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ONLINE SALES RETAILERS COLLECTING SALES TAX: BECOMING A REALITY
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On Cyber-Monday (December 2, 2013), the Supreme Court declined to hear an appeal brought by Amazon objecting to being required to collect sales tax charged by New York State for certain online retail sales. Previously I looked at the issue of what it means to sell over the Internet in all 50 states.  http://allrightsreservedblog.com/2010/09/30/selling-over-the-internet-may-require-knowing-the-law-in-all-50-states/ 

This latest development is a clarion call for small online retailers to pay attention.   Even though the sales tax war is now being fought by large online retailers and the states, the tide is moving closer to Congressional action to create a degree of uniformity.  It remains an open question as to what extent such sales tax collection requirements will reach down to small online retailers.

A majority of states now require online retailers to collect sales tax.  http://www.nolo.com/legal-encyclopedia/50-state-guide-internet-sales-tax-laws.html  However, given the constitutional requirement restricting governments from burdening interstate commerce, the states have employed a variety of approaches to enforce their respective sales tax laws, with varying degrees of success.   Conventional retail store operators and their advocates have long argued that they operate at a competitive disadvantage because sales tax collection requirements are not extended uniformly to online purveyors. Congress has heard this complaint.

This spring, the Senate cleared its version of The Marketplace Fairness Act with broad bi-partisan support and sent it to the House.   https://www.govtrack.us/congress/bills/113/s743/text  The House generated its own bill.  http://thomas.loc.gov/cgi-bin/query/z?c113:H.R.684

            Both bills offer some relief for small online operators.  However the small seller exception is defined as applying to those remote sellers whose gross annual sales receipts in the United States in the proceeding calendar year did not exceed $1 million.  Is this a fair and appropriate threshold?  Should the bills provide for an inflation factor adjustment to this base amount?

While any action is unlikely in 2013, the 113th Congress has another year in session.  If you run a small online retail operation, you should follow developments closely. You may also want to let your Congressional representative know about your interests and views on this issue.

TRADEMARK RIGHTS GIVE WAY TO FREEDOM OF EXPRESSION
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     If you plan to create a work that will include references to famous people, you may well ask will you run into challenges for using such references. A recent 9th Circuit decision offers guidance as to whether your use will withstand the challenge by a famous person who claims you are violating his or her trademark-related rights.

            Brown v. Electronic Arts, Inc., involves James “Jim” Brown (“Brown”), the famous football player, who sued Electronic Arts (“EA”), the manufacturer distributor and seller of the Madden NFL series of football video games.  http://caselaw.findlaw.com/us-9th-circuit/1640518.html?DCMP=NWL-pro_ip  The video games allow users to control avatars representing professional players, and to participate in simulated games.  Some versions of the games included likenesses of Brown.

            Brown’s claims under the Lanham Act, the main federal trademark law, are of particular interest here.  Generally with trademarks, the basic test a mark’s owner is asked to show is whether use of the competing mark is likely to cause confusion in the public’s mind, and Brown’s basic argument was that EA’s use of his likeness without his permission was likely to cause confusion in the mind of the public as to whether he endorsed the video games. 

            However, there is always the understanding that granting exclusive use of marks limits constitutionally protected free speech.  In evaluating the competing interests of protecting the public from deception and protecting freedom of expression, when the identifying material in question appears in an expressive work, Courts tend to shift the balance toward First Amendment considerations.

            Because EA’s videos are considered expressive works, the Court considered whether EA’s use of Brown’s likeness in the videos was relevant.  Given EA’s professed interest in creating a high level of realism for the various football teams portrayed, inclusion of Brown’s likeness in the recreation of the ’65 Cleveland Browns team was relevant.

            While the takeaway from the Brown v. EA decision is that if inclusion of a famous person’s likeness in an expressive work is relevant, you are likely to withstand a challenge to such use under federal law.  However, it is important to keep in mind, despite the dismissal of Brown’s case in federal court, Brown was not foreclosed from pursuing claims under California law for invasion of privacy and unfair businesses practices.  

PRIVACY, CHILDREN AND MOBILE APPS
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On December 10, 2012, the Federal Trade Commission (FTC) released its “Second Kids’ App Report” about privacy protections in apps designed for children.  The FTC’s findings were not pretty.   http://www.ftc.gov/opa/2012/12/kidsapp.shtm  

The report found that many of the apps sold and marketed to children transmitted data about phone numbers, precise location and the unique serial code of the mobile device to advertisers and other third parties.  All of this was without the users’ knowledge or consent.  The FTC reviewed 400 of the most popular children’s apps appearing on Google and Apple platforms.  Of those, only one-fifth disclosed data collection practices. 

As a result of this, the FTC announced its intention to examine the practices of some of the app developers to see whether they violated the Children’s Online Privacy Protection Act of 1998 (COPPA), 15 USC Section 6501-6506   http://www.coppa.org/.  COPPA requires website operators to obtain the permission of parents of children younger than 13 before collecting or sharing certain information about the child users.

