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Rights of Privacy and Publicity for Film and Television

By Rob Hassett

An earlier version of this article appeared in the January 1997 issue of The Multimedia & Technology Licensing Law Report published, at that time, by Warren, Gorham & Lamont, and later published by West Group.  That article was based on program materials developed by the writer in connection with his presentation at the Cutting Edge Music Conference in New Orleans, Louisiana in August of 1996.

The writer wishes to thank Lori Brill, Lynn Hassett, and Adam Alexander for their help in updating earlier versions of this Article.

RIGHTS OF PRIVACY AND PUBLICITY

When may a producer of a film and/or television program use an individual’s name, likeness, or identity or information concerning such individual without permission? Restrictions on the use of names, likenesses and identities of individuals and public disclosure of information about them are governed by the right of publicity and two categories of the right of privacy.

Restatements

Section 46 of the Restatement of the Law Third, Unfair Competition, states in pertinent part:

One who appropriates the commercial value of a person’s identity by using without consent the person’s name, likeness, or other indicia of identity for purposes of trade is subject to liability for the relief appropriate.

Section 652A of the Restatement of the Law, Torts 2d, states in pertinent part:

The right of privacy is invaded by: … (b) appropriation of the other’s name or likeness…; (c) unreasonable publicity given to the other’s private life….;

The elements of appropriation invasion of privacy are the same as for violation of the right of publicity with one exception.  The invasion of the right of privacy is a personal tort and generally may not be assigned or inherited.  The  right of publicity, a property right, may generally be assigned and inherited. See, e.g., Martin Luther King Jr. Center For Social Change v. American Heritage Products, 250 Ga. 135, 296 S.E.2d 697 (Ga. 1982).

There are two other categories of the right of privacy which are not addressed in this article – wrongful intrusion and false light.  Intentional intrusion upon the solitude or seclusion of another on his or her private affairs or concerns if such intrusion would be highly offensive to a reasonable person constitutes “wrongful intrusion.”  The elements of “false light” are the same as for defamation except that false light does not require that the false statement be disparaging.

Origins

English common law did not recognize the right of privacy or publicity except to the extent that such rights existed tangentially under copyright and trademark law. In 1890, Samuel D. Warren and future Supreme Court Justice Louis D. Brandeis wrote an article arguing that a right of privacy should exist. Samuel D. Warren & Louis D. Brandeis, The Right to Privacy, 4 Harv. L. Rev. 193 (1890). The first court to accept the right of privacy was the Georgia Supreme Court in Pavesich v. New England Life Ins. Co., 122 Ga. 190, 50 S.E. 68 (1905).  The Georgia Supreme Court held that Mr. Pavesich stated a claim against New England Life for alleged wrongful use of his picture in an advertisement for the Defendant’s insurance products.  Today, privacy and publicity rights are based on state common and statutory law. Because these rights are relatively new and different legislatures and courts decide how they apply, there are variations in the interpretation and application of these rights.

Acceptance

Since the Pavesich case, some form of the right of privacy relating to appropriation and/or the right of publicity has been adopted either by statute or court decision in every state that has addressed the issue. Minnesota and Virginia (in Virginia only in federal cases applying Virginia law) appear to be the only states which have rejected right to privacy involving giving unreasonable publicity to an individual’s private life. See, Hendry v. Conner, 303 Minn. 317, 226 N.W.2d 921 (1975) and Williams v. Nathan, 21 Med. L. Rptr. 1339 (E.D. Va. 1993); Brown v. American Broadcasting Co., 704 F.2d 1296 (4th Cir. 1983).   In 1998, the Supreme Court of Minnesota overruled prior precedent in recognizing this right.  See, Lake v. Wal-Mart Stores, Inc., 582 N.W.2d 231 (Minn.1998).

Written Consent

To avoid violating these rights, the best approach is to obtain a written consent from each person whose name, likeness, or identity will be included in a film or television program. There are three reasons consent should be obtained in writing. First, unless in writing, some state statutes provide that such consents are not valid. See, J. Thomas McCarthy, The Right of Publicity and Privacy, § 10.6 (2003). Second, there could be a dispute about the existence of an oral consent. Finally, unless the consent is in writing, there could be confusion concerning its scope.

USE OF NAME, LIKENESS OR IDENTITY WITHOUT CONSENT

Uses Permitted

There are often situations in which it is impractical to obtain written consent to use a name, likeness or identity and one must decide whether or not to use a particular photograph or video for a film or television program. Situations in which such uses are permitted include the reporting of newsworthy events and uses in which no person is identified or identifiable.  Courts generally hold that the use of names, likeness or identity in connection with the reporting of newsworthy events is allowed under the First Amendment which forbids any laws “abridging the freedom of speech or of the press.”

There are four circumstances in which the use of photographs, films and/or videos is permitted. First, the use of photographs, films and videos of buildings or other structures taken from public streets and similar non-restricted areas in which individuals are not recognizable does not violate anyone’s privacy or publicity rights. The reason is that privacy and publicity rights relate to individuals and not to buildings or other structures. See, e.g., Jaubert v. Crowley Post-Signal, Inc., 375 So.2d 1386 (La. 1979).  Of course it would still be important to make sure that the use of the photographs, films or videos of the structure does not infringe someone’s copyrights in the materials or constitute a violation of other privacy rights such as wrongful public disclosure of embarrassing private facts, which is discussed in this paper below, or amount to a wrongful intrusion, not addressed in this article but relating to such actions as peering into someone’s home through the windows.

Second, only individuals who are recognizable in a photograph or video have any claim for misappropriation of likeness or identity. Therefore, morphing pictures and videos so individuals are not recognizable eliminates any privacy and publicity right claims. See, e.g., Cheatham v. Paisano Publications, 891 F.Supp. 381 (W.D. Ken. 1995), where the Court said that there was a jury question whether or not the Plaintiff’s posterior was recognizable in the particular photograph.

In Pesina v. Midway, 948 F. Supp. 40 (N.D. Ill.1996), a martial artist hired to model for characters of the coin operated arcade games Mortal Kombat and Mortal Kombat II alleged that use of his name and likeness in subsequent home video games violated his common law right of publicity.  Mr. Pesina’s movements had been captured on video, digitized, and incorporated into the games after extensive editing.  The district court granted Midway’s motion for summary judgment in part because Midway was able to show that the public did not recognize Mr. Pesina within the game.  “[A]fter comparing Mr. Pesina and the game character, Johnny Cage, who allegedly resembles the plaintiff, only 6% of 306 Mortal Kombat users identified Mr. Pesina as the model.”  Id. at 42.  The brief use of Pesina’s name in the game (for eight seconds only when a player won), although unauthorized, also was held not enough to constitute a right of publicity claim.

Third, photographs, videos, and films taken of participants and spectators in connection with a newsworthy event may be used in photo essays and documentaries of the event. In Cheatham v. Paisano Publications, supra, the Plaintiff was a jean “designer” who wore one of her own “designs” to a Kentucky bikers’ convention. She had cut out the bottom of a pair of jeans and replaced it with fishnet fabric. A magazine published a photo essay of the event which included pictures of her wearing her special outfit. She sued the magazine and claimed that it misappropriated her identity. In dismissing her claim, the Court held that the photo essay was a report of a newsworthy event. See also, Time, Inc. and Steve Kagan v. Sand Creek Partners, L.P., 825 F.Supp. 210 (S.D. Ind. 1993). The Court in Cheatham also held that use of the Plaintiff’s pictures on T-shirts was not a protected newsworthy use and, if the Plaintiff were recognizable from the picture, then Plaintiff would have a basis for a claim.

There are limitations on the use of name, likeness, and identity in connection with reporting news. For example, in the movie “Woodstock” there is an extensive interview with an individual responsible for cleaning latrines. This interviewee sued for misappropriation of his right of privacy. The Court held that he was made an “involuntary performer” due to the extensive interview and allowed the case to proceed to trial. See, Taggart v. Wadleigh-Maurice, Ltd., 489 F.2d 434 (3d Cir. 1973). Additionally, copying a performer’s entire performance goes beyond the allowed reporting of a newsworthy event and constitutes a violation of the performer’s right of publicity. See, Zacchini v. Scripps-Howard Broadcasting, Co., 433 U.S. 564 (1977). Also, where a performance is staged using actors, such as a professional wrestling match, it is unlikely a Court would hold it to be the type of event to which the rights of publicity and appropriation policy do not apply. See, e.g., Ventura v. Titan Sports, Inc., 65 F.3d 725 (8th Cir. 1995).

