vanderbilt journal of

entertainment law " practice

Congressman Speaks Out: BAN the SPAM!! Buying a Hit on the Nations Airwaves

The End of an Era: Does the New CBA Make Agents Obsolete? Protecting Your Money in the City of Angels

contents
Protecting the Film Investor By Mark Litwak

VOLUME 2, NUMBER 1 WINTER 2000

29

Publication of Music Works By Michael Landau

The Role of the Sports Agent By Bappa Mukherji

96

of Private Norms 70 Enforcement in Cyberspace By David Post

Tomorrow Never Dies: The Protection of Fictional Characters Under the Federal Trademark Dilution Act By Kristen Knudsen Pay-For-Play: An Old Tactic In A New Environment By Doug Abell Sender Beware: The Discoverability and Admissibility of E-Mail By William DeCoste Planning for the Future: Using Child Support Trusts to Prepare Both Father and Child for Life After Sports By Thomas C. Quinlen ART & INDUSTRY FORUM How to Can Spam: Legislating Unsolicited Commercial E-Mail By Representative Gary Miller

13 52 79 108 127

Write an article for the VANDERBILT JOURNAL OF ENTERTAINMENT LAW & PRACTICE. Articles can vary from an in-depth analysis of a particular law to a word-to-the-wise practical discussion of legal topics spanning the spectrum of the entertainment industry. Submit articles to: Editor-in-Chief, VANDERBILT JOURNAL OF ENTERTAINMENT LAW & PRACTICE, 131 21st Ave. S., Nashville, TN 37203-1181. Please visit our webpage at www.vanderbilt.edu/Law/jentlaw/. 1

contributors
Michael B. Landau Professor of Law at Georgia State University Law School From 1992 to 1993, Michael Landau was a Visiting Professor of Law at the Dickinson School of Law. Prior to teaching, he was an associate at the New York law firms Cravath, Swaine & Moore and Skadden, Arps, Slate, Meagher & Flom. Mr. Landau graduated in 1975 from Pennsylvania State University with a B.A. (with distinction). He received his J.D. from the University of Pennsylvania in 1988. Mr. Landau is a member of the Copyright Society of the U.S.A. and the American Intellectual Property Lawyers Association. He is also an excellent musician and an avid guitar collector. Mark Litwak Of Counsel at Berton & Donaldson law firm; Author of several books on the film industry Mark Litwak (Litwak@attglobal.net) is an entertainment and multimedia attorney. He is Of Counsel to the Beverly Hills law firm of Berton & Donaldson. Litwak is the author of five books including REEL POWER, THE STRUGGLE FOR INFLUENCE AND SUCCESS IN THE NEW HOLLOYWOOD (William Morrow, 1986), DEALMAKING IN THE MOTION PICTURE AND TELEVISION INDUSTRY (Silman-James Press, 1994) and CONTRACTS FOR THE FILM AND TELEVISION INDUSTRY. (Silman-James Press, 1998). Additional information is available on his web site: www.marklitwak.com Gary Miller United States Congressman from California Representative Gary Miller represents portions of Califronias San Bernardino, Orange, and Los Angeles counties in the U.S. House of Representatives. He currently serves the House as a Freshman Whip and is a member of the Science and Technology Committee, the Transportation and Infrastructure Committee, and the Budget Committee. As a member of the California State Assembly, Miller successfully authored Californias current antispam law. After being elected to Congress, he immediately introduced his anti-spam legislation as H.R. 2162 in the U.S. House of Representatives. The House Commerce Subcommittee on Telecommunications, Trade and Consumer Protection held a hearing on the legislation late last year. Bappa Mukherji Agent and Attorney Bappa Mukherji is a principal of ProQuest Management, LLC, a firm specializing in financial planning, business management, and investment management for professional athletes, entertainers, professionals, and entrepreneurs. He concentrates in business management for athletes and entertainers and manages the investment portfolios of all clients. He has managed investment portfolios for over ten years. Mr. Mukherji has spoken frequently on sports law topics and has lectured at the University of Tennessee School of Law. Mr. Mukherji was awarded a J.D. from the Vanderbilt University School of Law and an M.B.A. from Vanderbilt University Owen Graduate School of Management in 1995. He graduated with honors from the California Institute of Technology with a Bachelors degree in Economics and was awarded the Caltech-Carnation Merit Award for his academic performance. Mr. Mukherji previously practiced law with Neal & Harwell, PLC in Nashville, Tennessee in the areas of commercial and banking law and litigation. David Post Associate Professor of Law at Temple University School of Law David Post teaches intellectual property law and the law of cyberspace at Temple. He is also the CoFounder and the Co-Director of the Cyberspace Law Institute, ICANN Watch, and Disputes.org. After a number of years as a physical anthropologist and teaching in the Anthropology Department of Columbia University (19761981), he attended Georgetown Law Center. He graduated summa cum laude in 1986. After clerking with thenJudge Ruth Bader Ginsburg on the D.C. Circuit Court of Appeals, he spent 6 years at the Washington, D.C. firm of Wilmer, Cutler & Pickering. He then clerked again for Justice Ginsburg during her first term on the Supreme Court of the United States. For four years (1994-1998) he wrote a bi-monthly column (Plugging In) on law and technology for the American Lawyer, and he has appeared as a commentator on the law of the Internet on such programs as Morning Edition, All Things Considered, and Court TVs Supreme Court Preview.

vanderbilt journal of

entertainment law " practice

Editors Mary H. Beard William DeCoste Joshua Ferguson Damon Goode Mark Hillier Kristen Knudsen Rikki Lober Thomas C. Quinlen Harlan R. Schreiber John W. Todd R. Craig Tolliver Sheri Tolliver Ian Wu Associate Editors Douglas Abell Jordan S. Arnold Cornelius Cowles Cinnamon Davis Andrea P. Ivory Thomas P. Keating Benjamin Olive Price Thompson Advisory Board David Ingram Ingram Entertainment, Nashville, TN Mike Milom Wyatt, Tarrant & Combs, Nashville, TN Malcolm Mimms, Jr. Loeb & Loeb, Nashville, TN Tom Sherrard Sherrard & Roe, Nashville, TN Visit our website at

Faculty Advisors J. H. Reichman Robert Covington Editor-in-Chief Steven Lopez Executive Editor Adam Newton Publisher Thomas J. Dobbins Managing Editor Aimee Todd Senior Editors Mark J. Plotkin, Music James Shinn & Patrick Willis, Film/TV Jim MacDonald, Internet Daniel A. Cohen, Sports Clayton Basser-Wall, Art & Industry Forum Heather Roberts, Online Meredith A. Schaffran, Development Symposium Editor Melissa Kaufman Case Competition Director Marc Moss

Writers Lauren Adams David Barry Bari Brooks Sean Bukowski Terry Bynum Debbie Cazan Hewson Chen Sonja Clayton-Pedersen Brian Drobnick David Dulabon Ty Ford Ronald Gaither Carla Fisher Kimberly Gilman Nadine Haig Karen Jordan Anna Lee Ekumene Lysonge Patrick Maroney Charles Mayfield Scott Oross Cherron Payne Linda Potapova Kenneth Sanney Jamie Smith Joycelyn Stevenson Sabrina Thomas Juan Villasenor

Printer Vanderbilt University Printing Services Thomas J. Fox, Director

www.vanderbilt.edu/Law/jentlaw/
2000 Vanderbilt Law School

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from the editor

elcome to the second issue of THE VANDERBILT JOURNAL

OF

ENTERTAINMENT LAW & PRACTICE. As always, we have blended legal scholarship, readable style, and engaging design to create a publication that we hope is as informative as it is entertaining. In the areas of Music, Internet, Film/TV, and Sports, youll hear from scholars, practitioners, students, and even a United States Congressman on issues that are timely, compelling, and relevant, to life and practice. Wed like to thank the professional and student writers whose sleepless nights and deadline-driven efforts made this publication possible. We also owe a great debt of gratitude to the editors, designers, citecheckers, and journal members whose hard work and selfless devotion made this journal a reality. This year, our ranks were immeasurably strengthened by the new class of staff writers whose contributions and leadership will guide the journal over the next year. Their pioneering spirit will surely enlarge the legacy upon which future Vanderbilt law students will build, and their vision will lead the journal and Vanderbilt Law School to even loftier heights in the years to come. We would also like to thank the administration and law faculty. In particular, wed like to recognize Professor Robert Covington, our faculty supervisor. His tireless editorial insights and impeccable eye for detail not only helped make this issue intellectually sound, but more importantly, produced stronger editors and writers. In closing, we would like to thank you, the reader. These long hours spent behind books and computers would be pointless were it not for an audience so responsive to our scholarship. Sincerely, Steven Lopez Editor-In-Chief

film/tv

The

L L Y O

Shuffle:

W OOD
Protecting Film Investors

risks every time they fund a movie project. Combine the whims of audience taste with unscrupulous or inexperienced filmmakers, throw in the inherent risk of any investment, and youve got a fantastic script for a disaster picture. Equal parts art and business, the motion picture industry has born witness to the fact that creating a marketable film product will always be risky. Unlike many manufactured products, there is no formula for churning out a series of hits in assembly-line fashion. The major studios regularly release bigbudget flops made by top writers, filmmakers, and stars; for every Forrest Gump there are 10 Hudson Hawks. Independent producers fare no better.

ilm investors face a number of potentially serious economic

By Mark Litwak
5

In Los Angeles, the city of a thousand stories, many tales are told by financiers who complain they have been cheated by producers or distributors. As would be expected in any industry grossing about seven billion dollars annually at the domestic box office, the movie business attracts more than its fair share of disreputable characters. The glamour of the business ensures a steady stream of star-struck investors motivated by non-financial concerns. This combination of the unsavory and inexperienced often produces hand-shake deals made without the proper investigation and due diligence. Consequently, experienced investors often refuse to even consider film-related investments. This is unfortunate because an intelligent investment in a motion picture can earn substantial returns. Although risky, the potential return from a hit can be enormous. The Blair Witch Project was produced for a paltry $40,000 yet it grossed $142 million at the domestic box office.1 In this age of media overlap, the once hard lines between movies, music, and games have become blurred. Not only can a film earn revenue from box office receipts, but also from numerous sources of ancillary income, including television, home video, merchandising, music publishing, soundtrack albums, sequels, and remakes. The potential rewards available to a film investor can far outweigh the risks - if the investor knows which questions to ask, what to demand, and when to listen. As an attorney who represents investors as well as filmmakers, I have learned that

there are ways to reduce the risk of film investments. In essence, an investor can greatly reduce his or her exposure to risk by taking three fundamental steps: conducting thorough research, analyzing the marketability of the project, and obtaining sound legal guidance.

In essence, an investor can greatly reduce his or her

exposure to risk by taking

three fundamental steps: conducting thorough research, analyzing the marketability of

the project, and obtaining sound legal guidance.

The facts Maam. Just the facts. DUE DILIGENCE

Thorough investigation of all the participants involved in any investment deal is of the utmost importance. Just as an experienced investor would research a corporation before purchasing a share of its stock, an attorney should check into the reputation and track record of any producer or distributor with whom her client contemplates doing business.2 Background checks should involve such things as speaking to filmmakers and investors who have done business with a candidate,
6

reviewing a candidates previous work, and even obtaining court records to see if the candidate or his company has been sued. Simply put, research will greatly increase the odds that your business partner will be a person of integrity who brings the necessary skills, expertise, and resources to the endeavor. One of the easiest ways to determine the professionalism of a potential partner is his track record. The importance of the track record of the films producer or distributor cannot be understated. A prudent film investor should never back a filmmaker or production team that does not possess the proven skill needed to make a professionallooking movie. While the rewards of such a venture are potentially high, the risk involved in investing in a firsttime filmmaker is great. You are safer backing filmmakers who have completed at least one short or a feature-length work. Filmmaking possesses such a tremendous learning curve that a filmmaker with many films to her credit will be immeasurably more professional, prepared, and understanding in dealing with you and your potential business relationship. I recently met a novice filmmaker who completed production only to discover that his movie was shot with a defective lens. Fixing the problem would require tens of thousands of dollars in additional expenditures. Obviously, this is not to say that a first-time director will never be professional or will never make a hit movie. Quentin Tarantinos film, Reservoir Dogs, was a critical and commercial success. However, it is

safe to say that such success is the exception rather than the rule.

FULL DISCLOSURE
Federal and state security laws are designed to protect investors. Offerings to the public generally require prior registration with the Securities and Exchange Commission (SEC) or a state agency.3 So-called private placements are limited to persons with whom the offeror has a pre-existing relationship.4 Even if registration is not required, the anti-fraud provisions of the security laws require that the offeror make full disclosure of all facts that a reasonably prudent investor would need to know in deciding whether to invest.5 The information disclosed should include a detailed recitation of all the risks involved in developing, producing, and marketing a movie. Avoid offerings that appear to violate this requirement by making less than full and truthful disclosure. Carefully review the prospectus.

ketability of a film. Although a comprehensive list would be impossible, the four most important factors are the genre of the film, the theme of the film, the talent involved in the project, and the vision and goals of the director. Certain types of film are inherently more marketable, and therefore more profitable, than others. There is a very limited market, and only modest potential revenue, to be earned from short films, documentaries, black and white films, and foreign language films. An investor should recognize, however, that such films may cost less than other films and therefore could be a good investment for beginning investors with limited funds. can be difficult to divine the commercial prospects of a film. Several years ago, I agreed to represent a black and white film about boxing. The film won several awards at festivals, received wonderful reviews, and had several big-name actors in the cast. Despite my efforts, I was unable to generate much interest among distributors for a black and white film. As a result, when another client of mine told me he was thinking of financing a black and white film about mathematics, I discouraged him. He ignored my advice and backed a movie called , which became a huge hit, earning considerable revenue. The choice of film stock (or videotape) also plays an important part in the marketability of a film. Distributors and exhibitors, including the top festivals, have traditionally been prejudiced against motion pictures that were shot on anything but 35mm film. A growing trend, however, is for independent produc7

ers to utilize digital cameras that allow them to significantly reduce production costs. In fact, the Sundance Film Festival recently began exhibiting movies on the latest digital projectors which have a resolution comparable to 35mm film projectors. The theme of a film also shapes its marketability. Certain themes, topics, and genres can be difficult, if not impossible, to sell. Religiouslythemed pictures, for example, can easily offend audiences and scare away distributors. The 1999 film Dogma perfectly illustrates how a seemingly bankable hityoung, hot director and stars plus big Hollywood moneycan have serious problems finding a distributor based solely on that films Catholic themes. Other hard sells include cerebral comedies that can be difficult to export because their humor may not translate; films with a great deal of violence that may be shunned by European television, a prime market for independents; and films with explicit sex that may not pass censorship boards in certain countries. films have $20 million openings based solely on the name above the title. In contrast, independent films without name actors may be difficult to sell. Of course, name recognition varies around the world. For example, a film like The Arrival, starring Charlie Sheen, did only limited business in the U.S. but made over $100 million oversees. The star of an American television series may be a big name in the United States but unknown abroad. On the other hand, some actors have a large following abroadsuch as Baywatchs David Hasselhoff in Europeyet are less famous in the United States. There are several

It

All dressed up and no where to go. IDENTIFY THE FILMS POTENTIAL MARKET
As a money-making investment, a film is only as good as its potential market. As self-evident as this statement may seem, investors may be tempted to allow personal feelings about a projects statement or a directors vision to influence their financial decision to invest. An attorney should strive to remind her client that a film investment must be viewed as a business venture like any other. Toward that end, the attorney and her client should review all the factors affecting the mar-

Some

publications that can be consulted to determine the commercial appeal of actors.6 In a more indirect way, the director of the film may ultimately determine the marketability of the final product. A filmmaker who shows no concern about making a movie with audience appeal may leave an investor with nothing more than an expensive home movie. This is not to say that the only films one should invest in are low-brow fare like Dumb and Dumber. A well-made art film like Elizabeth can win awards and make a handsome return on investment. Likewise, an investor must ensure that the filmmaker has a sharply defined audience in mind. For example, I once watched a wonderful Lassie-type family film spiced with four-letter words. The filmmaker apparently hadnt considered that his film could not be sold as a family market because of the vulgar language, and it was too soft a story to appeal to teens and adults. A films profitability can easily be lost in a filmmakers vision; the investment attorney must work with her client and the filmmaker to keep that from happening.

only does this arrangement equalize the risk and reward, it helps focus filmmakers on the ultimate goal of producing a profitable movie. For example, beginning filmmakers might receive a minimal salary during the year it takes them to produce a film. They might also receive a deferred payment, which is an additional amount usually payable after the investors recoup their capital investment. In addition, most filmmakers receive a significant share (5-50 percent) of the back-end, or profits, derived from the picture, if any. Similarly, an investor can take comfort investing in a motion picture on the same terms as a distributor when both parties recoup at the same time. An attorney should be wary of an investment deal in which other parties will benefit while the client takes a loss.

as the writer, director, and stars.

