Archive for the ‘Legislation/Regulations’ Category

The Broader Benefit of Benefit Corporations

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Ello, an ad-free social network, recently closed another round of venture funding, raising $5.5M. Exciting right? Another social media start-up getting some Series A funding. While $5.5M is surely nothing to sneeze at, perhaps the more interesting feature of this next stage of Ello's life is that it's registered itself as a public benefit corporation, enshrining in its corporate charter as a "public benefit" that it will never show ads or sell user data. To date, 27 states have enacted legislation recognizing "Benefit corporations," entities that give directors legal protection to pursue social and environmental goals over maximizing investor returns. According to benefitcorp.net, a defining characteristic of benefit corporations is that "they are required to create a material positive impact on society and the environment." One of the largest early adopters of the benefit corporation form was outdoor clothing and gear company Patagonia. In doing so, Patagonia sought a structure that would prevent shareholders from suing it in the pursuit of costly environment initiatives, such as donations to environmental organizations and support of renewable energy sources, that allowed it to serve the welfare of the global community. Warby Parker, with its initiatives ranging from staying carbon neutral, to providing lost cost eyewear to those in need, and even sponsoring a local Little League team, similarly sought the insulation of its directors through the benefit corporation structure. In both examples, the benefit corporation produces a direct, measurable and concrete positive impact on their communities and the environment. Ello's election to benefit corporation status brings with it a tweak to what we've seen so far. Even though Ello has registered as a public benefit corporation, their mission is in many ways fundamentally different from more well-known predecessors. Whereas Patagonia and Warby Parker have employed the benefit corporation as a way to protect their support of immediate and material benefits to the public good outside of the scope of their direct relationship with their consumers, Ello seems to have stretched the breadth of the defining characteristic of benefit corporations to protect what it believes to be the intrinsic value of its product. Is protecting users from ads a public benefit in kind with what we've seen from Patagonia and Warby Parker? In allowing Ello to register as a benefit corporation, Delaware state law seems not to see a distinction. Whatever the limits of the definition of public benefits, one thing Ello has shown about benefit corporations is how useful they can be in insulating directors from investor interference. Whether or not Ello's mission can truly be said to be in pursuit of the public good, they have succeeded in securing the pursuit of their vision. In effect then, perhaps it makes more sense to refer to Ello as a "mission" corporation, protecting the discretionary judgment of it leadership beyond its fiduciary duties to investors, than a benefit corporation. To all of the entrepreneurs of the world, be aware of this broader benefit.

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November 25th, 2014 at 10:37 pm

Update on Bitcoin Regulation

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Since the last post on a proposal for Bitcoin regulation, another 300,000 Bitcoins were mined, [1] the Alibaba Group banned the use of Bitcoin on its e-commerce sites, [2] and the U.S. Department of Justice charged the vice-chairman of the Bitcoin Foundation in a money-laundering conspiracy. [3] Earlier last week, Benjamin Lawsky, New York State’s Superintendent of Financial Services, held a series of hearings on virtual currency regulations. Speakers included the Winklevoss brothers and the deputy U.S. attorney for the Southern District of New York. Notably, Mr. Lawsky announced his plans to roll out a “regulatory framework for virtual currency firms operating in New York” in 2014. [4] Although it is admirable that New York is taking the initiative, it remains to be seen whether or not state regulation is a practical option. New York’s regulatory framework for Bitcoin will be necessarily confined within its state borders. It is easy to imagine other states following suit, but enacting different laws, which would result in an inconsistent mess of legislation. On one hand, this could lead to loopholes and allow for regulatory arbitrage. On the other hand, this could become so frustrating as to discourage Bitcoin use altogether. After all, one of Bitcoin’s advantages is that is not subject to regulation. Subjecting Bitcoin businesses and users to multiple regulatory regimes might cripple the virtual currency altogether. As Mr. Lawsky explained, however, “Businesses can deal with regulation. What they can’t deal with is uncertainty." [5]

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February 5th, 2014 at 12:35 pm