National laws and regulations like COPPA and state laws all have their own standards for the collection of personal data.  Additionally, there are the possible effects of future laws and regulations.  This is a difficult landscape for the small firm app developer to navigate because of the large number of moving parts.

If you are an app developer, regardless of whether your programs are geared to children, you need to understand these issues and take pro-active steps as these developments along with current and future regulations will affect your livelihood.

One big player among the states is California.  Its Online Privacy Protection Act (CALOPPA) Cal. Bus & Prof. Code Sections 22575-22579, requires all mobile apps that collect personal data to have a privacy policy.  California is fully prepared to play hardball with developers.  Recently, it sued Delta Airline for failing to comply with CALOPPA.  http://oag.ca.gov/news/press-releases/attorney-general-kamala-d-harris-files-suit-against-delta-airlines-failure

The current environment of consumer concern and industry pressure to move forward has a parallel in the recent past when we all endured a glut of SPAM in our e-mail in-boxes.  Various states enacted legislation to regulate the out of control spam, resulting in a patchwork of state laws and regulations.  In 2003, the federal government enacted the CAN-SPAM Act, 15 USC 7701 et seq.  http://en.wikipedia.org/wiki/CAN-SPAM_Act_of_2003.  Although the Act was not as strict as some wanted, the CAN-SPAM Act did provide order to the cacophony of regulatory schemes as the federal law preempted the state laws.  Needless to say, we are far from getting even that level of consistency.

There is an obvious need for one, nation-wide standard to protect children’s online privacy given the reach of the internet and the broad range of competing interests. But as of now, we are far from a uniform national standard.  And who knows whether Congress will develop a workable fix before the next big online communication method replaces mobile apps? 

However, there is hope. Some groups are trying to be proactive.  For example, the Application Developers Alliance (ADA), http://appdevelopersalliance.org/, and the American Civil Liberties Union (ACLU) have introduced draft app transparency screens.  These prototypes would give consumers a chance to compare the data collection practices of a mobile app, to show the kinds of data collected and the groups with whom it is shared before opening the program.  See http://www.nytimes.com/2012/12/09/technology/effort-to-clarify-mobile-app-data-rights-hits-snags.html    It is not certain that such would meet CALOPPA’s requirement, but it certainly would be a start.

App developers, especially smaller ones, should consider these proactive “fixes” and join a group like the ADA to be kept up-to-date about the many twists and turns in this ongoing story.

Apple’s Woes in China Provide Lessons for All Trademark Owners
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Who would think that Apple does not own the trademark rights in “iPad”?  Few would dream of manufacturing a computer tablet and calling it an iPad.  Well, it appears that Shenzhen Proview Technology (“Proview”), a Chinese company, won a Chinese court decision that, in fact, it and not Apple owns the mark in China.  This ruling led to the seizure of iPads from some retailers and Proview is pursuing such enforcement in 30 other Chinese cites. See http://www.washingtonpost.com/business/technology/chinese-company-to-seek-ban-on-ipad-import-export-in-dispute-over-ownership-of-name/2012/02/14/gIQA3a2dCR_story.html?wpisrc=nl_tech

This situation for Apple is not only awkward but could also have a profound effect on its bottom line.  Worse, since all of Apple’s iPad tablets are manufactured in China, its sales inside and outside of China could be halted.

Apple claims to have bought Proview’s rights in ten different countries including China.  But was that the case?  It appears that Apple dealt with Proview Taipei, a Taiwanese company affiliated with Proview in Mainland China.  Did the Taiwanese company have the requisite authority to bind its Mainland affiliate?  So far it seems that Proview is winning the dispute, although Apple has taken an appeal.

What about smaller firms? Can anyone other than a Fortune 500 company learn from Apple’s travails in China?  Yes! 

  • Lesson 1: Just because you own trademark rights in the United States does not mean you own rights in the identical mark in any other country.   Registration of a mark with the United States Patent and Trademark Office (USPTO) offers protection only within the US borders.  If you plan to sell your goods or services in other countries, it is important to register your mark there. 
  • Lesson 2:  You need to know exactly with whom you are negotiating a trademark deal.  Do they have the requisite authority to sell or license the rights that you are negotiating to purchase?  Apple’s agreement with the Taiwanese company surely contained representations and warranties (“reps and warranties”) as to authority, and may even provide for the indemnification of Apple should the reps and warranties prove to be untrue.  So what?  Regardless of the liability of the Taiwanese company for breach of the reps and warranties, Apple still has a problem.  The money it might get from the Taiwanese company in no way would compensate Apple for its loss of the large Chinese market or its ability to have the product manufactured on the Mainland.
  • Lesson 3: Difficult as it is for large companies to protect their marks worldwide, it can also be a problem and a large expense for smaller firms.

If you hope to make a worldwide splash with your product or services, careful advance planning for how you will introduce your trademarks will be critical to avoid some of the dilemmas now being faced by Apple.

