Challenges in Commercial Leases During Workouts - Risks in Delaying Remedies FAQ

Sun, 04 Apr 2010 12:00:00 GMT

Guest Writer, Laura P. Sims, Winstead PC

This is a series of blog entries [link] in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

What are the risks involved in delaying the exercise of remedies?

A period of delay between declaration of default and exercise of remedies increases the chance that some action or omission by Landlord or its representatives will be claimed by Tenant as evidence that:

Landlord has waived the default or
Tenant reasonably believed (and relied on its belief) that Landlord did not intend to strictly enforce the Lease.

Either one is a bad, bad result.

So, what should you do during any time period when landlord remedies are being deferred (or not exercised)?

Here are some tips:

avoid sending e-mail correspondence involving discussions of modification of the Lease
avoid in-person meetings involving discussions of modification of the Lease
don't accept partial or late cure
don't promise to forgo exercise of remedies (in other words, don't say "we won't exercise remedies")

Ideally, if rent failure is the issue, then monthly notices of failure to timely pay and demand for payment in full can and should continue during the period of delay - in order to combat any suggestion that Landlord will not strictly enforce its rights.

One final word of warning: at some point, the Landlord will need to get off the stump and act - or waive the default.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

Senate Approves Bill Extending COBRA, UI Benefits, Pension Relief Measures

Thu, 11 Mar 2010 19:45:36 GMT

On Wednesday, the Senate passed by a 62 to 36 margin the Tax Extender Act of 2009 (H.R. 4213), legislation that would extend until Dec. 31, 2010 the 65% premium COBRA subsidies and emergency unemployment insurance benefits, both programs that are set to expire in the coming weeks. The bill also extends several other tax credit initiatives, and includes pension funding relief measures. On Tuesday, the Senate voted 66-34 to limit debate on this bill, which was introduced by Sen. Max Baucus (D-MT) as an amendment (S. Amdt. 3336) in the nature of a substitute to the tax extender bill the House of Representatives passed in December.

In addition to extending the premium COBRA subsidy until the end of the year, the bill makes certain technical changes to the program itself. Specifically, the bill makes the following clarifications, among others:

Adds a new section clarifying special rules in the case of individuals losing COBRA coverage due to a reduction in hours;
Clarifies the period of assistance; and
Adds a provision stating that the government or the individual may bring a civil action to enforce applicable provisions of this law, and provides that the Secretary may assess a penalty of up to $110 per day against a plan sponsor or health insurance issuer for each violation.

The Senate also approved by voice vote an amendment (S. Amdt. 3430) to the bill that aims to encourage employers to continue their defined benefit pension programs by providing temporary relief from statutory pension funding obligations. According to a press release issued by Sen. Isakson (R-GA) – who introduced the amendment with Sen. Ben Cardin (D-MD) – the amendment would provide employers with two options “to spread out” their pension obligations:

Under the first option, employers would be able to repay their pension shortfall over seven years, but the seven-year amortization would start two years late. During the two-year delay period, the employer would only owe interest on the shortfall. Under the second option, employers would be able to pay back their pension shortfall over 15 years.

Employers electing to avail themselves of the “two and seven”, or 15-year relief plans would be required to abide by the “cash flow rule,” under which an employer must make an extra “matching” contribution equal to the amount by which any of its employees’ taxable compensation exceeds $1 million. An employer would also be required to contribute an amount equal to the “extraordinary dividends” paid during the year, and an amount equal to the aggregate fair market value of the “stock redeemed” during the year that exceeds the employer’s net income for accounting purposes.

Other pension funding relief measures are included in the bill, which, according to Sen. Baucus, are designed to provide temporary, targeted funding relief for single employer and multiemployer pension plans that suffered significant losses in asset value due to the 2008 market downturn.

The bill includes other tax credit measures, including an extension until Dec. 31, 2010 of an employer wage credit for employees who are active duty members of the uniformed services. This extension would provide eligible small business employers with a credit against income tax liability for a taxable year in an amount equal to 20 percent of the sum of differential wage payments to activated military reservists, up to $4,000, and be applicable to payments made after December 31, 2009. Other program extensions include one that provides a tax credit for employers of qualified employees that work or live on or near an Indian reservation, and an extension of the Work Opportunity Tax Credit (WOTC) for qualifying employers that hire employees in the areas hit hardest by Hurricane Katrina.

The measure will now need to be reconciled with the House bill and undergo a second round of approval before it can be signed into law.

China Issues New Tax Rules For Representative Offices Of Foreign Enterprises

Thu, 11 Mar 2010 19:01:28 GMT

On February 20, 2010, China's State Administration of Taxation (the "SAT") issued a Notice On Interim Measures For Tax Administration Of Representative Offices Of Foreign Enterprises (Guoshuifa [2010] No. 18, also referred to as "Circular 18"). Circular 18 states measures governing enterprise income tax (EIT), business tax, and value added tax (VAT) on representative offices of foreign enterprises (including those in Hong Kong, Macau and Taiwan). It takes effect retroactively as of January 1, 2010.

Main Points

Enterprise Income Tax

According to Article 6 of Circular 18, a legally registered representative office of a foreign enterprise must set up accounting books pursuant to relevant laws, regulations and rules. Furthermore, it must maintain the books based on legitimate vouchers, calculate the amount of its taxable income and tax liabilities according to the principle that function should match the risks taken, and declare EIT and business tax amount 15 days before the end of a quarter.

In a case where a representative office cannot correctly keep the books or calculate its costs and expenses, or where it does not objectively declare taxes as required, the governing tax authority can determine its taxable income by either of the two following methods:

1. Expenditure-Based Method – This method applies to representative offices that can correctly calculate its expenditure on operation but not its gross income or costs and expenses.

The formulas are:

Deemed gross income = Expenditures for operation of current period / (1 – Deemed profit rate – Business income tax rate;

Deemed payable tax amount = Deemed gross income x Deemed profit rate x EIT rate.

Expenditures for operations include: (i) salaries, bonuses, allowances, welfare allowances paid inside and outside of China to its personnel; (ii) payments on equipment and immovable properties; (iii) communication expenses; (iv) traveling and accommodation expenses; rental payments for equipment, and other expenses. The other expenses include: (i) cost of samples (including its transportation) purchased by the representative offices within China for the head quarter; (ii) storage and customs clearance expenses incurred within China when samples are shipped to China; (iii) interpretation and translation expenses for personnel of the headquarter who visit China; (iii) bid documents expenses for projects in China paid by the headquarter on behalf of its representative office.

The cost of purchasing fixes asset and the cost of decoration when an office is opened or relocated will be treated as one-time expenditures for operation when occurred. The expense that is actually incurred for marketing and public relationship is treated as an expenditure for operation. In addition, interest income cannot be used to offset against the expenditures for operation.

The following are excluded as expenditures for operation: Charitable donations made in cash within China, late payment fees and fines paid in Cash by the representative offices, and expenses unrelated to the representative office's business and paid by it on behalf of the head quarter.

2. Gross Income-based Method – This method should be applied when an representative correctly calculates its gross income but cannot accurately compute its costs and expenses. The formula is as follows:

Deemed EIT = Gross income x Deemed profit rate x EIT Rate

According to Circular 18, the new deemed profit rate is 15%, amending the previous rate of 10% which was used for more than a decade. The actual profit-based method will replace the expenditure-based method and the gross income-based method if a representative office can accurately keep the books and compute its taxable income and gross income correctly.

VAT and Business Tax

Under Circular 18, representative offices that engage in VAT and taxable business activities will be subject to VAT and business tax according to the relevant laws and regulations. According to the relevant Chinese laws, VAT is imposed on sales of merchandise services related to processing, repairing and assembling and import of goods.

