News from November 26-30, 2002

Massachusetts to Appeal in Microsoft Case

11/29. The state of Massachusetts announced that it will appeal in the government antitrust case against Microsoft. See, release.

Massachusetts Attorney General Tom Reilly also released a statement. He said that "One year ago, after a change in administrations, the Department of Justice negotiated a deal with Microsoft. The deal ignored Microsoft's ill gotten gains, did nothing about safeguarding competition in new technologies, and was filled with loopholes and exceptions. There was nothing in the deal that would change Microsoft's business practices in any substantial way. Some states joined the deal anyway, rather than continue. The rest made the decision to fight on, and seek a remedy that would make a difference. We knew that it would not be an easy path. We knew that this would end up having to be decided by higher Courts, one way or the other."

He added that "the district court did little more than accept Microsoft's loophole filled deal. We believe the final word must come from the appellate courts. We are going to appeal."

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11/29. The Copyright Office published a notice in the Federal Register in which it announced "a cost of living adjustment of 2.0% in the royalty rates paid by colleges, universities, or other nonprofit educational institutions that are not affiliated with National Public Radio for the use of copyrighted published nondramatic musical compositions in the BMI and ASCAP repertories." The increase will take effect on January 1, 2003. See, Federal Register, November 29, 2002, Vol. 67, No. 230, at page 71105.

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11/28. Michael Gallagher, a NTIA official, gave a speech in Seattle, Washington, titled "Broadband Deployment and Spectrum Policy". Gallagher is Deputy Assistant Secretary for Communications and Information at the Commerce Department's National Telecommunications and Information Administration (NTIA). He spoke at the University of Washington School of Law.

Genuity Files Chapter 11 Petition

11/27. Genuity filed a Chapter 11 bankruptcy petition in the U.S. Bankruptcy Court. Genuity also announced that "it has reached a definitive agreement with Level 3 ... to acquire substantially all of Genuity's assets and operations for $242 million, subject to adjustments". See, Genuity release.

Level3 Communications CEO James Crowe stated in a release that "The transaction combines the assets and operations of Genuity, the company that helped invent the Internet, with Level 3, the company that built the first network fully optimized for Internet Protocol based communications. Both companies are experienced providers of optical and IP based services, and both are Tier 1 Internet backbone providers with industry leading quality of service. Genuity's transport and dedicated and dial-up Internet access business -- more than 80 percent of revenue -- is complementary to Level 3's transport, managed modem and IP services business."

Genuity provides Internet access, transport, managed security and VPN, hosting and other services. Its largest customers are Verizon and America Online. Both have consented to the transaction.

Lawrence Babbio, Vice Chairman and President of Verizon, stated in a release that "As a significant creditor and customer of Genuity, we fully support this transaction. We are delighted that we've been able to resolve many complex issues in a way that benefits both the customers of Verizon and Genuity, and Genuity's creditors. We are also pleased that Verizon's willingness to continue existing commercial arrangements with Level 3 enabled Genuity to agree to this transaction."

This transaction is subject to approval by the bankruptcy court and various regulatory agencies, including Hart Scott Rodino approval.

7th Circuit Reverses in FutureSource v. Reuters

11/27. The U.S. Court of Appeals (7thCir) issued its opinion [8 pages in PDF] in FutureSource v. Reuters, a case involving the affect of a bankruptcy sale upon a contract involving intellectual property rights.

Background. Reuters is a news service. Bridge Information Services was, and FutureSource is, a competitor of Reuters. Bridge contracted with FutureSource to provide FutureSource with continuously updated financial markets data for resale to FutureSource's customers.

Bridge later filed for bankruptcy. Reuters bought the assets used in Bridge's financial markets data service in a bankruptcy court auction for $275 Million. This purchase was pursuant to an asset purchase agreement that provided that Reuters assumed no contractual or other obligations of Bridge other than those specified; it did not specify Bridge's contract with FutureSource. The bankruptcy court order stated that Reuters took the assets free of all liens and claims.

