DIGITAL MILLIENIUM COPYRIGHT ACT

Late last year, the President signed into law the Digital Millennium Copyright Act (DMCA). The DMCA amended federal copyright law in several important respects, all of which are meant to update the law's application to technology that did not exist at the time of the last major revision of copyright law. The DMCA also enabled Congress to ratify the World Intellectual Property Organization Treaties.

The DMCA prohibits circumvention of a "technological measure" that controls access to copyrighted material on the Internet. Such measures include encryption, scrambling, password protection, or other methods of access requiring the use of a "key" from the copyright owner. Going to the source of the problem, Congress also prohibited the manufacturing, importation, and sale of any technology that can be used to circumvent protective technological measures.

Also included in the DMCA is a "fair use" provision for nonprofit libraries, archives, or educational institutions that are open to the public. They may gain access to a commercially exploited copyrighted work solely for the purpose of making a good-faith determination of whether to acquire a copy of that work. The fair use provision does not apply if an identical copy of the work is reasonably available in another form.

To protect the integrity of "copyright management information" concerning a work, the DMCA prohibits intentionally removing or altering such information, or providing such information, knowing it to be false, with the intent to cause or conceal a copyright infringement. The main goal of this provision is to prevent removal of copyright notices, a first step in fraudulently passing off works as not copyrighted.

The sections of the law on circumvention of copyright protection systems and on violating the integrity of copyright management information are enforceable by a civil action for damages and injunctive relief and by criminal prosecution.

The most anticipated part of the DMCA exempts online service providers from copyright liability if certain conditions are met. The term "service provider" is broadly defined and includes not only commercial vendors but also providers of other online services, such as Internet access, e-mail, chat rooms, and web page hosting. The substance of the requirements for the "safe harbors" varies somewhat depending on the type of activity engaged in by the provider, but the requirements have these prerequisites in common: (1) implementation of a policy of terminating service to repeat online copyright infringers; (2) accommodation and noninterference with standard technical measures used to identify and protect copyrighted works; and (3) designation of an agent to receive notifications of claimed copyright infringement.

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THE HOME OFFICE TAX DEDUCTION

The Internal Revenue Service has issued new rules affecting the income tax deduction for the business use of a home. A "home" means a house, apartment, condominium, mobile home, or boat, including other structures on the property, but the term does not include any property used exclusively as a hotel or inn. The rules apply to individuals, trusts, estates, partnerships, and S corporations, but not to other corporations. Certain tests must be met to qualify for the home office deduction.


Nature of the Use

The use of the business part of the home must be exclusive, regular, and for a trade or business. "Exclusive use" means that a specific area of the home must be used only for business, not for personal purposes. The space does not need to be marked off from the rest of the home by a permanent partition, however. There are two exceptions to the exclusive-use requirement: storage of inventory or product samples for a wholesale or retail business located in the home; and operation of a day-care facility in part of the home. "Regular use" of part of the home as a business means that such use must be on a continuing basis, not occasional or incidental. The use of part of the home must be for a trade or business, not simply for any profit-seeking activity, such as working on personal investments.

If the taxpayer uses part of the home for business in the capacity of an employee, the deduction is available only if two additional conditions are met. First, the business use must be for the convenience of the employer. Second, the taxpayer must not rent all or part of the home to the employer while using the rented portion to perform services as an employee.


Nature of the Place

To qualify for the deduction, part of the taxpayer's home devoted to business must be one of the following: the principal place of business; a place where the taxpayer normally meets or deals with patients, clients, or customers; or a structure not attached to the home that is used only for the trade or business.

The primary consideration in determining whether a home office is a principal place of business is the nature and importance of the activities performed there, especially as compared with activities done elsewhere. If the relative importance of the activities does not clearly point to one location, the taxpayer should consider whether most of the time devoted to the business is spent at the home office. If it is, this weighs in favor of taking the deduction.


