TLJ News from June 6-10, 2008

DOJ Approves Verizon's Acquisition of Rural Cellular Subject to Divestitures

6/10. The Department of Justice's (DOJ) Antitrust Division filed a civil complaint in U.S. District Court (DC) against Verizon Communications alleging violation of federal antitrust law in connection with its acquisition of Rural Cellular Corp. (RCC). The DOJ simultaneously filed a proposed consent decree that will settle the matter.

The consent decree requires Verizon to divest assets in six geographic markets in the state of Vermont. The DOJ stated in a release that "The divestitures are required to assure continued competition in markets where the proposed transaction would otherwise result in a significant loss of competition. Verizon and RCC are the most significant competitors in Vermont's two Rural Service Areas (RSAs) and the Burlington Metropolitan Statistical Area, as well as in one RSA in New York and two RSAs in Washington. According to the complaint, the proposed transaction would substantially reduce competition for mobile wireless telecommunications services in these areas, where, in each case, Verizon and RCC collectively serve more than 60 percent of subscribers."

The federal Tunney Act requires notice in the Federal Register, and opportunity for public comment, prior to judicial approval. There is also a parallel proceeding proceeding before the Federal Communications Commission.

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6/10. The House Commerce Committee's (HCC) Subcommittee on Telecommunications and the Internet will held a hearing titled "Status of the DTV Transition: 252 Days and Counting". See, prepared testimony [PDF] of Kevin Martin (FCC), prepared testimony [PDF] of Bernadette Rivera (National Telecommunications and Information Administration), prepared testimony [PDF] of Mark Goldstein (Government Accountability Office), prepared testimony [PDF] of Tom Romeo (IBM), prepared testimony [PDF] of Tim Cannon (Time Warner Cable), prepared testimony [PDF] of Mark Lloyd (Leadership Conference on Civil Rights), prepared testimony [PDF] of Paul McTear (Raycom Media), prepared testimony [PDF] of John Ripperton (Radio Shack), and prepared testimony [PDF] of Eric Rossi (Nielsen Company).

6/10. The Securities and Exchange Commission (SEC) hosted an event titled "International Roundtable on Interactive Data for Public Financial Reporting". See, statement by SEC Chairman Chris Cox.

6/10. Lester Weber pled guilty in U.S. District Court (EDVa) to one count of mail fraud, one count of making and subscribing a false tax return and one count of theft from an organization receiving federal funds, in connection with his theft and subsequent sale of property from The Mariners’ Museum in Newport News, Virginia. The U.S. Attorneys Office for the Eastern District of Virginia stated in a release that he worked as an archivist at the museum, stole items from the museum, and then auctioned stolen items on eBay. Regarding the tax charge, the release states that he "failed to list any of the receipts earned through the sale of items on the eBay website".

Adelstein Advocates Media Justice

6/9. FCC Commissioner Jonathan Adelstein gave a speech in Minneapolis, Minnesota, at the Free Press's event titled "National Conference for Media Reform".

It was a spirited but amorphous denunciation of numerous practices of broadcasters and "media", with calls for investigations, rulemakings, and other unspecified government action. He also spoke about "carrying this fight from our media to the Internet". It was a speech about fighting for "freedom of the press and on the Internet" by regulating speech, media and the internet.

He began by citing Dan Rather as authority for the proposition that "corporate media has abandoned its sense of responsibility".

Jonathan AdelsteinAdelstein (at right) urged the House to pass SJRes 28, regarding the FCC's media ownership rules. The Senate passed this resolution on May 15, 2008. See, story titled "Senate Approves Media Ownership Resolution" in TLJ Daily E-Mail Alert No. 1,768, May 16, 2008. See also, story titled "FCC Releases Text of Media Ownership Order" in TLJ Daily E-Mail Alert No. 1,714, February 8, 2008, story titled "Copps and Adelstein Complain About FCC Media Ownership Agenda Item" in TLJ Daily E-Mail Alert No. 1,688, December 13, 2007, and story titled "Martin Releases Media Ownership Proposal" in TLJ Daily E-Mail Alert No. 1,675, November 13, 2007.

He also advocated further FCC regulation of broadcast speech. He urged the FCC to issue a notice of proposed rulemaking (NPRM) "to develop new rules to clarify that sponsorship identification has to be clear and understandable".

