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February 12, 2002, 9:00 AM ET, Alert No. 366.
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Congressional Report Suggests Taxing Internet Services to Subsidize Phone Service
2/11. The General Accounting Office (GAO) released a report [PDF] titled "Telecommunications: Federal and State Universal Service Programs and Challenges to Funding". The report provides an in depth review of existing universal service programs. It also offers the suggestion that providers of various Internet services be taxed to subsidize the government's universal service programs.
The report states that "The last decade has seen a rapid increase in the use of digital technologies and Internet Protocol (IP) networks for communications. Applications now exist to convert traditional analog voice services to digital, to break the digital voice into ``packets,创 and to send the voice packets over the Internet or other IP networks. However, under the current regulatory structure, providers of these IP voice services do not have to contribute to the Universal Service Fund for the IP voice services. Therefore, as these new voice services gain popularity, concerns exist of whether federal funding levels for universal service might eventually decline. In addition, there is much debate about whether the current federal regulatory framework for funding universal service -- with its reliance on interstate telecommunications revenues -- is appropriate for digital communications, where voice, video, and data are carried in the same manner over networks that lack intrastate/ interstate designations."
The report also states that "funding for federal universal service generally comes from providers of interstate ``telecommunications services,创 but may also be assessed upon other providers of interstate telecommunications if the public interest so requires. IP telephony is an application that has, to date, been treated in effect as an ``information service.创 Therefore, companies offering IP telephony are not currently required to make contributions to the universal service fund from revenues for IP telephony services. As the deployment of IP telephony technologies moves forward, and more businesses and consumers begin to substitute IP telephony for traditional telephone service, the question arises as to whether a decline in the funding for universal service could result."
The report continues that "Whether Congress and FCC should continue to rely largely on providers of interstate telecommunications services for the funding of federal universal service is an increasingly important debate as the world continues to migrate to digital communications technologies and IP networks."
The report concedes that "the Communications Act was originally structured and remains a ``stovepiped,创 or compartmentalized, law in which particular communications services are governed under particular provisions of the law. The resulting regulatory structure holds different types of networks to different rules -- even when they are used to provide similar services. Fundamentally, universal service funding has been carried out under laws and regulations pertaining to "telecommunications services." "
The report asserts that "It is unclear what rules should apply for voice applications that could be defined as ``information services,创 or more importantly, whether such service distinctions should remain. We previously noted that policymakers may face challenges in deciding how, under the present structure of communications law, functionally similar services are governed over different networks. IP telephony and its effect on universal service funding is another example of this increasing dilemma."
The report was prepared at the request of Rep. Ed Markey (D-MA), the ranking Democrat on the House Commerce Committee's Telecom Subcommittee, which oversees the FCC. The report's lead author is Peter Guerrero. Rep. Markey is a liberal Democrat who often favors a regulatory approach to telecommunications issues. However, many other members of the House Commerce Committee would likely oppose any efforts to tax Internet services for universal service purposes. In contrast, the Senate, which over represents sparsely populated plains and western states, has a much larger concentration of universal service enthusiasts.
GAO Report Reopens Debate Over IP Telephony and Phone Subsidies
2/11. The just released GAO report [PDF] reopens a debate over the future of the FCC's universal service programs. Various Congressional and other fora discussed this issue often in the late 1990s. However, Internet Protocol (IP) telephony and universal service have been little debated in recent years. At issue is whether or not, and if so, to what extent, communications services provided by new Internet based technologies, such as IP telephony, will be subjected to the cross subsidization and regulation model now applied to telecommunications services provided by the old analog phone technologies.
The Federal Communications Commission (FCC) and its subsidiary corporations run a collection of cross subsidization programs for the purpose of making telecommunications services more available in high cost and low income areas. Economists have long debated the effectiveness of these programs. However, they are strongly backed by legislators from rural states and districts. Also, the more recently developed e-rate program provides telecommunications services, computer networking, and Internet services to schools and libraries under the rubric of universal service. Under the various universal service programs, business customers subsidize residential customers, urban customers subsidize rural customers, and all phone customers subsidize schools and libraries.
