) and film clips,(51) motion picture series characters and plots,(52) television series,(53) children’s book series,(54) and radio programs,(55) just to name a few.

E. §107(4) Factor Four – Effect of the Use on the Market:

The Supreme Court stated in Harper & Row that the fourth statutory factor, the effect on the potential market, was “undoubtedly the single most important element of fair use.”(56) Although a couple of recent appellate court opinions have suggested that the Supreme Court may have now abandoned that idea and considers no one factor to be more important than the others,(57) one can easily surmise that this is the most important factor to the litigants, and probably the motivating factor in the lawsuit.

Like the other factors and elements of the fair use analysis, the fourth factor does not operate in a vacuum. Determinations and characterizations made in factors one through three will affect the outcome of factor four. “Market harm is a matter of degree, and the importance of this factor will vary, not only with the amount of harm, but also with the relative strength of the showing on the other factors.”(58)

The burden of proof to show market effect hinges on whether the court has determined the use to be commercial or non-commercial. If the challenged use is non-commercial, the burden of showing market effect (usually harm) lies with the copyright holder. Conversely, the party asserting the fair use defense has the burden of showing no market effect if their use has been deemed commercial in nature.(59)

Once the burden has been laid upon the appropriate party, market harm (or lack thereof) can be shown several ways. First, a party can show the direct effect on the market. An example of this can be found in Sega Enterprises v. Maphia, et. al.(60) Sega involved a BBS (which is a computer bulletin board accessible to users by modem) which offered 22 video games created or licensed by Sega as well as six “beta” versions of games soon to be released. Subscribers to the BBS could upload or download games onto the system. The defendant sold “converters” that allowed the downloaded data to be converted into a game that could be played on a Sega machine. Obviously, this was not a fair use. The infringement competed in the marketplace with its original author.

A second way to measure market harm is to “show that if the challenged use should become widespread, it would adversely affect the potential market for the copyrighted work.”(61) Evidence of “substantial harm”(62) would weigh against a finding of fair use because the licensing of derivatives is an important economic incentive to the creation of originals. This is the preferred test. A commercial use infringer is thus burdened with the awesome task of showing that if its use were to become prevalent, that it still would not affect the potential market for the copyrighted work.

“Potential market” includes the market for derivative works as well as licensing possibilities. While this initially would seem to be almost limitless, it is in fact limited by common sense. As the Second Circuit recognized in American Geophysical, a copyright holder with no license agreement can always claim some degree of adverse effect on its potential licensing revenues because of the defendant’s use.(63) However, “[t]he market for potential derivative uses includes only those that creators of original works would in general develop or license others to develop.”(64) In fairness, only “traditional, reasonable, or likely to be developed markets” are considered. Evidence of a copyright holder’s current and future plans for derivative works or licensing would be highly probative in defining the copyrighted work’s “potential market.”(65) A defendant may be permitted to fill a market niche that the copyright owner has no interest in occupying.(66) Likewise, if the copyright holder has an interest or has begun to exploit a licensing market, then potential revenues from such licenses are appropriately considered under the fourth factor.(67)

An illustrative case applying this factor is Infinity Broadcasting v. Kirkwood.(68) Kirkwood had placed radio receivers in each of America’s ten largest radio markets. Through use of a touch-tone telephone, his customers could dial into a receiver in a particular city and listen to a broadcast in these cities in real-time. Kirkwood’s service thus rebroadcast copyrighted radio programs for a profit and without the payment of royalties to any of the radio stations which he made available to his customers. The court found that Kirkwood’s use was fair. This decision was based in large part on the fact that Kirkwood served a different market than the radio stations. Infinity’s purpose, the court said, was to generate revenues from advertisers and syndication rights, thus their market was the masses. The parties had stipulated however, that Kirkwood’s service was not intended for the general public, but had been marketed to radio stations, consultants, advertisers, performance rights organizations and others in the advertising and entertainment industries.(69) The court determined that Kirkwood’s service had no impact on the value of Infinity’s copyrighted programs as a means of generating advertising or syndication revenues.(70)

