TLJ News from January 21-25, 2007

Maine Rejects REAL ID Act

1/25. The House and Senate of the state of Maine both approved a joint resolution pertaining to the federal REAL ID Act of 2005, a bill that federalizes the state identification document process, and mandates state electronic databases and data sharing.

The bills sets minimum standards for states, penalizes states that do not implement its standards, but nevertheless relies upon states to implement it. Maine is the first state to formally refuse to implement the REAL ID Act.

The resolution states that the "Maine State Legislature refuses to implement the REAL ID Act and thereby protest the treatment by Congress and the President of the states as agents of the federal government".

It further provides that "the Maine State Legislature implores the United States Congress to repeal the REAL ID Act of 2005."

Maine Senate Majority Libby Mitchell, the sponsor of the resolution, stated in a release that "The federal government may be willing to burden us with the high costs of a program that will do nothing to make us safer, but it is our job as state Legislators to protect the people of Maine from just this sort of dangerous federal mandate."

House Majority Leader Hannah Pingree stated in the same release that "The REAL ID Act is not only a massive unfunded federal mandate, but it also puts Maine people at increased risk ... We cannot be spending millions of state dollars on an initiative that does more harm to our state than good."

For a more detailed and analytical criticism of the REAL ID Act, see book [Amazon] titled, "Identity Crisis: How Identification is Overused and Misunderstood", by Jim Harper of the Cato Institute. See especially, Chapter 18, titled "Can Identification Cards Be Fixed".

The original version of HR 418 (109th Congress), the "REAL ID Act of 2005", was introduced by Rep. James Sensenbrenner (R-WI) on January 26, 2005. The House amended and approved one version of HR 418 as a stand alone bill on February 10, 2005.

However, the House also approved it as an appendage to HR 1268 (109th Congress), on May 11, 2005. HR 1268 was an untitled bill "Making emergency supplemental appropriations for the fiscal year ending September 30, 2005, and for other purposes". It was mainly a defense and anti-terrorism appropriations bill, that also included additional funding for the FBI, DEA, and other agencies.

That is, the REAL ID Act, as approved by the House, was attached to a major appropriations bill that most Representatives and Senators would support, in order to obtain approval of the REAL ID Act.

The House approved HR 418, not as a stand alone bill, but, pursuant to HRes 151 (109th), as an appendage to HR 1268 (109th Congress), on May 11, 2005. HRes 151 provided that "In the engrossment of H.R. 1268, the Clerk shall -- (1) add the text of H.R. 418, as passed by the House, as new matter at the end of H.R. 1268 ...". The Senate also approved this bill.

President Bush signed HR 1268 (109th) on May 11, 2005. It is now Public Law 109-13. Hence, the REAL ID Act was enacted as Division B of HR 1268. This Title B contains many provisions. Those related to the federalization of state identification systems are found at Title II of Title B, titled "Improved Security for Drivers' Licenses and Personal Identification Cards. It is Sections 201-207 of Title B.

Section 201 contains definitions. Section 202, titled "Minimum Document Requirements and Issuance Standards for Federal Recognition", contains most of the language that motivated Maine's revolt.

This section sets minimum standards regarding the contents of state identification documents, including machine readability, and issuance standards.

It requires that states maintain electronic databases that include "all data fields printed on drivers' licenses and identification cards issued by the State".

It also requires states to "Employ technology to capture digital images of identity source documents so that the images can be retained in electronic storage in a transferable format". It further requires that states "Provide electronic access to all other States to information contained in the motor vehicle database of the State".

However, states, which are sovereign entities, maintain these identification systems. The Act contains language to compel the states to implement the requirements set forth in the Act. For example, it provides that "a Federal agency may not accept, for any official purpose, a driver's license or identification card issued by a State to any person unless the State is meeting the requirements of this section".

While the REAL ID Act was enacted as part of an appropriations bill, it appropriated no money to reimburse the states for the cost of implementing the standards contained in the Act. That is, it is an unfunded mandate.

Federal Circuit Rules on Antitrust Actions for Enforcement of Patents Obtained by Fraud on USPTO

1/25. The U.S. Court of Appeals (FedCir) issued its divided opinion [22 pages in PDF] in Hydril Company LP v. Grant Prideco LP, a patent and antitrust case involving oil field technology.

Grant Prideco owns U.S. Patent No. 6,244,631, titled "High efficiency drill pipe". Hydril Company asserts that it acquired this patent by fraud upon the U.S. Patent and Trademark Office (USPTO) by failing to disclose to the USPTO material prior art of which Grant Prideco was aware.

Hydril Company filed a complaint in U.S. District Court (SDTex) against Grant Prideco alleging that it violated Section 2 of the Sherman Act by  monopolizing two product markets by enforcing a patent (No. 6,244,631) that had been obtained by fraud on the USPTO. Hydril also alleged that Grant Prideco infringed another patent that the Hydril owns, and breach of contract (a technology licensing agreement).

Section 2 of the Sherman Act, which is codified at 15 U.S.C. § 2, provides in part that "Every person who shall monopolize, or attempt to monopolize, or combine or conspire with any other person or persons, to monopolize any part of the trade or commerce among the several States, or with foreign nations, shall be deemed guilty of a felony, and, on conviction thereof, shall be punished ..."

The District Court dismissed the antitrust and patent claims for failure to state a claim under Rule 12(b)(6), FRCP. It wrote that Hydril "failed to allege enforcement activity by Grant Prideco which would create an objectively reasonable apprehension that Grant Prideco intended to enforce the ’631 Patent against Hydril". It dismissed the patent claim because the parties waived the right to sue for patent infringement in a prior agreement. The District Court dismissed the contract claim (a state law claim), without prejudice to refiling in state court. This appeal followed.

