News from July 26-31, 2003

Sen. Lisa Murkowski Introduces Bill to Roll Back Surveillance Provisions of PATRIOT Act

7/31. Sen. Lisa Murkowski (R-AK) introduced S 1552 [21 pages in PDF], the "Protecting the Rights of Individuals Act", or PRI Act. This bill contains numerous significant changes to the Foreign Intelligence Surveillance Act (FISA) and the Criminal Code to limit the powers of government to conduct searches, seizures, and surveillance. It contains some major rollbacks of provisions added to the FISA (Title 50) and the Criminal Code (Title 18) by the PATRIOT Act in late 2001. Sen. Ron Wyden (D-OR) is the cosponsor of the bill. See, full story.

The PATRIOT Act and the Murkowski Bill: An Analysis of Rules for Issuance of Electronic Surveillance Orders

7/31. There are three main types of court orders authorizing electronic surveillance. Each applies to a particular category of surveillance, and each has its own standard for issuance. That is, there are (1) wiretap orders, (2) pen registers and trap and trace device orders, and (3) Foreign Intelligence Surveillance Act (FISA) orders.

A wiretap order, which enables law enforcement agencies to obtain the content of a phone call or e-mail, is issued by a judge upon a showing of probable cause. This is often referred to as a Title III order. This is a very high standard.

In contrast, there is a much lower standard for obtaining pen register and trap and trace orders, which merely obtain outgoing and incoming phone numbers, and since passage of the PATRIOT Act, e-mail addressing and routing information. Under the current statute, the order must be issued if the government asserts mere relevance to a criminal investigation; the judge has no discretion. The Supreme Court has upheld this procedure on the basis that only phone numbers are obtained.

Finally, there is a separate, and low, standard for FISA orders. Under current law, a significant purpose of the surveillance must be foreign intelligence gathering. FISA orders are not available in criminal investigations.

The PATRIOT Act, which was passed quickly in late 2001 in the aftermath of the September 11 terrorist attacks, made some changes to this structure, both regarding what acts of surveillance fall into which of these three categories, and regarding the standards for issuance of an order in each category.

The statutes for wiretaps and pen register and trap and trace orders were drafted with analog Public Switched Telephone Network (PSTN) voice service in mind. Originally, 18 U.S.C. § 3127 provided that a pen register records the numbers that are dialed or punched into a telephone, while a trap and trace device captures the incoming electronic or other impulses which identify the originating number of an instrument or device from which a wire or electronic communication was transmitted. The PATRIOT Act expanded the scope of surveillance under pen register and trap and trace authority to include internet routing and addressing information. That is, an e-mail address in the "To:" line of an e-mail message is somewhat analogous to the number dialed in a PSTN voice call. However, this expanded authority also applies to new technologies for collecting addressing and routing information, such as the FBI's Carnivore system.

The PATRIOT Act did not change the standard for either wiretaps (a showing of probable cause) or pen register or trap and trace orders (an assertion of mere relevance to a criminal investigation). It did, however, lower the standard for issuance of a FISA order. The statute required that the "primary purpose" of the surveillance be foreign intelligence gathering. The PATRIOT Act changed this to "a significant purpose". The PATRIOT Act made it easier for the government to get a FISA order. This was a thoroughly debated issue in late 2001.

Sen. Murkowski's bill, S 1552, would also makes changes to both categorization, and standards for issuance of orders.

First, it addresses what internet communications are subject to pen register and trap and trace orders, and what falls under wiretap orders. It provides that "the contents of Internet electronic communications include the subject line of such communications and any portion of a Uniform Resource Identifier (URI) other than the server name and top level domain." That is, what is typed into the "Subject:" line of an e-mail message cannot be captured by the government pursuant to a pen register or trap and trace order. It would require a wiretap order. Similarly, a pen register and trap and trap order can be used to obtain the website that one visits, but not the actual page within that website, or other information that is appended to the URI, such as search terms. Technically, this is not either an expansion or contraction, because the PATRIOT Act is silent on these two items.

However, there was debate on this in 2001. During the House Judiciary Committee's mark up of the PATRIOT Act on October 3, 2002, Rep. Bob Goodlatte (R-VA) and Rep. Rick Boucher (D-VA) proposed and discussed an amendment that would have clarified the information that could be collected under pen register and trap and trace orders. Their proposal was as follows: "In Section 101, strike ``(but not including the contents of such communication)´´ each place it appears and insert ``(but not including in formation that reveals the subject matter of electronic communications, information identifying files or web pages accessed over the Internet (beyond the host name), or other contents of communications)´´. In Section 101, on page 5, line 3, by inserting after ``(but not including information that reveals the subject matter of electronic communications, information identifying files or web pages accessed over the Internet (beyond the host name), or other contents of communications)´´ after ``communications.´´" (Parentheses in original.)

However, Rep. Goodlatte and Rep. Boucher did not actually offer this amendment. Hence, it was neither approved, nor rejected. They settled for language in House Judiciary Committee report, House Report 107-236, on this point. (This report states that "an order under the statute could not authorize the collection of email subject lines, which are clearly content. Further, an order could not be used to collect information other than `dialing, routing, addressing, and signaling' information, such as the the portion of a URL (Uniform Resource Locator) specifying Web search terms or the name of a requested file or article.") Had the Goodlatte Boucher amendment been adopted, it would have accomplished the same objectives as S 1552.

See also, story titled "Content, Subject Lines, and URLs" in TLJ Daily E-Mail Alert No. 279, October 4, 2001, and "Content Versus Routing and Signaling Information" in TLJ Daily E-Mail Alert No. 286, October 14, 2001.

Second, S 1552 changes the standards for issuance of both pen register and trap and trace orders and FISA orders.

S 1552 would change the standard for a FISA order to "the primary purpose" must be foreign intelligence. The PATRIOT Act lowered the standard to "a significant purpose". Hence, S 1522 makes it harder for the government to obtain a FISA order.

S 1552 would also change the standard for issuance of a pen register and trap and trace order. The current requirement is merely that "the attorney for the Government has certified to the court that the information likely to be obtained by such installation and use is relevant to an ongoing criminal investigation". A judge must issue an order if the attorney for the government makes the requisite assertion.

S 1552 would change this standard to "the court shall enter" an order "if the court finds that there exist specific and articulable facts that reasonably indicate that a crime has been, is being, or will be committed, and that information likely to be obtained by such installation and use is relevant to the investigation of that crime." Thus, S 1552 makes three changes. First, the court must make a finding, and not rely on the government's assertion. Second, the government will have to identify not just a criminal investigation, but also specify what crime is involved. Third, the court will have to find the there are facts that indicate that that crime was or will be committed. This standard is much more demanding than the current standard. Hence, S 1522 makes it harder for the government to obtain a pen register or trap and trace order.

Also, it is notable that the change in the standard for issuance of a pen register and trap and trace order is not a rollback of the PATRIOT Act. The PATRIOT Act did not alter the standard for pen register and trap and trace orders that had been in effect for years. S 1552 thus toughens a standard that pre-dates the PATRIOT Act. The existing standard dates back to 1986.

Section by Section Summary of S 1552

7/31. The following is a section by section summary of S 1552 [21 pages in PDF], which was introduced on July 31, 2003 by Sen. Lisa Murkowski (R-AK) and Sen. Ron Wyden (D-OR).

Section 1: Title. Section 1 of the bill only states the title of the bill, the "Protecting the Rights of Individuals Act". It is also referred to by some as the PRI Act.

Section 2: Delay of Notice of Search Warrants. Section 2 of the bill amends 18 U.S.C. § 3103a. This section, which was amended by the PATRIOT Act, lists circumstances under which the government may delay giving notice of the issuance of a search warrant. S 1552 narrows the circumstances, and adds a new requirement that the Attorney General prepare a semi-annual report for the Congress and the public regarding requests for delays of notice.

Section 3: Definition of Domestic Terrorism. Section 3 of the bill amends 18 U.S.C. § 2331(5). This subsection, which was amended by the PATRIOT Act, provides a definition of the term "domestic terrorism". S 1552 narrows the definition to encompass less conduct. Currently, the statute defines "domestic terrorism" as follows:

"activities that --
(A) involve acts dangerous to human life that are a violation of the criminal laws of the United States or of any State; (B) appear to be intended --
  (i) to intimidate or coerce a civilian population;
  (ii) to influence the policy of a government by intimidation or coercion; or
  (iii) to affect the conduct of a government by mass destruction, assassination, or kidnapping; and
(C) occur primarily within the territorial jurisdiction of the United States."

S 1552 would define "domestic terrorism" by cross referencing the definition of "Federal crime of terrorism" at 18 U.S.C. § 2332b(g)(5).

This is significant because this latter definition enumerates a list of specific federal crimes or classes of crimes, while the current statute encompasses all "criminal laws". The law, as currently written, hypothetically, is susceptible to abuse by malicious government officials who might categorize as "domestic terrorism" acts that, while illegal and intimidating, are essentially political protest or activism.

Section 4a: Business Records. Section 4a amends the FISA, at 50 U.S.C. § 1861, to limit access to business records under the FISA.

Section 4b: FBI Access to Telephone Toll and Transactional Records. Section 4b amends 18 U.S.C. § 2709. This section, which was amended by the PATRIOT Act, covers "counterintelligence access to telephone toll and transactional records". The statute provides that "A wire or electronic communications service provider shall comply with a request for subscriber information and toll billing records information, or electronic communication transactional records in its custody or possession made by the Director ..." of the FBI. S 1552 would add that "A library shall not be treated as a wire or electronic communication service provider for purposes of this section."

Section 5: John Doe Roving Wiretaps. Section 5 amends the FISA, at 50 U.S.C. § 1805(c), to eliminate "John Doe" roving wiretaps.

Section 6: Pen Register and Trap and Trace Authority. The current requirement for the issuance of a pen register or trap and trace order is merely that "the attorney for the Government has certified to the court that the information likely to be obtained by such installation and use is relevant to an ongoing criminal investigation". Section 6 would change this standard to "the court shall enter an ex parte order ... if the court finds that there exist specific and articulable facts that reasonably indicate that a crime has been, is being, or will be committed, and that information likely to be obtained by such installation and use is relevant to the investigation of that crime."

Section 6 would also clarify that "the contents of Internet electronic communications include the subject line of such communications and any portion of a Uniform Resource Identifier (URI) other than the server name and top level domain", and thus cannot be obtained by the government with a pen register or trap and trace order.

Section 7: Moratorium on Data Mining. Section 7 provides that "No officer or employee of any department or agency of the Federal Government may take any action to implement or carry out any data-mining program or activity except pursuant to a law specifically authorizing such data-mining program or activity by such department or agency." This section might prohibit, for example, continuation of the Total Information Awareness (TIA) project without Congressional legislation approving the project.

Section 8: Expansion of Reporting FISA Reporting Requirement. Section 8 expands the public reporting requirement under the FISA. The current requirement is very minimal, and reveals little about FISA orders or the FISA process.

Section 9: Discovery. Section 9 amends the FISA regarding the applications of discovery procedures to evidence used in court proceedings.

Section 10: FISA Standard. Section 10 is only one sentence long. It provides that "Sections 104(a)(7)(B) and 303(a)(7)(B) of the Foreign Intelligence Surveillance Act of 1978 (50 U.S.C. 1804(a)(7)(B), 1823(a)(7)(B)) are each amended by striking ``a significant purpose´´ and inserting ``the primary purpose´´." Its impact is large. This changes the standard that the government must meet to obtain a FISA order.

The change proposed by S 1552 would make it harder for the the government to obtain FISA warrants. Moreover, since some FISA investigations regarding foreign intelligence uncover evidence of domestic crimes, which result in domestic prosecutions, tightening the standards may decrease the number of domestic criminal cases brought based upon evidence obtained under as FISA order, rather than an Title III order based upon probable cause.

And under a more cynical analysis, the heightened standard of S 1552 would make it harder for the government to avoid the stringent requirements for issuance of a Title III order, by obtaining a FISA order on the pretext that it is for foreign intelligence purposes, but then actually using the evidence collected for prosecutorial purposes, thereby evading the Fourth Amendment protections against unreasonable searches and seizures that the Title III process is intended to protect.

Section 11: Educational Records. Section 11 increases the showing that must be made by the government to obtain educational records.

Sen. Feingold Introduces Data Mining Reporting Act

7/31. Sen. Russ Feingold (D-WI) introduced S 1544, the "Data-Mining Reporting Act of 2003", a bill to require federal agencies engaged in data mining to submit a report to the Congress explaining their data mining activities.

Sen. Feingold stated that "The untested and controversial intelligence procedure known as data-mining is capable of maintaining extensive files containing both public and private records on each and every American. Almost weekly, we learn about a new data-mining program under development like the newly named Terrorism Information Awareness program. Congress should not be learning the details about these programs after millions of dollars are spent testing and using data-mining against unsuspecting Americans." See, Congressional Record, July 31, 2003, at S10672.

He explained that "My bill would require all Federal agencies to report to Congress within 90 days and every year thereafter on data-mining programs used to find a pattern indicating terrorist or other criminal activity and how these programs implicate the civil liberties and privacy of all Americans. If it was necessary, information in the various reports would even be classified." He added that "The bill does not end funding for any program, determine the rules for use of the technology or threaten any on-going investigation that uses data-mining technology."

The bill provides that "The head of each department or agency of the Federal Government that is engaged in any activity to use or develop data-mining technology shall each submit to Congress a report on all such activities of the department or agency under the jurisdiction of that official."