Finally, use of names, pictures and identities in connection with the production of biographies of newsworthy individuals is permissible. In Harris Matthews v. Random House, 15 F.3d 432 (5th Cir. 1994), the Fifth Circuit U.S. Court of Appeals, applying Texas law, held that a book detailing the author’s and her ex-husband’s experiences as undercover agents did not violate the privacy or publicity rights of her ex-husband.  Information concerning their activities and convictions were the subject of news reports.  Thus, it was a matter of public record and considered newsworthy events. See, also, Mickey Dora v. Frontline Video, Inc., 18 Cal. Rptr. 2D 790 (Cal. App. 1993), in which Mickey Dora, a surfing legend, appeared in a video documentary entitled “The Legends of Malibu.”  The Court held that the use of Dora’s picture was newsworthy.

Uses Not Permitted

As to some extent referred to above, there are at least three (3) categories of uses of names, likenesses, and identities of individuals which are generally not permissible. Those uses involve advertising and similar commercial exploitation of name, likeness or identity, staged performances and exceeding the scope of agreements limiting scope of use.

First, use of an individual’s name, likeness, or identity in advertising, without that individual’s consent is not permitted. For example, in Town & Country Properties, Inc. v. Riggins, 249 Va. 387, 457 S.E.2d 356 (1995), the Plaintiff, who had been a successful football player for the Washington Redskins, transferred his interest in a house he owned in Virginia to his ex-wife as part of a divorce settlement. When his wife decided to sell the house, she placed his name and picture prominently on flyers promoting her sale of the house. The Supreme Court of Virginia held that Riggins had a claim for infringement of what was, in effect, his right of publicity. See also, Pooley v. National Hole-N-One Assoc., 89 F. Supp. 2d 1108 (D.C. Az. 2000) (holding that Plaintiff’s right of publicity was violated because Defendant used video footage of Plaintiff making a “hole in one” in a commercial manner to promote its fundraising program).  The aforementioned situation is treated differently from the use of an individual’s name, likeness or identity in advertising of a publication or other media in which that person’s name, likeness or identity is legally used. See, e.g., Montana v. San Jose Mercury News, Inc., 40 Cal. Rptr. 2d 639 (6th Cir. 1995); Lane v. Random House, Inc., 23 Med. L. Rptr. 1385 (D.D.C. 1995).   If the name, likeness or identity is used in a form of media for a legitimate purpose, it may also be used in advertising for that publication, television program or other media.

Also, use of an individual’s name, likeness or identity for a purely commercial purpose (as opposed to in an informative or artistic, including literary, work) is prohibited.  For example, use of the Reverend Martin Luther’s King’s profile on mugs without the consent of his estate was held to constitute a violation of the right of publicity in Martin Luther King Jr. Center For Social Change v. American Heritage Products, 250 Ga. 135, 296 S.E.2d 697 (Ga. 1982).  Likewise, selling posters with the photo of a model or recording artist (as opposed to, for example, including an informative article about them in magazines) is a violation of these rights.

Second, there is no exception to privacy and publicity rights with respect to individuals performing as actors and actresses in dramatic productions. See, e.g., Ventura v. Titan Sports, Inc., supra.

Third, even where use is newsworthy and does not constitute advertising, unauthorized usage has been held to be illegal in instances where the limited purpose for which the interview or pictures was intended is exceeded. In Multimedia WMAZ, Inc. v. Kubach, 212 Ga. App. 707, 443 S.E.2d 491 (Ga. App. 1994), the Plaintiff appeared on a television program in which he was interviewed about having contracted AIDS. Prior to the program, the Plaintiff and Defendant reached an understanding that the Plaintiff’s face would be disguised digitally so that he could not be identified. Apparently, due to the negligence of station employees, the Plaintiff was recognizable at the beginning of the show. The Court held that the Plaintiff had a claim. See also, Daughtry v. Booth & Random House, 23 Med. L. Rptr. 1215 (Glynn County, Georgia Superior Court 1994).

Parody

Parodies are entitled to a substantial degree of First Amendment protection.  However, this protection must be balanced against intellectual property rights. See, for example, the Supreme Court’s application of the Doctrine of Fair Use in the copyright law context in Luther R. Campbell, et al. v. Acuff-Rose Music, Inc., 114 S.Ct. 1164 (1994). In Cardtoons, L.C. v. Major League Baseball Players Ass’n, 838 F. Supp. 1501 (N.D. Okla. 1993), the Plaintiff sought a declaratory judgment claiming that it was not a violation of the publicity rights of well-known baseball players to produce and distribute cards with caricatures and names similar to those baseball players and containing text on the back that ridicules the players. The Tenth Circuit Court of Appeals balanced the publicity rights of the baseball players against the Plaintiff’s First Amendment right to use parody to criticize activities of public figures.  The Court held that the Plaintiff was entitled to produce and distribute the cards. But see, White v. Sansung Electronics America, 971 F.2d 1395 (9th Cir. 1991) in which the Ninth Circuit Court of Appeals held, over two vigorous dissents, that a print advertisement using a robot that mimicked and parodied the persona of Vanna White infringed her right of publicity. Critics argued that celebrities’ monopolization of words, names and images of general cultural significance would lead to the depletion of the public domain and the stifling of free expression. However, recently, the Ninth Circuit Court of Appeals held that California’s right of publicity protects against uses of one’s image in advertising.  Newcombe v. Adolph Coors Co., 157 F.3d 686 (9th Cir. 1998).

Artistic and Literary Uses

Many times artists employ the use of a name or likeness of a real person in their artistic and literary projects.  Although this may not fall under the umbrella of newsworthy events, the First Amendment’s right to free speech often shields forms of expressive art.  “The use of the name of a real person as the name…in a title of a work of entertainment” can be immune from liability where it has “some real artistic relevance” to the work and is “not  chosen just to exploit the publicity value of the person”.  J. Thomas McCarthy, 2 Rights of Publicity and Privacy § 8:72 (2d ed. 2000).

First amendment protection and the right of publicity recently clashed in a case involving the music industry.  In Parks v. LaFace Records, 76 F. Supp. 2d 775 (E.D. Mich. 1999), Rosa Parks sued the Defendants to prevent the use of her name as the title of a rap song written, performed, marketed and distributed by the Defendants.  Ms. Parks objected to the use of her name due to the content of the song.  The United States District Court for the Eastern District of Michigan held that “because the title ‘Rosa Parks’ is not ‘wholly unrelated’ to Defendants’ song, and because the title is the name of an expressive work and not a disguised commercial for a product” the right of publicity did not exist.  Id. at 782.  The Second Circuit reversed and remanded holding that there was a genuine issue of material fact regarding the question of whether the title to the song “Rosa Parks” is or is not “wholly unrelated” to the content of the song.  The song does include the line “move to the back of the bus” but the Plaintiff argued that that line did not relate to Rosa Parks’ experience as a civil rights icon but rather to Outkast’s position that “Outkast” was superior to competitive music groups and that other groups should “take a back seat” to Outkast.  Interestingly, the Court of Appeals also held that there was a genuine issue of fact whether Rosa Parks had a claim for unfair competition under the federal Lanham Act, 15 U.S.C. §1125(a), stating that: “Rosa Parks clearly has a property interest in her name akin to that of a person holding a trademark” and said that the only difference between a right of publicity claim and a claim for unfair competition, which the Court also referred to here as “false advertising,” is that a right of publicity claim does not require any evidence that a consumer is likely to be confused (i.e., any evidence that the public would believe that Rosa Parks had endorsed “Outkast’s” song).

In Guglielmi v. Spelling Goldberg, 25 Cal. 3d 860, 603 P.2d 454 (1979),  the Supreme Court of California skirted the issue by declaring that the right of publicity is not descendible.  However, in Chief Justice Bird’s concurrence, she discussed the issue of whether the use of a celebrity’s name and likeness in a fictional film exhibited on television constituted an actionable infringement of that person’s right of publicity.  Id. The Chief Justice emphasized that film is “a significant medium for the communication of ideas”…and “is protected by the constitutional guarantees of free expression”. Id. at 865.  Film is an expression of ideas and is entitled to constitutional protection irrespective of its contribution to the market place.  The nature of celebrity and prominence is that they will invite creative comment.  Chief Justice Bird concluded that in this situation the value of first amendment protections outweighs the right of publicity.  Additionally, the use of likeness in advertisements of the film was considered merely an adjunct to the exhibition of the film and therefore, not actionable. Id.

