The unofficial Department of Justice guide to officiating Apple et al. (Godzilla) v. Amazon (King Kong)

The unofficial Department of Justice guide to officiating Apple et al. (Godzilla) v. Amazon (King Kong)

Wouldn’t you want to see who wins a cage match between Godzilla and King Kong? We certainly would. Until recently, that fight was under way. Major book publishers (“publishers”) and Apple, Inc. (“Apple”) (collectively “Godzilla”) were chipping way at the 90% market e-book share held by Amazon (“King Kong”). And yet on April 11, 2012, the Department of Justice (“DOJ”) sued Godzilla alleging that it violated the antitrust laws. In light of the potentially tenuous merit of the lawsuit, it seems only fair that that the DOJ would investigate potential predatory pricing of e-books by King Kong, too.

The DOJ’s lawsuit is potentially tenuous because the publishers and Apple are not garden variety horizontal competitors fixing prices, as was the case when Sotheby’s and Christie’s, the famous auction houses, agreed to fix their commissions. Instead, the contracts between the publishers and Apple (“agency agreements”) are more akin to a vertical distribution agreement between a manufacturer and a retailer. The DOJ’s allegations, even if true,support this view.

Apple separately transacted with several book publishers to distribute their titles. In exchange, Apple received a 30% commission off the price of the book, which was negotiated between the publishers and Apple. This agency model replaced the wholesale model, in which publishers would sell to Apple at half of the retail price, and then let Apple sell at whatever price it wished. As any distributor with power would do, Apple obtained assurances in the agency agreements that the publishers would not do an end run around Apple and distribute via others, including Amazon, for less.

Even though the agency agreements are vertical, the DOJ is treating the them as though they were horizontal. The characterization makes a legal difference. On the one hand, courts review agreements (and conspiracies) among horizontal competitors to fix prices under the per se illegal standard. Once the agreement is proved, it is deemed illegal, regardless of its potential pro-competitive benefits or the market power of the competitors. On the other hand, courts review vertical resale price maintenance agreements among a manufacturer and a retailer, for example, under the rule of reason. Under this test, the court weighs the pro-competitive benefits of the agreement with its anti-competitive effects. Because the agency agreements are more akin to resale price maintenance contracts, they should likely be judged under the rule of reason, which makes the DOJ’s case tougher.

But regardless of which way the court ends up characterizing the relationship between the publishers and Apple, it seems at the very least that the DOJ should have investigated King Kong — that is, Amazon — for potential predatory pricing, too. Pricing below cost is unlawful if “it is part of a strategy to eliminate competitors, and when that strategy has a dangerous probability of creating a monopoly for the discounting firm so that it can raise prices far into the future and recoup its losses.” This sounds very similar to what King Kong has been doing by selling major titles below cost through its Kindle device, which currently occupies roughly 90% of the distribution market for e-books. It seems that publishers felt the only way to fight back was to agree to Apple’s agency agreements, which it demands of all content providers, so that the publishers could then withhold titles from Amazon unless it agreed to the same pricing structure they gave to Apple.

In the end, it might have been wrong for Godzilla to blow fire into King Kong’s face. But then it might have been wrong for King Kong to throw acid into Godzilla’s eyes. Either both sides should be scrutinized for their potential wrongs, or the referee — the DOJ — should stay out of the match and let the market decide who to favor.

CrestCare — Constitutional?

CrestCare — Constitutional?

The Obama administration recently passed CrestCare. Never heard of it? It is a new federal law which requires every citizen to brush their teeth with Crest brand toothpaste. Certainly, the law must be unconstitutional, although it would be nice not to smell bad breath on the elevator ride up to the office, or on the construction site, in the morning. And yet maybe, just maybe, the law would be upheld by the Supreme Court if it was ever challenged.

Of course, there is no CrestCare. It is a wonder whether the federal government would be empowered to pass such a law if the United States Supreme Court upholds the constitutionality of ObamaCare’s requirement that all citizens have health insurance. On Monday, the high Court began hearing oral arguments to determine whether that part of ObamaCare, in addition to others, are constitutional. In the case, titled Department of Health & Human Services, et. al. v. States of Florida, et. al., No. 11-398, the attorney generals of various states have brought suit to bar enforcement of ObamaCare, the details of which have been covered ad nausea elsewhere, and which I will leave for your musings.