District Court. FutureSource filed a complaint in U.S. District Court (NDIll) against Reuters alleging breach of contract, and seeking to compel Reuters to continue providing the service that Bridge had provided to FutureSource. The District Court granted FutureSource an injunction. Reuters appealed.

Appeals Court. The Appeals Court reversed. Judge Richard Posner, writing for a three judge panel, stated the issue: "So all that has to be decided is whether Reuters is obligated to furnish the Bridge data service to FutureSource free of charge until the end of time." He concluded that it was not so obligated.

He first stated that "Nonsensical interpretations of contracts, as of statutes, are disfavored. ... Not because of a judicial aversion to nonsense as such, but because people are unlikely to make contracts, or legislators statutes, that they believe will have absurd consequences."

He then reasoned that "The argument that FutureSource makes on behalf of these results is that" its contract with Bridge "gave it a license to use Bridge's intellectual property and that an intellectual property license, like a tenancy in real estate, is not extinguished by the sale of the underlying property. This is true in general; and we may further assume that the contract did convey to FutureSource an interest in intellectual property. Although data are not copyrightable, compilations of data that involve a significant element of creativity are, Feist Publications, Inc. v. Rural Telephone Service Co., 499 U.S. 340, 348, 358-59 (1991); 17 U.S.C. §§ 101, 103, and for all we know that is the character of the Bridge data service, on which Bridge owns a copyright the validity of which is not challenged. No matter. The bankruptcy court's sale order, consistent with 11 U.S.C. § 363(f), extinguished all ``interests´´ in the assets acquired by Reuters, and this included an interest in the intellectual property that Reuters acquired from Bridge."

Judge Posner was not kind to the District Court judge. He concluded that "Obviously a preliminary injunction should not be entered if the plaintiff has no claim; and FutureSource has none. The next step in the district court presumably will be the filing of a motion for summary judgment by Reuters and its grant by the district judge."

Court Holds California PUC Does Not Have Jurisdiction Over Unfair Competition Complaints

11/27. The California Court of Appeal (1/3) issued its opinion [MS Word] in Greenlining Institute v. PUC, a petition for writ of review of an order of the California Public Utilities Commission (PUC).

The Greenlining Institute and others filed complaints against Pacific Bell with the PUC alleging that Pacific used a variety of misleading and deceptive marketing practices to sell optional services to customers in violation of PUC rules, and California unfair competition statutes. The PUC determined that certain of Pacific Bell's practices were unlawful and ordered prospective and retrospective relief. However, the PUC did not adjudicate the claims arising under California unfair competition law.

Greenlining then filed this petition for review with the Court of Appeal. The Court of Appeal held that the PUC does not have jurisdiction over complaints arising under California unfair competition law. This is a matter for the courts.

Bush Signs Cyber Security Research and Development Act

11/27. President Bush signed HR 3394, the "Cyber Security Research and Development Act". The bill authorizes funding for various new research and education programs pertaining to cyber security. See, White House release.

People and Appointments

11/27. Securities and Exchange Commission (SEC) Chief of Staff Mark Radke will leave the SEC. He has worked at the SEC since August, 2001. See, SEC release.

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11/27. Randal Milota plead guilty in U.S. District Court (EDCal) to mail fraud arising out of an internet based scheme to falsely advertise computer equipment that he never delivered. See, USAO release [PDF].

US To Propose Tariff Reductions to WTO

11/26. The Office of the U.S. Trade Representative (USTR) announced in a press release that the U.S. will present a proposal to the World Trade Organization (WTO) regarding the reduction of tariffs and non-tariff barriers to trade.

The USTR release states that "The U.S. proposal would eliminate tariffs on a full-range of consumer and industrial goods ranging from women's shoes, to tractors, to children's toys. The proposal, which will be presented to WTO members next week in Geneva, Switzerland, calls for a two-step approach to tariff elimination. First, WTO members must cut and harmonize their tariffs in the five year period from 2005 to 2010. Specifically, WTO members would eliminate all tariffs at or below 5 percent by 2010, cut all other tariffs through a "tariff equalizer" formula to less than 8 percent by 2010, and eliminate tariffs in certain highly traded industry sectors as soon as possible, but not later than 2010." See also, substantially identical DOC release.

