December 2011 Newsletter

We just published a newsletter with articles on year end to do items, social media issues and estate planning.
December 2011 Morton Memo

New Services Offered

My firm has expanded. I recently brought on board attorneys Kellie M. Delaney and Michael H. Ritter. Kellie is a relatively new attorney but has a great deal of experience in civil litigation, business and corporate governance. Mike is an experienced attorney in estate planning and telecommunications.

Mike and Kellie are not only fine attorneys but are very experienced in the business world.  They bring a more practical business sensibility in their approach to our clients' issues. 

Mike and Kellie will add considerable depth to the Law Offices of Eric D. Morton. We will provide greater services in the fields of real estate, litigation, estate planning and telecommunications. In addition, we are experimenting with ways to revolutionize the practice of law through technology and close collaboration with other attorneys and professionals.

Check out our website and our new practice fields.

Estate Planning

Litigation

Real Estate

Telecommunications

As always, we are dedicated to providing our clients with responsive, quality and cost-effective legal service.   

True Stories: IP registrations work

In the past week, I wrote demand letters for two clients whose intellectual property rights were being violated.  We received instant and complete success in both cases.

In one instance, a former employee was using my client's copyright protected materials.  I sent the former employee a demand letter to cease and desist, to destroy all materials in her possession and send us list of all such materials and a list of all persons to whom she distributed the materials.  The former employee complied with our demands, completely, within two hours. 

In the other case, I wrote a demand letter to a company that was offering a service that was identical to my client's service and was doing so under a brand name that was so close to my client's service name that it constituted infringement.  The other company's CFO called me immediately after receiving my letter and told me that they would stop using the infringing name.

The key in both cases was registration.  In the first instance, I trained my client to register its copyrights and the client did so.  The former employee could have been sued for violating the Digital Millennium Copyright Act and faced enormous exposure to a court award of damages and attorneys fees.

In the second instance, my client had a Federal trademark registration for its name.  The infringing company faced great exposure to a suit for bad faith infringement.

Over the years, I have urged my clients to register their copyrights and trademarks.  Having such a registration gives a tremendous advantage to the owner of such intellectual property.  These cases show the leverage that the owner of a copyright or a trademark can have.

Creative Commons - a good copyright resource for Internet publishers

A difficulty for creative persons on the Internet is that they want their art/content to be widely distributed (go viral) but still want attribution.  Traditional copyright law makes such distribution difficult since each person copying the such content would need to explicit permission of the owners.

A non-profit organization has started a web site called Creative Commons that provides the owners of copyright protected work (art, photos, articles, blogs, etc) with standard licenses that allow dissemination of the material on the Internet without the loss of attribution. 

Owners of copyrights can select how much of their material can be used - with and without attribution.  The owner can also select whether or not derivative works can be created from their work.
I recommend it to bloggers and anyone who would like their work to be re-distributed on the Internet.

Of course, if you did not want your work to be redistributed, then these licenses would not be appropriate.

Great Article on Importance of Boards of Directors

R.J. Kelly of the Wealth Legacy Group wrote a great article on the importance of a good board of directors for privately held corporations.  Click here for article

Indian Tribes are Immune from Lawsuits

A little known fact is that American Indian Tribes (and their economic enterprises) can't be sued. The tribes enjoy sovereign immunity from lawsuits.  Federal and state courts do not have jurisdiction over them.  A definitive case was the Kiowa Tribe vs. Oklahoma Manufacturing Technologies.  The Kiowa Tribe defaulted on a promissory note and was sued in state court.  The lower courts found the tribe was within the jurisdiction of the state court for off-reservation economic activity.  The U.S. Supreme Court reversed and held that the tribe was immune from suit.

In recent years, Indian tribes and their casinos, in particular, have become major economic forces.  There are several Indian casinos in and around San Diego County.  Anyone contracting with them cannot enforce those contracts normally.  The tribes can sue however, just like a foreign entity not subject to U.S. jurisdiction can bring suit in U.S. courts against U.S. persons.

The exceptions are very explicit contract terms that waive sovereign immunity and/or arbitration clauses.  Anyone contracting with an Indian tribe or any entity owned by a tribe must use particular care in forming the contract with that tribe.

Social Media Is Advertising

Advertising laws are now being applied to social media. Any business with a Facebook account or is on Twitter must understand that those means of communication are legally considered advertising.

