TLJ News from August 26-31, 2006

Bernanke Gives Another Speech on ICT and Productivity Growth

8/31. Federal Reserve Board Chairman Ben Bernanke gave a speech in Greenville, South Carolina titled "Productivity". He said that new information and communications technologies (ICT) are a cause of the increase in the rate of productivity growth in the last 15 years.

This speech paralleled the speeches of other members of the FRB in recent years. See, October 24, 2002 speech by former FRB Vice Chairman Roger Ferguson titled "Productivity Growth: A Realistic Assessment", and story titled "FRB Vice Chairman Addresses Impact of Computer and Software Technology on Productivity Gains" in TLJ Daily E-Mail Alert No. 535, October 25, 2002. See also, October 23, 2002 speech by former FRB Chairman Alan Greenspan, and story titled "Greenspan Addresses Productivity Gains and Technological Innovation" in TLJ Daily E-Mail Alert No. 534, October 24, 2002.

Also, Bernanke's August 31 speech was a revised and updated version of a speech which he gave on January 19, 2005. See, story titled "FRB's Bernanke Addresses Productivity Growth and Information Technology" in TLJ Daily E-Mail Alert No. 1,061, January 24, 2005.

Bernanke (at left) began his latest speech by noting that "From the early 1970s until about 1995, productivity growth in the U.S. nonfarm business sector averaged about 1-1/2 percent per year", but that from 1995 through 2000 productivity grew 2-1/2 percent per year, and that it grew at 3-1/2 percent from the end of 2000 through the end of 2003, despite the tech bust and the terrorist attacks of September 11, 2001. He added that it has been growing at near 2-1/2 percent per year since, and suggested that this trend may continue.

He also stated that "productivity growth increased very rapidly earlier this decade and has continued to rise at a solid pace, even though IT investment declined sharply after the stock prices of high-tech firms plummeted in 2000".

He also discussed the disparity between the US and EU since 1995. He discussed data that showed that while EU nations have access to the same ICT, productivity growth in the EU since 1995 has lagged well behind that of the US. He added that while the EU lacks a comparable IT sector, it does have an active communications technology sector. And, he stated that "the U.S. advantage has been most evident in the IT-using sectors".

Bernanke offered explanations for these trends. He stated that "By 2000 or so, an emerging consensus held that the pickup in productivity growth was, for the most part, the product of both rapid technological progress and increased investment in new information and communication technologies (IT) during the 1990s".

"According to this view," said Bernanke, "developments in IT promoted U.S. productivity growth in two ways. First, technological advances allowed the IT-producing sectors themselves to exhibit rapid productivity growth.  For example, the development of more-reliable semiconductor manufacturing equipment and faster wafer-inspection technologies increased the rate at which companies such as Intel were able to produce microprocessors. Intel was also able to shorten its product cycle and increase the frequency of new chip releases, shifting its product mix toward more-powerful and, consequently, higher-value chips. Both the more-rapid pace of production and the higher average quality of output raised productivity at Intel as well as at competing firms that were forced to keep pace."

Secondly, "advances in information technology also promoted productivity growth outside the IT-producing sector, as firms in a wide range of industries expanded their investments in high-tech equipment and software and used the new technologies to reduce costs and increase quality."

However, he added that "the technology-based explanation of increased productivity growth does raise a couple of puzzles", such as why many other countries have adopted new ICT, but have not experienced that same productivity growth as the U.S.

He argued first that it is the higher level of competition, and lower level of government regulation, that has enabled the US to realize higher productivity growth from advances in ICT.

He argued that the US EU difference arises out of the circumstance that "labor markets in the United States tend to be more flexible and competitive". He continued that "taking full advantage of new information and communication technologies may require extensive reorganization of work practices, the reassignment and retraining of workers, and ultimately some reallocation of labor among firms and industries. Regulations that raise the costs of hiring and firing workers and that reduce employers’ ability to change work assignments -- like those that exist in a number of European countries -- may make such changes more difficult to achieve."

He next focused on "product markets". He said that "a high degree of competition and low barriers to the entry of new firms in most industries in the United States provide strong incentives for firms to find ways to cut costs and to improve their products. In some other countries, in contrast, the prominence of government-owned firms with a degree of monopoly power, together with a regulatory environment that protects incumbent firms and makes the entry of new firms difficult, reduces the competitive pressure for innovation and the application of new ideas."

Bernanke that discussed a "second productivity puzzle", which "relates to the further acceleration in productivity that occurred earlier in this decade despite the decline in IT investment after 2000 and the rather modest recovery in recent years". This, he argued, is connected to the tendency for productivity improvements to lag well behind investments in new technology, because, for example, "managers must have a carefully thought-out plan for using new technologies before they acquire them".

He elaborated that "managers must supplement their purchases of new equipment with investments in firm- or industry-specific research and development, worker training, and organizational redesign -- all examples of what economists call intangible capital."

"Because investments in high-tech capital typically require complementary investments in intangible capital for productivity gains to be realized, the benefits of high-tech investment may become visible only after an extended period during which firms are making the necessary investments in intangibles", said Bernanke.