Other Matters

Detailed document list and procedure for tax registration and fillings are also provided for by Circular 18. In addition, representative offices seeking tax treaty benefits must complete tax registration and filings pursuant Article 6 of Circular 18, and must follow the applicable tax treaty and Guoshuifa [2009] No. 124 regarding nonresidents' eligibility for tax treaty treatment.

Guishuifa [1996] No. 165, Guoshuifa [2003] No. 28 and Guoshuihan [2008] No. 945 are abolished upon Circular 18's effective date of January 1, 2010. Local tax authorities no longer accept applications for EIT exemption by representative offices, but they will continue to handle the EIT exemption applications that have already been approved.

Authored By:

Jingyuan Sun
(212) 634-3094
jsun@sheppardmullin.com

Fifth Circuit Upholds Use of Contractual Interim Orders and Progress Payments to Preclude Contractors from Obtaining Further Payment for Extra Work

Thu, 11 Mar 2010 17:25:42 GMT

Addicks Servs., Inc. v. GGP-Bridgeland, LP, 2010 WL 4250054 (5th Cir. Feb. 8, 2010)

This case shows the effectiveness that explicit waivers and progress payments can have on precluding contractors from obtaining further pay for alleged extra work. A contractor sought damages for extra work and delay costs incurred in performing excavation and grading work for a developer. The Fifth Circuit, applying Texas law, granted summary judgment in favor of a developer because the interim waivers and accompanying progress payments unambiguously released any outstanding claims for payment of extra work performed before the date of each interim waiver.

Addicks Services, Inc. (“Addicks”) contracted with GGP-Bridgeland, LP (“GGP”) to perform excavation and grading work for $4, 582,721.79 to be paid in part in monthly progress payments. The contract stipulated that Addicks submit a written application for a progress payment with details of the work completed thus far accompanied by an executed lien waiver (“Interim Waiver”) that would relieve Addicks’s mechanic’s and materialman’s lien on the project as of the date on the Interim Waiver.

During the course of completing the project, Addicks submitted several change orders, per the contract, to account for necessary additional work and changes to the contract price. Addicks asserted that GGP would not allow it to include additional work on the payment applications unless such additional work was reduced to a change order. GGP only approved a few of these change orders. While many of these change orders were pending, Addicks submitted applications for progress payments and executed the Interim Waivers, which for the most part included a corresponding payment amount to the application. Although the Interim Waivers provided a blank space for Addicks to except from release any claims, Addicks never listed any claims for extra work in this space.

After the project was certified complete, Addicks filed a claim for amounts owed from GGP for extra work. GGP was granted summary judgment on claims for work performed prior to the last Interim Waiver. Addicks made three arguments why the Interim Waivers should not be enforced to bar payment of its claims: 1) ambiguity, 2) waiver, and 3) estoppel.

First, Addicks argued that the Interim Waivers were ambiguous; thus, it could introduce the parties’ course of performance that GGP would not allow Addicks to include claims for additional work on the payment applications. The Fifth Circuit held that the Interim Waiver unambiguously released all of Addicks claims for additional work up to the date of the last Interim Waiver, especially in light of the following language including extra work: “[Addicks] specifically waives, quitclaims, and releases any claim for damages due to delay, hindrance, interference, acceleration, inefficiencies or extra work or any other claim of any kind.” The court distinguished these facts from two other cases. In Green International, Inc. v. Solis, a dispute arose between a contractor and subcontractor regarding compensation for extra work. That waiver, however, did not include language regarding extra work, and the contractor approved change orders for extra work after the dates of the waiver rather than before the waiver’s execution. In Gilbane Building v. Two Turners Electric Co., the waiver included limiting language that released claims to the extent such monies have been paid. The Interim Waiver executed by Addicks included no such limitation.

Moreover, Addicks argued that the lack of a Final Waiver meant that claims for extra work could not ultimately be resolved. The court also rejected this argument because the Interim Waiver provided blank space to note any additional work Addicks was excepting from the release. Any lack of a Final Waiver did not affect the release of any claims as of the date of each Interim Waiver.

Addicks also argued that Texas Property Code section 53.152 supports its claim that the release only applies to amount paid. The Court dismissed this argument because the statute only provides a minimal obligation on contractors to release liens notwithstanding broader releases that can be contracted for between parties.

Addicks’ ambiguity argument failed because if Addicks wanted to except the extra work performed from being released, it could have done so. The court simply could not turn back the clock and insert exceptions for Addicks where it failed to do so in the blank space provided in the Interim Waiver.

Second, Addicks argued that GGP waived its right to rely on the Interim Waiver when it negotiated with Addicks regarding extra work, issued change orders, and paid some of the claims even though an Interim Waiver had previously been executed. This argument failed because GGP followed each payment for extra work with an Interim Waiver releasing the claim, which was consistent with the contract’s processes.

Third, Addicks argued that promissory estoppel should prevent enforcing the Interim Waivers, relying on an affidavit of its President and voicemail transcripts of a GGP project manager that GGP would resolve the claims for extra work at a later date. However, the court noted that this evidence was too vague and indefinite to prove promissory estoppel. The project manager’s comments only reflected an assurance of an ongoing negotiation process rather than a definite promise to pay for the extra work. Accordingly, the Fifth Circuit affirmed summary judgment in favor of GGP on the claims proceeding the dates of the Interim Waivers.

Do You Comply with the New Massachusetts Information Security Regulation?

Thu, 11 Mar 2010 16:32:05 GMT

By Bruce H. Nielson, K&L Gates Partner, Washington D.C.

What Does the Regulation Require?

Every business that “owns or licenses personal information” about a Massachusetts resident must “develop, implement, and maintain” a comprehensive written information security program (WISP). “Owns or licenses” is defined as “receives, stores, maintains, processes, or otherwise has access to personal information in connection with the provision of goods or services or in connection with employment.” “Personal information” (PI) means first name (or initial) and last name combined with a Social Security number, driver’s license or state-issued ID card number, or financial account or credit or debit card number (with or without any required password, security or access code, or personal identification number).

The WISP must contain administrative, technical and physical safeguards for PI that are “appropriate to (a) the size, scope and type of business . . .; (b) the amount of resources available . . .; (c) the amount of stored data; and (d) the need for security and confidentiality” of the PI.

WISP – Required Elements

The elements required in a WISP include:

Designating one or more employees to maintain the program
Identifying and assessing foreseeable internal and external risks to the security, confidentiality or integrity of records containing PI
Evaluating and improving safeguards for limiting risks, including employee training and compliance and means for detecting and preventing security failures
Developing security policies regarding storage, access and transportation of records containing PI outside of business premises
Imposing disciplinary measures for violations of security rules
Preventing terminated employees from accessing records containing PI
Imposing restrictions on physical access to records containing PI
Regular monitoring of the operation of the WISP
Reviewing security measures annually or whenever a material change in business practices implicates the security or integrity of records containing PI
Documenting responsive actions taken in connection with any security breach incident and conducting post-incident reviews
Selecting service providers capable of maintaining appropriate measures to protect PI
Contractually requiring service providers to maintain appropriate security measures (every service provider contract entered into before March 1, 2010 is deemed to comply)

Computer System Requirements

For businesses that electronically store or transmit personal information, the WISP must also include the establishment and maintenance of a computer security system (including any wireless system) that, “at a minimum, and to the extent technically feasible,” contains:

Secure user authentication protocols, including control of user IDs, a “reasonably secure” method of assigning and selecting passwords (or use of unique identifier technologies), control of data security passwords, restricting access to active users, and blocking access after multiple unsuccessful attempts
Secure access control measures that restrict access to PI to only those who need such information to perform their jobs and that assign unique identifications plus passwords that are designed to maintain the security of access controls
Encryption of all transmitted records and files that contain PI and travel across public networks
Encryption of all PI transmitted wirelessly or stored on laptops or other portable devices
Reasonable monitoring of systems for unauthorized use of or access to PI
For files containing PI on a system connected to the Internet, reasonably up-to-date firewall protection and operating system security patches designed to maintain the integrity of the PI
Reasonably up-to-date versions of system security agent software, including malware protection and patches and virus definitions
Education and training of employees on the proper use of the computer security system and the importance of PI security

What is the Penalty for Non-Compliance?