OBTAIN ALL PROMISES IN WRITING

Any first-year law student can explain the importance of reducing all promises and agreements to writing. In the fast-paced business of filmmaking, the written agreement is not just important, but essential. Even though California courts may enforce an oral contract, a film investor should never accept oral assurances from a producer or distributor. The cost of litigating the existence of an oral agreement will certainly be more expensive and time consuming than if the investor has a written contract in hand. If they promise to spend $50,000 on advertising, get it in writing; if there is not enough time to draft a long-form contract, demand a letter reiterating the promises. Retain copies of all correspondence, contracts, and any promotional literature. If a filmmaker makes fraudulent statements in order to induce your client to invest, you will have a much stronger case if such statements are in writing. equiring all agreements to be in writing not only protects your clients interest, but it can also reveal the poor business practices of potential partners before those issues affect the deal. Filmmakers who make handshake deals may handle other aspects in a sloppy manner. The most egregious oversight is failing to obtain the necessary contracts needed to fully secure ownership to their motion picture. In order to have a complete chain of title to a film, one needs to secure written contracts with many parties including actors, writers, and composers. Filmmakers

UNDERSTAND THE PARAMETERS OF A FAIR DEAL

Usually, investors are entitled to recoup all of their investment first, before payment of deferments or profits. Many times investors are allowed to recoup as much as 110 percent or more of their investment in order to compensate them for interest and inflation. A films profit is declared after the payment of all debts, investor recoupment, and payment of deferments. Once those payments are made, the profit is generally then halved between the producer(s) and the investors. Thus, investors who provide 100 percent of the financing are usually entitled to 50 percent of the profits. The 50 percent share of profits is reduced by whatever profits are granted to third-party profit participants, such
8

Lets make a deal

CONGRUENCE OF INTERESTS Basic business tenets provide that it is best to invest in an endeavor when everyone shares the risks and rewards. A filmmaker who receives a large fee from the production may financially prosper from a film that returns nothing to the investors. As a result, an investor should only back a filmmaker willing to work for a modest wage and share in the success of the endeavor through a deferment or profit participation. Not

need to obtain the following essentials: 1) Depiction releases from all actors who are identifiable in the film. This release may be part of the actor employment agreement. 2) Written employment agreements with everyone who makes a creative contribution to the film, such as writers, cinematographers, or composers. These agreements must state that services are being provided on a work-for-hire basis and the copyright to the work product vests in the production company or producer. 3) License agreements to incorporate any copyrighted work in the movie, such as music, still photos, and stock footage. Filmmakers who neglect such legal niceties place their investors at risk.

ests, he may be forced to watch from the sidelines as a distributor ignores the terms of a distribution agreement and pockets revenue from the film. The arbitration clause should contain certain specific provisions. The clause should provide that the award is final, binding, and not appealable. Otherwise, trial costs

In a more indirect way, the director of the film may ultimately determine the marketability of the final product. . . . A films profitability can easily be lost in a filmmakers vision; the investment attorney must work with her client and the filmmaker to keep that from happening.
may be avoided only to incur large legal bills on appeal. The parties should also specify the venue for any arbitration and may want to agree on the number of arbitrators and their qualifications.7 Several different organizations oversee arbitrations. Most entertainment industry arbitrations are conducted under the auspices of either the American Arbitration Association (AAA)8, or the AFMA
9

SECURE AN ARBITRATION CLAUSE

All contracts should provide that any disputes will be subject to binding arbitration rather than litigation, with the prevailing party entitled to reimbursement of legal fees and costs. Investors should also have their filmmakers demand an arbitration clause when contracting with distributors. Although the investor is not a direct party to such contracts, filmmaker disputes with a distributor can affect the investors bottom line. The filmmaker is invariably the financially weaker party in negotiations with the distributor; often the filmmaker cannot even afford to retain an attorney or pay court costs in order to bring a suit. If the filmmaker lacks a viable means of protecting his inter-

(formerly known as the American Film Marketing Association but now simply known as AFMA)9, a trade organization representing the interests of international distributors. The AAA has a well-defined system of procedural rules and maintains numerous offices across the nation and in many foreign countries. AFMA is the entity that organizes the American Film Market (AFM) held each February in Los Angeles. AFMA arbitrations usually occur in Los Angeles, but they can be held during an international film market or in a foreign city. All of the AFMA arbitrators are experienced entertainment attorneys. Under AFMA rules, if a filmmaker wins an award and the distributor refuses to comply with its terms, the filmmaker can have that distributor barred from participation in future AFMs. Since AFM is one of three major international film markets, the inability to participate may severely damage the business prospects of a company. This remedy is particularly useful if the distributors assets are abroad and difficult to reach under the authority of American law. The threat of being barred from AFM may convince a distributor to obey an arbitration award. Some disreputable individuals, however, have sought to avoid awards against them by abandoning their distribution companyoften a shell corporationand then establishing a new enterprise. Conducting their business under a new name, they exploit another wave of filmmakers, fully expecting to abandon the new company when the law catches up with

them. To prevent such behavior, the AFMA has created a personal binder that can be enforced against distribution executives. If an executive signs this binder, and his company fails to comply with an arbitration award, the executive can be personally barred from future AFMs.

against budget overrunswill issue a bond only after thorough investigation. Such companies as the Motion Picture Bond Company and Worldwide Film Completion have developed expertise in the area. Their investigation includes closely

reduce his percentage of the profits if the company allowed him to complete the film. This oversight by the completion bond provides both financial and personal peace of mind to the investor.

INTEREST ON LATE PAYMENTS

In addition to providing remedial measures for contract disputes, an investment attorney must also remove any incentive for a producer or distributor to retain the investors money. In some states, courts do not award pre-judgment interest to a prevailing party, unless there is a provision in the contract providing for it. Thus, if you become embroiled in a dispute with a distributor who is unlawfully holding $100,000, and, after four years of litigation you win the case, the court may award you only the original $100,000. Therefore, an attorney should always consult the law of the state in which the contract will be written and performed. If the state does not provide for pre-judgment interest, a provision guaranteeing such should be written into the contract. COMPLETION BOND A completion bond guarantees that if a film goes over budget, the investor will not confront the dilemma of either putting up more money or owning an unfinished film. A completion guarantoran insurance company that insures the production

With the creation of the Limited Liability Company, . . . an investor can be one of the managers of the enter-

Keep your eyes open. TAKE AN ACTIVE ROLE

prise yet maintain limited

liability. Thus, the investor can have a vote on critical

decisions such as approval of the script, cast, budget, and distribution agreements.
reviewing the production personnel, script, and budget and assessing whether they think this team of individuals can bring in this script within the shooting schedule and proposed budget. The completion bond company usually is quite diligent in its review because if the film goes over budget, the bond company is financially responsible. James Cameron experienced just how involved a completion bond company can become. While filming the monstrously successful Titanic, Cameron went over budget and was forced to
10

As a shareholder in a corporation, or limited partner in a partnership, an investor has very limited control over the management of the enterprise. In the past, investors who wanted limited liability had to be willing to pay the price of accepting limited control. With the creation of the Limited Liability Company (LLC), however, an investor can be one of the managers of the enterprise yet maintain limited liability. Thus, the investor can have a vote on critical decisions such as approval of the script, cast, budget, and distribution agreements. By being actively involved in the production, an investor will be better able to monitor the performance of the filmmaker and discover problems while there is still time to remedy them. This allows investors with more financial savvy than the filmmakers to oversee many of the important business decisions. Firsttime investors may want to bring in or consult with an experienced producer, attorney, or producer representative. In addition, an LLC avoids the problem of double taxation faced by a more traditional corporate structure. In a regular corporation, the company would be taxed on all income and then the investors

would be taxed individually based on their share of the profits. In an LLC, the company is not taxed for its income, only the individual investors pay personal income tax based on their profits.

MAKE SURE FUNDS ARE SPENT ON PRODUCTION

During fund raising, filmmakers commonly set up an escrow account to hold investor funds. The money stays in the escrow account until the filmmaker raises the minimum amount necessary to produce the film. If the filmmaker cannot raise enough money, the funds in escrow are returned to the investors. By depositing money in an escrow account, investors are protected because they know none of their capital will be spent unless and until all the money needed to produce the film has been raised. After funds are disbursed for production, there should be a system of checks and balances in place to ensure that all monies are properly spent and accounted for. A budget and cash flow schedule should be approved before disbursement. Production funds should be placed in a separate segregated account and not commingled with the filmmakers personal funds. All checks withdrawing funds from the account should be signed by two individuals. Investors may want one of the signatories to be a trusted person selected to represent them.

work, still photos, and slides should not be delivered directly to a distributor. Instead, the distributor should be given a lab access letter which enables it to order copies of the motion picture so the distributor can fulfill orders. Master elements should be retained by the producer for a number of reasons:

sional laboratory. Each distributor is then granted a lab access letter enabling it to order copies.

5. You can discourage cheating

by keeping masters in a laboratory and having the lab report to you how many copies have been duplicated. Suppose that at the end of one year, the lab reports to you that 10 film prints have been made. You review your producer reports and see eight sales reported. This is a red flag alerting you that sales may have been made that were not reported. Most filmmakers would not know if their film had been licensed in, for example, Malaysia.10 Distributors do not request copies of films without an order in hand. Typically, they receive full payment for the film before they manufacture a duplicate and ship it. selecting a laboratory for deposit of your materials, choose one that charges competitive rates and has experience duplicating films for international distribution. Buyers in certain countries, such as Germany, are notoriously finicky and often reject films on the grounds of poor technical quality. It is also a good idea to select a lab not ordinarily used by the distributor. A lab in the habit of filling orders for a regular client may not bother checking to see if that distributor has authority to order copies. Moreover, such a lab might inadvertently release the master to the distributor. Similarly, the filmmaker should always deliver the master directly to the laboratory only after the laboratory and distributor have signed a lab access letter. If

1. Masters may be irreplaceable. If lost or damaged, the producer will incur a substantial expense to replace them, if they can be replaced.

2. In the event of a dispute, it is

best for the producer to control the materials. If the distributor has defaulted, for instance, the filmmaker may have a right to terminate the agreement and seek a new distributor. The filmmaker will need access to the materials, however, in order to make delivery to a new distributor.

3. If your initial distributor has

become bankrupt, only costly and lengthy court action can extricate your materials from bankruptcy proceedings.

In

4. You may need to allow several distributors access to your materials. Typically, independent filmmakers enter into multiple distribution deals. While one deal is concluded with an international distributor (also known as a foreign sales agent) outside North America, one or more deals may also be made with a domestic distributor in the United States and Canada. The best solution when dealing with multiple distributors is to place the materials in a profes11

RETAIN MASTERS
The production company should retain possession of all master elements. Original film negatives, video masters, sound masters, art-

you deliver materials to the distributor, and the distributor places them with a lab, the laboratory may treat the distributor as the owner of the film. The lab access letter should include language permitting the filmmaker to receive copies of all invoices or periodic reports disclosing the nature and amount of duplication performed. Some filmmakers insist that the laboratory ship all copies directly to the territory buyers. The distributor will probably insist that the lab access letter be irrevocable for the term of the distribution deal. The distributor will want to retain access to the materials in order to fulfill any orders arising from its licenses.

and master materials. Likewise, investors may want their filmmakers to protect themselves by having distributors grant a security interest. The collateral here is the proceeds derived from commercial exploitation of the film. By obtaining a security interest, the filmmaker will have rights superior to those held by unsecured creditors. This can be a tremendous benefit if the distributor goes bankrupt. In such an event, the proceeds derived from the sale of the distributors assets, including the right to distribute the investors film, will be paid to the filmmaker first. It is important not only to have a written security agreement, but also to record it properly. The security interest agreement should be included in a clause within the distribution agreement. A separate long and short form security agreement is also signed by the parties, as well as a UCC-1 form, which is signed and recorded with the Secretary of State where the collateral or distributor is located.11 The security interest should also be recorded with the Copyright Office at the Library of Congress in Washington, D.C.

DONT INVEST MORE THAN YOU CAN AFFORD TO LOSE

Finally, any investor must understand that investing in a film is a highly risky endeavor. Investors should never invest more than they can afford to lose. The complete loss of an investment should not appreciably affect the investors standard of living. x
The author thanks Joshua Ferguson for his assistance in preparing this article.

OBTAIN AND REGISTER A SECURITY INTEREST

Generally speaking, a security interest gives the secured party rights in some designated collateral. In the movie and television industry, film lenders may want to secure their financial interests by obtaining a security interest in the film negative

1 BASELINE Box Office Grosses as of November 9, 1999. 2 Film Distributors can be researched by visiting the Filmmakers Clearinghouse, sponsored by Mark Litwak, Film Arts Foundation, the Association of Independent Video and Filmmakers, and MOVIEMAKER MAGAZINE. The survey form and responses can be found at: Entertainment Law Resources: <http://www.marklitwak.com>. 3 See 15 U.S.C. 77 (1999). 4 See 15 U.S.C. 77(d) (1999). 5 See 15 U.S.C. 77(k) (1999). 6 The Ulmer Guide (contact point: julmer@primenet.com) surveys financiers, sales agents, and other industry insiders. Also, the HOLLYWOOD REPORTER (213) 525-2087 publishes a Star Power guide.

7 It is common for the parties to have disputes resolved by a single arbitrator who is an entertainment attorney. 8 <http://www.adr.org> 9 <http://www.afma.com> 10 One way to monitor which countries have licensed a film is to place the music on the soundtrack with a music publisher (which could be a publishing company the producer establishes), and make sure the publisher has entered into an agreement with ASCAP, BMI, or one of the other music collection agencies. These agencies collect public performance royalties when the film is exhibited on television in the United States, and in theaters and television abroad. If the music is registered with such an agency, and royalties from Malaysia are remitted, for example, this alerts you that a sale to Malaysia has been made. 11 See e.g. CAL. U. CON. CODE 9401 (1984).

12

TOMORROW NEVER DIES

film/tv

We should; he is one of Americas most famous fictional characters.

ond, James Bond. We know the name well. Like

Mickey Mouse, Superman, and Bugs Bunny, James Bond although of British origin has become a national treasure, a voice[ ] of American assurance, the best America has to offer, and carr[ies] a certain sense of history.1 So imagine if suddenly James Bond were to appear in a different movie every year, portrayed each time by a different actor. Not Connery, Moore, or Brosnan or even Dalton,

The Protection of James Bond and Other Fictional Characters Under the Federal Trademark Dilution Act By Kristen Knudsen
for that matter. Instead, imagine James Bond portrayed by Robin Williams one year and Jim Carrey the next. Perhaps, too, you would see the suave secret agent in a new TV show, embroiled in a new international intrigue week after week. Soon, he would become an advertising spokesperson, pitching cars, beer, or toilet paper. If all this were to happen, you might be shaken, even stirred.

