Tech Law Journal Daily E-Mail Alert
December 9, 2002, 9:00 AM ET, Alert No. 563.
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FCC's NRIC Proposes Security Measures for Telecoms and ISPs
12/6. The Federal Communications Commission's (FCC) Network Reliability and Interoperability Council (NRIC) held a quarterly meeting to discuss telecommunications network security and cyber security. The NRIC reviewed 300 "best practices" for voluntary implementation by regulated telecommunications companies, as well as by data service providers and ISPs.

The NRIC has until December 20 to vote on its recommendations. The FCC issued a release [3 pages in MS Word] summarizing the issues discussed.

9th Circuit Dismisses Appeal in Knisley v. Network Associates
12/6. The U.S. Court of Appeals (9thCir) issued its opinion [PDF] in Knisley v. Network Associates, dismissing for lack of standing an appeal from an order awarding attorneys fees in a class action against Network Associates Inc. (NAI).

NAI entered into a settlement (which included attorneys fees) with the attorneys for the class, the law firm of Lieff Cabraser. Noel Gage, a NAI shareholder covered by the class action and its settlement, objected to the settlement. The District Court approved the settlement.

The Appeals Court noted that "One risk of class action settlements is that class counsel may collude with the defendants, tacitly reducing the overall settlement in return for a higher attorney’s fee." Hence, District Courts must review both the fairness and reasonableness of attorneys fees in class action settlements.

However, the Appeals Court's decision turned on the issue of standing. It found that Gage lacked standing to challenge the settlement. He was not a named plaintiff. He did not submit a claim form. He rejected the settlement. And, he is not the one who pays the attorneys fees. The Appeals Court concluded that he "has failed to show that the relief he seeks will redress the injury he claims to have suffered. He therefore lacks standing to appeal."

6th Circuit Buries Protectionist Statute in Tennessee Casket Case
12/6. The U.S. Court of Appeals (6thCir) issued its opinion in Craigmiles v. Giles, a constitutional law case that may make it easier to overturn some protectionist state statutes that impede electronic commerce. The Court held unconstitutional a state statute that it found to be an "attempt to prevent economic competition".

This case does not specifically involve Internet commerce, the use of technology, or even technology companies. It deals with the sale of caskets. This case involves a challenge to an obscure Tennessee statute regarding funeral directors. Nevertheless, this case may have broader consequences for other businesses, and particularly those involved in electronic commerce. The Court held unconstitutional on Due Process and Equal Protection grounds a statute enacted to protect state funeral directors from competition.

Numerous state protectionist statutes have the effect of banning many forms of e-commerce, including sales of cars, wines, contact lenses, and other products. These types of laws also obstruct Internet based travel agencies, pharmacies, mortgage brokers, and many other services. See, for example, story titled "House Subcommittee Holds Hearing on State Impediments to E-Commerce", TLJ Daily E-Mail Alert No. 518, September 27, 2002.

E-commerce proponents have had some success in challenging these types of statutes under the Constitution's Commerce Clause. For example, the U.S. District Court (SDNY) held on November 12 in Swedenburg v. Kelly, that New York state's ban on the direct shipment of out of state wine is unconstitutional. Small wineries that are prohibited from selling directly to New York customers over the Internet, or by other direct means, brought the challenge. See, opinion [32 pages in PDF].

However, this 6th Circuit case is remarkable because it is not a Commerce Clause case; rather, it is a Due Process and Equal Protection case. The Court followed over six decades of precedent in determining that the statute is an economic regulation. It also followed precedent in determining that the rational basis test applies. However, in applying the rational basis test to the statute in question, the Court parted with precedent. It turned the rational basis analysis into rigorous review in which it weighed the policy arguments in support of and against the regulation, reviewed the evidence in the record in support, and subjected the statute to economic analysis. The Court then found that the economic regulation failed to meet the mere rational basis test.

So much for Carolene Products and its progeny.

The New Deal Supreme Court began a method of constitutional interpretation in the landmark case of U.S. v. Carolene Products, 304 U.S. 144 (1938). Other cases have clarified this approach. It basically bifurcated the analysis of certain constitutional challenges to statutes and other government actions. A very high standard is to be applied in fundamental or individual rights cases, while a very low standard is to be applied in commercial or economic rights cases. (A smaller category of regulations now receive an intermediate level of scrutiny.)