He also called for further investigation of possible violations of the federal "payola" statute, and the "federal antipropaganda statute".

Adelstein stated that "We need to fight thinly disguised payola fueling homogenized corporate music that leaves no room for local and independent artists. We need to fight video news releases masquerading as news, with public relations agents pushing agendas that squeeze out real news coverage and local community concerns. We need to fight product placements turning news and entertainment shows alike into undisclosed commercials."

FCC actions in this area rely upon, among other statutory sections, 47 U.S.C. § 317 and 47 U.S.C. § 508, as well as FCC rules thereunder. Although, the FCC has not yet defined the term "homogenized corporate music".

Adelstein referenced this and other practices and activities of radio broadcasters of music. He also discussed broadcast and cable carriage of video news releases, Armstrong Williams, and the Department of Defense.

For further information about FCC activities in this area, see for example, stories titled "FCC Fines Comcast for Cablecasting Unattributed Information" in TLJ Daily E-Mail Alert No. 1,624, September 24, 2007; "FCC Fines Radio Broadcast Companies for Selling Airtime" in TLJ Daily E-Mail Alert No. 1,565, April 16, 2007; "FCC Chairman Directs Enforcement Bureau to Conduct Payola Investigation" in TLJ Daily E-Mail Alert No. 1,191, August 9, 2005; "Adelstein Angles for More FCC Regulation of Speech" in TLJ Daily E-Mail Alert No. 1,143, May 26, 2005; and "Powell Announces FCC Investigation Regarding Armstrong Williams" in TLJ Daily E-Mail Alert No. 1,057, January 17, 2005.

He also advocated expanding government involvement from regulation of broadcast and cable to regulation of internet activities. He said that "we need to fight rapacious advertisers preying on the unsuspecting minds of our young children."

He also advocated regulation of internet speech, including "interactive advertising". He also said, "Let us continue to promote the true American spirit of democracy in the media and on the Internet."

"We cannot let what happened to our media happen to the Internet. We cannot allow a few gatekeepers to control the Internet so they can maximize profits in the service of advertisers. We need to keep the Internet -- of the people, by the people and for the people."

It was a wide ranging, and vaguely worded speech. He was not specific regarding whether his comparisons of broadcasting to the internet constituted advocacy of network neutrality regulation of broadband service providers, content regulation of internet speakers, or something else.

The FCC has long engaged in various types of regulation of broadcast speech, pursuant to laws made by the Congress, and rules promulgated by the FCC. For example, in its recent actions with respect to video news releases the FCC assert reliance upon 47 U.S.C. § 503 and Section 76.1615(a) of its rules. Moreover, the FCC has prevailed in many First Amendment challenges to the Constitutionality of its actions. See for example, FCC v. Pacifica Foundation, 438 U.S. 726 (1978), Red Lion v. FCC, 395 U.S. 367 (1969), and NBC v. US, 319 U.S. 190 (1943).

While Adelstein hinted at regulation of internet speech, he did not elaborate on the statutory authority or Constitutionality of extending broadcast type regulation to internet speech.

Adelstein did not use this speech to discuss another area in which the FCC has been active in regulating speech -- indecency.

Adelstein also said in this speech that "We must open our airwaves to low-power FM stations and minority voices, restore public interest obligations on broadcasters, and protect public access channels on cable", promote broadband deployment, and build municipal broadband networks. He did not state whether his use of the term "we" referred to the FCC, the Congress, or another entity.

Supreme Court Rules on Patent Exhaustion Doctrine

6/9. The Supreme Court issued its opinion [22 pages in PDF] in Quanta Computers v. LG Electronics, a case regarding the patent exhaustion doctrine. It held that the doctrine applies to method claims. It also held, given the nature of the chipsets in this case, and the language of the cross licensing agreement, that the doctrine applies to the products that "substantially embody" the patents.

Summary. The Supreme Court reversed the judgment of the U.S. Court of Appeals (FedCir). See, July 7, 2006, opinion [31 pages in PDF], which is also reported at 453 F. 3d, at 1370.

The patent exhaustion doctrine restricts a patent holder from exercising his rights against an article embodying the patent holder's invention once that article has been sold by the patent holder or an authorized licensee.

