Background:

When copyrightable work is created by an employee, the work can become the property of the employer in one of two ways: either by qualifying as a “work made for hire” as defined in Section 101 of the U.S. Copyright Act or by having the employee assign the work to the employer.

A “work made for hire” can be created by an employee or by an independent contractor. If created by an employee within the scope of his or her employment, then all such work is automatically owned by the employer as a “work made for hire.” No written agreement or mention in an employee manual is required, though this may be recommended.

HOWEVER, when work is created by an independent contractor, then the law starts getting strange and, as time has passed, out of touch with reality. The work created by an independent contractor will only qualify as a “work made for hire,” and therefore owned by the employer, IF (1) there is a written agreement that the work is a “work made for hire” and (2) the work falls within one of the following categories:  “a contribution to a collective work, as a part of a motion picture or other audiovisual work, as a translation, as a supplementary work, as a compilation, as an instructional text, as a test, as answer material for a test, or as an atlas.” When was the last time you hired a contractor to prepare a test or an atlas?? If the work does not fall in one of these categories, then even a written agreement stating that the work is a “work made for hire” will not be effective in causing the work to be owned by the employer. In such a case, only a written assignment of copyright will be effective. Computer software, websites, graphic work, and music will often not be considered included in one of the “work made for hire” categories.

Let’s be clear on this, the default under the law is that copyright will be owned by the contractor UNLESS there is a written agreement that the work is a “work made for hire” (if it qualifies under one of the listed categories) or the work is assigned in writing to the employer. This is a counterintuitive result – but that’s the law.

To make things worse, what if a business has all of the correct documents in place with the independent contractor, but the independent contractor, hired a different independent contractor, and did not have the correct documents in place with this second independent contract. Well, you get the picture. 

What is an independent contractor? 

There are multiple factors that can be applied to determine whether there is an employment or an independent contractor relationship. Here some of the factors that will be considered and no single factor will be determinative:

1. Does the hiring party have the right to control the manner and means by which the work is created?
2. Who provides the equipment and tools needed to produce the work?
3. Is the hired party working on the hiring party’s premises or on their own premises?
4. Does the hired party have discretion when and how long to work?
5. Is the method of payment hourly or by the project?
6. Is the hired party getting any benefits offered to employess?
7. Is the hiring party withholding taxes? 

Implied License

If you don’t obtain copyright ownership in work you commissioned based upon the above analysis, then all might not be lost. Usually, when work is commissioned and paid for, then the hiring party and independent contractor understood that the goal of the project was that the hiring party was going to use the work that was created. This would create an implied license. Whereas, a “work made for hire” agreement or a copyright assignment, MUST be in writing, a license (other than an exclusive assignment) does not have to be in writing.

The complications begin when trying to define the scope of use granted by an implied license. For instance, if a website was developed for a business, then the business would have the right to use the website for the purpose for which it was created. However, could the business “white label” the website and license it out to third parties? Could the business modify the website or take components from the website and use them for a different purpose than for which is was originally developed?

Bottom Line:

Make sure you don’t fall into this trap for the unwary, and end up paying a lot for a product that you cannot properly exploit.

In the U.S., there is no federal law that requires a website to have a privacy policy. However, California requires any website that collects personally identifiable information from California residents to have a privacy policy. Therefore, in practice, based upon the California law, most websites would be required to have a privacy policy. As far as the FTC is concerned (which operates on the federal level), there is no absolute requirement to have a privacy policy, but if a website does have a privacy policy, failure to comply with the policy will be considered a deceptive practice in violation of the FTC Act. As will be explored below, the FTC is not shy at splitting hairs, in search of deceptive practice claims.

Below is a discussion of some of the more significant and relevant claims of deceptive practices alleged by the FTC Complaint. It should be noted that in the FTC Consent, Facebook denied all allegations.