A Proposal for Bitcoin Regulation

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Bitcoin, the creation of Satoshi Nakamoto, an anonymous person or group, is commonly touted as the “world’s first decentralized digital currency”. Since its launch in 2009, users around the world have “mined” just over 12 million Bitcoins, leaving about 9 million to be mined. Aside from the cool factor, Bitcoin offers portability, relative security, and lower transaction costs—unique features resulting from the absence of a central monetary authority.[1] However, the lack of a central monetary authority also creates extreme price volatility and the potential for use for tax evasion and foreign exchange arbitrage. A number of regulatory solutions have been proposed, including regulation by the U.S. Treasury or the Securities and Exchange Commission. Another option for Bitcoin regulation is as a commodity within the scope of the Commodity Exchange Act (CEA), under the supervision of the U.S. Commodity Futures Trading Commission (CFTC). Bitcoin may fall within the definition of a commodity as a good “in which contracts for future delivery are presently or in the future dealt in.”[2] Financial instruments that track the value of Bitcoin unattached to Bitcoin ownership would be regulated as a swap.[3] Subjecting Bitcoin dealers and investors to CFTC regulations for swap dealers and participants may allow regulators to closely monitor this new financial and technological development, prevent its use to exploit consumers, and curb its creation of systemic financial risk.

[1] See Finance and Economics: Bits and bob; Digital currencies, 39 The Economist 83 (Apr. 11, 2013).
[2] 7 U.S.C. §1a(9) (2012).
[3] 7 U.S.C. §1a(47) (2012).

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December 17th, 2013 at 8:53 am

Patent Litigation Integrity Act – Raising The Stakes

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Patent trolls had an especially scary Halloween this year as Senator Orrin Hatch (R-UT) introduced Senate Bill 1612 – the Patent Litigation Integrity Act. The short and succinct bill has one purpose – “To deter abusive patent litigation by targeting the economic incentives that fuel frivolous lawsuits.”[1] The bill would shift litigation costs by granting the prevailing party “reasonable fees and other expenses, including attorney fees.”[2] On defendant’s motion, it would also require plaintiffs to “post a bond sufficient to ensure payment of the accused infringer’s reasonable fees and other expenses, including attorney fees.”[3] With the high cost of litigation today,[4] many businesses find it easier and cheaper to settle claims of patent infringement, even if a plaintiff’s claims are weak or unsubstantiated. Senator Hatch aims to prevent this practice by requiring plaintiffs to essentially "put their money where their mouth is."[5] By raising the stakes to litigate patent claims and instituting a default rule of winner-takes-all, bill supporters are hoping “those facing troll threats [will now have] the tools necessary to fight back while also giving trolls a disincentive to bring harassment suits.”[6] The senator has received general kudos from companies and organizations seeking patent litigation reform.[7] However, if eventually passed, is fee-shifting the best means to deter patent trolls? While the bill allows courts to consider “special circumstances [that would] make an award unjust,”[8] and also consider the “position and conduct of the nonprevailing party or parties,”[9] could the bill also prevent merited claims? As with all obscure legislative phrases, judges will inevitably jump at the chance to define what constitutes “substantially justified [conduct of the nonprevailing party].”[10] However, should the exemption be too narrowly defined, the bill could broadly deter both “abusive patent litigation”[11] and potentially justified but financially weak plaintiff patent infringement claims.