The Court of Appeals reversed. It cited the 1965 opinion of the Supreme Court in Walker Process Equipment, Inc. v. Food Machinery & Chemical Corp., which is reported at 382 U.S. 172. The Supreme Court held then that "the enforcement of a patent procured by fraud on the Patent Office may be violative of § 2 of the Sherman Act provided the other elements necessary to a § 2 case are present."

The Court of Appeals added that Walker Process fraud is a variant of common law fraud, and that the elements of common law fraud include a representation of a material fact, the falsity of that representation, and the intent to deceive or, at least, a state of mind so reckless as to the consequences that it is held to be the equivalent of intent.

It reviewed the factual allegations in the complaint and concluded that the conduct alleged in Hydril’s complaint would constitute Walker Process fraud.

The Court of Appeals then held that the District Court erred in dismissing the antitrust claim for failure to allege sufficient enforcement activity by Grant Prideco.

It wrote that "To the extent the district court's ruling may have been based on Hydril's failure to allege threatened enforcement action against Hydril rather than against its customers, a valid Walker Process claim may be based upon enforcement activity directed against the plaintiff’s customers. Threats of patent litigation against customers, based on a fraudulently-procured patent, with a reasonable likelihood that such threats will cause the customers to cease dealing with their supplier, is the kind of economic coercion that the antitrust laws are intended to prevent. A supplier may be equally injured if it loses its share of the market because its customers stop dealing with it than if its competitor directs its monopolistic endeavors against the supplier itself. Without customers, a supplier has no business."

Grant Prideco also argued that the District Court dismissal can be upheld on grounds not stated by the District Court. The Court of Appeals did not rule on the merits of these arguments. Rather, it left them for consideration by the District Court on remand.

Grant Prideco argued that Hydril has not shown injury in fact because it alleged only exclusion from the international market rather than the domestic market, that Hydril is a remote party that cannot maintain Walker Process claim, and that Hydril has not alleged that the patent gave Grant Prideco any market power in the relevant market.

The Court of Appeals also reversed the dismissal of the patent claim, as a matter of interpretation of the waiver agreement. And, since it reinstated the two federal claims, it also reinstated the state law claim of breach of contract.

Judge Mayer dissented. He wrote that Hydril lacked standing to bring an antitrust claim. He elaborated that the exclusionary power of a U.S. Patent only extends to U.S. territory. And, Hydril did not allege in its complaint that either it, or its customers, participated in the U.S. market. He continued that this is a question of law, not fact, so the Court of Appeals should not punt this issue back to the District Court. He argued that the dismissal of the antitrust claim should have been affirmed.

Judge Mayer also differed on the matter of waiver of infringement claims.

This case is Hydril Company LP and Hydril Company U.K. v. Grant Prideco LP, and Grant Prideco, Inc., U.S. Court of Appeals for the Federal Circuit, App. Ct. No. 2006-1188, an appeal from the U.S. District Court for the Southern District of Texas, Judge Nancy Atlas presiding. Judge Friedman wrote the opinion of the Court of Appeals, in which Judge Bryson joined. Judge Mayer wrote a dissenting opinion.

DOJ's Barnett Discusses Telecom Mergers

1/25. Thomas Barnett, Assistant Attorney General in charge of the Department of Justice's (DOJ) Antitrust Division, gave a long speech in New York City titled "Merger Review: a Quest for Efficiency". He discussed, among other topics, telecommunications industry mergers, and how information technology has affected the review process. See also, presentation slides.

Thomas BarnettBarnett (at right) stated that "The telecommunications industry has kept the Division busy during the last few years. The Division has recently investigated the mergers of Verizon and MCI, SBC and AT&T, the new AT&T and BellSouth, Sprint and Nextel, and Cingular and AT&T Wireless, among others. The Division took action to challenge portions of these transactions to protect competition, and decided not to challenge others after concluding that they were not likely to result in a substantial lessening of competition."

After commenting upon technological developments since the AT&T break up, he said that "The Division's 2005 Verizon/MCI and SBC/AT&T investigations resulted in consent decrees early in FY2006. The Division investigated all areas in which the two sets of merging firms competed, including residential local and long distance service, Internet backbone services and a variety of telecommunications services provided to business customers. With the exception of the local private line service that was the subject of the consent decrees, the Division concluded that the transactions would not harm competition and would likely benefit consumers, due to existing competition, emerging technologies, the changing regulatory environment, and exceptionally large merger-specific efficiencies."

He continued that "The decrees require the parties to divest portions of certain local fiber-optic network facilities in order to protect competition in the market for facilities-based local private line service to certain business customers in a number of metropolitan areas. Like all Antitrust Division consent decrees, the Verizon/MCI and SBC/AT&T decrees are subject to the Tunney Act, which requires a determination by a federal district court that entry of the decrees is in the public interest. The decrees are currently before the U.S. District Court for the District of Columbia. That court must determine whether the decrees adequately prevent the competitive harm the United States alleged in its complaint without imposing undue harm in the process."

Barnett also discussed the growth in the volume of documents collected by the DOJ in merger reviews. He said that "In the Verizon/MCI and AT&T/SBC mergers, for example, the Division obtained approximately 25 million pages of documents."

He said that two of the reasons for this growth are the increasing complexity of antitrust analysis and product offerings. He also said that the use of information technology has contributed to this trend.