Other examples of the nuances of the fourth factor demonstrate that while the market must be “traditional and reasonable”, the harm experienced by that market may go beyond the normal economic harms. In Dr. Seuss Enterprises v. Penguin USA,(71) the court found market harm from the adverse affect on Dr. Seuss’s reputation and good will resulting from the defendant’s book about the O.J. Simpson murder trial.(72) In Metro-Goldwyn-Meyer v. American Honda,(73) the court found market harm in loss of potential endorsement value and “tie-in” marketing of products with motion pictures.(74) Market harm is not always found just because litigants are market competitors. In Sega Enterprises v. Accolade,(75) the Ninth Circuit Court of Appeals found that notwithstanding the fact that the parties were competitors and that Sega would suffer minor economic loss, Accolade’s copying of a limited amount of source code in the process of reverse engineering that code was permissible because it was necessary for Accolade to produce games compatible with the Sega player.(76) As these examples have shown, the fourth factor analysis has evolved into an amorphic and sometimes unwieldy determination. Counsel should always consider the wide variety of arguments that can be made under this factor.(77)

IV. INTERNET SCENARIOS/HYPOTHETICALS

As mentioned earlier, new technologies in multimedia and especially the Internet have heightened concern among many that copyrights will no longer be respected in the digital age. This has resulted in a spate of bills being introduced into Congress in an effort to amend the Copyright Act for purposes of clarification and sometimes to grant immunities.(78) Regardless of the outcome of these bills, the fair use defense still remains a viable argument in the face of infringement. The following are a series of scenarios and hypotheticals which are provided to show the range of situations in which the fair use defense could be raised in the context of the Internet.

• Al browses on-line and “surfs the web.” As he does so, Al’s computer makes copies onto its hard drive of every page viewed during Al’s on-line session. While it’s generally considered that there is an implied license for users to do this, one court has suggested that this is also a fair use.(79)

Ÿ While surfing the web at the office, Betty visits CNBC.com. There she sees an interesting but rather long story on the life of Princess Diana. Not having time to read it, Betty prints it out to read on the train ride home. Betty’s use is similar to media/time shifting which was approved by the Supreme Court in Sony.(80) It also is permissible to make copies for convenience,(81) and clearly making a single hard copy of an interesting article on the web would constitute fair use under both Sony and American Geophysical.

Ÿ Charlie is concerned about the plight of Angola. He maintains a non-commercial(82) web site espousing the increase in U.S. aid to Angola and detailing the conditions of Angolans and the corruption in their government. To lend credibility to his position, Charlie copies sections of text as well as some photos and maps from magazines and news-related web sites such as CNN.com which are incorporated into his web site. Charlie’s use of the copyrighted material is probably fair. Newsgroup discussions and web sites of current events, political or celebrity figures, social movements, news or editorial commentary would generally be fair(83) because 1) news-related and factual materials are accorded lower protections than other types of copyrighted materials;(84) 2) comment and criticism are recognized fair uses under §107; 3) the copied portions are only what was necessary to convey the facts or ideas;(85) 4) the use is non-commercial in nature;(86) and 5) there is a First Amendment free expression aspect to web sites of this type. This is reflected in the idea that the scope of fair use is wider when the use relates to issues of public concern.(87)

• Dolly is a big fan of daytime soap operas, particularly All My Children. While watching each day, Dolly faithfully takes notes detailing the plot twists of the show. Later, she updates the non-commercial web site she maintains as a sign of her devotion to the show. It contains an on-going general plot summary dating back to 1993 along with Dolly’s commentary on the characters and her predictions about where the show should go. She also provides a means for visitors to exchange commentary about the show with each other. Dolly has many “regulars” and has even proudly posted a letter she received from the head writer of All My Children commending her on her home page.(88) Dolly’s use would most likely be fair, in large part because her use is transformative, non-commercial and because she does not cause any market harm. Her commentary and predictions would be sufficiently transformative to negate what little market harm she might do to the show. Further, there seems to be little market for syndication of daytime soap operas after they have aired, and Dolly’s letter from the head writer would seem to be an acquiescence.