[1] Patent Litigation Integrity Act of 2013, S. 1612, 113th Cong. (1st Sess. 2013).
[2] Id.
[3] Id.
[4] In 2009 the American Intellectual Property Law Association (AIPLA) reported that the median cost per party in patent cases with stakes exceeding $25 million cost over $6.25 million to take the case to trial. In cases where the stakes were between $1-25 million, the median costs were $3.1 million. AMERICAN INTELLECTUAL PROPERTY LAW ASSOCIATION, REPORT OF THE ECONOMIC SURVEY 2009, at I-129.
[5] Senator Hatch, although in different context. Press Release, Senator Orrin Hatch, Hatch to Senate Democrats: Put Your Money Where Your Mouth Is (Dec. 19, 2012) (on file with author), available at http://www.hatch.senate.gov/public/index.cfm/releases?ID=51ba83f0-c04e-492d-bedb-519f4370d587.
[6] Julie Samuels, Trolls, Watch Out: Senator Hatch Introduces New Patent Legislation, Electronic Frontier Foundation (Oct. 30, 2013), https://www.eff.org/deeplinks/2013/10/trolls-watch-out-senator-hatch-introduces-new-patent-legislation.
[7] Id.; Keith Kupferschmid, SIIA Praises Senator Hatch’s New Patent Troll Bill, Software & Information Industry Association (Nov. 1, 2013), http://www.siia.net/blog/index.php/2013/11/siia-praises-senator-hatchs-new-patent-troll-bill/; Press Release, Overstock.com, Inc, Overstock.com Commends Senator Hatch for Introducing Patent Litigation Integrity Act (Oct. 31, 2013) (on file with author), available at http://finance.yahoo.com/news/overstock-com-commends-senator-hatch-190000119.html.
[8] S.R. 1612.
[9] Id.
[10] Id.
[11] Id.

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December 4th, 2013 at 10:44 am

California Passes New Revenge Porn Law, but is it Good Enough?

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Today, just about everything happens on the Internet. That includes flirting, dating, and breaking up. While ex-lovers with broken hearts have sought revenge for centuries, today the implications are far different. Before the Internet, such revenge may have included spreading rumors or writing a phone number in a bathroom stall. Today, however, revenge includes turning private explicit photos of a former lover into non-consensual porn. This is “revenge porn” and California is trying to stop it. Revenge porn is defined as sexually explicit media that is distributed online, without consent of the pictured individual, for the purpose of humiliation. The majority of photos used for revenge porn are taken consensually during a relationship and meant to remain private between the couple. There are a number of websites dedicated to posting such images and they profit from advertising revenue. Revenge porn victims cannot go after web hosts directly due to Section 230 of the Communications Decency Act, which provides a safe harbor. While some believe courts may pierce the section 230 immunity, California took a different approach: making it easier to go after those who distribute sexual images of their exes. Passed by California Governor, Jerry Brown, in early October, the anti-revenge porn legislation would impose a $1,000 dollar fine and six months of jail time upon people convicted of distributing revenge porn. While this may sound good at first, this new legislation has a number of problems. The most glaring problem is that the law only applies when the sexual images are taken by the person accused of posting them online. This means that the law does not apply when a person takes a photo of themselves and shares it with someone who later posts it to a revenge porn website. Unfortunately, according to the Cyber Civil Rights Initiative, over 80% of revenge porn victims (and they are predominantly women) took the photo themselves and assumed it would not later be available for public consumption. The law has been heavily criticized, prompting a robust discussion about how to legislate the tricky issue of non-consensual porn. Other ideas include amending the Copyright Act and establishing a federal law against the practice. While these ideas certainly have merit, they are only ideas. California’s law may have critical flaws, but it is at least a meaningful step toward protecting future victims of revenge porn.

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November 14th, 2013 at 2:09 pm