Section 254(d) of the Telecom Act of 1996 defines the obligation to contribute to universal service programs. It provides that "Every telecommunications carrier that provides interstate telecommunications services shall contribute, on an equitable and nondiscriminatory basis, to the specific, predictable, and sufficient mechanisms established by the Commission to preserve and advance universal service."
The statute does not require other regulated communications industries, such as cable and broadcasting, to contribute. Nor is the unregulated Internet industry required to contribute.
Administering the universal service system was complex when there was just one giant Bell monopoly. It became a vastly more difficult task for the FCC, and its various corporations and boards following divestiture, with the emergence multiple regulated telecommunications companies. Now, it is becoming increasing impossible in a open competitive environment in which a variety of competing technologies are used by people to communicate with each other.
Congressional backers of universal service cross subsidies have argued that unregulated and untaxed IP telephony services might replace the old fashioned analog public switched telephone network. Hence, they fear that their revenue pool might dry up. To make universal service programs work, the FCC needs a huge pool of revenue to tap. If businesses and consumers switch to IP telephony services, and the FCC and Congress still want to subsidize communications services, then the FCC would need to obtain revenues from some other source, such as IP telephony, other Internet services, or the general fund.
People and Appointments
2/11. The Senate confirmed Michael Melloy to be a Judge on the U.S. Court of Appeals (8thCir) by a vote of 91 to 0.
2/11. The Internet Corporation for Assigned Names and Numbers (ICANN) announced the appointment of Stephen Crocker as chair of its newly formed Standing Committee on Security and Stability, which will focus on the security of the Internet's naming and address allocation systems. See, ICANN release.
2/11. Terry Hungle, Chief Financial Officer of Nortel Networks, resigned. Nortel stated in a release that "The U.S. Securities and Exchange Commission and the Ontario Securities Commission have been voluntarily notified of the circumstances surrounding certain personal investment transactions carried out in 2001 by Hungle in the Nortel Networks U.S. Long-Term Investment (401k) Plan. These transactions occurred outside the trading windows imposed by the Corporation upon certain employees, including Hungle, and prior to news releases issued by the Corporation on March 27, 2001 and December 21, 2001." Frank Dunn, P/CEO of Nortel, was appointed acting CFO. Dunn stated in the Nortel release that "this matter solely relates to the personal investment transactions made by Terry Hungle and does not relate to the business, operations or financials of Nortel Networks."
2/11. Michael Kinsley resigned as editor of Slate magazine.
1/31. Jano Cabrera left the Recording Industry Association of America (RIAA) to join former Vice President Al Gore's political action committee as communications director. Before going to work for the RIAA he worked for the Gore Lieberman campaign as Gore's Deputy National Spokesman. Before that he was a Deputy Press Secretary in the Office of the Vice President. 
More News
2/11. Qwest Communications issued a release in which it stated that it "has received a subpoena for documents concerning Global Crossing Ltd. from the Securities and Exchange Commission (SEC) in connection with the SEC's investigation of Global Crossing. The company intends to cooperate fully with the SEC."
2/11. The General Accounting Office (GAO) released a report [PDF] titled "Tax Administration: Electronic Filing's Past and Future Impact on Processing Costs Dependent on Several Factors". The report found that "From fiscal years 1997 through 2000, the number of individual and business tax returns filed electronically increased from almost 23 million to almost 41 million." However, over the same time period, the total amount spent by the IRS processing all returns -- both paper and electronic -- still increased 16%. The report was prepared at the request of Rep. Amo Houghton (R-NY), the Chairman of the House Ways and Means Committee's Subcommittee on Oversight.
7th Circuit Rules on Ownership of Software
2/11. The U.S. Court of Appeals (7thCir) issued its opinion in Dispatch Automation v. Richards, a contract dispute involving ownership of a software program. The Appeals Court addressed what constitutes a development of an existing program, and what constitutes a new product. The Appeals Court also commented on the economics of software ownership.