• Eddie, Dolly’s cousin, is a devoted fan of the sitcom Seinfeld. Like Dolly, he too maintains a web site to pay homage to his favorite show. As a matter of fact, there are about 75 other web sites maintained by people like him. But Eddie’s site is very popular, and for good reason. By visiting his page, one can download audio and video clips of the show Eddie dubbed off his VCR. Eddie also has posted the entire script (along with stage directions) of every Seinfeld episode. After Eddie started getting over a thousand “hits” a day on his site, he decided to start selling advertising on his page to off-set his expenses and make a little money on his hobby. Eddie’s use is not fair. Not only is his use commercial, but the extent of his copying rises to a level where it could potentially interfere with the market for derivative works or decrease the syndication value of the show.(89) It is possible that a person who missed Seinfeld on Thursday night could visit Eddie’s site and read the script, as well as see and hear some of the “highlights” of the show without having to rent a video or tune-in to the re-run.(90)

• Frank just developed a new technology that will provide a means by which “micropayments” can be made for viewing material on-line. For example, as a part of a user’s monthly access fee with his Internet provider, he deposits a sum into a debit account. Now when he visits the New York Times site on-line, he is presented with an initial menu page. When he selects a story to read, several cents are deducted from his account. Frank’s invention could have profound effects on the Internet, because now, every hyperlink is potentially commercial in nature(91) and market harm under the fourth factor would be more easily shown. This technology, by the way, is only a few years from reality.

• Gertrude is a consumer activist. She heads an organization called LobbyWatch which publicizes the activities of lobbyists to those outside the beltway. Her principal targets are the lobbying activities of big tobacco, the gun lobby, and insurance carriers. Gertrude’s web site regularly posts flyers and mass mailings that such groups send to their members (Gertrude is on the mailing list) and form-letters that such groups mail to Congressional representatives which Gertrude surreptitiously obtains from a friend who is a Capitol Hill staffer. Gertrude posts the letters in their entirety, and offers no comment on the page with them. In an effort to frustrate Gertrude, several of the lobbyists began placing copyright notices on their letters before sending them out . They then bring suit against LobbyWatch for copyright infringement. Gertrude’s assertion of the fair use defense presents some interesting questions. Gertrude’s use would be considered comment or criticism, and arguably news, scholarship or research. Gertrude’s use is non-transformative. Although the use of the letters would be competitive in the sense the user is criticizing the lobbying efforts, such type of use is not considered to affect the market as is relevant under the fourth fair use factor.(92) There is a First Amendment aspect to Gertrude’s use in that it fosters public debate in the marketplace of ideas. The lobbyists letters are surely eloquent, but would likely be held to be of a factual or informative nature.(93) Additionally, their nature as brief, persuasive documents would make it difficult to separate the ideas contained within them from their expression.(94)

With respect to the letters that Gertrude received from the lobbyists which they mailed to their constituents, her use would likely be held fair. The posting of documents she obtained surreptitiously however, may not be fair use. Assuming the letters to the Congressmen were held to be unpublished, this would militate against an application of fair use. Gertrude’s acts could also be found to constitute bad faith, and as such would weigh against her under the fair use analysis.(95)

This hypothetical is an example of how complex a fair use fact pattern and analysis can become in the face of competing interests and policies. The outcome of a case such as this could vary from court to court and could be easily be overturned numerous times on its way through the appellate process.

V. CONCLUSION: FAIR USE IN THE DIGITAL FRONTIER

The old adage “the more things change, the more they stay the same” is particularly appropriate when discussing the effect of new technology on the fair use defense to copyright infringement. While the fair use doctrine dates back to the English common law, it can still be applicable in today’s digital age. A steady eye on the underlying policies of the fair use doctrine and a creative commitment to applying the doctrine to the challenges of multimedia, digital and Internet technologies will allow the practitioner to confidently raise the fair use defense in the face of the most sophisticated technological infringement claims.

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ENDNOTES

1 Religious Technology Center v. Lerma, 40 U.S.P.Q.2d 1569 (E.D.Va. 1996).

2 U.S. Constitution, Art. I, Sec. 8.

3 Sony Corp. of America v. Universal City Studios, Inc., 464 U.S. 417, 429 (1984).

4 Nimmer On Copyright §1.10[B][2].

5 Harper & Row, Publishers, Inc. v. Nation Enterprises, 471 U.S. 539, 556 (1985) quoting Consumers Union of U.S. v. General Signal Corp. 724 F.2d 195, 203 (2nd Cir. 1983).

