TLJ News from May 11-15, 2011

More News

5/15. Yahoo and Alibaba released a joint statement: "Alibaba Group, and its major stockholders Yahoo! Inc. and Softbank Corporation, are engaged in and committed to productive negotiations to resolve the outstanding issues related to Alipay in a manner that serves the intersts of all shareholders as soon as possible." Yahoo is a 43% owner of Alibaba, a Chinese e-commerce web site. Alipay is an online payment service spun off by Alibaba.

FTC to Hold Workshop on Standard Setting and Patents

5/13. The Federal Trade Commission (FTC) announced that it will hold a public workshop titled "Patent Standards Workshop" on June 21, 2011, in Washington DC. It also published a list of questions, and requested public comment, by July 8, 2011.

The FTC's notice does not set a deadline or a process for requesting to present or participate in this workshop. This event will be held at the FTC's Conference Center at 601 New Jersey Ave., NW.

This notice states that the FTC "may prepare a report". See also, the 2007 paper [68 pages in PDF] titled "Standard Setting, Patents, and Hold-Up". One of its co-authors is Joseph Farrell, Director of the FTC's Bureau of Economics.

This notice states that the FTC intends to examine "issues pertaining to potential patent hold-up of collaborative standards. It intends to consider antitrust issues, as well as examine how other legal doctrines (such as contract, patent, and consumer protection law), and economic and practical considerations affect the analysis of the issues." (Parentheses in original.)

It states that "Among the topics to be considered are the disclosure of patent rights during the standard-setting process, the implications of a patent holder's commitment to license users of the standard on reasonable and non-discriminatory (``RAND´´) terms, and the possibility of negotiating license terms prior to choosing the standard."

See, notice in the Federal Register, Vol. 76, No. 93, Friday, May 13, 2011, at Pages 28036-28038, and FTC release of May 9, 2011.

Questions. First, the FTC asks about the standards setting process and standards setting organizations (SSO). For example, it asks "How do patent disclosure policies vary among SSOs? How do disclosure policies vary in their effectiveness of making SSO members aware of relevant patent rights? What considerations drive variation in disclosure policies? Why do SSOs adopt policies that may lead to incomplete disclosure of relevant patents, for instance by excluding patent applications from disclosure or by not requiring members to search their patent portfolios?"

Also, "When SSO policies create a potential for incomplete disclosure of members' patent rights, how else can members protect themselves against hold-up?"

The FTC also asks numerous question about the licensing of patents on terms that are reasonable and non-discriminatory (RAND). For example, it asks, "Is a RAND commitment part of an enforceable contract between the SSO and the patent holder? Between the SSO members and the patent holder? Should non-members of the SSO who wish to use the standard be able to enforce the commitment? Do RAND licensing commitments without accompanying disclosure commitments provide adequate protection against patent hold-up?"

Next, the FTC asks numerous questions about ex ante disclosure and negotiation of licensing terms. For example, it asks, "What has been the experience of those SSOs that require or allow ex ante disclosure of licensing terms? How frequently do ex ante disclosures of licensing terms occur? Why are ex ante disclosures of licensing terms not required or made?"

Also, "To what extent do concerns about antitrust liability deter ex ante disclosure or negotiation of licensing terms?     What considerations should shape a rule of reason analysis of joint ex ante license discussions or negotiations?"

FTC's Rambus Debacle. This notice does not reference the FTC's failed administrative proceeding against Rambus arising out of its participation in a SSO.

The FTC filed an administrative complaint in 2002 against Rambus alleging anti-competitive behavior in violation of Section 5 of the Federal Trade Commission Act (FTCA) in connection with its participation in a standard setting body for dynamic random access memory products. See, story titled "FTC Files Administrative Complaint Against Rambus" in TLJ Daily E-Mail Alert No. 455, June 20, 2002.

The complaint pertained to Rambus's participation in the JEDEC Solid State Technology Association, which was formerly known as the Joint Electron Device Engineering Council. JEDEC develops and issues technical standards for a form of computer memory known as synchronous dynamic random access memory (SDRAM).

In 2006, the FTC concluded that "Rambus's acts of deception constituted exclusionary conduct under Section 2 of the Sherman Act, and that Rambus unlawfully monopolized the markets for four technologies incorporated into the JEDEC standards in violation of Section 5 of the FTC Act." See, FTC's August 2, 2006, opinion [120 pages in PDF] in its administrative proceeding titled "In the Matter of Rambus, Inc.". See also, FTC Docket No. 9302 for hyperlinks to pleadings in this proceeding.

And see, story titled "FTC Holds That Rambus Unlawfully Monopolized Markets" in TLJ Daily E-Mail Alert No. 1,427, August 8, 2006, and story titled "FTC Files Administrative Complaint Against Rambus" in TLJ Daily E-Mail Alert No. 455, June 20, 2002.

However, Rambus appealed, and on April 22, 2008, the U.S. Court of Appeals (DCCir) issued its opinion [24 pages in PDF] setting aside the FTC's order. See, story titled "Court of Appeals Rules in Rambus v. FTC" in TLJ Daily E-Mail Alert No. 1,752, April 23, 2008. The Supreme Court denied the FTC's petition for writ of certiorari in 2009.

See also, the 2007 opinion [39 pages in PDF] of the U.S. Court of Appeals (3rdCir) in Broadcom v. Qualcomm, 501 F.3d 297, and story titled "3rd Circuit Rules that Deception of SDO Can Give Rise to Claims for Violation of Sherman Act" in TLJ Daily E-Mail Alert No. 1,635, September 6, 2007.

People and Appointments

5/13. Sen. Herb Kohl (D-WI), longtime Senator for the state of Wisconsin, member of the Senate Judiciary Committee (SJC), and the SJC's Subcommittee on Antitrust, announced that he will not seek re-election in November of 2012. See, Sen. Kohl's release, and White House news office release.

More News

5/13. Rep. Ed Markey (D-MA) and Rep. Joe Barton (R-TX) introduced HR 1895 [LOC | WW], the "Do Not Track Kids Act of 2011", a bill to revise and expand the Children's Online Privacy Protection Act of 1998 (COPPA), which is codified at 15 U.S.C. §§ 6501-6506. This bill would, among other things, ban the tracking of children for marketing purposes and other child related activities. The two released a discussion draft [32 pages in PDF] on May 6, 2011. See, story titled "Rep. Markey and Rep. Barton Release Draft of Do Not Track Kids Act" in TLJ Daily E-Mail Alert No. 2,236, May 9, 2011.

5/13. The Copyright Office (CO) published a notice in the Federal Register that announces, describes, recites, and sets the effective date (May 13) for, its rules amendments regarding its Registration and Recordation Program. This CO notice states that these are "non-substantive amendments to its regulations to reflect a reorganization that has moved the Recordation function from the Visual Arts and Recordation Division of the Registration and Recordation Program to the Information and Records Division. As a result of this reorganization, the name of the Registration and Recordation Program has been changed to the Registration Program." See, Federal Register, Vol. 76, No. 93, Friday, May 13, 2011, at Page 27898.

Sen. Franken and Rep. Hank Johnson Reintroduce Arbitration Fairness Act

5/12. Sen. Al Franken (D-MN) and other Senate Democrats introduced S 987 [LOC | WW | PDF], the "Arbitration Fairness Act", on May 12, 2011. Also, Rep. Hank Johnson (D-GA) announced at a news conference on May 17 that he will introduce the companion bill in the House. The House will return from a recess on May 23.

This bill, and earlier versions in prior Congresses, are introduced in part in reaction to judicial opinions upholding the enforceability of arbitration clauses contracts between service providers and their customers, such as the April 27, 2011, opinion [39 pages in PDF] of the Supreme Court in AT&T Mobility v. Concepcion.

In that case the Supreme Court held that a contract between a wireless phone company and its consumers that provides for mandatory arbitration of consumer complaints, and waiver of class actions, is enforceable under Section 2 of the Federal Arbitration Act (FAA), notwithstanding the state of California's attempt to render such contracts unenforceable as unconscionable.

See also, story titled "Supreme Court Holds Class Action Waiver Clauses in Arbitration Contracts Are Enforceable" in TLJ Daily E-Mail Alert No. 2,228, April 28, 2011.

See also, the Supreme Court's 2001 opinion in Circuit City Stores, Inc. v. Adams, 532 U.S. 105, in which the Supreme Court held that an arbitration clause in an employment application is enforceable when that employee subsequently brings an employment discrimination action against the employer.

Sen. Al FrankenSen. Franken (at right) stated in a May 17 release that "Workers and consumers should never be forced to give up their rights to get hired for a job, or to get a cell phone ... I've introduced the Arbitration Fairness Act to ensure that workers and consumers have the right to choose arbitration over litigation, instead of being forced into it by corporations".

S 987 was referred to the Senate Judiciary Committee (SJC). Sen. Franken is a member.

Rep. Johnson stated in a release that "Forced arbitration clauses undermine our indelible Constitutional right to take our disputes to Court ... They benefit powerful business interests at the expense of American consumers and workers. These bills are designed to defend our rights and to re-empower consumers".

Rep. Johnson's bill will be referred to the House Judiciary Committee (HJC). He is a member.