Violators may be subject to a $5,000 civil penalty for each violation. How violations will be counted for purposes of the penalty is unclear. If violations are counted on a per-record basis, businesses with thousands of records containing PI of Massachusetts residents could potentially face fines of millions of dollars.

How Can My Business Comply?

The revised, final regulation is not quite as demanding as earlier versions, but it is still a tough regulation that may require businesses to revise existing – or create new – WISPs. The regulation is also indicative of the direction in which state and federal information security laws are heading. Because of this, even businesses not subject to the regulation may want to consider creating and implementing WISPs that comply with the standards of the Massachusetts regulation.

DOE Announces Upcoming Funding for Marine Hydrokinetics

Thu, 11 Mar 2010 16:21:33 GMT

Good news for marine hydrokinetics! On Wednesday, the U.S. Department of Energy ( the "DOE") issued a Notice of Intent announcing that its Wind and Hydropower Technologies Program will publish a Funding Opportunity Announcement ("FOA") for hydrokinetic technology development no later than March 31, 2010. This announcement comes just six months after the DOE awarded $14.6 million to 22 advanced water power projects designed to accelerate the commercial viability, market acceptance, and environmental performance of these technologies. Stoel Rives would like to congratulate Pacific Energy Ventures and Ocean Power Technologies for receiving two of those awards.

The FOA, called the "Marine and Hydrokinetic Technology Readiness Advancement Initiative," will solicit applications from industry-led partnerships that want to marine and hydrokinetic ("MHK") technologies at all levels of industry maturity. However, unlike past rounds of funding, this time the DOE will be using MHK-specific technology readiness levels ("TRLs") to assess system and component maturity. Preliminary definitions for the nine different proposed TRLs are included in the Notice of Intent. The DOE will direct funding in two areas using the new TRLs:

Concept Development- Funding in this area will focus on projects seeking to advance a novel concept from TRL 1-3 ("Discovery/Concept Definition") to TRL 4 ("Proof of Concept"). By funding these projects, the DOE hopes to stimulate technology breaktroughs.
Technology Readiness Level Advancement- Funding in this area will be directed to projects focused on operational readiness. Recipients will have established a proof of concept already and are moving toward laboratory or test facility validation of scale models, open water tests, operational verification, and commercial application.

Developers should begin assembling their teams immediately because the DOE anticipates a short application deadline once the FOA is announced. Remember that each applicant must be registered with FedConnect; each must have a Dun and Bradstreet Data Universal Numbering System number (a "DUNS number"), and each must be registered with the Central Contractor Registry.

HUD CHARGES LANDLORD IN COMPANION ANIMAL REASONABLE ACCOMMODATION CASE

Thu, 11 Mar 2010 15:55:34 GMT

Recently, we wrote entries about service animals and a variety of issues that property management and owners of service and/or companion animals should consider here and here (or you can scroll down). Further illustrating the timeliness of the service/companion animal issue, HUD just recently announced that it is charging two New York landlords with violations of the Fair Housing Act (“FHA”) for allegedly refusing to allow a Vietnam-era veteran to have a therapeutic service dog in his apartment. The tenant alleged that he had been diagnosed with post traumatic stress disorder, depression, and seizures, and that doctors had prescribed the dog to help reduce his symptoms. The property owners purportedly refused the tenant’s request because the apartment building had a “no-pets” policy. The property owners admit that the resident requested the dog, but allege that the tenant never made it clear why the dog was necessary and that he never provided any proof that the animal had been prescribed by a medical professional.

HUD has now charged the property owners with a violation of the FHA for denying the tenant’s reasonable accommodation request and for allegedly threatening to evict the tenant when they learned that the tenant had filed a housing discrimination complaint. Not surprisingly, the property owners deny that they threatened to evict the tenant. In addition to the claim regarding unlawful discrimination, HUD carefully investigates allegations of retaliation as the department wants to ensure that nobody feels intimidated into not exercising their rights under the FHA.

As we have indicated in the past, the FHA prohibits property owners and/or landlords from refusing to grant persons with disabilities a reasonable accommodation or reasonable modification, including making changes to rules and policies prohibiting a tenant from owning a pet when that pet is a prescribed service or companion animal. In addition, as noted above, the FHA prohibits a property owner from retaliating against a tenant who has filed a housing discrimination complaint.

In short, as this example makes clear -- always respond to reasonable accommodation or modification requests submitted by residents. In almost all cases, service and companion animals should be permitted. To be sure, while there may be times management cannot make the precise accommodation or modification sought, we can guarantee that failing to respond to or simply denying a request that should otherwise be granted can cause serious – and unnecessary – consequences.

Just A Thought.

Article by Christian Moffitt.

FDA Looks to Boost Criminal Prosecutions

Thu, 11 Mar 2010 14:44:32 GMT

In the wake of a scathing March 4^th GAO Report, FDA has informed Congress that it will boost criminal prosecutions of pharmaceutical and food industry executives.[1] Although the Agency’s Office of Criminal Investigation (OCI) can prosecute ‘responsible corporate officials,’ according to the GAO Report OCI has failed to exercise this enforcement tool to achieve FDA priorities and has underperformed comparable agencies in bringing misdemeanor prosecutions.

The Report determined that OCI instead operates independent from broader FDA priorities and with little accountability to top FDA officials. As the authors noted, “FDA’s oversight of OCI’s investigations of individuals and companies external to FDA is limited.” In her letter to Senator Charles Grassley (R-Iowa), FDA Commissioner Margaret Hamburg acknowledged that OCI and FDA’s various centers must improve their communication. If they do not, OCI will continue to operate outside the context of emerging Agency policies and priorities, and OCI’s prosecution trends cannot inform FDA policies or support appropriate allocation resources for inspections, civil enforcement, and risk communication.

Industry insiders find the lack of OCI accountability and oversight especially troubling during FDA’s public campaign for increased transparency. Meanwhile, FDA has allowed OCI to lag comparable federal agencies in developing performance standards; indeed, the GAO reports that OCI has failed to complete 70% of required assessments. Although Hamburg promises greater communication between OCI and high-level FDA administrators, there is no small gap to bridge.

Although the Report focused principally on improved communication, accountability, and oversight, what caught the press’s attention is the prospect of increased misdemeanor prosecutions. No surprise. The American public has not forgotten last year’s rash of adulterated imports, and the public has a keen interest in FDA-regulated products.

Prudently, however, FDA does not expect to see widespread and aggressive criminal prosecutions in all areas. Instead, stepped up criminal enforcement will likely more specifically target issues concerning counterfeiting, diversion, tampering, and adulteration: key Agency priorities. Under the FDCA's strict-liability provisions, fraudulent information is fraud; misdemeanor prosecutions can proceed without proof of intent to defraud.

Commissioner Hamburg expects revised OCI policies and procedures to incorporate some newly developed criteria for selecting cases to prosecute.