He stated that "technological advances have made it cheaper for companies to create and to store vast amounts of electronic documents and data and have revolutionized the way companies operate. For example, discussions that used to take place orally in meetings are now carried out on-line via e-mail and other systems, with more participants all over the country and around the world. E-mail messages and their attachments spread throughout a company like weeds and are about as indestructible; individual hard drives and shared drives fill up with multiple and alternative versions of documents; and databases are more numerous and more complex. A second request search that once could have been completed by going through some desks and file cabinets must now include personal computer hard drives, shared drives, e-mail servers, voicemail records, vast databases, archived or stored materials, Blackberrys and other wireless devices, and so on."

Barnett also used presentation slides, including one of  a cartoon depicting an attorney standing in a courtroom and holding up a disk. The attorney states to the court, "As precedent your Honor I offer the entire legal history of western civilization on CD ROM."

IRS Issues Chilling Release Regarding Telecom Tax Refunds

1/25. Mark Everson, Commissioner of the Internal Revenue Service (IRS), threatened in a release to freeze refunds of, audit returns of, and/or refer for criminal prosecution, taxpayers who claim incorrect amounts for refund of telecommunications taxes illegally collected by the IRS. He also threatened to investigate tax preparers.

Everson stated that "we are seeing some clear abuse involving overstated refund requests ... People requesting an inflated amount will likely see their refund frozen, may have their entire tax return audited and even face criminal prosecution where warranted."

This involves 26 U.S.C. § 4251, which imposes a 3 percent excise tax on some, but not all, communications services. This tax is sometimes referred to by its opponents as the "Spanish American War tax", since it was originally imposed as a tax to help fund that war.

The IRS previously applied a tortured interpretation to the applicable statutory language. 26 U.S.C. § 4252 contains the relevant definitions.

§ 4251(b) provides that the term ''communications services'' means "(A) local telephone service; (B) toll telephone service; and (C) teletypewriter exchange service". This matter concerns "toll telephone service".

26 U.S.C. § 4252(b) provides that to be taxable, a "toll telephone service" must include a "toll charge which varies in amount with the distance and elapsed transmission time". The key word here is "and". The carriers and taxpayers correctly asserted that the word "and" means "and". The IRS long asserted that "and" actually means "or", and thereby illegally collected billions of dollars of taxes on transactions not covered by the statute.

Taxpayers repeatedly challenged the illegal tax in federal court, and won. The IRS continued to collect the tax, even in jurisdictions in which the courts had ruled it illegal. The IRS appealed District Court judgments to the U.S. Courts of Appeals, and lost. Not until after five consecutive Courts of Appeal had ruled against the IRS did the IRS stop collecting the illegal tax.

See also, story titled "IRS Announces It Will Cease Its Illegal Collection of Excise Taxes on Phone Service" in TLJ Daily E-Mail Alert No. 1,379, May 26, 2006. That story lists each of the IRS's Appeals Court defeats, and hyperlinks to opinions and TLJ stories.

Taxpayers now seek refunds of amounts wrongfully collected by the IRS. And the IRS now seeks to intimidate tax return preparers and taxpayers from claiming refunds.

House and Senate Bills Address Emergency Communications Interoperability Grants

1/24. Sen. Daniel Inouye (D-HI), the Chairman of the Senate Commerce Committee (SCC)  introduced S 385, the "Interoperable Emergency Communications Act", on January 24, 2007.

On January 9, Rep. John Dingell (D-MI), the Chairman of the House Commerce Committee (HCC) introduced HR 338, the "Improving Communications Interoperability Grant Program Act". The two bill address the same topic, but are otherwise different bills

HR 338 would add a new Section 522 to Title V of the Homeland Security Act of 2002 to "establish the Improve Communications for Emergency Response Grant Program to make grants to States and regions to carry out initiatives to improve interoperable emergency communications, including initiatives to achieve solutions to statewide, regional, national, and, where appropriate, international interoperability". It was referred to the HCC.

"After September 11, 2001, we heard heartbreaking stories of firefighters and police officers who went into harm's way because they lacked adequate information. These brave men and women were unable to reach victims because their systems could not communicate with one another", Sen. Inouye stated. "Then Hurricane Katrina struck in August, 2006, and we found that our first responders faced the same communications failures." See, Congressional Record, January 24, 2007, at Page S1071.

Sen. Inouye summarized S 385. "Our bill provides needed direction to the National Telecommunications and Information Administration (NTIA) regarding its administration of the $1 billion grant program for interoperable communications systems for first responders, which was created by the Senate Commerce Committee early last year. It will be funded by money from the Digital Transition and Public Safety Fund and administered by the NTIA."

He added that "The bill designates grants for regional or statewide communications systems that will allow first responders to talk to one another during an emergency. It also sets aside funding for a technology reserve for immediate deployment of communications equipment in the event of an emergency or disaster."

The initial cosponsors of the Senate bill are Sen. Ted Stevens (R-AK), Sen. John Kerry (D-MA), Sen. Gordon Smith (R-OR), and Sen. Olympia Snowe (R-ME). All are members of the SCC. The bill was referred to the SCC.

The House bill has not initial cosponsors. It was referred to the HCC.

109th Congress. The SCC approved a huge communications reform bill on June 28, 2006. It was S 2686 (109th), the "Communications, Consumer's Choice, and Broadband Deployment Act of 2006". Subtitle B of Title I addressed interoperable emergency communications. S 385 IS (110th Congress) is a much revised version.

See also, stories titled "Senate Commerce Committee Marks Up Communications Bill" and "Mark Up of Title I -- Interoperable Emergency Communications" in TLJ Daily E-Mail Alert No. 1,404, July 5, 2006.

There were stand alone bills pertaining to interoperable emergency communications in the House in the 109th Congress. See for example, HR 6349 introduced by Rep. Joe Barton (R-TX) on December 5, 2006, and HR 5852, was approved by the House on July 25, 2006.

