Tech Law Journal Daily E-Mail Alert
December 21, 2007, Alert No. 1,692.
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DOJ Fines Microsoft, Google, and Yahoo $31.5 Million for Advertising of Internet Gambling

12/19. The Department of Justice's (DOJ) Office of the U.S. Attorney for the Eastern District of Missouri released a settlement agreement [7 pages in PDF] with Microsoft that provides for payments by Microsoft totaling $21 Million in return for settlement of government claims that Microsoft violated laws related to internet gambling.

The agreement states that this results "from the conduct of Microsoft Corporation involving its' alleged acceptance, processing and use of payments received for advertising on-line gambling activities in the United States from, or attributable to, on-line gambling businesses operating in violation of state or federal law."

The agreement further states that the government alleged that Microsoft "received payments from, or attributable to, on-line gambling businesses for advertising in the United States on-line gambling activities, ... the transmission and receipt of which funds the business operators knew, or should have known, were derived from criminal offenses, or funds intended to be used to promote or support unlawful activity, including violations of the Federal Wire Wager Act, of federal wagering excise tax laws, and of various states' statutes and municipal laws prohibiting gambling, either outright or absent regulation, licensing and/or taxation by the particular states and municipalities."

Under this agreement, Microsoft agrees to pay penalties, cooperate with the government in its ongoing investigations and prosecutions (including providing retained electronic data), and refrain from making any public statements refuting any part of the agreement. The government agrees not to bring any criminal or civil action against Microsoft under federal law.

Microsoft admits no wrongdoing in this agreement.

This agreement does not settle any state or local claims or allegations.

The DOJ released a similar settlement agreement [6 page in PDF] with Google, and another similar settlement agreement [7 pages in PDF] with Yahoo and related companies.

Microsoft's fine is $21 Million, payable as follows: $4.5 Million to the U.S., $7.5 Million to the International Center for Missing and Exploited Children (ICMEC), and $9 Million for internet advertising of the illegality of online gambling enterprises.

Google's fine is $3 Million.

Yahoo's fine is $7.5 Million, payable as follows:  $3 Million to the U.S., and $4.5 Million for internet anti-gambling advertising.

These actions involve several government agencies, including the DOJ, its Federal Bureau of Investigation (FBI), and the Internal Revenue Service (IRS). The DOJ's accompanying release reflects a variety of governmental goals. These include protection of onshore gambling operations from competition form offshore gambling operations, and maximization of tax revenues.

Catherine Hanaway, the U.S. Attorney for the Eastern District of Missouri, stated in this release “Honest taxpayers and gambling industry personnel who do follow the law suffer from those who promote illegal online behavior."

The IRS's James Vickery stated that "Illegal internet gaming operations continue to be areas of IRS compliance concern", and that it "will continue to play an enforcement role in the illegal gaming industry and to support regulatory and legislative initiatives aimed at eliminating an environment conducive to illegal gambling."

WTO Allows Offshore Nation not to Enforce US IPR as Damages for US Protection of Onshore Internet Gambling

12/21. The World Trade Organization (WTO) released a arbitration report [PDF] in the case brought by the tiny Caribbean nation of Antigua and Barbados (A&B). A&B asserts, and the WTO has held, that U.S. laws related to internet gambling violate U.S. trade treaty obligations by protecting onshore internet gambling, while outlawing the provision of similar gambling services online by providers in A&B. This report allows A&B to collect $21 Million per year from the U.S. in the form of non-protection of U.S. intellectual property rights (IPR).

Previously, in this long running WTO proceeding, the WTO found that the U.S. has violated its treaty obligations on the grounds that U.S. law carves out an domestic exception for internet gambling on horse racing.

This report summarizes past proceedings, and provides a ruling on remedies. It provides that A&B may collect damages of $21 Million per year from the U.S. by suspending their own treaty obligations, under the Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS) [33 pages in PDF], to protect U.S. IPR.

That is, unless the U.S., A&B, and other affected nations do not resolve this dispute, U.S. creators and inventors, IPR owners, and the content aggregation and distribution sectors, will pay to maintain the protection domestic gambling operations.

The report allows A&B not to enforce rights of U.S. persons with respect to "Copyright and related rights", "Trademarks", "Industrial designs", "Patents", and "Protection of undisclosed information".

It adds that "we may not question the complaining party's choice of specific obligations to be suspended".

A&B had sought billions per year in such damages. The small size of the damages award is a victory for the Office of the U.S. Trade Representative (OUSTR), which has long fought A&B in this proceeding.

Also, it should also be noted that but for the negligence of the OUSTR in failing to include gambling services as an exception to the treaty obligations of the U.S. in original negotiations, and the failure of the Congress to regulate internet gambling in a uniform and nondiscriminatory manner, A&B could not have maintained this WTO proceeding.

The report states that "the Arbitrator determines that the annual level of nullification or impairment of benefits accuing to Antigua in this case is US$21 million and that Antigua has followed the principles and procedures of Article 22.3 of the DSU in determining that it is not practicable or effective to suspend concessions or other obligations under the GATS and that the circumstances were serious enough. Accordingly, the Arbitrator determines that Antigua may request authorization from the DSB, to suspend the obligations under the TRIPS Agreement ... at a level not exceeding US$21 million annually."

