Tech Law Journal Daily E-Mail Alert
July 21, 2006, Alert No. 1,415.
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District Court Denies DOJ Motion Dismiss Class Action Against AT&T Regarding Warrantless Surveillance

7/20. The U.S. District Court (NDCal) issued an Order [72 pages in PDF] in Hepting v. AT&T, a class action against AT&T arising out of AT&T surveillance assistance to the U.S. government. The Order, which is also a lengthy opinion, denies the U.S. government's motion to dismiss based on the state secrets privilege.

The Order also denies AT&T's motion to dismiss based on the plaintiffs lack standing, and based on the argument that telecommunications providers are immune from suit if they receive a government certification authorizing them to conduct electronic surveillance.

Tash Hepting and other individuals filed a complaint in District Court against AT&T alleging violation of the 1st and 4th Amendments to the U.S. Constitution, the Foreign Intelligence Surveillance Act (FISA), the Electronic Communications Privacy Act (ECPA), the Stored Communications Act (SCA), the Communications Act at 47 U.S.C. § 605, and California statutes, in connection with its alleged "collaborating with the National Security Agency (NSA) in a massive warrantless surveillance program that illegally tracks the domestic and foreign communications and communication records of millions of Americans."

The allegations in the complaint relate to the disclosures made by the New York Times in December of 2005, and by USA Today in May of 2006. See, stories titled "President Bush Discloses Interception of Communications Without Court Approval" in TLJ Daily E-Mail Alert No. 1,275, December 19, 2005; "Bush, Gonzales & Hayden Discuss Presidential Intercepts and PATRIOT Act" in TLJ Daily E-Mail Alert No. 1,276, December 20, 2005; and "Bush Responds to USA Today Story Regarding NSA Database of Phone Calls" in TLJ Daily E-Mail Alert No. 1,369, May 12, 2005.

The original complaint was filed on January 31, 2006. The amended complaint [PDF] was filed on February 22, 2006.

The named plaintiffs seek class action certification. The named plaintiffs are represented by the the law firm of Lerach Coughlin Stoia Geller Rudman & Robbins. The senior name partner, William Lerach, and other attorneys in this firm, have a long history of bringing class action lawsuits against large technology and communications companies. However, their legal theories typically have been based upon federal securities statutes, rather than the statutory violations that are alleged in the present case.

The litigation activities of Lerach, and other class action securities lawyers, caused the Congress to twice enact securities litigation reform legislation in the 1990s.

Lerach's former law firm was the former Milberg Weiss Bershad Hynes & Lerach. The current law firm of Milberg Weiss Bershad & Schulman was recently indicted in connection with it class action litigation practices. See, story titled "Milberg Weiss Indicted for Paying Illegal Kickbacks to Class Action Plaintiffs" in TLJ Daily E-Mail Alert No. 1,375, May 22, 2006.

The named plaintiffs are also represented by the law firm of Traber Voorhees and the Electronic Frontier Foundation (EFF).

The United States is not a named defendant. However, it filed a motion to intervene. It also filed a motion [34 pages in PDF, incomplete version] to dismiss or for summary judgment that is the subject of the present opinion. The U.S. is represented in this case by the Department of Justice (DOJ). The DOJ's motion is signed by Anthony Coppolino and Andrew Tannenbaum.

The U.S. deleted numerous items from the publicly released version of this motion. TLJ offers no summary here because the extent of the redactions from the publicly released version render it incapable of accurate summary.

However, the U.S. did argue that the Court should "Dismiss this action because adjudication of Plaintiffs' claims risks or require the disclosure of protected state secrets and would thereby risk or cause exceptionally grave harm to the national security of the United States."

Also, the Court wrote that the U.S. asserted that "(1) the very subject matter of this case is a state secret; (2) plaintiffs cannot make a prima facie case for their claims without classified evidence and (3) the privilege effectively deprives AT&T of information necessary to raise valid defenses."

The U.S. did not argue in the publicly released version that failure to dismiss actions alleging violation of the Communications Act, FISA, ECPA, SCA, and other statutes, could result in civil judgments against the companies that violate these statutes, which in turn would provide a disincentive for companies to provide surveillance assistance to the government in violation of these statutes.

Six law professors who specialize in electronic surveillance and constitutional law filed an amicus curiae brief [PDF] urging the Court to deny the motion to dismiss. They are Susan Freiwald (University of San Francisco), Cynthia Farina (Cornell), Peter Shane and Joseph Platt (Ohio State University), Peter Raven-Hansen (George Washington University), and Erwin Chemerinsky (Duke University).

