ROB HASSETT AND ANDREW GREENBERG                         

This notice is for creative entrepreneurs, who are trying to raise funds to start or grow businesses that are in interactive media or entertainment.  If you are such a person, you may want to consider applying to be a presenter at the seventh (7th) consecutive annual Investment Day at Siege to be held on Friday, October 6.  It is part of the annual five (5) day SIEGE Conference (A/K/A the Southern Interactive Entertainment and Game Expo).   The 11th consecutive annual SIEGE Conference will be held from Tuesday, October 3 until Sunday, October 8.  Last  year we had eight teams pitch to forty   (40) investors and other people with connections to funding sources.  This year we are planning to increase the  number of  panelists/ judges  to  50.   The event is free to all participants.   There is likely to be increased interest from investors in this year’s presenters because it has become much easier for developers of interactive media to qualify for tax credits offered by the State of Georgia which can  total to as much as 30% of expenditures to develop  the product.   For a list of prior   presenters and panelists and instructions on how to file an application to be a presenter, go to  www.siegcon.net/investment-conference/.

 Rob Hassett is an attorney in Atlanta and the Co-Chair and a Co-founder of, the Investment Day at SIEGE.  For more information about Rob Hassett, see his law firm website, http://businesslawpartners.com.  

Andrew Greenberg, executive director of the Georgia Game Developers Association, has been making his living as a game developer since 1990. Best known for designing computer games and roleplaying games, he is lead developer on the upcoming Fading Suns: Noble Armada mobile and tablet game. A fellow with the Mythic Imagination Institute, Andrew is also organizer of the Southeast Interactive Entertainment and Games Expo (SIEGE). He serves on the Georgia Film, Music and Digital Entertainment Commission and chairs the DeKalb County commission of the same name.   More information about SIEGE is available at http://siegecon.net




Rob Hassett

June 12, 2017

On May 9, 2017 Georgia’s governor signed two bills into law that substantially strengthened and expanded the tax incentives available to the entertainment industry for producing works in Georgia.

We have had an incentive tax credit program for the film and television industries in Georgia since 2005.  Many other states have had similar programs.  North Carolina had one of the most favorable for the film industry and had become a movie powerhouse.  Then conservative legislators in North Carolina revoked the incentives and North Carolina’s movie industry has about disappeared.  Meanwhile, the Georgia legislature fought back against attempts to remove the incentives for film here.   As a result Georgia has become one of the top ranked centers for movie and television production in the world – by some measures, number 3 among the states after California and New York and by at least one measure, number one.

We have also had an incentive tax credit program for interactive entertainment for a few years, but it was not very helpful in incentivizing developers to start their companies here or to relocate here. It was mostly helpful in enticing companies to remain here. In its most recent form, prior to the recent amendments and additions, it required companies to spend $500,000 on payroll the year before they could start counting expenditures to which credits could apply.  The most important changes that the 2017 legislature made to the incentives for interactive entertainment were that the requirement of meeting a threshold in payroll the year before expenditures could be counted in connection with the calculation of incentives was eliminated and the threshold was reduced to $250,000 and applies only to payroll for the first year for which the credits are claimed.

The legislature also added a new incentive tax credit statute for postproduction activities, which greatly expanded the availability of the incentives available under the film and television credit, and added a new statute that provides incentives for live touring productions and music recordings.

The amendments and additions will be effective beginning January 1, 2018.  If the amount you spend in Georgia for any one entertainment project your company may work on may exceed a threshold of $100,000 over one tax year, then you may have a possibility of benefiting from the credits and should talk to an attorney or accountant with an understanding of how they work. In some situations it’s advisable to apply for any credits effective the first business day of the new year. You may not file earlier and you would not want to file later in those situations. At the time you file, you will need to have spent the time necessary to determine what you are required to file and how to answer many questions. Starting more than three months before  the first business day of 2018, which will be Tuesday, January 2018, is recommended.

Bear Stearns’ Collapse Was Inevitable

First Published in the Fulton County Daily Report in May of 2010

by Rob Hassett

Congress should enact legislation that discourages executives of financial firms and funds that are not regulated by the FDIC or other agencies from incurring unacceptable risk. Otherwise those unregulated financial firms are going to repeat the behavior that resulted in the collapse of Bear Stearns, Lehman Brothers and others.

During the week of May 3, 2010 James Cayne, the former chairman and chief executive officer of Bear Stearns, was quoted as saying in testimony before the congressionally chartered Financial Crisis Inquiry Commission:

[Bear Stearns’ collapse] was due to overwhelming market forces that Bear Stearns [could not survive].

Bear Stearns’ collapse was not only unavoidable but was inevitable. Bear Stearns’ business model, which is typical of financial firms and hedge funds, was to borrow many times the value of its equity mostly in overnight markets at low short term interest rates and place the money in long term investments at higher rates. I have seen reports that its ratio of assets to equity was over 35 to 1 before the collapse began. As a result of carrying so much leverage, its profits were immense. For example, with that ratio, if its investments paid 1% more than what it paid to borrow money, as a result of the high leverage, its profit on its equity investments, before compensation to employees, would equal about 35% per year. Each year the high level employees would receive very high compensation based on the huge profits.

Everything worked well so long as investments paid off at least marginally better than what was paid to the overnight lenders and the overnight lenders were comfortable renewing the loans. Of course even wise investments are not always successful and with such high leverage it was inevitable that at some point something would go wrong and the overnight lenders would refuse to renew their loans causing Bear Stearns to collapse.

Other Wall Street firms like Goldman Sachs also had outrageous asset to equity ratios, just not anywhere close to as high as Bear Stearns. Goldman Sachs survived because it was like two hunters being chased by a bear. Neither hunter has to run faster than the bear just faster than the other hunter. Likewise, Goldman Sachs just had to survive long enough for the government to be sufficiently shaken up by the failure of other firms to bail out the firms that remained.

The Wall Street firms and hedge funds that are not regulated are still operating under the same business model that resulted in the meltdown, although, for now, less aggressively. If things continue as they currently are, the incentive to increase leverage will inevitably result in another collapse, probably worst than the last one. To avoid another collapse, the incentives should be changed.

I suggest that Congress consider one or more of the following: (1) require any financial firm or hedge fund above a certain size, not already regulated, with an asset to equity ratio above a set number for more than thirty (30) consecutive days to pay a percentage of its annual profits, plus compensation above a set amount per employee, into an insurance fund to protect other parties in the event of a default, (2) provide that executives in any such firm or fund, which reaches an asset to equity ratio of greater than a set number for more than thirty (30) consecutive days to be personally liable to the extent of their compensation above a minimum amount for that year.

Taking steps like the ones suggested would create incentives for financial firms and funds to avoid taking on excessive debt as compared to their equity and thereby help avoid another financial crisis.

Rob Hassett is an attorney in technology, entertainment and corporate law with the Atlanta law firm of Casey Gilson P.C.

The Attorney-Client Privilege in the Corporate Setting


Originally published in Lawyers’ Professionalism and Ethics, 2005 Fall Newsletter

By:   Cynthia Tolbert

Of Counsel with Casey Gilson P.C., Atlanta, Georgia




Ramifications of the disclosure of privileged materials in compliance with the governmental investigation of a corporate client

Considered near sacred in context since the sixteenth century, the attorney-client privilege has been riddled with assaults by Federal legislation, the Department of Justice, and court action alike over the past decade.  The Sarbanes-Oxley Act of 2002; policy changes in the Department of Justice; and changes in various compliance procedures have had particular impact on the attorney-client privilege in corporate settings.  Attorneys representing corporate clients that are undergoing investigations by governmental agencies must assess, often before the filing of a civil or criminal action against their client, what must be produced in compliance with the agency’s investigation, and what, pursuant to the attorney-client privilege, may be withheld. This article will explore the attorney-client privilege in the corporate setting and the attorney’s duty, if any, to disclose privileged materials in compliance with a governmental investigation, particularly in an effort to avoid criminal action.


 The attorney-client privilege found its origin in Elizabethan England, initially as a protection and consideration for the “oath and honor of the attorney,” instead of a protection afforded the client. See Radiant Burners v. American Gas Association, 320 F.2d 314, 318 (7th Cir. 1963) (citing  8 Wigmore, Evidence  § 2990 (McNaughton Rev. 1961); Kelway v. Kelway, 21 Eng. Rep. 47 (Ch. 1580)).  A century later, courts recognized that the client was entitled to similar protection, and by the 18th century the privilege became substantially recognized as that of the client.  Id.  In the early 1700’s, courts recognized that privileged communications were made, “…first, during any litigation; next, in contemplation of litigation; next, during a controversy but not yet looking to litigation; and lastly, in any consultation for legal advice, wholly irrespective of litigation or even of controversy.”  Id.  The parameters of the modern privilege were set out in United States v. United Shoe Machinery Corp., 89 F. Supp. 357 (D. Mass 1950.)

The privilege applies only if (1) the asserted holder of the privilege is or sought to become a client; (2) the person to whom the communication was made (a) is a member of the bar of a court, or his subordinate and (b) in connection with this communication is acting as a lawyer; (3) the communication relates to a fact of which the attorney was informed (a) by his client (b) without the presence of strangers (c) for the purpose of securing primarily either (i) an opinion on law or (ii) legal services or (iii) assistance in some legal proceeding, and not (d) for the purpose of committing a crime or tort; and (4) the privilege has been (a) claimed and (b) not waived by the client.

Id., at 358-59.  Today, courts generally recognize that the attorney-client privilege is established when a communication is made between privileged persons, in confidence, for the purpose of Seeking, obtaining, or providing legal assistance to the client. Restatement (Third) of the law governing lawyers § 118 (1988.)  The policy behind the privilege is to allow the client an opportunity to fully divulge all information to his attorney so that the attorney is able to give informed legal advice.  Upjohn Co. v. United States, 449 U. S. 383, 389-392 (1981).  Without that protection, necessary information may be withheld from the attorney, and subsequent advice may be given based on half-truths or conjecture.  The privilege, therefore, evolved from common law and was subsequently codified in the Federal Rules of Evidence, as well as the Federal Rules of Civil Procedure and related state evidentiary and procedural rules.  See Fed. R. Evid. 501; Fed. R. Civ. Pro. 26 (b) (3).

Federal courts have long acknowledged the attorney-client privilege, extending the privilege to the corporate client as early as 1915.  See Radiant Burners, Inc. at 319 (citing United States v. Louisville & Nashville R.R., 236 U.S. 318, 336 (1915)).  In the corporate setting, the attorney-client privilege is unique in that the privilege attaches to the corporate entity, typically, and not to individual employees who communicate with the attorney.   Similarly, the decision as to whether to waive the attorney-client privilege belongs to the corporation, not its employees.  Obviously, a corporation may only act through its agents and any communication with an attorney on behalf of the corporation must be made by an individual.  Courts initially struggled with the application of the attorney-client privilege to certain individuals and the fact that the corporation itself as an “artificial creature of the law” could not communicate with its counsel.  See Upjohn Co., at 389.  Prior to the decision in Upjohn, Federal courts were split as to whether the privilege extended only to officers of the corporation, or whether it also extended to other employees of the corporation who had communicated with corporate attorneys.  See Harper & Row Pubs., Inc., v. Decker, 423 F.2d 487 (7th Cir. 1970).  Competing tests evolved for purposes of determining how and when to invoke the corporate attorney-client privilege regarding statements of corporate employees.  These tests were identified as the “control group test” and the “subject matter test.”  See Harper & Row Pubs., Inc., supra; General Electric Co. v. Kirkpatrick, 312 F. 2d (3rd Cir. 1962).  The “control group test” recognizes that the attorney-client privilege extends to the statements of corporate employees who are in a position to control or take a substantial part in a corporate decision.  See Harper & Row Pubs., Inc., at 490-491.  The “subject matter test” recognizes that an employee’s statement is that of the corporation when the employee makes the communication at the direction of his superiors and where the subject matter upon which advice was given was sought by the corporation.  See General Electric Co. v. Kirkpatrick, supra.  Both tests were analyzed by the Supreme Court in Upjohn Co., which ruled in favor of the more broadly applied  “subject matter test,” stating:

The control group test … frustrates the very purpose of the privilege by discouraging the communication of relevant information by employees of the client to attorneys Seeking to render legal advice to the client corporation.  The attorney’s advice will also frequently be more significant to noncontrol group members than to those who officially sanction the advice, and the control group test makes it more difficult to convey full and frank legal advice to the employees who will put into effect the client corporation’s policy.

Upjohn, at 392.

The Upjohn case arose out of the company’s internal investigation into “kickback” payments made by certain employees to foreign officials for the purpose of securing government business.  The payments exposed the company to increased tax liability, yet the company brought the issue to the attention of the Security and Exchange Commission (“SEC”) as well as the Internal Revenue Service (“IRS”).  In response, the IRS issued a subpoena seeking documents related to the internal investigation, including forms completed by company employees which had been submitted to its in-house counsel.  Upjohn refused to produce the forms based on the attorney-client privilege, and the IRS sought to enforce the subpoena.  The Court ruled that the communications at issue were protected because (1) they were made to in-house counsel at the direction of corporate superiors; (2) they concerned matters within the scope of the employees’ in-house duties; (3) the information was not available from upper-level management; and (4) the employees were aware that they were being questioned so that the corporation could receive legal advice.  Upjohn at 394-396; 397-398 (recognizing strong public policy underlying attorney work product privilege).  Pursuant to the “subject matter test” therefore, the attorney-client privilege is preserved if the criteria detailed in Upjohn is satisfied, which serves to protect communications between corporate attorneys and corporate employees during fact finding investigations.  Upjohn is the landmark case on the attorney-client privilege in the corporate context.  See Leslie Warton, Hazards for Attorney-Client Relationship, New York Law Journal, corporate counsel, November 18, 2002.  State law typically governs these issues, however, and the more rigorous “control group test” is followed in several jurisdictions.  See National Tank Co. v. Brotherton, 851 S.W. 2d 193 (Tex. 1993).

Through the next decade the Supreme Court vigorously defended the attorney-client privilege against government encroachment in the corporate setting.  See Swidler v. Berlin,  524 U. S. 399, 403 (1998) (public policy of attorney-client privilege was greater than the public policy of uncovering alleged wrongdoing of president); United States v. Zolin, 491 U. S. 554, 572 (1989) (to invoke crime-fraud exception to attorney-client communications challenging party must present sufficient evidence to demonstrate that the exception is warranted).  But in 1999, vast policy changes in the Department of Justice (DOJ) and in 2002, the reporting requirements of § 307 of the Sarbanes-Oxley Act, served to substantially modify the application of this privilege to the corporate client.  Recent changes, as late as December of 2006, substantially curtailed the more controversial DOJ policy changes affecting the attorney-client privilege.  But the recent changes do not outlaw waiver demands; some threat is still directed toward the attorney-corporate client privilege during a governmental investigation.


Before 1999, companies and their corporate counsel commonly conducted internal investigations regarding suspected corporate infractions without concern of waiving or forfeiting the attorney-client or attorney-work product privilege, particularly when guidelines established by Upjohn, supra were followed.  See Lawrence Finder, “Internal Investigations: Consequences of the Federal Deputation of Corporate America,” South Texas Law Review, Vol. 45: 111.  At that time, problems which merited inquiry would often be managed by an internal review, generally headed by outside counsel to better preserve the attorney-client and work product privileges.  Id.  In 1991, the Department of Justice promulgated guidelines for “Sentencing of Organizations,” which emphasized corporate cooperation during federal investigations to ensure leniency.  Id. at 113-14, citing U.S. Sentencing Guidelines Manual ch. 8 (2002).  At that time, the goal of most companies undergoing a federal investigation was to cooperate by disclosing” … just enough, but not too much” in an effort to avoid a waiver of the privilege and simultaneously take advantage of the promise of leniency.  Id.  These guidelines rewarded organizations with reduced penalties upon disclosure and further served to encourage federal prosecutors to request waivers of privilege and the production of work product underlying the internal investigations of corporations.  Id.