The marrow of the government’s argument as to why ObamaCare should be upheld is the Commerce Clause, which gives Congress the exclusive authority to “regulate commerce . . . among the several States.” That is my emphasis. Over the years, the Supreme Court has read “among” to include anything that could affect interstate commerce, even if the conduct in question is wholly intrastate in character. In Wickard v. Filburn, for example, the Court held in 1942 that the federal government could regulate a farmer’s growth of wheat in his own backyard even though it was for his own consumption. The reason: the farmer’s growth would affect the interstate flow of wheat. Then, in Gonzalez v. Reich, the high Court in 2005 held that the feds could regulate wholly intrastate consumption of marijuana under California’s Proposition 215.

While the Court’s decisions in both Wickard and Gonzalez stretch the limits of “among the several states” to their intellectual limits, neither decision dealt with a federal law compelling someone to do something. Instead, both decisions involved a federal law prohibiting someone from doing something. Whereas part of ObamaCare compels every living citizen to buy health insurance. This seems to stretch the Commerce Clause so far that it has no limits left. Even if you like the idea of nationalized healthcare, this is not a constitutionally permissible way to go about it.

If the Court upholds the part of ObamaCare mandating health insurance for all citizens on Commerce Clause grounds, there is nothing barring the feds — or Crest — from mandating CrestCare.

Eat your cake but you shouldn’t be able to have it, too.

Eat your cake but you shouldn’t be able to have it, too.

Dewey, Cheatem, & Howe. P.C. (“Dewey”) is a Dutch based professional corporation, pictured above, that helps Somalia pirates rob and steal from you, a Nigerian citizen, on the high seas. The U.S. Supreme Court heard oral arguments on Tuesday in Kiobel v. Royal Dutch Pertroleum Company to determine whether you would be able to sue Dewey in the United States under the Alien Tort Statute (“ATS”) even though Dewey is a corporation. Given that corporations are considered “persons” for First Amendment purposes, companies should also be considered persons subject to suit under ATS. Otherwise, the lawyers at Dewey — Curly, Moe, and Larry — would be free to aid and abet the pirates, while none of them alone would be able to.

In Kiobel, 12 Nigerian citizens sued Royal Dutch Petroleum (“Royal Dutch”) under the ATS in U.S. federal court for allegedly aiding and abetting human rights violations by the Abacha dictatorship in Nigeria. The ATS, passed in 1789, allows federal courts to hear “any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States.” The issue in the case is whether Royal Dutch may be sued even though it is a company and not a natural person. The law to date has only included natural persons within the scope of the ATS, which only defines who may sue but not who may be sued.

The opposing sides have arguments that are not supported by the text of the statute. Royal Dutch’s appellate lawyer, Kathleen Sullivan, argued to the Court that “[t]here is no country in the world that provides a civil cause of action against a corporation under their domestic law for a violation of the of nations,” reports The New York Times in Court Debates Rights Case Aimed at Corporations. Instead, she claims that “every convention for every international tribune excludes corporations.” The deputy solicitor general, Edwin S. Kneedler, argues on behalf of the plaintiffs that there need not to be a constraint on who may or may not be sued under the ATS because it “does not identify who the defendant may be.”

Regardless of what other countries do or the absence of textual guidance in the ATS, the Supreme Court recently reaffirmed its position that corporations are “persons” within the meaning of the First Amendment in Citizens United v. Federal Election Commissions. If Dewey were a professional corporation based in New York, it would have just as much protection under the First Amendment as you do. Given that this is the law of the land, it seems intellectually disingenuous to count corporations beyond the scope of the ATS as a matter of law but within the scope of the First Amendment. It seems a better approach would be to allow suits against companies like Dewey or Royal Dutch under the ATS but then potentially dismiss the suit for other reasons, including no violation of the law of nations or a treaty of the United States, until Congress hopefully amends the ATS to make it clearer.

 

Dude, you lost my 1.2 billion!

Dude, you lost my 1.2 billion!

It appears the previous title of our blog entry, which was “Dude, where’s my $1.2 billion?,” is no longer apt. The Journal recently reported in Money From MF Global Feared Gone that the $1.2 billion has been lost and will not be found. So we have aptly changed our tune in this blog entry’s title. In addition, we have a new main character in the debacle in addition to Mr. Corzine, and that is former FBI director Mr. Louis Freeh. He recently claimed attorney-client privilege to shield the gaze by the Commodities Futures Trading Commission (“CFTC”) into MF Global’s affairs. Can he do that? Probably so.

