Tech Law Journal Daily E-Mail Alert
December 19, 2002, 9:00 AM ET, Alert No. 571.
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Federal Circuit to Hear Elan v. Mayo En Banc
12/18. The U.S. Court of Appeals (FedCir) issued an order [MS Word] granting an en banc rehearing in Elan Pharmaceuticals v. Mayo, a patent infringement action. Elan's U.S. Patent No. 5,612,486 titled "Transgenic Animals Harboring APP Allele Having Swedish Mutation" continuation Patent No. 5,850,003 titled "Transgenic Rodents Harboring APP Allele Having Swedish Mutation" are directed to transgenic animals whose genetic makeup has been altered so that they are susceptible to Alzheimer's disease.

The U.S. District Court (NDCal) held the patent invalid on the ground of anticipation. A three judge panel of the Court of Appeals issued its split opinion on August 30, 2002 reversing the District Court.

Indictment Alleges Dallas Computer Business Was Funded by Middle Eastern Terrorist
12/16. A grand jury of the U.S. District Court (NDTex) returned a 33 count indictment [32 page PDF scan] against seven individuals and one company. The indictment charges five brothers named Elashi who have all worked for a company named Infocom Corporation, which is also charged, that exported computers and computer components to customers in the Middle East. The indictment contains twelve counts naming the Elashi brothers pertaining to exports to Libya and Syria in violation of U.S. export control laws.

Also charged is a cousin of the Elashi brothers, Nadia Marzook, and her husband, Mousa Abu Marzook. Mr. Marzook is the Deputy Chief of Hamas' Political Bureau. The U.S. named Mousa Abu Marzook a Specifically Designated Terrorist (SDT) in 1995, thus making certain transactions with him illegal. The remaining counts of the complaint allege that three of the Elashi brothers and Mr. and Mrs. Marzook engaged in various financial transactions that are illegal because of Mr. Marzook's status as a terrorist. More specifically, the indictment alleges that Mr. Marzook invested $250,000 in Infocom through his wife, and that Infocom made various transfers to her as a share of the profits.

See, BIS release and Ashcroft statement of December 18, 2002 regarding the latest indictment.

The Federal Bureau of Investigation (FBI) touted the indictment. It wrote in a release that "Today's indictment proves once again that the FBI is committed to aggressively pursuing terrorists and disrupting terrorist networks across the United States. The investigation out of Dallas relied upon an array of intelligence and law enforcement initiatives and tools that have characterized our post 9-11 prevention efforts."

The charges against the Marzooks and Elashis pertaining to financial transactions involving a terrorist are new. However, the investigation of the Elashis for export control violations predates the terrorist attacks of September 11, 2001. Also, the December 17 indictment does not contain the first criminal charges brought regarding the Elashi's activities.

The Department of Commerce's Bureau of Industry and Security (BIS), which was formerly known as the Bureau of Export Administration (BXA), first issued an injunction order naming the five Elashi brothers and Infocom on September 6, 2001.

The BIS issued its first injunction order on September 6, 2001. See, notice in the Federal Register, September 13, 2001, Vol. 66, No. 178, at pages 47630 - 47632. It names the five Elashi brothers, a sixth individual named Fadwa Elafrangi, Infocom, and a related corporation named Tetrabal Corporation. See also, story titled "BXA Issues Injunction for Exporting Computer Equipment to Terrorist States" in TLJ Daily E-Mail Alert No. 268, September 14, 2001.

The BIS later affirmed this injunction. See, notice in the Federal Register, November 20, 2001, Vol. 66, No. 224, at Pages 58112 - 58115. See also, story titled "Illegal Export of Computers to Libya and Syria" in TLJ Daily E-Mail Alert No. 313, November 21, 2001.

The BIS actions in 2001 were administrative injunctions, barring the Elashis and their companies from engaging in certain transactions, and warning other businesses not to do business with them. This was not a criminal proceeding. The indictment of December 17 does constitute criminal charges. However, this indictment does not allege facts regarding illegal exports that distinguish it from the facts underlying the earlier BIS administrative actions.

The December 17 superceding indictment states that the Elashis and Infocom exported "computers and computer components". However, it is silent regarding the actual products exported. Other releases by the Department of Justice do not specify the products exported. The BIS's releases and notices are also silent as to the products exported.

Nor does this indictment state the intended end users of the computers and computer components.

The indictment does not state the location or residence of the defendants. However, previous BIS announcements gives their locations in Richardson, Texas. This is a north Dallas suburb in close proximity to many technology companies. At times relevant to allegations in the indictment, nearby companies included Texas Instruments, Perot Systems, EDS, Sterling Software, Cyrix, Micrografx, and Dallas Semiconductor.