In 1999, prosecutors from the Department of Justice became more aggressive in their inquiries and investigations of corporations following the publication of a memorandum penned by then-Deputy Attorney General Eric Holder, called the “Holder Memorandum.”  Id.  This memorandum, often referred to as the death knell for attorney-client privilege, identified eight factors prosecutors were to consider in their analysis of whether to file criminal charges against a corporation.  Id. (citing David M. Zorrow & Keith D. Krakur, On the Brink of a Brave New World: The Death of Privilege in Corporate Criminal Investigations, 37 Am. Crim. L. Rev. 147, 147-48 (2000)).  The most notable and controversial of the eight factors required the prosecuting attorney to analyze:

“[t]he corporation’s timely and voluntary disclosure of wrongdoing and its willingness to cooperate in the investigation of its agents, including, if necessary, the waiver of corporate attorney-client and work product protection.”

Id. at 119.

In 2002, Congress enacted the Sarbanes-Oxley Act of 2002, Pub. L. No. 107-204, 116 Stat. 746, to redress corporate fraud.  This Act required the Securities and Exchange Commission to promulgate rules setting out “minimum standards of professional conduct” for attorneys appearing and practicing before the commission.  Warton, Leslie, Hazards for Attorney-Client Relationship, New York Law Journal, corporate counsel, November 18, 2002.  Specifically, § 307 of the Act required that rules be issued:

1.         requiring an attorney to report evidence of material violation of securities law or breach of fiduciary duty or similar violation by the company or any agent thereof, to the chief legal counsel or the chief executive officer of the company…; and

2.         if the counsel of officer does not appropriately respond to the evidence…requiring the attorney to report the evidence to the audit committee.

Id. (citing Sarbanes-Oxley Act, supra).   The Act thus requires attorneys who suspect corporate infractions of law or fraud to report what they perceive to be “material violations” of federal law to the corporation’s chief legal officer or chief executive officer.  Id.  See also Report of Investigation Pursuant to Section 21 (a) of the Securities Exchange Act of 1934 and Commission Statement on the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Re. No. 34-44969 (October 23, 2001), available at http://www.sec.gov.litigation/investreport/34-44969.htm  (Seaboard report: states that corporations can demonstrate cooperation by waiving privilege).   Those officials, in turn, are required to report back to the attorney on all steps taken to correct the suspected corporate abuse or fraud.  If the attorney is dissatisfied, he must then report “up the ladder,” to the corporation’s board of directors or to a designated committee.  Max R. Crane, and Peter G. Verniero, Attorney Client Privilege Under Assault, The Metropolitan Corporate Counsel, Vol. 13, No. 1, January, 2005.  Although under the rules the attorney’s reporting duty ends with the report he makes to the corporation’s board of directors or its appointed committee, the rules also provide that the attorney may report infractions to the SEC under certain situations.  Id.  If the attorney believes that investors’ interests are in jeopardy, the attorney may reveal confidential and privileged information to the SEC, without the company’s consent.  Id.  The attorney’s typical supportive position as an advocate for the corporate client is thus modified by § 307 of the Sarbanes-Oxley Act to that of corporate policeman.  Id.  The policing efforts encouraged by the Act also work to transform the attorney from advocate to whistleblower, which in turn, destroys the attorney-client privilege as applied and raises serious ethical issues for the reporting attorney.

Historically, the attorney-client privilege has not been completely impermeable.  One well recognized exception to the privilege is the “crime-fraud” exception.  See United States v. Zolin, supra.  Under this exception the privilege does not apply to attorney-client communications if the client was engaged in a crime or fraud at the time he sought an attorney’s advice, or if the advice was sought “in furtherance of” the crime or fraud.  Id.  See also Hazards for Attorney-Client Relationship, supra.  Attorneys are duty bound not to disclose a client’s past criminal activity, although future crimes are not protected by the privilege.  United States v. Cleveland, 1997 U.S. Dist. LEXIS 5895, April 28, 1997 (citing U. S. v. Zolin, supra).  In contrast, under the provisions of § 307 of the Sarbanes-Oxley Act, an attorney may report a client’s past acts.  Further, § 307 provides a de facto exception to the privilege, plausibly, before corporate crime or fraud is conceived, committed, or discovered.  See Hazards for Attorney-Client Relationship, supra; Report of Investigation Pursuant to Section 21 (a) of the Securities Exchange Act of 1934 and Commission Statement of the Relationship of Cooperation to Agency Enforcement Decisions, Exchange Act Rel. No. 34-44969 (Oct. 23, 2001), available at http://www.sec.gov./litigatoin/investreport/34-44969.htm.

Recently, courts have applied the crime-fraud exception to the attorney-client privilege in cases where no crime or fraud was committed, but where there was evidence of intent to commit a crime or fraud.  Id.  In Grassmueck v. Ogden Murphy Wallace, P.L.L.C., the court held that a prima facie showing that the attorney-client communications at issue were in furtherance of criminality was not required for the exception to apply if the Plaintiffs could show that the in camera review of the evidence “…may lead to evidence that the exception applies.”  Grassmueck v. Ogden Murphy Wallace, P.L.L.C., 213 F.R.D. 567,572-73 (W.D. Wash. 2003) (citing In re Grand Jury Subpoena 92-1, 31 F.3d 826, 830 (9th Cir. 1994)).  The Grassmueck court further noted that the crime-fraud exception may apply to negate the privilege “…even though the attorney is unaware of the crime and takes no affirmative stop that actually furthers it.”   Id. (citing In re Grand Jury Proceedings (the Corporation), 87 F.3d 377, 380 (9th Cir. 1996)).  Under the more relaxed standards cited above, prosecutors and plaintiff’s counsel could easily argue that the attorney-client privilege is breached for virtually any § 307 communication, even where counsel’s initial suspicions of fraud are unfounded.    See Hazards for Attorney-Client Relationship, supra.

Notably, § 307 provides no guidelines for an objective analysis of a reportable infraction and does not specifically provide for the attorney-client privilege regarding § 307 communications.  Ultimately, the attorney’s own communications with corporate officials, which are mandated by the Act, may be used to prosecute the corporate client.  Id.  Ironically, in a situation where an internal investigation is prompted by the corporation’s attorney, under the Sarbanes-Oxley reporting mandates, the corporation may be charged with the crime that the underlying internal investigation took place to prevent or correct.  Id.  And the attorney’s own communications may be used to prove certain elements of the “crime.”  Id.

In 2003, following the enactment of the Sarbanes-Oxley Act, the Department of Justice issued yet another memorandum.  The memorandum, which was entitled “Principles of Federal Prosecution of Business Organizations” (“Thompson Memorandum” after Holder’s successor Deputy Attorney General, Larry D. Thompson), served to impose more strident requirements for a corporation’s cooperation during a governmental investigation.  See Finder, Internal Investigations: Consequences of the Federal Deputation of Corporate America, at 115.  This memorandum directed prosecutors who encountered companies which impeded disclosure to “weigh in favor of a corporate prosecution.”  Id.  Specifically, the Thompson memorandum stated:

We will not tolerate conduct that ultimately obstructs our investigations, whether veiled or overt.  We are particularly watchful for: (1) overly broad assertions of corporate represent-action of employees; (2) inappropriate directions to employees to not volunteer information or decline interviews; and (3) presentations or assertions that contain misleading information or omissions.

Id. (citing Remarks of Deputy Attorney General Larry D. Thompson, Ninth Circuit Judicial Conference, http://www.usdoj.gov/dag/speech/2003/062503hawaii9thcircuit.htm (June 25, 2003)).  Although disclosure is strongly encouraged, the Thompson Memorandum further stated that “…a corporation’s offer of cooperation does not automatically entitle it to immunity from prosecution.”  Id. (citing Thompson Memorandum, supra, note 12, § II. A).

In response to great public and private outcry against the Thompson Memorandum, current Deputy Attorney General Paul McNulty issued his own guidelines on December 12, 2006, which curtailed some of the more egregious sections of his predecessor’s memorandum.  See Memorandum from Paul J. McNulty, Deputy Attorney General, to Heads of Department Components and United States Attorneys (Dec. 12, 2006), available at http://www.usdoj.gov/dag/speech/2006/mcnulty_memo.pdf.    Although the attorney-client privilege is not completely protected, the McNulty Memorandum requires prosecutors to obtain prior supervisory approval before making a demand for a waiver of the attorney-client privilege.  Specifically, the McNulty Memorandum states:

Waiver of attorney-client and work product protections is not a prerequisite to a finding that a company has cooperated in the government’s investigation.  However, a company’s disclosure of privileged information may permit the government to expedite its investigation.  In addition, the disclosure of privileged information may be critical in enabling the government to evaluate the accuracy and completeness of the company’s voluntary disclosure.

Prosecutors may only request waiver of attorney-client or work product protections when there is a legitimate need for the privileged information to fulfill their law enforcement obligations.   A legitimate need for the information is not established by concluding it is merely desirable or convenient to obtain privileged information.  The test requires a careful balancing of important policy considerations underlying the attorney-client privilege and work product doctrine and the law enforcement needs of the government’s investigation.

Whether there is a legitimate need depends upon:

(1)       the likelihood and degree to which the privileged information will benefit the government’s investigation;

(2)       whether the information sought can be obtained in a timely and complete fashion by using alternative means that do not require waiver;

(3)       the completeness of the voluntary disclosure already provided; and

(4)       the collateral consequences to a corporation of a waiver.

Id.  The McNulty Memorandum also imposes a “step-by-step” approach to requesting information, first requiring purely factual information, which may not be privileged, which is related to the underlying alleged misconduct.  This step is identified as a “Category I” request.  Id.  Before requesting that a corporation waive the attorney-client or work product protections for Category I information, prosecutors must first obtain written authorization from the United States Attorney, who must in turn consult with the Assistant Attorney General for the Criminal Division before granting or denying the request.  Id.  The prosecutor Seeking the waiver must identify the basis for and scope of the request.  Id.  Significantly, a corporation’s response to the government’s Category I request for waiver of privilege may be considered in determining whether a corporation has cooperated in the government’s investigation.  Id.

If the purely factual information provides an “incomplete basis to conduct a thorough investigation,” prosecutors may then request that the corporation provide attorney-client communications or non-factual attorney work product, which is identified as “Category II” information.  Id.  Prosecutors are cautioned that Category II information should only be sought in “rare circumstances.”  Id.  It should be noted that the McNulty Memorandum does not identify the “rare circumstances” in which this information may be sought.  However, prosecutors are required to follow similar steps for authority to proceed with this avenue of  investigation as required for Category I information, but, in addition, all requests for Category II information must be made in writing, setting forth the legitimate need for the information and identifying the scope of the waiver sought.  Id.  Such requests must also be maintained in the files of the Deputy Attorney General.  Id.  However, the memorandum notes that requests for Category II information do not include:

(1)       legal advice contemporaneous to the underlying misconduct when the corporation or one of its employees is relying upon an advice-of-counsel defense; and

(2)       legal advice or communications in furtherance of a crime or fraud, coming within the crime-fraud exception to the attorney-client privilege.

Id.  The memorandum directs prosecutors not to take into account a corporation’s decision not to provide Category II information, which distinctly differs from the provisions of the Thompson Memorandum.  The McNulty memorandum may serve to curtail some waiver demands from governmental prosecutors and further ensures uniformity in the government’s approach to the attorney-client privilege waiver during investigations.  Id.  See also Press Release, Department of Justice, U.S. Deputy Attorney General Paul J. McNulty Revises Charging Guidelines for Prosecuting Corporate Fraud, December 12, 2006, www.usdojgov.

Separately, Senate Judiciary Chairman, Arlen Specter (R-Pa), on December 7, 2006, proposed legislation that would completely bar prosecutors from forcing companies to waive their attorney-client privilege to avoid criminal charges.  See Press Release of Senate Judiciary Committee, and Carrie Johnson, “Shift in Corporate Prosecution Ahead,” Washington Post, November 30, 2006 www.washingtonpost.com/wp-dyn/content/article/2006/11/29/AR2006112901316  pf. The proposed legislation preserves the corporation’s ability to offer internal investigation materials to federal prosecutors, but only if such an offer is voluntary and unsolicited by prosecutors.


The “post-Enron” world is fraught with concerns regarding the impact corporate fraud has caused investors and retirees alike.  The reporting rules and guidelines promulgated by the Department of Justice and the Securities and Exchange Commission were developed, in part, to prevent the devastation and collapse of major corporations and individual retirement accounts.  As noted above, a waiver of the attorney-client privilege is encouraged in certain circumstances by both agencies.  Prosecutors may argue that the DOJ and SEC disclosure policies serve to prevent an employee from hiding his criminal activities behind the company‘s protective shield.  They may also argue in support of their disclosure policies because these policies may act to prevent the errant and/or criminal actions of an individual employee, which could, in turn, expose an entire company to criminal sanction.  This, as in the case of Arthur Andersen, may lead to the corporation’s demise.  See Internal Investigations, at 121; Martin, James and Calvert, Winston, The Threat of Criminal Prosecution To In-House Counsel, The Tide Has Changed But It Is Not a Tsunami, ABA Section of Litigation Committee on Corporate Counsel, February 16-19, 2006.  But the voluntary waiver of the attorney-client privilege in the face of a governmental investigation may also have far-reaching and devastating implications for the company and individual employees alike.

A.        The Lessons of McKesson

On January 12, 1999, McKesson, a large publicly traded, health care supply management company and HBOC, a publicly traded, health care information management software company, merged and HBOC became a wholly owned subsidiary of McKesson.  McKesson Corporation v. Green, 266 Ga. App. 157, 597 S. E. 2d 447 (2004) (cert. granted 279 Ga. 95, 610 S.E. 54 (2005)).  Shortly after the merger, McKesson acknowledged that HBOC had improperly recorded revenue before the merger, which had artificially inflated HBOC’s value.  Id. at 158.  McKesson issued a revised earnings statement shortly following its discovery and publicly announced the overstatement, which caused the value of its stock to plummet.  Id.  In May of that year, McKesson hired a law firm and an accounting firm to conduct an internal investigation to determine the nature and extent of HBOC’s accounting improprieties.  Id.  In keeping with their investigation, attorneys and accountants conducted extensive interviews of HBOC and McKesson officials and reviewed documents and other related materials from each company.  Id.  Advisory memoranda were prepared following this investigation and review of materials.  Id.