I attended a great telephone seminar today that was sponsored by the Intellectual Property Section of the California State Bar regarding advertising law. Among the many topics covered was social media as used by businesses.

The Federal Trade Commission and the courts have held that advertising and unfair competition laws apply to the use of social media by businesses. Furthermore, CAN-SPAM, the Federal anti-spam email law also applies.

Facebook has sued several business entities that spammed Facebook users. The courts held that Facebook had standing to use as an ISP under CAN-SPAM and that CAN-SPAM applied to communications on Facebook.

The FTC recently sued a plastic surgery clinic in Florida for unfair competition. The clinic used various types of social media, including blogs, to create an Internet buzz. Employees provided comments on Facebook and fake customers reviews, among other things.

The FTC sued on the basis that such practices were deceptive advertising. If an employee "Likes" his/her employer's Facebook page and provides favorable comments, and does not reveal that the he/she is an employee, then that is the same as writing a false customer testimonial. The business is liable under false advertising and unfair competition laws.

Any business that might get into any form of social media must have a social media policy that takes these legal issues into account.

Stolen notebooks = $23 million judgment

An employee quit his job and took a couple of binders of documents with him to his new job at a competing company.  This is a very common scenario; employees taking information or unique content with them when they leave a job.  They think that no one will know or care. 

However, the outcome proved disastrous for the employee and his new employer.  More than 10 years later, the employee and his new employer were hit with a judgment of more than $23 million dollars for copyright infringement. 

I tell my clients that copyright law is very strong and can provide powerful remedies for the owners of copyrights.  A recently published Federal case illustrates the strength of the U.S. Copyright Act and why one shouldn't steal documents or use misappropriated documents from another company.

In William A. Graham Co. v. Haughy, a Federal appellate court upheld an award of damages of more than $19 million and more than $4.6 million in pre-judgment interest for copyright infringement.   The infringement in this case was for the theft and use of two binders of documents that had been prepared by the plaintiff in the case - an insurance brokerage.  The binders were used by the plaintiff's agents to sell insurance products. 

An employee left the plaintiff's employment and took with him copies of the documents in the binders.  He gave the documents to his new employer, a competing insurance brokerage.  The new employer gave copies of the documents to its agents and used them for more than a decade before the plaintiff discovered the theft and use. 

The plaintiff sued the competing company and its former employer.  Although there is a statute of limitations for copyright infringement, it does start to run until the copyright owner discovers, or should have discovered, the infringement.  The plaintiff sought profits earned by the defendants that were attributable to the use of the documents in selling insurance products.  This is a form of infringement called indirect infringement.  The plaintiff wasn't seeking damages for the value of the documents themselves but the profits that were attributable to their use.

A jury found that the documents helped the defendants to attain tens of millions of dollars in profits in selling insurance.  The jury found that the portion of those profits attributable to the use of the documents was more than $19 million and added pre-judgment interest of $4.6 million.

The lessons:  register your copyrights for all the documents, art and content that you create, and don't steal or use stolen property!

ISPs must respond to warrants to identify subscribers

A California court ruled recently that an ISP must respond to warrants demanding the identification of its subscribers.

In criminal hacking case, the court held that the police could force an ISP (in that case, Time Warner) to give the identity and address of a Time Warner subscriber based on a IP (Internet Protocol) address.

The police subsequently searched the defendant's home and found evidence of the defendant hacking into a public school's computer network. The defendant claimed that he had a privacy expectation for his information with Time Warner.

"A subscriber has no expectation of privacy in the subscriber information he supplies to his Internet provider. Therefore, his challenge to a warrant requiring his Internet provider to identify him through his Internet Protocol (IP) number has no merit." wrote the court in People vs. Stipo.  The appellate court found no expectation of privacy in the defendant's subscriber information.

This case has some interesting implications, not only for criminal cases, but civil cases as well since a civil subpoena could also be used to find out identifying information as well.

Employees can be criminally prosecuted for misuse of computers

Employees can be criminally prosecuted for unauthorized and illegal use of computers and computer networks, but only if the employer has a strong and clear computer use policy.  A Federal court recently held that an employee can be criminally prosecuted if the employee accessed the employer’s computer system in order to defraud the employer.

In U.S. v. Nosal, No. 10--10038 (9th Cir, April 28, 2011), the 9th Circuit Court of Appeals held that employees could be prosecuted under the Federal Computer Fraud and Abuse Act (the “CFAA”).
CFAA is a statute that was originally intended to allow for the criminal prosecution of hackers. In the Nosal case, three employees used their employer's computer and obtain trade secrets from the employer. The employees then quit and started their own business using the employer's information.