Arbitration agreements have long been negotiated between businesses for resolution of commercial disputes. However, recent judicial interpretations of the FAA, which is codified at 9 U.S.C. § 1, et seq., have increased the use of arbitration clauses in business's contracts with consumers and employees.

However, businesses have increasingly been including arbitration clauses in agreements with consumers. They are used in connection with cell phone service, internet access service, user agreements for e-commerce web sites, and in other situations.

Opinion such as Circuit City and Concepcion encourage further and broader use of arbitration agreements. They have also resulted in Congressional efforts to limit the enforceability of arbitration clauses in consumer and employment contracts.

See also, story titled "Supreme Court Denies Cert in Case Involving Arbitration Clauses in Wireless Contracts" in TLJ Daily E-Mail Alert No. 1,773, May 28, 2008.

Bills in Prior Congresses. Rep. Johnson introduced HR 3010 [LOC | WW], the "Arbitration Fairness Act of 2007", in the 110th Congress. The HJC approved it on July 15, 2008. The full House did not approve it. See also, story titled "House Judiciary Committee to Hold Hearing on Arbitration Fairness Act" in TLJ Daily E-Mail Alert No. 1,658, October 19, 2007.

Former Sen. Russ Feingold (D-WI) introduced the companion bill in the Senate in the 110th Congress, S 1782 [LOC | WW], also titled the "Arbitration Fairness Act of 2007". Neither the Senate, nor the SJC approved that bill.

Rep. Johnson introduced HR 1020 [LOC | WW], the "Arbitration Fairness Act of 2009", in the 111th Congress. Neither the House nor the HJC passed that bill.

Former Sen. Feingold introduced S 931 [LOC | WW], also titled the "Arbitration Fairness Act of 2009", in the Senate in the 111th Congress. Neither the Senate nor the SJC passed that bill.

Statute. The FAA, at 9 U.S.C. § 2 currently provides, that "A written provision in any maritime transaction or a contract evidencing a transaction involving commerce to settle by arbitration a controversy thereafter arising out of such contract or transaction, or the refusal to perform the whole or any part thereof, or an agreement in writing to submit to arbitration an existing controversy arising out of such a contract, transaction, or refusal, shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract."

Bill Summary. This bill is similar, but not identical to S 931 (111th Congress).

It recites in its findings that the FAA "was intended to apply to disputes between commercial entities of generally similar sophistication and bargaining power" and that "Most consumers and employees have little or no meaningful choice whether to submit their claims to arbitration. Often, consumers and employees are not even aware that they have given up their rights."

The key clause of the bill provides that "no predispute arbitration agreement shall be valid or enforceable if it requires arbitration of an employment dispute, consumer dispute, or civil rights dispute".

The bill defines "consumer dispute" a "a dispute between an individual who seeks or acquires real or personal property, services (including services relating to securities and other investments), money, or credit for personal, family, or household purposes and the seller or provider of such property, services, money, or credit". (Parentheses in original.)

The original cosponsors of S 987 in the Senate are Sen. Richard Blumenthal (D-CT), Sen. Patrick Leahy (D-VT), Sen. Dick Durbin (D-IL), Sen. Sheldon Whitehouse (D-RI), Sen. Sherrod Brown (D-OH), Sen. Tom Harkin (D-IA), Sen. John Kerry (D-MA), Sen. Jeff Merkley (D-OR), Sen. Tom Udall (D-NM), and Sen. Ron Wyden (D-OR).

Microsoft Final Judgment Expires

5/12. The last of the provisions of the final judgment against Microsoft in USA v. Microsoft expired on May 12, 2011.

The Department of Justice's (DOJ) Antitrust Division stated in a release that "The Microsoft final judgment, which has been in effect since 2002, was designed to eliminate Microsoft's illegal practices, to prevent recurrence of the same or similar practices and to restore the potential for competition from software products known as ``middleware.´´ To that end, the judgment protected the development and distribution of middleware -- including web browsers, media players and instant messaging software -- thereby increasing choices available to consumers. The final judgment proved effective in protecting the development and distribution of middleware products and prevented Microsoft from continuing the type of exclusionary behavior that led to the original lawsuit."

This case is U.S.A. v. Microsoft, U.S. District Court for the District of Columbia, D.C. No. 98-CV-1232, and New York, et al. v. Microsoft, D.C. No. 98-CV-1233, consolidated.

The DOJ filed this action on May 18, 1998. See, TLJ story titled "The Government Sues Microsoft Again", May 19, 1998. For hyperlinks to earlier stories and pleadings related to this proceeding, see TLJ web page titled "DOJ v. Microsoft II".

The District Court quickly conducted a trial, and entered judgment against Microsoft on June 7, 2000.

Microsoft appealed. The U.S. Court of Appeals (DC) issued its opinion on June 28, 2001 affirming in part, and reversing in part. See, story titled "Appeals Court Rules in USA v. Microsoft" in TLJ Daily E-Mail Alert No. 219, June 29, 2001.

The DOJ's Antitrust Division, under Republican appointee Charles James, reached a settlement with Microsoft in November of 2001. See, stories titled "DOJ and Microsoft Reach Settlement" and "Summary of Prohibited Conduct Sections of the Proposed Final Judgment" in TLJ Daily E-Mail Alert No. 301, November 5, 2001.

A revised version of this became the final judgment on November 12, 2002. See, story titled "District Court Enters Final Judgment in Microsoft Case" in TLJ Daily E-Mail Alert No. 548, November 13, 2002.

Obama Administration Releases Vague Outline of Cyber Security Legislation

5/12. The White House (WH) news office issued a release titled "Cybersecurity Legislative Proposal". It states in vague language a set of proposals that could be included in a cyber security bill. No actual draft bill or draft language accompanied this release.

In addition, the WH news office released a second item titled "The Administration's Cybersecurity Accomplishments".

The legislative proposal described by this release contains a national data breach reporting requirement. The release adds that this "proposal helps businesses by simplifying and standardizing the existing patchwork of 47 state laws that contain these requirements". However, it does not elaborate on either the nature of the requirement, or on the subject of federal preemption of states laws.

The release also states that this legislative proposal "clarifies the penalties for computer crimes, synchronizes them with other crimes, and sets mandatory minimums for cyber intrusions into critical infrastructure."

The release adds that the "Racketeering Influenced and Corrupt Organizations Act (RICO) ... does not apply to cyber crimes, despite the fact that cyber crime has become a big business for organized crime."

The legislative proposal also provides "immunity when sharing cybersecurity information" with the Department of Homeland Security (DHS).

The legislative proposal also "will enable DHS to quickly help a private-sector company, state, or local government when that organization asks for its help".

The legislative proposal also calls for "each critical-infrastructure operator" to write a "cybersecurity risk mitigation plan", that then must be approved by "a third-party, commercial auditor", and for certain companies, by the Securities and Exchange Commission (SEC) also.

However, this release contains no proposal for an internet kill switch. See, story titled "The Big Red Switch in the Oval Office" in TLJ Daily E-Mail Alert No. 2,106, July 16, 2010.

The legislative proposal also addresses security of federal computer systems.

Sen. John Rockefeller (D-WV) and Sen. Olympia Snowe (R-ME) issued a joint statement. They were the sponsors in the 111th Congress of  S 773 [LOC | WW], the "Cybersecurity Act of 2009", and  S 778 [LOC | WW], an untitled bill that would merely create within the Executive Office of the President (EOP) the Office of the National Cybersecurity Advisor.

Sen. Rockefeller said that "The White House has presented a strong plan to better protect our nation from the growing cyber threat. Their plan incorporates many of the same elements of the bill we introduced last year. It establishes clear roles, responsibilities and accountability for cybersecurity in government and the private sector. Protecting our networks is a shared responsibility -- and like our bill, the Administration’s plan proposes close collaboration between the government and private sector. I am also pleased their proposal includes new protections for Americans in the event of a data breach. I look forward to continuing to work with the White House, and my colleagues in the House and Senate, to pass a comprehensive cybersecurity bill this year."

Sen. Snowe said that "it is imperative that the Administration come before Congress very soon to brief us on the reasoning behind its proposals. I look forward to working with my colleagues in the Senate, House and the Administration to swiftly pass comprehensive cybersecurity legislation as further delay compromises our ability to better protect Americans against cyber intrusions and attacks that target our financial, commercial, transportation and communications sectors."

Sen. Joe Lieberman (D-CT), Sen. Susan Collins (R-ME), and Sen. Tom Carper (D-DE) issued a joint statement. They are the sponsors of S 413 [LOC | WW], the "Cybersecurity and Internet Freedom Act of 2011".

They stated that the Obama administration proposal "is a welcome and necessary addition to the work we have been doing", and that "We look forward to working with the Administration to enact comprehensive cybersecurity legislation".

They also wrote that "The Senate and the White House are on the same track to make sure our cyber networks are protected against an attack that could throw the nation into chaos. We both recognize that the government and the private sector must work together to secure our nation’s most critical infrastructure, for example, our energy, water, financial, telecommunications, and transportation systems. We both call for risk-based assessments of the systems and assets that run that infrastructure. We both designate the Department of Homeland Security to lead this effort, with the assistance of other federal agencies. And we both encourage the government and the private sector to use and refine best practices honed over years of experience."

The American Civil Liberties Union's (ACLU) Laura Murphy stated in a release that "we're encouraged to see the absence of an `Internet kill switch´ in this bill".