Within days of McKesson’s public announcement, the SEC began an investigation into McKesson, as well as HBOC, to determine whether either of the corporations had filed materially false or misleading financial statements.  Id. at 159.  During these investigations, McKesson voluntarily provided the audit documents to the SEC and United States Attorneys Office (USAO), after securing a confidentiality agreement which provided that the production did not waive the attorney-client and work product protection.  Id. at 159 (citing O.C.G.A. § 9-11-26 (b)(3)).  In the interim, various McKesson shareholders filed securities fraud law suits for the devaluation of their stock.  Id. (citing McKesson HBOC, Inc. v. Adler, 254 Ga. App. 500, n. 1, 562 S.E. 2d 809 (2002)) (noting that more than 80 lawsuits arising out of the merger had been filed nationwide).  During this litigation, the shareholders moved the trial court to compel McKesson to produce the audit documents that the corporation had provided to the SEC and USAO.  Id. at 159.  The trial court ruled that although the documents at issue were work product and should be protected from discovery, the fact that McKesson voluntarily provided audit documents to an adversary worked to waive the work product protection.  Id. at 160 (citing McKesson HBOC, Inc., v. Adler, 254 Ga. App. at 501) (protection is not waived by voluntary disclosure to a third party, unless the third party was an adversary); United States v. Bergonzi, 216 FRD at 496-498 (McKesson and government were adversaries and did not share a “true common goal”); McKesson HBOC, Inc. v. Superior Court of San Francisco County, 115 Cal. App. 4th 1229, 1240, 9 Cal. Rptr. 3d 812 (2004) (finding that McKesson and the government were not aligned in any litigation and did not share the same stake or have the same goal); Saito v. McKesson HBOC, Inc., 2002 Del. Ch. LEXIS 125, at 6-20 (a shareholder suit in which the trial court found that McKesson did not share a common interest with the SEC at the time the documents were disclosed, that the SEC was a “foe” of the corporation, and that McKesson was aware that an adversarial relationship existed before disclosing its work product)).  The trial court further ruled that the confidentiality agreement between McKesson and the SEC did not prevent a waiver of the protection.  Id. at 160 (citing United States v. Bergonzi, 261 FRD at 496-497 (II) (A) (2) (b) (1), n. 10) (finding that the confidentiality agreements between McKesson and the government were not unconditional, gave the government the power to share the documents as “it saw fit,” and therefore did not prevent a waiver of the work product protection)).  In addition, the shareholders asserted that McKesson disclosed the audit documents to gain leniency from the SEC, not because there was a shared interest.  Id. (citing In re Steinhardt Partner, 9 F3d at 235-236 (noting that the SEC has continued to receive voluntary cooperation from subjects of investigations even absent the promise of confidentiality, because such cooperation benefits the subject by providing the possibility of leniency and limiting the duration and parameters of the investigation and resulting litigation); Westinghouse Elec. Corp. v. Republic of Philippines, 951 F2d 1414, 1429 (3rd Cir. 1992) (finding that when a party discloses protected materials to a government adversary in order to forestall prosecution or obtain lenient treatment, such disclosure waives the work product protection because both objectives are “foreign” to the rationale behind the work product doctrine)).  Interestingly, in an amicus brief to the trial court in McKesson v. Greene, the SEC admitted that it “often rewards cooperation [by the subject of the investigation] with lenient treatment.”  Id. at 164 (citing In re Subpoenas Duces Tecum, 738 F2d 1367, 1369 (D.C. Cir. 1984) (recognizing that the SEC’s ‘voluntary disclosure program…promises wrongdoers more lenient treatment and the chance to avoid formal investigation and litigation in return for thorough self-investigation and complete disclosure of the results to the SEC’)).  The appellate court in McKesson v. Green ruled that the trial court did not abuse its discretion in granting the shareholder’s motion to compel the discovery of the McKesson audit documents which had been submitted “in confidence” to the SEC.  Id. at 166.  See also McKesson HBOC, Inc. v. Superior Court, _____Cal. App. 4th _____, 2004 WL 318618 (Feb. 20, 2004) (disclosure of the audit documents to the government was not required for the attorneys to provide legal advice to McKesson, and McKesson was ordered to produce the documents to Merrill Lynch).

McKesson was obligated to report its discovery of HBOC’s misrepresented valuation, which acted to not only devalue its stock but also to trigger an internal audit and investigations by the SEC and the USAO.  As noted above, the government pressured McKesson into disclosing materials and memoranda from the McKesson internal audit to the SEC with the understanding that the company would be given a more lenient treatment if faced with criminal action.  Even though McKesson entered into a confidentiality agreement with the government, courts ruled that the company breached the attorney-client and work product privileges by disclosing the contents of their audit to an adversary.  The internal audit documents were allowed into evidence in multiple shareholder lawsuits throughout the country and led to criminal charges against the company’s chief financial officer.

On March 30, 2004, approximately five years following the disclosure of internal audit documents to the SEC, the U.S. Department of Justice issued a press release detailing what was to become one of the largest securities fraud investigations of an individual in the country.  Press Release, United States Attorney for the Northern District of California, SEC, U.S. Attorney’s Office and FBI Bring Securities Fraud Charges Against Former McKesson Chief Financial Officer Richard Hawkins (April 1, 2004).  The subject of the press release was the criminal and civil securities fraud charges leveled against Richard Hawkins, the former Chief Financial Officer for McKesson.  Hawkins was charged with conspiracy, securities fraud and lying to the company’s auditors.  U. S. v. Hawkins, 2005 U.S. Dist. LEXIS 9839, 33 Media L. Rep. 1570 (U.S.D.C.N.D. Calif. 2005).  McKesson intervened in the Hawkins litigation, asserting that the results of the internal audit conducted in 1999 were confidential attorney-client communications as well as attorney work product.  Id.  McKesson further contended that the contents of the audit and memoranda should be sealed and kept from public purview and access.  Id.  The Hawkins court held that McKesson did not prove that its interests overcame the public’s right to access of the audit documents.  Id.  Furthermore, during the course of Hawkins’ criminal trial, statements made by witnesses during the internal investigation became relevant to the government’s and the defense’s case, which required testimony from McKesson’s outside lawyers regarding their earlier audit and investigation of McKesson/HBO, Co.  See News Releases, Orrick, San Francisco, Former McKesson CFO Richard Hawkins Not Guilty on All Counts of Securities Fraud, (July 11, 2005); Orrick, Update: McKesson Acquittal Offers Insight Into Federal Prosecutions of Corporate Defendants.  Hawkins was acquitted following a six week bench trial.  Id.

As noted above, McKesson’s decision to “voluntarily share” the contents of its internal audit with the SEC waived the protections of the attorney-client privilege and the attorney work product doctrine.  It is also apparent that the audit documents, produced to the SEC by McKesson’s outside counsel following their investigation, were used to indict Hawkins and several of HBO’s corporate officers.  Even though the disclosures were apparently made to ensure governmental leniency for McKesson, the confidentiality agreement entered between McKesson and the government was invalidated and did not serve to protect any interests, including the interests of the corporation, McKesson or the interests of the corporate officers, including Hawkins.  The lesson of the McKesson dilemma may be to avoid the voluntary disclosure of internal audits and privileged documents to governmental agencies, even when leniency is promised.  Today, the McKesson internal audit documents would likely fall into Category I and Category II communications under the McNulty Memorandum.  Therefore, today, a refusal to produce fact-based, Category I information from an internal audit may be used by the USAO to assess corporate cooperation, or, more specifically, corporate lack of cooperation.  But, as noted above, the refusal  to produce Category II information, which is strictly privileged, would not, as per the McNulty Memorandum, be used against McKesson today when assessing corporate cooperation.

B.        To Produce or Not Produce; the Attorney’s Dilemma

Closely following the wake of the Enron scandal, in March of 2002, the Department of Justice brought an obstruction of justice charge against the Arthur Andersen firm in its entirety.  See The Threat of Criminal Prosecution To In-House Counsel, supra.  Arthur Andersen was charged with violating 18 U.S.C. § 1512 (b)(2)(A), which makes it a crime to “corruptly persuad[e] another person” to withhold or alter documents for use in an official proceeding.   Id.  See also Arthur Andersen v. United States, 125 S. Ct. 2129, 2136 (2005).  None of the individuals who actually caused the destruction of volumes of documents concerning Enron were indicted.  Id.  In the Arthur Andersen case, Nancy Temple, who was serving as in-house counsel to the firm, allegedly in anticipation of an SEC investigation, gave instructions for Arthur Andersen employees to “follow company document retention policy,” which called for the destruction of documents after a certain period of time.  Id.  This action led to the indictment of the company.  Id.

The guilty verdict entered against Arthur Andersen led to the destruction of the entire company, which once employed thousands.  The Threat of Criminal Prosecution To In-House Counsel, supra.  The company’s downfall became the bane of the Department of Justice, which was severely criticized for its decision to bring criminal charges against the firm instead of the responsible individuals.  Id.  Following the collapse of Arthur Andersen, certain U.S. Attorneys and a U.S. Deputy Attorney General asserted that the focus of future corporate fraud prosecutions would be on the corporate representatives responsible for the criminal conduct, including in-house counsel.  Id. (citing Lanny A. Brever & Christopher J. Burke, Lawyers, Accountants and Other Capital Market “Gatekeepers” Come Under Prosecutors’ Scrutiny, Wash. Legal found: Legal Backgrounder, Aug. 22, 2003, available at http://www.wlf.org/upload/082203LBBreuer.pdf.).  This initiative undoubtedly lead to the prosecution of Richard Hawkins, the McKesson CFO.  See supra.

In 2003, the Department of Justice announced its intention to investigate the role of in-house counsel in corporate fraud cases.  Id.  In its First Year Report to the President by the Corporate Task Force, the Task Force stated:

Task Force members have recognized that many of the corporate fraud schemes under investigation could not have occurred without various professionals, including attorneys, accountants and financial advisors, sometimes facilitating, aiding and abetting the conduct being investigated.  Therefore, the conduct of professionals has been a focus of the Task Force.

Id. (citing, Press Release, United States Attorney for the Northern District of California, SEC, U.S. Attorney’s Office and FBI Bring Fraud and Conspiracy Charges Against Former McKesson HBOC Chairman Charles McCall; U.S. Attorney’s Office and FBI also Indict Former HBOC General Counsel (June 4, 2003), available at http://www.usdoj.gov.sazo/can/press/htm1/2003_06_04 mekesson.htm.1).  By the end of 2005, 14 in-house counsel had been indicted with criminal charges, including counsel for Rite Aid Corp.; Tollman-Hundley Hotels; Tyco International; HBO & CO.; U.S. Wireless, Inc.; KPMG; and Hollinger, Inc.  Id.

In May of 2005, the U.S. Supreme Court overturned the conviction of Arthur Andersen, holding that jury instructions given in the case were “flawed.”  Id. (citing 125 S. Ct. 2129, 2137 (2005)).  The Court also limited criminality under 18 U.S.C. § 1512 to “persuaders conscious of their wrongdoing.”  Id. (citing 125 S. Ct. at 2136).  As noted above, in July of 2005, McKesson CFO Richard Hawkins was also acquitted in a bench trial.  Id.  Of the 14 indicted in-house counsel noted above, only seven were convicted, and two of those seven pled guilty.  Id.

The issues triggering the indictments of the several in-house counsel are whether they lied; whether they participated in a “cover-up” or destruction of evidence; and/or whether they refused to produce documents or obstructed justice during a governmental investigation.  Id.  Clearly, the destruction of evidence, lying, or hiding evidence are all proof that the “persuaders [are] conscious of their wrongdoing.”  Id.  See also 125 S. Ct. at 2136.   It is patently evident that destroying evidence, lying and/or hiding evidence are palpably wrong from an ethical, legal and procedural standpoint.  Yet, the ethical considerations and obligations regarding the production of privileged materials during a governmental investigation are not as clear.  Of some concern is whether an attorney’s or corporation’s refusal to produce privileged materials during a governmental investigation constitutes an obstruction of justice as defined by DOJ policies and rules.


Several months prior to the institution of the McNulty Memorandum by the Department of Justice, the court in U.S. v. Stein called into question several practices of the USAO regarding internal corporate investigations and practices, and how the government identified “cooperating” corporations as per the Holder and Thompson memoranda.  See United States v. Stein, 435 F. Supp. 2d 330 (S. D. N.Y. 2006); Timothy P. Harkness and Carmel E. Gabbay, U.S. v. Stein:  Rewriting The Rules of Corporate Cooperation With Government Investigations, The Metropolitan Corporate Counsel, August, 2006, 19 (“‘Cooperation’ has been the watchword for corporations subject to governmental scrutiny and investigation.”)  Specifically at issue in Stein was Section IV of the Holder memorandum which elaborated on what was meant by “cooperation” during governmental investigations of a corporation.  Stein, at 337.  The court took judicial notice of the Holder memorandum and noted that prosecutors gauge cooperation by a number of factors, including the corporation’s willingness to identify the culprits in the company; its willingness to make these witnesses available; its willingness to disclose the complete results of the internal investigation; and its willingness to waive the attorney-client privilege.  Id.  Stein specifically turned on the following commentary from the Holder memorandum:

Another factor to be weighed by the prosecutor is whether the corporation appears to be protecting its culpable employees and agents….a corporation’s promise of support to culpable employees and agents, either through the advancing of attorneys fees, through retaining the employees without sanction for their misconduct…. may be considered by the prosecutor in weighing the extent and value of a corporation’s cooperation.

Id. Tracing the history of governmental investigations of corporations, the court further noted that the Thompson memorandum, instituted in 2003, was only moderately distinct from the Holder memorandum, yet was binding on all federal prosecutors.  Id. at 338.  The court observed that “all United States Attorneys now are obliged to consider the advancing of legal fees by business entities…as at least possibly indicative of an attempt to protect culpable employees and as a factor weighing in favor of indictment of the entity.”  Id.

The relevant facts in Stein centered on a 2004 investigation of KPMG by the USAO and the IRS for fraud related to the planning of tax shelters.  Id. at 339.  At that time, government prosecutors suggested that to the extent KPMG employees needed outside counsel, that they retain attorneys who understood that “cooperation was the best way to go.”  Id. at 342-43.  The government further pressured KPMG not to “reward misconduct” by paying attorneys fees for those employees who refused to cooperate.  Id.  The government also warned KPMG that if it, in fact, had the discretion not to pay attorney fees for its employees, it would look at its decision to pay legal fees “under a microscope.”  Id. at 344.

The Stein court held that the government violated the Fifth and Sixth Amendments by causing KPMG to cut off payment of legal fees and other defense costs for its employees upon indictment.  Id. at 356.  The court also found that government’s actions violated the substantive due process right to fairness in the criminal process.  Id. at 360-62.  The court specifically noted that the defendants were entitled to substantive due process protections since the government coerced a third party (KPMG) to withhold funds lawfully available to the each of the criminal defendants.  Id.  Thus, the court found at least one provision of the Thompson Memorandum unconstitutional, bringing into question other provisions, including the government’s demands for privilege waivers.  Id.  In criticizing the Thompson Memorandum, the court noted that it was designed to minimize the involvement of defense attorneys in corporate investigations, which is also a violation of the Sixth Amendment right to counsel.  Id.

In 2005, the ABA Task Force on the Attorney-Client Privilege submitted a proposed resolution to the ABA House of Delegates which opposed governmental policies that erode the protections of the attorney-client privilege and the attorney work product doctrine.  Jeffrey Thomas and Susan T. Stead, Attorney-Client Privilege and Confidentiality Issues, The Brief, Vol. 35, No. 4, Summer, 2006, 13-21, at 17.  The resolution, which was unanimously approved by the ABA, states, in part:

… that the American Bar Association strongly supports the preservation of the attorney-client privilege and work-product doctrine as essential to maintaining the confidential relationship between client and attorney required to encourage clients to discuss their legal matters fully and candidly with their counsel so as to (1) promote compliance with law through effective counseling, (2) ensure effective advocacy for the client, (3) ensure access to justice and (4) promote the proper and efficient functioning of the American adversary system of justice; and

… that the American Bar Association opposes policies, practices and procedures of governmental bodies that have the effect of eroding the attorney-client privilege and work product doctrine and favors policies, practices and procedures that recognize the value of those protections …

… that the American Bar Association opposes the routine practice by government officials of seeking to obtain a waiver of the attorney-client privilege or work product doctrine through the grant or denial of any benefit or advantage.