For example, the Supreme Court wrote in Carolene Products that "the existence of facts supporting the legislative judgment is to be presumed, for regulatory legislation affecting ordinary commercial transactions is not to be pronounced unconstitutional unless in the light of the facts made known or generally assumed it is of such a character as to preclude the assumption that it rests upon some rational basis within the knowledge and experience of the legislators.4" The famous footnote four then went on to suggest a higher level of scrutiny for individual rights.

Subsequent cases elaborated a "strict scrutiny" test for challenges to statutes affecting certain individual rights, which test, as a practical matter, is rarely met by the statute under challenge. Subsequent cases also elaborated a "rational basis" test for challenges involving economic regulation, which test, as a practical matter, is almost always met.

The 6th Circuit wrote that "strict scrutiny" test requires that "the regulation must serve a compelling state purpose and be narrowly tailored to achieving that purpose", while the "rational basis" test requires "only that the regulation bear some rational relation to a legitimate state interest".

Leading cases in which the Supreme Court upheld protectionist state economic regulations include Williamson v. Lee Optical, 348 U.S. 483 (1955) and Ferguson v. Skrupa, 372 U.S. 726 (1963).

In a few rare cases the Supreme Court has found that the rational basis test is not satisfied. For example, in Metropolitan Life v. Ward, 470 U.S. 869 (1985), the Court overturned on Equal Protection grounds an Alabama statute that imposed a discriminatory tax on out of state insurance companies.

In the present case, the state of Tennessee required that only licensed funeral directors could sell caskets. It further required an extensive course of training to become a funeral director, much of which is unrelated to selling caskets. Nathaniel Craigmiles, and others, sold caskets without first obtaining funeral director licenses. The state shut down their businesses.

They filed a complaint in the U.S. District Court (EDTenn) seeking declaratory and injunctive relief that the Tennessee statute violates the Equal Protection, Due Process, and Privileges and Immunities clauses of the Fourteenth Amendment. The Institute for Justice, which also represents the plaintiffs in the New York wine case, represents the plaintiffs in this case.

The District Court ruled for the plaintiffs on Equal Protection and Due Process grounds, but rejected their Privileges and Immunities claim. See. Craigmiles v. Giles, 110 F. Supp. 2d 658. Tennessee appealed.

The Appeals Court affirmed on both Equal Protection and Due Process grounds. However, it declined to address the Privileges and Immunities claim. It wrote that the statute "appears directed at protecting licensed funeral directors from retail price competition", and that it "harms consumers in their pocketbooks".

This 6th Circuit case did not challenge the longstanding Constitutional principal that the rational basis test is to be applied in cases involving economic regulation. And, it purported to maintain continuity in the application of the rational basis test. In fact, the opinion of the Court gives new meaning to the rational basis test.

The Court began by stating that "The question before this court is whether requiring those who sell funeral merchandise to be licensed funeral directors bears a rational relationship to any legitimate purpose other than protecting the economic interests of licensed funeral directors."

The state of Tennessee offered several arguments as to why it "promotes both public health and safety and consumer protection". The Court addressed these one at a time, and rejected each. In some cases it simply found that countervailing arguments make more sense. In others, it cited a lack of "evidence in the record" to support Tennessee's arguments. In some situations it engaged in an analysis of competition. The Court addressed "retail price competition", "package pricing", "marginal costs", and the extraction of "monopoly rents".

The Court gave the rational basis analysis far more teeth that the Supreme Court gave it in cases such as Carolene Products, Lee Optical and Ferguson. Moreover, the references to concepts such as "rent seeking" sounds like an incorporation of "Chicago school" economic analysis into Equal Protection jurisprudence.

The Court concluded with this. "Judicial invalidation of economic regulation under the Fourteenth Amendment has been rare in the modern era. See West Coast Hotel v. Parrish, 300 U.S. 379 (1937). Our decision today is not a return to Lochner, by which this court would elevate its economic theory over that of legislative bodies. See Lochner v. New York, 198 U.S. 45 (1905). No sophisticated economic analysis is required to see the pretextual nature of the state's proffered explanations for the 1972 amendment. We are not imposing our view of a well-functioning market on the people of Tennessee. Instead, we invalidate only the General Assembly's naked attempt to raise a fortress protecting the monopoly rents that funeral directors extract from consumers. This measure to privilege certain businessmen over others at the expense of consumers is not animated by a legitimate governmental purpose and cannot survive even rational basis review."

