Technology – LegalBytes

February 22, 2018

The Blockchain Ecosystem

Dror Futter, a Venture Capital and Technology Partner at Rimon, P.C. has authored a comprehensive update on the state of blockchain law, which has been published by The Journal of PLI Press, the quarterly journal of the Practicing Law Institute The Current, (Winter 2018 Edition; Vol. 2, No. 1, Winter 2018 – Page 21. The article summarizes developments in the blockchain ecosystem to date, draws attention to considerations that participants in that ecosystem should take into account and also highlights many currently unanswered legal questions.

In addition to a growing blockchain practice, Mr. Futter focuses his practice on startup companies and their investors, and has worked with a wide range of technology companies. You can read the entire article right here: Blockchain Law ICO Regulation and Other Legal Considerations in the Blockchain Ecosystem and if you need more information you can contact Mr. Futter directly or if you want to know more about his practice click here. Of course, you can always contact me, Joe Rosenbaum, or any of the Rimon lawyers with whom you regularly work.

January 29, 2018

Streaming Music to be Streamlined

A bipartisan Congressional group wants to bring the Copyright Act into the digital age of streaming with the Music Modernization Act. Somewhat unusual in the world of new legislation, the bill seems to have garnered support from music publishers, songwriters and the digital streaming services that distribute the music. The House version is H.R. 4706 and Senate version is S.2334.

While there are a number of areas the proposed legislation seeks to update, the heart of this legislation is a major change in the way streaming services pay ‘mechanical’ royalties – the commissions paid to songwriters and publishers when their musical compositions are recorded or reproduced. Currently, under Section 115 of the Copyright Act, anyone can automatically get a license to reproduce a musical composition – to get access to the song, simply file a Notice of Intention through the Copyright Office and pay a set rate. But streaming music services complain they can’t find the authors for every single song and songwriters view the music services claims as an excuse to avoid paying royalties until (and if) they are sued.

Although the new Act won’t prohibit the digital music business from negotiating license agreements directly with the copyright owners, the new Act would create a central database called the “Mechanical Licensing Collective” and instead of requiring individual “Notices,” streaming music companies could pay a blanket license fee for their on-demand, digital music services (e.g. streaming music). The ‘Collective’ would be responsible for allocating payments of these mechanical royalties, which go to songwriters and publishers when their musical compositions are recorded or reproduced, to the rightful owners. The blanket license would cover every song in the Collective’s database – a database funded by the streaming music services, but administered by the music publishers. For the digital music companies, it would eliminate the liability associated with infringement lawsuits from songwriters and publishers since now the database administrators would be responsible for identifying the owner and making sure payments are made.

Which brings us to another major change the Act would implement. Currently, the Copyright Royalty Board, sets the rates paid for mechanical licenses, based on a set of public-interest directives known as 801(b)(1) factors which are intended, in essence, to balance competing interests – availability to the public versus the disruptive effect on the parties in interest. The new Act would use a more ‘fair market value’ type system (already used to set digital radio performance royalty rates) that would be intended to more closely resemble free-market dynamics.

There are numerous other changes the legislation would make to existing licensing and royalty schemes. For example, today, the major music licensing services (e.g., ASCAP, BMI) consistently have the same 2 judges that oversee the rate courts which decide compensation for songwriters. The new legislation would eliminate that process and assign judges, as with other Federal litigation, on a randomly rotating basis. The Act would also repeal the current rule (Section 114(i)) that prevents courts from hearing certain types of evidence when considering the calculation of performance royalties – the money paid when a musical composition is broadcast on radio or otherwise publicly (e.g., elevators, health clubs, etc.).
With broad bipartisan support and industry consensus, it seems likely the the Music Modernization Act, at least in some form closely resembling the bills introduced in both the House and Senate, will become law in the current Congressional session. Stay tuned – literally!

Rimon has lawyers with decades of experience in the music industry, representing artists, as well as publishers and industry associations and if you have questions, need help or would like to know more, feel free to contact me, Joe Rosenbaum, or any of the lawyers at Rimon with whom you regularly work.

December 12, 2017

The Digital Economy is So Taxing

– By Stephen Díaz Gavin and Claudio Palmieri

Economic activity is not only transnational, but increasingly digital. A business is physically located in one country, sells goods or services in another country and then declares its profits in yet a third country? Who is the taxing authority? Where is the transaction taxed and to which government do taxes get paid? This has never been a simple question internationally, but in today’s digital world, where borderless transactions are more frequent and more common, the leaders of the G-20 countries, in the Summit declaration of 18-19 June 2012 in Mexico, decried the consequences of these developments — tax base erosion and profit shifting to lower-tax jurisdictions. Even the proposed U.S. tax reform currently before the U.S. Congress addresses concerns about tax base erosion.