The employees were prosecuted under CFAA by the U.S. Government. Their defense was that CFAA was intended to prosecute hackers who did not have authorization to enter a computer or a computer network.  They argued that they should not be criminally prosecuted because they had access to the system.  (Of course, the employer could have sued but that is less serious than a criminal prosecution).

However, the government successfully argued when the employees used their user names and passwords to access the employer's trade secrets, they exceeded their authorization and broke the law. 


The key to the case:  The employer had strong computer use and confidentiality policies.  All employees were required to sign agreements that explained what was the employer's confidential information, its sensitive nature, and clearly stated that such information was only to be used for the employer's purpose.  All of the employer's computers were restricted access and protected by passwords and user names.  So, despite their status as employees with access to the employer's computer system, the court determined that the employees were, legally, no better than hackers.


I have had several instances of business owners who have been ripped off by employees stealing confidential information.  They now have a big stick to fight back with.

Businesses should develop clear computer use policies that forbid the use of their computers for anything other than company business, protect their computers with user names and passwords, and have their employees sign well written confidentiality agreements.  The threat of criminal prosecution is much more weighty than the threat of a lawsuit and will go farther to keep this type of theft in check.

Copyright Trolls - Don't use stock pictures without a license

Intellectual property has become a hardball arena in recent years. Small businesses steal trademarks and trade secrets from each other.  Patent trolls file serial lawsuits extorting money from busineses. Now we have copyright trolls.


A client was recently threatened with legal action by a stock photo company.  This stock photo company sells photographs on-line for use in websites.  Typically, a website owner or developer can download and use a photo for a royalty of $5.00 to $10.00.

My client had a stock photo on his website.  He received a demand letter from a stock photo company that had the rights to sell licenses to use this photo.   My client's website developer had downloaded this photo from somewhere (the developer was a little vague).

The stock photo company initially demanded $1,500.00 and threatened to take legal action if not paid.  My client discussed the matter with the stock photo company which progressively lowered its demand to around $900.00.

The threat of legal action was serious.  If you use a computer to download copyright protected art from a website and use it on your website, you can be liable for up to $150,000 in statutory damages, plus statutory attorneys fees, per download.  So, the potential exposure was huge, even for a lousy stock photo.

The stock photo company had an entire division devoted to collecting large fees from companies that had used the stock photo company's photos without authorization.  They searched the Internet with special software that looked for their photos and then checked to see if the use of the photos was authorized.  If not, then they would aggressively demand outrageous fees and threaten legal action.  Furthermore, the photos on the company's website were easily downloaded without payment of a royalty and watermarks were easy to crop out.  The company essentially had a copyright troll division searching out the unwary using their cheap photos.

In my client's case, the photo on his website was not registered with the U.S. Copyright Office.  Since it was not registered, the stock photo company could not collect the huge statutory damages but only actual damages, in this case about $5.00.  My client removed the photo from his website and the stock photo company left him alone when we asked for registration information.

Lessons:
1.   Do not use someone else's photos, pictures, videos, etc. on your website. 
2.   If you are a web developer, pay all royalties necessary for every bit of art on a website.
3.   Ask you website developer for proof of a license for all stock photos or other art on a website.  You will have to pay the price if the developer stole them.

Court rules that use of competing brand as keyword is not infringement

The courts are becoming more sophisticated in their application of trademark law to Internet. Today, the Federal 9th Circuit Court of Appeals issued a ruling in a keywords ad case.  The defendant in the case bought a competitor's brand name as a keyword for ads on Google and Bing.  A search for the competing brand would bring up a sponsored ad for the defendant. The competitor sued claiming that the use of its brand as a keyword was a violation of its trademark rights.

In Network Automation, Inc. v. Advance Systems Concepts, Inc.,court found that it was not since the search engine results showed the defendant's ad and name as a sponsored result. The court found that consumers are not likely to be confused by the sponsored ads since they can discern the difference between the companies' brand, plus the defendant's ad is obviously not the brand of the competitor.

This is a shift from earlier similar cases in which the same court held that the use of a competing brand could be considered trademark infringement if used as a keyword.  The court's reasoning in this case was that the Internet was changing, the consumers are more sophisticated now than in the past, and the court's must be flexible in applying the law to Internet cases.

The full case opinion is here.