There were several other developments that occurred around 1995 that Bernanke did not discuss in his speech. For example, he did not address whether the wide adoption of the world wide web and computer browsers around 1995 contributed to the jump in productivity growth around 1995. Nor did he discuss the possible impact on productivity growth of communications deregulation in the US.

Finally, he offered his predictions regarding future productivity growth. He said that "recent estimates by leading economists continue to peg the expected longer-term rate of productivity growth at roughly 2-1/2 percent per year". He then offered some comments on factors that may either impede or promote sustained high levels of productivity growth.

He said that "although spending on high-tech equipment and software has recovered noticeably from its recent lows, growth in IT spending remains well below the rates observed before the 2001 recession. Some industry participants have suggested that less-rapid growth in IT spending may reflect the absence of major new business applications for IT -- ``killer apps,´´ as they are called."

On the other hand, he said that "the price of computing power continues to fall sharply, having declined by nearly half in the five years between 2000 and 2005. Increased computing power has in turn contributed to advances in other fields, such as biotechnology, and has helped to increase the range of goods and services available to businesses and consumers. Moreover, whatever the pace of future technological progress, further diffusion of already-existing technologies and applications to more firms and industries should continue to increase aggregate productivity for a time."

He also offered one policy recommendation for maintaining technology based productivity gains. He said that "new technologies will translate into higher productivity only to the extent that workers have the skills needed to apply them effectively. Moreover, because technology is always changing, the acquisition of those skills has become a lifelong challenge, one that continues well after formal education is completed."

Hence, he concluded that "If the recent gains in productivity growth are to be sustained, ensuring that we have a workforce that is comfortable with and adaptable to new technologies will be essential."

IRS Announces Procedures for Refund of Illegally Collected Phone Excise Taxes

8/31. The Internal Revenue Service (IRS) announced procedures for taxpayers to obtain refunds of amounts paid to the IRS as a result of its illegal collection of certain excise taxes on telecommunications services. The IRS had collected taxes, pursuant to 26 U.S.C. § 4251, on services not covered by § 4251.

The IRS persisted in collecting certain taxes until after five federal circuits, and numerous trial courts, had held that it could not. In May of 2006 the IRS announced that it would cease its illegal collections. See, story titled "IRS Announces It Will Cease Its Illegal Collection of Excise Taxes on Phone Service" in TLJ Daily E-Mail Alert No. 1,379, May 26, 2006.

The IRS stated in a release on August 31 that "anyone who paid the long-distance telephone tax will get the refund on their 2006 federal income tax return. This includes individuals, businesses and nonprofit organizations."

The IRS added that for individuals, but not for businesses, the IRS will allow refunds of "standard amounts". It elaborated that "These amounts, which range from $30 to $60, will enable millions of individual taxpayers to request the telephone tax refund without having to dig through old phone bills."

The IRS also stated that while "businesses and nonprofits must base their telephone tax refund on the actual amount of tax paid, the IRS is looking for ways to make the refund process easier for these taxpayers. The IRS is considering an estimation method businesses and nonprofits may use for figuring the tax paid."

See also, IRS Notice 2006-50 [PDF] and IRS web page titled "Telephone Tax Refund Questions and Answers".

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8/31. The Internal Revenue Service (IRS) published a notice in the Federal Register that announces, describes, recites, and sets the effective date (August 31, 2006) of its final rule regarding property subject to 26 U.S.C. § 168 of the Internal Revenue Code (MACRS property) and the depreciation of computer software subject to 26 U.S.C. § 167. See, Federal Register, August 31, 2006, Vol. 71, No. 169, at Pages 51727-51748.

8/31. The Government Accountability Office (GAO) released a report [25 pages in PDF] titled "Information Security: Federal Reserve Needs to Address Treasury Auction Systems". The report finds that the Federal Reserve Banks have not "implemented information system controls to protect the confidentiality, integrity, and availability of sensitive data and computing resources for the distributed-based systems and the supporting network environment relevant to Treasury auctions". The report elaborates that the FRBs "did not consistently (1) identify and authenticate users to prevent unauthorized access; (2) enforce the principle of least privilege to ensure that authorized access was necessary and appropriate; (3) implement adequate boundary protections to limit connectivity to systems that process BPD business;(4) apply strong encryption technologies to protect sensitive data in storage and on its networks; (5) log, audit, or monitor security-related events; and (6) maintain secure configurations on servers and workstations." The report finds, as a result, that "auction information and computing resources for key distributed-based auction systems that the FRBs maintain and operate on behalf of BPD are at an increased risk of unauthorized and possibly undetected use, modification, destruction, and disclosure. Furthermore, other FRB applications that share common network resources with the distributed-based systems may face similar risks." (The BPD is the Bureau of the Public Debt.)

8/31. The National Institute of Standards and Technology's (NIST) Computer Security Division released Draft Special Publication 800-95 [140 pages in PDF], titled "Guide to Secure Web Services". The NIST has responsibility for providing standards and guidelines for the computer systems of the federal government. Private sector entities may choose to follow recommendations in these publications as guidelines. One thing that is notable about this publication is that it addresses security for a category of activity that is primarily private sector. Indeed, an example application of web services that is discussed in this publication is lending. The NIST was assisted by Booz Allen Hamilton in preparing this draft publication. The deadline to submit comments to the NIST is October 30, 2006.