Of course, separate and apart from the suspicions that the claim of privilege raises under these circumstances, there is also the question as to its legitimacy. Whether it is not legitimate really depends on the circumstances, the contours of which we don’t know at this point.

In the garden variety case, the privilege applies to protect private communications between an attorney and a client in the rendering of legal advise. So if Jack the Ripper tells Clarence Darrow, his lawyer, in private about murders Mr. Ripper previously committed and wants to know how to best defend himself in the court of law, that conversation is protected. It is still protected if Mr. Darrow’s paralegal or other advisor he hired is present. If, however, Mr. Ripper tells Mr. Darrow about a murder he is in the process of committing or is about to commit, then Mr. Darrow could tell authorities to prevent the harm.

In this case, Mr. Freeh is not a lawyer but he may have been assisting MF’s lawyers in the investigation, and so the privilege could still apply. We don’t know if the $1.2 billion has in fact been lost or is in the process of getting lost. If the money is currently being absconded, then Mr. Freeh — or one of his assistants — could divulge the protected conversation under some state’s ethical rules, but not others. For example, in California, there would need to be the threat of serious bodily harm in order for Mr. Freeh to have the option, whereas in New York it is enough for the client to have the intent to commit a crime, even if there is no bodily harm. Of course, if the money is already gone, then Mr. Freeh may not divulge the information.

Regardless if the CFTC is able to have any luck overcoming the attorney-client privilege here, there have been several class actions filed by sophisticated class action firms against MF Global. These firms employ forensic accountants who can find things out about the money even without Mr. Freeh’s assistance. In the end, we may eventually see if there is an answer to our original question: “Dude, where’s my $1.2 billion?” We hope so.

Dude, where’s my 1.2 billion?

Dude, where’s my 1.2 billion?

“Dude, where’s my car?” This was the famous question asked by the stoners in the 2000 movie called Dude, Where’s My Car?We ask the same question of Mr. Corzine: “Dude, where’s my $1.2 billion?” According to the USA Today, he recently testified that “I simply do not know where the money is” in front of Congress. Of course, this may be true. But the question is whether that will be enough to get him off the hook for civil and/or criminal claims that may arise from the downfall of MF Global.

Embezzlement is the first crime that comes to mind. In New York, there is no civil cause of action for embezzlement. But the state could bring a criminal case against Mr. Corzine if it could prove: (1) the $1.2 billion involved belonged to investors; (2) the money was converted or used for Mr. Corzine’s purposes; (3) Mr. Corzine was in a position of trust and possessed legal possession of (or access to) the money; and (4) the Mr. Corzine knowingly defrauded the owner of the property.

Of course, we don’t know the full factual picture of the situation with MF Global. But assume for the purpose of discussion that Mr. Corzine did not know where the money went, which roughly covers elements (2) and (4). Certainly some of his underlings knew. The issue in the case would then be whether their knowledge could, under the circumstances, be imputed to Mr. Corzine. After all, intent is generally a mental state that juries infer from the circumstances, since folks rarely state point blank: “now I know I am embezzling money and that what I am doing is illegal.” But it might be difficult to show that he knew or should have known what his underlings were doing, depending on how far down the totem pole they were and where the money ended up.

Regardless, it seems to run afoul of common sense that MF Global could not trace such a large amount of money as though they forgot in which parking spot they put the car at the shopping mall. Certainly, Mr. Corzine will face additional questioning from authorities. But what remains odd in the whole scenario is how they are approaching him with kid gloves. It seems if either dude in Dude, Where’s My Car? were overseeing an institution that misplaced such a large amount of money, they would likely be sitting in jail until the money was accounted for.

An offer you can’t refuse.

An offer you can’t refuse.

The WSJ recently reported in Zynga Leans on Some Workers to Surrender Pre-IPO Shares that the technology company is making certain employees an offer they can’t refuse: cough up your pre-IPO stock options or your first born is dead.  Well, not really. The threat is that the employee will lose his or her job. While it is understandable that the company doesn’t want to have another Google cook who makes out like a bandit when Zynga goes IPO, it is also unclear whether Zynga’s approach is either legal or wise.