1.Facebook privacy pages offered options to restrict profile information to “Only Friend” or “Friends of Friends”. However, even when such options were selected, Facebook often still provided profile information to an application that a Friend was using on their Facebook page. Such information included a user’s birthday, hometown, activities, interests, status updates, marital status, education (e.g., schools attended), place of employment, photos, and videos. Even though Facebook allowed users to restrict this access through other pages, Facebook nevertheless represented, according to the FTC, either expressly or by implication,  that access could be limited to “Friends” or “Friends of Friends” on the Profile Privacy Page, and did not indicate that further actions would be required to restrict access to applications of friends.

LESSON: As seen by the above claim, a disconnect between the Privacy Policy and the technical personnel implementing strategies can result in a claim by the FTC for deceptive practices. Furthermore, statements in a Privacy Policy must be vetted to verify that they do not claim, or appear to claim, a higher level of privacy than is actually provided.

2. In November, 2009, Facebook changed its privacy policy to designate certain user information as “publicly available” which change applied retroactively to information provided by users prior to the change. For instance, many users selected privacy settings to (i) restrict profile information from applications used by a Friend, (ii) restrict their Friends List, and (iii) restrict access to profile pictures and pages from users using the “search” function . To implement the privacy changes, Facebook required each user to click through a multi-page notice, known as the “Privacy Wizard.” According to the FTC, the Privacy Wizard did not disclose adequately that users no longer could restrict access to the newly-designated publicly available information via their profile privacy settings or that their existing choices to restrict access to such information via these settings would be overridden.

The FTC alleged that the Privacy Wizard, either explicitly or by implication, indicated that users would have “more control” over their privacy settings, above the prior settings. Which the FTC claimed was not the case. Facebook did not adequately explain that the new changes overrode prior settings as to name, profile picture, gender, friend list, pages, or networks. The FTC claimed that Facebook’s failure to adequately disclose these facts, in light of the representations made, constituted a deceptive act or practice.

LESSON: Changes were made retroactively to prior privacy settings without informed consent, amounts to an unfair act or practice. The FTC requires that (i) material changes to a Privacy Policy be conspicuously disclosed, (ii) users affirmatively opt-in to material changes that affect personally identifiable information previously collected, and (iii) material changes to Privacy Policies be explained clearly and truthfully.  As a note, the simplest way to obtain affirmative consent is the next time a user comes to the website, he or she is directed to an explanatory process and given the option to consent to the new changes.

3. The FTC Complaint states numerous examples of statements from Facebook that even though non-identifiable information is shared with advertisers so that they can provide advertisements targeted to the particular user, personally- identifying information is never provided to an advertiser without prior consent of the user. However, the FTC noted that if ads were clicked, then Facebook would provide to the advertiser a unique ID that Facebook assigns to each user. Apparently, advertisers could use the ID to identify the person. Then they could match criteria that they had selected for serving ads to that person. (e.g., if the ad targeted 23-year-old men who were “Interested In” men and “liked” a prescription drug, the advertiser could ascribe these traits to a specific user), plus the date, time and ad visited. Over time additional traits could be identified.

LESSON: This Claim is the easiest to understand and comply with. Personally identifiable information can only be disclosed as set forth in a Privacy Policy or in a manner otherwise consented to by the user.

BOTTOM LINE: Privacy Policies must be carefully drafted, and be clear and accurate. Management and technical personnel should review and confirm the contents of the Privacy Policy. Privacy Policies should be regularly reviewed to verify that procedural or technical changes are reflected in the Privacy Policy. Material changes to a Privacy Policy that affect previously collected personal user information require affirmative consent from the users. As a result of the FTC Consent, Facebook is now subject to detailed scrutiny and reporting for the next 20 years. It’s important to keep up with changing Internet laws.

On September 29, 2011, the Federal Trade Commission (FTC) issued an Order for Reebok International (RBK) to pay $25 million in refunds to consumers of its EasyTone and RunTone shoes (Reebok Toning Shoes),  and permanently enjoined Reebok  from making claims that such products are effective in strengthening muscles or that wearing such products will result in quantified percentage or amount of muscle toning or strengthening. Since the Internet has spawned a deluge of new marketing channels, Internet attorneys, marketers and advisors need to become sensitive to laws relating to deceptive advertising.