She added that "As Americans live more and more of their lives online every day, it is crucial that the information they share is not just safe from the peering eyes of criminals but also from our government."

Representatives and Senators Introduce Digital Goods and Services Tax Fairness Act

5/12. Rep. Lamar Smith (R-TX), Rep. Steve Cohen (D-TN), and others introduced HR 1860 [LOC | WW | PDF], the "Digital Goods and Services Tax Fairness Act of 2011", in the House.

On the same day, Sen. Ron Wyden (D-OR) and Sen. John Thune (R-SD) introduced S 971 [LOC | WW], the companion bill in the Senate.

Introduction. The bill would limit the ability of state and local governments to tax digital goods and services. It would not affect state taxation or regulation of telecommunications, internet access service, or audio or video programming service.

It would bar a state from imposing multiple or discriminatory taxes on the sale of digital goods or services (DGS). It would limit state DGS taxation to retail transactions. States could only tax the DGS seller or customer. States could only tax DGS sales when the address of the customer to the transaction is in its state.

However, the bill would allow a state to impose a sales tax on an out of state DGS seller, for a retail DGS sale, when the customer's address is in state.

The bill is 13 pages in PDF. It contains only six key prohibitions, and about as many key definitions, all of which are stated with a relative efficiency of words. However, actually applying these rules to the wide variety of taxing hypotheticals that may arise, especially in light of the already in place Internet Tax Freedom Act (ITFA) and the Supreme Court's Quill decision, may involve some complexity and lingering uncertainty. See, related story in this issue titled "Summary of HR 1860".

There was a related bill in the House in the 111th Congress, HR 5649 [LOC | WW], the "Digital Goods and Services Tax Fairness Act of 2010", introduced on June 30, 2010, by former Rep. Rick Boucher (D-VA) and Rep. Smith. It was similar, but not identical to HR 1860.

There have also been numerous bills over the years that pertain to state taxation that is in some way related to use of information and communications technologies. See, related story in this issue titled "Legislation to Limit State ICT Based Taxation".

There are also opponents of such legislation, including states that aggressively tax sales and/or that attempt to levy taxes on out of state individuals and businesses, as well as from groups that represent brick and mortar retail sellers that would like to see their online competitors subjected to more taxes.

The Retail Industry Leaders Association (RILA), for example, lobbies for legislation that would enable more state taxation of online and remote sellers. See also, HR 5660 [LOC | WW], the "Main Street Fairness Act", introduced in the 111th Congress, by former Rep. Bill Delahunt (D-MA).

It should also be noted that different states pursue different taxing strategies. While some states, such as California, are aggressive in attempting to impose sales taxes on distant online sellers, other states have no sales tax at all. Sen. Wyden's state of Oregon has no sales tax.

Sponsors' Comments. Rep. Smith stated in a release that "In our modern economy, more and more consumers are buying digital goods and services rather than tangible goods. While books are still sold in stores across the country, readers can now download hundreds of digital books, newspapers and magazines instantaneously with the click of a mouse from the comfort of their home. But as technology advances, it is important that tax policies do not unfairly penalize consumers who choose to download digital goods rather than purchase their tangible counterparts. This legislation promotes tax fairness and ensures that consumers are not discouraged from purchasing digital goods."

Rep. Cohen, the lead cosponsor, stated in this release that "Digital goods and services are quickly becoming a driving force in our national economy. We need to establish a uniform framework for the taxation of digital goods and services so consumers won't be double-taxed. Our Digital Goods and Services Tax Fairness Act of 2011 would accomplish such a goal.".

The other original cosponsors are Rep. Howard Coble (R-NC) and Rep. Alcee Hastings (D-FL). The House bill was referred to the HJC. Rep. Smith is the Chairman. Rep. Smith also announced that the HJC's Subcommittee on Courts, Commercial and Administrative Law will hold a hearing on this bill "this month". Rep. Coble is the Subcommittee Chairman, and Rep. Cohen is its ranking Democrat. The House will be in recess the week of May 16-20.

Sen. Ron WydenSen. Wyden (at right) asked rhetorically in a release, "Would consumers be as willing to try out a new I-Phone app if they have to pay taxes for every download? How many app's would even be available if every provider had to collect and comply with a different tax law or user fee in every state and/or locality?"

He added that "taxes discourage both product usage and innovation. It would be a mistake to crush the U.S. growing digital goods and services industry before it has an opportunity to reach its full potential. This bill gives the new and innovative digital economy the breathing room it needs to grow this exciting new market and create the good paying jobs that will result."

Sen. Wyden also wrote that "The creation and consumption of downloadable digital goods, like books, songs, ringtones and video games, and the provision of digital services, like health care monitoring and cloud computing, represent a rapidly growing segment of our national economy. ... The lack of a national framework addressing how State and local taxes can be imposed upon these products has led to a confusing process that will only grow more burdensome for consumers and the providers of digital commerce as new, innovative and emerging technologies become available." See, Congressional Record, May 12, 2011, at Page S2941.

The Senate bill was referred to the Senate Finance Committee (SFC). Sen. Wyden is a member.

Rick Boucher lost his bid for re-election in November of 2010. However, he wrote a statement that was published in the Congressional Record, June 30, 2010, at Page E1255-6, in which he summarized existing state taxation of digital goods and services.

Boucher, who was sponsor of the predecessor version of this bill, wrote that "The first state tax on digital goods was imposed in 2007. One year later, eleven additional states considered legislation to impose new taxes on digital goods, and in 2009 fourteen states considered legislation addressing the taxation of digital goods and services. Several states have attempted to impose telecommunication-specific taxes on downloaded music sold by communication providers, taxes which would not be imposed on similar products sold by non-communication companies."

He also noted this his bill was endorsed by the Recording Industry Association of America (RIAA), Verizon, Apple, Time Warner, and Electronic Arts.

Reaction. Steve Largent, head of the CTIA, and a former member of the HCC, praised these bills, and the sponsors. He stated in a release that "It makes no sense to levy additional, and sometimes hidden, state and local taxes against items that consumers purchase via the Internet and not in stores. Once passed, this legislation would provide tax administrators and consumers a better understanding of how music, books and other downloadable products should be taxed. At the same time, it would continue to encourage digital commerce to flourish and assist the nation’s economic recovery and enhance American economic competitiveness."

Similarly, Walter McCormack, head of the US Telecom, stated in a release that "By providing a national framework for state and local taxation of digital goods and services, this legislation will give consumers a consistent set of expectations for what they will actually pay when they purchase digital goods, such as e-books, videos, music or software. A tangle of varying and discriminatory taxes, which are under discussion in many states and localities searching for new sources of revenue, will confuse consumers and place an unfair financial burden on those who choose to go online to make certain purchases."

The Americans for Tax Reform (ATR) stated in a release that this bill "rightly prevents multiple states from taxing the same downloaded song, movie, or book as it travels across the Internet to a consumer. It means if the good is taxed, it happens once and only once. The legislation ties the hands of revenue-hungry state and local governments by not allowing them to double or triple tax the digital equivalent of a CD or book you'd buy in a store.

See also, statement of the National Taxpayers Union.

On the other side, the RILA, which represents brick and mortar retailers, states in its web site that it "supports federal legislation that would grant states the authority to require businesses to collect and remit, through a simplified system, state sales and use taxes on remote sales, including sales made over the Internet and through other remote methods."

It also "supports state action seeking to allow states collection authority by establishing nexus for online-only retailers through various means, or through direct state assessments of online-only retailers that have established facilities in a given state, as stop-gap measures until federal action to level the playing field can be enacted."

The RILA argues that "brick-and-mortar retailers are required to collect sales taxes while many online and catalog retailers are not. This difference is not only unfair to brick-and-mortar retailers, who create jobs in the community, but it is also costing states and localities, which are already facing severe budget crises, billions of dollars in lost revenue that could benefit vital public services."

On the other hand, out of state internet based sellers do not rely upon the state's police for protection, do not send their children to the state's schools, and do not otherwise avail themselves of most of the government services funded by the state's taxes.

Summary of HR 1860

5/12. HR 1860 [LOC | WW | PDF], the "Digital Goods and Services Tax Fairness Act of 2011", would impose several limitations upon state taxing authority.

First, it would provide that "No State or local jurisdiction shall impose multiple or discriminatory taxes on or with respect to the sale or use of digital goods or digital services."

HR 1860 also provides definitions of the words used in this provision. The term "discriminatory tax" means a tax "on or with respect to the sale or use of any digital good or digital service at a higher rate than is generally imposed on or with respect to the sale or use of tangible personal property or of similar services that are not provided electronically".

So, for example, a state could not tax a software program delivered electronically at a higher rate than it taxes the same software purchased on a DVD, or a downloaded e-book at a higher rate than an ink and paper book purchased in a brick and mortar store.

The bill also defines "digital service" to mean "any service that is provided electronically, including the provision of remote access to or use of a digital good". However, it does not include a "telecommunications service, Internet access service, or audio or video programming service". (But, the Internet Tax Freedom Act does cover internet access service. See, related story in this issue titled "Legislation to Limit State ICT Based Taxation".)

The bill does not include any reference to "cloud computing". However, it is likely the intent of the sponsors of this bill to include cloud computing services within the meaning of "digital service". Sen. Ron Wyden (D-OR) stated in the Senate that digital services includes cloud computing. See, Congressional Record, May 12, 2011, at Page S2941.