They wrote that "Federal law strictly prohibits interception of communications without a court order. It requires that telecommunications providers refuse to help the government listen in to citizens’ communications without a court’s approval. When it set up the statutory scheme, Congress recognized that telecommunications providers play a critical role in protecting subscribers’ privacy interests. In contrast to those whose houses are searched, victims of electronic surveillance rarely learn that someone has listened to their telephone conversations without authorization. For that reason, Congress tasked telecommunications providers with ensuring that any surveillance is properly authorized, and provided strict penalties for ignoring that responsibility. This case is about whether the Defendants violated their obligations under the law."

They added that "The Government asks this Court to disrupt this statutory scheme and to decline to decide whether the telecommunications companies violated the law because the case implicates state secrets. However, at least the interception claims, and perhaps all the claims, may be decided based on publicly available information. If Defendants intercepted Plaintiffs' conversations without a court order, they violated federal electronic surveillance law. Liability attaches regardless of what Defendants did with the information afterwards. While the government’s role in these interceptions may be an important part of the public discourse about this case, the government’s actions are not implicated in the interception claims."

This case is Tash Hepting et al. v. AT&T Corporation, AT&T, Inc., and Does 1-20, U.S. District Court for the Northern District of California, D.C. No. C-06-672 VRW, Judge Vaughn Walker presiding.

Federal Reserve Reports on Activity in Tech Sector

7/20. The Senate Banking Committee held a hearing on July 19 titled "The Federal Reserve's Second Monetary Policy Report to Congress for 2006". Federal Reserve Board (FRB) Chairman Ben Bernanke presented the FRB's report [30 pages in PDF] titled "Monetary Policy Report to the Congress". The House Financial Services Committee (HFSC) held a related hearing on July 20.

Bernanke stated in his prepared testimony that "Spending on equipment and software has also been strong."

However, the FRB's written report contained more detail. It states that "Demand for high-technology equipment stepped up noticeably in the first quarter because of a sharp jump in outlays for communications equipment. Providers of telecommunications services appear to be investing heavily in fiber-optic networks, which will allow them to offer a wider range of Internet services; the recent spurt likely also includes some replacement demand for equipment damaged by last year’s hurricanes. In contrast, business demand for computing equipment, while still increasing at a double-digit pace in real terms, has been relatively modest by historical standards so far this year."

It adds that "Industry analysts suggest that firms may be delaying investment in anticipation of introductions, later this year and in early 2007, of several products that will allow faster and more energy-efficient processing. Spending on equipment other than transportation and high-tech goods continued to trend up at a solid pace, on average, during the fourth and first quarters. Demand was particularly strong for metalworking and general industrial machinery as well as for equipment used in construction, energy extraction, and services industries."

The FRB report also states that "Productivity has been rising at a solid rate over the past two years, albeit more slowly than the especially rapid pace that prevailed during the first three years of the expansion. A strong trend in productivity is likely to be maintained as businesses take advantage of new investment in facilities and equipment, as diffusion of technology continues, and as organizational advancements and business process improvements yield further increases in efficiency.

See also, opening statement [PDF] of Rep. Mike Oxley (R-OH).

People and Appointments

7/20. President Bush nominated Sharon Lynn Hays to be Associate Director of the Office of Science and Technology Policy (OSTP). She is currently OSTP Chief of Staff. Before that she was Staff Director of the House Science Committee's Subcommittee on Research. See, White House release and release.

7/20. President Bush nominated Mary Ourisman to be Ambassador to Antigua and Barbuda, Barbados, St. Kitts and Nevis, Saint Lucia, the Commonwealth of Dominica, Grenada, and Saint Vincent and the Grenadines. See, White House release and release. Antigua and Barbuda, and other Caribbean states, are home to numerous internet gambling operations. Antigua and Barbuda have complained to the World Trade Organization (WTO) that various U.S. laws, including the Wire Act, and laws affecting international money transfers and payments, violate the U.S.'s treaty obligations. See, stories titled "WTO Panel Instructs Congress to Amend Wire Act to Legalize Internet Gambling" in TLJ Daily E-Mail Alert 1,016, November 11, 2004; "WTO Appellate Body Upholds U.S. Laws Affecting Internet Gambling" in TLJ Daily E-Mail Alert No. 1,111, April 8, 2005; and "Allgeier Addresses Trade Agreements and Internet Gambling" in TLJ Daily E-Mail Alert No. 1,118, April 19, 2006. The Congress is now considering further legislation affecting internet gambling, and associated financial transactions. Mary Ourisman married Mandell Ourisman, an automobile dealer and major Republican financial donor. Mary Ourisman is a hostess from Texas whose diplomatic experience consists of making five figure contributions to Republican committees, and appointment to the Board of Trustees of the Washington National Opera. See, Federal Election Commission (FEC) individual donor filings.