New Rules

Beginning in 1999, a home office will qualify as a principal place of business for deduction of expenses if it is used exclusively and regularly for administrative or management activities of the trade or business and if there is no other fixed location where the taxpayer conducts substantial administrative or management activities. Examples of such activities include billing, record keeping, ordering supplies, making appointments, and writing reports.

The new rules make it easier to qualify for the deduction. Some circumstances that used to disqualify the home office as a principal place of business no longer do so. For example, without losing the deduction the taxpayer can: have others do administrative or management activities outside the home; conduct such activities at non-fixed locations, such as cars or hotel rooms; and even carry on such activities at fixed locations outside the home, but only occasionally. Also, the deduction will not be lost when the taxpayer chooses to use a home office despite having suitable space outside the home for business activities.

If the home office is not the principal place of business, it may still qualify for the deduction if it is where the taxpayer meets with patients, clients, or customers in the normal course of business, and their use of the home office is substantial and integral to the conduct of the business. Sporadic telephone calls and occasional meetings at home will not satisfy this test. The third way for a home office to qualify is if it is a separate free-standing structure, such as a studio, garage, or barn, that is exclusively and regularly used for the business. Such a structure need not also be a principal place of business or a meeting place for patients, clients, or customers.

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Information and Readiness Disclosure Act

President Clinton recently signed into law the Year 2000 Information and Readiness Disclosure Act (IRDA). The statute's broad purposes are to promote the disclosure and exchange of information related to Year 2000 (often referred to as Y2K) readiness, to assist consumers, businesses, and local governments in responding to Year 2000 problems, and to establish uniform legal principles concerning disclosure and exchange of Year 2000 information.

Although a primary goal of the IRDA is the alleviation of concerns about litigation exposure that have inhibited the free flow of information, the law offers only limited protections. It also does not apply to actual failures that may arise from systems or devices that are unable to handle the change to the Year 2000. Since the IRDA is directed at information exchange between entities, it does not cover statements made to individual consumers in marketing products for personal use.

Even within its intended sphere of coverage, the IRDA's protections are carefully tailored and are limited by exceptions and exclusions. To receive the full measure of the protections afforded by the IRDA, a company should clearly identify its communication of Year 2000 information as a "Year 2000 Readiness Disclosure." To this end, a company is well advised to adopt a policy requiring that all Year 2000 statements be coordinated and disseminated through a centralized point, so that the company speaks with one voice on the subject.

A Year 2000 Readiness Disclosure will not be admissible in court against its maker to prove the accuracy or truth of any statements in it, except where the maker is being sued for repudiating a contract or where the maker's use of the readiness disclosure is in bad faith, fraudulent, or unreasonable. In addition, even if a company's Year 2000 statement is not labeled as a Year 2000 Readiness Disclosure, the IRDA generally shields the company from liability for any allegedly false, inaccurate, or misleading information in the statement.

Since qualifying for protection under the IRDA brings only a limited level of security, companies should consider negotiating protection for themselves in contractual provisions. This may allow for more definite protection that is also more closely tailored to particular businesses. The IRDA does not diminish the ability of parties to enter into such agreements.

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PHOTOCOPYING AND COPYRIGHT LAW

The Copyright Act gives the owner of copyrighted material the right to control its duplication and distribution and prohibits photocopying unless the copying falls within one of the limited exceptions provided for in the Act. For most businesses and individuals, the fair-use doctrine is the only exception that will allow them to photocopy copyrighted materials without the owner's permission.


Fair Use

In deciding whether copying without permission is legal under the fair-use doctrine, courts look at four factors. First, if the purpose and the character of the copying relate to endeavors such as criticism, comment, news reporting, teaching, scholarship, and research, fair use is more likely to be found. Second, the nature of the material to be copied is significant. For example, material meant to be consumed when used, such as workbooks or test answer forms, is less likely to fall under fair-use copying than a page from a newspaper or magazine article. The third factor is the amount and substantiality of the portion of the work that is copied. The sheer volume of copying is not the only consideration, as a single page from a newsletter can be as "substantial" as a whole chapter from a large book. In general, the more importance the copied portion has to the content of the whole document the less likely it is that fair use applies.