The Court did not reference Carolene Products, Lee Optical, or Ferguson.

The plaintiffs were fortunate in the assignment of judges to this case. Judge Danny Boggs, an outspoken, free market, Federalist Society, conservative, wrote the opinion. Judges Robert Krupansky and David Lawson joined. Krupansky and Boggs were both appointed to the 6th Circuit by President Reagan. Lawson is a District Court judge appointed by President Clinton.

The significance of this opinion is that this interpretation of the rational basis test could be used to strike down barriers to electronic commerce, as well as barriers to casket sales. The consequence may be that, at least in the 6th Circuit (Michigan, Ohio, Kentucky, and Tennessee), opponents of protectionist state statutes and rules will now have another effective legal argument for challenging legal barriers to electronic commerce.

O'Neill and Lindsey Resign
12/6. Secretary of the Treasury Paul O'Neill and Director of the National Economic Council Larry Lindsey both resigned. O'Neill's frank comments often upset other members of the Bush administration, but made good copy for journalists.

Several media reports have stated that President Bush may appoint CSX CEO John Snow to replace O'Neill. CSX is a railroad freight transportation company. Snow is a former lawyer, government official, and professor, who has worked for CSX since 1977. He was a Deputy Undersecretary of Transportation in the Ford administration. CSX is not a technology company. However, it does license other companies to place fiber optic cable in conduits along its railway rights of way.

President Bush released a statement. He wrote that "My economic team has worked with me to craft and implement an economic agenda that helped to lead the Nation out of recession and back into a period of growth. I appreciate Paul O'Neill's and Larry Lindsey's important contributions to making this happen. Both are highly talented and dedicated, and they have served my Administration and our Nation well. I thank them for their excellent service."

These latest departures add to the list of key government positions that are vacant. Other positions to be filled include Chairman of the Securities and Exchange Commission (SEC), Assistant Attorney General for the Antitrust Division, and numerous federal judgeships.

Monday, December 9
2:00 PM. The Information Technology Association of America (ITAA) will host a web cast event titled "Protecting Intellectual Property in Federal Government Contract Procurements". The speaker will be Diana Richard of the law firm of Gibson Dunn & Crutcher. See, online registration page. For more information, contact Thomas Vincent at

Extended deadline to submit comments to the FCC in response to its requests for comments regarding whether to revise, clarify or adopt any additional rules in order to more effectively carry out Congress's directives in the Telephone Consumer Protection Act of 1991 (TCPA). This is CG Docket No. 02-278. See, original notice in the Federal Register, and notice of extension [PDF].

Tuesday, December 10
10:45 AM -12:00 NOON. Assistant Secretary of the Treasury for International Affairs Randal Quarles will speak as part of a panel titled "The US-EU Agenda on Financial Services" at the European Institute's Trade and Investment Seminar. Location: Swissotel -- The Watergate, Monticello Room, 2650 Virginia Ave., NW.

12:15 PM. The FCBA's Cable Practice Committee will host a luncheon. The speaker will be Marsha MacBride (FCC Chief of Staff). The price is $15. No walk-ins. For more information, contact Lisa Cordell at 202 939-7900. RSVP to Location: NCTA, 1724 Massachusetts Ave., NW.

Deadline to submit comments to the National Telecommunications and Information Administration (NTIA) regarding the wills, codicils, and testamentary trusts exception to the E-SIGN Act. The Electronic Signatures in Global and National Commerce (E-SIGN) Act provides, at Section 101, for the acceptance of electronic signatures in interstate commerce, with certain enumerated exceptions. Section 103 of the Act provides that "The provisions of section 101 shall not apply to ... a State statute, regulation, or other rule of law governing the creation and execution of wills, codicils, or testamentary trusts". The Act also requires the NTIA to review, evaluate and report to Congress on each of the exceptions. See, notice in the Federal Register, October 11, 2002, Vol. 67, No. 198, at Pages 63379 - 63381.

Wednesday, December 11
9:30 AM. The FCC will hold a meeting. See, agenda. Location: FCC, 445 12th Street, SW, Room TW-C05 (Commission Meeting Room).