More News

7/17. The U.S. District Court (DC) approved the Securities and Exchange Commission's (SEC) plan to distribute $300 Million to investors in SEC v. Time Warner. The SEC stated in a release that it had "charged Time Warner with materially overstating online advertising revenue and the number of its Internet subscribers, with aiding and abetting three other securities frauds and with violating a Commission cease-and-desist order". This case is SEC v. Time Warner, Inc., U.S. District Court for the District of Columbia, Judge Gladys Kessler presiding.

DOJ and SEC File Criminal and Civil Charges Against Former Brocade Executives for Backdating Stock Option Grants

7/20. The Securities and Exchange Commission (SEC) filed a civil complaint [21 pages in PDF] in U.S. District Court (NDCal) against Gregory Reyes, Antonio Canova, and Stephanie Jensen alleging violation of federal securities laws in connection with their alleged backdating of stock option grants.

In addition, the Department of Justice (DOJ) filed a criminal complaint in U.S. District Court (NDCal) against Reyes and Jensen alleging criminal violation of 15 U.S.C. §§ 78j(b) and 78ff. See, complaint and supporting affidavit [15 pages in PDF]. See also, SEC release describing both actions.

Reyes was previously P/CEO of Brocade Communications Systems, which develops and sells storage networking products. Canova was Brocade's VP for finance and CFO. Jensen was VP of human resources.

The SEC's civil complaint states that "From at least 2000 through 2004, executives of Brocade Communications Systems, Inc. ... a San Jose computer networking company, concealed millions of dollars in expenses from investors, and significantly overstated the Company's income, by falsifying records relating to employee stock option grants. The fraudulent scheme was orchestrated by former chief executive officer Gregory L. Reyes, who routinely executed backdated documents and evaded rules requiring Brocade to publicly report these compensation expenses."

It further states that "In order to provide Brocade employees and executives with far more lucrative ``in-the-money´´ options, while avoiding having to inform shareholders of the millions of dollars in compensation expenses, Reyes engaged in a scheme to grant ``in-the-money´´ options by falsifying company records to create the false appearance that the options had been granted at the market price on an earlier date."

And, the complaint states that "By falsifying the dates on which options were purportedly granted, Reyes and others materially understated Brocade's expenses and overstated its income, and falsely represented in certain filings that Brocade had incurred no expense for options grants."

The SEC's complaint contains eight counts, including violation of Section 17(a) of the Securities Act (15 U.S.C. § 77q(a)), Section 10b of the Exchange Act (15 U.S.C. § 78j(b), Section 13(b)(5) of the Exchange Act (15 U.S.C. § 78m(b)(5), and rules thereunder.

Brocade stated in a release that "No executive officers involved in the historical stock option granting practices remain employed with Brocade."

It added that "In the first quarter of fiscal year 2006, the Company reserved $7 million for a proposed settlement with the SEC. The $7 million is based on an offer of settlement that the Company made to the SEC staff and which the Staff has indicated it would recommend to the SEC Commissioners. This proposed settlement is contingent upon SEC Commissioners approval."

The civil case is SEC v. Gregory Reyes, Antonio Canova, and Stephanie Jensen, U.S. District Court for the Northern District of California, at San Jose, D.C. No. C 06 4435.

The criminal case is USA v. Gregory Reyes and Stephanie Jensen, U.S. District Court for the Northern District of California, at San Francisco, D.C. No. 3 06 70450.

Washington Tech Calendar
New items are highlighted in red.
Friday, July 21

The House will not meet.

The Senate will meet at 9:30 AM. It will consider S 403, the Child Custody Protection Act.

10:00 AM. The House Homeland Security Committee's Subcommittee on Intelligence, Information Sharing, and Terrorism Risk Assessment will hold a hearing titled "The Homeland Security Information Network: An Update on DHS Information Sharing Efforts". The witnesses will include Charles Allen (DHS Chief Intelligence Officer). Location: Room 311, Cannon Building.

Monday, July 24

The House will meet at 12:30 PM.

5:00 PM. The House Rules Committee will meet to adopt a rule for consideration of HR 1956, the "Business Activity Tax Simplification Act of 2006". Location: Room H-313, Capitol Building.