More News

1/24. The Office of the U.S. Trade Representative (OUSTR) announced in a release that USTR Susan Schwab will participate in the World Economic Forum conference in Davos, Switzerland, on January 25-27, 2007, where she will "consult with her counterparts and other trade officials in order to advance the World Trade Organization's Doha Development Round, as well as discuss bilateral issues."

1/24. The Office of the U.S. Trade Representative (OUSTR) published a notice in the Federal Register requesting comments regarding the adequacy and effectiveness of intellectual property rights (IPR) protection and enforcement at the provincial level in the People's Republic of China (PRC). The OUSTR states that it is particularly interested in details about Beijing City, Fujian Province, Guangdong Province, Jiangsu Province, Shanghai City, and Zhejiang Province. See, Federal Register, January 24, 2007, Vol. 72, No. 15, at Pages 3170-3171. The OUSTR previously sought, and received, comments regarding the provinces and other provincial-level jurisdictions and issues that should be the focus of a special provincial review (SPR) of IPR protection in the PRC. See, notice in the Federal Register, June 16, 2006, Vol. 71, No. 116, at Pages 34969-34970, and story titled "USTR Seeks Comments IPR Protection in Various Locations in China" in TLJ Daily E-Mail Alert No. 1,393, June 16, 2006.

Bush Gives Speech

1/23. President Bush gave a speech titled "The State of the Union. He had little to say about technology.

He had nothing to say about communications on IP based services. He did not address communications reform legislation, network neutrality, broadband deployment, or related issues.

He had nothing to say about patent reform, copyright proposals, trade related intellectual property rights (IPR) issues, or any other IPR issues.

Bush spoke at length about the Islamic terrorist threat, and the need to address it. However, he said nothing about the technology related aspects of anti-terrorist programs, such as electronic surveillance, intercepts capabilities, data retention, electronic databases, and data mining.

Bush discussed health care. He mentioned that "We need to reduce costs and medical errors with better information technology."

He also asked the Senate to hold votes on his judicial nominees. He stated that "We have a shared obligation to ensure that the federal courts have enough judges to hear those cases and deliver timely rulings. As President, I have a duty to nominate qualified men and women to vacancies on the federal bench. And the United States Senate has a duty, as well, to give those nominees a fair hearing, and a prompt up-or-down vote on the Senate floor."

He also spoke at length about the violence in Iraq, Middle East politics, and his plans for the U.S. military. He also discussed immigration and border security. He also briefly discussed the state of the economy, and added, "Next week, I'll deliver a full report on the state of our economy". He also discussed energy technology. He also advocated a balanced budget, greater transparency in appropriations "earmarks", and entitlements reform.

Laura Bush attended the President's speech in the chamber of the House of Representatives. The White House press office released a list of her quests in the gallery. It includes Ernie Allen, head of the National Center for Missing & Exploited Children. He urges the Congress to impose a data retention mandate on internet service providers. See, Allen's prepared testimony for the Senate Commerce Committee's (SCC) hearing on September 19, 2006, titled "Online Child Pornography".

Federal Circuit Addresses 11th Amendment Immunity

1/23. The U.S. Court of Appeals (FedCir) issued its opinion [16 pages in PDF] in Vas-Cath, Inc. v. University of Missouri, a patent case involving 11th Amendment immunity. The Court of Appeals reversed the judgment of the District Court, which had dismissed an appeal from a USPTO interference determination on 11th Amendment grounds. The Court of Appeals held that after initiating and participating in a patent interference proceeding, a state cannot subsequently assert 11th Amendment immunity to preclude a statutory appeal from the determination of the USPTO.

Both Vas-Cath, Incorporated and the University of Missouri, which is a state entity, applied for patents from the U.S. Patent and Trademark Office (USPTO). The USPTO conducted an interference proceeding pursuant to 37 U.S.C. § 135 to determine priority.

The Court of Appeals wrote that the University of Missouri "invoked the procedures to institute an interference between the University's pending application and Vas-Cath's issued patent; the University amended its application by copying into the application all nineteen claims from the Vas-Cath patent, as the practice permits. During the ensuing six-year interference proceeding both sides vigorously contested the issues, producing records, examining and cross-examining witnesses, filing motions and briefs, and arguing their positions."

The USPTO awarded priority to Missouri and granted Vas-Cath's nineteen claims to Missouri.

Vas-Cath appealed the determination of the USPTO to the U.S. District Court (DC) pursuant to 35 U.S.C. § 146. The case was transferred to the U.S. District Court (WDMo). The District Court dismissed the case on the grounds that Missouri has 11th Amendment immunity.

This appeal followed.

The 11th Amendment provides that "The Judicial power of the United States shall not be construed to extend to any suit in law or equity, commenced or prosecuted against one of the United States by Citizens of another State, or by Citizens or Subjects of any Foreign State."

The Supreme Court held in its 1996 opinion of the Court in Seminole Tribe of Florida v. Florida, which is reported at 517 U.S. 44, that the Congress lacks authority under Article I of the Constitution to abrogate the States' 11th Amendment immunity from suit in federal courts. The Supreme Court extended this to the context of intellectual property in its 1999 opinion in Florida Prepaid v. College Savings Bank, which is reported at 527 U.S. 627. That case invalidated the Patent and Plant Variety Protection Remedy Clarification Act. It further extended this to trademark in its 1999 opinion in College Savings Bank v. Florida Prepaid, which is reported at 527 U.S. 666. That case invalidated the Trademark Remedy Clarification Act.

Under current Supreme Court interpretation of the 11th Amendment, states can hold intellectual property, and enforce their intellectual property rights in federal court. At the same same, states can infringe the intellectual property of others, without fear of money judgments against them. Some states infringe intellectual property rights, hide behind 11th Amendment immunity, and then lobby their Senators to block legislation that would remedy this situation.