The USTR also stated in a further summary that "Sectors should include, but are not limited to ... Information technology and electronics products".

The USTR elaborated in its release that "The second step calls for all members to make equal annual cuts in remaining tariffs between 2010 and 2015. These cuts would result in zero tariffs. The proposal also calls for a separate program to identify and eliminate non-tariff barriers, which would run on a parallel track with the negotiations on industrial tariffs. The United States will put forward an initial list of such barriers in January."

District Court Issues Judgment Against WorldCom

11/26. The U.S. District Court (SDNY) issued a judgment in SEC v. WorldCom. The Securities and Exchange Commission (SEC) stated in a release that the judgment "(1) imposes the full injunctive relief sought by the Commission, (2) orders an extensive review of the company's corporate governance systems, policies, plans, and practices, (3) orders an extensive review of the company's internal accounting control structure and policies, (4) orders that WorldCom provide reasonable training and education to certain officers and employees to minimize the possibility of future violations of the federal securities laws, and (5) provides that civil money penalties, if any, will be decided by the Court at a later date."

The SEC added that "This judgment settles part, but not all, of the Commission's action against WorldCom. ... The Commission's investigation into matters related to WorldCom's financial fraud is continuing."

John Sidgmore, P/CEO of WorldCom, stated that "This settlement is a significant milestone in WorldCom's restructuring efforts ... Resolution of this litigation enables our company to move even more confidently toward a successful conclusion of the company's financial restructuring." See, WorldCom release.

District Court Issues Order in FOIA Case Re PATRIOT Act

11/26. The U.S. District Court (DC) issued an order [2 pages in PDF] in ACLU v. DOJ, a Freedom of Information Act (FOIA) action seeking records from the Department of Justice (DOJ) pertaining to implementation of the PATRIOT Act. The order denies the Plaintiffs' motion for a preliminary injunction, and directs the DOJ to complete its processing of plaintiff' FOIA requests not later than January 15, 2003.

On October 24, 2002, the Electronic Privacy Information Center (EPIC), the ACLU, and others, filed a complaint [12 pages in PDF] alleging violation of the FOIA, 5 U.S.C. § 552, in connection with the DOJ's failure to respond to plaintiffs' FOIA request for records pertaining to the DOJ's implementation of the USA PATRIOT Act, the broad anti-terrorism bill passed late in 2001.

The complaint alleges that "there has been growing public concern about the scope of the Patriot Act and the government’s use of authorities thereunder, particularly in relation to constitutionally protected rights. Plaintiffs seek records that are critical to the public’s ability to evaluate the government’s use of vast new surveillance powers, and whose release can only serve national security, not undermine it."

The EPIC submitted a FOIA request to the DOJ and Federal Bureau of Investigation (FBI) on August 21, 2002. The document requested, among other things, records pertaining to the number of times the government has authorized the use of devices to trace the telephone calls or e-mails of people who are not suspected of any crime and the number of times the government has initiated surveillance of Americans under the expanded Foreign Intelligence Surveillance Act (FISA).

The complaint requests that the Court order the DOJ "immediately to state which records it intends to disclose in response to plaintiffs’ FOIA request" and "immediately to process plaintiffs' FOIA request and to disclose the requested records".

The order, signed by Judge Ellen Huvelle, states that "defendant shall complete its processing of plaintiffs’ FOIA requests, including identifying all responsive documents and informing plaintiffs which documents defendant seeks to withhold and on what basis, not later than January 15, 2003". It also states that "plaintiffs shall inform defendant in writing of the withholdings that it wishes to challenge no later than January 17, 2003.

The order also sets deadlines for proceedings on summary judgment. The DOJ shall file is motion for summary judgment by January 24. The plaintiffs shall file their opposition by February 6. The DOJ shall file is reply by February 17.

The other plaintiffs are the American Booksellers Foundation for Free Expression (ABFFE), the Freedom to Read Foundation (FTRF), and the American Civil Liberties Association (ACLU). David Sobel of the EPIC signed the complaint.