Authored by:

Deborah M. Shelton
(202) 772-5351
dshelton@sheppardmullin.com

[1] GAO, “Food and Drug Administration: Improved Monitoring and Development of Performance Measures Needed to Strengthen Oversight of Criminal Misconduct Investigations,” 29 January 2010, released 4 March 2010. Available http://gao.gov/products/GAO-10-221

FDA Proposed Rule: Sponsors Must Report Suspicions of Falsified Study Data

Thu, 11 Mar 2010 14:39:14 GMT

A proposed FDA rule would require all “sponsors” (defined broadly) to report not only known falsification of study data but also falsifications merely suspected. The rule, “Reporting Information Regarding Falsification of Data,” defines falsification as “creating, altering, recording, or omitting data in such a way that the data does not represent what actually occurred.” The rule proposes strict timeframes for reporting. The duty to report would be undiminished even where evidence of falsification is slight.

Parties seeking to comment on the proposed rule must submit comments by May 20, 2010.

Broadly Defining “Sponsor”

The proposed rule would include petitioners submitting food additive, color additive, nutrient content claim, and health claim petitions; manufacturers or distributors submitting new dietary ingredient notifications; and sponsors as defined in §§ 58.3(f) (non-clinical laboratory studies), 312.3(b) (clinical investigations), 510.3(k) (animal drugs), and 812.3(n) (investigational device exemptions). The Agency says this broad definition of “sponsor” is needed to prevent ambiguities.

Falsfications by Whom, and When?

Sponsors would report a finding or suspicion that any person has engaged in falsification in reporting of study results. Similarly, reports would be required for falsification during the course of proposing, designing, performing, recording, supervising, or reviewing studies that involve human subjects or animal subjects. The rule would cover falsifications discovered or suspected before, during or after study completion, as well as after review, approval, or authorization of the affected product or labeling.

Suspected Falsification

The proposed rule would require sponsors to report suspected falsification. Sponsors need not make definitive determinations of falsification prior to reporting, but they cannot avoid making a report of suspicion merely for lack of evidence. The Agency has declined to set a specific evidentiary threshold. “Rather, a sponsor would be required to report information of which it is aware suggesting that a person has, or may have, engaged in the falsification of data in connection with studies conducted by, or on behalf of, the sponsor, or relied on by the sponsor. This reporting obligation would exist regardless of the amount of evidence….” 33 Fed.Reg. 7415 (Feb. 19, 2010).

Timeframe for Reporting

Sponsors must report no later than 45 days after becoming aware of the falsification. In the case of suspected falsification, it is unclear whether the 45-day period is delayed for purposes of further investigation or whether satisfactory further investigation would relieve a sponsor’s obligation.

Information Included in Such Reports

Reports must include the name of the person suspected or confirmed to have engaged in falsification, and his or her address and phone number. The sponsor must identify the potentially affected study and, if applicable, information about the drug or device application. In addition, the sponsor must provide the information that led to the suspicion. FDA is considering whether reports should include additional information, such as the National Clinical Trail (NCT) number.

Reports can be made to the appropriate FDA center via telephone, facsimile, mail, or electronic mail. FDA will determine whether to investigate further.

Penalties

The Agency has not yet determined appropriate penalties. Under consideration: Making failure-to-report a violation of section 301(e) of the Federal Food, Drug, and Cosmetic Act (i.e., failure to make a required report); or a violation of 18 U.S.C. 1001, submission of a false statement to the government.

Reminder: comments must be submitted by May 20, 2010.

Authored by:

Deborah M. Shelton
(202) 772-5351
dshelton@sheppardmullin.com

and

Arianna B. Chernove
(202) 772-5361
achernove@sheppardmullin.com

Bipartisan Bill Supports Job Creation Through Investment in Innovation

Thu, 11 Mar 2010 14:00:00 GMT

Start-up companies have always been a driving force in the U.S. economy. They are even more important in a down economy, as innovation drives job creation. While there are visa categories for entrepreneurs who invest their own capital, there is a gap in U.S. visa policy when it comes to entrepreneurs with great ideas who have established investors ready to back them financially. The current investor categories are limited by country of citizenship for temporary visas and by a minimum investment of $1 million ($500,000 in some cases) for green cards, making a permanent visa solution unlikely for the vast majority of would-be foreign national entrepreneurs in the United States.

Senators John Kerry (D-Mass.) and Richard Lugar (R-Ind.) have introduced legislation proposing a new green card category for immigrant entrepreneurs who have secured at least $250,000 in funding from a qualified venture capitalist or “angel investor.” The bill is designed to drive job creation and increase the country’s global competitiveness by helping immigrant entrepreneurs secure permanent residence in the United States.

More than 160 venture capitalists from around the country have endorsed the bill, citing a restrictive visa policy that has forced many innovative entrepreneurs (and the corresponding creation of new jobs) to establish outside of the United States.

Jackson Lewis works with entrepreneurs and investors all over the world who wish to invest in the United States on opportunities which create jobs for Americans. If this bill is passed, the new visa category would substantially broaden the pool of potential investments for venture capital firms and help stimulate the U.S. economy.

IRS to Honor Certain Medical Resident FICA Refund Claims

Thu, 11 Mar 2010 13:00:00 GMT

Since the 1990's, many academic medical centers have filed claims with the IRS seeking refunds of FICA (social security and Medicare) taxes paid on medical resident salaries on the basis that the residents are students and exempt from FICA. For the most part, the government has come out on the losing side when this issue has been litigated.

The IRS has now announced that it plans to concede this issue for periods before April 1, 2005, when new IRS regulations went into effect. The IRS's brief announcement does not indicate the terms on which claims will be paid. Still, the IRS notes that verification of the claim amount will be required and interest will be paid.

The IRS is not conceding this issue for periods on and after April 1, 2005. On that date, new regulations went into effect providing that the student exception from FICA tax does not apply if the individual works full-time, which of course residents do. The Eighth Circuit decided last year that the new regulation was valid and precluded FICA tax refunds for residents after its effective date. This case is the only appellate case on the issue to date. The employers in that case, Mayo Foundation for Medical Education and Research and the University of Minnesota, have filed a cert. petition with the US Supreme Court; the Court has yet to act on that petition.

The IRS will, within 90 days of its announcement, begin contacting hospitals, universities, and medical residents who filed FICA refund claims for these periods with more information and procedures.

Employers and individuals with pending claims do not need to take any action at this time.

Taxpayers with currently pending suits should contact the Department of Justice attorney assigned to the case.

Organizations that employ residents and wish to keep their FICA claims for 2006 alive need to file refund claims by April 15, 2010.

For additional information about medical resident refund claims, please visit the IRS's Questions and Answers section.

Challenges in Commercial Leases During Workouts - Must a Landlord Exercise Remedies and/or Mitigate Damages FAQ

Thu, 11 Mar 2010 12:30:22 GMT

Guest Writer, Laura P. Sims, Winstead PC

This is a special series of blog entries in which we provide quick answers to lenders' frequently asked questions related to tenant leases (FAQ). Leases are "the" whole point of income producing property—and this series is pointed to the simple goal of helping you protect the basic value building block of your collateral—which are the leases. Of course, two things should be kept in mind. First, none of these questions can be answered in a vacuum. Questions should be considered with a thorough review of the file. And secondly, many of the questions are worth revisiting from time to time because subsequent events will impact the answers.

Is Landlord required to exercise its remedies and/or mitigate damages immediately once a default is declared under a commercial lease?

No, Landlord is not required to immediately exercise its remedies under a commercial lease.

Assuming the original demand letter protected Landlord's rights with respect to exercise of remedies, Landlord is entitled to the immediate exercise of all available remedies or, at its election, to delay the exercise of some or all remedies until a later, more suitable date.

In rough economic times, Landlords may have concerns that compete with the traditional process of repossession or termination of the lease (or terminating the Tenant's right of possession without terminating the lease itself).