Some state taxing authorities engage in highly creative interpretations of statutes and court precedent to levy taxes on distant parties with little contact with the taxing state. Were HR 1860 to be enacted as introduced, some states might nevertheless impose taxes on cloud computing services in a manner that would violate a prohibition contained in the bill, were such state to construe cloud computing services to be a digital service within the meaning of the bill.

The bill would also provide that "Taxes on or with respect to the sale of digital goods or digital services may only be imposed on or with respect to a sale to a customer." Moreover, the bill defines "customer" as "a person that purchases a digital good or digital service, for a purpose other than resale". Thus, this bill would preclude taxing sales to distributors. Only retail sales may be taxed. There could not be multiple taxes imposed at successive stages.

The bill would also provide that "Taxes on or with respect to the sale of digital goods or digital services may only be imposed on and collected only from a customer or a seller", and "may be imposed only by the State and local jurisdictions whose territorial limits encompass the customer's tax address".

HR 1860 does not reference the Quill holding. The Supreme Court ruled in Quill v. North Dakota, 504 U.S. 298 (1992) that state and local taxing authorities are barred under the Commerce Clause from requiring remote sellers without a substantial nexus to the taxing jurisdiction to collect sales taxes for sales to persons within the jurisdiction.

The Supreme Court added that Congress may extend such authority. It wrote in Quill that "Congress is now free to decide whether, when, and to what extent the States may burden interstate mail order concerns with a duty to collect use taxes."

HR 1860 states that it is an exercise of the "Congress’ plenary power under article I, section 8, 2 clause 3 of the Constitution of the United States (commonly known as the ‘‘commerce clause’’) ..." (Parentheses in original.)

The ban on "multiple" taxes would clearly preclude multiple taxation of the same transaction by a state.

But what of multiple taxation by multiple states, such as with the state of the customer imposing a tax on the customer, and the state of the seller imposing a tax on the seller, for the same transaction? The provision that a tax "may be imposed only by the State and local jurisdictions whose territorial limits encompass the customer's tax address" would appear to prohibit the state of the seller from imposing a tax, but allow the state of the customer to impose a tax, thus eliminating double taxation across two states.

But then, what of the authority of the state of the customer to impose a tax on the distant seller. The clause that states that a tax may be imposed on "a customer or a seller", combined with the clause that states that only the state that encompasses "the customer's tax address" can impose a tax, would appear to authorize the state of the customer in a digital goods or services transaction to impose a tax on a distant out of state seller.

So, what of the dormant commerce clause, state usurpation of federal power to regulate interstate commerce, the due process rights of the seller, and the Quill opinion?

Sen. Wyden wrote that "this legislation will use the address of the consumer to determine which jurisdiction has the authority to tax a digital purchase, as long as the State has passed a law to do so and is lawfully able under the Internet Tax Freedom Act and the Supreme Court's Quill decision".

Are the state powers defined by this bill still limited by that portion of the Quill holding that provides that a state can only tax a seller with a substantial nexus to the taxing state? Or, is this bill a grant of authority to the states to collect a tax on a seller without a substantial nexus to the taxing state, provided that the customer's address is in the taxing state?

The language of the HR 1860 states the latter. For example, notwithstanding Quill, if HR 1860 were enacted, any state could impose a sales tax on Apple for iTunes songs sales to customers whose address is in that state.

Some states now take the position that the holding in Quill only reaches sales taxes. Some states are using administrative processes, rather than state legislation, to assert taxing authority.

The bill states that "No tax on or with respect to the sale or use of tangible personal property, telecommunications service, Internet access service, or audio or video programming service may be construed by any regulation, administrative ruling, or otherwise, to be imposed on or with respect to the sale or use of a digital good or a digital service."

HR 1860 would also provide that "A seller that relies in good faith on information provided by a customer to determine the customer’s tax address or addresses shall not be held liable for any additional tax based on a different determination of the customer’s tax address or addresses."

Legislation to Limit State ICT Based Taxation

5/12. Since the 1990s the Congress has considered, and sometimes enacted, legislation to restrict the ability of states to levy abusive, discriminatory, multiple or extraterritorial taxes related to the use of information or communications technologies. This article describes some of these legislative efforts.

Throughout, Sen. Ron Wyden (D-OR), previously as Rep. Wyden, has been one of the key proponents of such legislation.

First, the Internet Tax Freedom Act (ITFA) and its extensions have limited state taxation of internet access service and other things. The Congress enacted the original ITFA in 1998. Sen. Wyden was a sponsor in the Senate. The ITFA has been the only notable legislative success in this area.

The original ITFA had a three year sunset. The Congress extended the limited moratorium contained in the bill in 2001, in 2004, and again in 2007. It is now set to sunset in 2014. See, HR 3678 [LOC | WW], the "Internet Tax Freedom Act Amendments Act of 2007". See also,

The ITFA, which is codified at 47 U.S.C. § 151 note, provides, in part, that "No State or political subdivision thereof may impose ... Taxes on Internet access" or "Multiple or discriminatory taxes on electronic commerce". There are, however, grandfathered taxes, and numerous exceptions.

Second, there is HR 1002 [LOC | WW] and S 543 [LOC | WW], the "Wireless Tax Fairness Act of 2011", introduced in March of this year. These bills would limit state taxation of wireless services. They would limit taxation of "mobile services, mobile service providers, or mobile service property".

They define "mobile services" as "commercial mobile radio service ... or any other service that is primarily intended for receipt on, transmission from, or use with a mobile telephone or other mobile device, including but not limited to the receipt of a digital good".

Rep. Zoe Lofgren (D-CA) is the sponsor of the House bill. Rep. Smith and Rep. Cohen are original cosponsors. Sen. Wyden is the sponsor of the Senate bill.

Third, there is HR 1439 [LOC | WW], the "Business Activity Tax Simplification Act of 2011", introduced on April 8, 2011. It would limit the ability of states to impose taxes based upon business activities, or BAT.

It provides, in part, that no state "shall have power to impose, assess, or collect a net income tax or other business activity tax on any person relating to such person's activities in interstate commerce unless such person has a physical presence in the State during the taxable period with respect to which the tax is imposed".

Rep. Bob Goodlatte (R-VA) has been introducing BAT bills for many Congresses, without success. Former Rep. Rick Boucher (D-VA) also sponsored these bills.

Fourth, there have been bills that would limit abusive state taxation of the incomes of individuals who live out of state, but who use internet and computer technology to telework for a company in the tax imposing state.

For more on this issue, see stories titled "Supreme Court Denies Cert in Challenge to State Income Tax on Out of State Teleworkers" and "Connecticut Legislators Seek End to New York's Taxation of Out of State Workers" in TLJ Daily E-Mail Alert No. 1,244, November 1, 2005.

For legislative proposals to address this issue, see for example:

House Ways and Means Committee Holds Hearing on International Tax Issues

5/12. The House Ways and Means Committee (HWMC) held a hearing titled "The Need for Comprehensive Tax Reform to Help American Companies Compete in the Global Market and Create Jobs for American Workers". It considered proposals for corporate tax reform, including a one time repatriation holiday.

Rep. Dave Camp (R-MI), the Chairman of the HWMC, wrote in his opening statement that "It's been 25 years since we reformed the tax code, and almost 50 years since we undertook a bottom-up review of our international tax laws."

He said that "a common complaint that we hear from American companies trying to compete abroad is that our tax code, with its complexity and its high corporate rates, acts as a hindrance. The tax code's antiquated features have diminished the attractiveness of the U.S. as the premiere country in which to locate a business."

He continued that "America's combined federal-state corporate tax rate of 39.2 percent is only outpaced by Japan's rate of 39.5 percent -- and Japan has already indicated its intent to lower its rate. Such action will leave America with the highest corporate tax rate in the world -- 50 percent higher than the 26-percent average rate for OECD countries."

Moreover, "the U.S. is one of the last major economies to operate a worldwide tax system for active business income, which many believe is a further barrier to the growth of American companies.

Rep. Camp concluded that "Ensuring long-term prosperity in the face of increasing global competition requires Congress to re-examine the tax code.  As we pursue comprehensive tax reform, this Committee intends to develop solutions that empower American companies to become more competitive and make the U.S. a more attractive place to invest and create the jobs this country needs."

See also, opening statement of Rep. Sander Levin (D-MI), the ranking Democrat on the HWMC.

Jane Gravelle of the Congressional Research Service (CRS) wrote in her prepared testimony [10 pages in PDF] that "The current U.S. system for taxing international business is a hybrid of worldwide and territorial principles. In part the system is based on a residence principle, applying U.S. taxes on a worldwide basis to U.S. firms while granting foreign tax credits, to alleviate double taxation. The system, however, also permits U.S. firms to defer the tax on profits earned by foreign subsidiaries until dividends are paid to the U.S. parent."

She added that "Deferral means that the U.S. system, while generally residence-based, has elements of a territorial system. It also encourages firms to conduct activities and retain earnings abroad."

She discussed proposals to move to either a worldwide or territorial system, and to reduce the tax rate. She also discussed repatriation holidays.