Also, the indictment does not indicate whether the Elashis sold, or conspired to sell, computers at, or above, prevailing market prices.

Attorney General John Ashcroft (at right) stated that "The war against terror is a war of audits and accountants as well as a war of weaponry and soldiers. Today's charges against a senior leader of Hamas are the latest in an aggressive campaign to identify, disrupt and destroy the sources of funding that make terrorism possible. The Department of Justice has conducted investigations into terrorist financing in 22 states, secured 23 convictions, and worked with the Treasury Department to freeze $112 million in terrorist-related funds. At this time, material support for terrorism charges are pending against individuals in Chicago, Portland, Seattle, Buffalo, San Diego, and Houston. And today, seven individuals and one corporation in Dallas stand charged with terrorist financing."

He continued that "Terrorist money men should know this: We are hunting down the murderers you support, and we will hunt you down. Just as we will prosecute the terrorist who plants a bomb, we will prosecute the terrorist supporter who writes a check. We will follow the money of terror. And we will pursue the financiers of terror as aggressively as we pursue the thugs who do their dirty work."

Counts 1 through 12 name various of the five Elashi brothers, and Infocom, but not the Marzooks. These counts all pertain to exporting to Libya and Syria without licenses from the U.S. government. Count 1 alleges conspiracy to violate the Export Administration Regulations and the Libyan Sanctions Regulations. The count (like counts 2 through 12) is not dependent on the nature of the items which defendants conspired to export.

Counts 2 through 6 allege Libyan export violations. Counts 8 through 10 allege Syrian export violations. Counts 7 and 11 allege the making of false statements in Shipper's Export Declarations regarding these export violations. Count 12 alleges money laundering. Specifically, it alleges the depositing in a financial institution of proceeds of illegal export sales.

Counts 13 through 33 pertain to financing and terrorism. Basically, the indictment alleges that Mr. Marzook, the Hamas terrorist, invested a total of $250,000 in Infocom in several installments. It further alleges that he made the investment through his wife, who is also a cousin of the Elashi brothers. It further alleges that the investment agreement called for regular payments "based upon 40% of the defendant Infocom's net profit/loss, to be made by the defendant Nadia Elashi by the defendant Infocom". Finally, the indictment alleges a series of payments by Infocom back to Mrs. Elashi.

Count 13 alleges conspiracy to deal in the property of a Specifically Designated Terrorist (SDT). Count 13 (as well as 14-33) names Mrs. Elashi, Infocom, and three of the Elashi brothers. It does not name two of the brothers, including Ihsan Elashi. Count 14 alleges dealing in the property of a SDT. Counts 15 through 23 allege specific instances of dealing in the property of a SDT. Count 24 alleges conspiracy to commit money laundering, and Counts 25 through 33 allege specific instances of money laundering.

One of the five Elashi brothers charged with violation of export laws in the December 17 indictment is Ihsan Elashi. He was also named in an earlier indictment. Moreover, he has already plead guilty to various charges. The BIS stated in a June 25 release that "Ihsan Elashyi, also known as Sammy Elashi, a resident of Richardson, Texas pled guilty in federal court to a charge of exporting computer equipment to Saudi Arabia in violation of a Department of Commerce Temporary Denial Order." See, USAO release and BIS release. See also, "More News" column in TLJ Daily E-Mail Alert No. 459, June 26, 2002.

The same BIS release states that "In his guilty plea, Elashyi admitted that, on September 22, 2001, after the imposition of the Temporary Denial Order, he and Tetrabal willfully violated that order by participating in a transaction that involved the export and attempted export of computers and monitors from the United States to Saudi Arabia."

The December 17, 2002 superceding indictment makes no mention of export of computers to Saudi Arabia, or associated export law violations. Moreover, while the December 17 indictment charges Ihsan Elashi, like his brothers, with export law violations with respect to Libya and Syria, it does not charge him in those Counts pertaining to terrorist financing.

An October 22, 2002 release of the U.S. Attorneys Office for the Northern District of Texas addresses Ihsan Elashi's Saudi Arabian dealings. In particular, it describes a transaction for the sale of 119 computers to a company in Saudi Arabia. It states that Elashi received payment of $107,385, but delivered no computers. The release does not allege that this was a sham transaction, or that it was related to terrorist financing. Rather, it states that Ihsan Elashi defrauded the Saudi Arabian company.