For instance, where a mixed-use or retail development is still within its initial lease-up phase, it might be prudent for Landlord to allow a Tenant occupying a prominent location within the development to remain in operation, particularly through a holiday or other critical period, notwithstanding the existence of an event of default. (Note the discussion of a forbearance agreement below.)
Even in an office context, where "dark space" is less of an immediate concern, a Landlord might still be inclined to delay termination of a lease in favor of repossession or even to delay taking any action in order to avoid negative press coverage surrounding the exercise of remedies.

For a commercial lease in Texas, under applicable Texas law and absent an express agreement to the contrary, a declaration of a default does not give rise to an obligation for Landlord to mitigate damages. A duty to mitigate arises (in Texas) only when Tenant has abandoned the premises and ceased the timely payment of rent or the Lease provides otherwise.

As such, Landlord is not triggering any additional burdens by completing the process for establishing an event of default and Landlord may, within reason, delay further action pending resolution of competing factors.

Even if termination or repossession are delayed, Landlord should make prompt inspection of the premises and address any immediate repair or maintenance concerns. Application can also be made of the security deposit to cover current deficiencies or Landlord expenses, subject to the specific terms of the lease.

Also, if the the relationship with the defaulting Tenant permits this approach and in the appropriate circumstances, the Landlord should consider entering into a forbearance agreement with the Tenant. This agreement will expressly recognize the default, it will set forth the Landlord's agreement to NOT exercise remedies for a specified time, and it will confirm the Tenant's agreement to perform (on a going-forward basis) the terms of the lease - again, for a specified time. After the time period ends, then the Landlord may exercise its remedies.

If you have thoughts, suggestions or questions on this topic, please post a comment below.

The Lead Plaintiff Motion - Do Side Deals Mean Inadequate Plaintiffs?

Thu, 11 Mar 2010 12:19:26 GMT

For the defendant, lead-plaintiff motions in class actions can often seem like a small sideshow to the real litigation. (Indeed, in many kinds of class actions, where only a single firm or consortium has brought a lawsuit, the lead-plaintiff motion may only be pro forma.) For plaintiffs however – particularly securities plaintiffs – lead-plaintiff motions lie somewhere between corporate merger and bloodsport. The consequences to winning or losing these motions can have effects for years, and the efforts to win have landed more than one attorney in ethical trouble, and sometimes prison.

But how important is the lead-plaintiff motion really? NYU Professor Stephen Choi offers one look (based on a survey of lead-plaintiff motions between 2003 and 2005) in a working paper entitled Motions for Lead Plaintiff in Securities Class Actions. His conclusion? Getting appointed lead plaintiff is still critically important to plaintiffs’ attorneys, primarily because it allows them to command higher fees.

Professor Choi also found that plaintiffs’ counsel – particularly experienced attorneys with lots of repeat interactions with co-counsel – will enter into side deals to determine who will be lead plaintiff, and with it, lead plaintiffs’ counsel. As a result, the plaintiffs with the largest losses are not always appointed lead plaintiff, and their attorneys are often able to command higher fees for fewer hours worked.

What use is Professor Choi’s study to the securities class-action defendant? The paper does provide valuable intelligence on how plaintiffs' counsel operate, something that defendants always need more of. But, more importantly, Professor Choi’s data suggests a possible argument at class certification. His data on fees and hours worked can operate as a rough proxy for client supervision. If there is evidence that plaintiffs’ counsel cut a side deal to determine who would be lead plaintiff (for example, if an investor with larger losses stepped aside to allow another investor represented by a larger firm to be lead plaintiff), that may indicate that the lead plaintiff does not have the independence to adequately oversee its attorneys. In that case, the defendant may argue that the named plaintiff is not an adequate representative of the class.

Summary Judgment for Drug Company in Pain Pump Case

Thu, 11 Mar 2010 11:44:23 GMT

A federal court has granted defendant summary judgment in a case which alleged that cartilage damage sustained by the plaintiff, a former high school athlete, was caused by the post-surgery use of the drug company’s pain medication in an automated pump device. Jensen Meharg, et al. v. I-Flow Corp., et al., No. 1:08-cv-00184 (S.D. Ind. 3/1/10).

The former high school athlete underwent shoulder surgery, after which a pain pump was utilized. The pain pump in question was manufactured and sold by I-Flow Corporation; the local anesthetic–bupivacaine Hcl – was manufactured and sold by defendant AstraZeneca. AstraZeneca did not in any way promote the use of bupivacaine with pain pumps, and that use was not mentioned in the instructions and warnings provided with the drug -- an off-label use. Several months later, plaintiff began to experience shoulder pain again. An MRI allegedly revealed that plaintiff had developed chondrolysis in her shoulder, which she alleged was caused by the post-surgery administration of the bupivacaine with the pain pump.

The strict liability claim was for alleged failure to warn; a warning defect claim requires that defendant had a duty to warn. Duty is generally a legal issue. In the context of a prescription drug manufacturer, the duty to warn does not arise until the manufacturer knows or should know of the risk. In cases that involve an off-label use of a prescription drug that is not promoted by the manufacturer, the requisite knowledge of the risk, at a minimum, includes that the manufacturer must know (or be charged with knowledge of) both that the off-label use is occurring and that the off-label use carries with it the risk of the harm at issue – in this case, damage to cartilage.

The court found as a matter of law that the information allegedly possessed by defendant was insufficient to trigger AstraZeneca’s duty to warn of the risk of cartilage damage from continuous infusion of bupivacaine into a patient’s joint. Simply put, the plaintiff failed to point to sufficient evidence that demonstrated that at the time of plaintiff’s surgery AstraZeneca knew of that risk or that it should have known of the risk because experts in the relevant field had such knowledge.

More interesting was plaintiff's other theory. Plaintiff's expert also opined that prior to plaintiff’s surgery the defendant supposedly knew that bupivacaine was being used in pain pumps, and that this knowledge triggered an alleged duty to “investigate the nature of that use, determine whether the drug was being promoted in accordance with approved indications, conduct or sponsor those studies necessary to ensure that the promoted use was safe, and to warn physicians that long-term risks to the joint had not been scientifically established but that the risks should be weighed seriously, given that the anticipated use was for elective post-operative pain therapy for which multiple alternatives existed.” The court noted that such a “duty” does not exist under relevant (Indiana) law. The duty to warn does not arise until the manufacturer knows or should know of the risk. The alleged far broader duty – a duty, in essence, to warn physicians that there might be a risk, although we don’t know yet because neither we or the scientific community at large has studied it yet -- doesn't exist.

Such a duty would cause physicians to be inundated with such pseudo-warnings and quasi-risk information distracting them from heeding real warnings of actual risk; and it would add very little to the fact that physicians already know, i.e., that if a use is omitted from a prescription drug’s label, that use has not been tested sufficiently to demonstrate to the FDA that it is safe and effective.

LA Textile Show: Your Opportunity to Source More Than Fabric!

Thu, 11 Mar 2010 03:14:28 GMT

If you are in Los Angeles and plan on sourcing fabrics or trims next week at the Los Angeles International Textile Show (also know as L.A. Textile 2010) at the California Market Center ("CMC"), I will there too!

I am honored to be speaking at the following two seminars:

On March 16, 2010 from 3:30–4:30 p.m. I will present “Legal Strategies for a Profitable Fashion Business” in CMC, suite C786; and
On March 17, 2010 from 1–2:15 p.m., I will be part of the panel “How to Plan, Merchandise & Sell Your Products in a Slow Economy,” along with Dana Fried, Ken Wengrod, Sheila Hill and Bobby Hines, and moderated by Frances Harder of Fashion Business Incorporated in CMC 13th-floor penthouse, suite 19

Please come by and say hello. This is a another good in-person networking opportunity as well as a chance for all you aspiring fashion lawyers out there to learn more about practicing fashion law.