FTC sets sights on Patent Trolls

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On September 28 of this year the Federal Trade Commission voted to seek public comments on proposed information requests to better understand patent troll practices. This move by the FTC marks the first step on the road to possibly regulating patent trolls. Patent trolls are firms that buy patents with the sole purpose of suing others whose goods infringe the patent. Patent trolls do not attempt to produce the invention disclosed by the patent, but rather sue those firms that do. With the FTC’s latest focus on patent trolls, it is clear that patent trolls are becoming problematic for businesses. In 2011 alone, according to a Financial Times article, litigation by trolls accounted for sixty percent of all patent lawsuits filed in the US. Trolls create IP minefields for businesses, whereby businesses must exert resources to carefully act to not infringe a patent troll’s patent. Sometimes companies decide to not undergo innovation because doing so might put the company at risk of being sued by a troll. This action also antagonizes the ultimate purpose of patents - to further scientific and technological progress - by slowing the pace of innovation. It, therefore, makes sense that the FTC has decided to fight back against trolls - especially in light of the agency’s key mission “to examine cutting-edge competition and consumer protection topics that may have a significant effect on the U.S. economy.” In spite of the FTC effort, it is unclear what regulations could effect in greater transparency of patent troll activities. One viewpoint is that if patents were bought and sold on an exchange, such centralization and transparency could make it easier for businesses to protect against patent trolls - by buying the patents first or through other financial incentives - and for regulators to prevent against behavior that thwarts competition and innovation. Creating a patent exchange would require better patent valuation techniques as well as a shift in thinking. While some firms, such as Ocean Tomo, have tried to popularize the idea of a patent exchange (e.g. Ocean Tomo's IPXI product), this reality has not become widely accepted. Might this be the future?

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October 10th, 2013 at 2:17 pm

Delete Button for the Internet? New California Law Says Yes

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On Monday, September 23, 2013, California Governor Jerry Brown signed SB 568 into law. SB 568 requires “the operator of an Internet Web site, online service, online application, or mobile application to permit a minor who is a registered user of the operator’s Internet Web site, online service, online application, or mobile application, to remove, or to request and obtain removal of, content or information posted.” The law will take effect on January 1, 2015. A second provision of the bill prohibits internet companies from marketing products to minors that are otherwise prohibited to be offered and cold to minors outside the internet. With the passage of the so called “Eraser Button Bill,” California is the first state to require websites to allow people younger than 18 to remove their own postings. SB 568 is not all encompassing, however, as the law covers only content (including photos) that is actually generated by the individual. Thus, internet companies and websites will not have to remove content posted or reposted by others. However, the law can reach websites located in other states, as websites located outside California must also comply with the law if the user in question is a minor from California. In terms of penalties for a violation, SB 568 doesn’t spell out specific penalties for sites that fail to comply, but it could expose web companies to civil liability. Supporters of the new law champion SB 568 as a victory for privacy rights. James Steyer, Chief Executive of Common Sense Media, a charity that promotes children’s digital privacy, stated that SB 568 “is a big step forward for privacy rights, especially since California has more tech companies than any other state.” California already allows certain people, such as victims of domestic violence, to get information struck from their online record. SB 568 is meant to protect teens from doing harm to their job and college applications. Nearly a quarter of college admissions counselors admitted to checking applicants social networking profiles and found “vulgarities, alcohol consumption, and illegal activities” which negatively affected applicants admissions chances. According to Steyer, “Teens often self-reveal before they self-reflect and may post sensitive personal information about themselves – and about others – without realizing the consequences.” Even Google has given at least tepid support to this type of legislation. In May of 2013, Google Chairman Eric Schmidt said the internet needed a “delete button.” Opponents have criticized the legislation as infringing on free speech rights. Others have concern that under this new legislation, websites will not understand what their legal obligations are. The Center for Democracy and Technology is concerned that such legislation “will discourage operators from developing content and services tailored to younger users, and will lead popular sites and services that may appeal to minors to prohibit minors from using their services.” Additionally, SB 568 will burden websites with developing policies for different states. Other opponents argue that even if SB 568 is well intentioned, the objective can’t be completed on a practical level as internet archives automatically create copies of nearly every piece of information on the web. And, they argue, the law is unnecessary, since nearly every imaginable service already offers a delete button. According to proponents, however, the law will allow users to do more than simply “delete” posts – as posts that are simply deleted are potentially retrievable. This law forces websites to permanently delete what has been posted. Finally, opponents are skeptical as to how the law should be applied. SB 568 only protects content that the user uploaded him or herself and not information that has been copied by a third party. But what if a friend “likes” a photo on Facebook? They argue that to have any sort of teeth, the law would have to permit the deletion of data that has been reposted, archived, or interacted with which would conflict with one’s right to share and discuss information. Will other states follow suit? Who knows – but this is not the highest profile attempt to give minors the ability to delete their postings. In 2011, a similar bill called the Do Not Track Kids Act died in committee in the U.S. House of Representatives. Perhaps California and SB 568 can serve as the test model for the rest of the nation.