Fortunately, a limited copyright term protects James Bond from this unseemly fate. But what will happen when the copyright expires?2 The Federal

Trademark Dilution Act may provide the necessary additional protection.3

13

number of different protections are available for fictional characters under intellectual property law.4 These have traditionally included copyright, trademark, and unfair competition, or some combination thereof.5 Another avenue of protection can be found in state dilution statutes, which prohibit unauthorized uses of characters that could harm their reputations, such as by blurring their ability to indicate one source, or by tarnishing their commercial value.6 This harm may occur even where there is no likelihood of public confusion, and even where the use is on a noncompeting good.7 Many commentators have criticized state dilution theories, however, as contravening the purposes of the federal copyright law, which grants protection for limited terms only8 then surrenders characters to the public domain.9 At least as a protection for characters, state dilution claims have been largely unsuccessful.10 Indeed, in 1992, one commentator pointed to Congressional refusal to add a dilution amendment to the Lanham Federal Trademark Act as evidence that Congress did not wish to provide this additional protection to characters.11 Just four years later, however, on January 16, 1996, Congress changed its course and passed the Federal Trademark Dilution Act of 1995.12 With this, a star was born: The dilution argument suddenly became a serious option for character protection. Because this added protection can override copyright law and permanently remove certain characters from the public domain, some scholars are critical of this change.13 Some critics also oppose dilution protection because it seems to create a

property right in a character, serving to protect an owners investment rather than protect consumers.14 This argument stems from the fact that federal dilution protection can be invoked to protect the trademark owner even where consumers are not likely to be confused by the use.15 In this way, the Dilution Act does create a sort of property right which favors the trademark owners interest in the advertising value of his mark over the more honorable goal of preventing public confusion.16 It is precisely because of their meaning to society, however, that some characters need protection beyond the copyright term. Furthermore, the limited property right created by federal dilution allows trademark owners to prevent loss of their characters to the public domain. Were James Bond, for example, appropriated to sell a variety of household products, he might disappear as we know him. Rare characters like James Bond are national treasures; as such they should not be free for all to use. The property right conferred by dilution protection guards these characters, preserving them for societys enjoyment.

right in Mickey Mouse had been set to expire in 2003.19 With this Act, Congress broadened copyrights limited term and ensured that Mickey would continue to receive the most intellectual property protection available until 2023.20 Once the new copyright terms expire, Congress may again be bombarded by lobbying efforts to extend copyright protection even further. But legislators did not have to stretch the copyright law to protect Mickey Mouse. The protection characters need is already in place. The Federal Trademark Dilution Act strengthens existing protection by preventing others from using famous characters, even where no likelihood of confusion exists. This benefits the public by preventing erosion of our cultural icons, a public policy validated by both Congress and the courts. This Note explores the traditional modes of protection for fictional characters and why these are inadequate in protecting some characters. The Note then explores federal dilution as a new alternative, concluding that this added protection is needed in special cases.

endorsed safeguards for certain characters. Despite the rule that upon expiration of a copyright a character shall enter the public domain, courts have long allowed ongoing trademark rights which prevent others from using some characters.17 In addition, Congress recently passed the Sonny Bono Copyright Term Extension Act of 1998 to lengthen copyright protection by 20 years.18 Though applicable to all types of copyrights, this Act was of particular importance to Disney, whose copy14

Both the courts and Congress have

DIFFERENT FORMS OF CHARACTER PROTECTION

them out as the sole fertile ground for converging intellectual property theories.21 Both literary and pictorial characters function uniquely as expressive works and indicators of source simultaneously.22 Independent characters appear today most commonly in television and movies.23 Continuing series, such as The Practice and Will & Grace, in which characters appear week after week in different adventures, are a staple of TV.24 Also common are sequels, such

The qualities of characters single

as Scream 3 , and spinoffs, such as Frasier , in which characters from an earlier work are used again in a new scenario. 25

Copyright

some fictional characters as creative works.26 The federal copyright law (along with the federal patent law) is authorized by the Constitution, which enables Congress to promote the Progress of Science and the useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.27 The introductory clause of this provision suggests the primary purpose of the copyright law: to promote the progress of science and useful arts. This purpose has been read beyond the confines of an authors reward, to more broadly encourage individual effort in advancing public welfare.28 As the Supreme Court has explained, The immediate effect of our copyright law is to secure a fair return for an authors creative labor. But the ultimate aim is, by this incentive, to stimulate artistic creativity for the general public good.29 The copyright system thus strikes a bargain with artists, granting a limited copyright monopoly on creative works for the purpose of encouraging artistic expression in return. Implicit in this exchange is that without the public benefit gained by continuing artistic expression, the copyright monopoly would not be justified.30 Copyright Acts protection subsists in original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can

Copyright protection extends to

be perceived, reproduced, or otherwise communicated . . . .31 Among other things, copyright protection extends to literary works,32 dramatic works,33 and motion pictures and other audiovisual works.34 The characters depicted in these works may be protected independently of a storys plot,35 however, Judge Learned Hand has explained: If Twelfth Night were copyrighted, it is quite possible that a second

comer might so closely imitate Sir Toby Belch or Malvolio as to infringe, but it would not be enough that for one of his characters he cast a riotous knight who kept wassail to the discomfort of the household, or a vain and foppish steward who became amorous of his mistress. These would be no more than Shakespeares ideas

HOW COURTS DETERMINE FAME

Some courts addressing the issue of fame under the Federal Trademark Dilution Act have accepted survey evidence. Below are examples of actual surveys. WAWA, Inc. v. Haaf, 40 USPQ 2d 1629 (E.D. Pa. 1996), affd, 116 F.3d 471 (3d Cir. 1997): 1) Have you ever heard of WAWA? 2) Have you ever visited a WAWA store? Star Mkts., Ltd. v. Texaco, Inc., 950 F. Supp. 1030 (D. Haw. 1996): 1) Please tell me the names of any grocery stores or supermarkets you can think of. 2) Have you ever heard of READ NAME? 3) Please tell me the brands of [product] you can think of. 4) Have you ever heard of READ NAME? Ringling-Bros.-Barnum & Bailey Combined Shows, Inc. v. Utah Div. of Travel Dev., 955 F. Supp. 605, (E.D. Va. 1997), affd, 170 F.3d 449 (4th Cir. 1999). . . . shoppers were presented with a series of three file cards . . . Each statement was a fill-in-the-blank with a key term missing. THE GREATEST _______ ON EARTH. Hershey Foods Corp. v. Mars, Inc., 998 F. Supp. 500 (M.D. Pa. 1998): If you think you know, what brand of candy comes in this package? . . . What, in particular, makes you think it is (brand previously named)?
Source: Gerald L. Ford, Dilution Surveys Update 1998, in LITIGATING COPYRIGHT, TRADEMARK & UNFAIR COMPETITION CASES FOR THE EXPERIENCED PRACTITIONER 1998, at 551, 554-55 (PLI Patents, Copyrights, Trademarks, and Literary Property Course Handbook Series No. G0-0027, 1998).

The

15

in the play, as little capable of monopoly as Einsteins Doctrine of Relativity, or Darwins theory of the Origin of Species. It follows that the less developed the characters, the less they can be copyrighted; that is the penalty an author must bear for marking them too indistinctly.36 In explaining character protection, Learned Hand relied on the fundamental principle of copyright law that ideas themselves will not be protected, only the expression of those ideas.37 To hold otherwise would remove basic ideas, such as the vain and foppish steward Judge Hand mentions, from the public domain. In order to be protected as expression, a character will need to be more than a generic, stock character, such as the do-good superhero. On the contrary, a character must be a clearly-defined expression of an artistic vision, such as a do-good superhero from the planet Krypton who works as a reporter at the Daily Planet by day. Since the inquiry usually focuses on whether the character is sufficiently well-developed and distinctive to deserve protection, visual characters are easier to protect than literary ones.38 One reason may be that copyright infringement requires a substantial similarity to the copyrighted work;39 a literary character like Hamlet lacks the unvarying visual features needed to prove this claim. Thus, it is precisely because of the objective differences between visual and verbal media, that the most puerile cartoon animal rightly enjoys greater copyright protection than the noblest human characters of a Hemingway or Faulkner.40 In ongoing series such as sequels

and spinoffs, once the copyright in the first work expires41 and that work enters the public domain, continuing copyright protection in later works from the series will not prevent others from copying a character based on the first work.42 For example, in Silverman v. CBS, Inc.,43 the court permitted a Broadway musical producer to use delineations of the AMOS N ANDY characters contained in public domain scripts, but not those delineations given in scripts still protected by copyright.44 Therefore, only the increments of expression added by newer, stillcopyrighted material remain protected.45 Distinguishing between characteristics in the public domain, however, and those still protected by copyright, is a difficult determination that may force courts into aesthetic disputes which by and large they are ill equipped to rule on as a matter of law.46 For this reason, one commentator has suggested that series characters may be better protected under trademark law.47

that all goods bearing the trademark come from a single source; (3) signify that all goods bearing the trademark share an equal level of quality; and (4) act as primary instruments in advertising and selling the goods.51 Trademarks also serve as objective symbols of goodwill, representing and reinforcing the consumer satisfaction a business has earned.52 A trademark is any word, name, symbol, or device which identifies goods and distinguishes them from the goods of others by indicating a single source of the goods, even if that source is unknown to the consumer.53 To indicate source, a mark must be inherently distinctive or have attained secondary meaning, such that it has become distinctive of the goods in commerce.54 To achieve secondary meaning, the public must have come to recognize that the mark refers to products from a unique source.55 To be used in commerce, and thus trigger federal regulation, the mark must be involved in commercial transactions across state lines.56 eligibility and strength of trademark protection depends on where a particular mark falls on the spectrum of distinctiveness.57 Marks range in strength from generic to arbitrary and fanciful, with descriptive and suggestive marks in between.58 A generic term, such as orange juice, is one that refers to the genus to which a product belongs, and is never protectible by a trademark.59 A term which is merely descriptive, such as purepremium for orange juice, may not be protected unless it has attained secondary meaning.60 Suggestive marks, such as Sunny Delight for orange juice, are more than descrip-

Trademark

the federal trademark law if they indicate the creative source from which they spring.48 Trademark protection is derived from the Commerce Clause of the Constitution, which provides, Congress shall have the Power . . . To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes.49 Like the copyright system, trademark protection has been justified as providing a public benefit.50 Indeed, trademarks function to (1) identify one sellers goods and distinguish them from the goods of others; (2) signify
16

Characters may be protected under

The

tive because they require some imagination in evoking the nature of the goods, but they are not quite arbitrary.61 If a term is suggestive, it is entitled to protection without proof of secondary meaning. Finally, arbitrary marks, such as Minute Maid for orange juice, are purely abstract and distinctive creations without apparent connection to the product; these are afforded the greatest protection.62 Before the passage of the Federal Dilution Act, protection under trademark law meant protection only from infringement. The infringement analysis requires a finding of likelihood of confusion, meaning that consumers will likely be confused by use of a mark too similar to an established mark.63

tects registered and unregistered trademarks from infringement.69 State dilution law, a remedy recognized by about half of the states, has also occasionally been used for character protection.70 Most of the states that accept the doctrine have enacted statutes based on the Model State Trademark Bill, which provides that injury to the business reputation of a company or the distinc-

Since a violation of the Act triggers extensive relief . . . a mark must be especially famous to merit protection.
tive quality of a mark shall be a ground for injunctive relief notwithstanding the absence of competition between the parties or the absence of confusion as to the source of goods or services.71 As discussed below, however, state dilution statutes offer only thin and inconsistent character protection.

1995, 28 states recognized dilution as a legal wrong.74 Many states required a showing of likelihood of confusion to find dilution.75 Others required that the parties not be competitors.76 As a matter of authority and enforcement, courts could not extend relief beyond state borders.77 Due to these inconsistent and unsettled doctrines, state courts largely ignored dilution claims, often tacking them onto the end of their opinions as dicta for decisions reached on other grounds.78 In cases where dilution was found and characters were at issue, those characters were very well-known, and the court usually supplemented its ruling by finding a likelihood of confusion under trademark law.79

Other Protections

ed under principles of unfair competition law.64 Unfair competition is a broad category of business tort that includes passing off; false advertising; misrepresentations about a product; and disparagement of a competitors goods, property, or reputation.65 In all of these, there is involved the element of fraudulent attempt of some one to reap where he has not sown and to appropriate to himself the harvest of those who have sown.66 In the case of characters, passing off can occur when a competitor copies distinctive features of a characters appearance in order to mislead the public into thinking that defendants character was created by the plaintiff.67 Unfair competition law stems from the common law of the states.68 It has been enacted at the federal level, too, by 43(a) of the Lanham Trademark Act, which prohibits false advertising and pro-

Characters have also been protect-

HISTORY OF DILUTION

1927 HARVARD LAW REVIEW article by Frank I. Schechter.72 In this article, Schechter explained that protection was needed to guard against the gradual whittling away or dispersion of the identity and hold upon the public mind of the mark or name by its use upon non-competing goods.73 Prior to the Federal Dilution Act of
17

Dilution is generally traced to a

Appeals showed renewed interest in dilution, finding a protectible interest against the cancer-like growth of dissimilar products or services which feeds upon the business reputation of an established trademark.80 But other states continued to gloss over these claims and interest soon waned again.81 Perceiving the flaws of the state dilution schemes, the U.S. Trademark Review Commission82 met in the late 1980s to discuss the advantages and disadvantages of a federal dilution law.83 A dilution amendment to the 1988 Trademark Law Revision Act was proposed but ultimately dropped due to First Amendment questions voiced by broadcasting, advertising, and publishing industries; these media were concerned that a dilution provision would prevent parodies and other journalistic uses.84 One commentator has also suggested that the amendment was dropped due to the political horse-trading of Congres-

In 1977, the New York Court of

sional compromise whereby dilution was deleted in exchange for the deletion of another undesired bill.85 But dilution hadnt seen its final day. By 1995, a number of federal courts had endorsed state dilution doctrine.86 Dilution also became an accepted doctrine internationally, as many countries adopted their own dilution statutes.87 This growing popularity finally resulted in a change on January 16, 1996, when President Clinton signed the Federal Trademark Dilution Act into law.88

The Federal Trademark Dilution Act of 1995

protection is so broad, the Act protects only famous marks. Since a violation of the Act triggers extensive reliefpreventing all others from using the mark, regardless of whether the marks are in related fields or are those of competitors, a mark must be especially famous to merit protection.92 The Federal Trademark Dilution Act protects famous trademarks from diluting uses even without a likelihood of confusion, provides a uniform standard that may decrease forum shopping, and assists American enterprises in international business.93 It also expressly grants federal courts the authority to issue nationwide injunctions based on dilution, elevating the oft neglected and inconsistently applied doctrine of dilution to the level of the more traditional remedies recognized under the Lanham Act.94 These remedies include injunctive relief95 and, if willful intent is shown, defendants profits,96 treble damages,97 court costs,98 attorney fees,99 and

Act amended the Lanham Act to become 43(c), Remedies for Dilution of Famous Marks.89 The section provides: The owner of a famous mark shall be entitled, subject to the principles of equity and upon such terms as the court deems reasonable, to an injunction against another persons commercial use in commerce of a mark or trade name, if such use begins after the mark has become famous and causes dilution of the distinctive quality of the famous mark . . . .90

The Federal Trademark Dilution

orders of destruction.100 As only famous marks are entitled to this new protection, the section outlines eight factors to be used in determining fame.101 These are: (A) the degree of inherent or acquired distinctiveness of the mark; (B) the duration and extent of use of the mark in connection with the goods or services with which the mark is used; (C) the duration and extent of advertising and publicity of the mark; (D) the geographical extent of the trading area in which the mark is used; (E) the channels of trade for the goods or services with which the mark is used; (F) the degree of recognition of the mark in the trading areas and channels of trade of the marks owner and the person against whom the injunction is sought;

DURATION OF COPYRIGHT UNDER THE 1976 ACT

Work Created Before 1/1/78
Published or Copyrighted: 95 years (2 terms: 28 + 67 95) Unpublished: Life + 70 years but all unpublished works on 1/1/78 will last until 2002, and if published, through 2047.

Work Created After 1/1/78

Created, i.e., Fixed: Life + 70 years or 95 years from publication or 120 years from creation, whichever is less, if an anonymous or pseudonymous work, or a work made for hire.

tion reveals that it was intended to prevent such uses as BUICK aspirin, DUPONT shoes, and KODAK pianosuses not likely to cause public confusion, but which could, over time, affect the capacity of renowned trademarks to uniquely identify one source.91 Because its

The legislative history of this sec-

Source: Modified from MARSHALL LEAFFER, UNDERSTANDING COPYRIGHT LAW 6.5[D], at 181 (2d ed. 1995).

18

(G) the nature and extent of use of the same or similar marks by third parties; and (H) whether the mark was registered under the Act of March 3, 1881, or the Act of February 20, 1905, or on the principal register.102

court may consider these factors, but none is determinative. For example, factor (H) considers whether or not the mark is registered under the Lanham Act.103 Since registration implies some level of distinctiveness, this could help in proving fame, but is not required for dilution protection.104 The Act also clarified the meaning of dilution. Section 45 now defines it as the lessening of the capacity of a famous mark to identify and distinguish goods or services, regardless of the presence or absence of(1) competition between the owner of the famous mark and other parties, or (2) likelihood of confusion, mistake, or deception.105 This departs significantly from traditional trademark protection because it does not rely upon the traditional test of likelihood of confusion to grant relief. While in many cases consumer confusion will be present,106 federal dilution does not require it, making dilution a separate and distinct cause of action under trademark law. Additionally, dilution protection may be granted against either competing or non-competing products using the mark.

The statute makes clear that a

law or a state dilution statute.107 The legislative history of the Act reveals that it is not intended to preempt state dilution statutes, however;108 separate state and federal claims may still be brought in the same case.109 In practice, the ability to bring concurrent claims will likely only retain importance in cases of locally famous marks.110 Dilution may occur by blurring or tarnishment. Blurring occurs when unauthorized use of a mark reduces the publics perception that the mark signifies something unique, singular, or particular.111 For example, the use of TIFFANY hot dogs, TIFFANY limousines, or TIFFANY pantyhose would threaten the ability of the TIFFANY trademark to solely identify the jewelry store.112 While some courts still require a showing that consumers are confused or actually harmed, the blurring analysis should be doctrinally independent.113 Tarnishment involves unauthorized use of a mark on inferior or offensive products, such that positive associations of the mark are degraded.114 In an early state tarnishment case, for example, ENJOY COCAINE on a poster was found to tarnish the trademark ENJOY COCA-COLA.115 Tarnishment differs from parody in that parody involves the use of some elements of a prior authors composition to create a new one that, at least in part, comments on that authors works.116 Tarnishment, on the other hand, degrades a trademark by causing the public to associate the two sources of the products.117

Sony Corp.118 indicates how broad the new federal dilution protection can be for film and television characters. In that case, the plaintiff Danjaq, with its production partner MGM Studios, sought a preliminary injunction against the defendants Sony Corporation and others, based on the defendants plans to make a series of JAMES BOND movies.119 Plaintiff Danjaq claimed to be author Ian Flemings exclusive assignee of all U.S. film and TV rights in the JAMES BOND character.120 The defendants countered that their affiliated writer-producer Kevin McClory, who made the Bond films Thunderball (1965) and Never Say Never Again (1983), had acquired the rights in the JAMES BOND character from author Ian Fleming prior to Danjaq and MGM.121 The court found that McClorys copyright had expired, leaving Danjaq as the sole owner of the copyright and the trademark in the JAMES BOND character.122 It granted an injunction based on copyright and trademark infringement, as well as trademark dilution.123 The court found that Sonys use of the JAMES BOND mark would violate the federal dilution statute and likely create dilution through blurring, as consumers would associate defendants Bond film with the identity and reputation of 124 Danjaqs Bond films. Although the case ultimately settled,125 it represents the revolutionary recognition of federal dilution as a separate and distinct cause of action for the protection of film and TV characters. In Danjaq, the court ultimately found copyright infringement, and did not decide whether the plaintiff could have prevailed on

mark registration shall be a complete bar to an action brought by another person under the common

Under 43(c)(3), federal trade-

BOND, JAMES BOND

The 1998 case of Danjaq LLC v.