Justice Clarence Thomas wrote the opinion for a unanimous Court. The Court relied and elaborated upon the holding of the Supreme Court in its 1942 opinion in United States v. Univis Lens Co., 316 U. S. 241.

The opinion offers this summary. "For over 150 years this Court has applied the doctrine of patent exhaustion to limit the patent rights that survive the initial authorized sale of a patented item. In this case, we decide whether patent exhaustion applies to the sale of components of a patented system that must be combined with additional components in order to practice the patented methods. The Court of Appeals for the Federal Circuit held that the doctrine does not apply to method patents at all and, in the alternative, that it does not apply here because the sales were not authorized by the license agreement. We disagree on both scores. Because the exhaustion doctrine applies to method patents, and because the license authorizes the sale of components that substantially embody the patents in suit, the sale exhausted the patents."

This is a victory for information technology companies that make things that include microprocessors and other products based upon patented technologies. It is a defeat for the patent holders. The two sides offered competing arguments regarding the policy consequences of judicial interpretation of the patent exhaustion doctrine. See, discussion of amicus curiae briefs below.

Background. LG Electronics, Inc. (LGE) purchased a portfolio of computer technology patents in 1999 including the three patents at issue, U.S. Patent Nos. 4,939,641, 5,379,379, and 5,077,733.

LGE then licensed a patent portfolio, including these three patents, to Intel. The cross licensing agreement permits Intel to manufacture and sell microprocessors and chipsets that use the three patents. The agreement authorizes Intel to "make, use, sell (directly or indirectly), offer to sell, import or otherwise dispose of" its own products practicing the three patents. The agreement also provides that no license "is granted by either party hereto ... to any third party for the combination by a third party of Licensed Products of either party with items, components, or the like acquired ... from sources other than a party hereto, or for the use, import, offer for sale or sale of such combination." (Parentheses in original.)

Quanta Computer, and other petitioners, are computer manufacturers. They purchased microprocessors and chipsets from Intel. They made computers using Intel parts in combination with non-Intel memory and buses in ways that practice the three patents that Intel licensed from LGE.

That is, Intel was licensed to sell chipsets that incorporated LGE's patented technology. But, this was a limited license. Although, nothing in the agreement barred Intel from selling chipsets. Intel sold chipsets to Quanta. Quanta did not resell the chipsets. Rather, it put them in computers in a manner that exceeded Intel's license. It relied upon its purchase from Intel, and the patent exhaustion doctrine. In contrast, LGE asserted that the patent exhaustion does not apply.

Proceedings Below. LGE filed a complaint in the U.S. District Court (NDCal) against Quanta and the other computer manufacturers alleging patent infringement.

The District Court granted summary judgment to Quanta. It held that the license that LGE granted to Intel resulted in forfeiture of any potential infringement actions against legitimate purchasers of the Intel's products.

The District Court held that although the Intel products do not fully practice any of the patents at issue, they have no reasonable noninfringing use and therefore their authorized sale exhausted patent rights in the completed computers under US v. Univis Lens. The District Court also held that patent exhaustion applies only to apparatus or composition of matter claims that describe a physical object, and does not apply to process, or method, claims that describe operations to make or use a product.

The Court of Appeals affirmed in part and reversed in part.

The Court of Appeals held that the doctrine of patent exhaustion does not apply to method claims, and in the alternative, it concluded that exhaustion did not apply because LGE did not license Intel to sell the Intel products to Quanta for use in combination with non-Intel products.

Supreme Court Opinion. The Supreme Court reversed.

It first addressed whether patent exhaustion applies to method patents. It held that it does.

It wrote that "Nothing in this Court's approach to patent exhaustion supports LGE’s argument that method patents cannot be exhausted. It is true that a patented method may not be sold in the same way as an article or device, but methods nonetheless may be ``embodied´´ in a product, the sale of which exhausts patent rights. Our precedents do not differentiate transactions involving embodiments of patented methods or processes from those involving patented apparatuses or materials. To the contrary, this Court has repeatedly held that method patents were exhausted by the sale of an item that embodied the method."

The Supreme Court also offered the rationale that "Eliminating exhaustion for method patents would seriously undermine the exhaustion doctrine. Patentees seeking to avoid patent exhaustion could simply draft their patent claims to describe a method rather than an apparatus."