GAO Report on Iran Sanctions Blasts OFAC’s Dead Tree Licensing System

Thu, 11 Mar 2010 01:26:38 GMT

The Government Accountability Office released a report last Thursday on the Iran Sanctions and there is, you might say, good news, bad news and old news in the report. First, the good news. The GAO’s audit of the licensing process of the Office of Foreign Assets Control (“OFAC”) found that all of the licenses [...]

The Basics of Music Licensing in Digital Media

Wed, 10 Mar 2010 23:24:24 GMT

03.10.10

By David D. Oxenford and Robert J. Driscoll

Businesses that are involved in digital media use music in many ways—and most require some sort of license to make the use legal. Whether the music is used in an advertisement or a music video, on a Web site or delivered via another digital platform, licenses are usually required. Unfortunately, there are a variety of rights that may be needed, depending on how the music will be used, so knowing what you need to do to avoid liability is not always easy.

Making it even more complicated is that fact that the different rights are often obtained from different individuals or groups, and it is not always easy to determine where to go to get the necessary rights. This advisory provides a basic description of some of the rights necessary for some of the most common uses of music under United States laws and where to obtain such rights.

Current copyright laws

Before discussing where to get permission to use music, you must first understand the different rights that can be implicated by the use of music.

Under current United States copyright laws, songs and other creative works first published as long ago as 1923 could still be protected by copyright. Section 106 of the Copyright Act gives the owner of a copyrighted work a number of exclusive rights with respect to the work, including the right to reproduce the work, the right to distribute the work, the right to prepare “derivative works” based the work (e.g., a new arrangement of a song or a translation of its lyrics into another language) and, in many cases, the right to publicly perform and publicly display the copyrighted work. The copyright owner also has the right to authorize or refuse to authorize others to exercise any of these rights. As a result, permission from the copyright owner—i.e., a license—generally is required any time copyrighted music is used.

The particulars of the permission that is required depends on the nature of the use and which of the various exclusive rights under Section 106 of the Copyright Act are implicated. In most cases, licenses must be negotiated with the copyright owner, although, as set forth below, there are certain music rights that can be obtained through a “statutory license” (i.e., a license that all affected copyright owners are required by law to grant and for which a license fee is established by the government). For certain uses of music, various rights societies (which are sometimes subject to government antitrust review), also offer “blanket licenses.”

To make matters more complicated, for each piece of recorded music, there are two separate copyrights, which are often held by different owners. First, there is the copyright in the underlying musical composition (that is, the notes and lyrics as they might be written out on paper). Copyrights in popular songs are usually controlled by a music publishing company (and sometimes multiple publishing companies, if the song has multiple writers with different publishing arrangements). Second, there is the copyright in the particular recording of the song that is being used (i.e., the song as sung or performed by a particular recording artist and contained in a CD, digital file or other recorded medium). Such recordings are referred to in the Copyright Act as “sound recordings” and in the music business usually are referred to as master recordings. For most popular recordings, the copyright is held by the record company. However, in some circumstances, copyrights in musical compositions and sound recording may be controlled directly by the songwriter and/or recording artist, particularly in the case of recordings by independent artists of songs that they have written.

In certain instances, particularly with older classical music, the underlying musical composition may have entered the public domain, while the more recently produced sound recording is still be protected by copyright. Depending on the type of use, a license may be needed with respect to the musical composition, the master recording, or both.

Streaming audio

Rights to the musical compositions

As noted above, the owner of a copyrighted musical composition has the exclusive right to control its public performance. “Public performance” is not limited to a live performance of a song in a concert or similar setting. Rather, the Copyright Act defines a public performance as one that occurs in any place open to the public or that is transmitted or otherwise made available to many people, whether they receive it in one place or many, or at one time or different times. An example of a public performance of music in a traditional context would be the broadcast of music as part of a television or radio program. Similarly, in the digital world, a public performance of music occurs in an Internet radio stream or when individual songs are streamed on a Web site.

A digital public performance of music—such as the streaming of music on a Web site—will trigger an obligation to obtain a public performance license from the songwriter or publisher. In situations where one or a small number of musical compositions is being performed via a Web site or other digital service, the operator will typically license the compositions directly from the songwriter or publisher. When larger numbers of songs are being used, or when the particular song performed varies (as in an Internet radio operation), licensing is most commonly done through a “blanket license” from a performing rights organization (PRO) that provides the rights to use all the music in the catalog of the PRO, which it licenses on behalf of the copyright owners.

Songwriters and music publishers in the United States are typically affiliated with one of three PROs (ASCAP, BMI, SESAC), which are responsible for licensing nondramatic public performances (i.e., performances of songs other than in dramatic productions such as an opera or a musical where the song is a part of and carries forward the plot, although the right to publicly perform songs from such productions in a nondramatic fashion can be licensed from the PROs). ASCAP and BMI are governed by antitrust consent decrees, administered by the federal courts. By law, they are required to offer licenses to all who seek them, and they must set rates that are uniform for all similarly situated users. Where rates for a user category cannot be established by negotiation, they are set through a rate court hearing in the district courts. Many of the standard licenses for existing categories of music users (with information about the rates) are available on these organizations’ Web sites. SESAC, as the smallest of the PROs, is not subject to an antitrust decree, though a group of television stations recently brought an action to seek to compel antitrust review of their practices. SESAC, unlike ASCAP and BMI, is a for-profit company. Thus, many of their rates are not publicly available, and SESAC does have the ability to negotiate individually on the rates that they charge.

Some music users, to minimize costs, have considered trying to live without a SESAC license. However, SESAC licenses the music of some very important writers whose songs are covered in many music genres (including Bob Dylan, Neil Diamond, and even some of the production music from certain commercial production companies). Thus, it is difficult if not impossible to do without a SESAC license if one seeks to perform a broad range of popular songs.

Rights to the sound recordings

Public performance licensing requirements are different for sound recordings. In the United States, until very recently, there has been no exclusive right to publicly perform a sound recording, and accordingly no public performance licenses have been required with respect to public performances of sound recordings in broadcast and other traditional media. However, in 1995, Congress created for the first time a public performance right in sound recordings, but limited that right to performances that are made by means of a “digital audio transmission.”

Unlike the public performance right in musical compositions, the sound recording performance right does not extend to performances made in over-the-air broadcasts, in retail establishments or in other brick-and-mortar businesses and public places. Nor does the digital performance right cover sound recordings used in “audio-visual” works (such as television programming or other audio-visual programming streamed online). Efforts are underway in Congress to extend public performance rights in sound recordings to cover some of these uses (in particular, over-the-air radio broadcasting), but at the moment no public performance royalty must be paid for the use of the sound recording outside of the limited context of digital audio transmissions.

Because of the digital public performance right in sound recordings, companies that stream recorded music digitally—such as Internet radio services and any company that streams recorded music on its Web site¹—must have licenses to digitally transmit those recordings to their listeners. For webcasters and other covered digital media companies, there is a statutory license available, which is administered on behalf of the record labels by a nonprofit company called SoundExchange. The royalties can be negotiated between groups of similarly situated users and SoundExchange. If these negotiations are unsuccessful, the royalties are set by a government body—the Copyright Royalty Board—usually for periods of five years.

Digital transmissions under this statutory license must be made within very specific limitations. Uses must not be part of an “interactive” service. (While the exact manner in which the statutory definition of “interactive” applies to various types of music services is still to be determined, a recent appeals court decision held that a certain degree of user influence is permitted without the service being classified as interactive.) Services operating under this statutory license also must limit the number of songs played from the same album or by the same artist in given periods of time, must show information about the song being played visually on the Web site, and must comply with other rules designed to limit digital music piracy.