She said that "One aspect of our deferral system is that it encourages firms to retain profits abroad if they are in circumstances where adequate foreign tax credits do not exist to offset U.S. tax. This incentive is somewhat constrained because if firms pay taxes in the future they will pay them with interest and because funds may be needed to pay dividends. This incentive could, however, be eliminated either through a territorial tax or through a repeal of deferral."

She also said that there was a repatriation holiday in 2004, and that the evidence suggests "that funds were used to pay shareholders" and "that the holiday increased the tendency of firms to retain profits abroad in later years, possibly in anticipation of another holiday".

In contrast, Rep. Kevin Brady (R-TX), a member of the HWMC, wrote in a May 11, 2011, release that "A similar law passed in 2004 resulted in an inflow of $312 billion in private capital that likely would have stayed abroad otherwise. Companies like Adobe, Oracle and Duke Energy used this cash to create or retain jobs, finance new capital spending and pay down domestic debt."

As for another repatriation holiday, Gravelle said that "the arguments are perhaps less compelling currently because of the large amount of liquid funds already held by corporations", and because granting another holiday might "reinforce firms' beliefs that they will periodically be allowed to repatriate at a low tax cost, and might further encourage future retentions abroad".

House Judiciary Committee Approves Bill to Extend Three Provisions of Surveillance Law

5/12. The House Judiciary Committee (HJC) approved, without amendment, HR 1800 [LOC | WW], the "FISA Sunsets Reauthorization Act of 2011".

Rep. James Sensenbrenner (R-WI) introduced this bill on Friday, May 6, 2011. The HJC's Subcommittee on Crime, Terrorism and Homeland Security held a hearing on Wednesday, May 11. See also, story titled "House Judiciary Committee to Mark Up Surveillance Sunsets Bill" in TLJ Daily E-Mail Alert No. 2,237, May 10, 2011, and story titled "House Crime Subcommittee Holds Hearing on Extending Surveillance Provisions" in TLJ Daily E-Mail Alert No. 2,239, May 12, 2011.

The final vote was 22-13. But first, the HJC rejected numerous amendments, all of which were offered by Democrats. It held seven roll call votes on amendments. Some were off topic.

The Committee divided largely along partisan lines. On the roll call votes on amendments, no Republican cast a vote in favor, and no Democrat cast a vote against.

However, Rep. Louie Gohmert (R-TX), who has expressed concerns about the bill, and government surveillance activities generally, did not vote in the first five roll calls. And, on the final vote, Rep. Jason Chaffetz (R-UT) voted against the bill, while Puerto Rico's Resident Commissioner Pedro Pierluisi (D-PR) and Rep. Mike Quigley (D-IL) voted for the bill.

On May 27, 2011, three provisions of surveillance law are scheduled to sunset. The three provisions are codified in the Foreign Intelligence Surveillance Act (FISA). They pertain to (1) treating lone wolf individuals like agents of foreign governments or terrorists organizations (see, 50 U.S.C. § 1801(b)'s definition of the term "agent of a foreign power"), (2) access to business records, including library records (see, 50 U.S.C. § 1861 as amended by Section 215 of the 2001 surveillance act), and (3) roving wiretaps (see, 50 U.S.C. § 1805).

This short bill provides a six year extension (until December 31, 2017) of the sunset for roving wiretap and Section 215 business records authority. It makes permanent lone wolf authority.

The HJC rejected an amendment offered by Rep. Sheila Lee (D-TX) that would have provided a three year sunset for Section 215, roving wiretap, and lone wolf authority. It failed on a roll call vote of 11-20. The HJC divided along partisan lines.

The HJC rejected an amendment offered by Rep. John Conyers (D-MI) that would have excluded library records from Section 215 authority. Rep. Lamar Smith (R-TX) argued that the amendment "could make libraries a safe haven for spies and terrorists". It failed on a roll call vote of 10-17. The HJC divided along partisan lines.

The HJC rejected an amendment offered by Rep. Jerrold Nadler (D-NY) that would have provided a heightened standard for obtaining library records under Section 215. It failed on a roll call vote of 11-21. The HJC divided along partisan lines.

The HJC rejected an amendment offered by Rep. Lee that would have required the President to submit a report to the Congress regarding whether the current degree of secrecy of the Foreign Intelligence Surveillance Court (FISC) is necessary. It failed on a roll call vote of 11-20. The HJC divided along partisan lines.

The HJC rejected an amendment offered by Rep. Hank Johnson (D-GA) regarding the collection of location information from personal electronic devices, such as cell phones tablet computers. Rep. Trey Gowdy (R-SC) argued that this amendment relates to private sector marketing, not the three government surveillance provisions addressed in HR 1800. He said that "this is an issue for another time and place". This amendment failed on a voice vote.

The HJC rejected an amendment offered by Rep. Johnson that would have imposed new requirements for approval of lone wolf orders, and imposed new reporting requirements. It failed on a voice vote.

The HJC rejected an amendment offered by Rep. Johnson that would have added the requirement that requests for roving wiretaps describe the target "with particularity". It failed on a voice vote of 11-18. The HJC divided along partisan lines.

The HJC rejected an amendment offered by Rep. Judy Chu (D-CA) that would have allowed individuals served with a Section 215 order for records to immediately challenge in court an associated gag order. Currently, the statute provides that one must wait one year before seeking judicial review.

The HJC also rejected an amendment offered by Rep. Chu that would have provided for annual reports by the Department of Justice's (DOJ) Office of the Inspector General (OIG). She said that these reviews would extend to use of Section 215 and pen register and trap and trace authority.

It was DOJ/OIG reports that disclosed wrongdoing by the Federal Bureau of Investigation (FBI) in the use of national security letters (NSLs) and exigent letters.

The two amendments offered by Rep. Chu failed in an en bloc vote of 12-18. The HJC divided along partisan lines.

Finally, the HJC rejected an off topic amendment offered by Rep. Mike Quigley (D-IL) regarding sale of firearms. It failed on a roll call vote of 11-21. The HJC divided along partisan lines.

The Senate has not yet passed this or another bill regarding extending these sunsets. However, on March 10, 2011, the Senate Judiciary Committee (SJC) approved S 193 [LOC | WW], the "USA PATRIOT Act Sunset Extension Act of 2011".

FCC Proposes Expanding Outage Reporting Requirements to VOIP and BIAS Providers

5/12. The Federal Communications Commission (FCC) adopted, but did not release, a Notice of Proposed Rulemaking (NPRM) regarding further expansion of its network outage reporting requirements to also cover broadband internet access service (BIAS) providers and voice over internet protocol (VOIP) providers.

The FCC did not release this NPRM. It only released a short press release and statements by four Commissioners. The FCC release states that this NPRM "proposes to expand outage reporting requirements relating to 9-1-1 to interconnected VoIP providers and broadband Internet service providers".

FCC Chairman Julius Genachowski made the case for imposing this mandate in his prepared statement. He said that people "increasingly rely on broadband networks and services", which are not subject to the FCC's current outage reporting requirements, so "if Hurricane Katrina were to happen again, or if there was another attack on American soil, we simply wouldn't have the facts to ascertain the impact on our critical communications infrastructure."

The FCC created its network outage reporting requirements for wireline phone service providers in 1992. It has since expanded this mandate to encompass voice and paging services provided by regulated wireline, wireless, cable and satellite service providers. However, the Communications Act contains no provision that directs the FCC to impose network outage reporting requirements. Moreover, the Act does not authorize the FCC to regulate BIAS providers. Hence, this NPRM proposes that the FCC impose a mandate without statutory authority.

FCC Commissioner Robert McDowell wrote in his statement that "we do not have Congress's authority to act as suggested". However, he still voted for this item.

The FCC's release does not cite any statutory authority.

FCC Commissioner Mignon Clyburn asserted in her statement that "the President has assigned the FCC the mission essential function of ensuring continuous operation of critical communications services". She also asserted that 47 U.S.C. § 615a-1 provides a Congressional mandate.

However, this section pertains only to VOIP service providers, and not to BIAS providers. Moreover, its only reference to "network outages" is in the context of cooperative efforts to develop "best practices" for, among other things, "call-handling in the event of call overflow or network outages". The subsection that directs the FCC to write regulations says nothing about reporting network outages.

Also, network outage is an old concept, applicable to the PSTN, PSAPs and ANI/ALI. If the FCC does expand its mandate, it will have to rewrite its definitions to explain what is a network outage in the context of internet access.

The FCC release states that this NPRM also "seeks comment on the definition of outage reporting for these services, the proposed reporting thresholds, the effectiveness of mandatory reporting, how the reporting process should work, what information should be reported, and confidential treatment of the outage reports."

The FCC issued a Public Notice (PN) [6 pages in PDF] on this subject on July 2, 2010. That PN is DA 10-1245 in ET Docket No. 04-35, WC Docket No. 05-271, and GN Docket Nos. 09-47, 09-51, and 09-137.

This NPRM is FCC 11-74 in PS Docket No. 11-82.

FCC Items Address International Phone Traffic

5/12. The Federal Communications Commission (FCC) adopted, but did not release, a Notice of Proposed Rulemaking (NPRM) regarding removing certain regulations governing the exchange of telephone traffic between U.S. and foreign carriers. See, FCC release. This NPRM is FCC 11-75 in IB Docket No. 05-254.