8/31. The National Institute of Standards and Technology's (NIST) Computer Security Division released Draft Special Publication 800-45A [143 PDF], titled "Guidelines on Electronic Mail Security". The deadline to submit comments to the NIST is October 6, 2006.

8/31. The National Institute of Standards and Technology's (NIST) Computer Security Division released Draft Special Publication 800-94 [123 pages in PDF], titled "Guide to Intrusion Detection and Prevention (IDP) Systems". The deadline to submit comments to the NIST is October 20, 2006.

8/31. The National Institute of Standards and Technology's (NIST) Computer Security Division released Draft Special Publication 800-101 [98 pages in PDF], titled "Guidelines on Cell Phone Forensics". The deadline to submit comments to the NIST is September 29, 2006.

8th Circuit Rules Against Copyright Owner on Registration Errors

8/30. The U.S. Court of Appeals (8thCir) issued its opinion [6 pages in PDF] in Action Tapes v. Mattson, a copyright infringement case. The Court of Appeals affirmed the District Court's summary judgment for the defendant/infringer.

The Court of Appeals held while the copyright owner had first obtained certificates of registration from the Copyright Office (CO), it could not maintain a suit for copyright infringement because it did not comply with registration and deposit requirements. Moreover, the Court of Appeals held that the plaintiff had not complied with requirements that are not contained in either the statute or regulations.

The opinion is notable for two reasons. First, it stands as authority for the proposition that the creator of a work, who has registered that work, and received a certificate of registration, can nevertheless loose a civil action against an infringer, on the basis of registration technicalities. This is significant, not only because many registrations are made by layman without legal expertise, but also because for some types of works, and particularly web based works, there are no clear rules for how to register works with the CO.

Second, this case is notable because the Court of Appeals ruled, in part, on the basis that the copyright owner did not comply with a CO circular. The CO publishes circulars to provide guidance to those who register works, and to the CO's examiners. However, they are not law. The CO does not adhere to the Administrative Procedure Act (APA) in writing them. There is no advance public notice, no opportunity for comment, no judicial review, and no codification. Yet, the Court of Appeals treated a circular as though it were law.

The circular relied upon by the Court of Appeals in this case is Circular 61 [PDF], titled "Copyright Registration for Computer Programs".

See, full story.

Bush Renominates Five for Courts of Appeals

8/30. President George Bush today announced his intent to nominate five men to be Judges of the U.S. Court of Appeals for various circuits. See, White House release.

All are renominations of persons whose prior nominations have languished in the Senate. In each case, President Bush lacks the 60 votes necessary to end a filibuster by Senate Democrats, and Democrats lack the 51 votes necessary to defeat the nomination on the merits.

Certain interest groups, and Senate Democrats, oppose these nominees for their conservatism. However, in the case of William Myers and Randy Smith, there is also a dispute over regional distribution of Judges. Bush is attempting to place on the 9th Circuit one more Judge from the state of Idaho than certain critics think appropriate. Some Californians argue that the seat should go to a Californian.

William Myers. Bush again nominated William Myers to be a Judge of the U.S. Court of Appeals (9thCir). Liberal interest groups, such as People for the American Way (PFAW), oppose Myers because of their expectations as to how he would rule in environmental law cases. See, PFAW paper [21 pages in PDF] on Myers.

William Myers was previously Solicitor of the Department of the Interior. He has also worked for the National Lands Council and the National Cattlemen's Beef Association. He is also a veteran of prior judicial confirmation battles. He worked for former Sen. Alan Simpson (R-WO), who sat on the Senate Judiciary Committee, at the time of the Scalia and Rehnquist nominations in 1986, the Bork, Ginsburg and Kennedy nominations in 1987, and many contested Appeals Court nominations during the second Reagan administration. Then, he worked in the Department of Justice during the administration of the elder President Bush at the time of the Souter and Thomas nominations.

He is now of counsel to the law firm of Holland & Hart in Boise, Idaho. See also, H&H bio and Bush's July 20, 2004, statement in support of Myers.

Randy Smith. Bush again nominated Randy Smith to be a Judge of the U.S. Court of Appeals (9thCir). He is a state court judge in Idaho.

The Judge he is nominated to replace is Stephen Trott, whose state is debated. Trott was from California at the time of his appointment, but later moved to Idaho.

Terrence Boyle. Bush again nominated Terrence Boyle to be a Judge of the U.S. Court of Appeals (4thCir). He has been a Judge of the U.S. District Court (EDNC) since 1984. Bush first nominated him for the 4th Circuit in May of 2003. See also, PFAW paper [27 pages in PDF] on Boyle.

On April 13, 2005, the 4th Circuit issued its opinion [9 pages in PDF] in Directv v. Nicholas, reversing Judge Boyle's District Court judgment. This is a case regarding civil actions by satellite television providers against individuals who use pirate access devices to avoid paying for service. The Court of Appeals held that a satellite company may maintain an action for damages under 18 U.S.C. § 2520 against someone who has violated 18 U.S.C. § 2511. See, story titled "4th Circuit Rules DBS Providers Can Sue Pirates for Damages" in TLJ Daily E-Mail Alert No. 1,117, April 18, 2005.