The Court of Appeals is bound by, and cited, these opinions in the present case. It nevertheless reversed.

The Court of Appeals reasoned that "The civil action authorized by §146 is not a new claim, but an authorized phase of the interference proceeding that is conducted by the PTO and is subject to judicial review."

The Court of Appeals concluded that "The University initiated and participated in the contested PTO interference against Vas-Cath; we conclude that the University cannot both retain the fruits of that action and bar the losing party from its statutory right of review, even if that review is conducted in federal court. In the circumstances that here exist, the state's actions with respect to the interference include waiver with respect to the ensuing civil action. Having waived any potential immunity as to the interference contest in the PTO, we conclude that the University waived any Constitution-based objection to Vas-Cath's statutory right of judicial review. The dismissal of the §146 action is reversed; we remand to the district court for further proceedings."

This case is Vas-Cath, Incorporated v. Curators of the University of Missouri, et al., U.S. Court of Appeals for the Federal Circuit, App. Ct. No. 06-1100, an appeal from the U.S. District Court for the Western District of Missouri, D.C. No. 05-0400-CV-W-GAF, Judge Gary Fenner presiding. Judge Pauline Newman wrote the opinion of the Court of Appeals, in which Judges Lourie and Rader joined.

Vas-Cath was represented by Vincent Belusko of the Los Angeles office of the law firm of Morrison & Foerster. The University of Missouri was represented by Barbara McCurdy of the Washington DC office of the law firm of Finnegan Henderson.

TLJ Commentary. Perhaps it should be noted that the Supreme Court only thinly decided the above cited cases regarding 11th Amendment immunity and intellectual property. Each was a 5-4 opinion. Two members of the majority have since died or retired (Rehnquist and O'Connor).

Both Seminole Tribe and Florida Prepaid were 5-4 opinions written by the late William Rehnquist. In both cases, he was joined by O'Connor, Thomas, Scalia, and Kennedy. In both cases, Stevens, Souter, Ginsburg and Breyer dissented. College Savings Bank was a 5-4 opinion written by Scalia.

Moreover, these majority opinions lack a sound constitutional basis. They are mechanical extensions of a conservative state rights judicial philosophy to an area of law that the philosophers of states rights never contemplated.

In addition, these majority opinions lack a policy justification. Although, some states that free ride on the intellectual property of others vigorously defend the opinions.

Also, on January 23, 2006, the Supreme Court issued its 5-4 opinion [41 pages in PDF] in Central Virginia Community College v. Katz, a bankruptcy case regarding state sovereign immunity in which the Supreme Court upheld a Congressional abrogation of state sovereign immunity.

That is, while the Supreme Court previously overturned Congressional attempts to abrogate state sovereign immunity in the context of intellectual property law, it allowed the Congress to abrogate state sovereign immunity in the context of bankruptcy law. But, Congressional authority to write intellectual property and bankruptcy statutes are on equal Constitutional footing.

Given these circumstances, and the recent turnover on the Supreme Court, it is possible that Supreme Court interpretation in this area could evolve.

Central Virginia Community College was also a 5-4 opinion. Justice O'Connor, who has since retired, switched from the states rights side to the Congressional side. Chief Justice Roberts joined the states rights camp. Justice Sam Alito has since joined the Supreme Court.

There is also the possibility of legislative action. There was no successful or concerted effort to address this issue in the 109th Congress. However, there were efforts prior to that. See, stories titled "Legislators Introduce Bills to Address Infringement by States" in TLJ Daily E-Mail Alert No. 302, November 6, 2001; "Sen. Leahy Reintroduces Bill to Close 11th Amendment Loophole to IPR" in TLJ Daily E-Mail Alert No. 394, March 22, 2002; "Senate Judiciary Committee Considers Federalism and Intellectual Property" in TLJ Daily E-Mail Alert No. 522, October 3, 2002; and "Legislators Re-Introduce Bills to Address State IPR Sovereign Immunity" in TLJ Daily E-Mail Alert No. 680, June 13, 2003.

People and Appointments

1/23. John Love was named Deputy commissioner for Patent Examination Policy at the U.S. Patent and Trademark Office (USPTO). He has worked for the USPTO since 1969. See, USPTO release.

1/23. Phil Perry announced his resignation as General Counsel at the Department of Homeland Security (DHS), effective February 6, 2007. See, statement by Michael Chertoff.

More News

1/23. The Federal Communications Commission (FCC) announced the corporate and group members of its task force titled "Media and Childhood Obesity: Today and Tomorrow". See, FCC release [PDF] and statement [PDF] by FCC Commissioner Deborah Tate.

1/23. The Federal Communications Commission (FCC) released a Notice of Debarment [11 pages in PDF] against Premio, Inc., which debars Premio from participating, for one year, in the FCC's waste, fraud, and abuse plagued e-rate tax and subsidy program. Premio has been convicted of two e-rate related felonies. This item is FCC 06-177. The FCC also released a Notice of Debarment [12 pages PDF] against NextiraOne LLC. NextiraOne is also a convicted e-rate felon. The FCC debarred it for one year. This item is FCC 06-126.

1/23. The National Institute of Standards and Technology (NIST) published a notice in the Federal Register requesting comments regarding hash algorithm requirements and evaluation criteria. Comments are due by April 27, 2007. The notice states that the "NIST has decided to develop one or more additional hash functions through a public competition, similar to the development process for the Advanced Encryption Standard (AES)." The present notice is a prelude to this competition. The NIST has drafted, and seeks comment on, minimum acceptability requirements, submission requirements, and evaluation criteria for candidate algorithms. The NIST does not yet want competition candidate algorithms. See, Federal Register, January 23, 2007, Vol. 72, No. 14, at Pages 2861-2863, and notice in NIST web site.