Background. Anthony Richards is a software developer who wrote a computer program called RIMS to help police and fire departments with records management and vehicle dispatch. He copyrighted the program. Richards and his wife formed a corporation named Dispatch Automation, Inc., with Gary Hagar and his wife for the purpose of licensing the software to police and fire departments. Each couple took a 50% interest. The articles of incorporation provided further that Richards retained ownership of the program, and that Richards agreed to license it to Dispatch Automation for $1 per year. It also stated that the corporation may continue to develop the product, but all ownership rights remain with Richards. The two couples had a falling out, Richards resigned from the company, and cancelled Dispatch Automation's license to market the program.
District Court. Dispatch Automation filed a complaint in U.S. District Court (WDWisc) against Richards alleging breach of contract. Federal jurisdiction in this case is based upon diversity of citizenship. Wisconsin law applies. The parties agreed that Richards owned products that were "developments" of the products that he had licensed to the corporation when it was formed, but not new products. Dispatch Automation argued that "developments" are small, incremental changes and that the latest version of the product was so different from the earlier versions that it was a new product. Richards argued that a "new" product is one that is not encompassed by the contractual term "RIMS group of computer aided dispatch and records management software products." The District Court granted summary judgment to Richards.
Appeals Court. The Appeals Court affirmed. Judge Richard Posner, writing for the three judge panel, noted that "It would have been cockeyed -- it would have been contrary to Dispatch Automation's own interests as they then appeared -- for the parties to have agreed that Richards would own successive versions provided they made only incremental improvements over their predecessors but that he would have no rights to a successive version that made a real breakthrough. That would have given him an incentive to pull his punches, or to quit the company if he thought he was on the brink of a breakthrough; neither the articles of incorporation nor, so far as we are aware, any other contractual provision binds Richards to Dispatch Automation. Since the corporation received the entire income (minus $1 a year) from the sale of programs licensed to it by Richards, it had every reason to encourage him to make breakthroughs."
Posner then reasoned that "When a contractual interpretation makes no economic sense, that's an admissible and, in the limit, a compelling reason for rejecting it." Hence, Posner, the author of Economic Analysis of Law, and countless other works applying economics to law, rejected Dispatch Automation's interpretation.
Judge Posner also commented that this corporate arrangement was unusual. He wrote that "Ordinarily an employer insists on owning all the software developed by its employees (unless created wholly on the employee's own time and at his sole expense), whether it is derivative of pre-employment work or completely new, precisely to avoid the kind of dispute that has arisen here. For an employee to own rights to part of the employer's output is bound to create difficult and contentious issues of managing and tracking who owns what, and there is also a danger that the employee will quit and take his technology with him. Then too software development is a risky undertaking and the employer is likely to be the superior risk bearer, and ownership of the software shifts the risk, both upside and downside, from the developer to the firm."
9th Circuit Reverses in Trademark Case
2/11. The U.S. Court of Appeals (9thCir) issued its opinion in Entrepreneur Media v. Smith, a trademark and unfair competition case involving the use of the trademark "Entrepreneur" on the cover of a print publication, in a domain name, and in other contexts. The Appeals Court largely reversed the District Court's summary judgment for the trademark holder, and remanded for trial.
Background. Entrepreneur Media, Inc. (EMI) publishes magazines, books, computer software, and audio and video. It publishes a magazine for small businesses named "Entrepreneur". It has registered the mark "Entrepreneur" with the USPTO. It has also registered the domain Scott Smith has a public relations business. He did business as EntrepreneurPR, and produced a publication by titled "Entrepreneur Illustrated". He also registered the domain
District Court. EMI filed a complaint in U.S. District Court (CDCal) against Smith alleging trademark infringement, unfair competition, and counterfeiting under the Lanham Act, 15 U.S.C. 1125, and unfair competition under the California Business and Professions Code 17200. The District Court granted summary judgment to EMI on the trademark infringement and unfair competition claims, awarded damages, and enjoined Smith from using any marks confusingly similar to "Entrepreneur".