19

dilution grounds alone. In future cases, however, where no copyright infringement exists, it appears that the doctrine could now stand alone to protect certain characters. In another recent case, Brown v. Its Entertainment, Inc.,126 the cartoon character ARTHUR was protected under the federal dilution statute from unauthorized use. ARTHUR, a cartoon aardvark, is the subject of over 60 best-selling books and a highly-rated television series.127 He appeared on the cover of FAO Schwarzs 1998 holiday catalog, and an ARTHUR balloon led the 1997 Macys Thanksgiving Day Parade.128 On these facts, the court found the ARTHUR character was famous enough to warrant protection from defendants use of an unlicensed ARTHUR costume at a toy store opening.129 The court reasoned, Should unauthorized Arthur impersonators proliferate . . . the image sought by plaintiffs for Arthur will be difficult to control and might easily become blurred or tarnished, resulting in a loss of credibility, public affection, and consumer interest.130 As these cases illustrate, although reserved for a rarefied class of marks, the Federal Trademark Dilution Act provides the broadest trademark protection possible. It ensures that famous fictional characters will not be pressed into undignified service or cloned by copiers. As one leading commentator noted, the Act was a major breakthrough for an elite category of trademark owners, and dilution protection now has teeth.131

nents of dilution nervous. It has been said that the furthest extensions of trademark rights have come in the area of preventing unauthorized uses of characters.132 Dilution extends that far reach even further. The First Amendment concerns voiced in 1988 should be calmed, at least, as 43(c)(4) exempts fair use, noncommercial use, and news reporting.133 In addition, parody is permissible under the Act.134 Other concerns remain, however. One contention is that dilution creates a property right in trademarks, similar to a trespass action. Critics argue that rather than furthering the lofty goal of preventing public confusion, dilution protects only the narrow private interest of those who own famous marks.135 After all, this broad provision could support a widespread ban on unauthorized uses even if the public is not in danger of being misled.136 This undermines the traditional view of trademark protection as preventing a tort against the public, not a trespass onto the trademark itself.137 The Supreme Court has stated: The law of unfair competition has its roots in the common law tort of deceit: its general concern is with protecting consumers from confusion as to source. While that concern may result in the creation of quasi-property rights in communicative symbols, the focus is on the protection of consumers, not the protection of producers as an incentive to product innovation.138 quasi-property theory of trademark protection historically
20

has been limited to the symbolic nature of a trademark.139 The Supreme Court has explained that a trademark is a property right only in the sense that a mans right to the continued enjoyment of his trade reputation and the good-will that flows from it, free from unwarranted interference by others, is a property right, for the protection of which a trademark is an instrumentality.140 Granting owners quasi-property status thus has always been accepted as the price paid for the protection of the public from confusion. Critics are correct that the property right conferred by the Federal Trademark Dilution Act does not protect the public from confusion, but it does protect the public in another way. According to the legislative history of the Act, The concept of dilution recognizes the substantial investment and aura of the mark itself, protecting both from those would appropriate the mark for their own gain.141 Unlike confusion, which can immediately harm the public, dilution harms the public in a more gradual way, slowly dissipating the public perception of the mark as something unique.142 The property right created by the dilution doctrine prevents such erosion.

CRITICISM OF DILUTION The Property Right

D ecisions like Danjaq make oppo-

This

ures do protect the public. For example, very famous trademarks like OREO and COCA-COLA have, like James Bond, become cultural icons. If an unauthorized user were to use those marks on inferior or even just different products, the significance of those marks would be blurred or tarnished among American consumers, thus corroding the goodwill in those marks and making it harder for consumers to

In this way, anti-dilution meas-

identify which product they want. Such national upset was seen in 1985 when Coca-Cola diluted its own mark with the introduction of New Coke.143 Although 61 percent of the people actually preferred New Coke in blind taste tests, the public revolted.144 When the public uproar forced the reintroduction of Coke Classic just three months later, Brian C. Dyson, then senior vice president of Coca-Cola Company, admitted at a news conference, We did not read the deep emotional ties that people had to the whole concept of Coca-Cola.145 While not a classic case of dilution because no unauthorized use was involved, this example is still instructive for two reasons. First, it demonstrates that a diluting use need not be by an inferior product any difference in the quality associated with the mark, be it better or worse, can harm the trademarks value. Second, it illustrates the emotional significance that the consuming public attaches to some very famous trademarks. It is these very special trademarks that the Federal Trademark Dilution Act seeks to protect.

source.148 Commentators complain that this perpetual grant nullifies the balance struck between copyrights broad protection and limited duration of exclusivity and trademarks narrow protection but unlimited duration of protection.149 This is a valid concern to be sure, but courts have long held that trademark and copyright regimes may safely coexist150 and the Copyright Act

extension of the copyright term since the current Copyright Act was enacted in 1976.153 The first copyright law, passed in 1790, granted protection for 14 years, plus a 14-year renewal term.154 In 1831, the initial term was extended to 28 years, with a 14-year renewal; this renewal term was extended to 28 years in 1909.155 In 1976, the renewal term was extended to 47 years for works created before January 1, 1978, and any works created after that date received a copyright term of the life of the author plus 50 years.156 The Copyright Term Extension Act amended various sections of the 1976 Act to make its renewal term 67 years; and its term of protection for post-1978 works the length of the authors life plus 70 years.157 With this, Congress has extended copyright protection to its greatest length yet. The legislative history of the Copyright Term Extension Act reveals it was enacted to bring the United States in line with European Union countries, which in 1995 extended copyright protection to the life of the author plus 70 years.158 Matching the protection of the European Union means that United States works will be protected for the same amount of time as European works, ensuring that U.S. authors will receive the profits generated from the sale of their works abroad.159 The House Report also identifies as a benefit that the extension of copyright protection will encourage U.S. authors to create new works and to restore older works for dissemination to the public.160 n addition to these benefits, there was another unstated benefit to particular copyright holders that Congress almost certainly consid-

With such characters, whose association with source is hard wired into the public consciousness, distinguishing language may not be enough to prevent dilution of those trademarks.
itself, in 301, states that it will not preempt other federal law.151 Moreover, Congress has recently indicated through the Copyright Term Extension Act that some characters simply do not belong in the public domain. The Sonny Bono Copyright Term Extension Act, enacted on October 27, 1998, extended copyright protection by 20 years in all copyrighted works not already in the public domain.152 This marks the first
21

Undermining Copyright

as undermining the public policy of the copyright law. The primary purpose of copyright is to promote creativity and dissemination of creative works, so that the public may benefit from the labor of authors.146 To that end, copyright grants a limited duration of protection, after which creative works enter the public domain.147 Trademark protection, on the other hand, can be permanent. A trademark will be protected for as long as it continues to indicate

D ilution has also been criticized

ered. Walt Disney and other entertainment companies led lobbying efforts in support of the Act, ultimately donating $342,000 to the major political parties involved.161 Their motive was clear: Disneys copyrights in many of its famous characters, including Mickey Mouse, would have expired starting in 2003.162 Additionally, Disney had recently purchased rights in the Winnie the Pooh character, a purchase contingent on an extension of copyright as Winnies copyright was also soon to expire.163 This would have happened just as the potential for new uses of characters . . . is expanding with new markets on digital television, cable services and the Internet.164 In part, the Copyright Term Extension Act indicates that Congress assumed the public would benefit more from Disneys continued marketing efforts of such characters than from free access to these characters on media like the Internet.165 One commentator notes: With only five years before the first Mickey fell into the public domain, the publics interest in free access to great works of fiction and non-fiction would necessarily take second place to the governments interest in Disneys continued economic health. Congress has clearly chosen how to set the balance between the rights of the copyright creators and the publics interest.166 ndeed, with the Copyright Term Extension Act, Congress suggests that Mickey Mouse and friends do not belong in the public domain.

The Act gave them 20 more years of protection, prompting Disney President Michael Eisner to write in a letter to shareholders: Toward the end of the year 1998, action was taken in Washington that should help us further protect and build on our heritage.167

for the same reason they criticize federal dilution protection: it undermines the Constitutional guarantee that creative works shall be protected for limited times.168 One federal judge has already ruled, however, that the Copyright Term Extension Act does not violate the Constitution, as Congress has the discretion to define limited times.169 One won-

Scholars criticize this extension

ders what will happen in 2023, however, when Disneys new extended copyright in Mickey Mouse will expire. Disney will likely lobby again for an extension of the copyright term. Congress may, again, grant it. A better solution would be to consider the protection of characters already provided by the Federal Trademark Dilution Act.

WHY CHARACTERS NEED DILUTION PROTECTION Protection of Goodwill

or logical as well as emotional reasons, characters are well-served by dilution protection. Certain characters, like Mickey Mouse, may cease to exist if given to the public for unrestricted use.170 With such characters, whose association with source is hard wired into the public consciousness, distinguishing language may not be enough to prevent dilution of those trademarks.171 For example, imagine that in 2023 when
22

Disneys copyright expires, Six Flags Amusement Parks starts using Mickey Mouse in its advertisements, perhaps depicting Mickey enjoying himself on one of Six Flags rides. Perhaps, too, the ad would contain a small written disclaimer explaining that Disney in no way endorsed it. While comparative advertising and parody are permissible under the dilution amendment, this use probably would not fall into those categories. Moreover, depending on the context, the public may not be confused; indeed, given the disclaimer, they may be able to discern that Disney is not in fact sponsoring the ads. Without a likelihood of confusion, there is no trademark infringement, and Six Flags is able to free ride on the very famous Mickey Mouse character and all of the goodwill that follows, in order to benefit its own competing theme park. If someone were to later have an unpleasant visit to Six Flags, or even just a different experience than at Disney World, then the positive images and feelings associated with Mickey Mouse might sour. Dilution prevents such erosion and protects the goodwill in Mickey that Disney has worked years to create.

Marketing Concerns

Besides protection of goodwill, characters also need special protection for other reasons. First, with the explosion of electronic commerce, a diluting mark can gain public recognition and begin sapping the commercial strength of a famous mark practically overnight.172 Once on the Internet, a character may be viewed by millions within a few minutes.173 Furthermore, anyone can alter or appropriate the character for his own use without the trademark

owners knowledge.174 This means that a diluting use can blur or tarnish a trademarks value both quickly and vastly. Second, due to the frequent use of characters on merchandise, those selling authorized merchandise depicting famous characters may be hurt financially by unauthorized merchandise.

ets of small businesses and ordinary citizens across the United States.180 Montan also urged Congress to recognize the value that trademark owners build into their famous marks: [T]he trademark owner, who has spent the time and investment needed to build up the goodwill in these marks, should be the sole determinant of how the marks are used in a commercial sense.181 He gave examples of counterfeit T-shirts depicting Bugs Bunny and the Tasmanian Devil smoking marijuana. Without a likelihood of confusion, which was doubtful in a case like this, Montan said character owners needed some additional way to protect their marks.182 He echoed the oft-cited fact that state dilution statutes were inadequate and inconsistently applied.183 He observed that most state courts would have great difficulty granting state law injunctions that apply outside state boundaries thus offering little protection to characters known on a national scale.184 Montan described how Warner Brothers and DC Comics had invested money and effort to build such characters as Bugs Bunny, Daffy Duck, Batman, and 185 Superman. Due to such efforts, these characters now instantaneously convey a wealth of information about the products on which they appear, including affiliation and high quality.186 With this, Montan identified the most compelling reason for guarding James Bond, Mickey Mouse, and the whole cast of famous characters: the need to protect them from diffusion and public disgrace. These trademarks have become classic pieces of Americana, Montan stated, and although they are com23

mercial assets owned by Time Warner, those of us employed to protect them consider ourselves trustees of national treasures.187

TOMORROW NEVER DIES

amous characters are more than F

passage of the dilution statute, owners of some famous creative characters spoke out in support of this extra protection.175 Nils Victor Montan, vice president and senior intellectual property counsel for Warner Brothers Film Studio, testified on behalf of Time Warners affiliated companies, including DC Comics and Warner Brothers Television, producers of such shows as ER and Friends.176 According to Montan, the Time Warner Companies enthusiastically endorse[d] the proposed dilution amendment.177 First, Montan spoke of the need to protect authorized, licensed users of the mark. He noted that Warner Brothers consumer products division had about 2,300 active licenses, and pointed out that these licensees looked to Warner Brothers and DC Comics to protect these marks and prevent others from using them Thus, without authorization.178 dilution protection would benefit Time Warner, its licensees, the employees of licensees, manufacturers of licensed clothing, and retailers who sell authorized products.179 Montan cited a WALL STREET JOURNAL article discussing the impact of the Hollywood licensing industry on the American economy, and concluded that laws like the Federal Trademark Dilution Act ultimately put money into the pock-

At committee hearings prior to the

Finally,

just part of a story; some take on lives of their own. But even the man of steel would not survive if appropriated for widespread public use. For this reason, characters have always received the highest levels of intellectual property protection, by a combination of copyright and trademark security. In most cases, these traditional forms of protection still suffice. But, in the sea of electronic commerce where copiers sometimes escape infringement and enforcement, the expansion of copyright protection is not the only answer. A more effective solution already exists in the Federal Trademark Dilution Act. This Act extends already existing trademark protection to an elite category of marks deserving of special protection. Their status as national treasures supports the application of this doctrine to famous characters and justifies the limited property right this doctrine confers. At its very core, the federal copyright system was created to benefit the public. Federal dilution protection can further this goal by preserving the integrity of favorite characters for all to enjoy. x

1 Steve Hartman, Brand Equity Impairment - The Meaning of Dilution, 87 TRADEMARK REP. 418, 420 n.5 (1997). 2 The Copyright Term Extension Act of 1998, see discussion infra, extended James Bonds copyright through 2048. See Francis M. Nevins, Jr., Copyright + Character Catastrophe, 39 J. COPYRIGHT SOCY USA 303, 336 (1992). 3 Lanham Act 43(c), 15 U.S.C. 1125(c) (Supp. II 1996). 4 See generally Michael Todd Helfand, When Mickey Mouse is as Strong as Superman: The Convergence of Intellectual Property Laws to Protect Fictional Literary and Pictorial Characters, 44 STAN. L. REV. 623 (1992); Leslie A. Kurtz, The Independent Legal Lives of Fictional Characters, 1986 WIS. L. REV. 429 (1986). 5 See, e.g., Helfand, supra note 4, at 647 (citing DC Comics, Inc. v. Unlimited Monkey Business, Inc., 598 F. Supp. 110, 115 (N.D. Ga. 1984) (creating a hybrid copyright-dilution cause of action)). 6 See Deere & Co. v. MTD Prods., 41 F.3d 39, 42-43 (2d Cir. 1994). 7 See Model State Trademark Bill 12 (USTA 1964). 8 The copyright term is currently the length of the authors life plus 70 years. Copyright Act of 1976, 17 U.S.C. 302(a) (Supp. IV 1998). 9 See Kurtz, supra note 4, at 512-14. 10 See, e.g., Warner Bros., Inc. v. American Broadcasting Cos., 530 F. Supp. 1187, 1198-99 (S.D.N.Y. 1982) (denying state dilution protection to SUPERMAN character). But cf. Fisher v. Star Co., 132 N.E. 133 (N.Y. 1921), affd, 720 F.2d 231 (2d Cir. 1983) (foreshadowing dilution doctrine by recognizing that public tiring could result from inferior imitations of a mark). 11Helfand, supra note 4, at 671. 12 Pub. L. No. 104-98, 109 Stat. 985 (codified at 15 USC 1125(c) (Supp. II 1996)). 13 See e.g., Helfand, supra note 4, at 654, and discussion infra. 14 See JEROME GILSON, TRADEMARK PROTECTION & PRACTICE 5.12[1][a] (1999). 15 Lanham Act 45, 15 U.S.C. 1127 (1994), amended by 15 U.S.C. 1127 (Supp. II 1996) (definition of dilution). 16 GILSON, supra note 14, at 5.12[1][a]. 17 See Frederick Warne & Co. v. Book Sales, Inc., 481 F. Supp. 1191, 1196-97 (S.D.N.Y. 1979). 18 Pub. L. No. 105-298, 112 Stat. 2827 (codified at 17 U.S.C. 302(a) (Supp. IV 1998)). 19 Mickey Mouse May Soon be Public Property, DALLAS MORNING NEWS, February 2, 1998, Home Final Ed., at 5C. 20 See Claudia Eller & James Bates, Congress Puts Power Behind Hollywoods Goals, LOS ANGELES TIMES, Oct. 23, 1998, Home Final Ed., at 1C. 21 Helfand, supra note 4, at 623. 24