Although many instances encompass the use of famous personalities, cases involving private individuals also arise.  Recently, the Second Circuit, upheld a New York Court of Appeals ruling stating that a Plaintiff could not recover under New York’s right of privacy statute “regardless of any false implication that might be reasonably drawn from the use of her photographs to illustrate” a magazine column on sexual regrets.    Messenger v. Gruner + Jahr Printing and Publ’g, 208 F.3d 122 (2nd Cir. 2000).   This decision was based on the determination that the column was newsworthy, the Plaintiff’s picture bore a relationship to the article and the article was not an “advertisement in disguise.”  Id.   The model whose photograph accompanied the article was not informed of its use prior to publication.   Individuals are cautioned to review the pertinent statutes and/or common law in each state.  The case in question was in New York, a jurisdiction which has exemptions to the laws of right of publicity which many other states do not follow.

Advertising versus Other Use

Under the law in most states, use of a person’s name, likeness, or picture other than as part of a public event, for a newsworthy purpose or in connection with an artistic work not primarily an impersonation would not be allowed. See, e.g., Estate of Elvis Presley v. Robb Russen, 513 F.Supp. 1339 (D.Ct. N.J. 1981) where an Elvis impersonator was held to have violated the rights of the Elvis estate. In some states, misappropriation of privacy rights and publicity rights prohibit only advertising. Courts applying Tennessee and Virginia law have construed applicable statutes that way. See, e.g., Apple Corps. Ltd. v. A.D.P.R., Inc., 843 F.Supp. 342 (M.D. Tenn. 1993) (holding that a band impersonating the Beatles could not be restricted from performing its act but was restricted from advertising it). See also, Williams v. Nathan, 21 Med. L. Rptr. 1339 (E.D. Va. 1993). On the other hand, although the California statute relating to privacy and publicity rights prohibits only use of an individual’s name, likeness, or identity in advertising, the California common law dictates that individuals have such rights in situations not involving advertising. See, e.g., Perfect 10, Inc. v. Talisman Communs. Inc., 2000 U.S. Dist. LEXIS 4564 (C.D. Ca. 2000).  In Perfect 10, the Court granted a default judgment to Plaintiff as a result of Defendant’s appropriation of photographs of Plaintiff’s assignors.  The photographs were appropriated for the purpose of advertising and soliciting “sale of photographs and other works on Defendant’s website and for the purpose of selling the appropriated photographs through paid subscriptions to restricted areas of Defendant’s website.”   The Court ruled that this constituted a violation of California’s right of publicity law. See also, Dora v. Frontline Video, Inc., 15 Cal. App. 4th 536 (1993).

UNREASONABLE PUBLIC DISCLOSURE OF EMBARRASSING PRIVATE FACTS

The tort of unreasonable public disclosure of embarrassing private facts is applicable only where the facts being publicized are not newsworthy or, if arguably newsworthy, go beyond the “information to which the public is entitled, and becomes a morbid and sensational prying into private lives for its own sake.” See, e.g., Baugh v. CBS, Inc., Group W. Television, 28 F.Supp. 745 (N.D. Cal. 1993), infra. In addition, the facts must be at least relatively confidential. In Cox Communications v. Lowe, 173 Ga. App. 812, 328 S.E.2d 384 (Ga. App. 1985), a prison inmate who incidentally appeared in a television report concerning prison abuse had no claim for public disclosure of the fact that he was imprisoned as his incarceration was a matter of public record. In Batts v. Capital City Press, Inc., 479 So.2d 534 (La. App. 1985), the Louisiana Court of Appeals held that because the Plaintiff was attacked in a public place, the information was public and could not be the subject of a claim for public disclosure of embarrassing private facts. Haynes v. Alfred A. Knopf, Inc., 8 F.3d 1222 (7th Cir. 1993), involved a book which detailed historical events. In the book, the writer discusses the life stories of various individuals. In a section regarding a particular woman, the author disclosed information about the woman’s ex-husband. The District Court rejected the ex-husband’s claim regarding publicity given to embarrassing private facts on the grounds that the information disclosed was either public record or publicly known prior to publication of the book. On the other hand, in Baugh v. CBS Company, Inc. Group W Television, 828 F.Supp. 745 (N.D. Cal. 1993), the Court held that there was a jury question whether the producers and broadcasters of Street Stories had gone too far in publicly disclosing private facts about a woman who was the victim of spousal abuse. See also, Johnson v. Sawyer, 4 F.3d 369 (5th Cir. 1993), in which a Texas court held that the IRS was liable for wrongfully disclosing confidential information relating to a taxpayer’s tax return.

With the explosion of the Internet, the rights of publicity and privacy have entered a new battlefield.  In a manner of seconds, photography, music and streaming video can be distributed to subscribers worldwide, posing increasing threats to the protection of these rights.  Once posted on the Web, users can copy items almost instantaneously.  This issue of unreasonable publicity of private facts was recently addressed in Michaels v. Internet Entertainment Group Inc., et. al., 5 F.Supp. 2d 823 (D.C. Cal. 1998).  Singer Bret Michaels and actress Pamela Anderson Lee sought to enjoin Defendants from disseminating videotape via the Internet of Michaels and Lee engaged in sexual intercourse.  Plaintiffs filed a preliminary injunction, inter alia, for violation of the right of privacy and right of publicity.  The Defendant argued that Ms. Anderson’s nude appearances in magazines, movies and publicly distributed videotapes rendered the facts on the Michaels videotape no longer private.   The Court disagreed concluding that the private facts depicted on the video were not public by either the “virtue of Lee’s professional appearances or by dissemination of the Tommy Lee videotape.” Id. at 841.  Furthermore, the Court disposed of the newsworthiness argument by noting that the “privilege to report newsworthy information is not without limit.  ‘Where the publicity is so offensive as to constitute a morbid and sensational prying into private lives for its own sake, it serve no legitimate public interest and is not deserving of protection’.” Id. at 840 (citing Diaz v. Oakland Tribune, Inc., 188 Cal. Rptr. 762 at 767 (1983)).  However, the United States District Court granted summary judgment to Paramount Pictures and Viacom (for broadcasting information about the video, as opposed to broadcasting the video itself, in a syndicated television program) noting that the California Supreme Court had recently restated the principle that the newsworthiness defense was to be construed broadly and reiterated that it is “not limited to high-minded discussion of politics and public affairs.” Michaels v. Internet Entertainment Group Inc., et. al., 48 U.S.P.Q. 2d (BNA) 1891(D.C. Cal. 1998).

Conclusion

It is always better to obtain a written consent which permits the use of the name, likeness, or identity of any individual appearing in or who is the subject of disclosure of events in any publication or production.  As outlined above, there are limited situations in which one may make such use without permission.  However, because of the legal uncertainty in this area, it is necessary to have competent counsel review the situation presented prior to any such proposed use.

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Impact of Apple vs. Franklin Decision

By Rob Hassett

Casey Gilson, P.C.

Six Concourse Parkway, Suite 2200

Atlanta, GA 30328

(770) 512-0300

http://www.internetlegal.com

 

Background and Summary

This article first appeared in the December 5, 1983 issue of Computer World and addressed the decision of the U.S. Court of Appeals for the Third Circuit regarding the Apple Computer v. Franklin Computer Corporation lawsuit. This was a very important case both to copyright law in general and to the evolution of the computer industry. (3 Pages)

On August 30, 1983 the U.S. Court of Appeals for the 3rd Circuit filed an opinion deciding that operating system computer programs contained only within computer hardware (in this case on chips) can be the subject of copyright.

According to the opinion, engineers at Franklin Computer Corp. copied operating system programs developed and used by Apple Computer, Inc. so that programs designed for the Apple II computer could also be run on the Franklin Ace computer. Apple Computer filed suit claiming copyright infringement. Apple Computer requested that the trial judge bar Franklin from using, copying or selling those programs until the trial of the case, an understandable request inasmuch as the final trial could be delayed for years.

In deciding whether to grant a request of this type, the courts generally consider two factors. First, is the moving party likely to prevail on the merits of the case at the trial? Second, what are the relative harms that will occur to each of the parties if the motion is granted, as opposed to if the motion is denied?