Appeals Court. The Appeals Court affirmed in part and reversed in part. It applied the eight factor test announced in AMF, Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979). That is, it considered "1. The strength of EMI's trademark; 2. The similarity of the marks; 3. The proximity or relatedness of the goods or services; 4. Smith's intent in selecting the marks; 5. Evidence of actual confusion; 6. The marketing channels used; 7. The likelihood of expansion of product lines; and, 8. The degree of care consumers are likely to exercise."
On the first factor, the Appeals Court held that "Entrepreneur" is a weak mark, and thus deserving less protection, because it is a common and necessarily used word.
On the second factor, regarding the domain name, the Court wrote that is different from, and that consumers attempting to reach the EMI web site are unlikely to enter the former by a typographical error. It concluded that a "juror could reasonably find Smith's domain name dissimilar from EMI's ENTREPRENEUR mark."
After weighing all eight factors, the Appeals Court concluded that "the way Smith has used the mark "Entrepreneur Illustrated" on the covers of EntrepreneurPR's printed publication, as it appears in the record, would likely confuse an appreciable number of reasonably prudent consumers, and thus infringed EMI's trademark "ENTREPRENEUR."" However, "As to all other allegations of trademark infringement, EMI has not demonstrated on this record that Smith has infringed its trademark as a matter of law. A trier of fact could reasonably conclude that none of the eight Sleekcraft factors weighs strongly in favor of a finding of likely confusion as to these allegations." The Appeals Court also reversed the summary judgment as to the unfair competition claim.
Privacy Advocates Oppose Standardization of State Driver Licensing
2/11. A collection of groups sent a letter to President Bush to "urge the Administration to oppose the attempts of state motor vehicle officials to create a national identification system (national ID) through the bureaucratic back door of state drivers' licenses."
The signatories to the letter include the American Civil Liberties Union (ACLU), Center for Democracy and Technology (CDT), Electronic Privacy Information Center (EPIC), Free Congress Foundation (FCF),, and other groups.
The letter continues that "Once government databases are integrated through a uniform ID, access to and uses of sensitive personal information would inevitably expand. Law enforcement, tax collectors, and other government agencies would want use of the data. Employers, landlords, insurers, credit agencies, mortgage brokers, direct mailers, private investigators, civil litigants, and a long list of other private parties would also begin using the ID and even the database, further eroding the privacy that Americans rightly expect in their personal lives. It would take us even further toward a surveillance society that would significantly diminish the freedom and privacy ..."
On February 7, the Progressive Policy Institute (PPI), a Democratic think tank, released a report [PDF] titled "Modernizing the State Identification System: An Action Agenda". It concludes that "our identification system is broken" and that Congress should require states to modernize, through such technologies as smart ID cards.
While the PPI report opposes a national ID card, it proposes "Modernizing the current system, in which the primary form of identification is issued by the Department of Motor Vehicles in each state". Specifically, the PPI report recommends that Congress "require states to issue ``smart ID cards创 containing a standardized hologram and digitally encoded biometric data specific to each holder; set standards for initial identity verification; accelerate the linking of state DMV databases; provide grants and loans for additional state smart card applications; upgrade the system for foreign visitors to incorporate a similar ``smart visa创 program; and create strict controls to protect privacy and prevent abuses." See also, PPI release.
Rep. James Moran (D-VA) will likely soon introduce legislation that incorporates some of the recommendations contained in the PPI report.
Immersion Sues Sony and Microsoft
2/11. Immersion Corporation filed a complaint in U.S. District Court (NDCal) against Microsoft and Sony alleging patent infringement. Immersion alleges that Microsoft's Xbox and the Sony's PlayStation use its haptic technology. See, Immersion release. This is case number 02-00710 CW, filed in the Oakland Division. CW references Judge Claudia Wilken.
Tuesday, Feb 12
The House will meet at 12:30 PM for morning hour and 2:00 PM for legislative business. The House will consider a number of bills under suspension of the rules. At 5:30 PM the House will consider HRes 344, a rule for consideration of HR 2356, the campaign finance bill.
9:30 AM. The U.S. Court of Appeals (DCCir) will hear oral argument in WorldCom v. FCC, No. 01-1218. Judges Tatel, Garland and Williams will preside.