The October 22 release states that "Elashyi engaged in a scheme to defraud Saudi Systems, Inc. of Saudi Arabia. He failed to disclose to Saudi Systems, Inc. that he and his company, Tetrabal, were the subject of the TDO and prohibited from shipping good outside the United States. In specific violation of the TDO, Elashyi negotiated the sale of 119 computers to Saudi Systems, Inc. and faxed a price quotation to their office in Riyadh, Saudi Arabia. He accepted their order and received a wire transfer of $107,385 from Saudi Systems, Inc. to pay for the computers. After he received the funds, Elashyi falsely told representatives of Saudi Systems, Inc. that he could not return their money as his bank account had been frozen by the United States government. According to documents filed in court, Elashyi kept the funds and used them for his own personal benefit and for the benefit of Tetrabal."

FTC Amends Telemarketing Sales Rule
12/18. The Federal Trade Commission (FTC) released a final amended Telemarketing Sales Rule (TSR). This new version of the TSR includes several significant changes. See, FTC release and notice [272 pages in PDF] to be published in the Federal Register.

The FTC stated that the new TSR "retains most of the original Rule's requirements concerning deceptive and abusive telemarketing acts or practices without major substantive changes". The FTC also stated that the new TSR "establishes a national ``do-not-call´´ registry maintained by the Commission".

The White House press office released a statement which said that "The President commends the Federal Trade Commission for voting to create a national ``Do Not Call´´ registry to allow consumers the option to stop unwanted telephone solicitations. Time with family is a precious commodity, and families should be given the tools they need to help prevent unwanted calls from telemarketers. Today's action by the FTC to approve the creation of a national ``Do Not Call´´ registry will make it easier for consumers to stop getting the sales calls they do not want."

Dane Snowden, Chief of the Federal Communications Commission's (FCC) Consumer and Governmental Affairs Bureau stated in a release that "The FCC remains committed to working closely with the Federal Trade Commission and the States to provide a comprehensive plan for protecting consumers from telemarketing abuses. We look forward to reviewing the FTC's plan for a national do-not-call list as we revisit the FCC's telemarketing and junk fax rules under the Telephone Consumer Protection Act, including the possibility of establishing a national do-not-call list. While we strive to balance consumers' privacy concerns with telemarketers' rights to conduct legitimate business over the telephone, the FCC urges all interested parties to submit comments in our proceedings until the close of the comment period on January 8, 2003."

For more information, contact Catherine McBride at the FTC at 202 326-2452, Karen Leonard at 326-3597, Michael Goodman at 326-3071, or Carole Danielson at 326-3115.

Thursday, December 19
11:30 AM. Representatives of cable operators and digital television (DTV) product manufacturers will hold a joint press conference to announce an agreement regarding the manufacture and sale of DTV sets, and the transition to DTV. The participants will include Gary Shapiro (Consumer Electronics Association), Robert Sachs (National Cable & Telecommunications Association), Mark Coblitz (Comcast), and Bob Perry (Mitsubishi Digital Electronics America). See, notice. Location: Lisagore Room, National Press Club, 11th Floor, 529 14th St., NW.

1:00 - 4:00 PM. The U.S. Patent and Trademark Office (USPTO) will host a roundtable meeting. The USPTO has offered two descriptions of the purpose of this meeting. It stated in an October 28 notice in the Federal Register that the meeting will address small business views on foreign patent challenges. It stated in a December 9 notice that the meeting will address harmonization of patent laws. This roundtable, along with two others in Los Angeles and Chicago, are being held pursuant to a recommendation contained in a General Accounting Office (GAO) report [PDF] titled "Federal Action Needed to Help Small Businesses Address Foreign Patent Challenges". This report was released on August 22, 2002. See also, story titled "GAO Reports Foreign Patent Challenges Facing Small Businesses" in TLJ Daily E-Mail Alert No. 497, August 23, 2002. December 19 is also the deadline to submit written comments. To make reservations to attend, contact Velica Steadman at 703 305-9300 or Location: Crystal Park 2, 2121 Crystal Drive, Arlington, VA.

Deadline for the FCC to rule on SBC's Section 271 application with the FCC to provide in region interLATA service in the state of California. This is WC Docket No. 02-306. See, FCC notice [PDF].

Deadline for the FCC to rule on BellSouth's Section 271 application with the FCC to provide in region interLATA service in the states of Florida and Tennessee. This is WC Docket No. 02-307. See, FCC notice [PDF].