For services that involve more interactivity—e.g., allowing on-demand streams where users know what music is coming up, or where they can select the artist or song that is to be played—the service provider must obtain public performance licenses in the sound recordings directly from the copyright holders. In most cases involving popular music, this will be the record company that released the recording.

Streaming videos and commercials

As noted above, a broadcast of music as part of a television program constitutes a public performance of the music. The same is generally true of the streaming of an audio-visual program including music via a Web site or other digital service. Accordingly, as in the brick-and-mortar world, those who transmit audio-visual programs generally need to obtain public performance licenses with respect to the musical compositions contained in those programs when streamed on a Web site or in another digital format.

The public performance license is not the only license that is necessary. When a composition is recorded in a production with spoken words or video, such as when music is included as part of the soundtrack of a film, television program or other similar video production, or is recorded as part of a commercial or other recorded promotional announcement, another license is needed. This type of reproduction of the musical composition is usually referred to in the music business as a “synchronization,” and a license known as a “synch” license must be obtained from the music publisher or songwriter that controls the composition. The producer of the video typically is responsible for obtaining the synch license.

The synch license issued by the publisher or songwriter relates only to the composition, and does not include the right to use any pre-existing master recording (i.e., the song as recorded by a particular artist). (If the licensor intends to create a new recording rather than using a pre-existing one, the right to do that should be granted in the synch license.) Accordingly, when a pre-existing master is synchronized with moving images in a film, television or other audiovisual production, or is recorded as part of a commercial or other recorded promotional announcement, a license must be obtained for the use of the master as well. This license is referred to as a “master use” license, and like the synch license, is usually obtained by the producer of the video.

With respect to major label recordings, the record label will usually issue the master use license. In most situations, the label and publisher will insist on “favored-nations” treatment (i.e., both will receive the same license fee).

For use in commercials, artists often have their own concerns about being associated with particular products, and thus each use of a master recording may be subject to a unique negotiation with the record company or artist management company representing that artist.

Downloads

Providing downloadable master recordings online involves a reproduction and distribution of the masters and underlying musical compositions. Thus, as with the other situations described above, rights to both the musical composition and the sound recording must be obtained. Typically, an online music store or other service that sells music will obtain the necessary rights from the record labels, which own the master recordings and are responsible for obtaining from the publishers or songwriters the right to reproduce and distribute the recorded composition.

However, where a site is not using major label recordings, but is instead transmitting recordings provided or made by a local or independent musical group, the site must be sure that the rights to the underlying musical compositions have been obtained even if the performers clear the use of the sound recording. For instance, a school may provide on its Web site the ability to download the spring choral concert. In doing so, although the school will own its recording of the concert, the school should be sure that it has also cleared the rights to the musical compositions performed in that concert. A radio station may want to post on its Web site for download recordings of bands that have performed in its studios. Even if a band has consented to the use of the recording of its performance, if the band does not also control the rights to the songs it performed, the radio station must make sure that it licenses the rights to those musical compositions.

Rights can be obtained from the publisher or songwriter through a statutory license, which is available for any musical work that has previously been recorded and requires prior notification to the copyright holder. In addition, these licenses—known as “mechanical” licenses—also can be obtained directly from the publishers or songwriters or, in many instances, through the Harry Fox Agency, which acts on behalf of many owners of musical compositions in connection with mechanical licensing. Unlike ASCAP, BMI and SESAC, Harry Fox does not provide rights to virtually all songs that a potential licensee would want to use, but it does have rights to an extensive catalog, and thus may be a convenient first stop in trying to obtain such licenses. There are a number of private companies that will also help to clear the underlying licenses to use the musical composition.

Podcasts

Many companies are creating some form of “podcast,” i.e., an on-demand program that can be downloaded onto a digital device for later replay (and can usually be played immediately on someone’s computer as well). The use of music in a podcast will usually require specific permission for the inclusion of both the musical composition and the sound recording, just as is the case in a video or a download. Simply having public performance rights from the PROs or from SoundExchange will typically be insufficient to cover the use of music in a podcast.

Areas of controversy

While the simple distinctions outlined above may seem easy to apply, in practice, things frequently become less clear in situations involving new media and platforms, as the lines between different types of services often get blurred.

For instance, the question of when a digital use of music constitutes a public performance has been raised in a number of court cases and is still the subject of some dispute in the music industry. In the brick-and-mortar context, the definition of “public performance” is often relatively easy to apply—if a performance is to a number of people in a public setting, it is a public performance. A performance in a concert hall, or a stadium, or a bar or on the radio clearly fits within the definition. However, the application of the definition to certain digital music services is less clear. For example, when a webcasting service sends out one stream to hundreds of people, the webcaster is operating much like a radio service, so there would seem to be a public performance. But when the service is interactive, so that unique streams are served up to each customer, is that really a “public” performance? Likewise, has a “public” performance taken place when a particular song is streamed to a user at that user’s request and is not simultaneously transmitted to other users?

In a recent decision, the Copyright Royalty Judges established a royalty formula for the digital delivery of musical compositions via interactive streaming in which a baseline percentage of revenue royalty is paid for the reproduction and distribution of the musical compositions, but that amount is to be offset by public performance royalties paid to the PROs in connection with such streaming. However, the Copyright Royalty Judges did not definitively answer the question of whether, and under what circumstances, such streaming actually constitutes a public performance for which a payment to the PROs is required. Similarly, because of some ambiguity in the language of the Copyright Act, some PROs have asserted that a download of a recording involves a public performance of the underlying musical composition, and similar questions have been raised with respect to the delivery of compositions in the form of mobile phone ringtones.

When the copyright owner’s exclusive reproduction right is implicated is another area of dispute. In any digital transmission process, there are multiple “copies” of a work made in the course of the process. Typically, copies are made in the server of the transmitting entity, and on the servers through which any transmission passes as it makes its way through the Internet to the recipient. Copies are also made on the RAM of any computer, and sometimes in the hard drive as well. Some of these copies may exist for only seconds, while others may persist longer. Are any of these copies, even made in a pure, wholly noninteractive stream, “reproductions” for which compensation should be paid? The Copyright Office has wrestled with this question, and suggested that copies are being made. But the issue has also been argued in the courts, and there has been no definitive, final answer to this question.

These are but a few of the unresolved issues that remain to be decided in the digital world. Questions of liability for copyrighted works used in user-generated content supply an endless debate over who owes what duty to whom to weed out uses of copyrighted music for which no royalty has been paid. Look for these and other areas to be the subject of litigation over the coming years unless Congress steps into the process and provides clearer guidance—an unlikely prospect unless the major players in the debates can themselves reach a consensus that can be reflected in a legislative remedy.

“Fair use”

In addition to all of the licensing issues, many music users grapple with the potential application of the “fair use” doctrine to their uses of music. Under the doctrine of fair use, the use of limited portions of copyrighted material for purposes such as teaching, research, criticism, news reporting or parody is permitted without the authorization of the copyright owner. Unfortunately, the law does not clearly indicate exactly which uses constitute fair use and which do not. Rather, it provides a set of guidelines that are interpreted by the courts with reference to the facts of each situation. For that reason, it can be difficult to identify with precision the types of music uses that may be deemed fair use.

In general, when determining whether an unlicensed use of music or other copyright works should be permitted as a fair use, courts will consider four factors: (i) the nature of the use, including whether such use is for a commercial purpose or rather for an educational or nonprofit purpose; (ii) the type of copyrighted work being used (more latitude is given for the unlicensed use of purely factual material than creative material); (iii) the amount of the original work that is being used in relation to the whole (i.e., is it just a short excerpt, or a significant portion of the original); and (iv) the effect of the unlicensed use on the market for the original work. In general, in a commercial context, courts will be reluctant to permit unlicensed use of creative copyrighted works, particularly where, as in the case of music, there is an established licensing market.