The USTR's Sean Spicer stated in a release on December 21 that "The United States has already initiated the formal process under the WTO for clarifying its schedule of commitments and is engaged in compensation negotiations with Antigua and six other WTO Members that have claimed to be affected. We announced a compensation agreement with three of those Members earlier this week, and are continuing discussions with the others.  We would expect that Antigua would not suspend its WTO commitments to the United States while that process is underway."

See also, USTR release of December 17.

Sallie James, a trade policy analyst at the Cato Institute, wrote in a short piece published in the Cato web site that "The $21 million worth of pirated software, movies, and music would go on annually unless and until the United States changes its laws, so we can expect some lobbying from Hollywood to have the restrictions on internet gambling lifted."

Sen. Kyl and State AGs Address Rep. Frank's Internet Gambling Bill and WTO

12/18. Sen. Jon Kyl (R-AZ) spoke in the Senate opposing HR 2046 [LOC | WW], the "Internet Gambling Regulation and Enforcement Act", sponsored by Rep. Barney Frank (D-MA), "or any similar proposals that would create a permissive Federal licensing scheme for Internet gambling".

Sen. Kyl discussed, and introduced into the record, a letter from numerous state attorneys general. He said that they "note that the recently enacted Unlawful Internet Gambling Enforcement Act of 2006 has ``effectively driven many illicit gambling operators from the American marketplace.'' The Frank bill ``proposes to do the opposite, by replacing state regulations with a federal licensing program that would permit Internet gambling companies to do business with U.S. customers.´´" See, Congressional Record, December 18, 2007, at Page S15896.

HR 2046 would provide for the licensing of operators of internet gambling facilities by the Department of the Treasury's (DOT) Financial Crimes Enforcement Network (FinCEN). The bill affect, but not not repeal, the Unlawful Internet Gambling Enforcement Act (UIGEA), the statute enacted in 2006 that targets the financial transactions associated with internet gambling.

Last year the Congress enacted the UIGEA. Ultimately, it was not approved as a stand alone bill, but rather a one component of the unrelated port security bill, which both the House and Senate approved on September 29, 2006. The larger bill was HR 4954 (109th Congress), the "Port Security Improvement Act of 2006". It is now Public Law No. 109-347. Title VIII of this bill is the UIGEA. See, story titled "House and Senate Approve Port Security Bill With Tech Provisions" in TLJ Daily E-Mail Alert No. 1,461, October 4, 2006.

The Frank bill would exempt from the provisions of the UIGEA financial transactions with licensed operators of internet gambling facilities.

Rep. Frank's bill does not expressly repeal or amend the federal Wire Act, or preempt any state laws banning any types of gambling or internet gambling. However, the bill provides that "It shall be a defense against any prosecution or enforcement action under any Federal or State law against any person possessing a valid license under this subchapter that the activity is authorized under and has been carried out lawfully under the terms of this subchapter".

See also, story titled "Rep. Frank Introduces Bill to Facilitate Licensed Internet Gambling" in TLJ Daily E-Mail Alert No. 1,574, May 3, 2007.

The state AGs wrote that "A federal license would supersede any state enforcement action, because §5387 in H.R. 2046 would grant an affirmative defense against any prosecution or enforcement action under any Federal or State law to any person who possesses a valid license and complies with the requirements of H.R. 2046. This divestment of state gambling enforcement power is sweeping and unprecedented."

They also wrote that "the opt-outs may prove illusory", because they "will likely be challenged" before the World Trade Organization (WTO). The AG's add that the WTO "has already shown itself to be hostile to U.S. restrictions on Internet gambling. If it strikes down state opt-outs as unduly restrictive of trade, the way will be open to the greatest expansion of legalized gambling in American history and near total preemption of State laws restricting Internet gambling."

SEC and DOJ Fine Lucent $2.5 Million for Entertaining Chinese Telecom Employees

12/21. The Securities and Exchange Commission (SEC) filed a complaint [15 pages in PDF] in U.S. District Court (DC) against Lucent Technologies alleging violation of the books and records and internal controls provisions of the Foreign Corrupt Practices Act (FCPA).

The complaint alleges that "From at least 2000 to 2003, Lucent spent over $10 Million for approximately 1,000 Chinese foreign officials, who were employees of Chinese state-owned or state-controlled telecommunications enterprises, to travel to the United States and elsewhere. The Chinese government enterprises were either entities to which Lucent was seeking to sell its equipment and services or existing Lucent customers."

The complaint continues that "The majority of the trips were ostensibly designed to allow the Chinese foreign officials to inspect Lucent's facilities and to train the officials in using Lucent equipment. In fact, during many of these trips, the officials spent little or not time in the United States visiting Lucent's facilities. Instead, they visited tourist destinations throughout the Unites States, such as Hawaii, Las Vegas, the Grand Canyon, Niagara Falls, Disney World, Universal Studios, and New York City."

The SEC simultaneously announced that it has reached a settlement with Lucent under which Lucent has agreed to entry of judgment, and pay a $1,500,000 civil fine, but admitted no wrongdoing. See, SEC release.