Four-Front Attack

In addition to the usual legal arguments on procedure, Franklin’s attorneys argued that the programs, or portions of the programs, were not protectable under the copyright laws anyway. They launched a four-front attack.

First, they argued that at least a portion of the programs were written in machine language, more an engineering than a written phenomenon. Since copyright laws apply to expressions, not engineering phenomena, the programs were not subject to copyright.

Second, some of the programs were contained on a read-only memory (ROM), which was only a three-dimensional device rather than in a written code that could be protectable under copyright laws.

Third, the operating system programs constituted ideas as opposed to mere expressions, copyright laws not being applicable to ideas.

Franklin’s attorneys also argued the “big guy, little guy” point that Franklin might be out of business if the motion were granted. If the motion were denied, Apple Computer would suffer, at the most, only the loss of some sales.

The trial court had denied Apple Computer’s motion. It reasoned that it was unclear at the juncture that the copyright laws applied. It bought the “big guy, little guy” argument that the harm to Apple Computer of denying the motion was greatly outweighed by the harm to Franklin of granting the motion. The stage was thus set for the appeal by Apple Computer.

Reversed the Ruling

The 3rd Circuit Court of Appeals reversed the ruling of the trial judge and sent the case back down for further determinations. The Court of Appeals held that:  Programs in machine language were copyrightable.

Whether programs were contained on a ROM chip or anywhere else made no difference.

The court also said that where properly “copyrighted material was concededly copied,” the balancing of harm tests normally applied in the determination of whether to grant a preliminary injunction was inapplicable: So much for the “little guy” whose actions were taken with wide open eyes. The Court of Appeals left two questions open for further determination by the trial judge.

First, the Court of Appeals restated the doctrine that it is only the expression of ideas, and not the idea themselves, that can be copyrighted. The court went on to adopt the rule that if an idea may be expressed in only one way, the idea and expression are said to be the same thing and, in that situation, even the expression may not be copyrighted.

Subject of Debate

The question of what is an idea has long been the subject of debate; but the Court of Appeals went on to say that the general function of translating source code into object code qualifies as an idea. The court cautioned that even though the function of translating such code in general was an idea, the function of translating any particular programs, such as Apple-compatible software, was not covered by this noncopyrightability rule if translation of other non-Apple-compatible software could be accomplished by different expressions.

Second, the court left it to the trial judge to decide whether Apple Computer had properly complied with the statutory formalities pertaining to copyright registration.

Although Apple Computer has overcome major obstacles in the lawsuit, it would, for the following reasons, be premature to say that Franklin has lost the case at the trial level:

It may be determined that one or more of the most important operating programs were governed by the idea-expression merger doctrine and are, therefore, not copyrightable.

It may be determined that various copyright registrations procedures were not followed.

It should be noted that if Franklin does lose the lawsuit, but survives the damages awarded, Franklin can be positioned to develop its own programs to obtain Apple Computer compatibility.

Not Copied

Indications are that the operating systems for the other major compatible systems were not copied. This decision would, therefore, be unlikely to affect companies manufacturing most of the other compatibles. There is a question of how well the “non-copy” compatibles work.

If Apple Computer ultimately prevails, what effect, if any, will this decision have on purchasers of the Franklin Ace? Will these people be considered to be infringers of the Apple Computer operating system? Are these systems subject to seizure?

Every case must be considered on its own facts. However, the copyright laws bar copying or publishing materials without permission of the owner, not the use of them. The few appellate courts that have decided the issue have held that wrongfully copied materials in the possession of subsequent purchasers are not subject to seizure for copyright infringement, with limited exceptions related to imported copies. Note that the use of application software generally requires that the application software be copied onto RAM which would seem to arguably make users of application software liable for infringement.

Regardless of the ultimate outcome of this case, the opinion will presently discourage any producer or intended producer of compatibles from copying operating system programs. In most cases, the risk will far outweigh the development cost savings.

The above information 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.

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.       

 © 1983 Rob Hassett, Atlanta, Georgia. All Rights Reserved.

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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.

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Selling a Good Idea

By Rob Hassett

Frequently asked questions about intellectual property and corporate law:

Question: I have two ideas that I am interested in selling. One is for a new television series that is based, in part, on historic and scientific knowledge. The other is for a new technology for a battery that would be able to power a golf cart across the country with one charge. Can I make money selling or licensing my ideas? If so, how?

Answer: You would have a much better chance of selling the battery idea than the television show. Even the smaller cable networks receive, on average, more than 100 pitches for television shows per day.

In order for you to make money by selling or licensing an idea, the prospective user needs to have a good reason to pay you. Here are some things you can do to make sure your idea pays off:

1.  You could apply for a patent. A patent can protect an idea. It’s very unlikely that the idea for the television show could be patented, but it’s likely the battery technology could be. If you were able to obtain a valid and sufficiently broad patent for the battery, there is a good chance you would be able to sell or license your invention for a large sum of money or a substantial royalty.

2.  You could think of a unique and clever name and have it registered with the United States Patent and Trademark Office to prevent theft. This is more important with respect to the television show than the battery technology. If a network representative wants to use the name for the show, and it’s been registered as a mark, he or she is more likely to enter into an arrangement with you.

3.  You could require that any prospective buyer or licensee enter into a non-disclosure agreement before disclosing your concept. If an idea is truly confidential, a properly crafted non-disclosure agreement will prevent anyone that signs the agreement from using or disclosing the concept. If you can demonstrate the superiority of your battery, you can probably obtain a signed non-disclosure agreement before disclosing how the battery works.

On the other hand, regarding the television program, most television networks will generally not sign a non-disclosure agreement. In fact most networks will insist that anyone that would like to submit an idea for a show, first sign a release providing that the network is not liable for using the show unless the network uses copyrightable material (copyrights protect only expression and not ideas). The network could then use the main idea of the show without violating any copyrights and therefore without having any obligation to you.

4.  You may be able to offer more than just the idea. For example, if you are a recognized authority on batteries, even without applying for a patent, the purchaser/licensee may want your help and input in commercializing the battery. If you have a record of creating desirable shows or, if the show is about history or science and you are an expert in the field who could appear on the show, the purchaser/licensee will likely be more inclined to do a deal with you.

Conclusion

If you want to sell your idea, you should do your best to add some legal protections and otherwise take the steps indicated above. If you are not able to take any of these steps, you should probably either use the idea to start your own business or think of another idea.

Rob Hassett is an attorney in technology, entertainment and corporate law with the Atlanta law firm of Casey Gilson P.C.  He also teaches in the professional education program at Georgia Tech and is the co-author of a volume on Internet Law of a leading treatise on entertainment law.  If you have a question about intellectual property or corporate law, you may contact him at [email protected].

This column and any answers provided are being provided for general information only, and do not, and will not, constitute legal advice.  Readers should always discuss legal matters with their attorneys.

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Costs of Registering Trademarks

SELECTION AND PROTECTION OF TRADEMARKS

(Should You Do It Yourself, Hire An Attorney or What?)

By

Rob Hassett

 

As is the case with a lot of areas of law, but more so than in most, protecting a trademark or service mark is a lot like playing chess.  In connection with clearing and registering a mark, there are numerous choices to make many of which are of high strategic importance beginning, with respect to applying to register the mark, as in chess, with the opening move.

If you are choosing a slogan or other mark and it would not be a problem to be required to stop using it in the future, you could run your own clearance and apply to register the mark yourself.  You would need to be alert to all deadlines.  If the mark is your brand name or is otherwise very important to you, you should hire an attorney who, among other things,  understands the relationships between and among common law and registered marks, registrations in the USPTO, registrations in one or more states and/or one or more other countries, rights to internet domain names, the role of courts and the effect of international treaties) and devotes time and attention to each registration (not a mill) to clear and protect it.

COSTS

I encourage all clients to run a preliminary trademark search themselves mostly relying on searching the database of USPTO.gov and google.com to see if there are any obvious problems.  I then charge hourly for discussion or review of anything found.

If there are no obvious problems, I charge $500 to $1,000 for legal fees and pass on the $129 to $650 out of pocket artificial intelligence computer based search fee, for what we call a “full search.”  The computer based search is much more effective than a human search because it will pick up similar words with different spellings and different words with similar meanings.

A computer based search will usually be more than 200 pages which I will summarize in 2 to 5 pages.

 

The legal fees are based on the likelihood of more versus less problematic “hits.”  Common words like “Apple” are going to have more similar marks that I will need to spend  time reviewing than made  up words like  “Google.”