The opinion published in U.S. v. Stein, the recommendations of the American Bar Association, as well as Congressional outrage, prompted recent revisions regarding the Federal prosecution of corporations as set forth in the McNulty Memorandum.  Yet, the McNulty Memorandum also assesses “the value of cooperation” during governmental investigations by assessing, in part, whether the corporation at issue waived the attorney-client and work product protections; whether the corporation shielded culpable employees and agents; and whether the corporation obstructed the investigation.  See Memorandum from Paul J. McNulty, supra.  One element of the “obstruction of justice” analysis in the McNulty Memorandum is whether the corporation asserts “overly broad or frivolous assertions of privilege to withhold disclosure of relevant, non-privileged documents.”  Id.  Thus, the recent revisions to the Federal Prosecution of Business Organizations as set forth in the McNulty Memorandum provide for and even encourage a waiver of attorney-client privileges, particularly since raising the privilege may result in an obstruction of justice charge against the corporation and its attorneys alike.

The protections afforded by the Fifth and Sixth Amendments should serve, ultimately, as per Stein, to prevent a miscarriage of justice by the government against the corporate client.  When faced with the threat of governmental investigation or criminal sanction, corporate clients and their attorneys should avoid the voluntary disclosure of any privileged documents to prevent a breach of the attorney-client privilege.   Nonetheless, if an internal investigation is conducted, each step of the investigation may, in due course, be turned over to the government.  See Internal Investigations: Consequences of the Federal Deputation of Corporate America, supra; Memorandum from Paul J. McNulty, supra.

If a corporation receives notification of a governmental investigation, outside counsel should be immediately employed to review the basis of the investigation.  The in-house attorney should draw up an agreement limiting the parameters of the outside counsel’s investigations, expressly noting the confidential nature of the work.  The agreement should also contain a provision requiring outside counsel to report only to in-house counsel instead of the corporate officers, or a business group to avoid a breach of the privilege.  Questions directed to employees on behalf of the company must be carefully administered by outside counsel.  If counsel interviews a corporate employee, the employee must be told that the lawyer represents the company, not the employee-witness.  See Attorney-Client Privilege and Confidentiality Issues, at 15.   Otherwise, the employee may be able to claim the attorney-client privilege and any statements made during the interview could be privileged.  Id. (citing Waggoner v. Snow, Becker, Kroll, Klaris & Krauss, 991 F. 2d 1501, 105006 (9th Cir. 1993)).

To further safeguard the privilege for the corporate client, communications from counsel should be limited.  Counsel should clarify with all employees questioned that interviews are conducted for the purpose of gathering information to enable the attorney to give appropriate legal advice.  Id.  The employee must also be advised that the interview is made on behalf of the corporation and is confidential so that the employee does not breach the privilege.  Id.  Outside counsel must also carefully consider whether to limit all communications regarding the internal investigation to oral communications, which may be advisable.  If communications are in writing, however, the attorney-client privilege may be easier to delineate since the written document may be marked as an “attorney-client/ work product” document.  In line with the McNulty Memorandum, all communications should be identified as either Category I, fact-based communications, or Category II, or privileged communications.  The privileged communications should be kept separately from the fact-based, Category 1 communications.

Today there is an even greater concern regarding waiver when communications take place via e-mail.  E-mails are easily transferred to third parties, and outside IT consultants may have access to the communications.  Joseph L. Buckley and Michael R. Potenza, Best Practices for Maintaining The Attorney-Client Privilege in Email Communications, The Metropolitan Corporate Counsel, Vol. 12, No. 11, November 2004 (citing Ben Delsa, E-Mail and the Attorney-Client Privilege: Simple E-Mail in Confidence, 50 La. L. Rev. 935, 939 (1999)).  It has been suggested that law firms enter into agreements with any and all outside IT consultants prohibiting access to the content of corporate and law firm e-mails.  Id.  It has also been suggested that  attorney-generated e-mails be marked with the appropriate “Attorney-Client Communication;”  “Privileged and Confidential;” or “Attorney Work-Product” markings as all written communications.  Id.  Further, all business and legal e-mail and other written communications should be kept separately.  Attorney e-mails should be kept in a separately dedicated server.  Id.  It has also been suggested that corporations develop a document retention policy, and that all legal e-mails and other written communications should be periodically deleted in accordance with the company’s policy.  Id.  But this suggestion carries with it a caveat.  Such “retention policies,” which are actually “document destruction policies,” could lead to a charge of obstruction of justice, particularly if the documents are destroyed in anticipation of or during a governmental investigation.  See The Threat of Criminal Prosecution to In-House Counsel, The Tide Has Changed But It Is Not a Tsunami, supra.

In the event the government, following the guidelines established in the McNulty report, requests privileged information from an attorney or the corporate client, the privilege should be asserted and the documents should not be produced voluntarily.  This should force the government to either subpoena the documents or formally demand the documents through court action.  At this time, the corporate defendant could file a formal objection placing the matter before a court of law.  A recently decided case, which is similar, factually, to the McKesson line of cases, underscores the adverse ramifications of voluntarily divulging privileged materials.  See United States of America v. Gregory L. Reyes, No. CR 06-0556 CRB, N.D. Calif, December 22, 2006.  In this case, Brocade, a company threatened with litigation concerning fraudulent accounting practices, hired two outside law firms to conduct an internal audit.  Brocade published restatements of its valuation which, in turn, triggered multiple lawsuits, as in the McKesson situation, supra.  Brocade and its attorneys conferred and agreed to meet with officials from the SEC and the DOJ.  One of the law firms (MoFo) did not provide the governmental officials with written material, although attorneys from this firm prepared notes for the meeting.  Instead, MoFo orally briefed the government regarding relevant facts.  Its counterpart firm, WSG&R, prepared a written briefing as well as a multimedia presentation.  Both firms signed confidentiality agreements with the government, specifically denying any intent to waive applicable privileges.  Although the agreements restricted dissemination of information to other parties, it allowed the government agencies the discretion to reveal the disclosed information to others as their duties required.

Following the conference with Brocade and its attorneys, the United States filed a criminal action against Reyes and Jensen, who were former officers of Brocade.  In this case, Reyes issued a subpoena for various documents in support of his defense, including all information and documents produced by MoFo and WSG&R.  Specifically, Reyes sought information produced from Brocade’s internal investigation.  Although the Court did not find that Reyes’ subpoena fell within the strict language of Civil Rule of Procedure 17(c), it did find that both law firms voluntarily waived their attorney-client and work product privileges, and that all of the documents and information could be produced for an in-camera inspection regarding their relevancy to the Reyes case.  The court specifically held that MoFo and WSG&R surrendered whatever privileges may have attached to the subpoenaed materials when they shared the contents with the government.  Because the law firms waived both the attorney-client privilege when they disclosed the substance of their investigative interviews, reports, and conclusions with the government, the Court found that those privileges posed no obstacle to Reyes’ attempt to subpoena them.  The Court further found that the attorney-client privilege cannot be partially waived, stating that “parties cannot be permitted to pick and choose” in their disclosures, thus, “waiving the privilege for some and resurrecting the claim of confidentiality to obstruct others.”  Id. (citing In re Columbia/HCA Healthcare Corp. Billing Practices Litig., 293 F. 3d 289,302-04 (6th Cir. 2002); United States v. Mass. Inst. of Tech., 129 F. 3d 681, 684-86 (1st Cir. 1997); Genentech, Inc. v. U. S. Int’l Trade Comm’n, 122 F. 3d 1409, 1415-18 (Fed Cir. 1997); In Re Steinhardt Partners, L.P., 9 F 3d 230, 234-36 (2d Cir. 1991); In Re Martin Marietta Corp., 856 F. 2d 619, 623-26 (4th Cir. 1988); Permian Corp. v. United States, 665 F.2d 1214, 1220-22 (D.C. Cir. 1981)).  The Court further noted that the putative confidentiality agreements did not preserve the privilege.    Id.  Compare In re McKesson HBOC, Incl, Sec.Litig., 2005 WL 934331 (N.D. Cal. Mar. 31, 2005), with United States v. Bergonzi, 216 F.R.D. 487 (N.D. Cal. 2003).  Thus, the lessons of McKesson and its progeny continue.  Unless a corporation and its attorneys are comfortable with a complete dissemination of their internal audits or other privileged information, they should not voluntarily release privileged materials, information or work product to the government or any adversary.


Attorneys who represent corporations involved in governmental investigations will likely need to walk a tight rope between compliance with government policies and the protection of attorney-client and work product privileges.  This may require the attorney to maintain all internal investigatory documents, even if the corporate document retention policy calls for periodic document destruction, particularly if the company is on notice of the government investigation.  Yet, to avoid a breach of the attorney-client privilege, these same attorneys may not voluntarily disclose the privileged documents to the government, even to avoid criminal sanction and even if a confidential agreement is in place.

Although most of the cases cited above concern investigations regarding SEC violations, these same concerns may impact other areas where regulation and reporting requirements are at issue, such as the insurance industry.  See Attorney-Client Privilege and Confidentiality Issues in Internal and External Investigations, supra.  It is not difficult to imagine similar issues arising during either OSHA or EPA compliance investigations.

In short, the DOJ policy, and the rules promulgated by the Sarbanes-Oxley Act which encourage if not demand a waiver of the attorney-client privilege, present serious legal and ethical issues for both attorney and client alike.  It is advisable to develop a structure and corporate wide policy for a self-policing, periodic, internal corporate investigation which protects the attorney-client/ work product privilege, far in advance of any governmental inspection or investigation.

Cynthia Tolbert is of counsel with the Casey Gilson P.C. law firm in Atlanta, GA.  She has practiced law for the past 20 years defending corporate clients, insurance companies, refineries and municipalities in litigation throughout the nation.  Areas of particular focus include personal injury defense, products liability defense, professional liability defense, the defense of toxic tort cases including the defense of companies in the face of EPA investigations and hearings as well as the defense of commercial liability, premises liability and property damage in state and federal courts.

Entity Comparison Chart

By Rob Hassett


(1)  Applies to All Three:





Limited Liability




(2)  Reasons to Use C:





Number of Owners

No restrictions


No restrictions unless publicly traded

Tax Year

May be fiscal

Usually calendar

Usually calendar

Deductions for health insurance




Fed tax on income left in business

Essentially 34%

Up to 35%

Up to 35%

Qualified small business stock (10% on capital gain)




(3)  Reasons to Use C or S:





Expenses of setup

Inexpensive w/out shareholder agreements, incentive stock options, etc.

Inexpensive w/out shareholder agreements

Usually more expensive where advantageous (to deal with allocations, capital accounts, etc.)

1244 Stock (ordinary loss on sale or liquidation)




Tax deferred reorganization




ISO’s allowed




Gain on redemption taxed at ordinary income rates to extent of receivables




(4)  Reasons to Use C or LLC:





Allowed Owners

No restrictions

Individuals and Certain Trusts, or 100% by S

No restrictions

Classes of Ownership


Voting v. non-voting only

Equivalent to C available

(5)  Reasons to Use S:





FICA including Medicare reductions




(6) Reasons to Use S or LLC:





Levels of Federal Taxation




Levels of State Taxation



1 in most states

Long-Term Capital Gain

Federal Income Tax at full rate on corporation’s gains

Federal Income Tax at 15% to shareholders

Federal Income Tax at 15% to Members

Accumulated Earnings Tax




Cash method of accounting

Generally allowed if under $5 million in sales (Restrictions apply when primary business is sale of inventory)

Generally allowed (Restrictions apply when primary business is sale of inventory)

Generally allowed if not owned by particular types of C corporations (Restrictions apply when primary business is sale of inventory)

(7)  Reasons to Use LLC:






Don’t pass through

Can’t be allocated

May be allocated

Later Conversion subject to tax on built in gains

C to S (yes ultimately)

C to LLC (yes)

S to C (no)

S to LLC (yes)

LLC to S (no)

LLC to C (no)

* The members of a limited liability company may elect that the limited liability company be treated for tax purposes as a C corporation, an S corporation or a partnership. For purposes of this checklist, it is assumed that the members have elected that the limited liability company be treated for tax purposes as a partnership.

Rob Hassett 3/15/2000 Revision.


Curbing Excessive Pay, Board Clout of Executives Would Help Business

First Published in the Atlanta Journal-Constitution 2-4-2009

by Rob Hassett

Now that we taxpayers are bailing out banks and other companies that were grossly mismanaged, we should put corporations on a sounder footing and curb excessive compensation for executives of public companies.

First, no executive of a public company should be allowed to sit on the board of directors of that company. The CEO of a public company is often on the board and sometimes the chairman. Being on the board gives the CEO undue influence on the other board members regarding his or her compensation.

Second, each public company should be required to display the last three years of revenue, earnings, stock prices and executive pay in a prominent and clear format on the investor-relations page of the company’s website. Investors can obtain this information from the Security and Exchange Commission’s Website, but putting it on the investor-relations page would make it more accessible to the average investor.

Third, if despite all of the above the directors of a company still decide to provide executive compensation that is above an amount that would be set liberally by the SEC based on the size of the company and other factors, the company should be required to obtain shareholder approval.

Unfortunately, many executives have shown they are not capable of reining in excessive pay and bonuses on their own.

Merrill Lynch, a company that lost $27 billion last year, paid out billions of dollars in bonuses to many of its executives just before Bank of America’s taxpayer-backed takeover. In 2006, the highest paid executive of any public company was Stanley O’Neal, the chief executive officer of Merrill Lynch at the time, who received total compensation of $91 million.

In 2006, the CEO of Countrywide Financial Corporation, Anthony Mozilo, received total compensation of $48 million. Countrywide was teetering on the edge of bankruptcy when it was recently sold to Bank of America in a fire sale brought on by poor management.

Mel Karmazin, the founder and chief executive officer of Sirius Satellite Radio, received compensation of $32 million in 2007 even though Sirius never made a profit before merging with XM Satellite Radio in 2008.

These are not isolated instances. The problem is not just that a few rogue executives are extraordinarily greedy and have indifferent or intimidated boards. The problem is that too many executives of public companies have insatiable appetites for money and choose to use their considerable skills to increase their compensation instead of doing what’s best for their shareholders.

Some will argue that part of the compensation referred to above was in the form of incentive compensation. In other words the executives were paid a large portion of their compensation for “outstanding” performance. The problem with incentive pay is that it encourages executives to accept unreasonable long-term risks for immediate income that increases incentive pay for that year. Agreements regarding incentive pay should be monitored as tightly as any other form of compensation.

The adverse consequences of unjustifiable executive compensation add up to more than what compensation gets paid out. It puts the company at a disadvantage when negotiating with unions, it creates cynicism among the other employees of the company and it understandably causes a lack of willingness by the public to provide taxpayer-funded bailouts when the economy turns sour.

Rob Hassett is a corporate and technology lawyer with the Atlanta law firm of Casey Gilson P.C.