 

 

INSURANCE AND PROTECTING YOUR INTELLECTUAL PROPERTY
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              In some of my previous blogs and articles I have urged business owners with intellectual property (“IP”) rights to take precautions to avoid being engulfed in costly infringement disputes.  The first line of defense to such threats is to use best practices with the handling of your IP, i.e., to know its provenance.  However, as with all risk management, another path is to acquire adequate insurance coverage.

               For those of you who carry commercial general liability insurance, check to see whether and to what extent your coverage extends to IP infringement.  Your carrier may have specifically exempted most intellectual property claims from your coverage, to your surprise.  The facts of the following case illustrate the dilemma in which you could find yourself.

                In Santa’s Best Craft, LLC v. St. Paul Fire and Marine Insurance Co., the Seventh Circuit examined whether the insurer (“St. Paul”) had an obligation to defend Santa’s Best Craft (“SBC”) and others in an IP infringement matter.  http://caselaw.findlaw.com/us-7th-circuit/1529895.html?DCMP=NWL-pro_ip

                SBC was sued by JLJ, Inc., (“JLJ”) over how it marketed certain holiday lights.  JLJ alleged that SBC copied its “Stay Lit” lights packaging design and used false and deceptive language, thereby co-opting the look and slogans of JLJ’s Stay Lit Lights. 

                SBC settled with JLJ for $3.5 million.  In the SBC-St. Paul’s litigation, although St. Paul, which originally questioned its duty to defend SBC, was found to have the obligation.  However, the facts in the case were such that it is easy to imagine the Court ruling in St. Paul’s favor. 

                St. Paul’s policy contained an IP exclusion disallowing coverage for “injury or damage . . . that results from any actual or alleged infringement or violation of any of the following rights or laws: “. . . trade dress . . .trademark, other intellectual property rights or laws.”  The St. Paul policy did provide coverage for “[u]nauthorized use of . . . any slogan . . . of others in your advertising.”

                Despite the fact that the JLJ complaint did not clearly allege an infringement of its slogan, luckily for SBC, the Court found enough facts in JLJ’s allegations to fall within the St Paul policy coverage.

                But can a business owner take much comfort from the outcome in this case?  Even if commercial liability insurance contains such an advertising exception to the general IP exclusion, is that enough to insulate you from potentially large damage claims by third parties? 

                The IP rights and laws typically covered in a commercial general liability policy include copyrights, patents, and trademarks.  It is therefore critical to determine to what extent your business activities rely on any IP.  Then, have a heart to hear discussion with your insurance agent that specifically focuses on your IP issues and to determine whether special insurance coverage is available and whether you should include such in your liability policy.

                A little effort now is better than to discover the limits of your coverage later — to your regret.

 

SELLING OVER THE INTERNET MAY REQUIRE KNOWING THE LAW IN ALL 50 STATES
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What could be easier than setting up an online sales business?  People do it all of the time, right?  However, while you may not need to spend money on expensive commercial space and all that is associated with that kind of business model, you still need to comply with laws governing your business’ operations; and there may be many more laws to deal with than you think.

For some answers about the variety of federal and state laws that may require compliance, visit the official website of the U.S. Small Business Administration (SBA) http://www.business.gov/business-law/online-business/.  This site provides useful general information about legal requirements which could affect your Internet business operations such as:  intellectual property protection, tax collections, truth in advertising and privacy.

One area not addressed on the SBA site, but which could have profound repercussions, was the subject of a recent U.S. Court of Appeals Seventh Circuit case entitled, Illinois v. Hemi Group, LLC.  The question asked and answered by the Circuit Court was whether an Illinois court could assert personal jurisdiction over an Internet business located in New Mexico.  Based on the facts in this case, the answer was “yes.”

In summary, Hemi Group, LLC, (Hemi) sold discount cigarettes through its website.  It paid federal sale taxes and notified its customers that they should check with their home state to find out if they needed to pay state tax.  Apparently Hemi was unaware that Illinois law not only required the customer to pay the applicable state tax for purchases over the Internet, but also required such businesses to file monthly reports of cigarette sales to Illinois residents.  Unfortunately for Hemi, not only did it sell cigarettes to the Illinois Department of Revenue, (I guess this was some kind of sting operation,) but it also failed to notify Illinois of the sales.  Ouch!

You may think, “Why should Hemi have to defend itself in Illinois?  Doesn’t that violate the due process clause of the U.S. Constitution?”  Well, the Circuit Court concluded that Hemi had sufficient contacts with Illinois to require the company to answer to complaints brought against it by the State of Illinois.

Thus, while it may appear to be relatively easy and profitable to conduct an e-business that is national in scope, you need to learn about and comply with the particular laws of each state in which you make your sales.  Keep in mind, given our troubled economy, state governments are hungry for money and, like Illinois, they may be willing to invest in this kind of aggressive enforcement effort.