This report must include,

"(1) A thorough description of the data-mining technology.
(2) A thorough discussion of the plans for the use of such technology and the target dates for the deployment of the data-mining technology.
(3) An assessment of the likely efficacy of the data-mining technology in providing accurate and valuable information consistent with the stated plans for the use of the technology.
(4) An assessment of the likely impact of the implementation of the data-mining technology on privacy and civil liberties.
(5) A list of the laws and regulations that govern the information to be collected, reviewed, gathered, and analyzed with the data-mining technology and a description of any modifications of such laws that will be required to use the information in the manner proposed under such program.
(6) A thorough discussion of the policies, procedures, and guidelines that are to be developed and applied in the use of such technology for data-mining in order to -- (A) protect the privacy rights of individuals; and (B) ensure that only accurate information is collected and used."

The bill does not contain a definition of data mining.

GAO Reports on Information Security Control Weaknesses at

7/31. The General Accounting Office (GAO) released a report [PDF] titled "Information Security: Computer Controls Controls over Key Treasury Internet Payment System". The report finds information security control weaknesses in the Department of the Treasury's Financial Management Service's (FMS) website, which allows the public to make certain payments to the federal government (not including income tax payments) via the internet.

The report notes that "The federal government is moving toward implementing Web-based electronic government to provide public services. At the same time, the computer systems that support these services face increasing security risks from viruses, hackers, and others who seek to interrupt federal operations or to obtain sensitive information that is stored in federal computers."

This report focuses on just one of the federal government's electronic government initiatives, the website, which the report states is "estimated to eventually handle up to 80 million transactions valued at $125 billion annually".

The report finds that "Although FMS and the Federal Reserve have documented and implemented many security controls to protect, security controls and practices have not always been effectively implemented to ensure the confidentiality, integrity, and availability of the computing environment and data."

The report elaborates that "numerous information security control weaknesses increased the risk that external and internal users could have gained unauthorized access to, which could have led to the inappropriate disclosure or modification of its data or to the disruption of service. For example, FMS and the Federal Reserve had not consistently implemented access controls to prevent, limit, and detect electronic access to the application and computing environment. In addition, weaknesses in other information system controls (segregation of duties, software change controls, and service continuity) and application security controls reduced FMS’s effectiveness in mitigating the risk of errors or fraud, preventing unauthorized changes to software, and ensuring the continuity of data processing operations when unexpected interruptions occur." (Parentheses in original.)

This report was prepared for Rep. Tom Davis (R-VA), the Chairman of the House Government Reform Committee, and Rep. Adam Putnam (R-FL), the Chairman of the Subcommittee on Technology, Information Policy, Intergovernmental Relations, and the Census.

Senate Judiciary Committee Approves Bill to Regulate Internet Cigarette Sales

7/31. The Senate Judiciary Committee amended and approved S 1177, the "Prevent All Cigarette Trafficking (PACT) Act of 2003". The bill would amend the Jenkins Act of 1949, 15 U.S.C. §§ 375-378, to, among other things, expand the reporting requirements of the Act to cover internet sales of cigarettes.

The bill is intended, in part, to facilitate state collection of taxes on cigarette sales over the internet. See, story titled "Senators Introduce Bill to Regulate Internet Cigarette Sales" in TLJ Daily E-Mail Alert No. 675, June 6, 2003.

The Jenkins Act requires that any person who sells and ships cigarettes across a state line to a buyer, other than a licensed distributor, to report the sale to the buyer's state tobacco tax administrator. Some states impose vastly higher taxes on the sales of cigarettes than others. The Jenkins Act helps these states enforce their cigarette tax laws. Currently, many internet based cigarette sellers are not reporting sales to state tax administrators.

Senate Banking Committee Approves Internet Gambling Bill

7/31. The Senate Banking Committee amended and approved S 627, the "Unlawful Internet Gambling Funding Prohibition Act", a bill to prevent the use of certain payments instruments, credit cards, and fund transfers for unlawful internet gambling. See, Banking Committee release.

The Committee held a hearing on this bill in March. See, TLJ story titled "Senate Committee Holds Hearing on Internet Gambling Bill", March 18, 2003.

On July 31, the Committee approved an amendment in the nature of a substitute that makes several changes to the bill as introduced. The amendment eliminates an exemption from the act for any lawful transaction with a business licensed or authorized by a state. The amendment also grandfathers state sanctioned and regulated parimutuel wagering on horse and dog racing that is conducted on a closed-loop subscriber system, and provides that any closed-loop subscriber system must be reasonably designed to verify the location at which a bet or wager is made.

The amendment also grandfathers gambling on a closed-loop system or private network in cases where both the sender and receiver of the bet are on Indian lands.

The amendment also provides that a person shall not be liable for restricting a transaction that is reasonably believed to be an online bet.

On June 10, 2003, the House amended and passed its version of the bill, HR 2143, which is also titled the "Unlawful Internet Gambling Funding Prohibition Act". It passed by a vote of 319-104. See, Roll Call No. 255. See also, story titled "House Passes Internet Gambling Bill" in TLJ Daily E-Mail Alert No. 678, June 11, 2003.

Senate Subcommittee Holds Hearing on ICANN

7/31. The Senate Commerce Committee's Communications Subcommittee held a hearing on the Internet Corporation for Assigned Names and Numbers (ICANN).

The ICANN manages the domain name system (DNS) pursuant to a Memorandum of Understanding (MOU) with the Department of Commerce (DOC). The current MOU expires at the end of September.

Nancy Victory, head of the DOC's National Telecommunications and Information Administration, stated in her prepared testimony that "ICANN has made significant strides this year in developing into a more stable, transparent and responsive organization. ICANN has completed a comprehensive reform effort that has resulted in major structural adjustments and refinements to its decision-making processes that allow for greater transparency and responsiveness to all critical Internet stakeholders".

Victory continued that the DOC "is currently in the process of reviewing ICANN's accomplishments and assessing what actions remain under the MOU. This review will underlie any decision to extend the MOU and, if so, how best to modify the agreement to focus ICANN's and the Department's efforts going forward."

Paul Twomey,  P/CEO of ICANN, reported on its activities. See, prepared testimony.

Ari Balough, SVP of VeriSign, stated in his prepared testimony that "As the ONLY institution serving in a multi-national capacity in the Internet space -- other than the professional technical standards bodies -- ICANN has ``acquired´´ some roles, and ``assumed´´ others that have little to do with ``coordinating the administration of the naming and numbering system.´´ And this functional ``ambiguity´´ for ICANN has led to significant debate around the nature of and proper scope of responsibility for any entity taking on responsibilities of Internet ``coordination.´´"

Balough argued that "any entity charged with ensuring the stability, availability and growth of the Internet requires the legitimacy, capacity and authority necessary to accomplish those tasks. Today's ICANN cannot effectively do this. ICANN's legitimacy is hampered by the non-inclusion/non-participation of regional numbering authorities, the collective community of root server operators or over 200 country code Top Level Domain registries. ICANN’s capacity is questioned by those who see security and stability as essential to the Internet, but find ICANN preoccupied with regulation of registrar business practices and the minutiae of delegation of new generic registries. ICANN's authority is clouded by its ambiguous status as a contractor with the U.S. Department of Commerce, but a PR message espousing its ``international´´ character."

He also stated that ICANN should be involved in promoting security and stability of the 13 root servers that serve as the nerve center of the Internet's addressing system.

Alan Davidson, of the Center for Democracy and Technology (CDT), stated in his prepared testimony that "serious questions persist about ICANN's public accountability and its ability to fulfill its role as a steward of an important public trust. While CDT remains a believer in the ideal behind ICANN, close oversight by Congress and the Department of Commerce are essential to provide accountability for ICANN."

Paul Stahura, CEO of eNom, a domain name registrar, stated in his prepared testimony, that "while ICANN is the correct model, there should be changes to increase ICANN's accountability to, and foster trust from, those they regulate."

Sen. Conrad Burns (R-MT) presided. See, Burns release.

Presidential Commission Reports on USPS and E-Mail

7/31. The President's Commission on the United States Postal Service issued a report [208 pages in PDF] titled "Embracing the Future, Making the Tough Choices to Preserve Universal Mail Service". The report recommends modernization, and revising the rules governing the USPS. It recommends maintaining the postal monopoly for small physical items, and having the USPS focus on these. It also recommends that the USPS stop providing electronic and internet based bill presentment and payment, money transfers, certified mail, and data transmission services.

The executive summary states that "The laws governing the Postal Service have not been substantially revised in more than 30 years. These rules were written well before the Internet offered a cheaper, faster form of correspondence and far in advance of the Information Revolution’s profound leaps in technology-driven opportunities to reduce costs. Now is the time to revisit these rules and modernize the Postal Service to not only preserve its future, but also to enhance its service to all Americans."

The report concludes that "a postal monopoly remains essential to the reliable, affordable provision of universal postal service today", but also that "the Postal Service be restricted to products and services related to the delivery of letters, newspapers, magazines, advertising mail, and parcels."

The report recommends using new technologies, including the internet, to modernize delivery of physical items. It states that "By placing a unique barcode on every piece of mail and investing in technologies throughout the postal network that can put that information to use to enhance customer service and reduce costs, the Postal Service can begin building a truly digital network that links postal facilities, vehicles, partners and employees not only to each other, but also via the Internet to customers and to the mail itself."

The report elaborates that "By applying the sophistication of the electronic world to the physical mail, the Postal Service can develop a new postal proposition for the 21st century, known as Intelligent Mail, and make its advantages available to all customers. Intelligent Mail could allow the Postal Service to permit mail-tracking and other in-demand services via a robust website that ultimately becomes the equivalent of an always open, full service post office. Intelligent mail also can significantly improve mail security through enhanced traceability, and could lead to substantial savings through sophisticated, real-time logistics management. Adopting this system will lead to the development of ``personalized´´ stamps that digitally embed basic information (such as the sender, the class of mail, and the destination) to enable a highly automated and efficient journey."

The report also addresses e-mail communications. It states that "In 2002, the volume of First-Class Mail (single-piece letters and bulk mail) -- which accounts for more than half of all Postal Service revenues -- declined for the first time in more than a quarter century."

"Electronic substitution is the primary reason long term First-Class Mail volumes are threatened. The initial rise of the Internet, e-mail, instant messaging and other communications trends siphoned away a large share of personal, one-to-one correspondence." The report adds that "As Americans become increasingly comfortable doing more complex correspondence on-line, the subcategory of First-Class Mail now most vulnerable to erosion is bill payment. Businesses have a strong incentive to encourage this trend: processing a digital payment over the Internet costs between one-third and one-half less than a check sent through the mail."

Finally, the report includes an insert titled "Is E-mail a Postal Service?" It states that "The world has greatly benefited from the revolution in correspondence precipitated by the rapid rise of electronic mail. Nevertheless, a Postal Service governed by a law written before the Internet as we know it even existed has led to some ... confusion. The 1970 Act may be read to provide broad authority to the Postal Service to be entrepreneurial in pursuing its self-financing mandate. However, the online revolution dramatically blurred the lines of what constitutes a "postal service," producing some dubious forays.

It continues that the USPS "Sells Postal Service-branded electronic bill presentment and payment services; Explored offering Internet-based tax services and money transfers; Offers certified electronic mail and on-line greeting cards; Contemplated offering e-mail and other data transmission services."

The report concludes that "These ventures have produced largely disappointing results. Also of concern, each of these markets is served by private companies who do not have the backing of the U.S. government and a national postal monopoly. These efforts also have drained time and resources that could have been spent improving traditional postal services. For this reason, the Commission recommends focusing the Postal Service on traditional mail, leaving electronic products and services to a well-served and innovative private marketplace."

Ed Black, P/CEO of Computer & Communications Industry Association (CCIA) praised the report. He stated in a release that "We are very pleased that the Commission has listened to our concerns about the Postal Service’s forays in to electronic commerce and other commercially competitive ventures, and believe the Commission’s recommendation demonstrates their concern about these activities as well ... With an infrastructure established though the U.S. Treasury, taxpayer subsidies, statutory protections, and the government-sponsored Postal Monopoly, the Postal Service’s entrance into these markets is both unfair to private companies and consumers, as well as detrimental to competition and innovation."

GSA Disbars MCI WorldCom From Competing for New Government Contracts

7/31. The General Services Administration (GSA) announced its "proposed debarment of MCI WorldCom from receiving new Federal government contracts". See, GSA release.

The GSA stated that it "has been closely monitoring the MCI WorldCom bankruptcy and allegations related to fraudulent conduct. On June 2, 2003, GSA's Office of Inspector General recommended that the agency's suspension and debarment official consider whether the company met the standard required of all government contractors of being ``presently responsible,´´ and therefore, eligible to compete for new government contracts. After careful review of the Inspector General's referral and all relevant information available, this official determined that MCI WorldCom lacks the necessary internal controls and business ethics. Accordingly, the proposed debarment has been issued which triggers an immediate suspension of the company's eligibility to compete for new Federal government contracts."

The GSA added that MCI WorldCom "is immediately prohibited from competing for new government contracts", and that "The company may, within 30 days, challenge the decision."

MCI WorldCom responded that "it accepts the General Services Administration's (GSA) decision for proposed debarment, which will not affect MCI's ability to serve its existing federal government customers." See, release.

Senate Passes Singapore and Chile FTAs

7/31. The Senate passed HR 2738, the "United States-Chile Free Trade Agreement Implementation Act", by a vote of 66-31. See, Roll Call No. 319. The Senate passed HR 2739, the "United States-Singapore Free Trade Agreement Implementation Act" by a vote of 66-32. See, Roll Call No. 318. The House passed both bills on July 23.

Sen. Max Baucus (D-MT) stated in a release that "These are the first trade agreements the Senate has considered under the renewed fast-track procedures in the Trade Act of 2002 adopted last year during my Chairmanship of the Finance Committee. They are the first agreements to be held to the new and progressive standards included in that Act. In areas from intellectual property, services, and e-commerce to agriculture, labor, and environment, they are truly state-of-the-art. That does not mean the Singapore and Chile texts will work for agreements with other countries."