6 Harper & Row, 471 U.S. at 556 (explaining Justice Brennan’s concurrence in N.Y.Times v. U.S. 403 US 713, 726 (1971)).

7 International News Service v. Associated Press, 248 U.S. 215, 234 (1918).

8 Harper & Row, at 556-57.

9 Luther R. Campbell v. Acuff-Rose Music, Inc., 114 S. Ct. 1164 (1994) citing Carey v. Kearsley, 4 Esp. 168, 170, 170 Eng. Rep. 679, 681 (K.B. 1803) (Lord Ellenborough).

10 See Id. at 12-13. All citations to the Campbell decision are to 1994 U.S. LEXIS 2052 pagination.

11 Emerson v. Davies, 8 F. Cas. 615, 619 (No.4,436) (CCD Mass. 1845).

12 Campbell, at 15.

13 The statute is clearly influenced by Justice Story’s early judicial doctrine. In Folsom v. Marsh, Story set forth what became the basis for statutory fair use: “look to the nature and objects of the selections made, the quantity and value of the materials used, and the degree in which the use may prejudice sale, or diminish the profits, or supersede the objects, of the original work.” 9 F. Cas. 342, 348 (No. 4,901)(CCD Mass. 1841).

14 Nimmer On Copyright §13.05; a prima facie case of copyright infringement is established by the plaintiff showing: 1) ownership of the copyright, and 2) copying of the constituent elements of the work that are original. Nimmer, at §13.01.

15 Campbell, at 16 (quoting H.R. Rep. No. 94-1476, p. 66 (1976); S. Rep. No. 94-473, p. 62 (1975)) (hereinafter Senate Report).

16 Campbell, at 16 (quoting Stewart, et. al v. Abend, 495 US 207, 236 (1990)).

17 Campbell. at 17; Nation at 560; Sony at 448.

18 Campbell, at 17.

19 Campbell, at 17 (quoting Senate Report at 62).

20 855 F. Supp. 905 (E.D. Mich. 1994).

21 74 F.3d 1512 (6th Cir. 1996); 1996 WL 648261

22 99 F.3d 1381 (6th Cir. 1996), cert. denied, 117 S. Ct. 1336 (1997).

23 “The malleability of fair use emerges starkly from the fact that all three [of the Supreme Court’s recent fair use decisions – Harper & Row, Sony, and Campbell] were overturned at each level of review, [and]two of them split opinions at the Supreme Court level.” Nimmer, at §13.05.

24 B. Kaplan, An Unhurried View of Copyright, vii-viii (1967).

25 Religious Technology Center v. Lerma, 40 U.S.P.Q.2d 1569 (E.D.Va. 1996).

26 §107

27 37 F.3d 881 (2nd Cir. 1994).

28 108 F.3d. 1119 (9th Cir. 1997).

29 Conversely, the Supreme Court found the taping of programming for later viewing to be a non-infringing fair use although “time-shifting” is not one of the named uses. Sony, 464 U.S. 417 (1984).

30 American Geophysical Union v. Texaco, 60 F.3d 913, 922, n. 8 (2nd Cir. 1994).

31 Harper & Row, at 562; citing Sony, at 451. In Harper & Row, the Supreme Court said the use of the excerpts was not a fair use.

32 Campbell, at 28-33. In Campbell, the Supreme Court sent the case back for further proceedings.

33 Campbell, at 19.

34 Campbell, at 19-20.

35 Harper & Row, at 563.

36 Id. at 563, quoting Gorman, Fact or Fancy? The Implications for Copyright, 29 J. Copyright Soc. 560, 561 (1982).

37 “[R]easonable people can disagree over how to classify Hubbard’s works.” New Era Publications Int’l v. Carol Publishing Group, 904 F.2d 152, 158 (2d Cir. 1989).

38 “The undisputed evidence shows that L. Ron Hubbard’s works are the product of his creative thought process, and not merely informational.” Bridge Publications, et. al. v. Vien, 827 F. Supp. 629, 635-36 (S.D. Cal. 1993)

39 Religious Technology Center v. Lerma, 908 F.Supp. 1362, 1367 (E.D.Va. 1995).

40 Harper & Row, at 564.

41 Id.

42 Religious Technology Center v. Netcom, 1995 U.S. Dist. LEXIS 16184 (N.D.Cal. 1995).

43 Campbell, at 34 citing Sony, at 449-50, Harper & Row, at 564, and Leval, Toward a Fair Use Standard, 103 Harv. L. Rev. 1105, 1123 (1990).