The FCC also adopted, but did not release, a Report and Order (R&O) and Further Notice of Proposed Rulemaking (FNPRM) regarding eliminating certain reporting requirements regarding international telephone service. See, FCC release. This item is FCC 11-76 in IB Docket No. 04-112.

FCC Commissioner Robert McDowell summarized these items in his statement. "Today, the FCC takes a small but positive step toward eliminating unnecessary reporting requirements regarding international telephone service. The Commission is also issuing a further notice seeking comment on streamlining remaining international data reporting to ensure our rules are relevant in light of a rapidly evolving market. Furthermore, we are also voting on a companion notice of proposed rulemaking on potentially eliminating the international settlements policy altogether. This notice recognizes the fundamental progress made in the marketplace while also asking important questions on areas where the Commission may need to maintain a more active presence."

AT&T stated in a release that this order "is a welcome measure that will eliminate unnecessary burdens on industry and the FCC.  Indeed, the reporting requirements removed today had ceased to have any relevance to the Commission's duties because of increased competition in the markets and associated changes in Commission policies."

AT&T also stated that the FCC's International Settlements Policy is now "at best obsolete, and at worst, an unintended impediment to further competition by US carriers in a global marketplace".

Obama Wants to Extend Mueller's Term

5/12. President Obama announced that he wants a two year extension of the term of Federal Bureau of Investigation (FBI) Director Robert Mueller.

Robert MuellerMueller (at left) is serving a ten year term that ends on September 4, 2011. See, White House news office release.

Sen. Patrick Leahy (D-VT), the Chairman of the Senate Judiciary Committee, stated that the FBI "has seen significant transformation since September 11, 2001, and Director Mueller has handled this evolution with professionalism and focus. The FBI plays a critical role in our efforts to protect national security. I appreciate Director Mueller's continued service to the nation, and I am fully supportive of this decision".

Sen. Charles Grassley (R-IA), the ranking Republican on the SJC, stated in a release that "This is an unusual step by the President, and is somewhat of a risky precedent to set. Thirty-five years ago Congress limited the FBI director's term to one, 10-year appointment as an important safeguard against improper political influence and abuses of the past. There's no question that Director Mueller has proven his ability to run the FBI. And, we live in extraordinary times. So, I’m open to the President's idea, but I will need to know more about his plan to ensure that this is not a more permanent extension that would undermine the purposes of the term limit."

Judicial Appointments

5/12. The Senate confirmed Michael Urbanski to be a Judge of the U.S. District Court (WDVa) by a vote of 94-0. See, Roll Call No. 70.

5/12. The Senate Judiciary Committee (SJC) held an executive business meeting at which it approved by voice vote the nomination of Henry Floyd to be a Judge of the U.S. Court of Appeals (4thCir).

5/12. The Senate Judiciary Committee (SJC) held an executive business meeting at which it approved the nomination of Kathleen Williams to be a Judge of the U.S. District Court (SDFl).

5/12. The Senate Judiciary Committee (SJC) held an executive business meeting at which it approved the nomination of Nelva Ramos to be a Judge of the U.S. District Court (SDTex).

5/12. The Senate Judiciary Committee (SJC) held an executive business meeting at which it approved the nomination of Richard Jackson to be a Judge of the U.S. District Court (DCO).

5/12. The Senate Judiciary Committee (SJC) held an executive business meeting at which it approved the nomination of and Sara Darrow to be a Judge of the U.S. District Court (CDIll).

More People and Appointments

5/12. The Senate Judiciary Committee (SJC) held an executive business meeting at which it approved the nomination of Donald Verrilli to be the Department of Justice's (DOJ) Solicitor General. See, SJC release.

5/12. The Senate Banking Committee (SBC) held an executive business meeting at which it approved the nominations of Peter Diamond (to be a member of the Board of Governors of the Federal Reserve System), David Cohen (to be the Department of the Treasury's Under Secretary for Terrorism and Financial Crimes), and Daniel Glaser (to be Assistant Secretary for Terrorist Financing). See, Congressional Record, May 12, 2011, at Page S2927.

More News

5/12. Burson Marsteller (BM), a public relations firm, disclosed in a release that it "undertook an assignment" for Facebook, which "requested that its name be withheld". The Wall Street Journal wrote in a May 12, 2011, story by Geoffrey Fowler and Amir Efrati titled "Facebook Hired PR Firm to Target Google" that "The social-networking company secretly hired a public-relations firm to push stories critical of Google's privacy practices." BM stated that "Whatever the rationale, this was not at all standard operating procedure and is against our policies, and the assignment on those terms should have been declined."

5/12. Microsoft released an report [89 pages in PDF] titled "Security Intelligence Report: Volume 10".

5/12. Sen. Patrick Leahy (D-VT), Sen. Orrin Hatch (R-UT), and others introduced S 968 [LOC | WW], the "Preventing Real Online Threats to Economic Creativity and Theft of Intellectual Property Act of 2011".

5/12. Rep. Howard Coble (R-NC) and Rep. Hank Johnson (D-GA) introduced HR 1864 [LOC | WW], a bill to limit the authority of states to tax certain income of employees for employment duties performed in other states.

5/12. The Recording Industry Association of America (RIAA) announced in a release that record companies and LimeWire reached "an out-of-court $105 million settlement". The RIAA wrote that "The settlement follows a decision by federal district court Judge Kimba Wood last year to shut down LimeWire after she found both the service and Mr. Gorton liable for inducing massive copyright infringement. A jury trial in New York City on the amount of damages to be paid by Mr. Gorton had begun last week."

5/12. The National Institute of Standards and Technology's (NIST) Computer Security Division (CSD) released its draft SP 800-146 [84 pages in PDF] titled "Cloud Computing Synopsis and Recommendations". The deadline to submit comments is June 13, 2011.

Rep. Brady Introduces Repatriation Holiday Bill

5/11. Rep. Kevin Brady (R-TX) and others introduced HR 1834 [LOC | WW | PDF], "The Freedom to Invest Act", a tax bill that would provide a one time earnings repatriation holiday. It is popular with many US tech companies.

This bill would amend the Internal Revenue Code to provide a one time deduction for US owners of foreign corporations that repatriate certain foreign earned income. This is a stand alone repatriation holiday bill, rather than a comprehensive reform of corporate taxation.

The US corporate tax system is old and outdated. Also, it imposes the comparatively high rate of 35%. And, it is vulnerable to the criticism that it makes the US less competitive internationally, and incents companies to locate outside the US.

There are other proposals for reform, such as overall reduction of the tax rate, and shifting to territorial, or source based, tax. The repatriation holiday proposal is particularly popular with information and communications technology companies. Some other industry sectors oppose it, and seek other changes to tax law instead.

This bill would amend 26 U.S.C. § 965, titled the "Temporary dividends received deduction", which currently provides for a 85% deduction for certain "cash dividends" received by a "United States shareholder" from "controlled foreign corporations".

It would apply only to tax years 2011 and 2012. Also, the reduction in tax would be reduced if the taxpaying company does not maintain an average employment level at least equal to its prior average employment.

In short, under current US tax system, US companies are taxed on a worldwide basis, but allowed foreign tax credits. Also, US companies can defer the tax on profits earned by foreign subsidiaries until dividends are paid to the US parent company. HR 1834 would allow US companies, for tax years 2011 or 2012, to receive dividends from their foreign subsidiaries, and receive an 85% deduction in tax, providing for an effective tax rate of 5.25%. The argument of the sponsors and supporters is that it would incent companies with foreign subsidiaries to send money to the US, that money would be invested in the US, and that investment would boost economic activity and employment in the US.

Rep. Kevin BradyRep. Brady (at right) stated in a release that "This is about creating jobs, expanding U.S. businesses and strengthening American companies."

The original cosponsors are Rep. Jim Matheson (D-UT), Rep. Robert Dold (R-IL), Rep. Jim Cooper (D-TN), Rep. Devin Nunes (R-CA) and Rep. Jared Polis (D-CO).

Rep. Cooper stated that "Our corporate tax rates are the highest in the world and they keep American companies from investing their overseas earnings here in the United States, ... Over $1 trillion is sitting in foreign banks; money that could be used to create jobs and get our economy back on track."

Rep. Polis added that in addition to this bill, "we still need comprehensive tax simplification with a  lower overall rate to help U.S. companies keep their competitive edge".

Rep. Matheson stated in a release that "Under this measure, companies who would return any foreign profits—above and beyond what they would ordinarily return -- would be taxed at a fraction of the current 35% corporate tax rate. At no cost to taxpayers, the extra money would help companies expand here at home and provide revenue to the federal treasury that it otherwise would not get".

Rep. Eric Cantor (R-VA), the House Majority Leader, stated in a release that "repatriation is an interim step that we can take to encourage businesses to bring investment back into our country. Such a step adds capital that would otherwise go overseas directly into our economy which will help create jobs, investment, and growth. I applaud the introduction of this bipartisan legislation".

A coalition of companies and trade groups operating under the title of "Working to Invest Now in America" or "WIN America" states in its web site that "Congress should pass legislation to offer an immediate reduction of taxation on income earned overseas by innovative American businesses to allow that money to be brought home and invested in the United States."