William HaynesWilliam Haynes. Bush again nominated William Haynes (at right) to be a Judge of the U.S. Court of Appeals (4thCir). He is the General Counsel of the Department of Defense (DOD). Bush first nominated him in September of 2003. Haynes is opposed by some for his actions related to the war on terrorism, particularly with respect to the detention of enemy combatants.

He previously worked as a partner at the law firm of Jenner & Block and as a VP and Associate General Counsel at General Dynamics Corporation. See, DOD biography.

Michael Wallace. Bush again nominated Michael Wallace to be a Judge of the U.S. Court of Appeals (5thCir).

See also, story titled "Bush to Renominate 20 for Federal Judgeships" in TLJ Daily E-Mail Alert No. 1,044, January 27, 2004.

President Bush is doggedly supportive of these five nominees. Certain Senate Democrats are persistent in their opposition. However, there is very little in the record to suggest that Bush's support for any of these five is related to any expertise in, or views regarding, any area of technology related law. Nor, is there anything in the record to suggest that any of the opposition is connected to technology law.

FDA States That Canadian Web Sites Sell Counterfeit and Unsafe Drugs

8/30. The Food and Drug Administration (FDA) issued a consumer advisory regarding counterfeit prescription drugs sold by web sites located in Canada.

The advisory states that consumers are advised "not to purchase prescription drugs from websites that have orders filled by Mediplan Prescription Plus Pharmacy or Mediplan Global Health in Manitoba, Canada following reports of counterfeit versions of prescription drug products being sold by these companies to U.S. consumers. FDA is investigating these reports and is coordinating with international law enforcement authorities on this matter."

The FDA recommends that "consumers who have purchased drugs from these websites not use the products because they may be unsafe".

The FDA advisory lists the names of the prescription drugs, and the following web sites:

The FDA advisory adds that "FDA advises consumers to use caution when buying medical products online. Although a website may appear reputable and similar to legitimate retail pharmacy websites, many actually operate from outside the U.S. and provide unapproved drugs from unreliable sources."

Moreover, the FDA advisory reports that "Of the drugs being promoted as ``Canadian,´´ based on accompanying documentation, 85 percent actually came from 27 other countries around the globe. A number of these products also were found to be counterfeit. These results demonstrated that some Internet sites that claimed to be ``Canadian´´ were, in fact, selling drugs of dubious origin, safety and efficacy.

See also, stories titled "Montgomery County, Maryland, Sues FDA Over Ban on Importation of Drugs" and "DHS Cracks Down on Importation of Prescription Drugs" in TLJ Daily E-Mail Alert No. 1,317, February 24, 2006, and "FDA and Health Canada Debate Internet Drug Sales" in TLJ Daily E-Mail Alert No. 782, November 19, 2003.

FCC Commissioners Praise BellSouth's and Verizon's Elimination of Fees Imposed on DSL Customers

8/30. BellSouth announced in a release on August 25, 2006, that "it is immediately eliminating a fee assessed on its DSL Internet services".

It added that the fee "was designed to recover a number of costs remaining from previous regulatory obligations and other network expenses that increase the cost of the Internet services we provide to consumers. Since the FCC eliminated the continuing applicability of many of these regulations, BellSouth has been able to provide a greater variety of Internet services to consumers, to which consumers have responded enthusiastically, and has signed over 300 contracts to provide independent Internet service providers with wholesale DSL services."

In addition, Verizon announced in a release on August 29, 2006, that it is "dropping previously announced plans to impose a supplier surcharge for DSL-based Internet access service on its retail customers."

Verizon added that it "began notifying its retail customers earlier this month of its plans to pass through a surcharge imposed by its affiliated operating telephone companies to cover costs associated with providing DSL service to customers who do not also subscribe to Verizon's traditional phone service. At the same time that the surcharge was to have been added, a federal government charge, the Universal Service Fund recovery fee, was eliminated from the bills."

Federal Communications Commission (FCC) Chairman Kevin Martin released a short statement [PDF] on August 30. He wrote that "I am pleased that both Verizon and BellSouth have eliminated fees recently imposed on their DSL customers. Consumers should receive the benefits of the Commission's action last summer to remove regulations imposed on DSL service. The continued deployment of broadband at affordable prices for consumers remains my top priority as Chairman."

FCC Commissioner Deborah Tate also released a short statement [PDF]: "Consumers today received good news that they should begin to reap the benefits of the Commission’s broadband deregulation decision. I am pleased that BellSouth determined last week -- and Verizon followed today -- to drop proposed new charges on consumer broadband bills."

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8/30. The U.S. Court of Appeals (9thCir) issued its opinion [16 pages in PDF] in Funky Films v. Time Warner, a copyright infringement case. The Court of Appeals affirmed the judgment of the District Court for Time Warner. Funky films filed a complaint in U.S. District Court (CDCal) against Time Warner alleging that its television program titled "Six Feet Under" infringed Funky Films' earlier screenplay titled "The Funk Parlor". The District Court assumed, without deciding, that Time Warner had access to the earlier work, but held that the two works were not substantially similar. The Court of Appeals affirmed. This case is Funky Films, Inc. v. Time Warner Entertainment Corporation, U.S. Court of Appeals for the 9th Circuit, App. Ct. No. 04-55578, an appeal from the U.S. District Court for the Central District of California, D.C. No. CV-03-00964-CJC, Judge Cormac Carney presiding. Judge Betty Fletcher wrote the opinion of the Court of Appeals, in which Judges Warren Ferguson and Consuelo Callahan joined.