 

There are a variety of search services which vary in price.  I will discuss the choices with the client and give the client my recommendation.

 

I charge $900 to $1500 to prepare and file an initial application to register a mark in the United States Patent and Trademark Office.  That does not include filing fees of $325 per class.

In about 6 to 12 months after the filing of the application it is likely that the examiner will require changes and may determine that the mark may not be registered for many reasons.  Additionally, competitors and others may raise objections.

I charge hourly to respond to these types of requirements and assertions.

It is at this stage that I am often consulted about a filing that has been made by someone  other than a traditional trademark lawyer.  Most of the time less than optimal decisions have been made regarding the initial application which increases the amount of work needed and the likelihood of a less favorable outcome.

If requirements are successfully negotiated and objections overcome and the filing was for a mark already in use, the mark will usually issue without additional cost or expense. If the mark was filed before use, there will be additional costs and expense to file an example of use.  Those costs and expenses  will be from $300 per class to much more if extensions must be filed because use of all goods and services the applicant wishes  to include have not begun within the amount of time ordinarily allowed.

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Glossary of Words and Phrases Relating to Internet Law

Interactive Online Entertainment Law

By:  Rob Hassett, Suellen W. Bergman and Lori M. Brill

 

Analog – derived from the word “analogous.” Applies in electronic transmission and storage of audio, visual and audio-visual works. The transmitted and/or stored version is similar to but not actually the same as the original. Quality degrades with serial copying.

Clickwrap – an agreement formed by a purchaser manifesting assent to the terms of an agreement online by pointing and clicking a mouse.

Cookies – small files that a Web site server places on a Web site users’ personal computer in which the Web site server stores its own information about the user which allows a Web site server to recognize the user and store the user’s preferences. Use of cookies can create privacy issues.

COPPA – Children’s Online Privacy Protection Act of 1998. The Act takes effect on April 21, 2000, and is not retroactive. According to Senator Richard Bryan (D –NV), who introduced the Act, the primary goals of the legislation are to enhance parental involvement in children’s online activities, maintain the security of personally identifiable information of children collected online, and protect children’s safety and privacy.

COPA – Child Online Protection Act. This was an anti-pornography act that was enacted by Congress but was held unconstitutional the first time a court reviewed it for violating the free speech clause of the First Amendment.

Cybersquatter – one who attempts to profit by registering a domain name which incorporates the trademark of a trademark owner with the hope of selling the mark at a profit back to the owner. This term is frequently used to describe anyone who registers domain names in bad faith.

Cybersquatting – the act of being a “cybersquatter.”

Digital – electronic technology that generates, stores, and processes data in terms of two states: positive and non-positive (positive is expressed or represented by the number 1 and non-positive by the number 0). Relevant here is that audio, visual and audio-visual works may be stored digitally (in other words as data), enabling one to create exact (quality does not degrade with serial copying) copies.

Dilution (Trademark or Service Mark) – use of the same or a similar mark in a manner which may or may not be deceptive or confusing but which lessens the capacity of the mark to identify and distinguish goods or services or which tarnishes the mark. Such action is not prohibited under federal law unless the mark meets the definition of “famous.”

DMCA – Digital Millennium Copyright Act of 1998, among other things, designed to implement the treaty signed in December 1996 at the WIPO Geneva Conference.

Domain Names – word names for Internet addresses (e.g., “www.ecommerce.gov”) which map to unique Internet Protocol (IP) numbers (e.g., 98.37.241.30) that serve as the actual routing addresses on the Internet.

DNS – domain name system; translates Internet names into the IP numbers needed for the transmission of information across the network.

DNSO – refers to the domain name supporting organization of ICANN. It is divided into groups which are charged with the responsibility of providing advice and consultation to ICANN on various topics. For example, Working Group C is responsible for providing ICANN with advice and consultation regarding whether and under what circumstances additional top level domain names should be allowed.

DVD – Digital Video Disk.

Ethernet – a local area network (LAN) developed by Xerox, Digital, and Intel; it is the most widely used LAN access method.

EU – European Union.

Framing – the act of splitting a browser window into multiple, independently controllable regions.

Hijacking (of domain name) – registration of a competitor’s mark as a domain name.

HDML – Handheld Device Markup Language; allows a Web site to be portable so visitors can view the site on their mobile phones, pagers, and other small devices.

Home Page – the first Web page that is supposed to be displayed upon bringing up a Web site with a Web browser.

HTML – Hypertext Markup Language; the authoring language used to create documents on the World Wide Web which defines the structure and layout of a Web document.

Http – Hypertext transfer protocol; the underlying protocol used by the World Wide Web. Http defines how messages are formatted and transmitted and directs how Web browsers and servers should respond to various commands.

Hypertext – a linkage between related text commonly used on World Wide Web pages.

ICANN – The Internet Corporation for Assigned Names and Numbers; the non-profit organization that is responsible for domain name registration. (This responsibility was assigned to ICANN by the United States government.)

Internet – an internet is a large network made up of many smaller networks; the Internet is comprised of interconnected networks in over seventy countries and connects individual, academic, commercial, government, and military networks.

Internet Address – format for addressing a message to an Internet user.

ISP – Internet Service Provider; a company that provides access to the Internet. For a monthly fee, the ISP gives a user a password, username, software package, and access phone number.

Link (Hyperlink) – a direct connection between Web sites, Web pages or places on the same Web page.

Markup Language – a computer language that describes how a Web page should be formatted.

Metatag – a hidden word or label in a file of a Web site used to draw the attention of Internet search engines to that Web site.

MP3 – MPEG-1 Audio Layer-3; a standard technology and format for compressing a sound sequence into a very small file (about one-twelfth the size of the original file) while preserving close to the original level of sound quality when it is played.

Napster – available at www.napster.com, this software can be used to find and download MP3 versions of freely available music (legal) and/or commercial proprietary music (illegal). With necessary technological protections, a version of Napster, or something similar, that allows payment by credit card for downloaded versions of music will likely recharge the industry.

NSI – Network Solutions, Inc.; the largest domain name registrar and the manager of the registry for the gTLD’s.

RAM – Random Access Memory; a computer’s primary work space.

Register – to reserve a domain name.

Registrar – companies, such as NSI and Register.com, that have been authorized by ICANN to register top level domain names for the public.

Registry – a database of top level domain names. NSI manages the “registries” for .com, .net and .org, among others.

Ripper – software which enables the user to digitally copy songs from a CD into MP3 and other formats.

Rio – a brand of portable MP3 player.

ROM – Read Only Memory; a memory chip which permanently stores instructions and data.

SDMI – Secure Digital Music Initiative; the SDMI was established to protect music companies’ copyrights on the Web and was designed to prevent serial copying.

Search Engine – a directory which retrieves Web sites responsive to a user’s search request.

Shrinkwrap License – license agreements included under the shrinkwrap covering of software packages.

Spam – unsolicited bulk e-mail.

TCP/IP – A communications protocol developed under contract from the U.S. Department of Defense to internetwork dissimilar systems. It is currently used to connect computers over the Internet.

TLD – Top level domain name; the Internet domain name space is constructed as a hierarchy which is divided into top-level domains (TLDs), with each TLD then divided into second-level domains (SLDs), and so on. More than 200 national, or country-code, TLDs (ccTLDs) are administered by their corresponding governments or by private entities with the appropriate national government’s acquiescence. A small set of gTLDs (generic TLDs) do not carry any national identifier, but denote the intended function of that portion of the domain space (for example, .com was established for commercial users, .org for not-for-profit organizations, and .net for network service providers). (Registrars do not screen for the actual function of the entity and will register gTLDs to entities without regard to whether the domain space properly corresponds to the identifier; i.e. many commercial entities have registered an Internet address ending in “.org.”)

UCITA – Uniform Computer Information Transactions Act; a proposed uniform commercial law for the information economy that would apply to computer software licensing and certain online transactions. The Virginia legislature has passed a bill to enact a version of the UCITA in that state, and it has been signed by the governor.

UETA – Uniform Electronic Transactions Act. UETA grants legal recognition of electronically produced and transmitted signatures, records, transactions, and contracts. A version of UETA has been enacted in California and Pennsylvania.

URL – Uniform Resource Locator; identifies the address where a Web page is stored.

Web Browser – a computer program which allows a user to view pages on the World Wide Web.