Give Shareholders an Easy Way to Vote Their Minds

First Published in the Atlanta Journal-Constitution May 8, 2009

by Rob Hassett

As part of the federal stimulus package, more than 400 financial institutions will be required to hold non-binding shareholder votes this year approving or disapproving executive compensation.

Shareholders at many public companies will also be voting whether to permit shareholders to vote on non-binding resolutions on executive pay.

None of this will have much impact unless each shareholder is given the right to be notified by e-mail when a proposal is to be voted on. The e-mail should link to a clear description of the proposal and link the shareholder to a proxy or other method to vote. Most companies will only offer this convenience if required by the Securities and Exchange Commission.

Under new SEC rules, public companies are required to post information about proposals to be voted on by the shareholders on their Web sites. But the SEC does not require companies to allow shareholders to grant proxies or otherwise vote via the Internet. Most shareholders who obtain information over the Internet would probably not go to the trouble of then mailing a proxy grant. Probably for these reasons, fewer individual shareholders are voting now than in the past.

In most cases shareholders can learn what methods of receiving materials and voting are available by checking the company’s investor relations page.

Failure of shareholders to cast votes is a primary reason that challenges to managements’ positions are almost always defeated. As a result, outrageous executive pay and conflicts resulting from executives serving on the board of directors have not been curbed.

Under Delaware and Georgia corporate law, the percentage of shares needed to constitute a quorum can be set as low as one-third of the shares outstanding. In companies that set a quorum at the minimum, when most shareholders do not vote, as few as one-sixth of the shares (plus one) can block any reform. Additionally, in some corporate bylaws, a failure to cast a vote by proxy or other means results in that shareholder’s shares being deemed cast in favor of management’s position. Finally, management is often supported by managers of mutual and hedge funds who genuinely believe that executives, like themselves, are entitled to exorbitant pay for mediocre performance.

Coca-Cola recently held a shareholder vote on whether to have a shareholder advisory vote on executive compensation. Certainly most individuals holding shares would want a chance to review and give an opinion on executive pay. That said, only 36 percent of the shares were voted in favor of the proposal.

An increasing number of companies are permitting individual shareholders to grant proxies over the Internet. On May 20, Intel is set to become the first public corporation to allow shareholders to participate in the annual shareholders meeting over the Web, which will include the ability to ask questions and cast votes during the meeting.

Most executives and board members will not want shareholder input on executive pay and other sensitive issues. Many shareholders will say that they do not have the time to adequately review the materials to make an informed decision on these matters. Ten years ago these attitudes may not have made much difference. But not today. In light of recent abuses and the dismal records of executives and directors, these kinds of decisions should not be left up solely to management.

Rob Hassett is a corporate and technology lawyer with the Atlanta law firm of Casey Gilson P.C.

Copyright 2009, The Atlanta Journal-Constitution.


Recent Developments in Internet Law

Rob Hassett and Suellen W. Bergman

Hassett Cohen Goldstein & Port, LLP

990 Hammond Drive, Suite 990 Atlanta, GA 30328

(770) 393-0990




The writers wish to thank Robert Port, a partner in the above law firm, and Lori Brill, an associate in the above law firm, for their help in preparing these materials.

I.       Introduction

Over the past year, courts, Congress, and state legislatures have dealt with a number of different issues concerning the Internet, including:

1.         The enforceability of agreements entered into over the Internet;

2.         Spam;

3.         Under what circumstances is there liability for copying?

4.         How far will the courts go to restrict the use of marks as domain names, metatags and other uses on the Internet?

5.         What privacy rules apply?

6.         What is a Web site operator’s liability for a Web site which involves activity that is legitimate in some jurisdictions, but illegal in others?

These and other recent developments are discussed in this paper.

II.      What constitutes an enforceable agreement entered into over the Internet?

Agreements entered into over the Internet generally take one of two forms, either an exchange of  e-mail or clickwrap. Clickwrap agreements are agreements formed by a purchaser manifesting assent to the terms of an agreement online by pointing and clicking a mouse. An agreement based on an exchange of e-mails relating to subject matter which does not require a signed writing to be enforceable has been held to be effective. See, e.g., CompuServe, Inc. v. Richard S. Patterson, 89 F.3d 1257 (6th Cir. 1996). The controversies regarding the enforceability of agreements entered into over the Internet involve the enforceability of clickwrap agreements and whether agreements entered into over the Internet constitute signed writings.

A.        Clickwrap Agreements

The authors are not aware of any cases to date that directly address the issue of whether clickwrap agreements are enforceable. There is one case that implicitly holds that they are enforceable. A number of cases deal with whether shrinkwrap agreements (which we believe provide a useful legal analogy) are enforceable. The most important issue addressed by courts today regarding the enforceability of shrinkwrap agreements is whether or not shrinkwrap agreements are pre-empted by copyright law.

1.         The case that implicitly held that clickwrap licenses are enforceable is Hotmail Corp. v. Van Money Pie, Inc., (N.D. Cal. 1998) 47 U.S.P.Q. 2d (BNA) 1020 (1998); 1998 U.S. Dist. Lexis 10729 (April 16, 1998). In that case, the United States District Court for the Northern District of California granted the plaintiff a preliminary injunction in a case alleging that the defendants breached the terms of a service contract for using the plaintiff’s e-mail service. Without discussing the issue, the Court in that case implicitly held that the defendants were obligated to the terms of service on the Hotmail Web site. Users of that service agreed to those terms by clicking the “I agree” button.

2.         In ProCD, Inc., v. Zeidenberg, 86 F.3rd 1447 (7th Cir. 1996), ProCD developed and sold copies of a CD ROM containing a database of telephone numbers. The CD ROM box informed the consumers there was a shrinkwrap license inside the box. The shrinkwrap license provided that the purchaser was only receiving a license and the purchaser could not make copies of the product. Zeidenberg copied the database onto his own Web site and then provided access to the database via his Web site to customers for a fee. The Court rejected the holding of Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th Cir. 1988), that shrinkwrap licenses are pre-empted by copyright law, and held that the ProCD shrinkwrap license was enforceable.(1) The Court thus provided a way for database developers to protect their databases (by contract) even though copyright law would probably not protect the database here. (2)

a.         Several courts have followed the ProCD decision: Microstar v. Formgen, Inc., 942 F. Supp. 1312 (S.D. Cal. 1996) (copying from a computer game); Hill v. Gateway 2000, Inc., 105 F.3rd 1147 (7th Cir.), cert. denied, 522 U.S. 808, 118 S.Ct. 47, 139 L.Ed.2d 13 (1997) (shrinkwrap license sent with a Gateway computer); Brower v. Gateway 2000, Inc., 246 A.D.2d 246, 676 N.Y.S.2d 569, 37 U.C.C. Rep. Serv. 2d (CBC) 54 (N.Y. App. Div. 1st Dep’t 1998) (allowed Gateway 2000 to require that any disputes be resolved by arbitration in Chicago, Illinois); and Mortenson Co., Inc. v. Timberline Software Corp., 93 Wash. App. 819, 831, 970 P.2d 803, 809 (1999) (upheld a shrinkwrap license agreement, included in the software, which was fairly standard and contained an “accept-or-return” provision).(3)

b.         Note that Section 112 of the Uniform Computer Information Transactions Act (UCITA), discussed infra, would modify ProCD somewhat because UCITA provides that where a mass-market purchaser licensee does not have an opportunity to review a mass-market license or a copy of it before becoming obligated to pay and does not agree, to the license after having the opportunity to review it, the licensee is entitled to return the product and (1) is entitled to reimbursement of any reasonable expenses incurred in complying with the licensor’s instructions for return or destruction of the computer information or, in the absence of instructions, incurred for return postage or similar reasonable expense in returning it; and, in some circumstances, (2) is entitled to compensation for any reasonable and foreseeable costs of restoring the licensee’s system. See UCITA Section 112.

A case which tangentially addressed the shrinkwrap issue is Step-Saver Sys. v. Wyse Tech. and The Software Link, 939 F.2d 91 (3rd Cir. 1991), where the Court applied the “battle of the forms” rules and determined that the parties’ agreement was complete when the goods were ordered via telephone coupled with the purchase order. The Court held that the shrinkwrap license was sent after the fact and thus had no effect. The Software Link’s shrinkwrap license was also held unenforceable for the same reason in Arizona Retail Sys., Inc. v. The Software Link, 831 F. Supp. 759 (D. Ariz. 1993).

3.       Generally, it appeared that the copyright pre-emption barrier raised in Vault Corp., supra, had been buried by ProCD and its progeny. However, in a case involving claims relating to the pitching of a marketing concept (which did not involve any kind of online agreement but could have repercussions in the online context), the United States District Court for the Western District of Michigan held that the claim was pre-empted by copyright law. See Wrench, LLC v. Taco Bell Corp., 51 F. Supp. 2d 840 (W.D. Mich. 1999), 51 U.S.P.Q.2d (BNA) 1238. The Court denied the claim of a company that had pitched the Chihuahua concept to Taco Bell and claimed Taco Bell used the concept without paying for it. The Court held that any implied contract was pre-empted by copyright law. The Court distinguished ProCD on the somewhat nebulous grounds that the ProCD agreement was in effect at the time of purchase (i.e. before use of the product) whereas the Taco Bell agreement was not supposed to take effect unless Taco Bell started using the Chihuahua concept (i.e. after use of the concept). Note that use or copying of a product (i.e. a copyrighted item) is the same action which triggers liability under copyright law. This case is in line with an earlier Louisiana case regarding shrinkwrap licenses: Vault Corp., supra.

B.      Signed Writings

Both clickwrap agreements and e-mail exchanges may cover transactions where signed writings are required under the applicable statute of frauds. A number of states now have some kind of a digital signature act. Most of these acts require that, to satisfy any statute of frauds, the electronic signature must be:

1.       Unique to the person using it,

2.       Capable of verification, and

3.       Under the sole control of the person using it.

See, e.g., Georgia Electronic and Signatures Act at O.C.G.A. §10-12-3 et seq. as originally enacted; the Utah Digital Signatures Act, Utah Code Ann. §46-3-101, et seq. (Supp. 1996). Before the enactment of O.C.G.A. §10-12-3 et seq., an argument could be made in Georgia that anything intended to be a signature would constitute a signature. See, e.g., Troutt v. Nash AMC-Jeep, Inc., 157 Ga. App. 399, 278 S.E.2d 54 (1981), which held that the printing of a company name at the bottom of a form constituted a signature, permitting a car dealer to meet certain state law requirements of providing a signed form. The latest developments in this area are discussed below.

1.       The newest version of Georgia’s statute, (4) Electronic Records and Signatures, which provides for broad acceptance of electronic signatures, reads, in pertinent part, as follows:

(a)        Records and signatures shall not be denied legal effect or validity solely on the grounds that they are electronic.

(b)        In any legal proceeding, an electronic record or electronic signature shall not be inadmissible as evidence solely on the basis that it is electronic.

(c)        When a rule of law requires a writing, an electronic record satisfies that rule of law.

(d)       When a rule of law requires a signature, an electronic signature satisfies that rule of law.

(e)        When a rule of law requires an original record or signature, an electronic record or electronic signature shall satisfy such rule of law.

(f)        Nothing in this Code section shall prevent a party from contesting an electronic record or signature on the basis of fraud.

O.C.G.A. §10-12-4 provides further as follows:

The term “electronic signature” is defined as “a signature created, transmitted, received, or stored by electronic means and includes but is not limited to a secure electronic signature.”(5) O.C.G.A. §10-12-3. The term “record” is defined as “information created, transmitted, received, or stored either in human perceivable form or in a form that is retrievable in human perceivable form.” O.C.G.A. §10-12-3.

2.       The proposed Uniform Electronic Transactions Act (UETA), which provides that “an electronic record or signature may not be denied legal effect or enforceability solely because it is in electronic form” and that “if a law requires a record to be in writing, an electronic record satisfies the law”(6) has been approved by the National Conference of Commissioners on Uniform State Laws, and the Conference has voted to present the Act to states for adoption. (7)

The Electronic Transactions Act has been passed in California. California’s Governor signed the Uniform Electronic Transactions Act on September 16, 1999, and it was chaptered (Chapter No. 428) by the Secretary of State on the same date. See CA S.B. 820.

3.       The Uniform Computer Information Transactions Act (former proposed UCC Article 2B). The legal rules for computer information transactions which was to be promulgated by the National Conference of Commissioners on Uniform State Laws (8) as Article 2B of the Uniform Commercial Code, instead is being proposed as the Uniform Computer Information Transactions Act (UCITA).(9) The Act is the first general commercial statute to provide comprehensive procedures and rules for computer software licensing. Most of those rules would also be appropriate for a broad range of transactions outside UCITA’s scope, and it is expected that they will form the model for several future articles of the UCC as they did for the Uniform Electronic Transactions Act (UETA), which was approved at the same time.(10) The provisions include:

an express recognition of electronic records as the equivalent of writings, rules for attribution of electronically generated messages, methods for establishing authentication, rules for allocating losses caused by electronic errors, and rules for determining when electronic messages are deemed to be effective. A particularly noteworthy provision recognizes the enforceability of agreements made by the interaction of “electronic agents,” even if no human was directly involved in either or both sides of the “negotiation.” (11)

Software publishers and computer manufacturers strongly support UCITA, but it is as strongly opposed by a wide range of groups. UCITA is controversial because:

UCITA represents a movement toward licensing of information in its many forms and away from the sale of copies as traditionally understood under copyright law. UCITA would enforce the broad [consumer] use of “shrink-wrap” and computer “click-on” licenses (called “mass-market licenses” in UCITA). By licensing rather than selling something, a vendor can wield more control of the downstream use of the product. Placing new constraints on the use of information in mass-market transactions can, in turn, constrain the use of information for important public purposes such as democratic speech, education, scientific research, and cultural exchange. Many believe that UCITA fails to appreciate the strong public interest in prohibiting new restrictions on information exchange.

The scope of UCITA is extremely broad. “Computer information,” under UCITA, includes everything from copyrighted expression, such as stories, computer programs, images, music and Web pages; to other traditional forms of intellectual property such as patents, trade secrets, and trademarks; to newer digital creations such as online databases and interactive games. Although the statute claims to be limited to information in electronic form, it allows other transactions to “opt-in” to being governed by UCITA.

Many legal community commentators are of the opinion that UCITA (or something like it) is not necessary or, at least, it is premature. This view is based on the opinion that existing common law and copyright law are developing appropriately to handle the new types of information-based transactions emerging in the information economy.

The American Law Institute (ALI), consumer advocacy groups, libraries, and the Federal Trade Commission have continued to criticize and/or oppose the UCITA proposal and prior UCC 2B drafts, yet their concerns have not been addressed. Instead, NCCUSL intends to push the UCITA proposal as quickly as possible to state legislatures.

A Quick Look at the Uniform Computer Information Transactions Act (UCITA), American Association of Law Libraries: Washington Affairs, July 15, 1999.(12)

4.         Ballas v. Tedesco, 41 F.Supp. 2d 531 (D.N.J. 1999). This case addresses the issue of whether an exchange of e-mails can satisfy the requirement that assignments of copyrights are not effective unless they are in writing and signed by the transferor. See, Copyright Act §201(d). In this case, Tedesco wanted to produce a CD of dance music for Ballas. Ballas would pay Tedesco a fee for the musical arrangements and production of the CD, and Ballas would have the exclusive right to manufacture copies of the CD for sale. Negotiations, via e-mail, were unsuccessful, and the parties did not agree on terms of the arrangement. The parties agreed that the music content copyright belonged to the Defendant. The Court enjoined the Plaintiff from making or selling the music on the CD because the Court found that there was no valid assignment of the copyright since there was no written assignment.