Friday, December 20
Deadline to submit comments to the Office of the U.S. Trade Representative (USTR) regarding its proposed free trade agreement (FTA) negotiations with Botswana, Lesotho, Namibia, South Africa and Swaziland. The proposed negotiations will address, among other things, electronic commerce, intellectual property rights (IPR), and access to telecommunications markets. See, notice in Federal Register, November 15, 2002, Vol. 67, No. 221, at Pages 69295 - 69297. See also, letter [PDF] from USTR Robert Zoellick to Sen. Robert Byrd (D-WV).
Monday, December 23
Deadline to submit reply comments to the Federal Communications Commission's (FCC) Wireline Competition Bureau (WCB) regarding AT&T's October 15 Petition for Rulemaking to Reform Regulation of Incumbent Local Exchange Carrier Rates for Interstate Special Access Services [118 pages in PDF]. This is RM No. 10593.

Deadline to submit notices of intent to participate to the Copyright Office regarding its request for "written comments and proposals for the scheduling of Copyright Arbitration Royalty Panel (CARP) proceedings to adjust royalty rates and terms under provisions of the Copyright Act governing ephemeral recordings and digital transmissions of performances of sound recordings, as well as notices of intent to participate in the CARP to set rates and terms under the statutory license for eligible nonsubscription services to make certain digital audio transmissions of sound recordings for the 2003-2004 period." See, notice in the Federal Register.

Tuesday, December 24
Christmas Eve. The TLJ Daily E-Mail Alert will not be published.
Wednesday, December 25
Christmas Day. The TLJ Daily E-Mail Alert will not be published.
Treasury Official Addresses R&D Tax Credit Rulemaking
12/18. Pam Olson, Assistant Treasury Secretary for Tax Policy, gave a speech in New York City in which she addressed the Treasury Department's lack of regulations implementing the research and development tax credit.

Section 41 of the Internal Revenue Code, 26 U.S.C. § 41, adopted in 1986, provides that the IRS is to promulgate implementing regulations. The IRS has not yet done so. However, sixteen years later, it is in the process of doing so. The IRS published a notice of a proposed rulemaking in the Federal Register, December 26, 2001, Vol. 66, No. 247, at Pages 66362 - 66375.

The issue is significant for the software industry, and companies that produce software in house, in part, because the courts have been restrictive in allowing companies to claim a tax credit under Section 41 for expenses related to software development.

For example, on December 13, 2002, the U.S. Court of Appeals (7thCir) issued its opinion [PDF] in Nicholas Eustace v. IRS, holding that the research and development tax credit is not available for expenses incurred in software improvement. See also, Tax & Accounting Software Corp. v. United States, 301 F.3d 1254 (10th Cir. 2002), and TLJ story titled "10th Circuit Disallows R&D Tax Credit for Software Development Costs", August 30, 2002.

Olson, who is head of the Office of Tax Policy, stated that "We are also trying to create simpler and more administrable rules under the current system. I would like to take a moment now to briefly discuss two of the more significant projects that we have been working on: the R&E credit and capitalization. These projects reflect Treasury’s view -- a view shared by the IRS -- that taxpayers should be provided clear rules in advance of undertaking expenses, gathering information, and filing returns, and that issues should be resolved through the rule making process (either administrative or legislative) and not through litigation. Resolution of issues through litigation is expensive, time consuming, and risky to tax administration and the development of sound tax policy."

Olson continued: "We have two projects in the research credit area. The first addresses the allocation of the credit among members of a controlled group. The second addresses the qualification of expenses for the credit. Both projects are priorities."

She also stated that "the proposed regulations last December made a number of important changes to the earlier final regulations issued in January of 2001. In particular, the proposed regulations addressed the general standard for qualifying expenses as well as the definition and qualification of internal use software. The proposed regulations also eliminated the credit specific record keeping requirements."

She also touched on the application of the tax credit to software. She said that "Most of the comments we have received support the changes we made in the proposed regulations. However, a number of taxpayers, including many financial institutions have expressed considerable concern about the definition of internal use software. This definition generally requires that the software be sold for separately stated consideration in order to not be considered internal use software. Other concerns have been expressed about the additional three part test that applies to this type of software."

She added that "The definition of internal use software contained in the proposed regulations is intended to provide a clear rule based on a factor that distinguishes internal use software from commercial software. As with any bright-line rule, there are many cases that will be near that line, on both sides."

Finally, she said that "We recognize the concerns expressed by many taxpayers, in a number of different industries, that the proposed definition of internal use software is too broad -- that it sweeps in software that is outside Congress' original contemplation of what should qualify for the credit. We recognize the concern that the proposed definition may disadvantage taxpayers who undertake software development in house rather than purchasing software from a vendor and taxpayers providing services other than computer services relative to taxpayers in the computer service business."

Olson said little about when the final rule will be promulgated. She said only, "as soon as possible".

She also addressed other topics, including international tax policy. She stated, as she has in the past, that "our international tax rules ... [have] created a competitive disadvantage for many U.S. companies doing business abroad". And again, she offered no legislative solutions.

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