9:30 AM. The Senate Governmental Affairs Committee's Subcommittee on International Security, Proliferation and Federal Services will hold a hearing to examine multilateral non-proliferation regimes, weapons of mass destruction technologies, and the war on terrorism. Location: Room 342, Dirksen Building.
10:00 AM. The Senate Banking Committee will hold a hearing on accounting and investor protection issues surrounding the problems with Enron and other public companies. The witnesses will be five former Chairmen of the Securities and Exchange Commission (SEC), Roderick Hills (1975-77), Harold Williams (1977-81), David Ruder (1987-89), Richard Breeden (1989-93), and Arthur Levitt (1993-2000). Location: Room 538, Dirksen Building.
11:00 AM. The Federal Trade Commission (FTC) will announce a "three point program to crack down on deceptive spam." FTC Chairman Timothy Muris will speak. See, FTC release. Location: FTC Internet Lab, Room 279, 600 Pennsylvania Ave., NW.
12:15 PM. The Federal Communications Bar Association's (FCBA) Common Carrier Committee will host a brown bag lunch. Kathleen Abernathy (FCC Commissioner) and Nanette Thompson (Chair of the Regulatory Commission of Alaska) will speak about universal service. RSVP to Rhe Brighthaupt at rbrighth Location: Wiley Rein & Fielding, 1750 K St., NW, 10th Floor.
12:15 PM. The Federal Communications Bar Association's (FCBA) Transactional Practice Brown Committee will host a brown bag lunch on wireless transactions. RSVP to Tina Screven at 202 383-3337. Location: Wilkinson Barker & Knauer, 2300 N Street NW.
12:30 PM. Salvatore Sodano, Ch/CEO of the American Stock Exchange will give a speech titled "Challenges Facing the Capital Markets as a Result of September 11th and Enron". Location: Ballroom, National Press Club, 529 14th St. NW, 13th Floor.
2:30 PM. The Senate Foreign Relations Committee will hold a hearing to examine the theft of American intellectual property at home and abroad. The scheduled witnesses include Alan Larson (Under Secretary of State), Peter Allgeier (Deputy U.S. Trade Representative), John Gordon (U.S. Attorney, Central District of California), Jack Valenti (P/CEO of the Motion Picture Association of America), Hilary Rosen (P/CEO of the Recording Industry Association of America), and Jeff Raikes (Microsoft). Location: Room 419, Dirksen Building.
4:00 PM. The House Judiciary Committee's Crime Subcommittee will hold a hearing on HR 3482, the "Cyber Security Enhancement Act of 2001", sponsored by Rep. Lamar Smith (R-TX). Location: Room 2237, Rayburn Building.
7:15 PM. FTC Chairman Timothy Muris will speak at the American Bar Association Antitrust Section Corporate Counsel Dinner. Location: Willard Intercontinental Hotel, 1401 Pennsylvania Ave., NW.
Wednesday, Feb 13
The House will likely begin its consideration of HR 2356, the campaign finance bill.
Day one of a three day conference titled Biometric Consortium Conference. The sponsors include the Information Technology Laboratory (ITL) and the Advanced Technology Program (ATP) of the National Institute of Standards and Technology (NIST), the National Security Agency (NSA), the Department of Defense's Biometric Management Office (BMO), the General Services Administration (GSA), and the Federal Technology Service (FTS) Center for Smart Card Solutions. This conference has been rescheduled from September 12-14, 2001. See, conference web site. Location: Hyatt Regency Crystal City, Arlington, VA.
10:00 AM - 12:00 NOON. The House Science Committee will hold a hearing titled "R&D Budget for Fiscal Year 2003: An Evaluation". The witnesses will be Jack Marburger (Director, Office of Science and Technology Policy), Rita Colwell (Director, National Science Foundation), Samuel Bodman (Deputy Secretary, Department of Commerce), Bruce Carnes (Department of Energy). Location: Room 2318, Rayburn Building.