According to the FTC Complaint issued on September 28, 2011, the FTC concluded that Reebok deceptively claimed that the Reebok Toning Shoes had the special ability to strengthen legs and backsides. The FTC found that there was no scientific evidence to back up these claims. Therefore, these claims were both false and deceptive in violation of the FTC Act.

Based upon the FTC Complaint, it would be reasonable to conclude that Reebok out and out lied to consumers. What motive could such large and successful company have for doing such a thing? Well for starters, the market for toning shoes was estimated to be $1 billion in 2010.

Laws Violated

The specific sections of the FTC Act that the FTC claims Reebok violated are: Section 5(a) of the FTC Act, 15 U.S.C. § 45(a), which prohibits “unfair or deceptive acts or practices in or affecting commerce”  and Section 12 of the FTC Act, 15 U.S.C. § 52, which prohibits the dissemination of any false advertisement in or affecting commerce for the purpose of inducing, or which is likely to induce, the purchase of food, drugs, devices, services, or cosmetics.”  For the purposes of Section 12 of the FTC Act, the Reebok Toning Shoes are considered “device[s]”.

Specific False Representations

According to the FTC Complaint: Reebok represented, among other things, that walking in Reebok Toning Shoes “is proven to tone and strengthen the lower body — toning and strengthening the gluteus maximus muscle 28% more than walking in a typical walking shoe, and toning and strengthening both the hamstring and calf muscles 11% more than walking  in a typical walking shoe.”  Reebok further represented “that running in RunTone shoes increases muscle activation, toning, strength, and endurance as compared to running in typical running shoes.” 

Even before the FTC Order, a major industry group had questioned the claims contained in the Reebok Toning Shoe advertising campaign. On January 10, 2011, the National Advertising Division (NAD) had recommended in a decision that Reebok discontinue certain claims Reebok was making for the Reebok Toning Shoe line made in advertising due to failure of Reebok to provide substantiation for its fitness claims. The NAD decision noted that Reebok claimed that the Reebok Toning Shoes “feature something called ‘moving air technology,’ which involves pockets of shifting air. This allegedly creates a phenomenon called ‘micro-instability,’ something akin to what happens when one sits on a stability ball or stands on a wobble-board.” Reebok when responding to NAD’s inquiry, claimed that the Reebok Toning Shoes are the only fitness shoes that incorporate a “balance ball” design on the soles to create instability to each step which, in turn, requires muscles to work harder.

Supporting Advertising Claims 

In response to the NAD request for substantiation, Reebok offered as support a study that it commissioned in 2008.The NAD reviewed a study that Reebok commissioned in 2008 and concluded that the study did not support Reebok’s claims. The study commissioned by Reebok only examined five subjects some wearing the Reebok Toning Shoes, some wearing regular walking shoes and others wearing no shoes. Electrodes were attached to key muscle areas. The subjects chose their own pace for five minutes on a treadmill. The NAD concluded that:  “[T]his was a very small scale study both in number of participants and duration of the study,” and that a sample size of only five subjects is not “representative of the universe of consumers to whom this product making broad performance claims is targeted. It is well-established that tests offered to support product performance claims must reflect real world conditions. Here, the only testing that was conducted was on a treadmill for a five-minute period of time.” Reebok responded in a statement merely that it disagreed with the NAD’s conclusions.

Bottom Line

Manufacturers and advertisers should carefully take note of what the FTC requires in order to support claims similar to those made by Reebok. Such evidence must result from a well-controlled human clinical study which conforms to acceptable designs and protocols. Competent and reliable scientific evidence means tests, analyses, research, or studies that have been conducted and evaluated in an objective manner by qualified persons and are generally accepted in the profession to yield accurate and reliable results.

Background

The U.S. Supreme Court in 1992 (Quill Corp. v. North Dakota) held that states can only impose sales tax where the out of state retailer does business in the state, or has a sufficient “nexus” to the state. This has traditionally been interpreted as requiring the retailer to have a physical retail presence in the state. Therefore, sales tax on purchases from online retailers would usually only be triggered when the purchaser lived in a state where the online retailer had a physical retail presence. Since Amazon has no retail presence in California, California had not previously been able to impose sales tax on purchases of Amazon goods by California residents. Currently, there are five states in which Amazon pays sales tax: Kansas, Kentucky, North Dakota, New York and Washington.