III.    Spam (13)

A.        Spam cases

1.         Hartford House, Ltd. d/b/a/ Blue Mountain Arts v. Microsoft Corp., CV 778550, Sup. Ct. Cal. Santa Clara County, 1998. Blue Mountain creates and sends electronic greeting cards. In this lawsuit, Blue Mountain charged that (1) Microsoft has a competing electronic greeting card Internet site and (2) Microsoft distributed a trial version of Internet Explorer which includes an e-mail filter that identifies Blue Mountain’s cards as spam and sends them into a junk mail folder instead of sending them to the intended recipient. On December 17, 1998, Judge Robert Baines ordered Microsoft to provide Blue Mountain with the necessary information to enable Blue Mountain to alter its e-mail notification messages and greeting cards to ensure that they pass through Microsoft’s anti-spam filtering tool in the beta version of Internet Explorer 5.0. (14)

2.         Intel v. Hamidi, Superior Court of California, County of Sacramento, Judge John R. Lewis, April, 1999. Ken Hamidi was dismissed from Intel in 1995. On six occasions between 1996 and 1998, he sent e-mail messages to over 30,000 Intel employees, which detailed his opinion of the company’s abusive and discriminatory employment practices. In April, 1999, Judge Lewis granted summary judgment to Intel, finding that Hamidi’s messages trespassed on Intel’s proprietary computer system and caused harm. This decision has been criticized (15) because (1) although there was arguably no state action,(16) Judge Lewis did not engage in any First Amendment analysis and (2) given the serious purpose of Hamidi’s messages and the minimal harm they caused to Intel’s computers, Hamidi’s free speech rights should prevail over Intel’s property rights in a fair balancing test.

3.         The Tenth Circuit, in U.S. West v. FCC, 182 F.3d 1224 (10th Cir. 1999), held that U.S. West could not be blocked by an FCC rule from using information obtained from customers regarding who the customers called, and other similar data, for marketing to those individuals because such prohibition was “a violation of the First Amendment.” The Court reasoned that such use constituted commercial speech, applied the First Amendment commercial speech analysis, and held that the proposed FCC rule was unconstitutional. The test (17) was as follows:

First, determine whether the commercial speech concerns lawful activity and is not misleading. If so, the speech can only be restricted if:

(1)        the government has a substantial state interest in regulating the speech;

(2)        the regulation directly and materially advances that interest; and

(3)        the regulation is no more extensive than necessary to serve the governmental interests.

Surprisingly, the Court found that the rule was not narrowly tailored because it did not do such things as allow phone customers to opt in or opt out (assuming that there is a serious desire by telephone company customers to have their personal calls tracked and used for marketing purposes). This indicates that some anti-spam statutes may violate free speech if they completely prohibit spam without considering other alternatives.

This case is troubling because:

(1)        it allows telephone companies that track customer calls to use that information to market to those customers, and

(2)        this analysis could support a First Amendment right to send spam.

As in other spam cases, U.S. West involves a “captive,” as opposed to a “voluntary,” audience. (18)

To date, the cases that have held spam to be illegal involved claims of Internet Service Providers and Intel,(19) that spam is a form of trespass. This analysis of spam as a trespass is not as vulnerable to a First Amendment attack as a state or federal statute prohibiting spam. See, e.g., CompuServe, Inc. v. Cyber Promotions, Inc., 962 F. Supp. 1015 (S.D. Ohio 1997) (holding that a private company’s motion seeking a court to enjoin “spam trespass” did not constitute state action subject to a First Amendment attack).(20)

B.        Federal Legislation

A proposed federal statute regarding unsolicited bulk e-mail was introduced in the House on May 5, 1999: Internet Freedom Act, 106 H.R. 1686. (21) This Act, in proposed Section 104, entitled “Protection from Fraudulent Unsolicited E-Mail,” would amend 18 U.S.C. § 1030 such that, inter alia, it would be a violation of the Act to “intentionally and without authorization initiate the transmission of a bulk unsolicited electronic mail message to a protected computer with knowledge that such message falsifies an Internet domain,(22) header information, date or time stamp, originating e-mail address or other identifier” or to sell or distribute a computer program which (a) “is designed or produced primarily for the purpose of concealing the source or routing information of bulk unsolicited electronic mail messages (23) in a manner prohibited by” the Act, (b) “has only limited commercially significant purpose or use other than to conceal such source or routing information,” or (c) “is marketed by the violator or another person acting in concert with the violator and with the violator’s knowledge for use in concealing the source or routing information of such messages.” The Act provides for the following potential damages for various offenses: injunctive relief and other equitable relief, actual monetary losses, statutory damages of $15,000 per violation or an amount of up to $10 per message per violation, whichever is greater; reasonable attorneys’ fees, and other litigation costs.

C.        State Legislation

Some states have passed laws regarding unsolicited e-mail.

1.         Washington State: Wash. Rev. Code § 19.190.020 (1999), entitled “Unsolicited or Misleading Electronic Mail — Prohibition,” provides as follows:

(1)        No person, corporation, partnership, or association may initiate the transmission of a commercial electronic mail message from a computer located in Washington or to an electronic mail address that the sender knows, or has reason to know, is held by a Washington resident that:

(a)        Uses a third party’s Internet domain name without permission of the third party, or otherwise misrepresents any information in identifying the point of origin or the transmission path of a commercial electronic mail message; or

(b)        Contains false or misleading information in the subject line.

(2)        For purposes of this section, a person, corporation, partnership, or association knows that the intended recipient of a commercial electronic mail message is a Washington resident if that information is available, upon request, from the registrant of the Internet domain name contained in the recipient’s electronic mail address.

2.         Nevada’s statute focuses on spam which contains advertisements. Nev. Rev. Stat. 41.730, entitled “Liability of Persons Who Transmit Items of Electronic Mail That Include Advertisements,” provides:

1.         Except as otherwise provided in Nev. Rev. Stat. 41.735, (24) if a person transmits or causes to be transmitted to a recipient an item of electronic mail (25) that includes an advertisement, the person is liable to the recipient for civil damages unless:

(a)        The person has a preexisting business or personal relationship with the recipient;

(b)        The recipient has expressly consented to receive the item of electronic mail from the person; or

(c)        The advertisement is readily identifiable as promotional, or contains a statement providing that it is an advertisement, and clearly and conspicuously provides:

(1)        The legal name, complete street address and electronic mail address of the person transmitting the electronic mail; and

(2)        A notice that the recipient may decline to receive additional electronic mail that includes an advertisement from the person transmitting the electronic mail and the procedures for declining such electronic mail.

2.         If a person is liable to a recipient pursuant to subsection 1, the recipient may recover from the person:

(a)        Actual damages or damages of $10 per item of electronic mail received, whichever is greater; and

(b)        Attorney’s fees and costs.

3.         In addition to any other recovery that is allowed pursuant to subsection 2, the recipient may apply to the district court of the county in which the recipient resides for an order enjoining the person from transmitting to the recipient any other item of electronic mail that includes an advertisement.

3.         California has also passed a law dealing with unsolicited bulk e-mail (which also applies to unsolicited faxes). This California Statute requires that the sender of unsolicited advertisements advise the e-mail recipient that the e-mail is an advertisement by placing the characters “ADV:” first in the subject line and also requires that the sender provide the recipient a return address or a toll-free number where the recipient can request that the sender refrain from sending additional unsolicited e-mail. See Cal. Business & Professions Code §17538.4. (Division 7, Part 3, Chapter 1) (Deering 1999), entitled “Unsolicited fax or e-mail.”(26)

IV.     Copyright

Several recent Internet related cases and statutes involve copyright issues, including the rights to sound recordings, distribution and derivative rights, and copyright term.

A.        Legislation

The Digital Millennium Copyright Act of 1998 (105 P.L. 304; 112 Stat. 2860)

1.         Exempts Internet service providers from liability for copyright infringement under certain circumstances;

2.         Makes it illegal to circumvent technology used to prevent copyright infringement(27) and, inter alia (this provision is to take effect two (2) years from October 28, 1998);

3.         Expands the rights of owners of sound recordings to restrict performance (or in some cases receive set royalties for) of their sound recordings from what was covered by the Digital Sound Recording Act of 1995 (28) to any sound recordings provided over the Internet whether or not it is via subscription or interactive (this provision is effective as of the date of enactment).

B.        RIAA v. Diamond Multimedia Sys., Inc., 29 F. Supp. 2d 624 (C.D. Cal. 1998) aff’d, 180 F.3d 1072 (9th Cir. 1999), 51 U.S.P.Q.2d (BNA) 1115.

The Court of Appeals for the Ninth Circuit affirmed the denial of a preliminary injunction finding that Diamond Multimedia, the maker of Rio,(29) had not violated the Audio Home Recording Act of 1992 (30) with the Rio because the Rio could not make copies except from a hard drive. The Court found that such copying was not covered by the Act. However, on August 4, 1999, Diamond Multimedia and the RIAA announced that they entered into a settlement agreement. RIAA’s general counsel and senior executive vice president, Cary Sherman, stated that this “announcement makes clear that the future of the digital music marketplace will be created in the marketplace itself, enabled by initiatives like SDMI [Secure Digital Music Initiative].”(31) While the authors have not been able to obtain details of the settlement reached between RIAA and Diamond Multimedia, one can infer from what has been published that the terms probably include a requirement that Diamond incorporate technology which prevents serial copying.

C. Tasini v. New York Times Co., 1999 U.S. App. LEXIS 23360 (2d Cir. 1999).

A federal district court in New York held that making publication information accessible on Lexis-Nexis and other similar data bases “constitutes reproduction and distribution of freelance contributions as part of that particular collective work.” Tasini v. The New York Times Co., 972 F.Supp. 804 (S.D.N.Y. 1997), 43 U.S.P.Q.2D (BNA) 1801. The District Court held that the publishers were protected by a privilege afforded to publishers of “collective works” under Section 201(c) of the Copyright Act, but the Second Circuit reversed this decision in Tasini v. New York Times Co., 1999 U.S. App. LEXIS 23360 (2d Cir. 1999). The Second Circuit concluded that “the Publishers’ licensing of Authors’ works to UMI for inclusion in these databases is not within the Section 201(c) revision privilege.” Id. at *22. The Court continued:

The relevant inquiry under Section 201(c), is . . . whether the republication or redistribution of the copyrighted piece is as part of a collective work that constitutes a “revision” of the previous collective work, or even a “later collective work in the same series.” If the republication is a “new anthology” or a different collective work, it is not within the privilege. H.R. Rep. No. 94-1476, at 122-23 (1976), reprinted in 1976 U.S.C.A.A.N. 5659, 5738. Because NYTO is for present purposes at best a new anthology of innumerable editions of the Times, and at worst a new anthology of innumerable articles from these editions, it cannot be said to be a “revision” of any (or all) particular editions or to be a “later collective work in the same series.”

Id. at *22-23. Accord Ryan v. Carl Corp., 23 F. Supp. 2d 1146, 1150 (N.D. Cal. 1998), 48 U.S.P.Q.2D (BNA) 1626 (commenting that “calling the reproduction of a single article a “revision” of a collected work, however, is more strained than even a flexible interpretation can withstand” and construing Section 201(c) of the Copyright Act in the authors’ favor).

D.        Challenging the constitutionality of Sonny Bono Copyright Term Extension Act of 1998 (CTEA).(32)

The Sonny Bono Copyright Term Extension Act of 1998 has been criticized as copyright overprotection, rather than copyright extension. This Act is important to the Internet because it reduces the benefits of those Internet sites that provide digital copies of public domain works.

Some have criticized the CTEA because it offers an extension of the term of copyrights for an author or creator without any reciprocal requirement of the author or creator. Also, the CTEA delays works from entering the public domain, without any corresponding benefit to society. One such critic of the CTEA, Lawrence Lessig, the Berkman Professor of Law at Harvard Law School, has filed a lawsuit on behalf of Eldritch Press,(33) a non-profit organization that posts literary works on the Internet when they have entered the public domain.(34)

Article I, Section 8 of the United States Constitution states that Congress may “promote the Progress of Science and useful arts, by securing for limited times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries” (emphasis added). In 1790, this limited time period of copyright was twenty-eight years. Subsequently, Congress enacted a series of extensions, which provide for copyright terms of up to seventy-five years. These extensions retroactively extended the copyright for works which were written many years ago that would otherwise soon enter the public domain.(35) The Sonny Bono Copyright Term Extension Act of 1998 has again retroactively extended the copyright terms; this extension is challenged in the Eldritch lawsuit. The plaintiffs argue that (1) the retroactive extension in the Sonny Bono Copyright Extension Act violates the constitutional “limited times” requirement for constitutional exclusive rights to “writings and discoveries” and (2) the retroactive and prospective extensions violate the First Amendment because they suppress speech without promoting any respective governmental interests. The Sonny Bono Copyright Extension Act has also been criticized by some as merely a vehicle which Disney (which lobbied for the Act) will benefit from, because Mickey Mouse would have entered the public domain in 2004. Under the Sonny Bono Act, however, Mickey will remain Disney’s copyright until 2023.(36)

V.      Domain Names and Marks

Domain names give an entity an Internet identity and enable the public to locate an entity on the Internet.

A.        Case law Registration of a competitor’s mark as a domain name (hijacking) was held to be legal in Juno Online Servs., L.P. v. Juno Lighting, Inc., 979 F.Supp. 684 (N.D. Ill. 1997), 44 U.S.P.Q.2D (BNA) 1913.

B.        Playboy Enters., Inc. v. Welles, 7 F.Supp.2d 1098 (S.D. Ca. 1998), 47 U.S.P.Q.2D (BNA) 1186, aff’d, 1998 U.S. App. LEXIS 27739 (9th Cir. 1998). A former playmate was permitted to state her association with Playboy (PEI)(37) on her own Web site. The heading of the defendant’s Web site is “Terri Welles–Playmate of the Year 1981,” and title of the link page is “Terri Welles–Playboy Playmate of the Year 1981.” Each of the pages uses “PMOY ’81” as a repeating watermark in the background. According to defendant, eleven of the fifteen free Web pages include a disclaimer at the bottom of the pages which indicates that the Web site is not endorsed by Playboy. Id. at 1100. Playboy moved for a preliminary injunction which would enjoin defendant from (1) using the trademarked term “Playmate of the Year” in the title of the home page and the link page; (2) from using the watermark “PMOY ’81” in the background; and (3) from using the trademarked terms “Playboy’ and ‘Playmate” in the meta-tagging of defendant’s site. The Court denied a preliminary injunction because the trademarks that defendant uses, and the manner in which she uses them, describe her and identify her. Therefore the Court held that the defendant has made a “fair use” of these marks(38) and her site was not confusingly similar to Playboy’s site.

C.        Playboy Enters., Inc. v. Netscape Communications Corp., 55 F. Supp. 2d 1070 (C.D. Ca. 1999). This case involves the sale of online banner ads keyed to specific search terms: “playboy” and “playmate.” The Court ruled that the terms “playboy” and “playmate” are generic and that Playboy has no monopoly on those words in all forms. Consequently, the Court denied Playboy’s request for a preliminary injunction against Excite, Inc. and Netscape Communications Corporation finding that the sale of those search keywords to third-party advertisers which operate adult entertainment sites does not constitute trademark infringement or dilution.