Webcasting – live or delayed streaming of audio or video on the Internet.

Web Page – a document on the World Wide Web. Each Web page is identified by a unique URL.

Web Server – a computer with software that can respond to a Web browser’s request for a page and sends the page to the Web browser through the Internet.

Website – a related collection of Web pages and files that includes a home page.

WIPO – World Intellectual Property Organization. An agency of the United Nations. WIPO is responsible for promoting the protection of intellectual property throughout the world and administers international intellectual property conventions and various multilateral treatises dealing with administrative and legal aspects of intellectual property.

World Wide Web – an Internet system that links documents by providing hypertext links from server to server.

©2000, Rob Hassett, Atlanta, Georgia. All Right Reserved.

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Interview With Bankruptcy Expert

At the time of this interview in 2009, the average caseload of each bankruptcy judge in the Northern District of Georgia exceeded five thousand.

INTERVIEW OF JUDGE PAUL BONAPFEL

ROB:    This is Rob Hassett with btobmagazine.com. Today, I’m going to be interviewing Judge Paul Bonapfel who is a bankruptcy judge in the Northern District of Georgia. Judge, it’s good to have you on today.

JUDGE:  Good morning. I’m glad to be here.

ROB:  Judge, now how long have you been a bankruptcy judge in the Northern District of Georgia?

JUDGE:  Actually, today marks the seventh anniversary, so it’s been seven years.

ROB:  How do you become a bankruptcy judge?

JUDGE:  The Court of Appeals in our circuit, the 11th Circuit, is the body that makes the appointment. The Court of Appeals is the Court that takes appeals from the District Courts, part of the federal system.

ROB:  And how long is the appointment?

JUDGE:  Fourteen years.

ROB:  How many bankruptcy judges do we have in the Northern District of Georgia?

JUDGE:  There are eight.

ROB:  Of course right now we’re in a recession. Has that increased the number of bankruptcies in Georgia?

JUDGE:  The bankruptcies have been increasing over the past couple of years, actually. Nationally, there was an increase from 2007 to 2008 of 31%, from about 851,000 cases to 1,100,000 in 2008. And Georgia has had a similar type of increase. We don’t have numbers, actually, for the first quarter of 2009, but our internal numbers indicate that case filings are going up even over last year’s.

ROB:  About how many cases does each bankruptcy judge handle?

JUDGE:  Well, I can give you the total for 2008. There were 40,122 cases filed in the Northern District, so at any given time I guess we’ve probably got five or six thousand.

ROB:  That sounds overwhelming.

JUDGE:  Well, many of them just go through on more or less of a routine basis. There’s judicial oversight all along the process, but many of the things are handled on more or less of a routine basis without the need for any particular judicial Court involvement as far as a judge looking at the matter. Of course, there’s a trustee in each case and they work through them on that basis. So it’s not like I see five thousand cases a year.

ROB:  How does somebody become a trustee?

JUDGE:  Well, actually, there are three types of trustees. In the Chapter 7 cases, there’s a panel of trustees who are appointed by the United States Trustee for this region. The United States Trustee’s Office is part of the Department of Justice. They interview and select usually members of the Bar, although business people and accountants and others are sometimes chosen to be trustees. They are selected and then they serve on what’s called the panel. And in a Chapter 7 straight liquidation case, the trustee is selected from that panel that the U.S. trustee appointed. In the Chapter 13 context, we have standing trustees and they are selected by the United States Trustee also, and that is a full time job for those folks. And they have a staff of people who assist them, and the U.S. Trustee selects the Chapter 13 trustees also. And in the Chapter 11 case, there is not the same type of regular appointment. Many times, a trustee is chosen from the Chapter 7 panel. Other times, there are people who have worked in bankruptcy cases in the past, and have developed expertise in the area: workout people, restructuring people, crisis managers, those types of folks, and they may be appointed to be a Chapter 11 trustee.

ROB:  What kinds of different types of bankruptcies are there and what are their purposes?

JUDGE:  Well, for present purposes, there are three and maybe four. Chapter 7 is what used to be called the straight liquidation bankruptcy case. That’s for individuals or business corporations. In a Chapter 7 case, a trustee is appointed, and the trustee’s job is to take the debtor’s assets except what the debtor is entitled to keep. The debtor can keep some property, and that’s called exempt property. The trustee then sees if there are assets that can be sold and then distributed to creditors in accordance with their priorities. That’s, again, a liquidation case. Then there’s, for individuals, a Chapter 13, and in a Chapter 13 the idea is that the debtor will propose a plan to pay some or all of his or her debts which will pay at least the amount those creditors would get in a liquidation case over a period of two to five years. That’s available only for individuals, and there are debt limitations that are applicable that limit the relief. Then, in a Chapter 11 case, it can be for individuals, but it’s usually used by corporations or partnerships or limited liability companies and the like. And Chapter 11 is designed to provide an opportunity for a business to reorganize much as a Chapter 13 provides that opportunity for an individual, although Chapter 11 is far more complicated. Creditors are entitled to vote by class, for example. And then, infrequently used in Georgia, there’s a Chapter 12 which is for a family farmer.

ROB:  What does it typically cost for a debtor to file for relief under Chapter 7?

JUDGE:  For an individual debtor in a Chapter 7 case, the typical fee would probably range from maybe $750 to $1500, perhaps more depending on the complexity. The more debt, the more assets, the more potential problems that a debtor may have, and problems that a debtor may have tend to increase with the amount of debt and the amount of assets and the amount of income; the fee could be as high as $2500 or maybe $5000.

ROB:  Is that fee subject to the bankruptcy judge’s approval?

JUDGE:  All bankruptcy fees are subject at some point to review by the Bankruptcy Court, but in a Chapter 7 case, that does not happen very often . That’s typically a matter between the debtor and his or her attorney, unless somebody thinks that it’s a really outrageous amount and brings it to the Court’s attention. Or, in some instances, Courts will come across a fee that the debtor has charged and will inquire into it and determine whether it’s reasonable under the circumstances.

ROB:  And what does it cost to file a Chapter 13 on average?

JUDGE:  Chapter 13, probably an average case would be between $3-4,000, maybe as high as $4500. The reason for that is that Chapters 13s are more complicated than Chapter 7s, and the debtor’s lawyer is looking at having to represent the debtor over the life of the case, which usually is at least three years, and in some cases as much as five years. So there’s a significantly greater time commitment for a debtor’s attorney in a Chapter 13.

ROB:  And what about for a Chapter 11? We read about these huge legal fees. I’m sure it depends on the case.

JUDGE:  Well, it does depend on the case, and you’re right. Those fees can get up in to what many people would think was just the stratosphere. Bear in mind that part of this is that in a Chapter 11 case, all of the professionals employed by the debtor are subject to Court approval and Court review of all of the fees, so those numbers that get reported included not just the fees of the bankruptcy or reorganization counsel or other professionals. They include all of the ordinary course of business lawyers as well in many instances. But those fees vary widely depending on the amount of assets, the amount of debts, and the problems that are anticipated in the case.

ROB:  And they are sometimes in the millions right?

JUDGE:  Oh, yes.

ROB:  If a debtor was trying to save their house and they’re behind on their mortgage, they would be more likely to file a Chapter 13, right?

JUDGE:  An individual behind on the house would probably file a Chapter 13 if they are unable to work something out with their lender prior to filing. I don’t have any statistics on this, but anecdotally, I think that in today’s economy there’s more of a desire on the part of lenders to try to work things out with borrowers who have the ability to get back on some sort of a payment schedule. But if a debtor is behind and cannot get something worked out with the lender, then Chapter 13 is an alternative because it permits what we call a cure and reinstatement, in that the plan can provide for the payment of the arrears that are due as of the time of filing over the life of the plan, which again is between three and five years. And then the debtor picks up the regular payments and continues to make them on a post-petition basis.

ROB:  Of course, that’s probably often a long shot because if the debtor had got behind on payments, it would be unusual that they would be able to pay not only the back payments, but start paying again the monthly payments.