7th Circuit Addresses Web Based Hotel Reservations and Consumer Fraud Actions

8/29. The U.S. Court of Appeals (7thCir) issued its opinion [7 pages in PDF] in Shaw v. Hyatt, a case involving a hotel that charged a customer more than the rate set by the customer's reservation, which was made through the hotel's web site registration system. The Court of Appeals affirmed the District Court's dismissal of the complaint for failure to state a claim.

The court did not dismiss for lack of jurisdiction. Nor is this a choice of forum or choice of law case. However, this case bears some similarities to jurisdiction, choice of forum, and choice of law disputes that frequently arise in cases involving internet based activities.

Facts of the Case. Britt Shaw is a resident of the United Kingdom. He stayed in the Ararat Park Hyatt Moscow, in Russia. He booked his reservation through the Hyatt International Corporation's (HIC) web site. HIC is a Delaware corporation with it principal place of business in Chicago, Illinois. Moreover, Shaw alleged that the HIC web site is in Illinois. (The Court of Appeals opinion states nothing to the contrary.)

In addition, the Court of Appeals noted that HIC's web site states that Illinois law governs all disputes arising out of use of its web site, that exclusive jurisdiction for any claim or action arising out of use the web site shall be in Illinois, and that the customer agrees to submit to the exercise of personal jurisdiction over him in Illinois.

When Shaw completed his stay at the hotel in Moscow, the hotel charged him significantly more than the rate set by the web site reservation.

Trial Court Proceedings. Shaw filed a complaint in state court in Chicago against HIC alleging unjust enrichment and violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (ICFDPA). He also sought class action status on behalf of other victims of HIC's practices.

HIC removed the action to the U.S. District Court (NDIll), based upon diversity of citizenship. The District Court then applied the law of the state of Illinois.

The District Court dismissed both claims for failure to state a claim. It reasoned that the ICFDPA applies only if circumstances that relate to the disputed transaction occur primarily and substantially in Illinois.

Court of Appeals. The Court of Appeals affirmed on the same grounds.

The Court of Appeals also reasoned that the ICFDPA is not meant to provide a remedy where the fraudulent or deceptive practices also constitute a breach of contract.

The Court of Appeals also affirmed the dismissal of the unjust enrichment claim on the grounds that Shaw's booking a reservation through Hyatt's web site created an express contract, and that a claim for unjust enrichment is unavailable where the claim rests on the breach of an express contract.

Analysis. Perhaps the dismissal of this action reflects a bias in favor of a home town company. Perhaps it reflects the judges' dislike for class action litigation generally. Perhaps it reflects the judges' dislike for private consumer fraud actions. Policy considerations aside, this opinion is notable for several reasons.

First, this opinion may preclude almost all actions under the ICFDPA against Hyatt arising out of web based transactions. The Court of Appeals concluded that booking a reservation through Hyatt's web site creates an express contract. But that same web process sets as terms of the contract both Illinois choice of forum and choice of law provisions. That is, one cannot maintain a suit arising out of an online reservation in another state or country, and even if one did, Illinois law would apply. Then, the Court of Appeals held that the ICFDPA only applies to transactions that occur primarily and substantially in Illinois.

Hyatt's customers come from all over the world, and there are Hyatt hotels all over the world. If a customer is cheated on a web based reservation at a hotel outside of Illinois, he cannot bring an action under the ICFDPA in Illinois, because the Court of Appeals held that the claim does not meet the "primarily and substantially" requirement. But, the Illinois choice of forum clause precludes the cheated customer from bringing the same claim in any other jurisdiction. Furthermore, the cheated customer cannot bring the action in Illinois, pursuant to the choice of forum requirement, but assert violation of consumer protection laws of other states or countries, because of the choice of law clause.

Second, any "primarily and substantially" requirement is arguably obsolete in the context of web based transactions. The plaintiff/consumer may be in one jurisdiction, while the defendant may be incorporated in another jurisdiction, with relevant offices and servers in still other jurisdictions. Suppliers may be located elsewhere, as may witnesses and events relevant to the transaction. With web based commerce, disputes are rarely "primarily and substantially" based in one jurisdiction, and hence, no one jurisdiction meets a "primarily and substantially" requirement. Yet, this opinion continues to apply this standard.

Third, the Court of Appeals also based its affirmance on its conclusion that the ICFDPA is not meant to provide a remedy where the fraudulent or deceptive practices also constitute a breach of contract. The Court of Appeals quoted judicial precedent, but no language from the ICFDPA, in support of this.

Even though Shaw brought no breach of contract action, the Court of Appeals held that there was a breach of contract.