Robert ZoellickThe U.S. Trade Representative (USTR), Robert Zoellick, negotiated these FTAs. Zoellick (at right) stated in a release that "Congressional approval of the Chile and Singapore free trade agreements gives us fresh momentum as we approach the midpoint of global trade negotiations at the WTO Ministerial meeting in Cancun. The Chile and Singapore free trade agreements eliminate tariffs, tackle non-tariff barriers, open services markets, strengthen intellectual property rights for knowledge industries, and improve labor and environmental protections. These agreements level the playing field for U.S. businesses, provide more choices and better value for American consumers, and add fresh momentum to the global drive for open markets."

Zoellick added that "In addition to our bilateral negotiations, the United States will continue to press for free markets globally, through the WTO negotiations and hemispherically, through the creation of a Free Trade Area of the Americas."

Secretary of Commerce Donald Evans issued a statement: "President Bush believes that free trade means new, higher paying jobs for American workers and stronger economic growth for the American economy. The Chile and Singapore Free Trade Agreements will build on our economy's strengths while sending an important signal to the world that America is serious about expanding free trade and creating new opportunities for our workers, farmers, ranchers and businesses."

Both agreements contain provisions relating to protections of intellectual property rights, electronic commerce, and telecommunications. See, texts of the U.S. Singapore Free Trade Agreement and the U.S. Chile Free Trade Agreement.

Robert Holleyman, P/CEO of the Business Software Alliance (BSA), stated in a release that "These agreements not only represent a critical step in trade liberalization with Singapore and Chile, they set important precedents for future agreements with trading partners around the world ... In these agreements, new baselines have been set for copyright protection and e-commerce, which should lead to significant market opportunities for the U.S. IT industry in the years ahead."

William Archey, P/CEO American Electronics Association (AeA), stated in a release that "Implementation of these agreements will result in significant market-opening in Chile and Singapore to U.S. high-tech products and services by eliminating tariffs, streamlining customs procedures, improving regulatory transparency, increasing intellectual property protections, opening up government procurement, promoting the development of electronic commerce, and liberalizing trade in services."

The Entertainment Industry Coalition for Free Trade (EIC), a group formed recently to represent the movie, record, and other entertainment industry sectors, stated in a release [PDF] that these two FTAs "provide standards of copyright protection for the modern digital age, and require that these countries ensure that intellectual property protection is meaningful in practice through strong enforcement. These agreements also provide commercially meaningful trade commitments with the elimination of tariff and customs barriers to all U.S. entertainment products, and groundbreaking provisions with respect to digital products."

Judge Awards Motorola $4,265,793,811.32 From Turkish Telecom Deadbeats

7/31. The U.S. District Court (SDNY) issued its Opinion and Order [172 pages in PDF] in Motorola and Nokia v. Uzan, holding defendants liable for common law fraud, promissory fraud, and civil conspiracy to defraud, and warding Motorola Credit Corporation (MCC) over $4 Billion in compensatory damages, punitive damages, and interest.

The District Court, Judge Jed Rakoff presiding, concluded that the "defendants -- in particular, the members of the Uzan family -- have perpetrated a huge fraud." He summed up the case as follows: "Under the guise of obtaining financing for a Turkish telecommunications company, the Uzans have siphoned more than a billion dollars of plaintiffs' money into their own pockets and into the coffers of other entities they control. Having fraudulently induced the loans, they have sought to advance and conceal their scheme through an almost endless series of lies, threats, and chicanery, including, among much else, filing false criminal charges against high level American and Finnish executives, grossly diluting and weakening the collateral for the loans, and repeatedly disobeying the orders of this Court."

On January 28, 2002, MCC and Nokia Corporation filed a complaint in District Court against Kemal Uzan, other members of the Uzan family, and corporations controlled by the Uzan family, regarding cellular communications deals in the nation of Turkey.

The complaint states that the defendants, who are politically well connected in Turkey, were awarded a Global System for Mobile Telephony (GSM) license by the Turkish government. Motorola then provided defendants loans to obtain base stations from Motorola, and Nokia provided loans to obtain switching equipment from Nokia. This equipment was then used to build a GSM and 2.5G wireless telecommunications system in Turkey. However, Motorola and Nokia did not get paid up front.

The complaint states that the defendants borrowed from Motorola and Nokia, and then intentionally and illegally diluted the value of stock pledged as collateral for the loans. The complaint also alleges that defendants manufactured transactions to transfer assets from the debtor companies.

The complaint alleges numerous causes of action. In the present opinion and order they prevail on fraud and constructive trust theories. However, they also plead RICO, fraud in connection with computers in violation of the Computer Fraud and Abuse Act, 18 U.S.C. § 1030(a)(4), interception of electronic communications in violation of the Electronic Communications Privacy Act, 18 U.S.C. § 2511(1)(a), and unlawful access to stored electronic communications in violation of the Electronic Communications Privacy Act, 18 U.S.C. § 2701(a)(2). See also, story titled "Motorola & Nokia Sue Turkish Cellular Company for RICO Violations and Computer Hacking" in TLJ Daily E-Mail Alert No. 357, January 30, 2002.

On July 31, 2003, the Court held that "MCC is entitled on its fraud claims, taken jointly and severally, to an award of compensatory damages from the defendants, jointly and severally, in the amount of $1,803,089,316.57 plus interest", which he found to be $329,807,589.09 through July 31, 2003, thus brining total compensatory damages to $2,132,896,905.66. The Court also awarded punitive damages in an equal amount, for a total award of $4,265,793,811.32.

The Court also found for the plaintiffs on their constructive trust claim. The Court therefore held that "As plaintiffs have prevailed on their constructive trust claim relating to the original value of their collateral that defendants stole from them, plaintiffs are hereby converted into the equitable owners of Telsim shares that are the functional equivalent of the original collateral, that is, Telsim shares held by any one or more of the entities controlled by the Uzans that collectively constitute 73.5% of the ownership, control, and share value of Telsim."

The Court further held that "Since Nokia has no meaningful remedy for the fraud perpetrated upon it other than the constructive trust imposed herein on its behalf, therefore, in light of the defendants’ past contempts, if defendants now fail to transfer or cause to be transferred the requisite Telsim shares to the Court’s registry on behalf of Nokia within one week from the entry of judgment, the Court hereby orders that judgment will automatically then enter requiring defendants (jointly and severally) to pay to Nokia two times the full amount outstanding on the loans extended by Nokia to Telsim (i.e., $711,000,977.23), plus pre-judgment interest in the amount of $142,706,661.90, for a total of $853,707,639.13."

Given the defendants conduct of fraud, deception, lies to the court, failure to appear at any depositions or trial, and violations of Court orders, the Court opined that "monetary sanctions will not suffice to bring defendants into compliance with this these orders." So, the Court ordered that "that unless and until defendants purge their contempts, the individual defendants, if found within the jurisdiction of the United States, will be immediately arrested and held in confinement until such time as they comply with the" Court's directives.

Christopher Galvin, Ch/CEO of Motorola, stated in a release that "We are extremely pleased with the Court's strong ruling and we look forward to recouping the billions of dollars that were diverted by the Uzans and returning it to the rightful owners -- Motorola's shareholders. Today's ruling is a landmark decision concerning the massive global fraud that has been perpetrated against Motorola by the Uzans, and the latest in a series of court judgments throughout the world against the Uzans."

Olli-Pekka Kallasvuo, CFO of Nokia, stated that "Today's judgment confirms our belief of wrong-doing against Nokia and proves the activities against us were fraudulent and intentional ... We will now use this ruling as part of our continued effort of recovering the funds."

This case is Motorola Credit Corporation and Nokia Corporation v. Kemal Uzan, et al., D.C. No. 02 CV 666.

Antitrust Division Closes Orbitz Investigation

7/31. The Department of Justice's (DOJ) Antitrust Division closed its Orbitz joint venture investigation. Orbitz is owned by several airlines, and sells airline tickets and other travel services online.

Hewitt PateHewitt Pate (at right), Assistant Attorney General in charge of the Antitrust Division, stated in a release that "After an extensive investigation of the available facts, the Antitrust Division concluded that the Orbitz joint venture has not reduced competition or harmed airline consumers. This thorough review involved interviewing numerous interested parties, reviewing many documents that were produced by Orbitz as well as by third parties, engaging in extensive empirical analyses of airline booking data, and examining the analyses suggested by third parties."

Pate added that "The Division considered several theories of harm none of which was ultimately borne out by the information collected by the Antitrust Division. These concerns included whether certain Orbitz contract terms would facilitate coordination among the participating airlines or reduce their incentives to discount resulting in higher fares and whether those contract terms would make the Orbitz joint venture dominant in online air travel distribution. The Division found that those terms did not result in higher fares or make Orbitz dominant in online air travel distribution."

Jeff Katz, P/CEO of Orbitz, stated in a release that "Today's DOJ's decision is consistent with previous government and independent examinations of Orbitz. Previously, the Department of Transportation Inspector General found no evidence of any anti-competitive behavior by Orbitz, and in fact determined that Orbitz provides a valuable service to consumers and promotes competition in the travel marketplace."

FTC Releases Policy Statement on Use of Equitable Remedies of Disgorgement and Restitution in Competition Cases

7/31. The Federal Trade Commission (FTC) released a document titled "Policy Statement on Monetary Equitable Remedies in Competition Cases".

The FTC explained that "Disgorgement is an equitable monetary remedy "designed to deprive a wrongdoer of his unjust enrichment and to deter others" from future violations. Depriving the violator of any of the benefits of illegal conduct has long been accepted as an appropriate, indeed necessary, element of antitrust remedies. ... Restitution is also an equitable remedy, serving different but often complementary purposes. Restitution is intended to restore the victims of a violation to the position they would have been in without the violation, often by refunding overpayments made as a result of the violation. The Commission has sought and obtained disgorgement or restitution in a number of competition cases over the last few decades, most recently in the Mylan and Hearst matters." (Footnotes and citations omitted.)

The FTC stated its policy that "we do not view monetary disgorgement or restitution as routine remedies for antitrust cases. In general, we will continue to rely primarily on more familiar, prospective remedies, and seek disgorgement and restitution in exceptional cases."

The FTC listed three factors that it will consider: "As a general matter, the Commission will consider the following three factors in determining whether to seek disgorgement or restitution in a competition case. First, the Commission will ordinarily seek monetary relief only where the underlying violation is clear. Second, there must be a reasonable basis for calculating the amount of a remedial payment. Third, the Commission will consider the value of seeking monetary relief in light of any other remedies available in the matter, including private actions and criminal proceedings. A strong showing in one area may tip the decision whether to seek monetary remedies. For example, a particularly egregious violation may justify pursuit of these remedies even if there appears to be some likelihood of private actions. Moreover, the pendency of numerous private actions may tilt the balance the other way, even if the violation is clear."

The Commission approved the statement on July 25, but did not publicly release it until July 31. See also, FTC release.

Treasury Secretary Addresses Internet Based Identity Theft

7/31. The Senate Banking Committee held a hearing on measures to enhance the operation of the Fair Credit Reporting Act. Secretary of the Treasury John Snow addressed internet based identity theft in his prepared testimony. He wrote that "Perhaps the most serious threat to financial consumers today is identity theft. Identity thieves are clever, adaptable, and heartless. Indeed, many identity thieves specifically target the most vulnerable members of society -- families of the recently deceased, seniors, hospital patients, and men and women serving our nation overseas."

John SnowSnow (at right) described one scheme. "Using a $100 commercially available keystroke logging program, an identity thief in New York stole over 450 online banking passwords during a two year period. The scam began with the thief installing a keyboard sniffing program on public Internet terminals at thirteen locations scattered throughout Manhattan. Unwitting customers using the terminals then had their keystrokes logged as they accessed information. With username and password information in hand, the thief then used the victims' personal and financial information to open new accounts under their names and transferred money from the victims' legitimate accounts into the new, fraudulent ones."

He added that "Many Americans have worked hard for years to build and keep good credit histories. In today’s information driven economy, one of your most important personal assets is your reputation, your credit history. The statistics are there -- and have been cited by many. For example, a recent study reports that identity theft has been seriously under-reported and asserts that 7 million Americans were victims of identity theft last year alone."

Senate Commerce Committee Approves Bill to Extend Internet Tax Moratorium

7/31. The Senate Commerce Committee amended and approved S 150, the "Internet Tax Non-discrimination Act of 2003" by voice vote. See, amendment in the nature of a substitute [4 pages in PDF] approved by the Committee.

The bill would permanently extend the moratorium on internet access taxes and multiple and discriminatory taxes on electronic commerce. The current moratorium is set to expire on November 1, 2003. The original moratorium was passed in late 1998, and extended in 2001.

The House Judiciary Committee approved the House version of the bill, HR 49, the "Internet Tax Nondiscrimination Act", on July 16. See, TLJ story titled "House Judiciary Committee Approves Internet Tax Bill", July 16, 2003.

Sen. George AllenSen. George Allen (R-VA) introduced S 150 on January 13, 2003. Sen. Allen (at right) stated that "If my measure is passed, once and for all time, prohibition on Internet access and discriminatory taxes will not be held hostage to other issues surrounding sales and use tax collection. This bill would permanently ban such Internet taxes and update the definition of Internet access to include wireless, satellite and new advancements in technology to provide access to Internet services. This is about the individual consumer's ability to access the Internet."

3 Year Phase Out of Grandfather Clause. The bill, as amended, includes a new provision that sunsets the grandfather clause after three years. The original 1998 moratorium provided a grandfather clause for those state and local taxes that existed as of October 1, 1998.

The House version of the bill would immediately repeal the grandfather clause.