The final, and often decisive, factor is the effect of the photocopying on the potential value of the copyrighted work. This relates in part to a dollars and cents consideration of whether the market for the material is adversely affected.

For example, copying and distributing a publication to employees in a company to save the cost of multiple subscriptions may seem harmless, but each saved subscription deprives the copyright owner of income as surely as selling photocopies of the publication on a street corner. The unauthorized use of material can also damage its value in a manner that is harder to quantify, such as copying portions of a book without attribution, which deprives the copyright owner of the credit and publicity he or she otherwise would receive.


Damages

The Copyright Act allows a copyright owner to sue for actual damages caused by an infringement and for any profits that are attributable to the infringement. Since it can be difficult to calculate actual damages, Congress provided an alternative--the recovery of statutory damages in an amount determined by a court within a range set forth in the Act. Because the statutory damages are imposed for each work infringed, substantial damages awards are possible. The owner also can recover for the costs of bringing suit and for attorney's fees.

It may be too much to expect that a person poised at the copying machine will run through the four-part, fair-use test before pushing the "copy" button. If the material to be copied has the copyright symbol on it, however, would-be copiers should at least consider whether they would object to the photocopying if they had written or drawn the material. If the answer is "yes," the copying is almost certain to be a copyright infringement. Even if the answer is "no," the person could still be committing copyright infringement.

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TAXES ON TIPS

A range of benefit programs under the broad umbrella of the Social Security Act is financed largely from taxes paid by employers and employees under the provisions of the Federal Insurance Contribution Act (FICA). The Internal Revenue Code requires every employee to pay a FICA tax, calculated as a percentage of his or her wages. The employer must deduct FICA taxes from wages as they are paid. Independent of the employee's obligation is the employer's duty to pay FICA taxes, which are computed as a percentage of the wages paid by the employer.

With some exceptions, tips received by employees are treated as wages for both the employee's and the employer's share of FICA taxes. On a monthly basis, employees are required to report to their employers in writing all tips received. As far as cash tips are concerned, employees are effectively operating under an honor system, since only they and the customers know the exact amount of the tips.

For the employee's portion of the FICA tax, federal law requires that the employer take into account only those tips that are included in the written report from the employee. However, there is no such statute for the employer's portion. Since the employer's tax must take into consideration tip income not included in the reports from its employees, the question arises as to how the employer must make this calculation. Competing methods advocated by businesses and the IRS have led to litigation in various federal courts, with conflicting results.


Aggregate Method

Most recently, a federal appeals court upheld the IRS in its claim against a restaurant for over $30,000 in back FICA taxes due to the underreporting of tip income received by its employees. The court approved of the IRS's use of the "aggregate method" for calculating the yearly tip income for each employee, including tips not on a written report.

The aggregate method applies an indirect formula that is indirect in the sense that it does not involve an examination of each employee's tax records to determine whether, and to what extent, tip income may not have been fully reported. Instead, the employer calculates the yearly sales attributable to each employee and then multiplies that figure by an average tip rate to arrive at the yearly tip income for each employee. This method advocated by the IRS was approved by the court of appeals in part because a contrary ruling could give an employer an incentive to discourage accurate reporting or simply to ignore inaccurate reporting by employees so that the employer could reduce its FICA taxes.

However, the same argument carried little weight for a federal district court which only a month earlier rejected the aggregate method espoused by the IRS and the resulting IRS claim for $23,000 in back taxes. In that court's view, the federal tax statutes require that the IRS review each employee's tax records and determine that they are inadequate before using an aggregate method to estimate the amount of tips received by the employee.