Contract actions are vital. But in many situations, especially e-commerce transactions between businesses and consumers, the amount in controversy is too small for it to be financially beneficial for the consumer to bring a breach of contract action. Consumer fraud and deception statutes enable government agencies and private parties to obtain recourse in some of these situations.

This case is Britt Shaw v. Hyatt International Corporation, U.S. Court of Appeals for the 7th Circuit, App. Ct. No. 05-4625, an appeal from the U.S. District Court for the Northern District of Illinois, Eastern Division, D.C. No. 05 C 5022, Judge Harry Leinenweber presiding. Judge Rovner wrote the opinion of the Court of Appeals, in which Judges Easterbrook and Evans.

AT&T Loses Customer Data to Hackers

8/29. AT&T announced in a release on August 29, 2006, that "unauthorized persons illegally hacked into a computer system and accessed personal data, including credit card information, from several thousand customers who purchased DSL equipment through the company's online Web store."

AT&T also stated that it is sending notifications of the breach to "fewer than 19,000 customers".

AT&T stated that it discovered that its servers had been hacked "within hours", and that it is "working with law enforcement to investigate the incident and pursue the perpetrators."

AT&T concluded that "We recognize that there is an active market for illegally obtained personal information." It added that it intends "to pay for credit monitoring services for customers whose accounts have been impacted." It did not state that it would compensate its customers for injuries suffered as a result of misuse of their personal information.

Schwab Says Many Protectionist Bills In Congress Won't Save a Single American Job

8/29. Susan Schwab, the U.S. Trade Representative (USTR), gave a speech in Beijing, People's Republic of China, in which she discussed Doha round trade talks, China's role in these talks, China's compliance with its World Trade Organization (WTO) obligations, the possibility of more WTO enforcement actions against China, and growing protectionism in the US Congress and around the world.

Susan SchwabSchwab (at right) said that "There are dozens of bills in the U.S. Congress proposed by members who want us to ``get tough´´ or ``stand up to China.´´ Many of these bills would not create or save a single American job. In fact, some would both kill jobs and limit consumers' choices as prices increase. Still, these Members of Congress reflect the very real concerns of many Americans about the impact of China's dramatic entry into the trading system. Responsible actions and leadership by China can help allay those concerns. Certainly, economic isolationism and protectionism are not the answer."

In addition, she warned that "a failed Doha Round could foster greater protectionism around the world."

She spoke at length about Doha trade talks. "The breakdown of the Doha Round trade talks late last month was a major disappointment for all who believe in the power of trade to promote economic development, to expand opportunities and to facilitate cooperation among nations. Indeed, the Doha Round is our generation's best opportunity to lift millions of people out of poverty and to raise living standards for millions more."

She stated that "President Bush has directed me to continue our collective quest for an ambitious, robust and balanced agreement that meets the objectives that WTO members adopted as part of the Doha Development Agenda."

"The Doha Round is also an important reason why I am in China today", said Schwab. "It is my strong hope that China will carry out a clear-eyed assessment of the costs and benefits of a successful Doha Round and conclude that it is in China’s long-term self-interest to play an active role in ensuring the Round’s ultimate success. And that ultimate success requires an outcome that truly opens markets and generates new trade flows."

She also addressed "China’s failure to honor certain commitments, including its failure to adequately enforce intellectual property rights, its efforts to protect and support certain domestic industries, and its delay in fulfilling certain market opening obligations."

She elaborated that "We are discussing additional WTO-related concerns with China related to IPR enforcement and subsidies, and are closely monitoring China’s fulfillment of commitments in other areas as well, including in financial services."

She said that "We do not enjoy bringing WTO enforcement cases", but that "when good faith dialogue does not yield positive results, we cannot stand by and allow commitments to go unobserved. We will use the dispute settlement mechanisms available to us."

She added that "Legal action should not be seen as a hostile act. Dispute settlement provides an objective means for trade partners to resolve disputes that otherwise might fester and color the entire trade relationship. It also provides helpful leverage to government agencies that are trying to convince other agencies within their own government to abide by WTO rules. Indeed, the entire global trading system benefits from fair and rational options for resolving differences."

She argued that "If the Doha Round is unsuccessful, it will be tempting for countries to rely on litigation rather than negotiation to achieve new market opportunities. In such a scenario, China's commerce could be particularly vulnerable to legal challenges over its compliance with global trade rules."

Solicitor General Urges Reversal in Bell Atlantic v. Twombly

9/29. The Office of the Solicitor General (OSG) filed an amicus brief in Bell Atlantic v. Twombly, a case involving the pleading requirements for an action under Section 1 of the Sherman Act against regional bell operating companies (RBOCs). The OSG urges reversal.

The legal is issue is whether a complaint that alleges parallel or similar behavior, and conspiracy to limit competition, but includes no allegations in support other than the similar or parallel conduct, is sufficient to survive a motion to dismiss.

The class action law firm of Milberg Weiss Bershad & Schulman filed the complaint in U.S. District Court (SDNY) against Bell Atlantic and three other RBOCs. The lead named plaintiff is Twombly. See also, story titled "Milberg Weiss Indicted for Paying Illegal Kickbacks to Class Action Plaintiffs" in TLJ Daily E-Mail Alert No. 1,375, May 22, 2006. The District Court dismissed the complaint for failure to state a claim. The U.S. Court of Appeals (2ndCir) vacated and remanded. See, October 3, 2005, opinion [43 pages in PDF] and story titled "2nd Circuit Vacates in Twombly v. Bell Atlantic" in TLJ Daily E-Mail Alert No. 1,226, October 4, 2005.