To understand this issue it is important to note that most states including California impose a use tax on purchases by residents from out of state retailers. Such laws require the purchasers to voluntarily pay these taxes to their state. Have you ever met anyone who has voluntarily paid a use tax for an online purchase? Neither have I. See here for a little humor on the subject. The current use tax legislative approach was designed at a time when people would purchase from catalogues or cross state lines to avoid sales tax in their home state. However, such “tax avoidance” did not approach the magnitude of the Internet purchases of today. Once again, law applying to the Internet struggles to catch up with reality. So, in effect, the new California law seeks to require Amazon and similar large online retailers to collect the use taxes that residents are required to pay.

States have been trying to “fix” this problem, and collect much needed tax revenue, by passing laws that redefine in a broad manner when a retailer is considered “doing business in a state” for sales tax purposes. California’s new law allows such presence to be established by (1) a subsidiary in the state where there is at least 80% ownership, or (2) sales referral sources located in the state which refer to the online retailer annually at least $10,000 plus the online retailer has at least $500,000 in annual total sales to in-state residents.  Amazon would qualify on the first criteria, because it has engineering and development subsidiaries in California (including for the Kindle product), and would easily qualify under the second criteria, based upon the numerous Amazon affiliates located in California. Amazon, like other similar companies, has tried to avoid qualifying under the first criteria by practicing “entity isolation”, which basically means that the local presence is operated under subsidiaries and not under the parent company directly. However, the California law essentially closes this loop hole.

Amazon’s Response

Amazon did not take long to remove the gloves. Just hours after Governor Jerry Brown signed the legislation, Amazon severed ties with over 10,000 local affiliates. The immediate effect was to send a message that the new tax law would not benefit California, because the tax gain would be more than offset by loss of jobs and revenue to local affiliates. Then Amazon promptly spent over $5 million to obtain the necessary 500,000 signatures to put a referendum on the ballot to revoke the legislation. At the end of the day, Amazon, which is the largest online retailer, in effect sought to rewrite sales tax policy for Internet.

The Rub

To prevail with the referendum, Amazon would need to convince California residents that it is in their best interests not to impose sales tax obligations on Amazon, and that Amazon is not acting in its own selfish interests, at the expense of it largest source of customers – California. This is possibly a difficult argument to make.

Is Amazon fighting for the viability of the Internet, or are its own interests primarily involved? Well, most people would admit that the viability of the Internet, once the argument for no sales tax, is no longer a question. As a matter of fact, the up to 8% price edge that exemption from sales tax provides online retailers is viewed by Amazon as a critical issue when competing against local brick and mortar state retailers. Not surprisingly, Walmart and Target are opposing Amazon’s referendum. The Wall Street Journal reported that Credit Suisse estimated that the amount of business that Amazon would lose to competitors if it were collecting sales taxes would be 1.4% of its $45.5 billion in annual revenue, or $653 million. Not a small issue. Amazon denied this projected result.

So What Happened?

The California legislature was unable to legislatively have the referendum revoked. Amazon made an offer that, in exchange for exemption from the new law until 2014, it would build two facilities in California and create 7,000 jobs. The Governor rejected this offer. So, as a compromise, California agreed to defer enforcement of the law for one year and Amazon agreed to withdraw the referendum.

Why did Amazon seemingly cave in? Allegedly, the rationale for Amazon’s acquiescence was to give Amazon time to get a federal sales tax regime in place for Internet sales, which would pre-empt state sales tax laws on online retailers. Amazon has supported such federal legislation in the past. Presumably, the tax rate would be lower than many state sales tax rates, and the collection process would be greatly simplified. However, such legislation is in all probability years away. Some say Amazon entered into this compromise in order to have time to move its subsidiaries out of California. In the end, an important factor may very well have been that during the campaign for the referendum, Amazon’s image would be heavily attacked by the opposition and heavily damaged, regardless of the ultimate outcome of the referendum. Lastly, it’s important to note that under the compromise with California, Amazon still has the option to challenge the new law on both Constitutional and other grounds. Stay tuned.