Under New York’s Limited Liability Company Act, for example, an employee’s sweat equity is valued like a cash contribution. So if you offer $50,000.00 of your cooking services to a cash starved start-up in exchange for 2% of the company and a measly $25,000.00 salary, you are in the same position as another investor who put in $50,000.00 cash for 2%. Of course, you could end up getting a windfall if the company eventually goes public and is worth $2 billion.

That is the position Zynga is about to find itself when it goes public. To rectify the problem of attracting new talent with not enough shares to dole out, the company is apparently going to certain employees and demanding that they return some or all of their stock options, or else. If this is merely a case buyer’s remorse, then Zynga will be asking for a great deal of breach of contract and wrongful termination litigation from terminated employees. Of course, if the employees have not lived up to their part of the bargain, then the law in New York at least allows companies like Zynga to ask for interests back under threat of breach of contract litigation against the employee.

In either case, it doesn’t seem like good business. People will be more reticent to work with start-ups if they expect that, down the line, the company will finagle them out of their not yet vested stock options so that they can go to more efficient resources — i.e. more valuable people. If a company is worried about getting itself into a tight bind like this, it seems better to hybrid the transaction with some cash so that the company doesn’t find itself later on with not enough stock to go around, or, worse, embroiled in class action litigation. Otherwise, the company shouldn’t make the deal in the first place.

What is good for the goose is good for the gander.

What is good for the goose is good for the gander.

Banksy and other graffiti artists are gaining increased commercial acceptance in the traditional art world. The Los Angeles Museum of Contemporary Art recently had an exhibition called Art in the Streets featuring artists such as Banksy and others. But whether such artists’ works are protected by the Copyright Act, among other legal doctrines, is unclear. There is paltry case law on point.  We recently found this out when researching the issue for a somewhat famous — or some might say infamous — New York graffiti legend.

The Copyright Act generally protects creative works fixed in a tangible medium. Song lyrics are a good example. When Bob Dylan writes his song, All Along The Watch Tower, on a piece a paper, he can register the song with the Copyright Office. Only then can Mr. Dylan can than pursue others for using the song unlawfully. Many federal courts require a work to be so registered before suit can be brought by the artist for damages, attorney’s fees, and statutory damages.

But what about creative works that are fixed by graffiti artists all around New York City’s walls and subways? Assume Banksy paints the picture above on a Fifth Avenue wall. Could he then go and register the work with the Copyright Office, just as Mr. Dylan did with his song? Even if he can’t, does that mean Bansky has no legal protection? The questions are simple. But the answers are not so clear.

There are no cases directly on point. There is one case from the Northern District of Illinois, entitled Villa v. Pearson Education, Inc., in which the court denied the defendant’s motion to dismiss the graffiti artist’s copyright infringement claim because there was an issue of fact whether his art was illegal. There is also another case pending overseas between graffiti artist CanTwo and the Spanish Olympic Committee, reports the Wall Street Journal in CanTwo Says “Can Not!” to Spanish Swimmers. But that case is not yet decided and it involved apparently legal graffiti.

While this uncertainty is troubling, a graffiti artist should nonetheless be able to argue that a gallery is unjustly enriched when they sell a photo of his work but don’t pay him even if he does not have a copyright claim. That’s because what is good for the goose is good for the gander. If a gallery is going to commodify the artist’s graffiti efforts in a secondary market, it will be hard pressed to argue that the artist has no rights in the primary market because the work was illegal.

What would Jimmy do?

What would Jimmy do?

In 1994, Congress extended copyright protection to foreign works of art that were not previously protected by the Copyright Act. You say: “so what?” Well, in so doing, Congress made it so that you have to pay to use certain works, such as “If I Had My Way,” which were previously in the public domain. The debate has made its way to the U.S. Supreme Court, where arguments were heard last week in Golan v. Holder on whether Congress has such power under the Constitution. Congress likely has such power, and there are good reasons why Congress would expand copyright protections to such works.

The legal issue before the Court in Golan is whether Congress has the power to grant copyright for the very first time to works that were not previously copyrighted at all. The plaintiffs in the case argue that if the works were not protected by copyright at the time, they cannot now be retroactively subject to copyright by Congress under the Constitution.

Congress has broad power under the Constitution to “promote the Progress of Science and useful Aerts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.” As such, Congress does not have unfettered right to bestow copyright protection for however long it wants. In the plaintiff’s view, the 1994 law extends the term of copyright, which is the life of the author plus 70 years for works created on or after January 1, 1978, beyond that currently allowed.