Second, the Supreme Court addressed the extent to which a product must embody a patent in order to trigger exhaustion. It held that the patent exhaustion doctrine applies to products that "substantially embody" the patents.

The Supreme Court compared the facts of this case to those in Univis Lens, and concluded that its holding governs in this case.

The Court wrote that "LGE has suggested no reasonable use for the Intel Products other than incorporating them into computer systems that practice the LGE Patents. Nor can we can discern one: A microprocessor or chipset cannot function until it is connected to buses and memory. And here, as in Univis, the only apparent object of Intel’s sales to Quanta was to permit Quanta to incorporate the Intel Products into computers that would practice the patents." (Footnote omitted.)

"Like the Univis lens blanks, the Intel Products constitute a material part of the patented invention and all but completely practice the patent. Here, as in Univis, the incomplete article substantially embodies the patent because the only step necessary to practice the patent is the application of common processes or the addition of standard parts. Everything inventive about each patent is embodied in the Intel Products."

The Court continued that "the Intel Products cannot carry out these functions unless they are attached to memory and buses, but those additions are standard components in the system, providing the material that enables the microprocessors and chipsets to function. The Intel Products were specifically designed to function only when memory or buses are attached; Quanta was not required to make any creative or inventive decision when it added those parts. Indeed, Quanta had no alternative but to follow Intel’s specifications in incorporating the Intel Products into its computers because it did not know their internal structure, which Intel guards as a trade secret. ... Intel all but practiced the patent itself by designing its products to practice the patents, lacking only the addition of standard parts."

"The sale of a device that practices patent A does not, by virtue of practicing patent A, exhaust patent B. But if the device practices patent A while substantially embodying patent B, its relationship to patent A does not prevent exhaustion of patent B." (Emphasis in original.)

"While each Intel microprocessor and chipset practices thousands of individual patents, including some LGE patents not at issue in this case, the exhaustion analysis is not altered by the fact that more than one patent is practiced by the same product. The relevant consideration is whether the Intel Products that partially practice a patent -- by, for example, embodying its essential features -- exhaust that patent." (Emphasis in original.)

Finally, the Supreme Court concluded that the "sale to Quanta exhausted LGE’s patent rights".

Amicus Briefs. The case attracted numerous amicus curiae briefs, both in support of the LGE, and in support of Quanta.

The Intellectual Property Owners Association wrote in its amicus brief [PDF] in support of LGE that "patentees may place conditions on their licensing of inventions, so long as they do not use those conditions to abuse their patent rights. Conditional licenses that are used improperly, in violation of antitrust laws, are subject to the doctrine of patent exhaustion. Valid conditional licenses, however, are necessary to both patentees and licensees in order to bring useful technologies to the appropriate markets for an appropriate exchange of economic value. If intellectual property is to be effectively used and protected, the Court must re-enforce its precedent endorsing conditional sales and license agreements, when the conditions are not unlawful."

Qualcomm wrote in its amicus brief [PDF] in support to LGE that "High technology industries, such as the wireless communications industry, frequently involve manufacturing in a multi-step chain of production, which results in various companies owning large portfolios of multifaceted, interrelated patents. Members of these industries accordingly have negotiated licensing agreements under which patent owners license their patents to a diverse array of companies, each with substantially differing licensing needs, at various points in the production chain."

Qualcomm continued that "Critical to the complex structure of patent licensing in these industries is the well established rule that a patent owner has the flexibility, as a matter of law, to license different aspects of its bundle of make, use and sell rights separately without exhausting the whole of the patent owner’s rights, and may grant restricted, conditional licenses that authorize the licensee to practice only those patent rights that are necessary to accomplish that particular licensee’s intended purpose."

It wrote in its December 10, 2007, brief that the interpretation of the patent exhaustion doctrine that has now been adopted by the Supreme Court disregards industry customs and Supreme Court precedent, and "jeopardizes efficient allocations of risk and reward across the chain of production".

In contrast, the Computer and Communications Industry Association (CCIA) wrote in its amicus brief [PDF] in support of Quanta that "Under the Federal Circuit's rule, making sales ``conditional´´ circumvents the exhaustion doctrine and allows patentees to retain the option of asserting the full arsenal of patent rights at any point that component changes hands."