In 2013 the Organization of Economic Cooperation and Development (“OECD”) began a project to combat tax base erosion and profit shifting and the first action item of their Final Report of 2015 concludes the digital economy cannot be considered separate from the rest of the economy for tax purposes – it is increasingly becoming the economy itself. Significantly, the OECD believes solutions lie not so much in creating new rules, but adapting existing regulations to address the new, digital environment. Meanwhile, the European Union and some countries in Europe are making their own provisions for dealing with changes caused by the digital economy. With its Communication of September 2017, A Fair and Efficient Tax System in the European Union for the Digital Single Market, the European Commission (“EC”) announced a legislative proposal for the Digital Single Market in Europe, that is intended to be available for implementation if an adequate, ready and preferably international solution inside the G-20/OECD project framework is not implemented. The two main policy challenges addressed by the EC are: (1) where to tax digital services provided by companies with little or no physical presence and (2) what is taxable (e.g., the value created by intangible assets, data and knowledge). While a long term approach is favored, the EC is focused on short term measures to address some of these problems quickly such as a tax on untaxed or insufficiently taxed income generated from internet-based business activities (whether creditable against the corporate income tax or as a separate tax); a standalone gross-basis withholding tax on certain payments made to non-resident providers of goods and services ordered online; a levy on revenues generated from the provision of digital services or advertising activity.

In addition to European-wide solutions, some individual countries are also attempting to address the taxation of the digital economy. For example, in September 2016, a bill was introduced before the Italian Parliament regarding tax measures applicable to competition in digital commercial activities (DDL S.2526 “Misure in materia fiscale per la concorrenza nell’economia digitale” del 10 novembre 2016). The bill would not only reinforce the powers of Agenzia delle Entrate, the Italian governmental agency which collects taxes and revenue, but would introduce a “hidden permanent establishment” (“stabile organizzazione occulta”) concept which would consider revenues generated from certain types of international transactions, as income generated in Italy. For example, fees paid to non-Italian companies by Italian consumers for the purchase of software licenses distributed on the Italian market. Thus, if a U.S. company engages in online business regularly, with greater than 500 transactions in any six-month period and collecting more than € 1 Million in that same period, that company would be considered to have a “hidden permanent establishment” subject to tax by the Italian authorities. In addition, the proposed Italian 2018 Budget Law (not yet adopted), includes a proposal for a 6% web tax on services provided by nonresident companies and individuals on revenues generated from the sale to Italian residents of fully “dematerialised services” (e.g., intangible services such as video and audio downloads).

The common theme in these new proposals in the European Union and EU member countries suggests that governments will look increasingly to tax where economic value is delivered. If your business is part of the digital economy you clearly need to monitor these developments and pay attention to the legislative and regulatory initiatives being considered at the national, regional and multinational levels, especially in Europe, an important market and one which appears to be moving more quickly than other regions of the world. You can read the full Client Alert on this issue and if you need more information, have questions or would like assistance, the International Practice Group at Rimon, with an office in Rome, is particularly well suited to serve your needs. Feel free to contact Stephen Díaz Gavin, Partner based in Washington, DC and Rome or Claudio Palmieri, Counsel to Rimon and principal of Studio Legale Palmieri – Rimon Italia, based in Rome. Of course, you can always contact me, Joe Rosenbaum, or any of the lawyers at Rimon with whom you regularly work.

November 22, 2017

Inter Net Neutrality

What an interesting play on words. According to the Merriam-Webster dictionary, “inter” is a verb that means “to deposit (a dead body) in the earth or in a tomb.”

Earlier this week, the Chairman of the U.S. Federal Communications Commission (FCC) outlined plans to bury the Internet rules promulgated under the Obama administration that required providers of Internet services to treat all web traffic equally. Those rules, among other things, limit the ability of ISPs to favor content or customers, to block or slow down the online services they provide. Under the proposed changes, ISPs (wired and wireless) would be allowed to offer web-based services at different speeds and differing quality of service. In addition, they could enable more favorable speed or quality, or both, for websites that paid a fee – as long as that relationship was disclosed.

Over the years, a lively and heated debate over the nature and extent of regulation needed to protect consumers without stifling innovation has continued. Proponents of eliminating the rules claim that allowing the market to create different financial and performance models will spur investment and the development of technology, while critics argue that consumer prices would increase and so would barriers to entry and start-up costs for new companies. Critics point to the airline industry (where the FCC net neutrality rules have never been applicable) as an example of the potential for harm – one U.S. air carrier provides easy access to one online video service which has paid the airline for such priority status, while others are not enabled with the same speed or quality.