Tuesday, July 25

9:30 AM - 5:30 PM. The Antitrust Modernization Commission (AMC) will hold a meeting to deliberate on possible recommendations regarding the antitrust laws to Congress and the President. The meeting is open to the public, but registration is required. See, notice in the Federal Register, June 23, 2006, Vol. 71, No. 121, at Pages 36059-36060.

10:30 AM. The Senate Finance Committee will hold a hearing titled "How Much Should Borders Matter?: Tax Jurisdiction in the New Economy". The witnesses will be Sen. Michael Enzi (R-WY), Sen. Byron Dorgan (D-ND), Daniel Noble (Wyoming Department of Revenue), George Isaacson (Brann & Isaacson, Lewiston), Christopher Rants (Speaker of the Iowa House of Representatives), Robert Benham (Balliet's, LLC), Gary Imig (Sierra Trading Post), Douglas Lindholm (Council on State Taxation), Dan Bucks (Montana Department of Revenue), and Michael Mundaca (Ernst & Young). See, notice. Location: Room 215, Dirksen Building.

11:30 AM. The House Judiciary Committee's (HJC) Subcommittee on Commercial and Administrative Law will hold an oversight hearing titled "The 60th Anniversary of the Administrative Procedure Act: Where Do We Go From Here?" See, notice. The hearing will be webcast by the HJC. Press contact: Jeff Lungren or Terry Shawn at 202-225-2492. Location: Room 2141, Rayburn Building.

Wednesday, July 26

9:00 AM - 4:00 PM. Day one of a two day public meeting of the Federal Accounting Standards Advisory Board (FASAB). See, agenda [PDF] and notice in the Federal Register, July 12, 2006, Vol. 71, No. 133, at Pages 39318. Location: Room 7C13, GAO Building, 441 G St., NW.

9:30 AM. The Senate Judiciary Committee may hold a hearing titled "FISA for the 21st Century". Location: Room 226, Dirksen Building.

9:30 AM - 5:30 PM. The Antitrust Modernization Commission (AMC) will hold a meeting to deliberate on possible recommendations regarding the antitrust laws to Congress and the President. The meeting is open to the public, but registration is required. See, notice in the Federal Register, June 23, 2006, Vol. 71, No. 121, at Pages 36059-36060.

12:00 NOON - 2:00 PM. The DC Bar Association's Intellectual Property Law Section will host a panel discussion titled "Introduction To Patent Law and Trade Secret Law". The speakers will include Steven Warner (Fitzpatrick Cella Harper & Scinto) and Milton Babirak (Babirak Vangellow & Carr). The price to attend ranges from $15-$30. For more information, call 202-626-3463. See, notice. Location: D.C. Bar Conference Center, 1250 H Street NW, B-1 Level.

2:00 - 5:00 PM. The National Telecommunications and Information Administration (NTIA) will hold a meeting regarding management of the internet domain name and addressing system. See, NTIA notice and notice in the Federal Register, Federal Register, May 26, 2006, Vol. 71, No. 102, at Pages 30388-30389. Location: auditorium of the Department of Commerce's main building at 1401 Constitution Ave., NW.

Thursday, July 27

9:00 AM. The House Judiciary Committee's Subcommittee on Courts, the Internet and Intellectual Property will hold a hearing on HR 5055, an untitled bill to amend the Copyright Act to provide to protection for fashion design. See, notice. Press contact: Jeff Lungren or Terry Shawn at 202-225-2492. Location: Room 2141, Rayburn Building.

9:00 AM - 4:00 PM. Day one of a two day public meeting of the Federal Accounting Standards Advisory Board (FASAB). See, agenda [PDF] and notice in the Federal Register, July 12, 2006, Vol. 71, No. 133, at Pages 39318. Location: Room 7C13, GAO Building, 441 G St., NW.

11:45 AM - 1:15 PM. The Federal Communications Bar Association's (FCBA) Young Lawyers Committee will host a brown bag lunch titled "The Role of Communications Trade Association Counsel and Policymakers". The speakers will be Dan Brenner (National Cable & Telecommunications Association), Carolyn Brandon (Cellular Telecommunications & Internet Association), Ann Bobeck (National Association of Broadcasters), Colin Sandy (National Exchange Carriers Association), and David Cavossa (Satellite Industry Association). Location: Willkie Farr & Gallagher, 1875 K Street, NW.

6:00 - 8:00 PM. The DC Bar Association will host a continuing legal education (CLE) seminar titled "Trade Secrets: Case Law Update 2006". The speakers will include Milton Babirak (Babirak Vangellow & Carr). The price to attend ranges from $70-$125. For more information, call 202-626-3488. See, notice. Location: D.C. Bar Conference Center, 1250 H Street NW, B-1 Level.

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