D. Avery Dennison Corp. v. Sumpton, 1999
U.S. App. LEXIS 19954 (9th Cir. 1999) 51 U.S.P.Q.2D (BNA) 1801. This was an appeal of a case in which an entity which maintained domain registrations for individual names that included among other surnames, “Avery.net” and “Dennison.net” was held not to have diluted the “Avery Dennison” mark. The Ninth Circuit reversed the District Court’s holding that there was dilution. The Ninth Circuit held that:

1.         The Avery Dennison mark was not famous because it was not “truly prominent and renowned” so that even marks “with such powerful consumer associations and even non-competing users can impinge on their value.” Avery, 1999 U.S. App. LEXIS 19954, *13. The Court pointed out that there were many registrations of marks and uses of the marks “Avery” and “Dennison” by others, and this factor weighs against those being famous marks.

2.         The Court also said that although “an intent to arbitrage” constituted a commercial use, an intent to “capitalize on the surname status of ‘Avery’ and ‘Dennison’ did not constitute a commercial use of a mark.” Id. at *30.

E.        Anti-Cybersquatting Consumer Protection Act

The United States Senate has passed a proposed act, entitled the Anti-Cybersquatting Consumer Protection Act (S. 1255), which would:

1.         Allow the bringing of an in rem action(39) against the domain name that had been registered in violation of the Act; and

2.         Permit recovery for cybersquatting, i.e. allow trademark holders to obtain civil damages from those who register domain name identifiers which are identical or similar to their mark: the trademark holder can recover damages of at least $1,000.00, but not more than $100,000.000 per domain name identifier.

F.         Ringling Bros.-Barnum & Bailey Combined Shows v. Utah Div. of Travel Dev., 170 F.3d 449 (4th Cir. 1999), 50 U.S.P.Q.2d (BNA) 1065, held that Ringling Brothers could not prevent Utah from using “The Greatest Snow on Earth” as a slogan for Utah’s winter sports attractions because the Federal Anti-Dilution law was held to require a showing of “actual economic harm” to the famous marks’ economic value by lessening its former selling power as an advertising agent for its goods or services. Proof of this harm should be demonstrated by surveys and showing actual loss.

G.        The First Circuit, in I.P. Lund Trading A.P.S. v. Kohler Co., 163 F.3d 27, 49 U.S.P.Q.2d (BNA) 1225 (1st Cir. 1998), specifically rejected the “lessening of demand for the product” test that had been applied by the Fourth Circuit in the Ringling Brothers case.

H.        ICANN

ICANN is the new non-profit body responsible for domain name system management, IP address allocation, and related functions. ICANN was established last year to (a) phase out the government’s involvement in the domain name system and (b) to end the monopoly held by Network Solutions Inc. (Nasdaq: NSOL), by opening up the registration of such popular domains as “.com” and “.net” to additional companies. In the past year:

1.         An Internet tax ICANN sought to impose was rejected. ICANN had funding problems and sought to impose a charge on all new Internet domain names payable to ICANN. A Congressional committee started an investigation and ICANN backed down on this.

2.         Open meetings were initiated. ICANN was originally holding closed-door meetings. Criticisms erupted and ICANN appears to have changed its procedures and now holds open meetings.

3.         Criticism by Ralph Nadar’s organization:

Ralph Nader, a consumer rights advocate, challenges how ICANN’s power is controlled and proposes “that the group’s authority should be based on a multilateral government charter that clearly defines and limits the organization’s authority.” He has previously criticized the “beleaguered organization for catering to corporate interests and overextending its authority.”(40)

a.         Nader argues that the right to have an Internet domain name should be considered on par with the right to have a street address, a phone number, or a name.

b.         Nader wants ICANN’s internal documents and budget available to the public.

c.         Nader invites public comment to his thirteen point proposal(41) at mailto:ralph@essential.

4.         An additional controversy exists regarding the registration of domain names. A number of entrepreneurs have also tried to change the organization of the domain naming systems by allowing for the private ownership of new top level domain names. Their proposal is that private companies that create a top level domain name and are able to obtain market acceptance of it should own the rights to register and run the registry of those domain names. Although the White House at one time appeared to favor this approach, ICANN has, to date, rejected any such proposal.

5.         The U.S.P.T.O. weighs in. The “Green Paper” and the “White Paper” were drafted under Ira Magaziner’s direction when he was in the White House. Mr. Magaziner appeared to be somewhat sympathetic to the proposed market-oriented approach for adding top level domain names. Becky Burr,(42) at the Department of Commerce, now appears to be in charge of policies regarding these issues and seems opposed to the marketing approach of adding top level domain names.

The U.S.P.T.O., as of May 18, 1999, allows the registration of second level domain names stating on its Web site at http://www.uspto.gov/web/offices/tac/domain/tmdomain.htm:

An Internet domain name that is used to identify and distinguish the goods and/or services of one person, from the goods of and/or services of others, and to indicate the source of the goods and/or services may be registered as a trademark in the U.S.P.T.O.

On the other hand, the U.S.P.T.O. is hostile to the registration of top level domain names stating in its policy dated September 29, 1999 in Guide No. 2-99 available at http://www.uspto.gov/web/offices/tac/notices/guide299.htm:

If a mark is composed solely of a TLD for “domain name registry services” (e.g., the services currently provided by Network Solutions, Inc. of registering .com domain names), registration should be refused under Trademark Act §§1, 2, 3 and 45, 15 U.S.C. §§1051, 1052, 1053 and 1127, on the ground that it the TLD would not be perceived as a mark. The examining attorney should include evidence from the NEXIS® database, the Internet, or other sources to show that the proposed mark is currently used as a TLD or is under consideration as a new TLD.

If the TLD merely describes the subject or user of the domain space, registration should be refused under Trademark Act §2(e)(1), 15 U.S.C. §2(e)(1), on the ground that the TLD is merely descriptive of the registry services.

The U.S.P.T.O. has also rejected applications to register proposed top level domain names for services other than just “domain name registry services.” The writers are unaware of the U.S.P.T.O. granting any registrations of proposed top level domain names to date regardless of the services with which those proposed domain names are associated.

VI.     Privacy

The latest developments concerning privacy on the Internet relate to the passage of the Children’s Online Privacy Protection Act of 1998 and the effect of the European Privacy Directive.

A.        Legislation

The Children’s Online Privacy Protection Act of 1998 (COPPA), 64 Fed. Reg. 22750 (April 27, 1999), forbids the collection and distribution of minors’ personal information(43) without parental consent and restricts distribution and use of that information. This Act is intended to provide protection to the individually identifiable data of children as collected by Internet Service Providers or Web site operators. The Act is supposed to be implemented by FTC rules which should be in place between eighteen and thirty months from COPPA’s enactment. The FTC has not yet issued any final rules, but interim rules were proposed on April 20, 1999:

Of particular importance is the COPPA requirement that, with certain exceptions, Web sites obtain “verifiable parental consent” before collecting, using, or disclosing personal information from children. Section 312.5 of the proposed rule sets forth this requirement along with the following performance standard:

An operator must make reasonable efforts to obtain verifiable parental consent, taking into consideration available technology. Any method to obtain verifiable consent must be reasonably calculated, in light of available technology, to ensure that the person providing consent is the child’s parent. (64 Fed. Reg. 22756)

In its discussion of this section, the Commission identified a number of methods an operator might use to obtain verifiable parental consent, including a print-and-send form signed by the parent and mailed or faxed to the Web site; a credit-card transaction initiated by the parent; a call made by the parent to a toll-free number; or an e-mail accompanied by the parent’s valid digital signature. The Commission also solicited comment on whether there are other e-mail based mechanisms that could provide sufficient assurance that the person providing consent is the child’s parent. (64 Fed. Reg. 22756, 22762) (44)

B.        European Union Privacy Directive

The European Union (EU), in its European Union Privacy Directive,(45) has granted broad rights to individuals about whom personal information is collected and stored in databases. This EU position, based on the idea that privacy is a fundamental human right, is more rigorous than the United States’ position, which does not provide as extensive access to individuals to review this kind of information and has relatively few restrictions on the use of such personal information.(46) This conflict between the EU position and the US position has threatened international electronic commerce.(47) Therefore, the US Department of Commerce negotiated with EU representatives and proposed safe harbor principles for American companies to use in determining whether they comply with EU data protection laws.(48) The “safe harbor” arrangement is expected to be finalized in the fall of 1999. (49)

Major companies are now requiring sites in which they advertise to meet these standards and the proposed safe harbor provision. For example, IBM’s policy(50) on personal information states that it will inform the consumer how it will use the personal information collected:

At IBM, we intend to give you as much control as possible over your personal information. In general, you can visit IBM on the Web without telling us who you are or revealing any information about yourself. There are times, however, when we may need information from you, such as your name and address. It is our intent to let you know before we collect personal information from you on the Internet.

If you choose to give us personal information via the Internet that we or our business partners may need — to correspond with you, process an order or provide you with a subscription, for example – it is our intent to let you know how we will use such information. If you tell us that you do not wish to have this information used as a basis for further contact with you, we will respect your wishes. We do keep track of the domains from which people visit us. We analyze this data for trends and statistics, and then we discard it.

VII.        First Amendment: Child Online Protection Act

The Child Online Protection Act was held unconstitutional in ACLU v. Reno, 1998 U.S. District Lexis 18546 (E.D. Pa. 1998) and ACLU v. Reno, 31 F.Supp. 2d 473 (E.D. Pa. 1999), but there have not been any decisions from the appellate level yet.

VIII.      Jurisdictional Issues

A.        There have also been some interesting recent cases relating to jurisdiction. First, according to the Internet Newsletter, August 1999, a New York trial court has held that a gambling site in Antigua that would not allow gambling on the site if anyone gave an address in a state that prohibited gambling but did not take any other further steps to verify the address’ accuracy constituted a violation of New York State’s prohibitions on gambling and the Federal Wire Act, the Travel Act, and the Interstate Transportation of Wagering Paraphernalia Act. People v. World Interactive Gaming Corp., N.Y. Sup. Ct., N.Y. Co. (July 24, 1999).

B.        Coastal Video Communications Corp. v. Staywell Corp., 1999 U.S. Dist. LEXIS 11827 (E.D. Va. 1999). In a copyright case where one company alleged that its employee handbook had been infringed by another company, the District Court held that whether there was long-arm statute jurisdiction depended on whether the defendant had actually sold its publication, not just attempted to sell its publication, in Virginia. The Court also said that even if such copies were sold in Virginia, that would not be enough to grant specific jurisdiction in that case because the declaratory judgment action that had been filed does not “arise from the sale of the defendant’s publication” but rather from its very existence. Perhaps the lesson from this case, if you desire to get jurisdiction, is to file an infringement action in a copyright case instead of a declaratory judgment.

C.        Where a Virginia resident sued out of state defendants for posting allegedly defamatory material (one defendant posted the material on servers in Virginia via “AOL” and the other defendant posted the material on servers outside Virginia but was held by the Court to be doing business in Virginia from its Web site), a District Court for the Eastern District of Virginia held that there was a tort in the State of Virginia, and there were sufficient minimum contacts to allow for jurisdiction. Bochan v. LaFontaine, 1999 U.S. Dist. LEXIS 8253 (E.D. Va. 1999).

D.        In a similar case, Melvin v. Doe, Cir. Ct. of Loudoun County, Civil No. 21942 (June 24, 1999), a Virginia Court held that where both the plaintiff and the defendant were Pennsylvania residents, even though a tort may have occurred in Virginia by defamatory material being placed on the AOL server in Virginia, there were not sufficient minimum contacts to meet the jurisdiction requirements for personal jurisdiction.

E.         In Mink v. AAAA Dev., 1999 U.S. App. LEXIS 22783 (5th Cir. 1999), the Fifth Circuit articulated a structure for determining when a court can assume jurisdiction of a company with a presence in cyberspace.

1.         The Fifth Circuit followed the sliding scale in Zippos Mfg. Co. v. Zippo Dot Com, 952 F. Supp. 1119, 1124 (W.D. Pa. 1997), setting out three levels of Internet business. (51)

a.         First, companies which merely advertise or post information about their business on the Internet with “passive” Web sites cannot be sued out of state simply because they maintain the Web site. In Mink, the company’s Web site “provides users with a printable mail-in order form, AAAA’s toll-free telephone number, a mailing address, and an electronic mail (“e-mail”) address, [and] orders are not taken through AAAA’s website [sic]. This does not classify the website [sic] as anything more than a passive advertisement.” Mink at *7.

b.         The second category consists of companies whose Web site allows a user to exchange information with a host computer. Citing Zippos, the Court reasoned that “the exercise of jurisdiction is determined by the level of interactivity.” Mink at *7 – *8.

c.         The companies which enter into contracts with out-of-state residents that involve the “knowing and repeated transmission of computer files over the Internet,” can be sued in the home state of the out of state residents. Mink at *8 -*9.

IX.     Conclusion

We are now at the point where there are judicial precedents and/or proposed statutes resolving many previously troubling Internet issues. Future cases are likely to focus more on reconciling the conflicts between intellectual property rights and/or privacy rights, on one hand, and free speech rights, on the other hand.


(1) In Vault Corp. v. Quaid Software Ltd., 847 F.2d 255 (5th Cir. 1988), the Fifth Circuit, applying Louisiana law, held that the shrinkwrap license was unenforceable. In this case, the Plaintiff, Vault Corporation, developed software for Vault Corp.’s software developer customers to embed in their software to prevent their end user customers from using the software on more than one computer. When the Vault Corporation sold its software, it included a shrinkwrap license which was expressly authorized by a Louisiana statute and prohibited reverse engineering of the software. The defendant, Quaid, purchased the software and reversed engineered it. The Fifth Circuit held that the shrinkwrap license and the related statute were unenforceable because they were “pre-empted” by copyright law. The Court’s holding implies that if pre-emption does not apply, then the shrinkwrap license is enforceable. Most courts that have decided the issue have held that agreements prohibiting reverse engineering and disclosure of confidential information are not pre-empted by the Copyright Act because they involve an agreement between private consenting parties, and therefore are different from copyright which is imposed by statute. See, e.g., Computer Associates v. Altai, 982 F.2d 693 (2nd Cir. 1992).

(2) See, e.g., Feist Publications, Inc. v. Rural Telephone Company Service, 499 U.S. 340, 111 S. Ct. 1282, 113 L.Ed. 2d 358 (1991). For additional materials on copyright law, see the writers’ law firm Web site at http://www.internetlegal.com. There is some concern among commentators that to allow unlimited use of shrinkwrap and clickwrap licenses to protect material not otherwise protected by copyright law could vitiate the copyright fair use doctrine.

(3) This case also dealt with the enforceability of a limitations of remedies clause contained in a shrinkwrap license.

(4) See O.C.G.A. §10-12-2.

(5) A “secure electronic signature” is defined as “an electronic or digital method executed or adopted by a party with the intent to be bound by or to authenticate a record, which is unique to the person using it, is capable of verification, is under the sole control of the person using it, and is linked to data in such a manner that if the data are changed the electronic signature is invalidated.” O.C.G.A. §10-12-3.

(6) The Act provides, in Section 106, Legal Recognition of Electronic Records, Electronic Signatures, and Electronic Contracts

(a)        A record or signature may not be denied legal effect or enforceability solely because it is in electronic form.

(b)        A contract may not be denied legal effect or enforceability solely because an electronic record was used in its formation.

(c)        If a law requires a record to be in writing, or provides consequences if it is not, an electronic record satisfies the law.