44 See Harper & Row, at 565. The Court mentions a percentage, but then says infringing article “structured around quotes which serve as dramatic focal points.”

45 Sheldon v. Metro-Goldwyn Pictures Corp., 81 F.2d. 49, 56 (2d Cir. 1936).

46 Harper & Row, at 565.

47 Campbell, at 37. The Court recognized that in cases of parodies, taking the heart of the original is necessary because it is assured of conjuring up the original in the minds of the parodist’s audience. The Court further said that a parodist should take no more than is necessary to conjure up the original.

48 Los Angeles News Service v. Audio Video Reporting Service, 973 F.2d 791 (9th Cir. 1992).

49 99 F.3d 1381 (6th Cir. 1996), cert. denied, 117 S. Ct. 1336 (1997).

50 See Art Rogers v. Jeff Koons, 960 F.2d 301 (2d Cir. 1992) (photograph of couple holding eight puppies copied by defendant in sculpture not fair use); Leibovitz v. Paramount Pictures, 948 F. Supp. 1214 (S.D.N.Y. 1996) (Leslie Neilsen advertisement for upcoming film Naked Gun 33 1/3: The Final Insult held fair use parody of Demi Moore’s nude, pregnant photo for cover of Vanity Fair).

51 See Monster Communications, Inc. v. Turner Broadcasting System, Inc., 935 F.Supp. 490 (S.D.N.Y. 1996) (court denies plaintiffs request for injunction against the release of Turner’s When We Were Kings, a movie about the life of Muhammad Ali; court finds that Turner is likely to show that its use of less than two minutes of footage from Ali’s 1974 heavyweight title fight is a fair use).

52 See Metro Goldwyn Mayer, Inc. v. American Honda Motor Co., 900 F.Supp. 1287 (C.D.Cal. 1995) (Honda Del Sol commercial which portrays “a high-thrill chase of the ultra-cool British charmer and his beautiful and alarming sidekick by a grotesque villain in which the hero escapes through wit, aided by high-tech gadgetry” held not fair use of “classic James Bond adventures”).

53 See Twin Peaks Productions, Inc. v. Publication Int’l, Ltd., et. al., 996 F. 2d 1366 (2d Cir. 1993) (Defendant’s book describing aspects of the first season of the Twin Peaks television series and which contained information on characters detailed plot summaries and trivia held not fair use of series copyrights); Castle Rock Entertainment v. Carol Publishing, 955 F. Supp. 260 (S.D.N.Y. 1997) (Defendant’s Seinfeld Aptitude Test, a book consisting of trivia about the show, identified and appropriated the most important elements of the sitcom Seinfeld – no fair use).

54 See Dr. Seuss Enterprises v. Penguin Books USA, 109 F.3d 1394 (9th Cir. 1997) (Defendant’s book The Cat NOT in the Hat about the Brown/Goldman murders and OJ Simpson’s trial held not fair use of the Cat in the Hat).

55 See Infinity Broadcasting v. Kirkwood, 965 F.Supp 553, 557 (S.D.N.Y. 1997) (court held third factor against defendant’s service based on “fairness” because neither party could show the extent of actual retransmission, let alone the content, and defendant’s service allowed subscribers to monitor radio programs in distant cities 24 hours a day).

56 Harper & Row, at 566, citing Nimmer §13.05

57 See American Geophysical, 60 F. 3d, at 926.

58 Campbell, at 42, n. 21.

59 Sony, at 451.

60 948 F. Supp 923 (N.D.Cal. 1996).

61 Harper & Row, at 568, quoting Sony, at 451.

62 Campbell, at 46.

63 American Geophysical Union v. Texaco, Inc., 60 F.3d 913 (2d Cir. 1994).

64 Campbell, at 44.

65 Litigants should always address the market for derivatives and licenses. In Campbell, 2 Live Crew asserted that its use of the song Pretty Woman was a parody. While the Court did find the band’s use to be parody, the Crew was put at a disadvantage under factor four because they failed to address the potential market for a non-parody rap version of Pretty Woman. The Court sent the case back for further proceedings on this issue.