The CCIA further argued that in the long run, the Federal Circuit's ruling, which the Supreme Court reversed, would have created "a shadow economy of permissions that advantage opportunists, especially those who own patents outside their core business and so have little need to cooperate in promoting stable and predictable markets in those areas. It will disrupt and skew the entire business ecology of the IT sector to favor upstream patent interests at the expense of assemblers, integrators, vendors, and end users -- and likely return the world to a less efficient economy based on vertical integration and stovepiped products and services that do not interoperate."

Similarly, Dell, eBay, HP and Cisco Systems wrote in their joint amicus brief [PDF] that the Federal Circuit's "regime is not necessary to enable patent owners to obtain full compensation for use of their invention, will create considerable confusion and uncertainty for downstream participants in the manufacturing process (as well as for sellers and the ultimate users of any products containing components implicating a patent), and opens the door to new, and very substantial abusive patent infringement claims." (Parentheses in original.)

It also argued, as the Supreme Court ultimately concluded, that "categorically excluding all method claims from the patent exhaustion doctrine" creates "an exception that swallows the rule".

This case is Quanta Computer, Inc., et al. v. LG Electronics, Inc., Supreme Court of the U.S., Sup. Ct. No. 06-937, a petition for writ of certiorari to the U.S. Court of Appeals for the Federal Circuit, App. Ct. Nos. 05-1261, 05-1262, 05-1263, 05-1264, 05-1302, 05-1303, and 05-1304. Judge Mayer wrote the opinion of the Court of Appeals, in which Judges Michel and Newman joined. The Court of Appeals heard appeals from the U.S. District Court for the Northern District of California, Judge Claudia Wilkin presiding.

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6/9. The Supreme Court denied certiorari in Festo v. Shoketsu Kinzoki Kogyo, Sup. Ct. No. 07-1066, a patent case involving the doctrine of equivalents. See, Orders List [10 pages in PDF] at page 3. This lets stand the July 5, 2007, opinion [32 pages in PDF] of the U.S. Court of Appeals (FedCir). See, Supreme Court docket.

6/9. The Supreme Court denied certiorari in Prostar Computer v. IpVenture, Sup. Ct. No. 07-1304, a patent case involved technology for managing personal computer systems. See, Orders List [10 pages in PDF] at page 4. This lets stand the September 28, 2007, opinion [7 pages in PDF] of the U.S. Court of Appeals (FedCir). See, Supreme Court docket.

6/9. The Copyright Alliance announced a program titled "One Voice". The CA stated in a release that this is a "campaign to engage, educate and enlist creators across America in the dialogue about copyright and its importance to the U.S. economy and the livelihoods of millions of Americans".

6/9. The CTIA announced in a release that it has issued a Request For Information (RFI) regarding the enhanced messaging space.

6/9. The U.S. District Court (SDCal) sentenced Jon Paul Oson to serve 63 months in prison, and to pay over $400,000 in restitution, following his conviction in August of 2007 of violation of 18 U.S.C. § 1030(a)(5)(A)(i), the federal computer hacking statute. The U.S. Attorneys Office for the Southern District of California (USAO) stated in a release [PDF] that Oson after leaving his employment as a network engineer and as technical services manager for the Council of Community Health Clinics (CCHC), he accessed its servers without authorization and deleted patient data and software, and disabled automatic backup, thereby causing financial harm and affecting patient care. The District Court ordered him to pay $144,358.83 in restitution to the CCHC, and $264,979.00 in restitution to another clinic whose data was deleted. The USAO added that this is "one of the longest sentences imposed for computer hacking in the United States".

FTC Subpoenas Intel

6/6. Intel announced in a release that the Federal Trade Commission (FTC) on June 4 "served a subpoena related to Intel's business practices with respect to competition in the microprocessor market." See also, Intel's Form 8-K filed with the Securities and Exchange Commission (SEC) on June 6, 2008.

Intel's release continues that "Since 2006 Intel has been working closely with the FTC on an informal inquiry into competition in the microprocessor market and has provided the commission staff with a considerable amount of information and thousands of documents. By proceeding to a subpoena, the Commission will be able to obtain not only information that Intel has already committed to provide but also information from other parties. Consistent with its standard practice Intel will work cooperatively with the FTC staff to comply with the subpoena and continue providing information."