Consumers Union Criticizes FCC Protection of Cable Industry

11/26. The Consumers Union (CU) issued a release in which it criticized the Federal Communications Commission (FCC) for protecting cable companies from competitors with different technologies.

The CU stated that "The proposed merger of satellite companies EchoStar and DirecTV understandably raised antitrust and competitive concerns, but under modifications proposed by the companies, the merger would have allowed them to offer local channels nationwide and present a real challenge to cable giants. Rather than work with the companies to restructure the deal, the Federal Communications Commission (FCC) simply rejected the merger. The FCC has also refused to grant licenses to companies seeking to compete with cable TV service, such as Broadwave USA and its Northpoint technology."

The CU added that "the FCC is apparently unwilling to lift a finger to help consumers harmed by cable's monopolistic practices. Congress and the FCC need to go back to the drawing board and fix the Telecommunications Act in order to promote competition so that consumers can see the increased choices and lower prices that they were promised six years ago."

The CU also criticized various cable companies for raising rates. It stated that "The holiday round of cable rate hikes is part of a troubling trend that dates back to 1996 when Congress passed the Telecommunications Act to initiate deregulation of cable companies." It added that "in the six years since the law was passed, cable rates nationwide have skyrocketed 45 percent, and 95 percent of American households still have only one cable company in their communities."

The National Cable and Telecommunications Association's (NCTA) Rob Stoddard responded that "Cable operators are highly sensitive to the competitive conditions of the marketplace. The analysis by Consumers Union distorts or overlooks a number of facts, including the constant escalation in costs of content; the recruitment, training, and retention of qualified personnel; improvements in customer care and service; as well as the industry's on-going investment in upgrading its plant. This year alone, operators are expected to have invested nearly $15 billion. The charge that direct broadcast satellite service is non-competitive is ludicrous, based on DBS’ acquisition of 20 million customers in less than a decade. We compete vigorously with DBS, but cable service -- featuring more choice, better local programming, and new digital services -- remains the best consumer value in the marketplace today." See, NCTA release.

SEC Files Complaint Against Former FVC Executives

11/26. The Securities and Exchange Commission (SEC) filed a civil complaint in U.S. District Court (NDCal) against Ralph Ungermann, Alan McMillan, and James Mitchell, all former officers of First Virtual Communications (FVC), alleging violation of federal securities laws in connection with the overstatement of revenues and earnings of FVC, and subsequent sale of shares of FVC.

FVC is a Santa Clara, California company that makes video and web conferencing products. The complaint alleged that all three violated the antifraud provision of Section 17(a) of the Securities Act and Section 10(b) of the Exchange Act, and Rule 10b-5 thereunder, and lying to auditors in violation of Rule 13b2-2 under the Exchange Act. The complaint further alleged that Ungermann and Mitchell violated the record keeping provisions of Section 13(b)(2)(A) of the Exchange Act and Rule 13b2-1 thereunder.

The three also settled with the SEC, without admitting wrongdoing. They agreed to pay $1.3 Million in illegal trading profits, interest, and civil money penalties. This is D.C. No. C 02-05613 RS. See, SEC release.

Tech Crime Report

11/26. The U.S. Court of Appeals (7thCir) issued its opinion [PDF] in USA v. Lange, a criminal case involving theft of trade secrets in the form of computer data. Lange stole computer data from his former employer, Replacement Aircraft Parts, and attempted to sell it to a competitor, in violation 18 U.S.C. §1832. He was convicted by the trial court. The appeal concerned the meaning of the term "trade secrets". The Appeals Court affirmed.

11/26. The U.S. District Court (NDCal) sentenced Lisa Chan to eighteen months in prison for conspiracy to infringe the copyrights of computer software. The U.S. Attorney's Office (USAO) stated in a release [PDF] that she sold thousands of copies of counterfeit Microsoft software. See also, indictment [PDF] and plea agreement [PDF].

Go to News from November 21-25, 2002.