Technology Neutrality. The bill, as amended, includes a new provision that would provide for technology neutrality. It provides that "The second sentence of section 1104(5), and the second sentence of section 1101(e)(3)(D), of the Internet Tax Freedom Act (47 U.S.C. 151 note) are each amended by inserting ‘‘, except to the extent such services are used to provide Internet access’’ before the period." (Parentheses in original.)

Subsection 1101(e) lists exceptions to the moratorium. Subsection 1101(e)(3) contains definitions. Subsection 1101(e)(3)(D) defines "Internet access service" as follows: "The term 'Internet access service' means a service that enables users to access content, information, electronic mail, or other services offered over the Internet and may also include access to proprietary content, information, and other services as part of a package of services offered to consumers. Such term does not include telecommunications services."

Section 1104 is the general definitions section. Subsection 1104(5) defines "Internet access" as follows: "The term 'Internet access' means a service that enables users to access content, information, electronic mail, or other services offered over the Internet, and may also include access to proprietary content, information, and other services as part of a package of services offered to users. Such term does not include telecommunications services."

Thus, the existing moratorium provides a ban on internet access taxes, but expressly excepts telecommunications services. In 1998 it was more clear what was "internet access", and what was "telecommunications". Some states now impose a tax on DSL service when it is sold as part of a package with phone service. Thus, internet access, when provided by DSL, is taxed, while other technologies for providing broadband internet access are not taxed. This amendment would clarify "telecommunications services" are covered by the moratorium "to the extent such services are used to provide Internet access".

Steve Berry of the Cellular Telecommunications and Internet Association (CTIA) stated in a release that "Americans access the Internet in a myriad of ways; this legislation ensures that no matter the method, that access will be tax free."

This new language is identical to language that was added to the House bill on July 16.

Universal Service. The bill, as amended, includes a new provision pertaining to universal service. It provides that "Nothing in the Internet Tax Freedom Act shall prevent the imposition or collection of any fees or charges used to preserve and advance Federal universal service or similar State programs authorized by section 254 of the Communications Act of 1934."

This provision is not in the House version of the bill, as approved on July 16.

Further Action. Both the House and Senate bills still require passage by the full House and Senate. Then a conference committee will have to reconcile differences between the two bills, and the House and Senate will have to approve that conference report.

Rep. Chris Cox (R-CA), the sponsor of the House bill, praised the Senate Commerce Committee for approving its bill. He further stated that "we expect movement on the House floor in early September." See, Cox release.

The Bush administration supports the bill. Treasury Secretary John Snow and Commerce Secretary Donald Evans issued a joint release after the Committee approved the bill. They stated that "A permanent moratorium means permanent innovation. Keeping the Internet free of multiple or discriminatory taxes on electronic commerce will help create an environment for innovation and help ensure that electronic commerce remains a vital part of our economy. As policy makers, we need to encourage the roll out of new Internet services and not stifle innovation by imposing new taxes." See, Treasury release.

People and Appointments

7/31. The Senate confirmed Frank Montalvo to be a Judge of the U.S. District Court (WDTex) by a vote of 95-0. See, Roll Call No. 321.

7/31. The Senate confirmed James Cohn to be a Judge of the U.S. District Court (SDFl) by a vote of 96-0. See, Roll Call No. 320.

7/31. The Senate Finance Committee favorably reported, by unanimous votes, the nominations Josette Shiner to be a Deputy U.S. Trade Representative, James Jochum to be an Assistant Secretary of Commerce, and Robert Nichols to be an Assistant Secretary of the Treasury.

7/31. The Senate Judiciary Committee favorably reported the nominations of Steven Colloton (U.S. Court of Appeals for the Eighth Circuit), James Browning (District of New Mexico), Brent McKnight (Western District of North Carolina), David Proctor (Northern District of Alabama), Kevin Castel (Southern District of New York), Sandra Feuerstein (Eastern District of New York), Richard Holwell (Southern District of New York), Stephen Robinson (Southern District of New York), Rene Acosta to be an Assistant Attorney General in charge of the Civil Rights Division, and Daniel Bryant to be an Assistant Attorney General in charge of the Office of Legal Policy.

7/31. The Senate confirmed former Rep. Connie Morella (R-MD) to be the U.S. representative to the Organization for Economic Cooperation and Development (OECD).

7/31. The Senate confirmed Brent McKnight to be a Judge of the U.S. District Court for the Western District of North Carolina.

7/31. The Senate confirmed Xavier Rodriguez to be a Judge of the U.S. District Court for the Western District of Texas.

7/31. The Senate confirmed James Browning to be a Judge of the U.S. District Court for the District of New Mexico.

More News

7/31. The Radio Music License Committee (RMLC) and Broadcast Music Inc. (BMI) announced in a release that they have reached an agreement "on new commercial radio station blanket and per program licenses for the musical works in BMI's repertoire. The agreement settles a rate proceeding commenced in 1999 by the RMLC in the Federal District Court in New York."

7/31. The Senate Commerce Committee approved S 1478, the "National Telecommunications and Information Administration Reauthorization Act of 2003".

7/31. Sen. Ron Wyden (D-OR) and Sen. Byron Dorgan (D-ND) released a statement on the resignation of John Poindexter as Director of the Terrorism Information Awareness (TIA) program of the Department of Defense's (DOD) Defense Advanced Research Projects Agency (DARPA). The wrote that "As Congress contemplates the future of the Terrorism Information Awareness Program after the resignation of Dr. Poindexter, we want to make one point clear: even with today’s announcement, the proposed TIA program would still be the biggest spying and surveillance overreach in America’s history, and it should be shut down. Congress will have the opportunity to do just that in the conference for the defense appropriations bill in the fall and we hope to see this program de-funded once and for all. We have always believed that it is possible to fight terrorism vigorously without gutting civil liberties. The TIA program skews that balance and needs to go."

Tauzin and Upton Request Documents From FCC Re MCI WorldCom Avoidance of Paying Access Charges

7/30. Rep. Billy Tauzin (R-LA) and Rep. Fred Upton (R-MI) sent a letter to Federal Communications Commission (FCC) Chairman Michael Powell "to express our serious concern regarding allegations that MCI has engaged in a deliberate effort to avoid paying access charges by disguising the origin and routing of telecommunications traffic".

Rep. Billy TauzinRep. Tauzin (at right) is the Chairman of the House Commerce Committee, while Rep. Upton is the Chairman of its Telecom and Internet Subcommittee.

They continued that "Access charges represent the cornerstone of the relationship between local exchange carriers (LECs) and inter-exchange carriers (IXCs). Without the origination and termination of inter-exchange traffic, long-distance calls would never be connected. Thus, a gross violation of regulations governing the origination and termination of long-distance calls undermines the basic telecommunications system of the United States."

They asked that the FCC keep them apprised of actions that it takes regarding this matter. They also asked for the FCC to produce documents, by August 13, 2003, regarding "actual or alleged violations of the access charge rules by MCI, any of its affiliates, any entity that purchased or was acquired by MCI, or any entity acting in concert with MCI."

California Court Allows Service of Complaint By Mail on Chinadotcom in Hong Kong

7/30. The California Court of Appeal (6) issued its opinion [MS Word] in Denlinger v. Chinadotcom, a case regarding the validity of service of process by registered mail upon defendants located in Hong Kong.

Peter Denlinger is a former employee of, an entity related to Chinadotcom. Peter Hamilton, Peter Yip Hak Yung, and Raymond Ch'ien are directors and officers of Chinadotcom. Chinadotcom is incorporated in the Cayman Islands, and has its offices in Hong Kong.  Hamilton, Hak and Ch'ien work and reside in Hong Kong.

Denlinger filed a complaint in state court in California against Chinadotcom, related corporate entities, and Hamilton, Hak and Ch'ien, alleging wrongful termination.

Denlinger served the complaint and summons upon defendants by by registered mail in Hong Kong. The defendants moved to quash the service of summons. The trial court held that the service was invalid.

The Court of Appeal held that Article 10(a) of The Hague Convention on the Service Abroad of Judicial and Extrajudicial Documents in Civil and Commercial Matters allows service of process by mail, and therefore reversed.

This is Denlinger v. Chinadotcom, No. H024577, an appeal from the Superior Court for Santa Clara County, Super. Ct. No. CV804169, Judge Jamie May presiding.

10th Circuit Holds AOL May Have Violated ADA By Not Hiring Deaf Person for Call Center

7/30. The U.S. Court of Appeals (10thCir) issued its opinion in Davidson v. AOL, reversing the District Court's summary judgment that America Online did not violate the Americans with Disabilities Act (ADA) when it declined to hire a deaf person for its Ogden, Utah call center.

George Davidson is a deaf person who sought employment with America Online in its call center in Ogden, Utah in a non voice phone position. This was a primarily voice call center. AOL did, however, have primarily non voice phone call center in Philippines. Once AOL opened its Philippines call center, it did not make external hires in Utah for non voice phone positions. AOL did not hire Davidson, either when he applied in 1997, or again when he applied in 1998.

Davidson filed a complaint in the District Court in Utah against AOL alleging violation of the Americans with Disabilities Act (ADA), codified at 42 U.S.C. §§ 12101-12213. The District Court granted summary judgment to AOL. It held that the 1997 claim was time barred. It held that Davidson failed to establish a prima facie case of discrimination because he was not "qualified, with or without reasonable accommodation, to perform the essential functions of the positions that were offered to and open for external hires". And, it held that it would be an unreasonable accommodation to force AOL to restructure its hiring practices as requested by Davidson.

The Appeals Court reversed. Filing administrative claim within 300 days of the challenged action is a prerequisite to bringing an action under the ADA. The Appeals Court held that Davidson had not met this requirement as to the 1997 claim, and therefore affirmed the District Court in this issue. (The 1998 claim was not time barred.)

The Appeals Court ruled that the District Court erred in granting AOL summary that Davidson had not established a prima facie case of discrimination. The Appeals Court held that in the present case the question of whether Davidson is a "qualified individual" is a question of fact for the jury.

The Appeals Court also ruled that the District Court erred in granting AOL summary judgment on the accommodation issue. And hence, the Court reversed and remanded.

Bush Nominates Takings Clause Advocate to Federal Claims Court

7/30. President Bush nominated George Miller to be a Judge of the U.S. Court of Federal Claims. He is currently a partner at the law firm of Hogan & Hartson. See, White House release and release.

His biography in the Hogan & Hartson web site states that "has developed a unique practice representing property owners and governmental entities in cases arising under the ``takings´´ clause of the Fifth Amendment to the U.S. Constitution." This clause provides, "nor shall private property be taken for public use without just compensation". While many of the leading cases in this area deal with real property rights and environmental issues, this clause also has application to intangible property in the technology sector, such as in compulsory licensing of patents and copyrights in music or software, and infringement of patents and copyrights by governmental entities.

The Court of Federal Claims, which has national jurisdiction, is authorized to hear primarily money claims founded upon the Constitution, federal statutes, executive regulations, or contracts, express or implied-in-fact, with the United States.

Pacific Bell Internet Services Sues RIAA Over Infringer Subpoenas

7/30. Pacific Bell Internet Services (PBIS) filed a complaint in U.S. District Court (NDCal) against the Recording Industry Association of America (RIAA) seeking declaratory and injunctive relief regarding the validity of subpoenas issued by the U.S. District Court (DC), pursuant to Section 512 of the DMCA, that directs ISPs to provide information about subscribers alleged to be engaging in P2P copyright infringement over the ISPs networks. The complaint seeks to relitigate many of the issues raised by Verizon in a case in the District of Columbia. (Verizon lost on these issues.) However, the complaint also raises new issues regarding the form of the subpoenas, the manner in which they are served, and whether the recipient is entitled to compensation for compliance. See, full story.

GAO Reports That Uneven Compliance With Privacy Act Leaves Privacy Rights Unprotected

7/30. The General Accounting Office (GAO) released a report [82 pages in PDF] titled "Privacy Act: OMB Leadership Needed to Improve Agency Compliance".

The Privacy Act of 1974 regulates the government's use of personal information. The GAO, which is an arm of the Congress, examined a sample of 25 departments and agencies, and prepared a report for Sen. Joe Lieberman (D-CT), the ranking Democrat on the Senate Governmental Affairs Committee.

The GAO concludes that "If these issues and the overall uneven compliance are not addressed, the government will not be able to provide the public with sufficient assurance that individual privacy rights are appropriately protected."

The report found that "A key characteristic of agencies’ systems of records is that a large proportion of them are electronic, reflecting the government’s significant use of computers and the Internet to collect and share personal information. Based on survey responses, we estimate that 70 percent of the agencies' 2,400 systems of records contain electronic records. Specifically, an estimated 12 percent were exclusively electronic records, 58 percent were a combination of paper and electronic, and 31 percent were exclusively paper records. In addition, agencies allowed individuals to access their personal information via the Internet in an estimated 9 percent of systems of records (about 1 in 10)."

The GAO found that "While compliance with Privacy Act provisions and related OMB guidance was generally high in many areas, according to agency reports, it was uneven across the federal government -- ranging from 100 percent to about 70 percent for the various provisions. For example, we estimate that for all systems of records (100 percent), agencies issued the required rule that explains to the public why they exempted the system of records from one or more of the act’s privacy protections. In contrast, fewer agencies were compliant with the provision that information should be complete, accurate, relevant, and timely before it is disclosed to a nonfederal organization; we estimate that agencies took steps to comply with this requirement for 71 percent of systems of records."

The GAO report states that agency officials "identified barriers to improved compliance that include a need for more OMB leadership and guidance on the act, low agency priority given to implementing the act, and insufficient training on the act. In the absence of consistent compliance with the Privacy Act, the government cannot adequately assure the public that all legislated individual privacy rights are being protected."