Enter the Copyright Alert System

On July 7^th major Internet service providers (ISPs), the Recording Industry Association of America (RIAA), and the Motion Picture Association of America (MPAA), after beginning negotiations in 2008, announced the establishment of the Copyright Alert System (CAS). The CAS has been designed to ferret out people using peer-to-peer filing sharing applications to transfer copyrighted music and movies. The ISPs that have agreed to implement the CAS include biggies such as Comcast, AT&T, Time Warner, Cablevision and Verizon.

This alliance of ISPs and media companies breaks new ground. In the past, ISPs were accused by media companies of ignoring massive infringing activities. Why join forces now? According to one commentator, the large amounts of bandwidth required for these infringing activities has incentivized the ISPs to assist in reducing such sharing, thereby reducing bandwidth usage. The CAS expected to be implemented later this year.

What to expect

Monitoring software will be utilized to spy on file-sharing services like BitTorrent. When a media company identifies activity suspected to include the unlawful sharing of copyrighted materials, then the media company will notify the suspect’s ISP. The notice to the ISP will include the suspects IP address and the time that the infringing sharing occurred. That information will be enough for the ISP to specifically identify the suspect.

What follows is a series of email notices sent to the suspect. The first level notice informs the suspect that illicit activity has been associated with their computer or device. If the suspect continues the infringing sharing activities, then a series of messages will be sent seeking acknowledgement that the messages have been received. The purpose of this second level of messages in a bit unclear. However, seeking acknowledgement probably will have the effect of suggesting to the suspect that some future threatening response might be in the offing. It is doubtful that anyone will acknowledge receipt of this second level of notices. This second level of message would make any defense of innocent infringement unavailable. If these second level messages have not caused the suspect to cease the activities, then the ISP may implement a consequence or “mitigation measure” as it is called in the CAS.

Mitigation measures could include a reduction of Internet speeds, causing the user to be automatically directed to an educational landing page with information on the topic of copyright infringement, or even suspension of service. These mitigation measures are not obligatory on the ISPs. While, on the one hand, ISPs have a disincentive to terminate service (i.e., they will lose customers), on the other hand, the music and movie industries will likely keep increasing the pressure on the ISPs to impose some “mitigation measures.” The CAS does have an appeal process, which costs $35 to initiate.

While all this might sound fairly threatening, under the CAS, the ISPs will not provide any personally identifying information about the suspected infringers to the copyright holders without a subpoena or court order.

How effective will it be?

It is important to recognize that the CAS does not result in any new laws or regulations. Under current law, ISPs are required to terminate repeat infringers in order to maintain protection of the safe harbor under Section 512 of the Digital Millennium Copyright Act (DMCA). Also, copyright owners can always sue copyright infringers, and send take down notices under DMCA.

The RIAA has indicated that they are not expecting to influence the hardcore infringers. Therefore, after a certain number of CAS warning notices have failed to cause a change in behavior, the notices will cease. The RIAA expects that the notices will cause most infringers to stop even before any mitigation measures are implemented. What would happen if the alleged infringers still don’t comply? Well, the RIAA sued 35,000 alleged infringers between 2003 and 2008, and it has not denied that it may attempt this strategy in conjunction with the implementation of the CAS. However, how they will actually respond is anybody’s guess.

The American Civil Liberties Union (ACLU) and others have expressed concern that the CAS could result in people being denied access to the Internet without any due process. Our justice system considers people innocent until proven guilty. However, the CAS would operate in an opposite manner, by putting the burden of proving innocence on the accused.

The CAS is being billed as an educational program to alert people when their accounts are being used to share infringing materials. The press release announcing the CAS stresses that parents have a right to know if their Internet connection is being used for illicit activities. The expectation, as stated in the fact sheet put out by the Center for Copyright Information (CCI), which was established as part of the CAS, is that once people are aware that their accounts are being used for illicit purposes they will voluntarily comply. The CCI claims that 70% of users will take action if they know that their accounts are being used for infringing activities and that such activities could subject them to legal liability and consequences for violating their ISPs terms of use or acceptable use policy. Stay tuned.