10:00 - 11:30 AM. The FCC will hold a public forum to unveil the new concept designs for online filings. Location: FCC, 12th Street, SW, Conference Room #1, 8th Floor.

12:15 PM. The FCBA's Mass Media Practice Committee will host a brown bag luncheon. The speakers will be Brooks Boliek (Hollywood Reporter), Bridgette Greenberg (Communications Daily), Doug Halonen (Electronic Media), Ted Hearn (Multichannel News), Bill McConnell (Broadcasting and Cable), and Leslie Stimson (Radio World). RSVP to Barry Umansky at 202 263-4128 or Location: National Association of Broadcasters (NAB), 1st Floor Conference Room, 1771 N Street, NW.

Thursday, December 12
9:00 AM. The President's Council of Advisors on Science and Technology's (PCAST) Subcommittee on Federal Research and Development Investment and its National Benefits will hold an open public forum on federal technology transfer mechanisms. See, notice in the Federal Register. Location: RAND Washington Office, 1200 S. Hayes St., Arlington, VA, Room 4204 (which is accessible from the Pentagon City metro stop).

12:00 NOON. The Cato Institute will host a Capitol Hill briefing titled "Yellow Light on Total Information Awareness". The scheduled speakers include Wayne Crews, Robert Levy, Charles Peña. See, notice and online registration form. Location: 1539 Longworth House Office Building.

The FCBA will host its annual Chairman's Dinner. See, registration form [PDF]. Location: Washington Hilton and Towers.

Day one of a two day conference hosted by the Practicing Law Institute and the FCBA titled "Telecommunications Policy and Regulation". At 12:15 PM FCC Commissioner Kevin Martin will deliver a keynote address. Location: Reagan International Trade Center.

Friday, December 13
9:15 - 11:30 AM. The American Enterprise Institute (AEI) will host a panel discussion titled "Intellectual Property: A Positive Side for Developing Country Business?". The speakers will be Michael Finger (AEI), Ron Layton (LightYears IP), and others. Location: AEI, 12th floor, 1150 17th St., NW.

9:30 AM. The U.S. International Trade Commission (USITC) will meet regarding the preliminary countervailing duty investigation regarding DRAMs and DRAM Modules from Korea (Investigation No. 701-TA-431). See, notice published in the Federal Register. Location: Main Hearing Room, ITC Building, 500 E Street, SW.

Day two of a two day conference hosted by the Practicing Law Institute and the FCBA titled "Telecommunications Policy and Regulation". Location: Reagan International Trade Center.

EXTENDED TO JANUARY 17. Deadline to submit reply comments to the FCC in response to its Notice of Proposed Rulemaking (NPRM) [15 pages in PDF] in its proceeding titled "In the Matter of Digital Broadcast Copy Protection". This NPRM proposes that the FCC promulgate a broadcast flag rule, and seeks comment on this, and related questions. This is MB Docket No. 02-230. See also, FCC release [PDF] and Order [PDF] of October 11, 2002 extending deadlines.

People and Appointments
12/7. Incumbent Sen. Mary Landrieu (D-LA) won the Louisiana Senate runoff election.
More News
12/6. The U.S. Patent and Trademark Office (USPTO) announced that it "launched a prototype to test replacing its standard paper processing of patent applications with electronic processing." See, USPTO release.

12/6. IBM announced that it has entered into an agreement with Rational Software to acquire the equity of Rational at a price of approximately $2.1 Billion. See, IBM release and substantial identical Rational release. Rational makes open, industry standard tools, best practices and services for developing business applications and building software products and systems, including embedded software for cell phones. The deal will require regulatory approval.

12/6. The Securities and Exchange Commission (SEC) issued orders instituting administrative proceedings against, and imposing sanctions upon, three former WorldCom executives, Buford Yates (former Director of General Accounting), David Myers (former Comptroller and SVP), and Betty Vinson (former Director of Management Reporting), for materially overstating earnings of WorldCom. See, SEC release regarding Yates, release regarding Myers, and release regarding Vinson. The SEC previously filed civil enforcement actions in U.S. District Court (SDNY) against Yates, Myers, Vinson, and WorldCom. Judgments have been entered in those actions. See, SEC release summarizing those actions.

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