The Office of Management and Budget (OMB), which is a part of the Executive Office of the President, disputes the report's conclusion.

AEI Brooking Study Compares US and EU Privacy Practices in E-Commerce

7/30. The AEI Brookings Joint Center for Regulatory Studies released a paper [34 pages in PDF] titled "Enforced Standards Versus Evolution by General Acceptance: A Comparative Study of E-Commerce Privacy Disclosure and Practice in The U.S. and The U.K." The paper was written by Karim Jamal, Michael Maier, and Shyam Sunder.

The paper presents data on privacy practices in e-commerce in the United Kingdom, which is governed by the European Union's regulatory regime, and data on privacy practices in the U.S., which does not have a regulatory regime. The paper concludes that "The codification by the EU law, and the enforcement by the U.K. government, improves neither the disclosure nor the practice of e-commerce privacy relative to the U.S. On the contrary, some evidence shows the unregulated practices in U.S. to be superior. Regulation in the U.K. also appears to stifle development of a market for web assurance services. Both U.S. and U.K. consumers continue to be vulnerable to a small number of e-commerce websites who spam their customers, ignoring the latter’s expressed or implied preferences."

The paper finds that "A comparison of the U.S. and the U.K. practices reveals that the frequency of junk email received by those who register at e-commerce websites in the two countries is about the same. Only a small number of websites in the two countries violate the privacy of their customers by sharing personally identifiable information with third parties."

However, the paper also finds that "the unregulated disclosures of privacy policies in U.S. dominate the regulated disclosures in U.K. (from the consumer’s point of view). This comparison raises important questions about the validity of the assumption that the standardized and enforced financial reporting regimes, which have gained significant currency around the world in recent years, dominate the evolutionary approach of generally accepted accounting principles." (Parentheses in original.)

The paper elaborates that "One consequence of a legislated approach to setting e-commerce privacy standards appears to be the elimination, or preclusion, of a market for private web assurance. Since the law in the U.K. specifies privacy disclosure requirements, and there is no legal requirement to purchase a privacy audit certificate, there is no market for privacy assurance seals. Contrary to its intent, the privacy disclosure law appears to have eliminated the incentives for the websites to use web-seals as signals of their good privacy practices to consumers."

In addition, it states that "In the absence of mandated standards, U.S. websites tend to view the disclosure of privacy policies as an instrument of their marketing strategy to attract consumers. Accordingly, they make it easy to find their statements of policy, and adhere to these policies reasonably closely. U.K. websites, on the other hand, appear to view privacy disclosure as merely a compliance matter; they appear to be, at the very least, indifferent to the consumer concerns about their privacy policies, and on average, make it more difficult than in U.S. for their customers to find their statements of policy."

Jim Harper, the editor of Privacilla, commented on the AEI Brookings paper. He stated in a release that "While Europe has built a creaking privacy bureaucracy, America is poised to move forward with new innovations that benefit consumers. Countries that follow the bureaucratic model will stand on the sidelines as U.S. consumers consistently enjoy more goods and services at lower prices, along with the privacy protection they want. Europe may have all the regulations, but the American system delivers real privacy for real people."

GAO Reports on WTO Trade Remedy Rulings

7/30. The General Accounting Office (GAO) released a report [128 pages in PDF] titled "World Trade Organization: Standard of Review and Impact of Trade Remedy Rulings".

The report states that "About a third of the cases filed in the WTO dispute settlement system from 1995 through 2002 challenged members’ trade remedies", and that "the United States faced substantially more challenges than other WTO members."

The report also states that "the WTO ruled for and against the U.S. and other members in roughly the same ratios." Also, "WTO rulings resulted in few changes to members' laws, regulations, and practices but had a relatively greater impact on those of the United States. While U.S. agencies stated that WTO rulings have not yet significantly impaired their ability to impose trade remedies, they had concerns about the potential future adverse impact of WTO rulings."

In addition, it states that "legal experts ... concluded that the WTO has properly applied standards of review and correctly ruled on major trade remedy issues. However, a significant minority strongly disagreed with these conclusions."

SEC Chairman Discusses Tech Sector

7/30. William Donaldson, the Chairman of the Securities and Exchange Commission (SEC), gave a speech in Washington DC in which he gave his take on the technology sector.

William DonaldsonDonaldson (at right) stated that "The mid-1990s saw the beginning of the full flourish of the so-called ``new economy´´ in America. Not only had the economy changed, but so had living in America. The personal computer became nearly omnipresent in businesses and in many homes. There were revolutions in information technology and communications. The Internet changed the way people did business, and the way they lived their lives."

He continued that "The stock market reflected the enormity of the changes taking place in the economy and society. Stock averages soared at increasing rates from the mid-1990s through early 2000. New entrants to the market were among the biggest gainers, especially those that symbolized the ``´´ sector of the economy. The IPO of then fifteen-month old Netscape in August 1995 was a harbinger for market watchers -- the price of Netscape went up 150% on the first day of trading. During the market boom there were IPOs where the first-day price increase left Netscape in the dust. Communications, the explosion of information technology and changes in the culture of equity investing brought millions of individuals with their savings into our stock markets for the first time."

"Starting in the second quarter of 2000, the bubble burst. Stock prices plummeted. Investors fled the markets. And the IPO market disappeared", said Donaldson.

He also commented about the framework for regulating securities markets. "We also are taking a comprehensive look at the complex issues involving the structure of our markets -- including their regulation, the balance between competition and fragmentation, and the use of market data -- all in the context of our global marketplace. These market structure issues are among the thorniest the Commission faces, but also the most important. Revolutions in technology and communications and the unrelenting pace of globalization make it imperative that we revisit on a comprehensive basis the framework of our system for regulating markets."

FCC Releases Agenda for August 6 Meeting

7/30. The Federal Communications Commission (FCC) announced the agenda for its meeting on Wednesday, August 6.

The FCC's Wireless Telecommunications Bureau (WTB), and the Department of Agriculture's (USDA) Rural Utilities Service (RUS) Administrator, will report on the recently launched USDA/FCC initiative to increase broadband deployment and wireless access for the benefit of rural consumers.

The FCC will consider a Report and Order concerning the Alaska Bush Earth Station policy. See, February 11, 2002 NPRM [10 pages in PDF] in which the FCC proposed to eliminate the "Bush Policy", which "precludes installing or operating more than one satellite earth station in any Alaskan Bush community1 for competitive carriage of interstate Message Telephone Service (``MTS´´) communications -- i.e., ordinary interstate, interexchange toll telephone calls."  This is IB Docket No. 02-30 and RM-7246.

The FCC will consider a Notice of Proposed Rulemaking (NPRM) regarding rules, policies and procedures for digital station operations for low power television, TV translators and TV booster stations, which primarily provide television service to smaller geographic regions and rural communities.

The FCC's Wireline Competition Bureau (WCB) will report on the growth of subscribership to high-speed service during the last three years.

The FCC's Consumer & Governmental Affairs Bureau and the Office of Strategic Planning will report on the FCC's outreach and coordination initiatives to rural America.

The meeting will be web cast. It will be held at 9:30 AM in the FCC, Commission Meeting Room (TW-C305), 445 12th Street, SW.

FBI Wants Broadband Internet Access Classified As A Telecommunications Service So That CALEA Will Apply

7/30. Representatives of the Department of Justice (DOJ) and the Federal Bureau of Investigation (FBI) held ex parte meetings in July with Federal Communications Commission (FCC) officials to lobby for rules that would have the effect of expanding the scope of the CALEA statute to broadband internet services offered by cable and wireline providers.

See especially, July 11, 2003 notice of ex parte communication [15 pages in PDF] submitted to the FCC by Leslie Szwajkowski, a Unit Chief in the Federal Bureau of Investigation's (FBI) Electronic Surveillance Technology Section (ESTS), regarding a July 10 ex parte meeting. The DOJ and FBI argue that "broadband networks may ultimately replace narrowband networks. This trend offers increasing opportunities for terrorists, spies, and criminals to evade lawful electronic surveillance."

The CALEA statute gives the FCC authority to promulgate implementing regulations. The FCC has a proceeding for this purpose, numbered CC Docket No. 97-213. The FCC has promulgated CALEA rules. However, the DOJ and FBI are seeking these rules, not through a CALEA rule making, but as part of the FCC's proceeding regarding the regulatory classification of broadband services.

The regulatory classification of broadband internet services is important for many reasons. Different regulatory regimes applied to different regulatory categories. For example, services that fall within the regulatory classification of "information services" are largely unregulated. In contrast, services that fall within the regulatory category of "telecommunications services" are heavily regulated. They are subject to universal service contributions, consumer privacy rules, interconnection requirements, unbundling requirements, resale obligations, and other mandates. Certain telecommunications services, but not information services, are also subject to the CALEA.

The FCC has already stated that "we conclude that cable modem service, as it is currently offered, is properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service". It has also stated that "we tentatively conclude that when an entity provides wireline broadband Internet access service over its own transmission facilities, this service, too, is an information service under the Act. In addition, we tentatively conclude that the transmission component of retail wireline broadband Internet access service provided over an entity’s own facilities is ``telecommunications´´ and not a ``telecommunications service.´´". However, the FCC has several open NPRMs pertaining to these regulatory classification issues.

Companies that provide DSL service over wireline facilities seek classification as an information service, or as they put it, "regulatory parity" with cable modem service providers. See, TLJ story titled "House Subcommittee Holds Hearing on Classification of Broadband Services", July 21, 2003

CALEA. The Communications Assistance for Law Enforcement Act (CALEA) is codified at 47 U.S.C. §§ 1001-1010. Congress passed the CALEA in 1994 for the purpose of allowing law enforcement authorities to maintain their existing wiretap capabilities in new telecommunications devices. It enumerated that wireline, cellular, and broadband Personal Communications Services carriers must make their equipment capable of certain surveillance functions.

Section 103 (47 U.S.C. § 1002) provides, in part, that "a telecommunications carrier shall ensure that its equipment, facilities, or services that provide a customer or subscriber with the ability to originate, terminate, or direct communications are capable of expeditiously isolating and enabling the government ... intercept, to the exclusion of any other communications, all wire and electronic communications carried by the carrier within a service area to or from equipment, facilities, or services of a subscriber of such carrier concurrently with their transmission to or from the subscriber's equipment, facility, or service, or at such later time as may be acceptable to the government".

The Act also requires telecommunications carriers to ensure that its facilities are capable of enabling the government "to access call-identifying information".

However, the CALEA also provides that its provisions do not apply to "information services". Subsection 103(b) provides that "The requirements of subsection (a) of this section do not apply to -- (A) information services ..."

Subsection 102(6) (47 U.S.C. § 1001) provides that "The term ``information services'' --
  (A) means the offering of a capability for generating, acquiring, storing, transforming, processing, retrieving, utilizing, or making available information via telecommunications; and
  (B) includes -- (i) a service that permits a customer to retrieve stored information from, or file information for storage in, information storage facilities; (ii) electronic publishing; and (iii) electronic messaging services; but
  (C) does not include any capability for a telecommunications carrier's internal management, control, or operation of its telecommunications network."

Subsection 102(8) provides that "The term ``telecommunications carrier'' ... (C) does not include -- (i) persons or entities insofar as they are engaged in providing information services".

The CALEA also provides, in subsection 102(8)(B)(ii) that "telecommunications carrier" includes "a person or entity engaged in providing wire or electronic communication switching or transmission service to the extent that the Commission finds that such service is a replacement for a substantial portion of the local telephone exchange service and that it is in the public interest to deem such a person or entity to be a telecommunications carrier for purposes of this chapter". The DOJ and FBI's July 11 notice of ex parte communication reveals that the DOJ and FBI rely heavily upon this subsection in their arguments, and largely ignore the provisions that reference "information services".

FBI Request. Representatives of the FBI and DOJ held a series of private meeting with FCC officials to make requests regarding the applications of the CALEA to broadband internet services. That is, they did not make their meeting at a public hearing or event, nor did they submit their requests as written comments in these proceedings. However, the FCC, which allows certain ex parte communications, also has ex parte rules that require disclosure of the nature of those communications. The FBI submitted several letters, and copy of a document titled "DOJ and FBI Ex Parte Presentation in the FCC's Broadband Internet Access Proceedings". It appears to be an outline of an oral presentation, rather than a complete expression of the FBI's position.

The DOJ and FBI argue that "the Commission has not yet ruled that CALEA covers broadband telephony (otherwise known as ``IP telephony,´´ ``Internet telephony,´´ or VoIP´´), there is no safe-harbor CALEA solution for broadband telephony, and broadband telephony involves packet-mode communications, which are more difficult to intercept than circuit-mode communications."

They further state that "The need for CALEA-standardized broadband intercept capabilities is especially urgent in light of today’s heightened threats to homeland security and the ongoing tendency of criminals to use the most clandestine modes of communication."

The DOJ and FBI conclude that "The Commission should rule that CALEA applies to any transmission used by wireline or cable modem Internet access providers for services such as broadband telephony".

Moreover, "The Commission should specifically rule that for purposes of CALEA, wireline and cable modem Internet access providers are ``telecommunications carriers´´ but have no CALEA obligations insofar as they are engaged in providing information services".

The DOJ and FBI document does not address how government interception would obtain only packets that contain "voice", as opposed to other packets.

Classifying broadband internet access services as "telecommunications" would have broad consequences for service providers, and consumers. However, the DOJ and FBI appear to argue for an FCC determination that broadband can be classified as "telecommunications" for the purpose of CALEA, but as "information" for the purposes of interconnection, unbundling, resale, and other things. Their notice of ex parte communications includes the statement that "Broadband services would still be subject to minimal regulation because CALEA coverage would not force the Commission to impose any other regulatory mandates."