1/23. The U.S. Patent and Trademark Office (USPTO) published a notice in the Federal Register that announces, describes, recites, and sets the effective date (January 23, 2007) of the changes to its rules of practice to support implementation of the USPTO's electronic filing system (EFS) for patent correspondence, including the web based electronic filing system (EFS-Web). See, Federal Register, January 23, 2007, Vol. 72, No. 14, at Pages 2770-2776.

Atkins Discusses Sarbox 404

1/22. Securities and Exchange Commission (SEC) Commissioner Atkins gave a speech in San Diego, California, in which he discussed Section 404 of the Sarbanes-Oxley Act.

Atkins has previously discussed the problems created by implementation of Section 404 of the Sarbanes-Oxley Act. See, for example, stories titled "Atkins Says SEC Seeks More Rational Approach to Section 404" in TLJ Daily E-Mail Alert No. 1,395, June 20, 2006, and "SEC's Atkins Discusses E-Proxies, XBRL and 404 Reform" in TLJ Daily E-Mail Alert No. 1,405, July 6, 2007.

Small publicly traded technology companies, and the trade groups that represent them, have complained about unintended harmful consequences of Section 404.

Paul AtkinsAtkins (at right) said that "one section of the Act has caused Sarbanes-Oxley to become synonymous with American regulatory over-reach -- especially in the international community. That provision, of course, is Section 404. This section requires management to assess annually the effectiveness of internal controls for financial reporting and requires a company’s outside auditor to attest to, and report on, management’s assessment."

Section 404 is titled "Management assessment of internal controls". It provides, in full, as follows:

Atkins said that the Congress and SEC incorrectly estimated how much it would cost companies to comply with this requirement.

He said that "management should have a reasonable control environment that provides assurance as to the integrity of the financial statements". However, there has been a "flawed implementation of Section 404."

He continued that "Benefits should exceed costs. When we embarked on implementing Section 404, the SEC envisioned a top-down, enterprise-focused approach, where a company would focus on entity-level controls that could materially impact the consolidated financial statements. The SEC rule was a principles-based approach aimed at management. However, the rules that the PCAOB developed for auditors had an entirely different effect. Of course, I am referring to the now-infamous Audit Standard No. 2 (AS 2), a 300-page rule that has been supplemented by a large amount of additional interpretive guidance."

He added that the "SEC approved the rule, mainly out of a misplaced sense of deference to the PCAOB."

Atkins argued that "the primary flaw of AS 2 was that it lacked a firm grounding in the concept of materiality." This and other factors led auditing firms to implement AS 2 in "a very process-intensive, document-oriented, bottom-up approach". He described "atmosphere in which what-if scenarios created mountains out of molehills" and companies where auditors told companies to "document, analyze, and create process charts for literally tens or hundreds of thousands of supposedly key internal controls"

Finally, he said that the "PCAOB proposed replacing AS 2 with a new audit standard, AS 5, for an outside auditor’s attestation of internal controls. Far from being a rollback or lessening of standards, I think the new proposals go a long way towards implementing the original vision of Sarbanes-Oxley."

He did not discuss the possibility of legislation in the prepared text of his speech.

Rep. Hayes Introduces Telemarketing Fraud Bill

1/22. Rep. Robin Hayes (R-NC) introduced HR 605, the "Seniors Taking on Phony Marketers Act of 2007", or STOP Marketers Act.

This bill would amend 18 U.S.C. § 2326, which provides for enhanced prison sentences for certain enumerated telemarketing related offenses when the defendant targets or victimized persons over the age of 55, to increase the maximum prison term from 10 to 15 years.

The bill would also authorize the appropriation of funds for hiring and training Postal Inspection Service (PIS) and Department of Justice (DOJ) personnel to investigate and prosecute telemarketing fraud cases. It would also authorize appropriations for awareness campaigns at the PIS and Federal Trade Commission (FTC).

The bill was referred to the House Judiciary Committee (HJC), House Commerce Committee (HCC), and House Government Oversight and Reform Committee (HGORC).

Rep. Rush Re-introduces Bill To Provide Tax Advantages to Promote Diversity Ownership of Telecom Business

1/22. Rep. Bobby Rush (D-IL), Rep. Ed Towns (D-NY), and Rep. Al Wynn (D-MD) introduced HR 600, the "Telecommunications Ownership Diversification Act of 2007".

This bill would amend the Internal Revenue Code to provide for a deferral of tax on gain from the sale of telecommunications businesses, and other tax benefits, to promote diversity of ownership of telecommunications businesses.

It was referred to the House Ways and Means Committee (HWMC).

This bill is a reintroduction of HR 1473 (109th Congress), titled the "Telecommunications Ownership Diversification Act of 2007". Rep. Rush introduced that bill on April 5, 2005. Neither the HWMC nor the full House took any action on that bill.

House Bill Would Mandate Notices for Consumers Regarding DTV Transition

1/22. Rep. Joe Barton (R-TX), Rep. Fred Upton (R-MI), and Rep. Denny Hastert (R-IL) introduced HR  608, the "Digital Television Consumer Education Act of 2007", a bill that builds on the "Digital Television Transition and Public Safety Act of 2005".

Rep. Barton stated in a release that "For people who get their TV programs over the air instead of by cable or satellite, the legislation created a converter-box program that can help transform the new digital signals to the analog ones that older television sets recognize."