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IMPROPER USE OF CREDIT REPORTS

The Fair Credit Reporting Act (FCRA) limits access to credit reports to parties having a legitimate interest in obtaining the information. If a credit reporting agency provides a "consumer report" to someone for a purpose other than those set forth in the Act, the agency and the recipient are subject to a suit for damages and attorney's fees.

A recent federal case illustrates how the Act may be applied. James was involved in a car accident and submitted claims of bodily injury and property damage to the other driver's insurance company. Suspecting the claims to be fraudulent, an investigator for the insurer obtained from a credit agency a computer-generated "Inquiry Activity Report" (IAR) on James.

An IAR contains a list of all entities, such as lending institutions or collection agencies, that have inquired about a subject's credit history for the previous two years. Although an IAR does not give the purpose of each inquiry, evidence in the lawsuit brought by James indicated that having numerous inquiries on an individual's report is a negative factor in evaluating credit risk.

A federal district court dismissed James's claim under the FCRA on the ground that the IAR was not a consumer report covered by the Act. The appeals court disagreed. Among the necessary elements for a consumer report is the requirement that its initial compilation, its expected use, or its ultimate use be for one of the permissible purposes listed under the FCRA. The IAR in James's file was a consumer report despite the fact that its ultimate use by the insurance company--to evaluate an insurance claim--was not a permissible purpose under the statute. The document constituted a consumer report because the credit agency initially compiled and expected the IAR to be used for credit-related transactions. Both the credit agency and the insurer were exposed to liability under the FCRA for misuse of a credit report. p>

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HAVE WEBSITE, MUST TRAVEL (TO COURT)

The ease with which an online business can deal with customers in other states has a downside. Setting up a website and reaching out to anyone online could expose a business to lawsuits in any state where a disgruntled customer claims injury. This threat applies even to the smallest of businesses who may think of themselves only in local or regional terms.

The traditional rule, established long before the arrival of the Internet, required that a business have "minimum contacts" in a particular state in order for the business to be sued in the courts of that state. Opening a branch office in a state or sending a sales representative there is easier to categorize as "contacts" than are activities that take place only in cyberspace. Adaptation of the concept to business conducted on the Internet is a work in progress, but some patterns are starting to emerge.


Passive vs. Active Websites

Some courts distinguish between "passive" and "active" websites. A website that is clearly passive is limited to describing the company or providing its address or telephone number. It is unlikely that a passive website, by itself, will subject the business to lawsuits wherever it can be seen. On an active website, customers can make online transactions by signing up for services or buying products. Among courts adopting this approach, the consensus is that an active website constitutes doing business in the users' home states, subjecting the business to the jurisdiction of courts in those states.

The passive/active website distinction is flawed because there are large gray areas between the two ends of the spectrum. Courts have struggled with how to characterize "interactive" websites that do not permit online transactions but allow customers to get on mailing lists, communicate with company representatives, or check on orders.


Internet Server Location

Other courts find jurisdiction in the state where the Internet service provider is located. The problem with this approach is that businesses may use one or more servers not as part of a plan to do business where the server is located but simply for technical reasons. In fact, many businesses and individuals do not even know the location of their server. One state appellate court has concluded that a New York organization could not be sued for defamation in a California court on the ground that it had contracted with an Internet service provider in California. The court accepted the argument that choosing a server with a few keystrokes at the computer was for the purpose of giving access to people all over the world but not to target California in particular.


Non-Internet Factors

If no clear answer to the jurisdiction question emerges from the nature of a business's website activities, the scales may be tipped by non-Internet factors. For example, a manufacturer of beds in one state maintained a passive website in that no sales were conducted through it. The site was accessible to over two million residents in another state halfway across the country, and sales by conventional means in the second state represented over 3% of the manufacturer's gross sales. A federal district court in the second state allowed two of its residents to sue the manufacturer in their home state when their three-year-old was asphyxiated in a bunk bed.