FCC's Broadband Classification Proceedings. The DOJ and FBI have approached the FCC to rule within the context, not of its CALEA proceeding, but rather, two of its broadband classification proceedings.

First, there is the Cable Modem Service NPRM. This is Docket No. 00-185 and Docket No. 02-52. It is actually both a Declaratory Ruling (DR) and a NPRM. The FCC adopted a Declaratory Ruling and Notice of Proposed Rulemaking [75 pages in PDF] at its March 14, 2002 meeting. See also, March 14 FCC release.

This NPRM addresses the legal classification and the appropriate regulatory framework for broadband access to the Internet over cable system facilities. It states that "we conclude that cable modem service, as it is currently offered, is properly classified as an interstate information service, not as a cable service, and that there is no separate offering of telecommunications service. In addition, we initiate a rulemaking proceeding to determine the scope of the Commission's jurisdiction to regulate cable modem service and whether (and, if so, how) cable modem service should be regulated under the law ..." (Parentheses in original.)

Second, there is the FCC's Wireline Broadband NRPM. This is Docket 02-33, 95-20 and 98-10. The FCC adopted this NPRM [58 pages in PDF] at its February 14, 2002 meeting. See also, the FCC's notice in the Federal Register. This NPRM pertains to the appropriate regulatory framework for broadband access to the Internet over wireline facilities.

This NPRM states that "we examine the appropriate classification for wireline broadband Internet access service. As discussed more fully below, we tentatively conclude that, as a matter of statutory interpretation, the provision of wireline broadband Internet access service is an information service. In addition, we tentatively conclude that when an entity provides wireline broadband Internet access service over its own transmission facilities, this service, too, is an information service under the Act. In addition, we tentatively conclude that the transmission component of retail wireline broadband Internet access service provided over an entity’s own facilities is ``telecommunications´´ and not a ``telecommunications service.´´ We seek comment on these tentative conclusions and ask additional questions with regard to the proper classification of wireline broadband Internet access service."

Nevertheless, the FCC did mention the CALEA in one paragraph of this 58 page NPRM. The NPRM states, at paragraph 55, on page 26, that "We ask commenters to discuss how our tentative conclusion that wireline broadband Internet access service is an information service will affect the scope of the CALEA assistance capabilities that telecommunications carriers must offer to law enforcement authorities. Commenters should address what effect, if any, the USA PATRIOT Act of 2001 may have on an entity that provides information services. While section 222 of the USA PATRIOT Act states that "nothing in this Act shall impose any additional technical obligation or requirement on a provider of wire or electronic communication service or other person to furnish facilities or technical assistance," commenters may wish to discuss how the expansion of surveillance authority to electronic communications under various provision of the USA PATRIOT Act might affect providers of wireline broadband Internet access service if these services were classified as information services. More generally, we ask for comment on how designating wireline broadband Internet access service as an information service may affect other national security or emergency preparedness obligations applicable to service providers and their networks." (Footnotes omitted.)

Section 222 of the PATRIOT Act, which is referenced in the FCC's NPRM, was originally offered as an amendment to the bill during the House Judiciary Committee's markup on the night of October 3, 2001. The legislative history is noteworthy. It was offered by Rep. Rick Boucher (D-VA) and cosponsored by Rep. Bob Goodlatte (R-VA) and Rep. Chris Cannon (R-UT), three of the leading technophiles in the House. Rep. Boucher and Rep. Goodlatte are co-chairs of the Internet Caucus. Rep. Goodlatte and Rep. Boucher both explained their reasons for offering this amendment, during the markup, and outside the hearing room. They were concerned about the history of the implementation of the CALEA. They explained that the Congress passed this Act in 1994 to enable law enforcement authorities to maintain their existing wiretap capabilities in new telecommunications devices. The Congress had cell phones in mind, and expressly excluded the internet. The Act provides that wireline, cellular, and broadband PCS carriers must make their equipment capable of certain surveillance functions. However, the FBI has since sought an implementation of CALEA that expands surveillance capabilities beyond those provided in the statute. Moreover, the FCC, which adopted implementing rules, has largely backed the FBI. This has imposed considerable burdens and costs upon service providers, and their customers. This amendment was adopted by unanimous voice vote. Later that night, the Committee approved the bill by a vote of 36-0. See, story titled "No Technology Mandates", and other stories about the markup of the PATRIOT Act, in TLJ Daily E-Mail Alert No. 279, October 4, 2001.

The FBI submitted a comment [16 pages in PDF] in the cable broadband proceeding, No. 02-52, on June 17, 2002, in which it argued that the FCC should require in its rules that the CALEA applies to "cable modem service".

The FBI submitted a comment [15 pages in PDF] in the wireline broadband proceeding, Nos. 02-33, 95-20, and 98-10, on April 15, 2002, in which it argued that the FCC should require in its rules that the CALEA applies to "DSL and other forms of wireline broadband Internet access".

More About the Ex Parte Communications. The key document that is a part of the FCC record is the DOJ and FBI's document titled "DOJ and FBI Ex Parte Presentation in the FCC's Broadband Internet Access Proceedings", which is attached to its July 11 notice of ex parte communication.

In addition, the DOJ and FBI submitted a July 15 ex parte communication [PDF] that states that "The Department of Justice (the ``DOJ´´) and the Federal Bureau of Investigation (the ``FBI´´) hereby submit an addendum to their July 11, 2003 Notice of Ex Parte Presentation in the above-referenced proceedings to add the names of the individuals who represented the above parties at the ex parte presentation.

"Michael Stawasz and Scott McIntosh represented the DOJ. Martin J. King, Ken Coon, Joel M. Margolis, and the undersigned counsel appeared on behalf of the FBI."

This notice also includes a cc list: Carol Mattey, Brent Olson, Thomas J. Beers, Kyle Dixon, Barbara Esbin, Eric Bash, John Kiefer, Alison Greenwald, Priscilla Lee, J. Scott Marcus, Qualex International, Scott McIntosh, and Michael Stawasz.

Also, on July 23, the DOJ and FBI submitted another notice of ex parte communication [PDF] that states describes another ex parte meeting on July 22. It provides this description: "The law enforcement representatives at the meeting were John Pignataro, Deputy Superintendent of the Maryland State Police, Joel M. Margolis, a contract attorney for the FBI's Electronic Surveillance Technology Section (``ESTS´´), Dawn Dohrmann, another ESTS contractor, and the undersigned ESTS Unit Chief. The Commission official in attendance was Daniel Gonzalez, Senior Legal Advisor to Commissioner Kevin J. Martin. The FBI stated that Internet access providers should be deemed telecommunications carriers for purposes of the Communications Assistance for Law Enforcement Act. In support, the FBI summarized the arguments already placed on the record in its July 11, 2003 Notice of Ex Parte Presentation in the instant proceedings."

All of the DOJ and FBI notices of ex parte communications reference CC Docket Nos. 02-33, 95-20, 98-10 and CS Docket No. 02-52.

Commentary on Process and Transparency. The DOJ and FBI seek a change to the CALEA and surveillance regime that is arguably legislative in nature. That is, it rests heavily on the policy argument that law enforcement authorities will need to be able to monitor voice over IP to be able to catch terrorists and other criminals. This may be a meritorious policy argument. And, while the DOJ and FBI argue that the CALEA statute requires that VOIP be covered, the statute's language defining and exempting information services, combined with the FCC's longstanding treatment of information services, make such a conclusion problematic.

Crafting broad rules based upon a weighing of policy concerns is essentially the legislative function, while drafting detailed rules to implement these legislative mandates is essentially an administrative function. The DOJ and FBI are asking to the FCC to perform the former, rather than the latter, function. However, the present request is not a communication to the Congress requesting a legislative remedy. The legislative process would entail  public hearings, debates, and the input that that would involve. Rather, the DOJ and FBI request an administrative agency to, in effect, legislate through the rule making process.

Second, this administrative agency, the FCC, has a proceeding pertaining to implementing the CALEA statute. It is CC Docket No. 97-213. And, the DOJ and FBI seek a rule that construes the CALEA. Yet, the present request is not a petition for a rule making in that proceeding. Such a rule making would be governed by the Administrative Procedure Act, which would require public notice, opportunity to submit comments, and an opportunity to review and rebut the comments of others.

Third, the present request has been made in an ex parte manner. That is, representatives of the DOJ and FBI have held closed meetings with FCC representatives. In ex parte communications, there is no notice, no public access, no web cast, and no transcript of the proceedings.

In sum, the DOJ and FBI are pursuing a major change in the law governing the interception of internet communications in a non-transparent manner that evades the procedures and processes normally relied upon to provide the public and affected companies with an opportunity to know about, and participate in, the law making process, and in a manner that deprives the rule makers of the benefit of the further information and arguments that would advanced in a more transparent process.

People and Appointments

7/30. Secretary of Commerce Donald Evans appointed three new members of the Patent Public Advisory Committee, Rick Nydegger, Andrew Dillon, and Howard Klein. Nydegger is an attorney with the Utah law firm of Workman Nydegger & Seeley. He is also the President-Elect of the American Intellectual Property Law Association (AIPLA). Dillon in an attorney in the Austin, Texas office of the law firm of Bracewell & Patterson. He focuses on intellectual property matters in the electronics and software industries. Klein is a lawyer in Irvine, California who specializes in intellectual property law. See, USPTO release.

7/30. Secretary of Commerce Donald Evans appointed three new members of the Trademark Public Advisory Committee, Jeffrey Samuels, Maury Tepper, and Joseph Welch. Samuels is a law professor at the University of Akron. Tepper is a partner in the law firm of Womble Carlyle. Welch is a partner in the law firm of Pattishall McAuliffe. See, USPTO release.

More News

7/30. The Federal Communications Commission (FCC) released a Notice of Inquiry (NOI) which solicits "data and information on the status of competition in the market for the delivery of video programming for our tenth annual report". Comments are due by September 11, 2003. Reply comments are due by September 26, 2003.

Sen. Wyden Introduces Bill to Require Government to Disclose Its Use of Databases

7/29. Sen. Ron Wyden (R-OR) introduced S 1484 [9 pages in PDF], "The Citizens' Protection In Federal Databases Act". This is a disclosure bill. It does not actually restrict the government's collection or use of data. Rather, it would cut off funding for certain enumerated government entities to obtain or access commercial databases, unless these entities first provide a detailed report to the Congress and the public explaining their use of these databases. See, full story.

Court Holds That State Laws Requiring Opt-In For Information Sharing Among Affiliated Financial Institutions Are Preempted

7/29. The U.S. District Court (NDCal) issued its Order on Cross Motions for Summary Judgment [23 pages in PDF] in Bank of America v. Daly City, regarding whether municipal and county ordinances regulating the sharing of information among affiliated financial institutions is preempted by various federal statutes.

The District Court wrote, "The Court declares that the ordinances at issue are preempted under federal law to the extent that the ordinances restrict the sharing of confidential consumer information between financial institutions and their affiliates. The Court enjoins enforcement of the ordinances to that extent. The Court upholds the ordinances’ restrictions on the sharing of information between financial institutions and non-affiliated third parties."

The Bank of America (BA) is a bank that does business, among other places, in California. It affiliates include Banc of America Investment Services, Inc., and Bank of America Insurance Services, Inc. These affiliates use BA's customer information to conduct business and to sell credit card, securities and other products to BA customers. Wells Fargo Bank, and its affiliates, also do business in California. They similarly share information.

The City of Daly City is a city of 100,000 people in northern San Mateo County, California, near San Francisco. It passed an ordinance that bars financial institutions operating in Daly City from disclosing or sharing confidential consumer information to either affiliates or non-affiliated third parties without first providing written notice to the consumer, and obtaining a consent acknowledgment from the consumer.

That is, the ordinance requires financial institutions to obtain a consumer's consent, or opt-in, prior to releasing confidential information about the consumer, as opposed to requiring financial institutions to allow consumers to opt-out of such information disclosures.

San Mateo County and Contra Costa County also passed substantially similar ordinances.

The Bank of America, and its affiliates, and the Wells Fargo Bank, and its affiliates, filed a complaint in the District Court against Daly City, San Mateo County and Contra Costa County, challenging their consumer privacy ordinances as preempted under federal law.

They sought a declaration that the ordinances are preempted by the Fair Credit Reporting Act (FCRA), 15 U.S.C. §§ 1681 et seq., the Gramm Leach Bliley Act (GLBA), 15 U.S.C. §§ 6801 et seq., and the National Bank Act (NBA), 12 U.S.C. §§ 21 et seq. They also sought injunctive relief barring the defendants from enforcing their ordinances.

FCRA. First, the Court found that the ordinances are preempted by the FCRA, which provides, at 15 U.S.C. § 1681t(b)(2) that "No requirement or prohibition may be imposed under the laws of any State ... with respect to the exchange of information among persons affiliated by common ownership or common corporate control ..." Daly City and the other defendants argued that this applies to consumer reports. However, the Court concluded that "``information,´´ as used in § 1681t(b)(2), encompasses the confidential consumer information that is the subject of the ordinances."

GLBA. Second, the Court addressed the GLB Act. The defendants relied upon §§ 6807(a) and (b).

§ 6807(a) provides that "This subchapter and the amendments made to this subchapter shall not be construed as superseding, altering, or affecting any statute, regulation, order, or interpretation in effect in any State, except to the extent that such statute, regulation, order, or interpretation is inconsistent with the provisions of this subchapter, and then only to the extent of the inconsistency."

§ 6807(a) provides that "For purposes of this section, a State statute, regulation, order, or interpretation is not inconsistent with the provisions of this subchapter if the protection such statute, regulation, order, or interpretation affords any person is greater than the protection provided under this subchapter and the amendments made by this subchapter ..."