66 Twin Peaks Productions, Inc. v. Publication Int’l, Ltd., et. al., 996 F. 2d 1366, 1377 (2d Cir. 1993).

67 American Geophysical, at 930.

68 965 F. Supp 553 (S.D.N.Y. 1997).

69 These were the typical users of Kirkwood’s service who used it to monitor advertising, gather statistical data for performance rights organizations, or audition on-air talent.

70 This is a good place to remind the reader of the impact of the other three factors in the overall outcome of a fair use determination. The court found factor one favored Kirkwood because although his retransmissions were not transformative, they were for a limited and different purpose than used by Infinity. As Kirkwood’s use was for a commercial purpose, many courts would have held that this factor favored Infinity. Factor two went to Infinity with the recognition that its copyright was predominately a compilation composed of independently copyrighted works (songs, commercials). Factor three went to Infinity as well because Kirkwood offered the possibility of retransmission of entire copyrighted works.

71 109 F.3d 1394 (9th Cir. 1997).

72 The defendant’s book was an attempt at parody entitled The Cat NOT in the Hat! The court borrowed a market harm test from the Second Circuit which sought to “strike a balance between the benefit the public will derive if the use is permitted and the personal gain the copyright owner will receive if the use is denied. The less adverse effect that an alleged use has on the copyright owner’s expectation of gain, the less public benefit need be shown to justify the use.” Id at 1403, quoting MCA, Inc. v. Wilson, 677 F.2d 180, 183 (2d Cir. 1981).

73 900 F.Supp. 1287 (C.D.Cal. 1995).

74 The court found the fourth factor to tip in favor of MGM because Honda’s use of the James Bond-like character and scenes diluted the market value of movie tie-ins and endorsements by Bond movies. The court specifically noted the arrangements to feature the BMW Z3 Roadster in the movie Goldeneye. “The court can very well imagine [that] a majority of the public, when viewing the Honda commercial and a future BMW ad, would come to the conclusion that James Bond was endorsing two automobile companies.” Id. at 1301.

75 Sega Enterprises, Ltd. v. Accolade, Inc., 977 F.2d 1510 (9th Cir. 1992).

76 Significant to this case was the fact that deconstructing Sega’s code was essential to allow Accolade to produce a game to be played on the Sega game player. After noting that it was free to consider public benefit resulting from a particular use, the court held that “an attempt to monopolize the market by making it impossible for others to compete runs counter to the statutory purpose of promoting creative expression and cannot constitute a strong equitable basis for resisting the invocation of the fair use doctrine.” Accolade, 977 F.2d at 1523-24.

77 When the potentially infringing uses are parody or criticism, courts have recognized since Campbell that even if the use is commercial in nature, the parody or criticism does not generally cause market harm to the copyright holder because the two uses serve different purposes. Authors do not typically also produce parodies of their own works nor can a criticism, scathing though it may be, compete in the marketplace with the original. See Campbell, at 40-48.

78 See, e.g., WIPO Copyright and Performance and Phonograms Treaty Implementation Act of 1997 (introduced in the Senate); Digital Copyright Clarification and Technology Education Act of 1997 (introduced in the Senate). Both available at <http://thomas.loc.gov>

79 Religious Technology Center v. Netcom On-Line, et. al., 1995 U.S. Dist. LEXIS 18173 (N.D.Cal. 1995). This court suggests that browsing on-line is the functional equivalent of reading a book in a library (although thousands can read at once) and that there is not, at least at this point, a market for licensing the temporary copying of digital works onto computer screens to allow browsing. Id. at 47.

80 Sony, at 455 n. 40.

81 American Geophysical, 60 F.3d at 923.

82 The term “non-commercial” web site will be used to refer to those sites which do not derive revenues through subscriptions, passwords, advertisements or other commercial support. Such sites are typically maintained by individuals who pay for the site out of their own pocket.

83 Compare Religious Technology Center v. Lerma, 40 USPQ 2d 1569 (E.D.Va. 1996) (even though defendant’s use was non-commercial, posting entire unpublished works went beyond fair use).