22 See id. at 628. 23 Kurtz, supra note 4, at 436. 24 See id. (citing Leon Kellman, The Legal Protection of Fictional Characters, 25 BROOK L. REV. 3, 3 (1958)). 25 Id. 26 See id. at 440. 27 U.S. CONST. art. I, 8; cl. 8. see also id. at cl. 18 (giving Congress the power to make all laws which shall be necessary and proper for carrying into Execution the foregoing powers). 28 Mazer v. Stein, 347 U.S. 201, 219 (1954), superseded by statute on other grounds as stated in Fabrica, Inc. v. El Dorado Corp., 697 F.2d 890 (9th Cir. 1983); see also MELVILLE B. NIMMER, NIMMER ON COPYRIGHT 1.03[A] (1999). 29 Twentieth Century Music Corp. v. Aiken, 422 U.S. 151, 156 (1975), superseded by statute on other grounds as stated in Crabshaw Music v. K-Bobs of El Paso, Inc., 744 F. Supp. 763 (W.D. Tex. 1990). 30 NIMMER, supra note 28, at 1.03 [A]. 31 Copyright Act of 1976, 17 U.S.C. 102(a)(1) (1994). 32 Id. at 102(a)(1). 33 Id. at 102(a)(3). 34 Id. at 102(a)(6). 35 Nichols v. Universal Pictures Corp., 45 F.2d 119, 121 (2d Cir. 1930); see also NIMMER, supra note 28, at 2.12. 36 Nichols, 45 F.2d at 121. But see Warner Bros. Pictures, Inc. v. Columbia Broadcasting Sys., Inc., 216 F.2d 945, 950 (9th Cir. 1954) (suggesting that no character is protectible unless it really constitutes the story being told and is not just a chess man in the game of telling the story). This view has since been limited to word portraits, as distinguished from cartoon and other graphic representations. See NIMMER, supra note 28, at 2.12. 37 17 U.S.C. 102(b). 38 See Leslie A. Kurtz, The Methuselah Factor: When Characters Outlive Their Copyrights, 11 U. MIAMI ENT. & SPORTS L. REV. 437, 438-39 (1994). 39 See NIMMER, supra note 28, at 13.03. The infringement analysis also requires a showing that the alleged infringer likely had access to the copyrighted work. Id. at 13.02. 40 Nevins, supra note 2, at 314. 41 The copyright term is currently the life of the author plus 70 years. 17 U.S.C. 302(a), amended by 17 U.S.C. 302(a) (Supp. IV 1998). 42 NIMMER, supra note 28, at 2.12. 43 870 F.2d 40 (2d Cir. 1989). 44 Id. at 50.

45 Id. 46 Nevins, supra note 2, at 342. One commentator has suggested that character protection should be lost when protection in the first work is lost. See NIMMER, supra note 28, at 2.12. 47 Nevins, supra note 2, at 342. 48 See Lanham Act 45, 15 U.S.C. 1127 (1994) (definition of service mark). The popularity of characters as trademarks can be seen by the guest list at one Trademark Association reception, which included Tony the Tiger, plain M & Ms, Tweety Bird, the Tasmanian Devil, Porky Pig, Sylvester, Bugs Bunny, Daffy Duck, Wonder Woman, the Care Bears, Mr. Peanut, the Pink Panther, Mickey and Minnie Mouse, Chester Cheetah, the Campbells Soup Kids, the Pillsbury Dough Boy, and even the Kool-Aid Pitcher. RALPH S. BROWN 7 ROBERT C. DENICOLA, CASES ON COPYRIGHT 701-02 (7th ed., Foundation Press 1998) (citing USTA Bulletin, April 3, 1989). 49 U.S. CONST. art. I, 8, cl. 3. 50 RESTATEMENT (THIRD)
OF

ads amounted to unlawful passing off of plaintiffs LONE RANGER character under unfair competition law). 65 ARTHUR H. SEIDEL, ET AL., WHAT THE GENERAL PRACTITIONER SHOULD KNOW ABOUT TRADEMARKS AND COPYRIGHTS 1.05 at 12-13 (1995). 66 Lone Ranger, 124 F.2d at 653. 67 Id. See also Seidel, supra note 65, at 12. 68 See Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 157 (1989). 69 Lanham Act 43(a), 15 U.S.C. 1125(a) (1994). 70 Gilson, supra note 14, at 5.12[1][a]. See, e.g., Pillsbury Co. v. Milky Way Prods., Inc., 215 USPQ 124, 135 (N.D. Ga. 1981) (granting relief under Georgia antidilution statute where plaintiffs POPPIN FRESH and POPPIE FRESH characters were depicted in defendants magazine engaging in sexual conduct). 71 Model State Trademark Bill 12 (USTA 1964). 72 Frank I. Schechter, The Rational Basis of Trademark Protection, 40 HARV. L. REV. 813, 825 (1927). 73 Gilson, supra note 14, at 5.12[1][a]. 74 Id. 75 Robert D. Litowitz & Douglas A. Rettew, Cleansing and Clarifying the Mark: The Year-Old Federal Trademark Dilution Act is Already Protecting Famous Marks from Blurring and Tarnishment, LEGAL TIMES, Dec. 9, 1996, at 36. See, e.g., Warner Bros., Inc. v. American Broadcasting Companies, 720 F.2d 231, 248 (2d Cir. 1983) (denying state dilution protection to SUPERMAN character where there was no confusion with THE GREATEST AMERICAN HERO character). 76 Gilson, supra note 14, at 5.12[1][a]. 77 Id. 78 Jerome Gilson, A Federal Dilution Statute: Is it Time?, 83 TRADEMARK REP. 107, 110 (1993). 79 Kurtz, supra note 4, at 512-13. Kurtz refers to cases involving Superman and Wonder Woman, DC Comics, Inc. v. Unlimited Monkey Business, Inc., 598 F. Supp. 110 (N.D. Ga. 1984); Peanuts characters, United Feature Syndicate, Inc. v. Sunrise Mold Co., 569 F. Supp. 1475 (S.D. Fla. 1983); and Tarzan, Edgar Rice Burroughs, Inc. v. Manns Theatres, 195 USPQ 159 (C.D. Cal. 1976). But see Pillsbury Co. v. Milky Way Prod., Inc., 215 U.S.P.Q. 124, 135 (N.D. Ga. 1981) (finding dilution despite an absence of confusion). 80 See Gilson, supra note 78, at 110 (citations omitted). 81 See H.R. REP. NO. 104-374, at 3-4 (1995), reprinted in 1995 U.S.C.C.A.N. 1029, 1030-31. 82 The Trademark Review Commission, a subset of the U.S. Trademark Association, consisted of 29 trademark attorneys with various corporate, law firm, and academic backgrounds. See GILSON, supra note 14, at 1.04[4][a].

UNFAIR COMPETITION 9 cmt. b (1995).

ON

51 J. THOMAS MCCARTHY, MCCARTHY COMPETITON 3:2 (1999). 52 Id.

TRADEMARKS

AND

UNFAIR

5315 U.S.C. 1127 (definition of trademark). 54 Id. at 1052(f). See, e.g., Inwood Labs., Inc., v. Ives Labs., Inc., 456 U.S. 844, 851 n.11 (1982). 55 Inwood Labs., 456 U.S. at 851 n.11. 56 15 U.S.C. 1051; see also South Corp. v. United States, 690 F.2d 1368 (Fed. Cir. 1982). 57 Anne Hiaring, Basic Principles of Trademark Law, in UNDERSTANDING BASIC TRADEMARK LAW 1999, at 9, 24-25 (PLI Intellectual Property Course Handbook Series No. G-569, 1999). 58Id. 5915 U.S.C. 1064(3). 60 Id. at 1052(f). 61 Frank L. Politano, Overview of Basic Principles of Trademark Law and Unfair Competition, in UNDERSTANDING BASIC TRADEMARK LAW 1999, supra note 57, at 255, 264. 62 Id. 63 15 U.S.C. 1114. Courts evaluating likelihood of confusion consider a number of factors, including: (1) strength of plaintiffs mark; (2) degree of similarity between the two marks; (3) proximity of products and services; (4) likelihood that plaintiff would have entered that product arena; (5) evidence of actual confusion; (6) defendants good faith in adopting the mark; (7) quality of defendants products or services; and (8) sophistication of the buyers. See Polaroid Corp. v. Polaroid Electronics Corp., 287 F.2d 492, 495 (2d Cir. 1961). 64 Lone Ranger, Inc. v. Cox, 124 F.2d 650, 652-53 (4th Cir. 1942) (finding that defendants use of ORIGINAL LONE RANGER in circus 25

83 Gilson, supra note 14, at 5.12[1][b]; see also Vincent N. Palladino, Reigning in Trademark Dilution Claims, N.Y. L.J., June 10, 1999, at 1, 8. 84 H.R. REP.NO. 104-374 at 4. 85 Gilson, supra note 78, at 114-15 (describing that a consumer rights bill which would have given consumers the right to sue advertisers for misleading advertising was deleted along with the dilution amendment). 86 See Deere & Co. v. MTD Prods. Inc., 41 F.3d 39, 45 (2d Cir. 1994) (upholding injunction against diluting use of JOHN DEERE trademark by competitor); Ringling Bros.-Barnum & Bailey Combined Shows, Inc. v. Celozzi-Ettelson Chevrolet, Inc., 855 F.2d 480, 485 (7th Cir. 1988) (finding car dealerships GREATEST USED CAR SHOW ON EARTH ads diluted plaintiffs GREATEST SHOW ON EARTH slogan). 87 Jerome Gilson, TRADEMARK DILUTION NOW A FEDERAL WRONG; AN ANALYSIS OF THE FEDERAL TRADEMARK DILUTION ACT OF 1995 (1996); see also Stephen F. Mohr, The New Federal Trademark Dilution Act: Expanding the Rights of Trademark Owners, in ANNUAL ADVANCED SEMINAR ON TRADEMARK LAW 1997, at 7, 12 (PLI Patents, Copyrights, Trademarks, and Literary Property Course Series No. G-476, 1997). 88 Gilson, supra note 14, at 5.12[1][a]. 89 Lanham Act 43(c), 15 U.S.C. 1125(c) (Supp. II 1996). 90 Id. 91 H.R. REP. NO. 104-374 at 3 (1995), reprinted in 1995 U.S.C.C.A.N. 1029, 1030. 92 Star Mkts., Ltd. v. Texaco, Inc., 950 F. Supp. 1030, 1033 (D. Haw. 1996). 93 Charles E. McKenney & George F. Long, III, The Attainment of Fame and the Aegis of Protection: The Courts and the Federal Trademark Dilution Act, INTELLECTUAL PROPERTY TODAY, November, 1998, at 42. 94 Id.; see also Litowitz & Rettew, supra note 75, at 36. 95 15 U.S.C. 1125(c)(2). 96 Id. at 1117(a). 97 Id. at 1117(b). 98 Id. at 1117(a). 99 Id. 100 Id. at 1118. 101 Id. at 1125(c). 102 Id. 103 Marks may be registered on the Principal Register, see 15 U.S.C. 1052; or on the Supplemental Register, see 15 U.S.C. 1091. 104 See 15 U.S.C. 1065 (mark becomes incontestable after five years 26

of use). Once incontestable, it is conclusively presumed either that the mark is nondescriptive, or if descriptive, has acquired secondary meaning. MCCARTHY, supra note 51, at 15:35. 105 15 U.S.C. 1127. 106 Gilson, supra note 14, at 5.12[1][b]. 10715 U.S.C. 1125(c)(3). 108 H.R. REP. NO. 104-374, at 8 (1995), reprinted in 1995 U.S.C.C.A.N 1029, 1035. 109 Id. 110 See, e.g., Wedgewood Homes, Inc. v. Lund, 222 USPQ 446, 451-52 (Ore. 1983) (finding state dilution where mark was famous to significant percentage of local county). 111 H.R. REP. NO. 104-374 at 3; see also Panavision, Intl, L.P. v. Toeppen, 141 F.3d 1316, 1326 n. 7 (9th Cir. 1998) (Blurring occurs when a defendant uses a plaintiffs trademark to identify the defendants goods or services, creating the possibility that the mark will lose its ability to serve as a unique identifier of the plaintiffs product). 112 Sandra Edelman & Bruce R. Ewing, 50th Anniversary of the Lanham Act: The Federal Trademark Dilution Act of 1995: A Litigation Perspective, 86 TRADEMARK REP. 485, 501 (1996). 113 Ringling Bros.-Barnum & Bailey Combined Shows v. Utah Div. of Travel Dev., 170 F.3d 449, 461 (4th Cir. 1999), cert. denied, 120 S. Ct. 286 (1999) (requiring a finding of actual economic harm). This case has been criticized, however, and Nabisco, Inc. v. PF Brands, 191 F.3d 208, 223-24 (2d Cir. 1999), rejects it. See MCCARTHY, supra note 510, at 24:94 (actual loss not required; only a lessening of capacity or ability of the mark to be a strong commercial identifier); see also Johnson Publg Co. v. Willitts Designs Intl, Inc., 1998 WL 34168 *7-8 (N.D. Ill. 1998) (finding that an absence of confusion reduces likelihood of blurring in dilution analysis). 114See Panavision, 141 F.3d at 1326 n.7; see also MCCARTHY, supra note 51, at 24:95. 115 Coca-Cola Co. v. Gemini Rising, Inc., 346 F. Supp. 1183, 1191-93 (E.D.N.Y. 1972). 116 Campbell v. Acuff-Rose Music, 510 U.S. 569, 580 (1994). 117 See Jordache Enters. v. Hogg Wyld, Ltd., 828 F.2d 1482, 1491 (10th Cir. 1987). 118 49 USPQ 2d 1341 (C.D. Cal. 1998). 119 Id. at 1344-45. 120 Id. 121 Sony Pays MGM $5 Million for James Bond Settlement, ANDREWS INTELL. PROP. LITIG. REP., April 28, 1999, at 6. 122 Danjaq, 49 USPQ 2d at 1344-45. 123 Id. at 1346.

124 Id. 125 Sony, supra note 121, at 6. 126 34 F. Supp. 2d 854 (E.D.N.Y. 1999). 127 Id. at 858. 128 Id. 129 Id. at 859. See also Nabisco, Inc. v. PF Brands, 191 F.3d 208, 222-23 (2d Cir. 1999) (affirming injunction against Nabiscos use of goldfish-shaped crackers based solely on dilution of plaintiffs trade dress). 130 34 F. Supp. 2d at 859. 131 GILSON, supra note 14, at 5.12[1][a]; see also Helfand, supra note 4, at 639 (Dilution statutes thus potentially provide the most expansive protection against the unauthorized use of fictional characters that have become indicators of source (citations omitted)). 132 MCCARTHY, supra note 51, at 24:8. 133 Lanham Act 43 (c)(4), 15 U.S.C. 1125 (c)(4) (Supp. II 1996). Parodies have generally been held to be noncommercial uses under this section. See, e.g., Mattel, Inc. v. MCA Records, Inc., 28 F. Supp. 2d 1120, 1156 (C.D. Cal. 1998) (Use of BARBIE trademark in parody song not dilution). 134 See Lyons Partnership v. Giannoulas, 179 F.3d 384, 388 (5th Cir. 1999) (finding that defendants use of BARNEY lookalike only parodied plaintiffs BARNEY character); Jordache Enters., Inc. v. Hogg Wyld, Ltd., 828 F.2d 1482, 1486-87 (10th Cir. 1981) (LARDASHE on jeans a permissible parody of JORDACHE jeans). But see WAWA Inc. v. Haaf, 40 USPQ2d 1629, 1633 (E.D. Pa. 1996), affd, 116 F.3d 471 (3d Cir. 1997) (HAHA for market diluted WAWA for convenience store). 135 GILSON, supra note 14, at 5.12[1][a]. 136 Palladino, supra note 83, at 8. 137 Kenneth L. Port, The Unnatural Expansion of Trademark Rights: Is a Federal Dilution Statute Necessary?, 85 TRADEMARK REP. 525, 555 (1995). 138 Bonito Boats, Inc. v. Thunder Craft Boats, Inc., 489 U.S. 141, 157 (1989). 139 RESTATEMENT (THIRD)
OF

GINSBURG, COPYRIGHT 147 See id. at 450. 148 Id.

FOR THE

NINETIES 13-16 (4th Ed. 1993)).