(d)       If a law requires a signature, or provides consequences in the absence of a signature, the law is satisfied with respect to an electronic record if the electronic record includes an electronic signature.

See UETA Sections 201, 301, and 401(a) (1998 Annual Meeting Draft); Uncitral Model Articles 5, 6, and 7.

(7) A copy of the proposed Act is available online at www.law.upenn.edu/library/ulc/ulc.htm

(8) The National Conference of Commissioners on Uniform State Laws (NCCUSL) and the American Law Institute (ALI) are responsible for overseeing updates to the Uniform Commercial Code. In 1995, a committee was formed to draft a separate UCC article to specifically address software licensing and electronic commerce. Various versions have been proposed and debated. The goal is to propose a version that most, if not all, of the state legislatures will adopt.

(9) UCITA was approved by the National Conference of Commissioners on Uniform State Laws (NCCUSL) at its annual meeting in Denver at the end of July, 1999. Foster, Ed, UCITA Author Does Some Moonlighting for Money, Courtesy of Microsoft, InfoWorld: The Gripe Line, Oct. 11, 1999.

(10) Graff, George L., Controversial Computer Act Offers Major Innovations: Proposed Uniform Statute for The Information Age Is Approved, Computer Law Strategist, Aug. 1999, Vol. XVI, No. 4.

(11) Id.

(12) See also http://www.ll.georgetown.edu/allwash/UCITA2html

(13) Spam is the name given for unsolicited e-mail messages which flood the Internet. Spam generally consists of commercial advertising (sometimes for adult oriented Web sites or get-rich-quick schemes).

(14) A copy of this Order is attached as Appendix A.

(15) See William M. McSwain, The Long Arm of Cyber-Reach, 112 Harv. L. Rev. ___ (Issue 7, May, 1999).

(16) See, CompuServe, Inc. v. Cyber Promotions, Inc., 962 F.Supp. 1015 (S.D. Ohio 1997) in which the court held that enjoining the sending of spam to CompuServe’s customers was based on a trespass action that didn’t involve First Amendment considerations.

(17) See Central Hudson Gas & Elec. Corp. v. Public Serv. Comm’n of N.Y., 447 U.S. 557, 562-563, 65 L.Ed.2d 341, 100 S.Ct. 2343 (1980).

(18) Cf. Sable Communications v. FCC, 492 U.S. 115, 127-128, 109 S.Ct. 2829, 2837, 106 L.Ed.2d 93 (1989) (there is no captive audience problem where the listener of dial-a-porn must take affirmative steps to receive the communication).

(19) See Intel v. Hamidi, supra.

(20) In similar cases, the First Amendment issue was not raised. See, e.g., America Online v. IMS, 24 F. Supp. 2d 548 (E.D. Va. 1998); America Online v. Prime Data Sys., Inc., 1998 U.S. Dist. LEXIS 20226 (E.D. Va. 1998); America Online v. LCGM, Inc., 46 F. Supp. 2d 444 (E.D. Va 1998).

(21) The text is attached as Appendix B.

(22) Because this language is written broadly enough to prevent noncommercial anonymous bulk e-mailings, it arguably violates the First Amendment. See, ACLU of Georgia v. Miller, 977 F.Supp. 1228 (N.D. Ga. 1997).

(23) The Act defines the term “unsolicited electronic mail message” as “any substantially identical electronic mail message other than electronic mail initiated by any person to others with whom such person has a prior relationship, including prior business relationship, or electronic mail sent by a source to recipients where such recipients, or their designees, have at any time affirmatively requested to receive communications from that source.”

(24) Nev. Rev. Stat. 41.735 provides immunity for persons who provide users with access to a network and applies to items of electronic mail obtained voluntarily.

(25) Nev. Rev. Stat. 41.715 defines “electronic mail” as a message, a file or other information that is transmitted through a local, regional or global network, regardless of whether the message, file or other information is:

1. Viewed;

2. Stored for retrieval at a later time;

3. Printed onto paper or other similar material; or

4. Filtered or screened by a computer program that is designed or intended to filter or screen items of electronic mail.

(26) Cal. Business & Professions Code §17538.4 provides as follows:

(a) No person or entity conducting business in this state shall facsimile (fax) or cause to be faxed, or electronically mail (e-mail) or cause to be e-mailed, documents consisting of unsolicited advertising material for the lease, sale, rental, gift offer, or other disposition of any realty, goods, services, or extension of credit unless:

(1) In the case of a fax, that person or entity establishes a toll-free telephone number that a recipient of the unsolicited faxed documents may call to notify the sender not to fax the recipient any further unsolicited documents.

(2) In the case of e-mail, that person or entity establishes a toll-free telephone number or valid sender operated return e-mail address that the recipient of the unsolicited documents may call or e-mail to notify the sender not to e-mail any further unsolicited documents.

(b) All unsolicited faxed or e-mailed documents subject to this section shall include a statement informing the recipient of the toll-free telephone number that the recipient may call, or a valid return address to which the recipient may write or e-mail, as the case may be, notifying the sender not to fax or e-mail the recipient any further unsolicited documents to the fax number, or numbers, or e-mail address, or addresses, specified by the recipient.

In the case of faxed material, the statement shall be in at least nine-point type. In the case of e-mail, the statement shall be the first text in the body of the message and shall be of the same size as the majority of the text of the message.

(c) Upon notification by a recipient of his or her request not to receive any further unsolicited faxed or e-mailed documents, no person or entity conducting business in this state shall fax or cause to be faxed or e-mail or cause to be e-mailed any unsolicited documents to that recipient.

(d) In the case of e-mail, this section shall apply when the unsolicited e-mailed documents are delivered to a California resident via an electronic mail service provider’s service or equipment located in this state. For these purposes “electronic mail service provider” means any business or organization qualified to do business in this state that provides individuals, corporations, or other entities the ability to send or receive electronic mail through equipment located in this state and that is an intermediary in sending or receiving electronic mail.

(e) As used in this section, “unsolicited e-mailed documents” means any e-mailed document or documents consisting of advertising material for the lease, sale, rental, gift offer, or other disposition of any realty, goods, services, or extension of credit that meet both of the following requirements:

(1) The documents are addressed to a recipient with whom the initiator does not have an existing business or personal relationship.

(2) The documents are not sent at the request of, or with the express consent of, the recipient.

(f) As used in this section, “fax” or “cause to be faxed” or ” e-mail” or “cause to be e-mailed” does not include or refer to the transmission of any documents by a telecommunications utility or Internet service provider to the extent that the telecommunications utility or Internet service provider merely carries that transmission over its network.

(g) In the case of e-mail that consists of unsolicited advertising material for the lease, sale, rental, gift offer, or other disposition of any realty, goods, services, or extension of credit, the subject line of each and every message shall include “ADV:” as the first four characters. If these messages contain information that consists of unsolicited advertising material for the lease, sale, rental, gift offer, or other disposition of any realty, goods, services, or extension of credit, that may only be viewed, purchased, rented, leased, or held in possession by an individual 18 years of age and older, the subject line of each and every message shall include “ADV:ADLT” as the first eight characters.

(h) An employer who is the registered owner of more than one e-mail address may notify the person or entity conducting business in this state e-mailing or causing to be e-mailed, documents consisting of unsolicited advertising material for the lease, sale, rental, gift offer, or other disposition of any realty, goods, services, or extension of credit of the desire to cease e-mailing on behalf of all of the employees who may use employer-provided and employer-controlled e-mail addresses.

(i) This section, or any part of this section, shall become inoperative on and after the date that federal law is enacted that prohibits or otherwise regulates the transmission of unsolicited advertising by electronic mail (e-mail).

(27) See Digital Millenium Copyright Act, Sec. 1201. Circumvention of copyright protection systems.

(28) Digital Performance Right in Sound Recordings Act of 1995 (Public Law 104-39).

(29) The Rio portable music player is a digital audio recording device. The Rio is a small device (roughly the size of an audio cassette) with headphones that allows a user to download MP3 audio files from a computer and to listen to them elsewhere.

(30) See 17 U.S.C. §1001 et seq. (P.L. 102-563, at 4, 106 Stat. 4248).

(31) Discord Surrounding Diamond Multimedia’s Rio Player is Ended Through Settlement Agreement, The Intellectual Property Strategist, Sept. 1999, Volume 1, Number 12, at 4.

(32) See P.L. 105-298, 112 Stat. 2827.

(33) Eric Eldred founded Eldritch Press in late 1995, and initially, Eldritch Press posted works of American literature by authors such as Nathaniel Hawthorne and Henry James. Now, Eldritch Press posts new works the moment they enter the public domain. Some of the works Eldritch Press posts are out of print or are not included in library collections, and therefore they are not obtainable by the public in any other way. See How Long is Too Long? Recent Congressional Copyright Giveaway Claimed Unconstitutional at http://eldred.ne.mediaone.net/pr-1999-01-12.txt.

(34) See Eldred v. Reno, United States District Court for the District of Columbia, Case No. 1:99CV00065 JLG (filed January 11, 1999). Visit this Web site to view the pleadings in this case: http://cyber.law.harvard.edu/eldredvreno/legaldocs.html.

(35) See http://www.kingkong.demon.co.uk/ccer/ccer.htm, a site that documents all renewals of 1923 book copyrights, representing works that the Copyright Term Extension Act keeps from the public domain.

(36) Slotek, Jim, M-I-C . . . © you real soon . . . k-e-y . . ., Toronto Sun Times, Nov. 1, 1998; see also Naughton, John, Mickey Mouse Saved for Disney? Phew. What a Narrow Squeak, Guardian Unlimited, May 2, 1999.

(37) As found by the Court, Playboy Enterprises (PEI):

owns federally registered trademarks for the terms Playboy, Playmate, Playmate of the Month, and Playmate of the Year. The term Playmate of the Year is sometimes abbreviated “PMOY.” PEI does not have a federally registered trademark in the abbreviation “PMOY,” although PEI argues that “PMOY” is worthy of trademark protection because it is a well-known abbreviation for the trademark Playmate of the Year.

Playboy Enterprises, 7 F.Supp.2d 1098, 1100.

(38) The Court also found that, with respect to the meta tags, there is no trademark infringement where defendant has used Playboy’s trademarks in good faith to index the content of her Web site.

(39) This statute would allow a court to order the cancellation or forfeiture of the domain name or the transfer of the name to the owner of the trademark. It will make it possible for plaintiffs to go after domain names as a group rather than being forced to sue each of the registrants individually. See Porsche Cars North America, Inc. v. porsch.com, 51 F. Supp. 2d 707 (E.D. Va. 1999), 51 U.S.P.Q.2d (BNA)1461, in which the Court rejected Porsche’s “in rem” claim to grab control of domain names incorporating versions of the “Porsche” name to avoid having to individually sue hundreds of registrants that had registered those domain names.

(40) Mack, Jennifer, Nader Proposes Limits to ICANN, ZDNet News, Sept. 27, 1999.

(41) A framework for ICANN and DNS Management

Initial Proposals (comments welcome)

version 1.02 September 25, 1999

1. ICANN’s authority should be based upon a multilateral government charter. That Charter should define and limit ICANN’s authority.

2. The charter should be based upon a limited purpose sui generis agreement among countries that express interest in working together, and that agree that ICANN’s role should be limited to tasks essential to maintaining an efficient and reliable DNS management, and that ICANN will not be used as an instrument to promote policies relating to conduct or content on the Internet. (Additional multilateral institutions may be desired to address electronic commerce issues, but ICANN itself should not become the foundation for a vast Internet governance institution. See http://www.cptech.org/ecom/cpt-wcpo.html)

3. ICANN should not use its power over domain registration policy to exclude persons from the use of a domain on issues that are not germane to managing the DNS system of mapping IP addresses into domain names. The right to have a domain on the Internet should be considered the same as the right to have a street address, a telephone number or a person’s name.

4. ICANN should identify a membership and elect its board of directors from its membership before it makes additional policy decisions (in those areas appropriate for action by ICANN).

5. Membership should be open to anyone who uses the Internet. There should be no fee associated with membership or voting rights.

6. The records of ICANN should be open to the public. The public should have rights to documents as, similar to rights provided in the US Freedom of Information Act.

7. The meetings of ICANN should be open to the public.

8. The public should be given an annual opportunity to review and comment on the ICANN budget.

9. The budget of ICANN should be subject to review by the countries that provide the ICANN charter. Fees associated with domain registration should only be spent on activities essential to the management of the DNS system.

10. National governments should be permitted to exercise discretion over policies relating to the use of country top level domains (.fr, .uk, .us, etc.).

11. For generic top level domains (.com, .org, .net, and new gTLDs), the domain space should be declared a public resource. The registrar or registries perform services on behalf of the users of the domains, and will not own the domain space. It should be possible to replace firms engaged in registration services and DNS management, without risking the stability of the Internet.

12. On matters of public interest (in the narrow areas where ICANN will operate), such as policies regarding the use of trademarks or the privacy of domain registration information, ICANN should make recommendations to the sui generis multinational body created to manage ICANN, and the multinational body should accept, reject or modify the recommendations, after giving the public a fully adequate opportunity to review and comment on the proposals.

13. On the issue of trademarks, the Charter should explicitly protect the public’s rights to parody, criticism and free speech. For example, domain names like GM-sucks.com, which would not be confused with GM.com, should be permitted.

(42) Becky Burr is the Associate Administrator of the National Telecommunication and Information Administration, Office of International Affairs.

(43) The Act defines “personal information” to include an individual’s first and last name, home and other physical address, e-mail address, social security number, and telephone number. 1999 S. 809; 106 S. 809.

(44) See Benjamin I. Berman, Acting Secretary of the Federal Trade Commission, Federal Register Notice announcing Public Workshop on Proposed Regulations Implementing the Children’s Online Privacy Protection Act, Supplementary Information, June 23, 1999, 16 C.F.R. Part 312, Children’s Online Privacy Protection Rule at http://www.ftc.gov/os/1999/9906/kidsprivacy.htm.

(45) For the official text of the European Union Privacy Directive, see Official Journal of the European Communities of 23 November 1995 No L. 281 p. 31. For an unofficial version, visit http://www.cdt.org/privacy/eudirective/EU_Directive_.html.

(46) See, e.g., Mosceyunas, Anne K., On-Line Privacy: The Push and Pull of Self-Regulation and Law, Computer Law Section Newsletter, State Bar of Georgia, July, August, September, 1999, pp. 13-15; Cranman, Kevin A., Internet and Electronic Communication Privacy Issues: An Overview and Legislative Update, 14th Annual Computer Law Institute, Program Materials 1999, Part 10.

(47) Winn, Jane K., Digital Signatures, Smart Cards, and Electronic Payment Systems, ICLE Fourteenth Annual Computer Law Institute, Sept. 24, 1999, p. 22.

(48) See Joint Report on Data Protection Dialogue to the EU/US Summit, June 21, 1999, which is attached as Appendix C.

(49) Id.

(50) See http://www.ibm.com/privacy/.

(51) For further analysis, see Koppel, Nathan, Cyber-Ad Jurisdiction Isn’t Automatic, Texas Lawyer, Sept. 27, 1999.

The information above is provided for general educational purposes and not as legal advice. Laws in areas in which we practice change continually and also vary from jurisdiction to jurisdiction. Therefore no visitor to our site should rely on any of the articles provided for legal advice, but should always consult their own attorney regarding legal matters.

© 1999, Rob Hassett, Atlanta, Georgia. All Right Reserved.