WIN America represents many technology related companies and groups. Its company members include Adobe, Apple, Broadcom, Cisco, Google, Microsoft, Oracle, and Qualcomm. Its trade group members include the Association for Competitive Technology (ACT), Business Software Alliance (BSA), Consumer Electronics Association (CEA), Software and Information Industry Association (SIIA), Tech America (TA), and Telecommunications Industry Association (TIA).

The WIN America adds that "Currently, there is over $1 trillion earned by American businesses trapped overseas. We strongly support corporate tax reform – it is essential to keeping us competitive. But as Washington works on broader reform -- likely to be a long process -- an essential first step would be to allow these worldwide American businesses the freedom to bring up to $1 trillion in global earnings home to invest it now into our still fragile economy. Unfortunately, our broken tax system actually penalizes U.S. businesses that want to bring their global earnings to America."

Grant Seiffert, head of the TIA, stated in a release that "With over 95% of the world's population outside of the United States it's no surprise that foreign subsidiaries of American companies are earning profits abroad ... However, our tax code inhibits the repatriation of these earnings due to prohibitively high U.S. tax rates on this income. ... Providing U.S. companies with the option to repatriate these earnings at a 5.25% tax rate is a terrific incentive to bring these dollars back for investment in the United States".

House Crime Subcommittee Holds Hearing on Extending Surveillance Provisions

5/11. The House Judiciary Committee's (HJC) Subcommittee on Crime, Terrorism and Homeland Security held a hearing titled "The USA PATRIOT Act: Dispelling the Myths".

The subject matter of the hearing was undefined. In the context of surveillance law, one person's myth is another person's reality, and vice versa. However, on May 27, 2011, three provisions of surveillance law are scheduled to sunset. Thus, the hearing dealt with how the Congress should proceed legislatively in the next two weeks.

The three provisions pertain to federal powers under the Foreign Intelligence Surveillance Act (FISA) regarding lone wolves (see, 50 U.S.C. § 1801(b)'s definition of the term "agent of a foreign power"), business records (50 U.S.C. § 1861) (also referred to as Section 215), and roving wiretaps (50 U.S.C. § 1805).

It is highly unlikely that the Congress would allow the three provisions to expire. What is at issue is for how long the provisions will be extended, whether any will be made permanent, whether any provisions not now scheduled to sunset will be sunsetted, and whether the Congress will impose any new procedural safeguards, reporting requirements, or oversight processes.

Sunsets are significant because the intelligence agencies and the Department of Justice (DOJ) and its Federal Bureau of Investigation (FBI) operate with considerable secrecy on surveillance matters. And, as DOJ Inspector General reports have revealed, the FBI has also sometimes operated without regard for the letter of the law.

The Congress 's ability to conduct effective oversight is enhanced by the leverage of sunsets. With sunsets in place, the DOJ must return to the Congress every few years to ask for extensions. In return, Members of Congress demand, and to some extent receive, oversight cooperation. This oversight has several consequences, one of which is to incent government officials to follow Congressional statutes.

On Thursday, May 12, the HJC will meet to mark up HR 1800 [LOC | WW | PDF], the "FISA Sunsets Reauthorization Act of 2011", which Rep. James Sensenbrenner (R-WI) introduced on Friday, May 6. See, story titled "House Judiciary Committee to Mark Up Surveillance Sunsets Bill" in TLJ Daily E-Mail Alert No. 2,237, May 10, 2011.

In February, the Congress delayed consideration of these issues by enacting a mere three month extension. See, HR  514 [LOC | WW], the "FISA Sunsets Extension Act of 2011", and story titled "Obama Signs Three Month Extension of Surveillance Provisions" in TLJ Daily E-Mail Alert No. 2,198, February 25, 2011.

In addition to HR 1800, there is HR 1805 [LOC | WW | PDF], the "USA PATRIOT Act Sunset Extension Act of 2011", introduced by Rep. John Conyers (D-MI) late on Tuesday, May 10, 2011. It is almost identical to S 193 [LOC | WW], the "USA PATRIOT Act Sunset Extension Act of 2011", which the Senate Judiciary Committee (SJC) approved on March 10, 2011. See, related story in this issue titled "Rep. Conyers Introduces Bill to Extend Provisions of Surveillance Law".

The May 11 hearing divided members of the Subcommittee largely along partisan lines. Republicans generally defended ongoing surveillance operations as vital to the war on terror, and consistent with rights and liberties, and urged extension of sunsetted provisions. Democrats questioned whether the government is conducting certain surveillance activities in a manner that is consistent to the 4th Amendment and privacy rights of Americans.

rightThe one exception was Rep. Louie Gohmert (R-TX), who raised the matter of FBI abuse of national security letter (NSL) authority. NSL authority is not subject to sunset, but Rep. Gohmert questioned whether it should be subject to a sunset.

Rep. Gohmert (at right) said that "as the last five years have unfolded, it seems to me that the biggest abuses have not come in" the use of lone wolf, roving wiretap, or Section 215 business records authority, but rather in the use of "national security letters. That is where we had the IG report that was just devastating about how abusive that has been. And, that is not something that is up for renewal. But, I had concerns that maybe we ought to slide NSL authority under the business records provision. I am just uncomfortable after we saw how easily abused that could be."

Back in 2005 the same Subcommittee held a long series of hearings on various provisions of the 2001 surveillance act, Section II of the bill also known as the "USA PATRIOT Act". That was HR 3162 (107th Congress), the "Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001". Both Rep. Gohmert and Rep. Jeff Flake (R-AZ), who is no longer a member of the HJC, asked tough questions of government witnesses.

At this May 11 hearing the Subcommittee heard from Patrick Rowan, who until recently was a career DOJ attorney, and Ed Mullins, a long time New York City police officer. Both defended surveillance operations, and urged extensions. The Subcommittee also heard from two ancient icons of conservatism, former Rep. Bob Barr (R-GA) and Bruce Fein. Both argued that government surveillance activities should be constricted by Americans' 4th Amendment and privacy rights.

The Subcommittee did not hear testimony from any advocates of individual rights from the political left, such as representatives of the ACLU or EFF. Nor did any current government officials testify.

Rep. Sensenbrenner, the Chairman of the Subcommittee, presided. He pushed the hearing to a quick conclusion by strictly limiting witnesses and members to five minutes. He cut off Representatives -- from both parties -- in mid question. Although, he made exceptions for Rep. Conyers, the ranking Democrat on the HJC, by granting him additional time.

Rep. Bobby Scott (D-VA), the ranking Democrat on the Subcommittee, stated that these are "controversial provisions".

Rep. John Conyers (D-MI), the ranking Democrat on the full Committee, said in his opening statement that "I for one do not think that concerns about the PATRIOT Act are fanciful. For one thing, these powers are used in secret and the people whose phones are tapped or records are seized often never find out. And if they do find out they are often barred by court order from telling anyone. So I question whether it will ever be possible to fully document the impact of these powers on our privacy and civil liberties."

Barr wrote in his prepared testimony [46 pages in PDF] that the HJC should reject the approach of HR 1800 "and either amend these sections in order to bring them into full compliance with the letter and the intent of our Constitution, or else allow them to expire".

"In the aftermath of 9/11, the government itself has become one of the major threats to the very thing it was designed to protect -- our liberty. We have sacrificed our liberty for, at best, perceived security. We have allowed the government to largely render the Fourth Amendment a nullity by way of the PATRIOT Act and warrantless wiretapping programs that empower the government to snoop on its own citizens."

Fein (Campaign for Liberty) wrote in his prepared testimony [13 pages in PDF] that the government "has no business collecting or retaining information about citizens without ``probable cause´´ to believe that a crime has been or will be committed by a target who is identified with “particularity; or, that a particularized search will unearth evidence of crime. Each and every Patriot Act investigation involving citizens triggered by less than probable cause or involving nonparticularized targets or searches is an abuse of government power."

Patrick Rowan is a partner at McGuire Woods. He was previously the Assistant Attorney General in charge of the Department of Justice's (DOJ) National Security Division (NSD). There is currently no AAG for the NSD. Todd Hinnen is the acting AAG. Lisa Monaco has been nominate for the position, and approved by the Senate Judiciary Committee (SJC).

Rowan wrote in his prepared testimony [7 pages in PDF], regarding the Section 215, roving wiretap, and lone wolf authority, that "each of the provisions is subject to substantial protections against civil rights abuses. Each requires the Government to make a showing to an independent court, the FISA court. Each provision comes with rules governing how the Government handles information regarding United States persons. And each is subject to extensive executive branch oversight, as well as congressional reporting requirements."

Ed Mullins wrote in his prepared testimony [6 pages in PDF] that the Congress should not "disarm those sworn to protect" but not extending the three provisions at issue.

Lone Wolves. This authority is a part of the FISA, but was not created by the 2001 surveillance act, Title II of the PATRIOT Act. Rather, it was created by Section 6001 of S 2845 (108th Congress), the "Intelligence Reform and Terrorism Prevention Act of 2004".

The FISA was originally enacted in 1978. It is codified in Title 50 of the U.S. Code. It pertains to surveillance of a "foreign power" and an "agent of a foreign power". The term "foreign power" is defined to include "a group engaged in international terrorism". The FISA gives the government broader powers to conduct surveillance of foreign powers and their agents, and under lower standards, than the government possesses under Title 18 when conducting surveillance of U.S. persons.