149 Helfand, supra note 4, at 654. 150 See Frederick Warne & Co. v. Book Sales, Inc., 481 F. Supp. 1191, 1196-97 (S.D.N.Y. 1979) (the fact that a copyrightable character or design has fallen into the public domain should not preclude protection under the trademark laws so long as it is shown to have acquired independent trademark significance, identifying in some way the source or sponsorship of the goods); see also Harvey Cartoons v. Columbia Pictures Indus., 645 F. Supp. 1564, 1570-73 (S.D.N.Y. 1986) (deciding issue of trademark infringement even though copyright had expired, thus indicating trademark rights endured despite expiration of copyright). 151 Copyright Act of 1976, 17 U.S.C. 301 (1994). 152 H.R. REP. NO. 105-452, at 3 (1998). 153 Sabra Chartrand, Patents; Congress has extended its protection for Goofy, Gershwin and some moguls of the Internet, NEW YORK TIMES, October 19, 1998, at 2C. 154 Id. 155 Id. 156 Id. 157 H.R. REP. NO. 105-452, at 7-8. 158 Id. at 4. 159 Id. 160 Id. 161 Special Interests Gave Millions in Legislative Crunch, CHICAGO TRIBUNE, Nov. 1, 1998, at 14. 162 Mickey Mouse May Soon be Public Property, DALLAS MORNING NEWS, Feb. 2, 1998, Home Final Ed., at 5C. 163 Jon M. Garon, Media & Monopoly in the Information Age: Slowing the Convergence at the Marketplace of Ideas, 17 CARDOZO ARTS & ENT. L.J. 491, 523 (1999). 164 Chartrand, supra note 153, at 2C. 165 Garon, supra note 163, at 523. 166 Id. at 523-24. 167 James H. Johnston, Putting Robert Frost on Ice, LEGAL TIMES, February 22, 1999, at 49. 168 See Chartrand, supra note 153, at 2C. 169 Eldred v. Reno, 74 F. Supp. 2d 1, 6-7 (D.C. Cir. 1999).
JANE C.

UNFAIR COMPETITION 9 cmt. d (1995).

140 Hanover Star Milling Co. v. Metcalf, 240 U.S. 403, 413 (1916). 141 See H.R. REP. NO. 104-374, reprinted in 1995 USCCAN 1029. 142 See id. 143 Hartman, supra note 1, at 420 n.5. 144 Id. 145 Id. 146 Kurtz, supra note 38, at 439 (citing ROBERT A. GORMAN &

170 Kurtz, supra note 38, at 451-52. 27

171 Helfand, supra note 4, at 671-72. 172 Andrew L. Deutsch, Ruling Creates a Split in Dilution Jurisprudence, NATL L. J., Oct. 25, 1999, at C22. 173 See DEBORA J. HALBER, INTELLECTUAL PROPERTY INFORMATION AGE 127-128 (Quorum Books 1999). 174 See id. 175 Dilution: Hearing on H.R. 1295 Before the Judiciarys Subcomm. on Courts and Intellectual Property, 104th Cong., 1st Sess. (1995) (statements of Nils Victor Montan, Vice President and Senior Intellectual Property Counsel, Warner Bros.), reprinted in GILSON, supra note 14, 43 at 43-214 - 43-223. 176 Id. 177 Id. 178 Id. 179 Id. 180 Id. 181 Id. 182 Id. 183 Id. 184 Id. 185 Id. 186 Id. 187 Id.
IN THE

28

music

Publication, Musical Compositions, and the Copyright Act of 1909:

lmost a century ago, in White-Smith v. Apollo,2 the Supreme Court faced the issue of how

to treat player-piano rolls under the then-existing Copyright Act of 1897. Specifically, the court confronted whether player-piano rolls constituted unauthorized copies of the musical composi-

after
infringement.3

r z c a y
still
all these

years

By Michael B. Landau1
tions embodied therein, thereby making the manufacturers of the rolls liable for copyright

Interestingly enough, the issue of whether player-piano rollsa mechanical reproduction of an underlying musical compositionwere copies led to an age-old disagreement among the courts regarding another form of mechanical reproduction of musical compositions: phonograph

29

records or sound recordings.4 Almost 90 years after White-Smith, the 1995 Ninth Circuit decision in La Cienega v. Z.Z. Top5 caused an inter-circuit split to emerge between the Second Circuit6 and the Ninth Circuit7; the issue was whether the sale of sound recordings constituted a publication of the underlying musical composition for purposes of either obtaining (investiture) or forfeiting (divestiture) federal copyright protection. The Supreme Court denied certiorari8, leaving the issue unresolved and ultimately one for Congress to fix.9 The resolution of the issue of what constitutes a publication had profound implications for the music business. Since the Supreme Court refused to hear the case, prior to Congressional action in 1997, the copyright status of thousands of songs recorded before January 1, 1978 the effective date of the 1976 Copyright Act was in question. Because of the inter-circuit split, depending upon where an action was initiated, many of the pre-1978 songs were either in the public domain, and therefore free for all to use, or still protected by copyright. The split of authority also called into question the validity of thousands of license agreements and assignments of ownership related to musical works created before 1978. The issue was especially relevant because of the popularity of reissues and the ever-increasing nostalgia for the music of days gone by. In fact most of the classic rock of the 1960s and early 1970s fell into this category, not to mention most, if not all, jazz standards. In terms of statutory analysis, the requirement of publication of pre-1978 musical works is especially interesting because it involves interpretation of the 1909 Copyright Act, and not of the Copyright Act of 1976.10 11 Although provisions of the current 1976 Act address many issues relating to works created before the Act took effect, several important issues relating to threshold requirements and standards of copyright protection of

Congress finally resolved the issue regarding musical

compositions and distributed

phonorecords . . . by amending 303 of the 1976 Act. That

revision, however, was not the end of the controversy, . . . . Thus, the issue of

publication of underlying works is once again hot.

pre-1978 works are still solely governed by the 1909 Act. Therefore, despite the fact that the current Act has been in effect for approximately 20 years, cases still arise in which courts must interpret the provisions of the 1909 Act to arrive at the proper result.12 Congress finally resolved the issue regarding musical compositions and distributed phonorecords in November of 1997 by amending 303 of the 1976 Act. That revision, however, was not the end of the controversy, since the applicability of the statute was challenged in 1999. In addition, a similar and related issue whether the publication of a motion picture also publishes the incorporated or underlying story and/or soundtrack has come before the courts within the last two years. Thus, the issue of publication of underlying works is once again hot. This Article will first examine whether the sale and distribution of phonograph records or other sound recordings constituted a publication of the underlying musical compositions for purposes of 13 14 investiture or divestiture of federal copyright protection under the 1909 Copyright Act. The analysis examines precedent, the statutory language and legislative history behind the 1909 and 1976 Acts, United States Copyright Office Practice and Procedure, music industry practice and commentary from the time, and relevant considerations of harmonizing international copyright law throughout the past century. After briefly discussing the new legislation, the Article then progresses to discuss the impact of post-amendment cases.

Obtaining Copyright Protection

Under the 1909 Act, federal copyright protection for

an authors work applied only after certain legal formalities were met. From the time that an original work was created until federal protection attached, the work was protected by common law copyright. Common law copy30

right protection was perpetual until publication or registration, granting the author the exclusive rights of first publication. Therefore, if an author wrote a manuscript and kept it in his desk drawer, or even stored it in his attic for years without publishing or registering it, it would have been protected by common law copyright. Common law copyright was expressly abolished by 303(a) of the Copyright Act of 1976. Section 303(a) of the 1976 Copyright Act provides federal protection for works created but not published prior to January 1, 197815. In addition, 301 of the 1976 Act expressly preempts any state law equivalent cause of action. The abolition of common law copyright and whether the work was published or unpublished therefore determines not only the duration of protection, but also which provisions of the Copyright Act of 1976 apply to the work. The new copyright act did not apply to material that had already entered the public domain. Thus, the gateway to protection was the concept of publication. There were two methods for obtaining federal copyright protection under the Copyright Act of 1909: publication of copies with proper copyright notice pursuant 16 to 10 or registering and depositing copies of an unpublished work with the United States Copyright Office pur17 suant to 12. Prior to federal protection, the work was covered by common law copyright. In the event that copies of the work were published without proper copyright notice as required by 10, the work would fall through the cracks of the law and into the public domain.18 The copyright clause of the United States Constitution empowers Congress [t]o promote the Progress of Science and useful Arts, by Securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.19 The purpose of copyright law is to strike a balance between the publics desire to have free access to information and authors rights to protection of their private works. 20 Common law copyright somewhat reflects this balance by providing the author with perpetual protection until first publication. Federal copyright law, however, with its more limited duration for protection, better balances these competing 21 interests. Once the author publishes a work, he or she reaps personal benefits from distributing copies.22 In return for these personal benefits, the authors rights to the work are automatically subject to federal copyright protection. Federal protection balances an authors rights against the publics desire to freely use the work by providing copyright protection of a shorter duration
31

than the perpetual common law protection.23 The trigger event that extinguishes common law protection and activates the federal balancing scheme is publication. Publication is a legal term of art, and is at the center of many of the current controversies. Interestingly, the Copyright Act of 1909 did not itself provide a definition of publication. Although publication was not expressly 24 defined in 26 of the 1909 Act25, guiding language appeared within the 1909 Acts definition of date of publication. Section 26 of the Act provided as follows: In the interpretation and construction of this title, the date of publication shall in the case of a work in which copies are reproduced for sale or distribution be held to be the earliest date when copies of the first authorized edition are placed on sale, sold, or publicly distributed by the proprietor of the copyright or under his authority. . .26 The date of publication was especially important under the 1909 Act because: it was intended to fix the date from which the term of copyright should begin to run for such a work...The importance of the actual date of publication the day, month, and year arose because, in the case of every work copyrighted in the first five instance by publication with notice, the first term of 28 years began to run from that date; hence any error on the part of the applicant could have serious consequences, especially in connection with applications for renewals of copyright which had to be made within one year prior to the expiration of the original term of copyright.27 (This problem was avoided in the 1976 Act by the calendar 28 year ending of all terms, including renewals.) Despite the language above, there have been numerous disputes regarding what actually constitutes a publication. Therefore, courts have developed the doctrines of general publication and limited publication. These two doctrines lead to very different protection as it is only a general publication that triggers the federal statutory scheme of protection with respect to pre-1978 works.

The type of publication considered to be a legal publication for purposes of triggering federal copyright protection under the 1909 Act was a general publication. A general publication could occur when the work was made available to indiscriminate members of the public, with-

out regard for what they intended to do with it. Phrased another way, [a] general publication occurs when any interested party could have a copy.30 The key issue with respect to general publication is the availability of the work to members of the general public, not the number of copies available. Therefore, a very small number of copies even one made available to the public may be sufficient to trigger the federal scheme of protection. The common-law right is lost by the general 31 publication or unrestricted sale of a single copy. On the other hand, the distribution of copies of a work, even large numbers, to a (1) definitely selected group, and (2) for a limited purpose, without the right of further reproduction, distribution, or sale32 is not a general publication, but is a limited publication which is insufficient to trigger the federal scheme of protection. Even if the dissemination of the work was categorized as a limited publication, common-law copyright protection was preserved until the author engaged in a general publication or registered a copy of the work with the Copyright Office. Under the 1909 Act, there was a tendency in the courts to apply different standards for purposes of obtaining copyright than for losing it. Courts at times stretched the law to arrive at a finding of limited publication when an accused infringer was challenging the validity of the copyright. For example, in King v. Mister Maestro, Inc., numerous copies of the text of Martin Luther King, Jr.s now famous I Have A Dream speech were distributed to the media to allow the press to use the speeches in whole or in part for their news value.34 Despite the large numbers of advance copies distributed, the court still found the distribution to be a limited publication based upon the specific group of recipients and specific purpose of the distribution.35 Likewise, in Academy of Motion Picture Arts and Sciences v. Creative House Promotions, Inc.,36 the distribution of Oscar statuettes without copyright notice to recipients of the Academy Awards was held to be a limited publication, insufficient to divest the academy of its copyright protection. Similarly, in Mills Music, Inc. v. Cromwell Music, 37 Inc., the distribution of mimeographed copies of the sheet music to a chorus for purposes of performing the 38 music was held to be a limited publication. In addition, the acts of third parties that are contrary to the wishes of an author of a limited publication will not turn the subsequent distributions into a general publication. For example, in Burke v. National
32 33

29

Broadcasting Company,39 an amateur photographer sent film footage of a zebra mare defending itself against a lion attack to a professor in Germany, Bernhard Grzimek, who was also the host of a German public television program about wildlife.40 The film was sent to the professor specifically for use personally in lectures and 41 on a television program. While Burkes film was in possession of Professor Grzimek, Survival Anglia Limited (SAL), a British nature film company, asked him to make a copy of the film.42 SAL included the segments of the film in one of its productions and subsequently sold the film to NBC. NBC broadcast the film in the United States in 1977. Burke sued NBC for copyright infringement. In upholding the validity of Burkes common law copyright, the court held that the release of the film to Professor Grzimek was solely for his specific educational purpose and was therefore a limited publication despite the widespread publication of it by NBC.43 NBCs unauthorized broadcast did not commit the footage to the public domain. Under current copyright provisions, publication no longer serves as the gateway from common law protec44 tion to statutory protection. Federal statutory protection now subsists when a work is fixed in any tangible 45 medium of expression. The 1976 Acts definition of publication includes the distribution of copies or phonorecords of a work to the public by sale or the offering to distribute copies or phonorecords.46 Thus, the distribution of phonorecords is expressly a form of publication under the current copyright statute. This distinction is further evidenced by the language of 102, which delineates the subject matter covered by the 1976 Act.47 Publication retained its importance under the 1976 Act, however, with reference to works published with proper notice prior to the effective date of the 1976 Act (January 48 1, 1978). Also, as previously stated, the 1976 Act does not apply retroactively to works in the public domain at 49 the time the 1976 Act took effect. The 1976 Acts legislative history demonstrates that language requiring a work to be fixed in a tangible medium of expression, in a medium now known or later developed, and capable of being communicated, either 50 directly or with the aid of a machine or device, was intended to abrogate the White-Smith doctrine, but only for works created after January 1, 1978.51 Presumably, Congress chose not to fix the problem created when a musical work, which had no copyright on its sheet music, was sold in phonorecord form without meeting notice

specifications. The legislative history of the 1976 Acts statutory preemption provision indicates that Congress purpose was to clear up the confusing unpredictable 52 results created by the concept of publication under the 1909 Act. Congress intended to implement the limited times provision of the Constitution by not allowing perpetual protection for fixed works that had been disseminated by means other than publication.53 Hence, the sale of phonorecords under the 1976 Act clearly constitutes publication, but the issue was left unresolved for works prior to January 1, 1978.

A Performance is Not a Publication

According to one commentator, Copyright law, precisely because it has taken shape around the model of a book communicated to the public by multiplication of copies, has experienced difficulty, not to say frustration, with cases where the communication is by performance or representation.54 There was, therefore, the question of whether or not a live performance of an unpublished written play or noted musical composition or a broadcast constituted a publication for purposes of the statute. This question, too, is not answered by the text of the 1909 Act itself. It has, however, been addressed numerous times by the courts. The first time that the issue of whether a performance constituted a publication for purposes of triggering federal copyright and extinguishing common law copyright was addressed was in Ferris v. Frohman.55 The facts of Ferris are quite complicated and involve issues of English copyright law as well. The pivotal issue, however, was whether the public performance of a play whose script had been neither printed nor published constituted a legal publication and therefore extinguished common law rights. The Supreme Court answered with a resounding no: The public representation of a dramatic composition, not printed and published, does not deprive the owner of his common-law right, save by operation of statute. At common law, the public performance of a play is not an abandonment of it to public use. . . . So, where a dramatic performance has been allowed by the author to be acted at the theater, no person has a right to pirate such performance, and to publish copies of it surreptitiously; or to act it at another theater without the consent of the
33

author or proprietor; for his permission to act it at a public theater does not amount to an abandonment of title to it, or to a dedication of it to the public at large. Accordingly, the Ferris rule holds that a perform56 ance is not a publication. The rule has been applied, by analogy, to performances in various forms other than 57 plays. In McCarthy v. White58 and in Heim v. Universal Pictures Co.,59 for example, it was applied to the public performance of musical compositions. In 60 DeMille v. Casey, it was applied to the exhibition or projection of a motion picture. In Nutt v. National Institute, Inc.,61 it was applied to the delivery of lectures and speeches. In Uproar Co. v. National Broadcasting 62 Co., the Ferris Rule was applied to radio broadcasts. In King v. Mister Maestro, Inc.,63 the rule also applied to television broadcasts.64 Thus, the principle that public performance does not constitute a publication of the work is well established in the American Law of Copyright.65 Application of the Ferris rule, however, can lead to some strange and counterintuitive results. For example, assume that in 1910 one wrote a play, only distributed copies of the script to the essential actors and director, and never offered copies of the script to the public. As discussed above, this would not constitute general publication but rather a limited publication of the written script for the play, which preserves common law copyright. Assume the play is then first performed in the same year, and every year since. Under the Ferris rule, performances of the play were not publications, and therefore did not lose common law protection. If the script itself were never published, it would have been protected by common law copyright until the 1976 Act took effect on January 1, 1978. On that date, pursuant to 303(a) of the new 1976 Act, federal protection would have started, and the play would be protected at least until December 31, 2002, and if published after 1978, at least until December 2047.66 This scheme gives the playwright protection for a term of at least 137 years. Had the play been published in the year that it was first written and performed, however, the maximum protection would have been for 56 years. The same analysis would, of course, be true with respect to a musical composition. Provided that the sheet music was never published, the composer could have his song protected for quite a long time.67 The issue gets a bit trickier with respect to sound recordings. Clearly, the performance of the song is not a

publication. But is the recording a copy and its widespread distribution a publication? Or is a recording more like a performance, albeit captured in time and in tangible form? The term copy is not defined in the statute, and, as discussed below, is the source of the inter-circuit split of authority. The issue of whether a pre-1978 mechanical reproduction of a musical composition is a copy was first addressed in the context of player piano 68 rolls in White-Smith Publishing Co. v. Apollo Co.