Preventive Measures

Short of retreating from the age of the Internet, there are measures that can be taken to reduce the likelihood of being hauled into court up to three time zones away from your home state. Give thought to the kind of website you use and to its purpose. Some courts have held that the likelihood that jurisdiction can be asserted over an out-of-state business is directly proportionate to the nature and quality of the commercial activity that an entity conducts over the Internet.

While courts may not always enforce the practice against individual consumers, businesses can try to protect themselves by posting choice-of-jurisdiction and choice-of-law provisions on their sites. This is the online version of including in written contracts clauses in which parties agree that any dispute will be resolved in the courts, and according to the laws, of a specified state.

While such agreements can be in written form in the product's packaging, it is more effective to use "click wrap" agreements where a potential customer first must click on a button that says "I accept these terms." A federal court has upheld such an agreement, ruling that a couple who sustained personal injuries at a Las Vegas hotel could not sue the hotel in their home state. Although any customer in any state could reserve a room through the hotel's website, the customer first had to agree to have legal disputes settled in a court in Nevada as part of making the online reservation.

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TRADEMARK INFRINGEMENT

Is a "Hog" Always a "Harley"?

A federal appellate court answered that question in a recent trademark infringement suit, in which the defendant operated a motorcycle repair shop known as "The Hog Farm." In his promotional materials, he prominently displayed the bar-and-shield design mark owned by Harley-Davidson, the renowned manufacturer of large motorcycles. The defendant's materials also referred to his business as an "Unauthorized Dealer." Harley sued to forbid the defendant's infringing use of Harley's design trademark and his use of the term "hog," for which Harley claimed protection as a trademark.

For many years, motorcycle aficionados informally used the term "hog" to refer to large motorcycles, and in particular to those manufactured by Harley. At first, Harley was not entirely content with the association of its products with the term "hog," since that term had become identified with some of the more unsavory motorcycle enthusiasts. Later, however, Harley changed its corporate mind and decided that the association of the term "hog" with its brawny motorcycles was, on balance, positive. Accordingly, it sought and obtained trademark registration for the term "hog," used in connection with motorcycle products and services.

Despite the registration of the mark, the appeals court concluded that the term "hog" had become generically associated with all large motorcycles, not only those manufactured and sold by Harley. No protection could be claimed by Harley for the term "hog" and thus there could be no infringement by the defendant in using that term in the context of his motorcycle repair business. While a rose may always be a rose, a hog is not always a Harley.

The defendant's unauthorized use of Harley's design mark was quite another matter. The defendant claimed it was merely using the mark as a parody of the Harley name and identity. A lawful use of a trademark as a parody must comment on or inform the original use of the mark by the mark's owner. Here, the defendant was using the alleged parody not to comment on Harley's mark but instead to sell a competing service, because Harley's authorized dealers also provide motorcycle service and parts. The court concluded that the defendant's use of the mark infringed Harley's design mark.

In addition, the defendant's use of the phrase "Unauthorized Dealer" was not sufficient to disclaim association with Harley-Davidson. Rarely will the use of a disclaimer be sufficient to avoid the possibility of confusion and thus the defendant was found liable for infringement.

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SKYBOX DEDUCTIONS

A Nebraska corporation made a substantial contribution to a university for a skybox being built in the university's football stadium. Resolving a dispute over deductibility of the contribution, the IRS has ruled that 80% of the contribution is deductible as a charitable contribution where, as in the case before it, the donor receives the rights to purchase tickets for seating in the skybox at athletic events. Amounts representing the value of ticket purchases, the right to use the skybox, passes to visit the skybox, and parking privileges are not deductible as charitable contributions.

The general rule is that a charitable contribution made in exchange for goods and services is deductible if the taxpayer intends to make a payment that exceeds the value of the goods and services, and the payment actually does exceed the value of the goods and services. Taxpayers may rely on the allocation made by the university in determining the value of a lease for a suite or a skybox received in exchange for a contribution. The end result is that the value of the benefits received by the donor is subtracted from the contribution, and 80% of that difference qualifies as a charitable deduction.


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