The Supreme Court granted certiorari in June. See, story titled "Supreme Court Grants Cert in Bell Atlantic v. Twombly" in TLJ Daily E-Mail Alert No. 1,399, June 26, 2006.

Section 1 of the Sherman Act, which is codified at 15 U.S.C. § 1, provides, in part, that "Every contract, combination in the form of trust or otherwise, or conspiracy, in restraint of trade or commerce among the several States, or with foreign nations, is declared to be illegal. Every person who shall make any contract or engage in any combination or conspiracy hereby declared to be illegal shall be deemed guilty of a felony, and, on conviction thereof, shall be punished ..."

The OSG argued that "The Federal Rules of Civil Procedure provide that a complaint must set forth a claim showing that the plaintiff is entitled to relief, and require that the complaint provide fair notice to the defendant of the nature of the plaintiff's claim and the grounds upon which the claim is based. To meet those criteria, a complaint must allege, at a minimum, a sufficient factual predicate to provide meaningful notice to the defendant and to demonstrate a reasonable basis for inferring that the alleged conduct may be wrongful."

The OSG continued that principles governing pleadings "demand more than mere allegations of parallel conduct and conclusory allegations of an agreement or conspiracy in the context of a complex antitrust suit. To be sure, evidence of parallel conduct may at times provide important circumstantial evidence supporting an inference of agreement in a suit alleging a violation of Section 1 of the Sherman Act. But parallel conduct is to be expected even in fully competitive markets and, standing alone, provides an insufficient basis for inferring an illegal agreement."

Moreover, the OSG wrote, "a conclusory assertion of a conspiracy or agreement does not suffice to convert allegations of parallel conduct into a sufficient claim of a Section 1 violation. Because an agreement is the critical factor distinguishing innocuous parallel conduct from a Section 1 violation, courts must insist on more than mere conclusory allegations of that element. The court of appeals' standard -- which would appear to require nothing more than allegations of parallel conduct and a conclusory allegation of conspiracy -- is clearly insufficient."

This case is Bell Atlantic Corporation, et al. v. William Twombly, et al., Sup. Ct. No. 05-1126, a petition for writ of certiorari to the U.S. Court of Appeals for the 2nd Circuit, App. Ct. No. 03-9213. Judge Sack wrote the opinion of the Court of Appeals, in which Judges Raggi and Hall joined. The Court of Appeals heard an appeal from the U.S. District Court for the Southern District of New York, Judge Gerald Lynch presiding.

See also, Supreme Court docket.

Bell Atlantic and the other petitioners are represented by Michael Kellogg of the Washington DC law firm of Kellogg Huber.

People and Appointments

8/29. President Bush announced his intent to nominate Robert Howard to be Assistant Secretary of Veterans Affairs (Information and Technology). See, White House release.

More News

8/29. Two U.S. Courts of Appeals issued opinions just before the Labor Day weekend regarding the Federal Communications Commission's (FCC) former pick and choose interpretation of 47 U.S.C. § 252(i), and its current all or nothing interpretation. On August 29, 2006, the U.S. Court of Appeals (9thCir) issued its opinion [19 pages in PDF] in New Edge Network v. FCC, denying petitions for review of the all or nothing rule. This case is New Edge Network, Inc., et al. v. FCC, and consolidated actions, U.S. Court of Appeals for the 9th Circuit, App. Ct. Nos. 04-73800, 04-74401, 04-74408, 04-74410, 04-74720, 04-74724, 04-75445, and 04-76136, petitions for review of a final order of the FCC. Judge Thomas Nelson wrote the opinion of the Court of Appeals, in which Judge Pam Rymer and William Fletcher joined. On August 28, 2006, the U.S. Court of Appeals (6thCir) issued its opinion [14 pages in PDF] in BellSouth v. Southeast Telephone, a case regarding retroactive application of the all or nothing rule by state public utility commissions. This case is BellSouth Telecommunications, Inc. v. Southeast Telephone, Inc. and Public Service Commission of Kentucky, U.S. Court of Appeals for the 6th Circuit, App. Ct. No. 05-6657, an appeal from the U.S. District Court for the Eastern District of Kentucky, at Frankfort, D.C. No. 04-00084, Judge Joseph Hood presiding. Judge Ronald Gilman wrote the opinion of the Court of Appeals, in which Judges Sutton and Denise Hood joined.

1st Circuit Rules That § 605 Does Not Apply to Theft of Cable Signals Delivered by Wire

8/28. The U.S. Court of Appeals (1stCir) issued its opinion in Charter Communications v. Burdulis, a case regarding theft of cable signals.

Charter is a cable television operator. Its cable signals for premium channels and pay-per-view services are electronically coded, or scrambled.

Thomas Burdulis used an illegally modified cable descrambler device to receive service for which he did not pay. Miquel Sanchez used a quickboard designed to effect the unauthorized reception of premium and pay-per-view programming.