84 “The law generally recognizes a greater need to disseminate factual works than works of fiction or fantasy.” Harper & Row, at 563.

85 The greater the portion taken from the original, the less it looks like fair use. “[N]o more of a work may be taken than is necessary to make the accompanying comment understandable.” Supermarket of Homes, Inc. v. San Fernando Valley Board of Realtors, 786 F.2d 1400, 1409 (9th Cir. 1986).

86 However, the more transformative the use, the more commercial the site could be. The new work must be more than “merely the product of ‘the facile use of scissors.’ [or cut and paste as the case may be].” Maxtone-Graham v. Burtchaell, 803 F.2d 1253, 1260 (2d Cir. 1986) (quoting Folsom v. Marsh, at 345). See supra Section III.A.

87 National Rifle Association v. Handgun Control Federation of Ohio, 15 F.3d 559 (6th Cir. 1994).

88 These facts are a variation on one of many Beverly Hills 90210 sites on the web. One site in particular claimed “visits” from cast members and posted a letter from the show’s executive producer who offered suggestions and inside information.

89 Seinfeld’s producers, it turns out, have asserted their rights when individuals have sought to “cash in” on the show’s popularity. See Castle Rock Entertainment v. Carol Publishing, Inc., 955 F. Supp. 260 (S.D.N.Y. 1997). The court held that a Seinfeld trivia book took too much and competed in a marketplace which the plaintiff was likely to enter.

90 In Twin Peaks Productions v. Publications International, 996 F.2d 1366 (2nd Cir. 1993), the defendant’s unauthorized book about the characters, story and social phenomena of the first season of the television series Twin Peaks was found to make an unfair use of the copyrighted scripts of the show. The defendant’s detailed plot summaries, the court said, would allow someone to read the book to find out what happened the first season instead of renting a video. “The author of Twin Peaks cannot preserve for itself the entire field of publishable works that wish to cash in on the Twin Peaks phenomenon. But it may rightfully claim a favorable weighing of the fourth fair use factor with respect to a book that reports the plot in such extraordinary detail as to risk impairment of the market for the copyrighted works themselves or derivative works that the author is entitled to license.” Id.

91 See Pamela Samuelson, The Copyright Grab, Wired, Jan. 1996, available at <http://wwww.wired.com/wired/4.01/features/whitepaper.html> Samuelson’s article, among other things, criticizes a proposal, adamantly rejected to date, to exclude any material for which payments could be collected on a reasonable basis for even de minimus copying from being available under fair use.

92 It is unlikely that a lobby group would ever license this type of use, so the market analysis may be more akin to that of parody or criticism. There is no protectable derivative market for criticism. Courts have realistically acknowledged that it is “unlikel[y] that the creators of . . . works [would] license critical reviews . . . of their own product.” Campbell, at 45. Even if a court found Gertrude and the lobbyists to be competitors, it is likely that greater principals of public concern and freedom of expression issues would be over-riding. More than one court has factored in public concern and benefit when analyzing the fourth factor. See National Rifle Association v. Handgun Control Association, 15 F.3d 559 (6th Cir. 1994) (use was fair because it was related to petitioning the government on legislation and commenting of public issues); Sega Enterprises v. Accolade, Inc., 977 F.2d 1510, 1523 (9th Cir. 1992) “Public benefit need not be direct or tangible, but may arise because the challenged use serves a public interest.”

93 See Religious Technology Center v. Lerma, 40 U.S.P.Q. 2d 1569 (EDVa 1996) (works that were intended to be informational in nature rather than creative further from the core of copyright protection).

94 See Harper & Row, at 564 (President Ford’s characterization of the “smoking gun” difficult to convey without using his exact words).

95 See Religious Technology Center v. Netcom On-Line, 1995 U.S. Dist. LEXIS 16184 (N.D. Cal. 1995) (obtaining copies in an unauthorized manner, while not fatal to a fair use defense, tends to weigh in plaintiff’s favor and will be considered among the other factors). Often in such close cases, courts will look for “bad guy” behavior on the part of one party.

The above information is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.

© 1997, Rob Hassett, Atlanta, Georgia. All Right Reserved.