Under the previous administration, the Internet and ISPs (both wired and wireless) were treated as utilities, virtually excluding them from regulatory oversight by the Federal Trade Commission (FTC), whose fact-based, case-by-case, analytical approach to regulation is generally perceived as more suitable (and friendly) for emerging technology and evolving markets. Based on Chairman Ajit Pai’s remarks, in another reversal of the prior administration’s approach, it appears the FCC is now willing to share oversight with the FTC and have the FTC be responsible for monitoring ISP disclosures, determining if consumers are being harmed and determining whether these firms are engaging in anti-competitive or unfair trade practices. The FCC indicated it plans to enact the new rules early in the new year. Stay tuned.

If you have any questions or want more information about this or any Legal Bytes’ post, don’t hesitate to contact me, Joe Rosenbaum, a New York based partner at Rimon, P.C., or any of the other lawyers at Rimon with whom you regularly work.

June 8, 2017

Net Neutrality: Is the Cease Fire Over?

By Stephen Díaz Gavin *

The way the U.S. Government regulates the Internet is back in play again. The outcome of the long running battle over “net neutrality” and regulation of the Internet – now more than 15 years old — is still uncertain. However, it is clear that the Federal Communications Commission (FCC) is stepping back from the stronger supervision of Internet Service Providers (ISPs) adopted in March 2015 under former FCC Chairman Tom Wheeler at the insistence of former President Obama.
On May 18, 2017, the FCC voted to release a Notice of Proposed Rulemaking (NPRM) to step back from the agency’s controversial March 2015 decision to treat ISPs as “common carriers” under Title II of the Communications Act. Instead, the “proposed rule,” will revert to classifying ISPs as providers of an “information service” and return jurisdiction over ISPs privacy practices to the Federal Trade Commission (FTC) – a clear indication of the direction the FCC will take under the current administration.
Law professor Tim Wu coined the term “net neutrality” in 2003. As the FCC’s current Chairman Pai recently noted in an interview in the Wall Street Journal, the term “[i]s one of the more seductive marketing slogans that’s ever been attached to a public policy issue”. Who can be against “leaving the Internet alone?” (“Why ‘Net Neutrality’ Drives the Left Crazy,” Wall Street Journal). Apparently, many believe that it should not be left alone: the FCC received nearly 1.25 million comments submitted via the Internet in the three weeks following FCC Chairman Pai’s announcement that he intended to reconsider the Title II rules; nearly all opposing the proposal.
At the core of the dispute is the tension between the ISPs on the one hand, and streaming content providers like Netflix and Amazon, as well as Internet giants like Google and Facebook on the other.
Consumers fear a slowdown in service. The ISPs maintain the March 2015 common carrier regulation decision will stifle investments and ultimately produce what consumers fear: a slower Internet. Indeed, in the NPRM the FCC cited a decline in investment since the March 2015 Order in support of changing the rules. The clash of interests highlights how outdated the old ways of government oversight of telecommunications have become. The Communications Act of 1934, was originally enacted to monitor the monopoly telephone provider at the time (ATT), based on the model of regulating railroad service and freight rates under the Interstate Commerce Act of 1887 – hardly a relevant basis for overseeing the backbone of 21st century technology.
The common carrier regulatory model prohibits additional charges for streaming content providers, which could be viewed as discriminatory. However, such a regulatory structure does not account for how ISPs pay for upgrades to maintain service quality as consumer demand increases for such content streaming. Video content producers that stream large volumes of data, slow up Internet connections. Although the largest ISPs have agreed voluntarily not to charge the Netflix and Amazons of the world for doing so, where must the money come from in order to continue to upgrade capacity to maintain high speed download? Retail consumers are concerned about higher rates, surcharges or deliberate “slowing” of service, yet these same consumers are customers of over-the-top online video gaming and streaming services that consume huge amounts of capacity. Consumers always want more and faster service and they want it at the lowest price.
Given the current Republican majority, the FCC will likely eliminate Title II regulation of ISPs as it has proposed. However, the decision can and will again be challenged in the courts (as has every prior rule on net neutrality). Even if upheld by the courts, only Congress can define ‘net neutrality’ once and for all and give some degree of regulatory certainty to the regulations (which can be changed by a Democratic majority just as easily as the current Republican controlled FCC has done to the Obama era rules).
Net neutrality is now a hot political issue and despite current Republican majorities in both the House and Senate, it is uncertain whether a working majority in both exists that can adopt legislation to guide the FCC. No matter who you are, in the debate over net neutrality, clearly nobody is neutral. Until Congress acts to give some greater definition to the term, successive FCC Chairmen will be able to reinterpret net neutrality as they see fit.

* This post was derived and adapted from a Rimon Law Client Alert “No Peace in Sight for Net Neutrality” by Stephen Díaz Gavin, who you can contact directly for more information.

February 17, 2015

mHealth – Mobile Health Care

Last year, I was invited to participate in and present a paper at the “mHealth and the Law Workshop” in Washington, D.C. [See mHealth – The Future of Mobile Health Care].