White-Smith Publishing Co. v. Apollo Co.69

n 1908, the Supreme Court addressed the issue of whether a mechanical reproduction of a musical composition was a copy of the underlying musical composition in White- Smith Publishing Co. v. Apollo Co. In this case, the plaintiff held the copyrights to two musical compositions, Little Cotton Dolly and Kentucky Babe.70 The defendant, Apollo, was engaged in the manufacture and sale of perforated player-piano rolls and had created and sold piano rolls of the two songs at issue.71 The plaintiff alleged that these were unauthorized copies of the underlying musical composition, and that they therefore infringed the copyrights to the underlying protected songs.72 In determining whether the piano rolls were infringing copies, the Court looked to earlier cases from the 74 district courts,73 English common law and the Berne Convention for guidance.75 The Supreme Court held that the perforated piano rolls were not copies under copyright law because they were not visibly intelligible reproductions of the musical notation: A copy is that which comes so near to the original as to give every person seeing it the idea created by the original. . . . [A] copy of a musical composition [is] a written or printed record of it in intelligible notation . . . . When the combination of musical sounds is reproduced to the ear it is the original tune as conceived by the author which is heard. These musical tones are not a copy which appeals to the eye. In no sense can musical sounds which reach us through the sense of hearing be said to be copies as that term is generally understood, and as we believe it was intended to be understood in the statutes under consideration.76 The Court continued: A musical composition is an intellectual creation which first exists in the mind of the composer. . . . It is not susceptible of being copied until it
34

has been put in a form which others can see and read.77 In addition, the Court observed that mechanical means for the reproduction of musicsuch as the cylinder of a music box, record of the gramophone, and the pipe organ operated by devices similar to those in use in the pianola78had been widely known when the relevant copyrights acts and amendments were passed. Congress could have included them or provided that their use constituted infringement but did not. As the Act of Congress now stands, concluded the Court, we believe 79 it does not include these records as copies or publications of the copyrighted music involved in these cases.80 Based upon the finding that the rolls were not legal copies or publications of the underlying musical compositions, the Court held that there was no infringement. Justice Holmes concurred in view of the facts and opinions in this country and abroad,81 but added the admonition, On principle anything that mechanically reproduces that collocation of sounds ought to be held a copy, or if the statute is too narrow ought to be made so by a further act, except so far as some extraneous consideration of policy may oppose.82 Under the holding of White-Smith, it is clear that a mechanical reproduction whether a piano roll, a music box cylinder, or a phonograph record is not a copy of the underlying musical composition. By extension, it follows that the sale or distribution of the mechanical reproduction cannot be a publication, for publication entails the distribution of copies.83

The Legislative History of the 1909 Act

White-Smith was decided prior to the enactment of

the Copyright Act of 1909. The question then arises as to whether Congress changed the law in response to the Supreme Courts holding that mechanical reproductions were not copies under prior copyright law. In order to answer that question, one must look to both the language and the legislative history of the 1909 Act. The issue of mechanical reproductions of music took more of the time of the committee than any other provi84 sion of the bill that was eventually enacted. The spotlight of the debate actually centered on whether composers should have control over, and receive compensation for, the newly evolving mechanical reproductions of 85 Several issues came into their musical compositions. play as the statute evolved. The first was whether such protection would create a monopoly for companies able to

purchase the rights to a majority of compositions. The second was whether such protection would invade the 87 machine manufacturers patent rights. The third was whether the United States should take action that other 88 countries had refrained from taking. At this point, it should be clear that much of this debate centered on the outcome of the White-Smith case.89 In fact, the Committee on Patents at one point proposed that further legislation regarding this matter should be postponed until the case was resolved.90 Although Congress did not extend protection to the mechanical reproduc91 tions themselves, the issues delineated above are worthy of some discussion. As to the possibility of a monopoly, lawmakers voiced concerns that the proposed protection for composers was designed for the Aeolian Company so that it could obtain a monopoly in the 92 music roll business. The

86

protection does not further extend to musical works, 100 which are the sole creation of the composer. The lawmakers also examined how the European countries were treating this new form of music.101 The legislative history indicates that Italy was the only country at the time to extend protection to such mechanical reproductions.102 It was further noted that Germany, England, Switzerland and France had all refrained from offering such protection.103 Proponents advocated that the United States should be the leader in the promotion of the arts,104 while opponents countered that the United States should not lead precipitously in enacting such a broad statute when other countries had rejected such protection.105 Interestingly, the legislative history further reveals that European countries were likely influenced by Switzerlands economic interest in the music box, which was an important Swiss industry.106 This influence was also

The issue of mechanical reproductions of

music took more of the time of the committee

Music Publishers Association reflected in the Berne had made contracts with the Conventions provisions that Aeolian Company to establish excluded mechanical reproducthese rights and contended tions of musical compositions that the contracts depended from claims of infringeupon the outcome of the thenment.107 Proponents of new pending White-Smith case, protection in the United States and not on proposed legisla93 distinguished the main feature tion. Regardless of its of a music box, which was an source, those opposed were unchangeable mechanism concerned that no law should (the 1909 Act) playing only one melodic set of effectively cede control over music, from the newer devices the music roll and the piano business (that obviously depended on these rolls) to one that could play a multitude of compositions.108 The leg94 Proponents of the change argued that the islative history further noted, with great foresight, that company. rights of private contract and the protection of composers this form of music might replace sheet music.109 works would be incentives to create such material for the Further, the proponents asserted that the composers machine manufacturers to utilize.95 The proponents also would be encouraged in their efforts through such conasserted that antitrust laws would provide protection trol over their musical compositions, and that this auton110 Proponents argued that against any actual monopoly.96 In order to resolve this omy would promote the arts. allowing others to exploit the authors work with no issue, Congress set out to provide protection for the comaccountability would neither encourage the authors nor poser without creating a monopoly.97 In the end, the concern that protection of musical promote the arts.111 They called for legislative action reproductions would invade the patent protection of the rather than awaiting the outcome of the White-Smith player machines was ruled out.98 Although patent law case, believing that its holding would ultimately be lim112 provided protection to the inventors for their machines or ited to its precise issue. These particular issues were finally resolved in House for the device for reproducing musical sounds,99 patent

than any other provision of the bill that was eventually enacted.

35

Report 2222,113 in which Congress sought to provide an adequate return to the composers while at the same time avoiding monopolies that would harm the public.114 Section 1(e) of the 1909 Act, the final embodiment of these concerns, provided the authors exclusive protection over their compositions until the owners used or allowed mechanical reproductions to be made of their works, at which time anyone could use the work upon the payment of a royalty.115 However, this provision did not resolve whether the distribution of mechanical devices constituted publication. By the time of the 1909 Acts enactment, the WhiteSmith case had been decided, but the 1909 Act did not change its result when it gave the composer control over the manufacture and use of such devices116 as opposed to the mechanical reproductions themselves.117 The 1909 Act provided protection to the composer without 118 equating mechanical reproduction with copy.

After ruling that no infringement had occurred on other grounds, Judge Igoe noted that the plaintiff abandoned his rights by selling phonorecords of the respective composition prior to obtaining a statutory copyright.126 The court made no distinction between the sale of sheet music and the distribution of phonorecords and further stated that publication should not turn on a technical defini127 tion of the word copy. In this case, the court ignored the perpetual monopoly that would result by failing to recognize this distribution to the general public as a 128 publication of the musical composition. Thus, a sale of a phonorecord was seen as a publication. This new conception was raised again as dicta in 1954 129 in Mills Music, Inc. v. Cromwell Music, Inc. Here, although there was no respective sale of phonograph records failing to meet notice requirements, the judge noted that such a sale would have constituted publication.130 The judge went even further, however, by stating that the weight of legal authority seems to support that view.131 Interestingly, the issue arose again in McIntyre v. Double-A-Music Corp.,132 wherein a court also found no infringement when the defendant had issued a revised edition of the sheet music of a song that the plaintiff had sold in the form of phonorecords.133 In that case, the plaintiff had authorization to record mechanically the composition from the copyright owner of the original arrangement, but the plaintiff failed to copyright his own arrangement.134 The court stated that the subsequent sale of records constituted a general publication that destroyed whatever rights he had in the arrangement under the common law of copyrights.135 However, the court held the plaintiffs version of the original composition was not worthy of any protection at all because the plaintiffs contributions were only de minimis. Professor Alan Latman has described this judicial thought in the 1950s as the genesis of the idea that the sale of phonorecords should be considered divestitive publication.136 The traditional viewpoint was raised again in 1964, when a court held that copyright formalities do not apply to the sale of phonorecords that are not copies of a musical composition, and that such a sale does not constitute a publication.137

The Sound Recording Act of 1971

he Sound Recording Act extended protection to the sound recordings themselves as opposed to the tangible medium of fixation or reproductions of sound recordings.119 This protection was intended for the aggregation of sounds created by the record producers or the performers whose performance is captured.120 The statutes legislative history indicates that its purpose was to stop the unauthorized reproduction of phonograph records and tapes by record pirates; the legislation was only to be effective until December 31, 1974, at which time the next copyright revision could possibly provide permanent protection.121 This protection was included as copyrightable subject matter in the 1976 122 Copyright Act as 102. For the purposes of this Article, it is important to realize that the 1976 Acts legislative history reveals no intent to address the issue of whether the sale of phonorecords constitutes publication of their underlying 123 musical compositions.

Sound Recording Publication Cases After White-Smith

issue concerning whether the sale of phonorecords constituted publication under the 1909 Act first arose as dicta in Shapiro, Bernstein & Co. v. Miracle Records Co.,124 a 1950 opinion written by Judge Igoe.125
36

The

The Inter-Circuit Split: Rosette v. Rainbo Mfg. Corp

In Rosette v. Rainbo Mfg. Corp.,138 a composer (the

plaintiff) claimed infringement of childrens songs that had never been published as sheet music, but rather had 139 been sold as phonorecords. The plaintiff argued that the mechanical reproduction on a phonograph record is only a performance of the work and thus unprotected.140 The defendants maintained that the phonorecord was a copy, was perpetuated as opposed to ephemeral, and 141 thus was a publication of the underlying work. The Rosette court, alluding to stare decisis, expressed a strong reluctance to depart from what it viewed as established principles in this technical field.142 The court further referenced reluctance to cast into the public domain thousands of works that had been distributed on phonograph records without statutory copyright in reliance upon the rule of law that a distribution of phonograph records is not a publication.143

The Sound Recording

Act extended protection to the sound recordings

carve out an exception to the protection of unpublished musical compositions when phonorecords were sold,151 but that [t]his was not done.152 While the court ruled for the plaintiff and held that no publication occurred, it limited its holding by ruling that no infringement action could be brought on works until the plaintiff had obtained statutory protection by complying with notice provisions.153 The court reasoned that allowing common law protection when no notice was given would directly conflict with the Congressional policy of requiring notice by copyright owners to would-be users so that they could comply with the royalty provisions of the 1909 Act.154 Thus, the court placed a limit on common law protection, but held that the sale of phonograph records is not a divestment of common law rights.155 In 1976, the Second

The court especially relied on the holding in White-Smith that mechanical reproductions are not copies, noting that although the 1909 Act was a comprehensive revision of the Copyright Law,144 it did not extend copyright protection to these reproductions.145 While expressing a distaste for allowing authors to maintain a perpetual monopoly on such works, the court further reasoned that the Universal Copyright Convention limited its definition of publication to the distribution of copies that could be read or visually perceived.146 Although the court mentioned that this definition was derived less by theory and more by the motive to secure the United States approval of the Convention, the court upheld this rationale.147 Additionally, the court cited a Copyright Office Regulation148 for the proposition that phonorecords are not deemed to be copies of musical compositions for registration purposes.149 The Rosette court criticized prior case law such as Mills Music, Shapiro, Bernstein & Co., and McIntyre for failing to make any reference to the White-Smith doctrine or to the 1909 Acts treatment of it.150 The court noted that it would have been simple for Congress to

themselves as opposed to the tangible medium of

fixation or reproductions of sound recordings.

Circuit Court of Appeals affirmed this ruling, although it recognized in a footnote that the 1976 Copyright Act expressly included the distribution of phonorecords in its definition of publication.156 In a subsequent district court case, Jones v. Virgin Records, Ltd.,157 the plaintiffs alleged that the popular rock star, Boy George, had infringed upon their 1960 song, Handyman.158 The defendants raised the defense that the 1960 version of the song was in the public domain because the song had been sold in record form without copyright protection.159 The court, noting that Congress had left the concept of publication under the 1909 Act to judicial interpretation and acknowledging that such judicial results had not been uniform, was compelled to follow Rosette, and held that the recording and selling of a phonorecord does not con160 stitute publication of the underlying musical work.

La Cienega Music Co. v. ZZ Top

In January 1995, the Ninth Circuit Court of Appeals

decided the case of La Cienega Music Co. v. ZZ Top holding that the sale of records constitutes publication.162
37 161

This holding is contrary to the Second Circuits Rosette 163 opinion. La Cienega involved an infringement action against the blues-rock group, ZZ Top, concerning their popular song, La Grange, which was written in 1973.164 La Cienega claimed that La Grange infringed a 1948 song written by Johnny Lee Hooker and Bernard Besman entitled Boogie Chillen.165 Almost one million records of Boogie Chillen were sold in 1948, and it was 166 subsequently released in both 1950 and 1970. The issue rested on whether or not Boogie Chillen was in the public domain under the 1909 Act at the time that ZZ Top wrote La Grange.167 The court was primarily concerned with the 1970 version of the song because the earlier versions would have fallen into the public domain through a failure to renew, if not through a publication 168 without notice. La Cienega argued that the song was protected by common law until it published the song by filing notice with the Copyright Office in 1967, 1970, and 1992; the court, however, held that publication actually occurred when phonorecords of the song were sold in the respec169 tive years. The court remanded the case for a determination if La Cienega complied with notice requirements regarding the 1970 version of the song.170 Absent such compliance, the song was in the public domain and 171 ZZ Top did not infringe. The court adopted a less restrictive definition of the term copy and endorsed the policy that by selling phonorecords, an author exploits his 172 work and must seek statutory protection. The court further warned against a protectionist policy that would encourage artists to delay compliance with the Copyright Acts requirements and thereby receive longer copyright protection. 173 The court specifically declined to follow 174 Rosettes holding, which it deemed the minority rule: We decline to follow Rosette. First, Rosette is the minority rule; our research fails to find any other circuit which has followed it. The majority rule, as noted by the district court, has been articulated by Nimmer. The courts in applying the 1909 Act were in most instances unpersuaded by the argument that no publication occurs by virtue of the sale of a phonorecord because the record is not a copy of the work recorded. On the contrary, the relatively few courts which considered the issue were almost unanimous175 in determining that public sale or other distribution of phonorecords does constitute a publication and, hence, a divestiture
38

of common law rights in the works recorded. This conclusion is certainly consistent with the common understanding of the word copy.176 Had the Ninth Circuit been thorough in its research, it would have found an earlier Ninth Circuit case, Corcoran v. Montgomery Ward & Co.,177 which follows WhiteSmith and holds that a phonograph recording is not a copy. In addition, even overlooking Corcoran, the courts statement is disingenuous. There are no circuit court cases following Rosette, not because it is a minority opinion, but because no other appellate courts had the opportunity to address the issue. In addition, the district court precedent to which La Cienega refers consists of opinions from lower courts within the Second Circuit. Those opinions, therefore, would have been overruled when the Second Circuit decided Rosette. Judge Fernandez, concurring and dissenting, agreed that the case should be remanded to determine whether statutory protection was obtained for the 1970 version of Boogie Chillen.178 In opposition to the majority, however, he believed that the White-Smith doctrine was based on sound reasoning and could identify no way to convert a recorded performance into a publication of the underlying work.179 Judge Fernandez acknowledged that such a rule appears to give the common law copyright holder . . . greater rights than a person who has actually registered his copyright under the 1909 Act.180 Yet he reasoned that because an author cannot receive royalties or recover for anothers use of the work until the work is registered, the author who does not register in a timely fashion cannot artfully extend the time during which he can exploit the work.181