But, the Court concluded, the subchapter referred to in these clauses regulate only the disclosure of nonpublic personal information to a nonaffiliated third parties. The present case pertains to disclosure to affiliated parties. The Court therefore concluded that "States and local governments are free to enact law affording some protection to consumer privacy greater than that provided by federal law, but not with regard to the disclosure of information to affiliates."

BA and Wells Fargo also argued that the ordinances are preempted by the GLBA. However, the Court concluded that, "having concluded that the ordinances are preempted by the FCRA with regard to affiliate disclosures, it need not consider this argument."

NBA. BA and Wells Fargo also argued that the ordinances are preempted by the National Banking Act (NBA). Here again, the Court concluded that "Having concluded that the ordinances are preempted by the FCRA to the extent that they restrict such affiliate disclosure, the Court need not consider Plaintiffs’ arguments regarding the NBA."

Hence, the Court granted summary judgment for BA and Wells Fargo, and their affiliates, on the question of preemption of the ordinances, to the extent that they purport to regulate information sharing among affiliates. However, the Court granted summary judgment to Daly City and the counties on the question of those portions of the ordinances that regulate information sharing among non-affiliated entities.

The Electronic Privacy Information Center (EPIC) characterized the order as "a serious setback to privacy rights". It elaborated that "The ordinances were intended to supplement the federal Gramm Leach Bliley Act (GLBA), which sets weak, opt-out standards for information sharing among non-affiliates, and does not allow any choice in regards to affiliate sharing. The court invalidated opt-in requirements for affiliate sharing, but upheld an opt-in standard for non-affiliate information sharing. The court's decision is likely to be appealed, as Congress clearly intended to allow states to regulate information sharing in passing the GLBA."

This case is Bank of America, et al. v. Daly City, et al, D.C. Nos. 02-4343 CW and 02-4943 CW, Judge Claudia Wilken presiding.

Court Rules FBI Use of Private Hacker Does Not Violate 4th Amendment

7/29. The U.S. Court of Appeals (4thCir) issued its opinion [13 pages in PDF] in U.S. v. Jarrett, a case regarding the Federal Bureau of Investigation's (FBI) use of a private party to hack computers to obtain evidence of crimes. The District Court had held that the hacker had an agency relationship with the FBI, that there was therefore an unreasonable search by the FBI, and that evidence seized by the government is suppressed. The Appeals Court held there was no agency relationship, and the search by the hacker, though illegal, did not constitute a violation of 4th Amendment rights.

The defendant, William Jarrett, did the crime -- manufacturing child pormography on his PC in violation of 18 U.S.C. § 2251(a). (He conditionally plead guilty.) And, following the Appeals Court decision, it appears that he will serve time.

The significance of this case, however, is the procedure employed by the FBI to obtain the evidence of his crime, and the precedent that this case sets for FBI agents to use private hackers to obtain information from individuals personal computers by illeg hacking in future cases.

The government obtained its evidence against Jarrett by searching his PC. It was able to conduct this search because it had first obtained a search warrant from a judge. This search warrant was obtained on the representation by the government that an anonymous computer hacker had illegally accessed Jarrett's PC and discovered illegal images. The FBI and court opinions also refer to this hacker as "unknown user" and "Unknownuser", because that was the user name in his e-mail address.

The hacker neither testified in any court proceeding, nor provided sworn testimony. He remained an anonymous e-mail correspondent. He provided no evidence. He provided the basis for obtaining the search warrant. The government's evidence was the fruits of its search of Jarrett's PC. Yet, it would not have obtained this without the hacker's search. Jarrett thus argued that the evidence of the crime should be suppressed because it was obtained as a result an illegal search of his computer by the hacker in violation of his 4th Amendment rights.

The Fourth Amendment provides that "The right of the people to be secure in their persons, houses, papers, and effects, against unreasonable searches and seizures, shall not be violated, and no Warrants shall issue, but upon probable cause, supported by Oath or affirmation, and particularly describing the place to be searched, and the persons or things to be seized."

The Supreme Court has held in numerous cases that the 4th Amendment protects against unreasonable searches and seizures conducted by government officials, but not by private parties acting in a private capacity. See, for example, Coolidge v. New Hampshire, 403 U.S. 443 (1971) and United States v. Jacobsen, 466 U.S.109 (1984).

The hacker searched Jarrett's computer by obtaining unauthorized access to it. He did this by posting a photograph in a pormography newsgroup with a trojan horse program appended. Jarrett downloaded the file, and the appended trojan horse. The hacker was then able to access and search Jarrett's PC via the internet. This is illegal conduct. See, 18 U.S.C. § 1030.

If the hacker had been an FBI Special Agent, it would have been clear that the search by the hacker was illegal, that the subpoena was based upon illegally conduct, that the subpoena was defective, and that the evidence seized in the search conducted pursuant to the subpoena must be suppressed. However, the hacker was not employed by the FBI or other law enforcement authority. He was an anonymous resident of Instanbul, Turkey. The question thus became whether there was an agency relationship between the hacker and the FBI. If there was an agency relationship, then the evidence must be suppressed.

The FBI asserted that there was no agency relationship. However, the District Court found that there was an agency relationship, and suppressed the evidence obtained by the government. The District Court relied upon e-mails exchanged by FBI agents and the hacker.

FBI agents exchanged numerous e-mails with the hacker. He discussed his hacking activities. The FBI thanked him for sending them the fruits of his hacks, and encouraged him to continue, but maintained the pretext that they were not actually asking him to hack into other people's computers.

For example, in one e-mail an FBI agent wrote, "I can not ask you to search out cases such as the ones you have sent to us. That would make you an agent of the Federal Government and make how you obtain your information illegal and we could not use it against the men in the pictures you send. But if you should happen across such pictures as the ones you have sent to us and wish us to look into the matter, please feel free to send them to us. We may have lots of questions and have to email you with the questions. But as long as you are not ‘hacking’ at our request, we can take the pictures and identify the men and take them to court. We also have no desire to charge you with hacking. You are not a US citizen and are not bound by our laws."

An FBI agent wrote in another e-mail, "the FACT still stands that you are not a citizen of the United States and are not bound by our laws. Our Federal attorneys have expressed NO desire to charge you with any CRIMINAL offense."

The FBI statement that "you are not a citizen of the United States and are not bound by our laws" may be contrasted with the actions of the FBI in other cases in which foreign nationals have hacked into computers in the U.S. from abroad. For example, in U.S. v. Aleksey Vladimirovich Ivanov (Eastern District of California), the FBI investigated, and the Department of Justice prosecuted, a Russian who hacked computers from Russia. Of course, the FBI had to trick him into traveling to the U.S. to be able to arrest him. Ivanov plead guilty and was sentenced to 4 years in a U.S. prison. The FBI's statements to the hacker also contrast with the FBI's description of his activities in its application for a search warrant -- "illegally hacking".

The District Court concluded in an order that "the defendant has established that the government knew of and acquiesced in the searches conducted by Unknownuser and that Unknownuser's actions were motivated solely by an interest to further law enforcement efforts. Therefore, the Court concludes that the evidenced seized from the defendant's computer by Unknownuser was the result of an unlawful search in violation of the Fourth Amendment, thus making the affidavit filed in support of the search warrant defective, as well as the search warrant itself and all evidence seized as a result of its execution. The defendant's motion to suppress is granted, and the evidence will be suppressed."

The government appealed. The Appeals Court was not swayed by the long train of e-mails between the hacker and FBI agents. However, the Appeals Court's conclusion rested on the fact that some of the most damaging e-mails were dated after the hacker had accessed Jarrett's computer. It reasoned that the agency relationship had to exist at the time of the unauthorized access.

The Appeals Court wrote that "Although the Government operated close to the line in this case, it did not (at least on the evidence before the district court) demonstrate the requisite level of knowledge and acquiescence sufficient to make Unknownuser a Government agent when he hacked into Jarrett’s computer." (Parentheses in original.)

This is U.S. v. William Jarrett, No. 02-4953, an appeal from the U.S. District Court for the Eastern District of Virginia, at Richmond, Judge Richard Williams presiding, D.C. No. CR-02-11.

House Commerce Committee Leaders Ask FCC to Revise TELRIC Pricing Rules

7/29. Rep. Billy Tauzin (R-LA), Rep. John Dingell (D-MI) and Rep. Fred Upton (R-MI) sent a letter to Federal Communications Commission (FCC) Chairman Michael Powell regarding current TELRIC pricing rules. They argue that the rules undermine investment, and that the FCC should promptly amend its pricing rules that apply when incumbent local exchange carriers (ILECs) are required to provide network elements to competitive local exchange carriers (CLECs) on an unbundled basis.

They requested that the FCC conduct a rule making proceeding to reform its pricing rules for unbundled network elements, and to complete it by the end of 2003. They also requested the the FCC "make clear at the time it initiates this proceeding that it will no longer base prices on hypothetical, imaginary networks, but rather will base prices on real-world networks that are used to provide unbundled elements", and that the FCC "will require the states to re-calculate the existing UNE rates using the modified pricing methodology promptly after the new rules are adopted."

Finally, the three Commerce Committee leaders stated that the FCC "should move immediately to take interim steps to begin to limit the most harmful effects of its existing rules, including the effects of the arbitrage created by applying the current pricing rules to the UNE-P. It should stop applying the TELRIC rules to the UNE-P, and make clear that the resale-pricing standard prescribed by Congress provides the price floor."

Rep. John DingellRep. Tauzin is the Chairman of the House Commerce Committee, Rep. Dingell (at right) is the ranking Democrat, and Rep. Upton is the Chairman of its Telecom and Internet Subcommittee.

The argument that they advanced in support of these requests is one that they have made many times in the past. They made the economic argument that "firms will invest in new facilities only to the extent that they believe that the financial return over time from those facilities exceeds the cost".

They elaborated that "The primary problem is that the Commission's TELRIC pricing rules are based on hypothetical, ideally efficient networks rather than real-world network elements that must be provided to CLECs on an unbundled basis. By their very nature, the current rules discourage investment by incumbent telephone companies, which cannot recover their investment under the TELRIC methodology. The rules similarly discourage investment by competing carriers, who have little reason to invest when they can lease the existing network at artificially low prices and when any investment they do make can be undercut by other carriers who provide service leasing the incumbent's facilities at TELRIC rates."

They added that "This problem is made much worse by the fact that the same pricing rules are applied when other carriers provide service entirely over the incumbent's existing network using what is referred to as the ``unbundled network element platform´´ (UNE-P). Of course, the 1996 Act did not impose this requirement. Rather, the 1996 Act allowed other carriers to provide services using the incumbent's entire local network exclusively under a separate resale pricing standard. It was the Commission that created the UNE-P after the Act was passed, and it was the Commission that decided to apply its TELRIC rules rather than the resale pricing standard mandated by Congress. By doing so, the rules have created a classic case of regulatory arbitrage."

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7/29. The Department of Commerce's (DOC) Bureau of Industry and Security (BIS), which is still also known as the Bureau of Export Administration (BXA), published a notice in the Federal Register stating that it is recruiting members for its six Technical Advisory Committees (TACs). The membership of each TAC is appointed by the Secretary of Commerce, serves about four years, and meets about four times per year. Three TACs are technology related -- Category 3 (electronics and semiconductors), Category 4 (computers), and Category 5 (telecommunications and
information security). The notice states that resumes should be sent to Lee Ann Carpenter at The deadline is "one year from its date of publication in the Federal Register". See, Federal Register, July 29, 2003, Vol. 68, No. 145, at Page 44524.

7/29. President Bush signed an executive order pertaining to homeland security information sharing.

7/29 The Consumers Union wrote another letter expressing its opposition to the Federal Communications Commission's (FCC) new media ownership rules, announced on June 2, 2003. This letter encourages Senators to cosponsor legislation. Meanwhile, on July 28, FCC Chairman Michael Powell again expressed his support for the FCC's Report and Order. See, opinion piece [PDF] titled "New Rules, Old Rhetoric", published in the FCC web site, and in the New York Times. See, June 2 Report and Order and Notice of Proposed Rulemaking [257 pages in PDF] amending media ownership rules. See also, story titled "FCC Announces Revisions to Media Ownership Rules" in TLJ Daily E-Mail Alert No. 672, June 3, 2003.

Commentary: Spyware and P2P Smut Bills Would Also Restrict P2P Music Piracy

7/29. On July 24, 2003 Rep. Joe Pitts (R-PA) and others introduced HR 2885, the "Protecting Children from Peer-to-Peer Pormography Act of 2003". On July 25, Rep. Mary Bono (R-CA) introduced HR 2929 [PDF], the "Safeguard Against Privacy Invasions Act". While the former bill would assist parents in protecting their children from being exposed unwittingly to pormography, and the later bill would enhance the ability of internet users to protect their privacy from the operators of spyware systems, both bills would also have the effect burdening the production and distribution of peer to peer file sharing software (P2P), and hence, limit P2P music and movie piracy.

These bills might therefore also be classified as anti piracy bills along with two other bills introduced in the House this month: HR 2752, the "Author, Consumer, and Computer Owner Protection and Security (ACCOPS) Act of 2003", introduced on July 16 by Rep. John Conyers (D-MI), Rep. Howard Berman (D-CA) and others, and HR 2517, the "Piracy Deterrence and Education Act of 2003", introduced on July 19 by Rep. Lamar Smith (R-TX) and others.

The Conyers Berman ACCOPS bill would amend the Copyright Act and the criminal code to protect digital works from online infringement. It would, among other things, criminalize the unauthorized placement of copyrighted works on P2P networks, and criminalize offering certain P2P software without first giving notice of the privacy and security risks. See, story titled "Conyers and Berman Introduce Bill to Criminalize Placing Copyrighted Works on P2P Networks" in TLJ Daily E-Mail Alert No. 702, July 21, 2003.