11:00 AM. The Cato Institute will host a panel discussion titled "Trade War or Tax Reform? The WTO Ruling on Tax Breaks for U.S. Exporters". The panelists will be Rep. Phil Crane (R-IL), Chairman of the Trade Subcommittee of the House Ways and Means Committee, William Reinsch, National Foreign Trade Council, John Meagher, Price Waterhouse Coopers, and Chris Edwards, Cato Institute. Cato will web cast the event. A luncheon will follow the program. See, Cato event summary. Location: Cato Institute, 1000 Massachusetts Avenue, NW.
2:00 PM. The Senate Judiciary Committee's Administrative Oversight and the Courts Subcommittee will hold a hearing titled "Administrative Oversight: Are We Ready For A Cyber Terror Attack?". Sen. Charles Schumer (D-NY) will preside. Location: Room 226, Dirksen Building.
5:00 - 7:00 PM. The Congressional Internet Caucus Advisory Committee will host an event titled "Reception and Technology Fair". Each of the Co-chairs of the Internet Caucus, Sen. Patrick Leahy (D-VT), Sen. Conrad Burns (R-MT), Rep. Bob Goodlatte (R-VA) and Rep. Rick Boucher (D-VA), is likely to speak. The Co-chairs of the Wireless Task Force, Sen. John Ensign (R-NV) and Rep. Mike Honda (D-CA), are likely to speak also. Location: Room 902, Hart Building.
Thursday, Feb 14
The House will likely continue its consideration of HR 2356, the campaign finance bill.
Day two of a three day conference titled Biometric Consortium Conference.  See, conference web site. Location: Hyatt Regency Crystal City, Arlington, VA.
The Forum on Technology and Innovation (Tech Forum) will hold a event relating to cyber security. The speakers will be Richard Clarke (Special Advisor to the President for Cyberspace Security), Vint Cerf (WorldCom), and Bruce Schneier (CTO of Counterpane Internet Security). The Tech Forum was founded by Sen. Bill Frist (R-TN), Sen. Jay Rockefeller (D-WV), and the Council on Competitiveness.
9:30 AM. The Federal Communications Commission (FCC) will hold a meeting. See, FCC release. Location: Room TW-C305, 445 12th St., SW.
9:30 AM. The House Commerce Committee's Subcommittee on Commerce, Trade, and Consumer Protection will hold a hearing titled "Are Current Financial Accounting Standards Protecting Investors?" Location: Room 2212, Rayburn Building.
10:00 AM. The House Judiciary Committee's Subcommittee on Courts, Internet and Intellectual Property will hold a hearing on the "Federal Trademark Dilution Act." Location: Room 2141, Rayburn Building.
2:30 PM. The Senate Judiciary Committee's Technology, Terrorism, and Government Information Subcommittee will hold a hearing on privacy, identity theft, and protection of personal information. Sen. Dianne Feinstein (D-CA) will preside. Location: Room 226, Dirksen Building.
Friday, Feb 15
The House will not be in session.
Day three of a three day conference titled Biometric Consortium Conference. See, conference web site. Location: Hyatt Regency Crystal City, Arlington, VA.
8:00 AM - 2:00 PM. The National Science Foundation's (NSF's) Advisory Committee for Cyberinfrastructure will hold an open meeting. See, notice in Federal Register. Location: Room 1150, NSF, 4201 Wilson Blvd., Arlington, VA.
9:30 AM. The U.S. Court of Appeals (DCCir) will hear oral argument in New World Radio v. FCC, No. 1110. Judges Henderson, Randolph and Rogers will preside.
12:00 NOON. Deadline to submit comments to the Office of the U.S. Trade Representative (USTR) regarding foreign countries that deny adequate and effective protection of intellectual property rights or deny fair and equitable market access to U.S. persons who rely on intellectual property protection. The USTR requests comments pursuant to its duties under  182 of the Trade Act of 1974, 19 U.S.C. 2242, which is better known as the "Special 301" provisions. See, notice in the Federal Register.
Extended deadline to file reply comments with the FCC in its proceeding regarding cross ownership of broadcast stations and newspapers. This is MM Docket No. 01-235. See, notice in Federal Register.
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