Intel added that it "believes its business practices are well within U.S. law. The evidence that this industry is fiercely competitive and working is compelling. For example, prices for microprocessors declined by 42.4 percent from 2000 to end of 2007. When competitors perform and execute the market rewards them. When they falter and under-perform the market responds accordingly."

Al Foer, head of the American Antitrust Institute (AAI), praised the FTC action. He stated in a release that this is a "landmark monopolization case". The AAI's interests are aligned with those of the plaintiffs' antitrust bar.

Ed Black, head of the Computer and Communications Industry Association (CCIA), stated in a release that "This is a very positive development". He noted that the European Union has also opened and investigation of Intel, and that Korea has recently fined Intel.

Black continued that "Now, the most influential antitrust authorities from North America, Europe and Asia have either opened a formal investigation or already ruled against Intel. It is good to see antitrust agencies from around the world committed to fair competition in the high tech arena."

He also said that "The extremely high start-up and capital expenditure costs associated with the microprocessor market make new entry into this market very difficult if not impossible. It is essential that action be taken while viable competitors still exist."

On July 27, 2007, the European Commission (EC) announced in a release that it "has sent a Statement of Objections (SO) to Intel on 26th July 2007. The SO outlines the Commission's preliminary view that Intel has infringed the EC Treaty rules on abuse of a dominant position (Article 82) with the aim of excluding its main rival, AMD, from the x86 Computer Processing Units (CPU) market." See, story titled "European Commission Initiates Proceeding Against Intel Alleging Anticompetitive Behavior" in TLJ Daily E-Mail Alert No. 1,617, July 27, 2007.

On January 10, 2008, the Office of the Attorney General of the state of New York announced in a release that it has "served a wide-ranging subpoena seeking documents and information on Intel Corporation". See, story titled "New York Announces Investigation of Intel" in TLJ Daily E-Mail Alert No. 1,700, January 15, 2008.

Intel's June 6 SEC Form 8-K also states that the Korea Fair Trade Commission (KFTC) "has ruled that Intel Corporation (`Intel´´) has violated Korean antitrust laws on two counts of ``abuse of dominance.´´ The Commission fined Intel approximately $25.4 million (26 billion Korean won). Intel representatives have stated that the company is extremely disappointed by the decision of the KFTC and believes that the ruling represents an outcome that will dampen, not enhance, the price competition that has resulted in lower prices for customers and consumers."

This Form 8-K adds that Intel "will review the ruling and it is presently expected that Intel will request a further review from the KFTC and, if it proves necessary, an appeal which will permit a Korean court to review the case in its entirety and reach its own decision in the matter."

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6/6. 15 groups sent a letter [PDF] to the Rep. Ed Markey (D-MA), the Chairman of the House Commerce Committee's (HCC) Subcommittee on Telecommunications and the Internet, and Rep. Joe Barton (R-TX), the ranking Republican on the HCC, urging the HCC to "hold hearings on the issue of Internet service providers (ISPs) and their business partners targeting ads to subscribers based on inspections of those subscribers' Web activities." The letter was sent by the Center for Democracy and Technology (CDT), Center for Digital Democracy (CDD), Consumer Federation of America (CFA), Consumers Union (CU), Electronic Frontier Foundation (EFF), Electronic Privacy Information Center (EPIC), Free Press (FP), Media Access Project (MAP), Public Knowledge (PK), and others. They added that "We are concerned that such ISP wiretapping schemes may violate multiple privacy laws and policies."

6/6. The Department of Justice (DOJ) published a notice in the Federal Register that announces, describes, recites, and sets the comment deadline (August 5, 2008) for, it notice of proposed rulemaking regarding the record keeping, labeling, and inspection requirements to implement provisions of the Adam Walsh Child Protection and Safety Act of 2006 that require producers of depictions of simulated sexually explicit conduct. This notice states that the proposed rules provides that these records "shall include a copy of the depiction and, where the depiction is published on an Internet computer site or service, a copy of any URL associated with the depiction." The notice adds that, pursuant to Supreme Court's 2002 opinion in Ashcroft v. Free Speech Coalition, 535 U.S. 234, these requirements do not apply to "computer-generated images that only appear to be real human beings". See, Federal Register, June 6, 2008, Vol. 73, No. 110, at Pages 32262-32273.

Go to News from June 1-5, 2008.