The Smith bill would enhance the government's resources for prosecuting intellectual property crimes, and involve the Federal Bureau of Investigation (FBI) and Department of Justice (DOJ) in educating and warning the public regarding internet based copyright infringement. See, TLJ story titled "House CIIP Subcommittee Holds Hearing on Piracy Deterrence and Education Act", July 17, 2003.

Congressional Hearings on P2P Networks, Privacy and Pormography. The issues of privacy and pormography on P2P networks has been addressed at previous Congressional hearings. There is a record of testimony to support the Bono and Pitts bills.

The Senate Judiciary Committee held a hearing on June 17, 2003 titled "The Dark Side of a Bright Idea: Could Personal and National Security Risks Compromise the Potential of Peer to Peer File Sharing Networks". The members and witnesses focused on privacy and pormography, and barely touched national security issues. See, story titled "Senate Committee Holds Hearing on P2P Networks" in TLJ Daily E-Mail Alert No. 683, June 18, 2003.

Witnesses discussed the problem of pormography on P2P networks that is often disguised a popular music files, thus causing children to unwittingly be exposed. They also addressed the harms of spyware in P2P software.

Sen. Orrin Hatch (R-UT) stated in his opening statement on June 17 that "I am also troubled that many P2P networks require their users to install so-called ``spyware´´ or ``adware´´ -- programs that monitor, collect, and report information about the Internet ``browsing´´ habits of a particular user."

On March 13, 2003, the House Government Reform Committee held a hearing that focused on the prevalence of pormography on P2P networks. See, record of the hearing [123 pages in PDF].

Bono Spyware Bill. HR 2929 [PDF], Rep. Bono's spyware bill, does not reference P2P networks, copyrights or piracy. However, spyware is incorporated into P2P software. Thus, while Rep. Bono's bill works to protect user privacy, it would also burden P2P software makers and distributors with regulations that would likely decrease the distribution of P2P software.

Chris Murray, Legislative Counsel for the Consumers Union, testified at the Senate Judiciary Committee's June 17 hearing. He wrote in his prepared testimony that "A more troubling privacy and security issue facing P2P networks, however, is the invasive, nonconsensual use of ``spyware´´ and ``adware´´ programs. Spyware is a generic term that describes software whose purpose is to collect demographic and usage information from a person's computer, typically for advertising purposes. Not all adware is spyware. Spyware programs target advertisements based on a user's location, browsing habits, search engine queries and other criteria, while adware programs display advertising, but do not track or report a computer user's behavior."

Murray added that "In the case of Kazaa's spyware, I see this to be an issue of public domain software that is advertising supported. When a business has no income stream other whatever data it can sell and whatever advertising it can serve, we have a recipe for egregious violations of users' security and privacy. But this recipe exists in many business models beyond P2P."

Murray also made the point that "while peer-to-peer programs commonly bundle spyware and adware with their products, alarmingly, so do more mainstream software companies such as Microsoft, AOL, and RealNetworks."

However, Rep. Bono's bill only covers spyware that is transmitted over the internet. Hence, any spyware that is incorporated in Microsoft's Media Player, that is preinstalled by an OEM, is not covered by Rep. Bono's bill. Similarly, any spyware incorporated in AOL's or Netscape's browsers, that is either preinstalled by an OEM, or installed from a CD, is not covered by Rep. Bono's bill. What is covered by Rep. Bono's bill is spyware incorporated in P2P software.

(Alan Murray, EVP of Sharman Networks, which distributes the Kazaa Media Desktop software, asserted in his prepared testimony that "Kazaa has a firm ``No Spyware´´ policy to protect users against software that is either surreptitiously installed or which covertly gathers user information.")

Pitts Pornography Bill. Similarly, Rep. Pitts' bill, while it addresses P2P networks, does not reference infringement on those networks. However, the restrictions placed upon the makers of P2P software contained in the bill would likely reduce the distribution of P2P software, and hence, reduce infringement on P2P networks. The bill would also have the effect of requiring P2P software distributions to rewrite their software, thus adding to their costs of doing business.

The bill provides enforcement authority to the FTC and state attorneys general. It further contains provisions to facilitate FTC and state actions. However, these same provisions would make it easier for the recording and movie industries to bring suits against P2P software distributors or users for infringement.

For example, the bill requires the FTC to write regulations that provide that if the distributor of P2P software does not reside in the U.S., it must designate a resident agent in the U.S. Since many P2P companies locate abroad for the purpose of escaping the reach of the U.S. courts in copyright actions, this provision would assist music and movie industry plaintiffs.

Similarly, the bill requires the FTC to write regulations requiring P2P software distributors to verify age, obtain parental consent, and comply with the provisions of the Children's Online Privacy Protection Act (COPPA), which is codified at 15 U.S.C. §§ 6501-6506. Finally, the bill requires the FTC to write regulations requiring that each distributor "maintain reasonable records of its compliance with the requirements set forth in this paragraph". These records would assist the FTC and states attorneys general in enforcing the statute and the regulations. However, these records may also be the subject of subpoenas and pretrial discovery requests in suits brought by the recording or movie industries for copyright infringement. These records might contain information about individual infringers that would assist movie and record companies in bringing civil actions for infringement against these individual infringers.

McCain and Hollings Introduce NTIA Authorization Bill

7/28. Sen. John McCain (R-AZ) and Sen. Ernest Hollings (D-SC) introduced S 1478, an untitled bill to authorize appropriations for the National Telecommunications and Information Administration (NTIA).

The bill authorizes appropriations for fiscal years 2004 through 2008 for NTIA administration, and for Technology Opportunity Program (TOP) grants, as follows:

  Administration TOP Grants
2004 $18,869,000 $15,862,000
2005 $19,435,000 $16,338,000
2006 $20,018,000 $16,828,000
2007 $20,619,000 $17,333,000
2008 $21,237,000 $17,852,000

The bill also amends the NTIA Organization Act's provision relating to spectrum management. See, 47 U.S.C. § 903. The bill provides that "the NTIA shall assess against, and collect from, each Federal agency for which the NTIA assigns spectrum or provides any spectrum management functions a charge to cover the costs thereof." The bill further provides that "The NTIA may not assign any spectrum for use for, or provide any spectrum management functions with respect to, any Federal agency, except to the extent that the NTIA obtains reimbursement for the costs thereof.'."

The Senate Commerce Committee is scheduled to mark up the bill at its meeting at 9:30 AM on Thursday, July 31.

Legislators Introduce Bills to Repeal ETI Regime and Extend R&D Tax Credit

7/28. On July 28, Sen. Orrin Hatch (R-UT) introduced S 1475, the "Promote Growth and Jobs in the USA Act of 2003". On July 25, Rep. Bill Thomas (R-CA) introduced HR 2896, the "American Jobs Creation Act of 2003". Both bills are large and complex tax bills with numerous provisions. Two provisions are of particular importance to technology companies -- the extension and modification of the research and development tax credit, and repeal of the recently enacted ETI regime.

R&D Tax Credit. The R&D tax credit has become a perennial issue in Congress. The credit was first enacted in 1981 as a temporary measure. It has been extended repeatedly since then. Under the current scheme, corporations receive a 20% tax credit for qualified research and development expenditures (QREs) in excess of a calculated base amount.

HR 2896 and S 1475 would once again amend Section 41 of the Internal Revenue Code to extend the R&D tax credit. It is currently set to expire on June 30, 2004. Sen. Hatch's bill, at Section 301, would permanently extend the credit. Rep. Thomas' bill, at Section 1011, would extend the credit until December 31, 2007.

Rep. Thomas' bill would also amend Section 41 regarding the alternative simplified credit for qualified research expenses. Rep. Thomas issued a release that states that this change "is of particular benefit to military manufacturers and other manufacturers that make significant R&D expenditures but receive a relatively small credit under current law."

Sen. Hatch's bill would increase the rates of the alternative incremental credit, and provide an alternative simplified credit for qualified research expenses. Sen. Hatch stated at a press conference on July 25 that his bill "would extend permanently the research credit, which is one of the most important incentives we can offer to keep innovation in this country. This issue is clear. R&D is vital to a nation's long-term economic health. If we don't provide a strong incentive for companies to keep this research here, our trading partners will lure it away." See, transcript.

Sections 301-303 of Sen. Hatch's bill are substantially the same as a stand alone bill introduced by Sen. Hatch, Sen. Max Baucus (D-MT) and others on March 19, 2003 -- S 664, the Investment in America Act of 2003. S 664, in turn, is the companion bill to HR 463, introduced by Rep. Nancy Johnson (R-CT) and others on January 29, 2003.

See also, story titled "Representatives Introduce Bills to Make R&D Tax Credit Permanent" in TLJ Daily E-Mail Alert No. 596, February 3, 2003.

FSC/ETI. Both bills would repeal the Extraterritorial Income Exclusion Act of 2000 (ETI), which the Congress enacted as a replacement for the Foreign Sales Corporation (FSC) tax regime.

The World Trade Organization (WTO) has ruled that both the FSC and ETI tax regimes constitute illegal export subsidies, and authorized the European Union (EU) to impose retaliatory tariffs. The U.S. unsuccessfully argued to the WTO that the U.S. has a global tax system, while European nations have territorial tax systems, that this puts U.S. exporters at a competitive advantage, and that tax regimes such as ETI and FSC that exempt certain foreign source income from taxation merely level the playing field.

Technology companies that sell software or equipment abroad have benefited from FSC/ETI. Also, the EU has indicted that if it takes retaliatory measures, it may target certain technology sectors.

Rep. Thomas' release states that his bill "takes necessary steps to repeal the FSC-ETI regime that has been found illegal -- four times -- by the World Trade Organization (WTO). Absent legislative action, the European Union (EU) has announced it will begin imposing $4 billion in sanctions against U.S. products by January 1, 2004. This legislation will not only prevent retaliation, but also make U.S. companies and workers more competitive and productive than they are today by reforming our antiquated corporate tax system."

Sen. Hatch stated that "our bills are quite different in many respects". He stated that his bill "would repeal the FSC/ETI rules, but would give generous transition relief -- a 3-year phaseout starting in 2004." He added that "it includes the most comprehensive set of international tax reform provisions ever considered by Congress. It would offer significant relief from double taxation in the context of the foreign tax credit, as well as rationalize the rules governing how U.S. companies structure their global operations."

Sen. Hatch also stated that "Like the bill Chairman Thomas is introducing, my legislation is not revenue neutral. I have targeted it to have a net cost of about $200 billion. Some of you may be wondering if I think I can get another tax cut bill of $200 billion through the Senate. Probably not, but enactment of my entire bill this year is not my primary goal." He elaborated that he wants "to highlight the importance of complying with our WTO obligations this year", "expand the options on the table", and "make the final bill more beneficial to U.S. domestic and U.S.-based multinational companies and their workers".

See, stories titled "WTO Authorizes FSC/ETI Related Tariffs" in TLJ Daily E-Mail Alert No. 657, May 8, 2003; "Rep. Thomas Writes Colleagues Re FSC Dispute" in TLJ Daily E-Mail Alert No. 622, March 13, 2003; "Deputy Treasury Secretary Addresses FSC/ETI and WTO Rulings" in TLJ Daily E-Mail Alert No. 526, October 9, 2002; "Sen. Baucus Calls WTO Dispute Settlement Process a ``Kangaroo Court´´" in TLJ Daily E-Mail Alert No. 519, September 30, 2003; and, "Grassley and Baucus Organize Meeting on FSC/ETI Issue" in TLJ Daily E-Mail Alert No. 511, September 18, 2002. See also, TLJ news analysis titled "The FSC Tax Bill and Technology Exporters", November 17, 2000.

Rep. Thomas is the Chairman of the House Ways and Means Committee, which has jurisdiction over his bill. Sen. Hatch is a senior member of the Senate Finance Committee, which has jurisdiction over his bill.

People and Appointments

7/28. Mitch Bainwol was named Chairman and CEO of the Recording Industry Association of America (RIAA). He was previously Chief of Staff to Sen. Bill Frist (R-TN), the Senate Majority Leader.

7/28. Armando Irizarry and Thomas Mays were named Counsel for Intellectual Property in the Federal Trade Commission's (FTC) Competition Bureau. Irizarry is a law professor at Michigan State University. Before that, he worked for the law firm of Fish & Neave. Mays has previously worked as the Director of the Office of Technology Development at the National Institute of Health's (NIH) National Cancer Institute, and at the law firm of Morrison and Forester. Mays also holds a doctorate in microbiology. Irizarry and Mays join Suzanne Michel, who is the FTC's Chief Counsel of Intellectual Property, and Lore Unt, who is a Counsel for Intellectual Property. See, FTC release.

7/28. John Orlando was named EVP, Government Relations, at the National Association of Broadcasters (NAB). He has worked for the NAB since January of 2001. Previously, he worked at Timmons & Co., a lobbying firm. From 1989 through 1993, Orlando was chief of staff for the House Commerce Committee. See, NAB release.

7/28. The Senate confirmed Earl Leroy Yeakel and Kathleen Cardone to be a Judges of the U.S. District Court for the Western District of Texas.

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7/28. The Federal Trade Commission (FTC) announced that "As of Monday morning, July 28, 2003, consumers have registered a total of 28.7 million telephone numbers in the National Do Not Call Registry: 23 million or 80 percent of those registrations have been made on the Internet, and 5.7 million or 20 percent via the telephone."

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7/26. President Bush used his Saturday radio address to discuss the 13th anniversary of the passage of the Americans with Disabilities Act (ADA). He stated that "we are making government websites more accessible to people with disabilities so that they can more easily find information about services and programs of the federal government."

Go to News from July 21-25, 2003.