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October 1st, 2013 at 1:53 pm

New Zealand Changes Patent Laws to Exclude Software

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The legendary Patent Troll Wars will not see much of a theater in New Zealand, after Parliament just this month determined that software is no longer able to be patented in New Zealand. New Zealand's Patent Act 2013 seeks to clean up the patent process by no longer granting patents for software, "strengthen the criteria for granting a patent by introducing an 'absolute novelty' standard, and examine patent applications for usefulness and the presence of an 'inventive step,'" and "simplify the procedures for granting a patent, streamline the procedures for challenging a patent, and expand revocation procedures to allow any person, at any time, to apply to the Commissioner of Patents for a grant of patent to be revoked." Patent Act 2013, Introduction. These changes are designed to allow several things, but the overarching goal is to make it less-likely that so-called 'patent trolls' will be able to press their case in New Zealand. So far, it appears as though the Kiwi tech world is on board with the changes as well, and several American publications are urging the U.S. to follow suit. http://www.zdnet.com/new-zealand-bans-software-patents-7000019955/ http://www.iitp.org.nz/news/archives/4926-Newsline_Extra_Weekly_roundup_of_big_news_in_tech?r=2-IITP-News (for a list of articles supporting the new Act) The Institute of IT Professionals chief Executive Paul Matthews stated, "Today's historic legislation will support our innovative technology industry, and sends a clear message to the rest of the world that New Zealand won't tolerate the vexatious practice of 'patent trolls'. That is, when software patents are created with the sole purpose of bringing costly litigation against inventive technology companies...In short, the banning of software patents is a victory for common sense." It remains to be seen how this new Act will impact the software industry in New Zealand, but the short-term ramifications will likely be a decrease in 'frivolous' patent litigation. While American developers are being forced to resort to extreme measures to deal with patent infringement claims here in the U.S., New Zealand is looking far more attractive as a tech start-up hub. Full text of the Patent Act 2013: http://www.legislation.govt.nz/bill/government/2008/0235/14.0/whole.html#DLM1419228

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September 22nd, 2013 at 3:46 pm

One Crucial Step to Regulate the Use of Bitcoins for Illegal Purposes

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Virtual currencies have the potential to revolutionize how consumers buy, trade, and sell goods and services – and government regulators must be prepared to adapt to maintain their effectiveness. One such currency, the Bitcoin, has been featured prominently in the news. The Bitcoin is a digital currency that is based on an open source cryptographic protocol. Bitcoins are traded on a peer-to-peer network with no central governing authority. As of 11:16 AM EST, September 3, 2013, one Bitcoin (BTC) trades for $146.47445 on Mt. Gox, a prominent Bitcoin exchange. Because only an electronic device is required to transfer Bitcoins, transactions can be made anonymously across international borders with almost no transaction costs. They are also untraceable. For potential Bitcoin owners, these qualities can be problems or opportunities. For instance, an investor who wouldn’t normally consider the Bitcoin market might see an opportunity to avoid government interference or local conflict. Recently, for example, the use of Bitcoins increased in Europe during the Cyprus bailout because the Bitcoin market was seen as a safe haven in a time of economic uncertainty. Unfortunately, the elusiveness of the Bitcoin market also makes it ideal for black market transactions. Weapons, drugs, and other items are increasingly being paid for by criminal organizations with Bitcoins. This creates a strong incentive – and with it – a unique challenge for governments to regulate Bitcoin transactions. To effectively regulate virtual currencies such as the Bitcoin, governments must start by legitimizing the Bitcoin as a currency. This is crucial because the use of a digital currency must fall under the purview of statutory law – for instance, the definition of “money” in money laundering. Recently, the Financial Crimes Enforcement Network (FinCEN) released a memo regarding virtual currencies. The memo states that virtual currencies such as the Bitcoin are not real currencies because they are not legal tender in any jurisdiction. Thus, a mere user of Bitcoins is cleared of legal obligations. However, the memo also states that entities involved with manufacturing or converting virtual currencies into a real currency are subject to the same reporting and regulatory requirements as other financial institutions. This would mean that a Bitcoin exchange within the jurisdiction of the United States must cooperate and report suspicious activity, among other requirements. In more recent months, U.S. regulators and Bitcoin advocates have been meeting and talking about the challenges associated with virtual currencies. With regard to regulatory efforts, the FinCEN’s memo is a great start. However, this memo is just that, a memo. There is no explicit statutory guidance regarding virtual currencies. This leaves room for litigation and confusion. In addition, the memo is ambiguous. For instance, when does one move from a user to a converter of Bitcoins? It isn’t clear. What is clear is that more needs to be done in order to effectively police the use of virtual currencies in illegal activities. My solution is simple. Bitcoins should be statutorily deemed a real currency transaction valued as the Bitcoin-to-dollar conversion of the average of the three most prominent Bitcoin exchanges at the time and date of the transaction. Once the amount of Bitcoins in the transaction is determined, it is easy to administer and eliminates the concern of a person using a virtual currency. It is the cleanest solution to regulate the use of virtual currencies for illegal purposes. If a person illegally buys drugs with $10000 or 67.281 Bitcoins, it doesn’t – and shouldn’t – make a difference.