The Congress amended the FISA in 2004 to provide that certain individuals, who are not agents of any power or terrorist organization, are subject to FISA based surveillance. Specifically, 50 U.S.C. § 1801(b) defines the term "agent of a foreign power". The 2004 Act amended the definition to include "any person other than a United States person, who ... engages in international terrorism or activities in preparation therefore", thus bringing individuals acting alone within the reach of the FISA. These individuals, acting alone, are sometimes referred to a lone wolves.

There is a contradiction here. The FISA applies to agents of foreign powers and terrorists organizations. But, lone wolves are not agents of any foreign power or terrorist organization. Hence, the Congress also added a sunset clause.

Rep. Sensenbrenner said at the May 11 hearing that "lone wolf is simply a definition intended to close a gap in our intelligence laws that allows rogue terrorists to slip through the cracks. It is not a free standing provision. It does not create a set of surveillance tools different from the FISA. It does not enable the government to engage in warrantless surveillance or gather any intelligence without the approval of the FISA court."

He also stated that it "can only be applied to non-U.S. persons, meaning that it can't be applied to citizens or permanent resident aliens".

Rep. Conyers said that making permanent the lone wolf provision is "the wrong way to go".

Section 215. Section 215 of the 2001 Act rewrote Section 501 of the FISA, which is codified at 50 U.S.C. § 1861. This is the section of the FISA that provides for "Access to Certain Business Records for Foreign Intelligence and International Terrorism Investigations".

This 215/501/1861 authority enables the FBI to obtain from a judge or magistrate an order requiring the production business records. While the statute does not expressly include library records, it is not disputed that library records are covered.

It further provides that if the government submits an application to the court that states that there are "reasonable grounds to believe that the tangible things sought are relevant to an authorized investigation", then the "judge shall enter an ex parte order as requested. This is a very low standard, and the judge is left with no discretion.

Libraries have been vocal in their opposition to this provision. This authority also carries a sunset.

Rep. Conyers stated that Section 215 authority "is so broad that the issue is not whether it has been misused -- the question is whether the permitted uses of it are too broad. The critical question is not whether the rules are being broken, but whether we have the right rules in the first place."

Roving Wiretaps. Section 206 of the 2001 Act amended Section 105(c)(2)(B) of the FISA, which is codified at 50 U.S.C. § 1805, to have the effect of allowing the court to authorize roving wiretaps.

Section 1805(c)(2)(B) now provides that "An order approving an electronic surveillance under this section shall direct ... upon the request of the applicant, a specified communication or other common carrier, landlord, custodian, or other specified person, or in circumstances where the Court finds, based upon specific facts provided in the application, that the actions of the target of the application may have the effect of thwarting the identification of a specified person, such other persons, furnish the applicant forthwith all information, facilities, or technical assistance necessary to accomplish the electronic surveillance in such a manner as will protect its secrecy and produce a minimum of interference with the services that such carrier, landlord, custodian, or other person is providing that target of electronic surveillance".

Rep. Sensenbrenner said, "Gone are the days of land lines and rotary phones. Today's terrorist and spies use disposable phone and free e-mail accounts to hide their tracks" so roving authority is necessary.

Rep. Sensenbrenner asserted that "roving authority does not create a John Doe warrant". However, he said that terrorists and spies use "nick names and aliases", so "when the identity of the target is unknown", the government can obtain a roving wiretap order based upon a description.

Baker to Leave FCC for NBC Universal

5/11. Federal Communications Commission (FCC) Commissioner Meredith Baker announced that she will leave the FCC on June 3, 2011. She will go to work for NBC Universal as SVP for Government Affairs.

Meredith BakerBaker (at right) stated in a release that "I depart most proud of our collective efforts to focus on long-term comprehensive spectrum reform. It is the most important step we can take to ensure our nation's competitiveness in an increasingly interconnected world."

FCC Chairman Julius Genachowski stated in a release that "For the past two years, it's been my privilege to serve with Meredith Baker as the FCC has navigated the communications challenges of the 21st century. Meredith's wonderful spirit, broad experience and deep policy acumen have made the FCC a more effective agency. She's made our decisions smarter and our policies better. I wish her well in her new role at NBC Universal."

The three other Commissioners also expressed their best wishes. See, statement of Michael Copps, statement of Robert McDowell, and statement of Mignon Clyburn.

Baker opposed Chairman Genachowski's efforts to impose a new regulatory regime on broadband internet access service (BIAS) providers. Internet groups such as the Free Press and Public Knowledge sought a more onerous regulatory regime.

The Free Press, which is often uncivil in its characterization of those who oppose its policy objectives, stated in a release that "the complete capture of government by industry barely raises any eyebrows. The continuously revolving door at the FCC continues to erode any prospects for good public policy. We hope -- but won't hold our breath -- that her replacement will be someone who is not just greasing the way for their next industry job."

The FP added that Baker is "cashing in at a company she is supposed to be regulating".

Gigi Sohn, head of the Public Knowledge, stated in a release that "We were disappointed to learn of the resignation of FCC Commissioner Meredith Atwell Baker. We have enjoyed working with her on a variety of issues, and respect her dedication to, and knowledge of the telecommunications industry through her service not only at the FCC but also at the National Telecommunications and Information Administration."

Walter McCormick, head of the US Telecom, stated in a release that "Commissioner Baker brought an extraordinary level of talent, commitment and knowledge of communications to the commission, and we will miss her. We are grateful for her public service, for her fair and even-handed approach, and for the time and effort she spent in seeking to thoroughly understand each of the major issues facing our industry. We wish her much success in her new career with NBCUniversal."

Michael Powell, head of the National Cable and Telecommunications Association (NCTA), stated in a release that "Meredith has been a great friend for many years and an outstanding public servant, as she has served with honor and integrity at the FCC and NTIA.  She deserves enormous credit for her policy leadership during the nation’s broadcast digital TV transition.  She also always has kept consumers’ best interests in mind when addressing the many challenging telecom policy issues that have come before the FCC during her tenure.  She will be sorely missed, but I wish her well in the next chapter of her noteworthy career."

Gordon Smith, head of the National Association of Broadcasters (NAB), stated in a release that "With a winning combination of integrity, intellect and experience, Meredith Baker will be a key player for NBCUniversal, and I know that her in-depth knowledge of broadcast issues, deep understanding of the D.C. landscape and strong leadership abilities will make her an important resource for the entire broadcast industry."

House Rules Committee Adopts Rule for Consideration of Intelligence Authorization Bill

5/11. The House Rules Committee (HRC) held a meeting on Wednesday, May 11, 2011, at which it adopted a structured rule [PDF] for consideration of HR 754 [LOC | WW], the "Intelligence Authorization Act for Fiscal Year 2011". This is a bill to authorize appropriations for sixteen federal agencies involved in intelligence related activities.

This bill would create a new program intended to detect transfers of information to entities such as WikiLeaks. The Senate version of the bill contains the same provision. See, S 719 [LOC | WW], also titled "Intelligence Authorization Act for Fiscal Year 2011". See also, stories titled "Intelligence Authorization Bills Seek to Counter WikiLeaks" and "Commentary: Information Sharing and National Security Leaks" in TLJ Daily E-Mail Alert No. 2,235, May 7, 2011.

The House is scheduled to consider this bill on Thursday, May 12, and Friday, May 13. The rule makes in order nine amendments.

The Senate version of this bill would also create a new administrative process to be used against government employees who transfer classified information. It would provide the government a procedure that is simpler, and less burdened by due process requirements, than criminal prosecutions. That provision from the Senate bill in not in the House bill as reported, in the manager's amendment, or in any other amendment made in order by the just adopted rule.

Rep. Rush Holt (D-NJ) offered an amendment, which the HRC did not make in order, titled the "Judicious Use of Surveillance Tools In Counterterrorism Efforts Act of 2011" or "JUSTICE Act".

Rep. Rush HoltRep.Holt's (at right) amendment borrows the substantive language of S 1686 [LOC | WW], the "Judicious Use of Surveillance Tools In Counterterrorism Efforts Act of 2009", a bill sponsored in the 111th Congress by former Sen. Russ Feingold (D-WI). That bill had ten cosponsors, all Democrats. Sen. Feingold lost his bid for re-election in November of 2010. The House version of that bill was HR 4005 [LOC | WW]. This has not been introduced as a stand alone bill in the 112th Congress.

The Holt amendment addresses a wide range of surveillance authorities. It devotes 35 pages to revising and limiting national security letter (NSL) authority. It also revises Section 215 (business records under the FISA) authority. It also revises the sneak and peek search warrant provision of the PATRIOT Act. It also revises roving wiretap authority. It also revises pen register and trap and trace authority. It also addresses "reverse targeting", the wiretapping a person overseas when what the government is really interested in is listening to an American in the US with whom the foreigner is communicating.

But, the House will not vote on it, or any of its components.

People and Appointments

5/11. Former Representative and Speaker of the House Newt Gingrich (R-GA) announced his candidacy for President in 2102.

5/11. Sen. Richard Burr (R-NC) was named to the Senate Finance Committee (SFC), which has jurisdiction over trade issues. See, SFC release.

More News

5/11. Rep. Cliff Stearns (R-FL) and Rep. Jim Matheson (D-UT) introduced HR 1841 [LOC | WW], the "Data Accountability and Trust Act (DATA) of 2011".

Go to News from May 6-10, 2011.