Then last month, I was invited to participate in a panel at the Mobile FirstLook 2015 Conference in New York, and as a result of my participation, the editors of Mobile Marketer asked if they could republish (with attribution of course), the paper.

In case you missed it, you can view “Exploring legal challenges to fulfilling the potential of mHealth” online, or you can download the original from the Legal Bytes posting above.

As always, if you have questions, or need advice or guidance, just contact me, Joe Rosenbaum, or the lawyer with whom you regularly work at Rimon.

May 19, 2014

Entertainment Media Crowd Funding Oscar (No, Not That One)

In 1918 there were no Academy Awards. But there was another Oscar! Oscar Micheaux, who taught us something about financing media and entertainment projects – perhaps the first crowd funding entrepreneur in the publishing and motion picture industry.

If you would like to know more about crowd funding and what’s new and what’s next (and about Oscar), you can read about it in Volume 25, Issue 3 of the Entertainment Law Review, where an article about crowd funding, authored by Joseph I. Rosenbaum, was first published by Sweet and Maxwell in London (a Thomson Reuters (Professional) UK Limited company.

You can read Joe’s entire article or download the PDF for your own personal use (i.e., not for redistribution) right here: Crowd Funding – A Funny Thing Happened on the Way to the Investment Bank. [PDF]

As always, if you want to know more about Crowd Funding (or any other matter requiring legal representation, counsel or guidance, please contact me, Joe Rosenbaum, or the Rimon attorney with whom you regularly work.

September 17, 2013

Crowd Funding. Apologies, William Wordsworth

“I wandered lonely as a cloud
That floats on high o’er vales and hills,
When all at once I saw a crowd,”

. . . and so begins the beautiful and timeless poem by William Wordsworth. Although Wordsworth’s crowd was a host of golden daffodils, the crowds most of us have been hearing about lately are either crowd sourcing (check out When Online Games, Health & Life Sciences and Crowd Sourcing Combine) or crowd funding – the subject of this post.

In today’s world, according to the Wikipedia definition, “crowd funding” refers to the collective effort of individuals who network and pool their money, usually via the Internet, to support efforts initiated by other people or organizations.”

There remains some confusion in the marketplace as to the mechanisms by which the crowds’ funds are made available to business ventures, film promotion and production, worthy causes, and civic organizations. Contrary to what many may believe, it is currently not legal to solicit, offer or otherwise make available any form of securities or equity investment (I’m over-simplifying, but that is the net effect) through online, crowd or other web-based funding schemes. In other words, you can’t raise equity or solicit investments through crowd funding that provide the expectation of profit or the risk of loss of capital investment – in much the same way the traditional stock markets function when they allow individuals to purchase and sell securities.

It is true that the U.S. Securities Exchange Commission has been talking about promulgating regulations aimed at legitimizing, with regulation and oversight, the use of crowd funding as an investment opportunity (and the SEC has publicly announced that it hopes to have the regulations released for comment this fall). But until the regulators promulgate rules and enable it, you can’t “invest,” and businesses and other ventures can’t “raise capital,” through equity or securities offerings through crowd funding.

So what’s the buzz about. Well, first it combines “power to the people” with “put your money where your mouth is” in ways unheard of prior to the Internet! Second, there are still opportunities to raise capital from the public in ways that aren’t illegal and don’t involve equity or securities. Currently, there are four major categories of crowd funding activity. To wit:

I am a musician (not really, it’s just an example) and I tell you that if you pay me $1,000, I will write a song to or about you. If you pay me $5,000, I’ll not only write the song, but if I’m nominated for a major music award (e.g., Grammy, VMA, CMA), I’ll get you two tickets to the awards show. That is referred to as the ”rewards” model of crowdfunding.

Next is the ”pre-payment” model. Please send me $5 and when the song is completed, but before it’s released and available to the general public for $7, I will send you a copy. If I offer to autograph it for another $3, I’ve combined the pre-payment and rewards model.

Then there’s the cause-related model. Listen, I am talented and you love good music, but I’m starving. Please just send me $10 so I can eat, rent recording studio time, and try to publish and distribute my music. Pure online begging – there is no expectation of anything in return.

Last, but not least, the ”loan” model. Please help finance the production of my music, my tour (I’ll send you a T-shirt) and just lend me some money. I promise to pay you back when I start making money – but, WITHOUT interest. There must be no expectation that anyone who lends money will make a profit (interest) on the loan. While there may still be lending laws that apply as to how this is done, it won’t trigger the prohibitions under securities’ laws, as long as you don’t pay interest.

In conclusion, while there are some high-profile examples of projects that have raised millions through crowd funding, most do not – at least not yet. In fact, most commercial ventures raise very little through crowd funding. In the words of Wordsworth: “A poet could not but be gay, In such a jocund company. I gazed – and gazed – but little thought, What wealth the show to me had brought.”