Because of the fact-specific nature of the fair use analysis, for most commercial users of music it will make sense to rely on the fair use doctrine only in limited situations, where only a portion of a composition or a recording is being used, where some type of commentary on the song or recording or some other “transformative” activity (such as a parody²) is taking place, and where the use is not of a type for which licenses are generally obtained. For instance, using an excerpt of a song in a record review would probably constitute a fair use, but the use of a song in a commercial, even a funny version of the song (where the comedy comes from the commercial message—and not from making fun of underlying the song itself), probably would not be fair use.

The issues discussed above are only some of the myriad of copyright issues that come up in connection with the use of music in the digital world. Be familiar with these issues as improper use of music can lead to copyright violations, which can, in some cases, carry large monetary penalties. Enjoy your music carefully.

FOOTNOTES

1 Satellite radio and digital cable radio also pay these royalties. The Internet radio royalties, in most cases, currently cover streaming of noninteractive music streams to mobile phone platforms. While background music services do not pay a public performance royalty, the Copyright Act does require that the services themselves (as opposed to the retail establishments that may use these services) pay for the “ephemeral copies” of sound recordings made in the digital transmission process, i.e., the server and buffer copies made in the digital transmission process. Effectively, this acts much like a public performance royalty for the sound recordings used by these “business establishment services.”

2 A “parody” in a copyright context has a very specific meaning. While some might think that a re-recording of the tune of a familiar song, with different funny lyrics is a parody, the law finds a parody only where the comedic use is making fun of the original musical work—not where it has some independent comedic value. This is an important distinction, as many times advertisers have sought to use the tune of a familiar song as the basis for a commercial message—and in virtually all advertising contexts, this will not be a “fair use,” and thus permission from the copyright holder will be necessary for this derivative work.

Related Files

Disclaimer

This advisory is a publication of Davis Wright Tremaine LLP. Our purpose in publishing this advisory is to inform our clients and friends of recent legal developments. It is not intended, nor should it be used, as a substitute for specific legal advice as legal counsel may only be given in response to inquiries regarding particular situations.

Torts Twits of the Month: NY Assembly Members Ortiz, Markey, and Perry

Wed, 10 Mar 2010 23:17:04 GMT

I'm instituting a new feature on the blog this month: "Torts Twit of the Month." Each month I'll name someone who has done something exceptionally ridiculous in the field of torts be our Twit of the Month. Who knows, if it catches on, perhaps we can vote for our favorite Torts Twit of the Year!

The idea came to me as I read about the legislation featured below. To be candid, I'm not at all sure that I'll be able to keep up a Torts Twit of the Month feature. Most folks who do things that I disagree with in the field of torts are motivated by a legitimate reason. I may not agree with it, but I wouldn't go so far as to call them a twit. Biased, maybe. Wrong even. But not a twit.

But every once in a while you come across some bozo who is just soooo far out there that he just cries out for recognition of some kind. Here are their stories.

Three members of the New York Assembly make up our first recipients of the Torts Twit of the Month honors. This great triumvirate sponsors legislation to ban New York restaurants from cooking with salt.

Yes, you read that right: BAN New York restaurants from COOKING with ANY salt WHATSOEVER!

This salty troika's bill would empower the Attorney General -- who surely has better things to do -- to go to court to enjoin restaurants that violate the salt ban "without requiring proof that any person has, in fact, been injured or damaged thereby." The bill also would allow civil penalties of up to $1,000 for each instance of a restaurant's use of salt in meal preparation.

Salt, of course, is the oldest known food additive. It enhances other tastes, so that sweets taste sweeter and bitters less bitter. Salt is used in everything from eggs to soups to baked goods. It even acts as a preservative in my favorite Easter ham.

Which is what makes it so darn ridiculous that our March Torts Twits want to ban it entirely from restaurants. These elected officials are no doubt motivated by a desire to improve public health by lowering our salt intake. They may even have compelling personal stories about family experiences with health issues caused by the overconsumption of salt.

But that does not excuse the sheer hubris of this trio of local politicos in deciding for the rest of New Yorkers that they shall never have salt in a restaurant meal again. That's no way to approach a public health problem. Education? Sure. Public information campaigns? You bet. Targeted interventions by medical professionals? Absolutely.

But for the arrogance to assume the power to tell New Yorkers what we can and can't eat in our increasingly expensive restaurants, these three Assembly members have jointly earned the title of Torts Twits of the Month:

Assemblyman Felix Ortiz

District 51 (Brooklyn)

Salt Ban Sponsor

Assemblywoman Margaret M. Markey

District 30 (Queens)

Salt Ban Co-Sponsor

Assemblyman N. Nick Perry

District 58 (Brooklyn)

Salt Ban Multi-Sponsor

LifeLock To Pay $12 Million to Settle Charges That Identity Theft Prevention and Data Security Claims Were False

blogs@foleyhoag.com (Foley Hoag) — Wed, 10 Mar 2010 23:06:57 GMT

LifeLock, Inc., a self-proclaimed “industry leader in the rapidly growing field of identity theft protection” has agreed to pay $11 million to the Federal Trade Commission and $1 million to a group of 35 state attorneys general to settle charges that Lifelock falsely promoted its identity theft protection services. Lifelock publicized its services through advertisements that publicly disclosed its CEO’s Social Security number. As part of the settlement, LifeLock and its principals will be barred from making deceptive claims and required to take more stringent measures to safeguard the personal information they collect from customers.

The FTC’s complaint charged that the fraud alerts that LifeLock placed on customers’ credit files protected only against a few types of identity theft and gave them no protection against the misuse of existing accounts, the most common type of identity theft. New account fraud, the type of identity theft for which fraud alerts are most effective, comprised only about 17 percent of identity theft incidents. The FTC also alleged that Lifelock provided no protection against other types of identify theft, such as medical identity theft and employment identity theft.

The FTC’s complaint further alleged that LifeLock claimed that it would prevent unauthorized changes to customers’ address information, that it constantly monitored activity on customer credit reports, and that it would ensure that a customer always would receive a telephone call from a potential creditor before a new account was opened. Ironically, the FTC also charged that LifeLock’s own data repositories were not encrypted, and sensitive consumer information was shared inappropriately, and could have been exploited by hackers.

The FTC will use the $11 million it receives from the settlements to provide refunds to consumers. It will be sending letters to the current and former customers of LifeLock who may be eligible for refunds under the settlement.

H-1B Filings for Fiscal Year 2011 can be Filed April 1, 2010

Wed, 10 Mar 2010 22:12:48 GMT

H-1B filing season is upon us again. The most often used work visa for Professional Workers is the H-1B. The H-1B has a limited availability of approximately 58,000 per year. Despite the economy, these visas still are anticipated to be in high demand and become unavailable by the end of 2010.

Although, H-1B visas will be valid on October 1, 2010, a company may apply as early as April 1, 2010. Because of the high demand in this category, employers should file as early as possible. Indeed, the first week of April is recommended.

This H-1B quota applies to current or potential employees who are not in H-1B status, for example:

- Employees currently in F-1 student status who are working on a limited duration work authorization;

- Employees in TN, L, E or another status for whom the company may want to commence a green card process; and

- Employees currently abroad who will move to a U.S.-based role in the fall.

Employees currently working based on H-1B status are not subject to this numerical limit, and therefore generally do not need to be concerned about this timing.

Last year, the government did not meet the H-1B cap until December. We anticipate that the filing window will be much shorter this year. Contact the Global Immigration practice group at Jackson Lewis as soon as possible to start the filing process.

Recent Articles in AmLaw 200 Blogs from LexMonitor