However, there are good reasons why the passage of the 1994 law “promotes the Progress of Science and useful Arts” by extended the protective shroud of — and not the term of protection under — the Copyright Act. Under the Berne Convention, American artists get reciprocal protection for their works overseas provided their foreign artist colleagues are protected here, too. As Solicitor General Donald Verilli is quoted in Copyright Law Challenged, the 1994 law amounted to “the price of admission to the international system.”

It seems that, if Mr. Jimmy Hendrix were alive, we would likely have been in favor of the 1994 law. (Justice Roberts referred to Mr. Hendrix in oral argument.) An avid traveler to places like Essaouira, Morocco, Mr. Hendrix would have wanted his works to be protected overseas, even if that meant his foreign compatriot’s works would be provided protection here, too.

Don’t put the regulatory cart before the entrepreneurial horse.

Don’t put the regulatory cart before the entrepreneurial horse.

“We cannot regulate our way out of this.” Mr. Charles Schwab makes this great point about the futility of using regulation as the silver bullet for our recession woes in Every Job Requires an Entrepreneur. And yet the WSJ reports in As Federal Crime List Grows, Threshold of Guilt Declines (“Threshold”), that criminal laws are burgeoning at break neck speed and that many teeter on strict liability. This means you can go to jail for violating an obscure law even if you didn’t know about it. Congress needs to regulate less, more clearly when it does, and with the need of a lot more mens rea.

As the Threshold article points out, mens rea is a Latin term that refers to “guilty mind,” which in the law means that you know what you are doing is against the law, like when you rob a bank. But when you kill an obscure fish in the middle of Maine and cook it for dinner, you may have no idea that the fish is on the federal list of endangered species. Unbeknownst to you, your dinner may subject you to criminal penalties and/or jail time.

The problem in discarding the mens rea requirement is that it makes it too easy for the government to make any one of us criminally liable for being an unintentional contributor to the demise of an endangered fish. We live in an increasing regulatory state that is saturated with statutes, regulations, and judicial decisions. The meaning of these sources of law is sometimes ambiguous to even the most well trained lawyers. As a result, entrepreneurs are operating in more uncertain regulatory times, which exacerbates the financial crisis.

That’s why Mr. Schwab’s statement is so apt. It seems many in Washington think that Washington is the answer. It is not. As Mr. Schwab points out, American entrepreneurs are the answer to our problems. To the extent we seek refuge in the labrynth of laws and regulations coming out of Washington, we are putting the regulatory cart before the entrepreneurial horse.

The T-Mobile – AT & T Merger — Why not just require a corporate pre-nup?

The T-Mobile – AT & T Merger — Why not just require a corporate pre-nup?

The Department of Justice (“DOJ”) recently sought to block the merger between AT & T and T-Mobile (“merging entities”). Indeed, many states, including New York, are now on board to stop the merger, too, reports the WSJ in States Join Suit Against AT & T.  The fear: the new entity will have too much market power. This, in turn, will enable to the new entity to raise prices, restrict output, and/or reduce the quality of service.  Rather than block the merger, the DOJ should permit it and require the corporate couple to have pre-nuptual agreement, which is something most but not all couples, including Russel Brand and Katy Perry, pictured below, now have.

In their Answer to the DOJ’s complaint, the merging entities claim that their merger will improve the quality of services they provide by, among other things, increasing the bandwidth — or decreasing the “spectrum shortage” — in the marketplace so as to cause less dropped calls. The Answer cites FCC Chairman Genachowski as saying that this “spectrum shortage” is a threat to the economy as more and more burdens are placed on the cellular highway. In short, the merging entities are telling the proverbial Rabbi — or Priest — that is the DOJ: we will be a good corporate couple, good corporate parents, and will foster a family of products that will cause pro-competitive benefits.

Instead of vetoing the marriage, the DOJ should allow it but require the merging entities to sign onto a proverbial corporate pre-nuptual agreement. The agreement would require the merged entity to report on a quarterly basis to the DOJ concerning the pricing and quality of its products compared to others in the marketplace. Such reports are often required by courts who issue injunctions. The agreement should also require the merged entity to achieve certain benchmarks which would determine whether the pro-competitive vows of the merged entities, as more fully set forth in their Answer, have been met. If not, the agreement would provide for the dissolution of the merged company. It seems that this is a better way to handle the merger than to outlaw it due to knee jerk fears which, in the end, may be unfounded.