Charter filed complaints in U.S. District Court (DMass) against Burdulis and Sanchez alleging unauthorized reception of cable service in violation of 47 U.S.C. § 553 and unauthorized publication or use of communications in violation of 47 U.S.C. § 605.

The District Court entered default judgments against both defendants on the § 553 claims. However, it held that § 605 does not apply to theft of radio signals transmitted over a cable network. It also held that the amount of statutory damages awarded should be limited to the estimated value of the cable services stolen, and that not more than one award of statutory damages of up to $10,000 would be allowed for all of Sánchez's statutory violations.

Charter appealed. The Court of Appeals affirmed.

§ 605(a) provides, in part, that "no person receiving, assisting in receiving, transmitting, or assisting in transmitting, any interstate or foreign communication by wire or radio shall divulge or publish the existence, contents, substance, purport, effect, or meaning thereof, except through authorized channels of transmission or reception ..."

§ 553 provides in part that "No person shall intercept or receive or assist in intercepting or receiving any communications service offered over a cable system, unless specifically authorized to do so by a cable operator or as may otherwise be specifically authorized by law".

§ 605(b) also provides in part that "The provisions of subsection (a) of this section shall not apply to the interception or receipt by any individual, or the assisting (including the manufacture or sale) of such interception or receipt, of any satellite cable programming for private viewing if -- (1) the programming involved is not encrypted ..."

Subsection 605(e)(3) provides a private cause of action for violations, as does § 553(c). However, prevailing on separate claim under the two sections could give a cable operator two separate damage awards. Moreover, § 605 can result in a higher damage award than § 553.

The Court of Appeals held that "the statutory text does make clear that § 605 is not to apply to signals delivered by wire over a cable network. And if there is any doubt, we think that the structure of the regulatory regime provides the necessary clarity."

It elaborated that § 605 regulates the theft of radio or satellite signals, not the theft of cable signals delivered by wire.

The Court of Appeals concluded that "If Congress finds that theft of wire-based cable continues to be a major problem, it certainly possesses the power to raise the penalty amounts for wire-based cable theft, so that such penalties are on a par with the amounts for wireless theft. Until that time, however, Charter will have to remain content with the penalty amounts available under § 553."

This case is Charter Communications Entertainment I v. Thomas Burdulis and Miquel Sanchez, U.S. Court of Appeals for the 1st Circuit, App. Ct. Nos. 05-1653 and 05-1726, appeals from the U.S. District Court for the District of Massachusetts. Judge Torruella wrote the opinion of the Court of Appeals, in which Judges Lipez and Stafford joined.

People and Appointments

8/28. Lee Peeler, the Deputy Director of the Federal Trade Commission's (FTC) Bureau of Consumer Protection will leave the FTC to become President of the National Advertising Review Council and Executive Vice President for National Advertising and Self-Regulation of the Council of Better Business Bureaus. See, FTC release.

More News

8/28. The Supreme Court issued an order [PDF] in Leegin Creative Leather Products v. PSKS, Inc., an antitrust case. PSKS, which runs a women's clothing and accessories store, filed a complaint in the U.S. District Court (EDTex) against Leegin Creative Leather Products, which makes women's accessories, alleging violation of Section 1 of the Sherman Act, in connection with its manufacturer's suggested resale price policies. The District Court awarded $3.6 Million in treble damages to PSKS. The Court of Appeals affirmed in a unpublished opinion. The Supreme Court order states in full that "The application to recall and stay the mandate of the United States Court of Appeals for the Fifth Circuit, case No. 04-41243, presented to Justice Scalia and by him referred to the Court is granted pending the timely filing and disposition of a petition for a writ of certiorari. Should the petition for a writ of certiorari be denied, this stay shall terminate automatically. In the event the petition for a writ of certiorari is granted, the stay shall terminate upon the issuance of the judgment of this Court. This order is conditioned upon the remaining in effect of the bond posted in the United States District Court for the Eastern District of Texas."

8/28. The U.S. Court of Appeals (4thCir) issued its opinion [11 pages in PDF] in USA v. Curry, an eBay fraud case, in which the defendant, Kenneth Curry, auctioned through the eBay web site, but did not deliver, hundreds of gold coins. The Court of Appeals affirmed the conviction for mail fraud under 18 U.S.C. § 1341 and wire fraud under 18 U.S.C. § 1343. However, the Court of Appeals vacated the sentence. This case is USA v. Kenneth Curry II, U.S. Court of Appeals for the 4th Circuit, App. Ct. Nos. 05-5090 and 05-5173, appeals from the U.S. District Court for the Eastern District of Virginia, at Norfolk, D.C. No. CR-05-3, Judge Walter Kelly presiding.

8/28. The Federal Communications Commission's (FCC) Wireless Telecommunications Bureau (WTB) released a Public Notice [6 pages in PDF] that announces changes to the FCC's Universal Licensing System (ULS) to implement FCC Form 608, which is titled "Wireless Telecommunications Bureau Application or Notification for Spectrum Leasing Arrangement or Private Commons Arrangement (Form 608)". This item is DA-06-1723.

Go to News from August 21-25, 2006.