"Some provisions in that good bill were designed to educate consumers about the DTV transition and the converter-box program. Regrettably, those provisions were stripped out and left behind because of Senate procedural rules." Rep. Barton added that "the bill we introduce today reasserts the necessary public education provisions that were left out last year."

The "Digital Television Transition and Public Safety Act of 2005" was enacted as Title III of S 1932 (109th Congress), the "Deficit Reduction Act of 2005". President Bush signed the bill on February 8, 2006. It is now Public Law No. 109-171. It is codified in 47 U.S.C. § 330. See also, story titled "Congress Enacts DTV Transition Legislation" in TLJ Daily E-Mail Alert No. 1,303, February 3, 2006.

HR 608 would provide that within 45 days of enactment, "(A) any retail distributor that displays for sale or rent any analog-only television sets shall place conspicuously in the vicinity of such television sets a sign containing, in clear and conspicuous print, the consumer alert described in paragraph (2); and (B) any retail distributor that offers for sale or rent such television sets via direct mail, catalog, or electronic means shall prominently display in the vicinity of all advertisements or descriptions of such television sets, in clear and conspicuous print, the consumer alert described in paragraph (2)."

This paragraph (2) requires the following language: "This TV has only an analog broadcast tuner and will require a converter box after February 17, 2009, to receive over-the-air broadcasts with an antenna because of the Nation's transition to digital broadcasting."

The bill would also require all multichannel video programming distributors (MVPD) to include notices regarding the transition with monthly billing statements.

The bill would also require licensed broadcasters to file reports with the Federal Communications Commission (FCC) stating what steps they have taken to inform consumers regarding the DTV transition.

The bill would require the FCC to "establish and maintain a digital television transition public outreach program", maintain a related web site, and establish an advisory committee titled "DTV Working Group".

The bill would also provide that the National Telecommunications and Information Administration (NTIA) "shall establish energy consumption standards applicable to digital-to-analog converter boxes ... in order for such boxes to qualify for purchase with coupons made available under this section."

Finally, the bill would require the FCC and NTIA to prepare reports for the Congress.

This bill was referred to the House Commerce Committee. The three original sponsors are members.

DOJ and FTC File Amicus Merits Brief in Case Regarding Minimum Resale Price Maintenance

1/22. The Department of Justice's (DOJ) Antitrust Division and the Federal Trade Commission (FTC) filed a joint amicus curiae brief [PDF] on the merits with the Supreme Court in Leegin Creative Leather Products v. PSKS, Inc., an antitrust case that might affect electronic commerce and the marketing of consumer electronics products.

The DOJ/FTC wrote that "The question in this case is whether an agreement between a supplier and its dealer that sets the dealer's minimum retail price constitutes a per se violation of Section 1 of the Sherman Act, 15 U.S.C. 1, or is instead properly analyzed under the rule of reason."

It argued that "The per se rule against vertical minimum resale price maintenance (RPM) established in Dr. Miles is irreconcilable with this Court’s modern antitrust jurisprudence and cannot withstand analysis. That per se rule should be abandoned, and Dr. Miles should be overruled."

Section 1 of the Sherman Act, which is codified at 15 U.S.C. § 1, provides that "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal." Section 1 also contains a criminal prohibition.

The SCUS held in 1911 that intrabrand vertical price fixing by manufacturers or intermediate distributors is a per se violation of the Sherman Act. That is, a manufacturer cannot fix the minimum price at which retailers sell its product. See, opinion in Dr. Miles Medical Co. v. John D. Park & Sons Co., which is reported at 220 U.S. 373.

However, more recently the SCUS has rendered opinions that have eroded the Dr. Miles rule. For example, it has held that vertical nonprice restraints and maximum resale price maintenance are not per se unlawful under the antitrust laws. Yet, the basic rule remains that minimum resale price fixing is a per se violation.

The DOJ/FTC wrote that "By reducing intrabrand competition, RPM can stimulate interbrand competition by giving retailers incentives to promote the manufacturer’s brand in ways that are desirable for both consumers and the manufacturer. RPM may ensure sufficient margins and incentives for retailers to engage in beneficial point-of-sale services, because it prevents "free riding" by price-cutting dealers that would otherwise make it unprofitable for retailers to incur the cost of providing those services. That potential is magnified by the advent of high-volume Internet retailers. Even absent free riding, RPM may give retailers economic incentives to make additional non-price sales efforts, such as investing in attractive stores and locations or stocking greater quantities of a product in the face of uncertain consumer demand. And, at least for some products, RPM may also serve the manufacturer’s interest in preserving brand reputation and consumer loyalty."

It added that "The problem is exacerbated by catalog retailing and the advent of the Internet, as consumers may visit traditional, brick-and-mortar retailers to examine a product and select its features but then purchase the product at a discounted price from a catalog or on-line retailer, whose very lack of "bricks and mortar" affords point-of-sale services impossible and whose lack of expenses for bricks and mortar gives them a competitive advantage over traditional retailers who provide the services that some manufacturers desire."

The vote on the FTC to approve this brief was 3-2, with the three Republicans (Deborah Majoras, William Kovacic and Thomas Rosch) voting in favor, and the two Democrats (Pamela Harbour and Jonathan Liebowitz) voting against.

The CTIA, which represents wireless service providers, submitted an amicus brief [PDF] in support of granting certiorari, and an amicus brief [38 pages in PDF] on the merits in support of reversal. See, TLJ story which discussed the CTIA's first brief, titled "Supreme Court Grants Certiorari in Antitrust Cases" in TLJ Daily E-Mail Alert No. 1,501, December 8, 2006.