In addition, the Department of Justice (DOJ) announced that has reached a related settlement with Lucent under which it will pay a $1,000,000 fine. See, DOJ release.

Lucent Technologies is now a wholly owned subsidiary of Alcatel-Lucent.

Cox Discusses Impact of Technology and Mergers in Securities Markets

12/20. Chris Cox, the Chairman of the Securities and Exchange Commission (SEC) gave a speech in New York City in which he addressed the adoption of new technologies by exchanges, the conversion of mutual exchanges into shareholder owned electronic markets, and the consequences for efficiency and costs, competition and acquisition, and globalization of securities markets.

He said that "the same technology that is increasing productivity in every corner of the economy is fundamentally changing the way that exchanges themselves operate. As a result of technological advances over the past decade or so, investors in today's markets enjoy lower costs and more efficient access to liquidity."

Cox stated that the new more flexible shareholder owned electronic markets can use new capital to invest in technology that offers customers faster, more efficient, and lower cost trading.

He also said that "today technology has virtually eliminated the need for face-to-face trading on the NYSE and everywhere else" and that "the trading floor itself is becoming obsolete".

Cox elaborated that "The combination of new technology and new legal structures has been the springboard, first, for dramatic changes in the U.S. capital markets, and, simultaneously, for the new globalization of markets that so clearly characterizes the new century. That's because, in addition to allowing innovation, demutualization has also allowed rapid combinations of exchanges, both internationally and domestically."

He also reviewed the recent history of  mergers of exchange markets, and the consequences, especially for securities regulators.

Washington Tech Calendar
New items are highlighted in red.
Sunday, December 23

The Senate will meet at 11:00 AM in pro forma session only.

Monday, December 24

There will be no issue of the TLJ Daily E-Mail Alert.

All federal executive branch departments and agencies will be closed. See, Executive Order of December 6, 2007.

Deadline to submit comments to the U.S. Patent and Trademark Office (USPTO) regarding its proposal to amend the Rules of Practice in Trademark Cases to require a description of the mark in all applications to register a mark not in standard characters. See, notice in the Federal Register, October 25, 2007, Vol. 72, No. 206, at Pages 60609-60611.

Effective date of the Federal Communications Commission's (FCC) Second Report and Order regarding video franchising. This item is FCC 07-190 in MB Docket No. 05-311. See, notice in the Federal Register, November 23, 2007, Vol. 72, No. 225, at Pages 65670-65677. See also, story titled "FCC Adopts 2nd Report and Order on Video Franchising" in TLJ Daily E-Mail Alert No. 1,668, November 2, 2007.

Tuesday, December 25


There will be no issue of the TLJ Daily E-Mail Alert.

The Federal Communications Commission (FCC) and other federal offices will be closed. See, Office of Personnel Management's (OPM) list of federal holidays and 5 U.S.C. § 6103.

Wednesday, December 26

There will be no issue of the TLJ Daily E-Mail Alert.

Friday, December 28

2:00 PM. Deadline for petitioner (Quanta Computer) to file its reply brief with the Supreme Court of the US (SCUS) in Quanta Computer v. LG Electronics, a patent infringement case. See, story titled "Supreme Court Grants Certiorari in Patent Exhaustion Case" in TLJ Daily E-Mail Alert No. 1,647, September 27, 2007.

Monday, December 31

The research and development tax credit expires.

Deadline to submit comments to the General Services Administration (GSA) and other agencies in response to the proposal to amend the Federal Acquisition Regulation (FAR) to implement the Governmentwide Enterprise Software Licensing Program, which is also named SmartBUY. See, notice in the Federal Register, October 31, 2007, Vol. 72, No. 210, at Pages 61603-61605.

Tuesday, January 1

New Year's Day. See, Office of Personnel Management's (OPM) list of 2008 federal holidays.

Effective date of the Securities and Exchange Commission's (SEC) amendments to its proxy rules to require issuers and other soliciting persons to post their proxy materials on an internet web site, and to provide shareholders with a notice of the internet availability of the materials. See, notice in the Federal Register, August 1, 2007, Vol. 72, No. 147, at Pages 42221-42239. See also, story titled "SEC Seeks Comments on Proposal to Mandate Internet Availability of Proxy Materials" in TLJ Daily E-Mail Alert No. 1,529, January 30, 2007.

Effective date of the Copyright Office's (CO) October 23, 2007, notice in the Federal Register that contains a final list of stations listed in affidavits sent to the CO in which the owner or licensee of the station attests that the station qualifies as a specialty station. The notice states that this list "shall be used to verify the specialty station status of those stations identified as such by cable systems on their semi-annual statements of account". See, Federal Register, October 23, 2007, Vol. 72, No. 204, at Pages 60029-60030, and 17 U.S.C. § 111.

Effective date of the Copyright Royalty Judge's final rule setting the royalty rates and terms for the use of sound recordings and the making of ephemeral phonorecords by preexisting subscription services for the period 2008 through 2012. See, notice in the Federal Register, December 19, 2007, Vol. 72, No. 243, at Pages 71795-71798.

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