JUDGE:  It is, in many instances, difficult for a debtor to do that, especially if the debtor has become unemployed and is facing continued unemployment or has a medical problem and is facing continued medical problems. I think, at least as originally contemplated, and Chapter 13 goes back to the ‘30s, the idea was that where there’s been some sort of temporary problem that has arisen, it is now fixed or is going to be fixed so that the debtor’s income has come back to a stable point that Chapter 13 provides the opportunity to catch up and get things rolling on a regular basis again. And the other thing is debtors may have been struggling with other debts and trying to keep all the balls in the air, so to speak, maybe debts that are on cars and the car is too expensive from what they can now afford. The payment is too high, so they could surrender that car and not have to make that car payment so that that would free up some money to make house payments, and then they could try and get a cheaper car. Or they may have been trying to keep up on their credit card payments as another example, and a Chapter 13 filing will permit possibly an elimination of some or all of that debt, or at least will stretch out those payments and eliminate, potentially, the interest on the credit card. So that may free up some cash flow on a monthly basis that would permit a debtor to keep the house.

ROB:  Got it. Now, in a lot of situations, a debtor would just rather file a Chapter 7 and that would not allow him or her to keep anything that was above the exemptions that are allowed. But that would mean that if they didn’t have any fraudulently procured debt or anything like that, they would be able to obtain a discharge and have all their debts wiped clean and not have to make any payments.

JUDGE:  If a debtor is relatively current on house payments or car payments, or at least on the payment on the house or car that the debtor wants to keep, then Chapter 7 may be a better alternative for that debtor than a Chapter 13. And the reason is that Chapter 7 permits a debtor to agree with a creditor, and of course that takes the creditor’s agreement, to reaffirm a debt, which means to continue to pay it and to remain liable on it, notwithstanding the filing of the bankruptcy case. So if the value of the debtor’s property is less than the amount of the exemption, in other words if the debtor can keep it without the trustee wanting to sell it, Chapter 7 may be the right choice for that debtor because he or she doesn’t have to spend three to five years in a Chapter 13 case and can get rid of all of the other debt and then reaffirm the house or car debt on the property that they want to keep.

ROB:  But sometimes those people who file Chapter 7 are not allowed to stay in Chapter 7. They are required to convert to a 13, right?

JUDGE:  Yes. This is a result primarily of the 2005 legislation which is called the Bankruptcy Abuse Prevention and Consumer Protection Act, and it’s frequently called BAPCPA for the initials. But BAPCPA brought in what is commonly referred to as the means test, and it provides a statutory test to measure the debtor’s income against statutorily permitted expenditures to determine how much over a five year period a debtor could pay to unsecured creditors. And if that amount exceeds statutory thresholds, then the debtor cannot stay in Chapter 7 so the Court either dismisses the case or, with the debtor’s consent, converts it to a case under Chapter 13 so the debtor can propose a plan to pay debts.

ROB:  Judge, in this time of recession, a small to medium sized corporation that is engaged in business has overwhelmingly secured debt and cannot survive without reduction of the debt, what’s available to them in bankruptcy?

JUDGE:  That’s a difficult situation for that small or medium sized business to be in. And it depends in part on the nature of the collateral for the debt. If the debt is part assets: equipment, machinery, real estate, that’s one thing. If the collateral is also accounts receivable inventory, that’s another. Because the inventory and accounts receivable situation gives rise to what is called cash collateral. And in the case of cash collateral, a debtor can’t use it without getting Court approval and/or with the lender’s consent and providing to the lender what’s called adequate protection. And adequate protection is a term of art that generally means that the lender won’t suffer a loss as a result of the bankruptcy case. Well, if all of the debtor’s assets are tied up in favor of the lender, there’s no other asset that the debtor can give to provide that adequate protection and so if the business is in a situation where it is losing money and is likely to continue to lose money, that makes it a very difficult situation for a lender to agree to permit its collateral to continue to fund those losses, and it makes it difficult for the Court to find that there is, in fact, any kind of adequate protection that would permit the use by the debtor of the lender’s collateral. So it’s a difficult hill for a debtor to climb when dramatically over-encumbered. Now often in that circumstance, a lender will prefer to have the debtor in a bankruptcy case either to liquidate or to reorganize on some basis, because the lender realizes that it is more likely that they can get more out of the collateral through an orderly liquidation process than foreclosing on it. But a debtor in that circumstance, without the cooperation at least of the lender, will have a very difficult time getting out particularly if the cash flow of the business is negative.

ROB:  You had mentioned that in a Chapter 7 there are exemptions in Georgia that the debtor is permitted to keep and the various kinds of exemptions. What are the main exemptions?

JUDGE:  Well the main exemption is, of course, for the debtor’s house. And the debtor can exempt $10,000 of equity in a residence. Actually, it can be a condominium or a co-op unit as well as a house. But that’s $10,000 for an individual debtor, $20,000 if the debtor is married. So that’s the primary exemption. There’s an exemption for household goods, personal effects and the like. There’s an exemption for automobiles. They are somewhat limited. There’s an exemption for jewelry. IRAs, 401Ks, those are exempt as a matter of federal law also.

ROB:  What about cash?

JUDGE:  Cash is not exempt. There is what’s called a wild card exemption which is the unused portion of the residential exemption up to $5,000. So if a debtor either doesn’t have a house or doesn’t need to use all of the exemption for the house, then that so-called wild card exemption is available for cash.

ROB:  Now exemptions vary from state to state and are set by the state legislatures, right?

JUDGE:  That’s correct.

ROB:  So we always hear about people moving to Texas and Florida that are having financial problems. What is the advantage there?

JUDGE:  Well, Florida does not have any limits on the homestead exemption for a residence and Texas does not either. And so a debtor who lives in Texas or Florida and gets in to trouble with the creditors, the creditors cannot levy on or take the house to satisfy their debts. That doesn’t apply, of course, if it’s a mortgage. IF there is a mortgage then it can be foreclosed. But generally a debtor can keep the house regardless of its value in Texas and Florida. The BAPCPA (The Bankruptcy Abuse Prevention and Consumer Protection Act) limits the ability to use exemptions in a very complicated way, so anyone who has that particular issue needs to talk to the lawyer about it.

ROB:  A bankruptcy lawyer?

JUDGE:  Yes.

ROB:  If somebody in Georgia has a lot of cash but a lot of debt and is about to file bankruptcy, could they move to Florida, buy a million dollar house, wait six months or so to become a resident of Florida, then declare bankruptcy and keep the house?

JUDGE:  There’s a lot of problems with that type of scenario. That is one of the things that Congress thought was going on to a large degree and prompted the passage of the 2005 legislation, the Bankruptcy Abuse Prevention and Consumer Protection Act. And in the 2005 legislation, there are limits on the availability to move in to a state and use that state’s exemptions. And there are limitations on the property that can be exempted when it has been recently acquired. So those are very complicated provisions of the new legislation that are really beyond the scope of this discussion and anyone interested in that subject needs to talk to a bankruptcy lawyer.

ROB:  Understood.

JUDGE:  That’s another way of saying I’m not sure if I could completely explain all those provisions. Those provisions do not usually apply in Georgia because Georgia’s exemptions are limited, and Georgia is not a state that someone would want to move in to in order to take advantage of the exemption law.

ROB:  Now in a Chapter 11, you mentioned that you need a vote of creditors to get approval. Chapter 11s are used for businesses generally, you had mentioned. If a corporation goes into a Chapter 11, what vote of creditors do they need to get their plan approved?

JUDGE:  The voting is by classes, and the classes are determined by the rights of the creditors. In a typical case, the secure lender will be in a class by itself, although in some instances, the secure lender may itself be a group of creditors. So theoretically at least, they could vote among themselves. The main class in a Chapter 11 case is the unsecured creditor class, and in that instance the vote is the majority in number, and 2/3 in amount. In the context of stockholder interests, it’s simply a vote based on the number of shares. In a small case, the stockholder vote usually doesn’t matter because the stockholders are the family or a small group of people in a closely held corporation.

ROB:  And they often may lose something themselves or they may get wiped out. In a large Chapter 11, the stockholders often get wiped out, right?

JUDGE:  Stockholders usually get wiped out in a Chapter 11 case of a publicly held corporation. And that’s the danger that some people have fallen in to because the filing of a bankruptcy by a public corporation does not in and of itself stop the trading on the exchanges. So Delta, for example, when it filed, they continued to trade and people continued to buy and sell. Well the people who bought and sold after the bankruptcy case were surprised once the bankruptcy case went through its whole process that the existing stock, the pre-confirmation stock, got completely wiped out. And the reason is that creditors have a first call on the assets of a corporation. So if the assets are not sufficient to cover all of the debts, then the creditors, unless they agree otherwise, get to take over the ownership of the company.