The dispute that gave rise to this case is not technology related. PSKS, which runs a women's clothing and accessories store, filed a complaint in the U.S. District Court (EDTex) against Leegin Creative Leather Products, which makes women's accessories, alleging violation of Section 1 of the Sherman Act, in connection with its manufacturer's suggested resale price policies. The District Court awarded $3.6 Million in treble damages to PSKS. The U.S. Court of Appeals (5thCir) affirmed in a non-precedential opinion [PDF]. The District Court and Court of Appeals both applied the antitrust per se violation rule to LCLP's imposing of a minimum price fixing agreement on its retailer, PSKS.

The Supreme Court granted certiorari on December 7, 2006.

Oral argument is scheduled for March 26, 2007.

This case is Leegin Creative Leather Products, Inc. v. PSKS, Inc., Sup. Ct. No. 06-480, a petition for writ of certiorari to the U.S. Court of Appeals for the 5th Circuit, App. Ct. No. 04-41243. See also, Supreme Court docket.

Cato Paper Discusses Data Retention Mandate

1/22. The Cato Institute released a short paper titled "``Data Retention´´: Costly Outsourced Surveillance". The author is the Cato's James Plummer. He wrote about the costs that would be imposed by a mandate, and the impact on Constitutional rights.

The paper begins by noting the Department of Justice (DOJ), which is seeking a data retention mandate, is not stating publicly what the nature and scope of that mandate should be.

See also, story titled "Gonzales Testifies Before Senate Judiciary Committee" in TLJ Daily E-Mail Alert No. 1,522, January 18, 2007, and especially subsection of that story subtitled "Data Retention Mandate".

The Cato paper states that "The possibilities range from merely keeping track of which Internet Protocol (IP) numbers are assigned to which users on which days, to keeping logs of all websites visited, header information of emails, instant message transmissions, and so on. If data retention proponents don't have all this content on their wish lists now, they may soon."

The paper discusses the costs of data retention mandates. It sates that "no data-retention regime currently under consideration in America contemplates reimbursing firms for the costs of compliance -- much of which is passed on to consumers in the form of higher bills. Of course, reimbursement would pass the costs along in the form of taxes".

It continues that "Data-retention regulations would not only make it costlier to add new hardware to existing systems, but also make it much harder to design and implement new methods for dealing with ever-increasing traffic. Those yet-to-be-discovered, innovative, nimble designs needed for a growing Internet are threatened if the state requires bit after bit after bit to be routed through devices that copy and save."

Microsoft wrote in a statement published by CNET on May 31, 2006, that data retention has implications for "security, privacy, safety and availability of low-cost or free Internet services".

The Cato paper also discusses Constitutional rights.

The Fourth Amendment of the Constitution 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 paper states that "By mandating data retention, the federal government would essentially make ISPs act as its agents -- and engage in surveillance without suspicion or a warrant." It calls this a "subtly hidden form of search and seizure".

It concludes that data retention laws "would essentially outsource the surveillance without the bother of probable cause or presenting an application to a judge."

People and Appointments

1/22. Joshua Wright was named to the new position of Scholar In Residence at Federal Trade Commission's (FTC) Bureau of Competition. See, FTC release. Wright, who has a JD and a PhD in economics, has taught antitrust law at the George Mason University Law School.

1/22. Marian Bruno was promoted to Associate Director of the Federal Trade Commission's (FTC) Bureau of Competition. See, FTC release.

1/22. President Bush announced his intent to nominate James Clapper to be Under Secretary of Defense for Intelligence. He is currently Chief Operating Officer of Government Services at DFI International. Before that, he was Director of the National Geospatial-Intelligence Agency. He is also a former Director of the Defense Intelligence Agency. See, White House release.

1/22. President Bush nominated John Negroponte to be Deputy Secretary of State. He will replace Robert Zoellick, who left last summer. Bush nominated Michael McConnell to be Director of National Intelligence, replacing John Negroponte. See, White House release. President Bush announced his intent to nominate Negroponte and McConnell back on January 5, 2007. See, transcript of January 5 event.

More News

1/22. Rep. Bart Gordon (D-TN), the Chairman of the House Science and Technology Committee (HSTC) stated in a release that the HSTC "will do our part this Congress to advance the Democrats' Innovation Agenda and I hope the President will work with us to quickly enact legislation that makes a real commitment to bolstering math and science education and invests in basic research".

1/22. The Supreme Court of the U.S. (SCUS) denied certiorari in Korsinsky v. Microsoft, a patent infringement case. See, Order List [8 pages in PDF] at page 3. The District Court granted summary judgment to Microsoft on the grounds that Korsinsky had let his patent expire by not paying paying the 3.5 year maintenance fee. Korsinsky appealed, and the U.S. Court of Appeals (FedCir) affirmed in a non-precedential opinion [PDF]. This case is Gersh Korsinsky v. Microsoft Corporation, U.S. Supreme Court, Sup. Ct. No. 06-785, a petition for writ of certiorari to the U.S. Court of Appeals for the 9th Circuit, App. Ct. No. 2006-1225. The Court of Appeals heard an appeal from the U.S. District Court for the Eastern District of New York, D.C. No. 04CF2695.

1/22. Securities and Exchange Commission (SEC) Chairman Chris Cox gave a speech at Northwestern University Law School. He once again discussed interactive data. He said that "at the same time that we are making the disclosure you get more thorough and easier to read, we're also working to make it interactive, so you can download it from the Web and compare it with other information from other companies. By going online, you won't just be reading a paper document in electronic form -- now you will be able to search a proxy statement for the items you want, and follow links to other, more detailed information."

1/22. The Center for Democracy and Technology (CDT) released its legislative recommendations regarding surveillance and national security, consumer privacy, copyright, free expression on the internet, and other issues. See, release and agenda.

Go to News from January, 16-20, 2007.