Domains today cost about $10 to register and maintain annually. These new domains will cost $185,000 for the application and $25,000 to maintain annually. These may sound like astronomical fees, but if you consider the economic value and also that various entities can share the “.bank” domain, then the fee might be viewed as quite modest. Additionally, once owned, the owner could sell off usage rights, which could be worth millions. For instance, the owner of “.bank” could sell “chase.bank” to Chase, “citi.bank” to Citi, etc. You can begin to see the possibilities.

How will ICANN handle competing claims for the same domain – like “.bank”? If the competitors can’t resolve the issue themselves, then ICANN will auction the domain. Obviously, in such a case the price could become astronomical. It’s not a first come – first served process like today’s registration of the standard available domains.

This expansion process also has numerous complexities. For instance, ICANN will have to resolve trademark disputes and infringement claims and determine allowable domains when faced with applications for obscene, violent or hate-related names.

Justice Antonin Scalia wrote for the majority: “Like the protected books, plays and movies that preceded them, video games communicate ideas – and even social messages – through many familiar literary devices (such as characters, dialogue, plot and music) and through features distinctive to the medium (such as the player’s interaction with the virtual world). That suffices to confer First Amendment protection.”

Interestingly, Justice Scalia noted that violence as a subject matter in media has never been subject to government regulation. He noted that the plots of Grimm’s Fairly Tales, Snow White, Cinderella and Hansel and Gretel are filled with violence, as well as are children’s cartoons. Generally, the only type of speech that is not protected by the First Amendment is incitement, obscenity and fighting words. The court did not see any compelling basis for adding a new category for protected speech.

The game industry is worth more than $10 billion a year. So the real winners of this decision are industry, not the morals of our children. The decision may be correct. However, the manner in which computer games created today can powerfully affect the psyche of a child, and the long term impact on the child and our society at large, is not a consequence that can be ignored.

This YouTube arrangement is important because it greatly expands the material that video developers can incorporate royalty free into their works. YouTube is expected to unveil this feature through its free online video editor with more than 10,000 selections. The selections will be provided from sources such as C-SPAN, Public.Resource.org, Voice of America, and Al Jazeera.

Traditionally, a defendant accused of committing copyright infringement would be subject to be sued in the courts where the infringement actually occurred. This circumstance would make it more difficult and expensive for a copyright owner to undertake an infringement action against an out of state defendant.

Enter the Internet. The Second Circuit has now held in Penguin Group USA Inc. v. American Buddha, 2011 WL 1044581 (N.Y. March 24, 2011), that for online infringement (in this case where the defendant uploaded copyrighted material to a website), the harm occurs where the copyright owner is located. So, even though in this case the material was uploaded on servers located outside of New York, the court held that the defendant can be sued in the courts of New York. There is a dispute in the courts on this issue, but until the U.S. Supreme Court would decide differently, this is the law applicable when a copyright owner is located in New York.

This case certainly is of benefit to copyright owners located in New York. However, there are copyright trolls who will also appreciate this decision. A copyright troll is a person or business that has “purchased” the right to sue for copyright infringement, even though the troll is not the original copyright owner. Copyright trolls are opportunistic (and not well-liked by good natured folk). So, hopefully the courts will temper this ruling on the basis of fairness, when appropriate.

This month Twitpic, with over 20 million users, which allows users to upload images and link them on Twitter announced that World Entertainment News Network has become the exclusive photo agent partner of Twitpic. This deal allows World Entertainment to sell images posted on Twitpic.

Celebrities that had uploaded images to Twitpic are surprised that their images may now be freely sold by World Entertainment, and they won’t have any control or even receive any royalties. How is this possible? Well, the terms of use of Twitpic state that users grant to Twitpic “a worldwide, nonexclusive, royalty-free, sublicenseable, and transferable license to use, reproduce, distribute, prepare derivative works of, display, and perform the Content in connection with the Service and Twitpic’s (and its successors’ and affiliates’) business.” That’s how. So, it might be important to read those Terms of Use!