ROB:  Judge, with respect to a Chapter 7 versus a 13, I understand that in a Chapter 7 there are certain situations in which the debtor cannot receive a discharge or certain debts that can’t be discharged, but which they can be discharged in a Chapter 13 if they propose a plan that’s approved. Is that right?

JUDGE:  Yes. That is true. Although the differences have been significantly narrowed as a result of the 2005 legislation, the Bankruptcy Abuse Prevention and Consumer Protection Act. Prior to that, there was in Chapter 13 what was called the Super Discharge. And a number of debts that were excepted from discharge in Chapter 7 were nevertheless discharged in Chapter 13. Originally, the concept behind that was if the debtor was making an effort to pay debts in a Chapter 13 case, the case ought not to be bogged down by litigation over whether a debt is going to be discharged, and that the debtor having made an effort to pay debts ought to receive a discharge at the end of the case that would include everything. The problem arose because some debtors would propose a Chapter 13 plan to pay little or nothing on unsecured debt, and nevertheless receive a discharge and thereby get rid of debt that could not have been discharged in a Chapter 7 case. And that led to a great deal of litigation over good faith and other issues. The 2005 legislation for the most part eliminates, in many instances, that argument because the Chapter 13 discharge is now narrowed so that the primary exceptions to the discharge of a debt that is in a Chapter 7 case that usually occur in a consumer case are now excluded from the Chapter 13 discharge as well. For example, debts for fraud that are excepted from the Chapter 7 discharge and used to be not excepted from the Chapter 13 discharge, are now excepted from both. A primary example of the difference that currently exists is that an obligation for property settlement is excepted from discharge in a Chapter 7 case, but in a Chapter 13 case, a property settlement obligation is dischargeable. Alimony or child support continue to be excepted from discharge in both chapters.

ROB:  Got it. Judge, what is the automatic stay and when does it apply?

JUDGE:  The automatic stay is a statutory provision that says when a bankruptcy case is filed, almost all actions against a debtor and the debtor’s property by creditors to try to collect debts must stop on a temporary basis, pending what goes on in the bankruptcy case. So for example, if a creditor is foreclosing on a house or trying to repossess a car or garnishing a debtor’s wages or bank account and a bankruptcy case is filed, that creditor has to stop that enforcement activity because of the bankruptcy case. And the reason is one, to give the debtor what’s called a breathing spell to try to figure things out, and two, basically to protect other creditors. For example, in the foreclosure situation, it may be that if the property could be sold at an orderly sale, it will generate more money than the foreclosure sale and would make money available to pay other creditors besides the foreclosing lender. So those are the two reasons that the automatic stay exists. It’s in order to permit an administration in a judicial process in an orderly way of the debtor’s assets, and to provide the debtor an opportunity to try to keep the assets in a Chapter 11 or Chapter 13 situation, work out a plan to pay some or all of the debts in accordance with the bankruptcy code. It applies generally to the collection of debts. One academic once said that if you have a question about whether the automatic stay applies, it probably does. It is very broad. There are some exceptions for police and regulatory activities, criminal activities, certain activities or judicial proceedings in the domestic area, for example, termination of paternity is not stayed. Collection of child support from property that is not property of the estate is not stayed. In a Chapter 13 case, that does not help the collecting spouse much because the wages of the debtor are property of the estate in a Chapter 13 case. But there are exceptions to the stay. If a creditor is being harmed by the stay or thinks that for some reason the stay should not be continued, the creditor files a Motion with the Bankruptcy Court seeking relief from the stay, and a hearing is held. At that point, the Court will determine whether or not the stay should be continued or whether it should be lifted. For example, going back to our foreclosure situation, if it appears that the property is not worth more than the debt, then the stay will probably be lifted unless the debtor is in a Chapter 13 case and is trying to do a plan to cure the arrearage and bring the debt current and continue to make regular monthly payments. But continuing that situation, if the debtor has been in bankruptcy and has defaulted again and it doesn’t look like the debtor is going to be able to make the payments on a regular basis, then it’s quite probable that the automatic stay will be lifted to let the lender foreclose.

ROB:  Judge, if a business has equipment pledged as security for a loan and the business files a Chapter 11 bankruptcy, what’s the range of time a debtor can expect that the stay will continue without having to make payments?

JUDGE:  Well, in the case of equipment, you would typically find that the lender is not going to be moving real aggressively like on the first day. But if a lender is concerned about its equipment and it’s depreciating, that’s the big question. If it’s depreciating in value, then the lender is going to move for relief from the stay or, in the alternative, for adequate protection payments. And many lenders are satisfied, they may not be happy, but they are satisfied if, during the course of bankruptcy case, they are receiving some sort of payment with regard to their collateral to guard against depreciation. And the other thing they’re going to be concerned about is making sure that the property is insured and making sure that it is being properly maintained and is not being abused or misused. That’s typically a big, big, big issue on all those fronts when equipment is rolling stock or a tractor or trailer or moving equipment. But how long the debtor will be able to keep the property will depend on the ability to make adequate protection payments if required, and the progress that is made in the case. Bankruptcy is not a permanent solution. It is a temporary stop on the way to restoring financial health and the ultimate objective of a Chapter 11 case is to propose a plan that deals with all of the debt. So depending on the complexity, some of the public company cases can take years. And some of the smaller cases, likewise, will take a considerable period of time. But it’s not an indefinite process. It’s difficult to say exactly how long it would be, but the bottom line measuring stick is there needs to be some progress towards a solution to the debt problem that will work either because the debtor can get a plan approved over a creditor’s objection or the creditor is happy with the treatment that is being proposed. In many instances, the debtor and creditor are able to work something out because the creditor is interested in getting payments from the debtor, not the collateral. So there is an incentive on both sides for them to come to some sort of agreement as to what the debtor can realistically afford to pay and what will be at least acceptable to the creditor and better than foreclosing or repossessing the collateral.

ROB:  Judge, do you have any other suggestions for small to medium sized business owners relating to the bankruptcy issues in this time that we’re having the recession?

JUDGE:  This is a very difficult time for everyone, and particularly small business people. When I was in practice, which was before this type of situation, we did not have this type of economic situation when I was in practice. But what I would tell my debtor clients was one, they really have to be candid and up front with the lender because in most instances it is difficult, if not impossible, to litigate with a lender and come out of Chapter 11. And the reason is not because you can’t win, although that’s a problem because in many instances the law and facts are often on the side of the lender. But the mere uncertainty and the cost of the litigation itself may make it such that it’s not possible to go forward with the reorganization effort. It’s difficult enough being in an insolvent financially distressed circumstance without having to go to Court on a regular basis to argue with your lender. So one of the things that is very important is to try and get an agreement with the lender, and that requires honesty and candor with the lender so that the lender has confidence at least in the debtor’s basic integrity. One thing that will justifiably drive lenders nuts is a debtor who is dishonest and the lender thinks that the debtor is stealing the collateral basically. So that’s probably the key — having a good relationship with the lender. Beyond that there are a lot of details that have to be done in a bankruptcy case, and a lot of situations arise that are unique in a bankruptcy case that don’t frequently arise in the regular ordinary course of business. So particularly as bankruptcy laws have gotten more complicated, I think it is important to have, in addition to a good lawyer, a good financial consultant or someone who is able to come in and be able to recognize how to deal with the bankruptcy accounting problems and the bankruptcy business issues on a day-to-day basis. So in addition to a lawyer, I think some sort of assistance in the accounting and business consulting area. In some instances, a company will appoint a chief restructuring officer. That obviously adds a layer of cost that may not be feasible for a small to medium sized business. In that circumstance, I still think it’s helpful to find some sort of financial or accounting person who, if not a chief restructuring officer, is nevertheless available to provide some advice and assistance on what do I do today in response to this creditor threatening to cut me off. So those are some of the suggestions I would have. The main suggestion is find a good lawyer out there.

ROB:  Judge, thanks a lot for being on today. I really appreciate it.

JUDGE:  I have enjoyed it. Thank you very much.

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TAX CREDITS FOR THE ENTERTAINMENT INDUSTRY IN GA

TAX INCENTIVES FOR THE ENTERTAINMENT INDUSTRY IN GEORGIA

By

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.

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2017 INVESTMENT DAY AT SIEGE

       OPPORTUNITY FOR ENTREPRENEURS IN INTERACTIVE MEDIA AND ENTERTAINMENT TO PRESENT BUSINESS PLANS TO INVESTORS

BY

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