Should We Forget the Right to Be Forgotten?

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While Facebook has had some recent success in Europe vis-à-vis its policies – this week winning a challenge in Germany against its “real names” policy – the EU currently has several proposals on the table that have the potential to seriously impact Facebook’s data collection and business practices. One particularly interesting proposal is the establishment of a “right to be forgotten.” First proposed by European Commissioner for Justice Viviane Reding last year, and expected to be voted on this summer, the right to be forgotten would require companies that collect or host personal information online to delete such information upon request. While this new right may seem an attractive way to protect online privacy and enables one to escape the past – perhaps memorialized in embarrassing Facebook pictures – it has been hotly debated, and fiercely opposed this side of the Atlantic. Critics worry that the proposed right will essentially be a right to rewrite history, and furthermore, will pose a serious threat to freedom of speech. As currently formulated, the right-to-be-forgotten proposal defines the personal data one may request taken down as “any information relating to a data subject." Law professor Jeffrey Rosen worries that the proposed right may allow a person to demand deletion of not only Facebook photos that person posted herself, but also photos others post that include the person, and also more generally (and problematically), information others post to the internet about the person, whether it is true or not. Thus, Google’s Peter Fleischer wonders if, under the proposed regime, “someone else posts something about me, do I have a right to delete it?” If the final formulation of the right to be forgotten allows an individual to demand a takedown of truthful information posted by another, obviously there are major freedom of expression concerns, and as Rosen points out, the freedom and openness of the internet will be seriously inhibited. While the scope of the proposed right to be forgotten may very well be too broad, it should be noted that the proposal will continue to be debated in the coming months before enactment, and it is possible the EU may in practice interpret the right narrowly. Imperfections aside, the EU’s proposed policy illuminates the notable trend of Europe taking online privacy seriously and engaging with the difficult issues of this arena more substantively than has the United States. With a few exceptions, the online privacy policies of American companies are voluntary and no major progress has been made toward federal legislation and regulation in this area. While the current administration advocates the creation of voluntary industry privacy standards, Silicon Valley’s vigorous lobbying in Brussels shows how much is at stake when it comes to privacy policies and practices and suggests that like the EU and US companies, the US government should more seriously engage these topics. It will be interesting to see how the debate in Europe affects the final formulation of the right to be forgotten. It will also be interesting to see how this debate affects US tech titans who generate a considerable amount of revenue in the EU, not to mention how it influences the US government’s approach to privacy issues. Here’s hoping this strong focus on privacy makes its way to our shores.

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