New Litigation Page on Website

I just developed and published on my website a page devoted to litigation.  I explain my new revolutionary system of project management for business litigation.  Click on this link:  Litigation Page on Eric's website

Newsletters for February 2011

I just published a newsletter.  Some good news for small businesses.

The Morton Memo February 2011

New model for business litigation.

I am thinking of an experiment in business litigation that could save considerable attorneys fees for business owners.  Essentially, teams of contract attorneys would handle cases on an as needed basis.  The client's documents and all documents generated by attorneys would be digitally stored and shared.  The attorneys would be billed at considerably lower rate than prevailing rates. The teams would be managed on a project management basis by the lead attorney.  The client would save considerable monies in attorneys fees. 

My idea comes from a few sources.  One is the fact that there is a lot of legal talent available that is unemployed or underemployed.  My wife has been an attorney for a little more than a year and she knows a lot of attorneys who aren't working or working as contract attorneys.

The other inspiration is technology.  The use of the Internet, including cloud computing and digital vaults make it possible for professionals, especially attorneys, to collaborate on projects without the need to be collocated.  

The idea is to assemble a team of contract attorneys for each lawsuit.  Each attorney would work on a particular project, such as research, drafting a pleading, discovery response, etc. as needed.  Each project would have a deadline and a number of hours allotted to it.  The case would be handled on a project management basis so that the client knows the cost in advance.  The contract attorneys would be billed at a going contract rate plus overhead and a small profit.  The lead attorney would bill at a higher rate.  I am also considering billing the contract attorneys for cost during the course of the case with the client owing the remainder at the end of the case.

The key to the model is payment by the client.  The client would need to make a commitment to pay a certain amount each month since the contract attorneys and the costs of the suit would have to be paid each month.   This amount would be considerably less than the retainers paid monthly to dedicated litigation firms, particularly large firms.  But, the client would need to understand and commit to pay.

Another key is that the contract attorneys would need to have to have strong writing and research skills.  And, they would need to be able to work on a project/limited hours basis with little direct supervision.  They would have to understand that they can't milk the file and, if a project was more difficult and might take longer, they would have to immediately communicate that fact to the lead attorney/project manager.

Documents, including client documents, would be cloud stored or stored in digital vaults.  There is no need a lot of paper or attorneys collocated in a firm.  Everything would be digital. Obviously, the lead attorney/project manager would have to have excellent communication and management skills.  And, frankly, that attorney would have to be ruthless about contract attorneys who couldn't do quality work within a reasonable amount of time.  Those attorneys would have to be cut out or, preferably, not hired in the first place. 

I calculate that in a business litigation case, the project management model might reduce the attorneys fees by as much as 70% over dedicated litigation firms, particularly larger firms.  That is a huge savings.  I have discussed it with a few attorneys and they think it is a great idea.  One even said that he didn't understand why someone wasn't doing it already.

Change in California Business Entity Reporting

The California Secretary of State reminds California business entities to file their annual Statements of Information.

Statements of Information are filed with the Secretary of State annually by entities such as corporations and limited liability companies. The statements are the public records of those entities. An entity that does not file a statement can be suspended and/or fined $250.00.

In the past, the Secretary of State would, every year, send a Statement of Information and a self-addressed envelope to each entity 90 days before the statement was due. Starting earlier this year, the Secretary of State only sends a postcard reminder to each entity. This is a cost cutting measure.

A corporation or a limited liability company must now either download the Statement of Information from the Secretary of State's website, fill it out and mail it to the Secretary of State, or a corporation can file one electronically through the Secretary of State's website.

I have a few clients who did not timely file their Statements of Information this year because they were waiting for their Statement of Information forms in the mail. They failed to take note of the postcard informing them of the new policy. They were quickly fined $250.00 - much faster than in the past. Since the state is hurting for money, it is cutting costs and enforcing penalties more harshly.

The following is a link to the Secretary of State's website explaining the policy. http://www.sos.ca.gov/business/be/forms/si-mailer-format-change.pdf

If you own a corporation, a limited partnership or a limited liability company, please ensure that your entity's Statement of Information is timely filed. It is a mundane but important chore in keeping your entity in good standing.

If you have any questions about Statements of Information, or anything else, please contact us. Remember, we do not charge for initial consultations.

Please also visit our website.

Happy New Year! 2010 was a difficult year for almost every business owner and professional that I know. I hope that everyone enjoys a more prosperous 2011.