The Effect of the Ninth Circuits La Cienega Decision

he Supreme Court denied certiorari for La Cienega, leaving the courts split on what constitutes a publication of a musical work.182 In a news article published pending the certiorari decision, Besmans attorney, Alan Dowling, warned that [t]he decision under appeal impacts the copyright in virtually every recorded song released before 1978 by threatening to make those songs public domain works.183 Dowling further warned that the Ninth Circuits holding could potentially stir the waters in music licensing organizations such as Broadcast Music Inc. (BMI) and American Society of Composers, Authors and Publishers (ASCAP) due to the

uncertainty about ownership of songs created prior to 184 1978. Presumably, the Supreme Court did not share Mr. Dowlings concerns. Prior to the 1997 Congressional amendment of the Act to overrule La Cienega, there was clear disagreement regarding publication and copies with respect to musical compositions and sound recordings under the 1909 Act. Thousands of works that were thought to be protected by copyright may now be in the public domainat least if the validity of their copyrights is challenged in the Ninth Circuit, and probably the Sixth. As was noted in the Petition for Certiorari: In its decision, the majority of the Ninth Circuit panel has called into question the copyright in, and therefore clouded the title of, the vast majority of musical compositions created over a period of as much as five decades, up to 1978 literally hundreds of thousands of songs. Many of these are owned or administered by music publishers who (or which) are successors, several generations removed from the original publishers / copyright owners / authors, due to assignments, sales, and inheritance of rights over several decades. In the event of any dispute calling into question any of their copyrights, they would have to determine the entire history of each disputed song, including date and circumstances of composition, recording, first distribution of recordings, each and all subsequent exploitations, existence (or absence) of notice of copyright on any and all recordings (and accuracy of such notice), date of registration, identity of registrant, filing of notice of use, and the like, much of which may be extremely difficult and expensive, or even impossible, to ascertain (or ascertain accurately) at this late date. Undeniably, numerous contracts, involving literally billions of dollars have been entered into over the years, based upon the presumption (and generally the express contractual warranty and representation) that the original, and all subsequent, music publishers had valid copyright in the compositions, where they acted consistently with music industry custom and practice over the years. Not only have many millions of dollars been spent buying and selling entire catalogues, but numerous
39

millions have been paid as royalties based upon the presumed validity of those catalogues and the contractual terms relating thereto. Literally every such contract relating to each such composition may be deemed rescindable due to mutual mistake of fact and material failure of consideration, and the rights in hundreds of thousands of songs would be forfeited to the public domain (with no way to tell, read185 ily, on the face of it, which songs). As previously discussed, a work may fall into the public domain in two ways: through general publication without proper copyright notice,186 and through expiration of the copyright term.187 Related to expiration of the term of copyright is the failure to file a renewal application in a timely manner. In essence, failure to renew causes the work to fall into the public domain at the expiration of the first 28-year term.188 Under the La Cienega theory of copy and publication, many pre-1978 underlying musical compositions would have fallen into the public domain in one of two ways. Because the Ninth Circuit held that phonograph records (sound recordings) are copies, the sale of the records constituted publication for federal copyright purposes. If the recordings were sold without copyright notice, the underlying musical compositions would have fallen into the public domain upon their release to the public. However, even if the records were sold with copyright notice which was highly unlikely because United States copyright law did not recognize sound recordings 189 as copyrightable subject matter until 1972 they would have fallen into the public domain for failure to renew in a timely manner. In order to secure the renewal term, the renewal application must be filed in the last year of the first term of the copyright. The problem created by La Cienega was one of timing and the trigger date. Based upon the prior precedent and the policies of the Copyright Office, which considered the sound recording not to be a copy, the only ways to obtain federal copyright protection for the musical composition was either through the sale of sheet music (readable musical notation) with notice or the registration of the sheet music with the Copyright Office along with a claim of copyright. The common practice for many in the music industry, including the plaintiffs in La Cienega, was to release the phonograph record first, and then register the work with the Copyright Office years later. Shortly after registration, the applicant would

have received a certificate of registration. In the view of both the Copyright Office and the registrant, federal copyright protection began on the day of registration. Therefore, in the copyright holders eyes, the proper time for filing the renewal application was in the 28th year after filing registration. Under the logic of La Cienega, the proper time for filing a renewal was not in the 28th year after registration, but in the 28th year after the sale of the record. Therefore, in cases in which the sale of the record preceded the registration, any renewal application tied to the date of registration would be late. By not counting the date of sale as the trigger date, many copyright holders would have forfeited their copyrights to the public domain. Because large numbers of copyright holders released the records prior to registration, the copyright status of countless numbers of musical compositions is in jeopardy, at least in the Ninth Circuit, and in any other jurisdiction that decides to follow the Ninth Circuit, as did the Middle District of Tennessee in Mayhew v. Gusto Records.190 hat makes the Ninth Circuits holding even more unpalatable is that it goes against long-established Copyright Office practice and policy,191 effectively changing the registration rules ex post facto. For example, if a composer or publisher viewed the recording itself as a legal copy, the Copyright Office did not. Therefore, if a party attempting to register a work sent a recording of the musical composition to the Copyright Office along with the registration documents, the Copyright Office would have returned it and requested that a copy of the musical notation be sent instead. Therefore, even if one had the clairvoyance to anticipate the Ninth Circuits holding, one could not have complied with its definition of publication due to then existing Copyright Office regulations.

International Considerations
n determining whether a mechanical reproduction, in this case, a phonorecord was a copy under the 1909 Act, it is also instructive to look to the position taken in international copyright treaties. For example, the Universal Copyright Convention (UCC), to which the United States is a party, has clearly eliminated mechanical production of phonograph records as constituting publication. The Convention in Article VI defines publication as the reproduction in tangible form and the general distribution to the public of copies of a work from which it can be read or otherwise visually per192 ceived. Interestingly, this definition was based upon an understanding by the delegates that the issuance of phonograph records does not amount to publication under United States law. It was believed that a contrary provision in the Convention would require an amendment of the United States Copyright Law unlikely to be accepted by Congress.193 In fact, three of the four American delegates to the Conference in 1952 who participated in the drafting of the Convention are said to have stated the view that the sale of records is not a publication of 194 the underlying musical work. At the time that the 1909 Act was being drafted, Germany, England, Switzerland, and France did not extend copyright protection to mechanical reproductions 195 of music. The Berne Convention of 1886 provides in pertinent part: It is understood that the manufacture and sale of instruments serving to reproduce mechanically the airs of music borrowed from the private domain are not considered as constituting musical infringement. It, therefore, was the prevalent world view at the time that mechanical reproductions of music were non-entities as far as either protection or infringement was concerned.196

Because large numbers of

copyright holders released the records prior to registration, the copyright status of

countless numbers of musical compositions is in jeopardy, at least in the Ninth Circuit,

and in any other jurisdiction that decides to follow the Ninth Circuit

40

Music Industry Practice at the Time

nder common music industry practices, the release of a phonorecord was not a publication of the musical work.197 In 1955, after the 1909 Act had been in force for over 40 years, Benjamin Kaplan (then a professor at Harvard Law School) noted that lawyers of exceptional ability as well as the practical conduct of business did not treat the release of records as publications: Records have frequently been issued at the outset in order to test the public reaction, and sheet music may not be published at all if the record fails to catch on. . . .[S]tatutory copyright need not be resorted to unless sheet music is issued.198 According to Nimmer, other commentators agreed with Kaplan. Many eminent members of the Copyright Bar as well as the music industry generally long maintained that public distribution of phonograph records (or phonorecords) did not constitute a publication of the works embodied therein.199 Nimmer continues: Copyright owners under the 1909 Act . . . frequently failed to obtain statutory copyright of musical compositions before selling records of the compositions. This was often a deliberate omission on advice of counsel who concluded . . . that sale of a phonorecord would not constitute a sur200 render of common law rights in the work.

The Position of the United States Copyright Office and the Importance of Legal Symmetry

The United States Copyright Office has always taken

the position that the sale of a phonograph record prior to January 1, 1978 did not constitute a publication for purposes of obtaining a copyright. U.S. Copyright Office Circular No. 50, Sound Recordings states this clearly: Prior to 1978, musical compositions were considered published when copies (not phonorecords) were sold, placed on sale, or publicly distributed under the authority of the copyright owner. Works first published before 1978 can be registered only if the published copies bore a copyright notice in the prescribed form and location. . . . Phonorecords were not considered copies of musical compositions under the law in effect through December 31, 1977. The sale or public distribution of phonorecords, therefore, did not publish the musical composition that 202 was embodied in them. In addition, the standard form Certificate of Registration of a Claim of Copyright issued by the United States Copyright Office stated on the second page of each certificate: Sound Recordings. Phonograph Records, tape recordings and other sound recordings are not regarded as copies of the musical compositions recorded on them, and are not acceptable for copyright registration.203 [emphasis added] Furthermore, the federal regulations regarding regis204 tration and deposit of samples under the 1909 Act also clearly state that registration of musical compositions 205 must be made in the form of visible notation. Other regulations confirmed that recordings were not proper copies for registration and deposit purposes: (b) A Phonorecord such as a disk, tape, or other reproduction of a sound recording is not considered a copy of the musical composition or literary or dramatic work recorded on it and is not acceptable as a deposit copy for the musical composition or literary or dramatic work.206 [emphasis added] Therefore, under Copyright Office Regulations in effect during the 1909 Act, if one submitted a form for copyright registration and included a recording of the song instead of a form of visible notation,207 the application would be rejected and an actual sample of the
41

Prior to 1978, parties in the music business who were

operating under assumptions or advice of counsel regarding the 1909 Act, usually did not register the musical compositions until after the recordings were sold. Indeed, ASCAP, BMI, the National Academy of Songwriters, and the Songwriters Guild of America all took the position in their amici briefs to La Cienega that: [T]he Ninth Circuits holding is completely opposite to this industrys understanding and the law upon which it was based; consequently this decision threatens to take away copyright protection from all who relied upon the 201 well grounded industry practices. If there were any questions regarding the law at the time, competent counsel would have advised their clients to register the musical compositions as unpublished works prior to the release of the sound recordings in order to avoid the extreme penalty of total copyright forfeiture in the future.

musical notation would be required. In short, there was no possible way in which one could have complied with what was to become the Ninth Circuits view of the law in La Cienega. Even after the Ninth Circuits La Cienega decision, the Copyright Office has steadfastly maintained that pre1978 sound recordings are not copies of the underlying musical compositions and sales of sound recordings of the musical compositions are not publications of the underlying songs. In a November 17, 1995 letter to Rep. Howard Coble of the House Judiciary Committees Subcommittee on Courts and Intellectual Property, Register Mary Beth Peters reiterated this position: For many years, the Copyright Office has espoused the view that recordings sold before January 1, 1978, i.e., those that were released under the 1909 Act, were not copies of the musical compositions embodied on them, and therefore the distribution of recordings did not constitute publication under the federal copyright statute. Moreover, if by chance a recording bore an appropriate notice for the musical composition embodied on it and registration of the music was sought on this basis, registration was refused. The Office would state that copies had to be visually perceptible, e.g., sheet music copies, and unless such copies had been sold, placed on sale, or offered to the public, registration for the music as a published work was not possible. The Office would suggest registration for the work as an unpublished work208 and ask for the deposit of a lead sheet. In 1972 when sound recordings were added to the statute,209 the law made it clear that phonorecords constituted copies of only the sound recording they were not copies of the musical compositions embodied on them.210 In any case, the Office refused registration of these works as published works. Many of these works were instead registered as unpublished works; as mentioned above this is what the Copyright Office suggested. Renewal registrations based on these unpublished registrations may have been made. Later published sheet music editions may have been made, and renewals and renewals based on these registration(sic) may also have been made. Despite all of this, copyright for these
42

works could now be considered to be lost by publication of recordings at any time before January 1, 1978. It seems incongruous that at the time when Congress is considering lengthening the copyright term for musical compositions211 that we are faced with the possibility that many of these works will be found in the public domain under the logic of the Ninth Circuit. If the Copyright Office did not consider a phonograph record to be a copy for purposes of registration under 12 of the 1909 Act,212 or the sale of sound recordings with proper notice to be publications for the purposes of obtaining copyright protection under 10 of the 1909 Act,213 how can a court find that sale of records without proper notice divests one of protection, or that the renewal date is to be tied to the date of the sale of the record, and not to the date of the registration of the unpublished work? The Ninth Circuits opinion in La Cienega, while it might make sense in todays commercial marketplace, does not make sense based upon the rules under which composers and publishers had to play at the time that the musical compositions were written and at the time that the sound recordings usually as phonorecords were released to the public. The effective result of La Cienega is a retroactive changing of the rules.

Legislation to Rectify the La Cienega Problem

On June 19, 1997, Rep. Howard Coble, introduced a bill amending the Copyright Act to overrule La Cienega and to affirm the long-standing position of the United States Copyright Office that the pre-1978 distribution of phonorecords did not constitute a publication of the underlying musical composition. Similar legislation, 214 introduced in 1996, died in Congress. Under the Coble Bill, the current language at 303 of Title 17 entitled Duration of copyright: Works created but not published or copyrighted before January 1, 1978, has changed. A new 303(b) reads as follows: The distribution before January 1, 1978, of a phonograph shall not for any purpose constitute a publication of the musical work embodied therein [emphasis added].215 On October 7, 1997, the bill was approved by the House Judiciary Committee, and was placed on the fast track. On November 13, 1997, President Clinton signed Pub. L. 105-80 into law, officially amending the

Copyright Act of 1976 by adding 303(b).216

Post Section 303(b) Amendment Cases

After Congress amended the Act by adding 303(b),217 there were questions regarding the retroactive applicability of the statute. Because the change affected parties who created works prior to 1978, the argument was raised that changing the rules that were in effect was constitutionally impermissible.218 This uncertainty was addressed in Mayhew v. Allsop, 219 a recent Sixth Circuit case. In Mayhew, the plaintiff asserted that the defendant had infringed the copyrights in the song, A Big Ball in Cow Town, written in the 1940s by Hoyle Nix. The defendant countered that the song was in the public domain, by virtue of the publication of the sound recording that embodied the composition. In September of 1997, shortly before the new statute was enacted, the district court, in an unpublished opinion, agreed with the defendant, and granted summary judgment. In 1999, on appeal, the Sixth Circuit reversed and held in favor of the plaintiff by applying 303(b). Addressing the issue of retroactive application, the court found no constitutional problem in applying the new statute to pending cases: When Congress has unambiguously specified the temporal reach of a new statute, there is no conflict between the presumption against statutory retroactivity and the rule that a court should apply the law in effect at the time of its decision. It is clear from the language employed that 303(b) should be applied to pending cases. First, the subsection obviously applies to pre-enactment conduct. In fact, it only applies to the distribution of records prior to January 1, 1978. Thus applying the statute to pending cases has no impact on the conduct

The release of sound recordings is not a

publication of the underlying musical compositions!

that is the subject of the subsection. Second, the subsection provides that the distribution of phonorecords shall not for any purpose constitute a publication. This court would be defying the express mandate of the statute if we were to decide on de novo review that the phonorecord constituted publication. Finally, the presumption against retroactive application of statutes is based, in part, on a hesitancy to reverse settled expectations. In enacting 303(b), however, Congress has resolved a problem of unsettled expectations that had arisen from the circuit split. We conclude that 303(b) should be applied in resolving the present appeal.220

Having resolved the appli-

That, however, is not the end of

the publication issue.

cability issue, the court held that the underlying musical compositions were still protected by copyright contrary to La Cienega. As a result of the passage of 303(b) and the interpretation in Mayhew, the issue of whether the publication of a sound recording prior to the enactment of the 1976 Act has been settled: The release of sound recordings is not a publication of the underlying musical compositions! That, however, is not the end of the publication issue. In 1998 and 1999, the courts entertained the related issue of whether or not the publication of a motion picture constitutes the publication of its underlying common law copyright component parts, such as the screenplay and the musical compositions in the soundtrack. In the motion picture setting, the courts make a distinction between the protection afforded to a federally copyrighted work and that afforded to a common law work when the motion picture enters the public domain, most often through failure to renew. In Dolman v Agee, 221 the Ninth Circuit examined whether the publication of a motion picture also constituted publication of its soundtrack. In Dolman, the plaintiff had acquired the copyrights to songs that were

43

originally written pursuant to a contract with Hal Roach Studio for inclusion in Laurel & Hardy movies. The movies were released in the early 1930s, and were registered by Metro-Goldwyn-Mayer (MGM). The songs were registered separately after the movies were released.222 Plaintiff Dolman acquired his interest through a series of assignments.223 Defendant Agee did business under the name L & H Records and distributed the Music Box containing renditions of the songs at issue. In 1990, when Dolman learned of the distribution of the recordings, he contacted Agee stating that Agee required a license. Agee did not respond to the letters until 1993, when he acknowledged Dolmans ownership of the copyrights to the songs. He did not agree to take a license, however.224 Dolman then commenced a copyright infringement action. In an unpublished opinion, the district court granted summary judgment in favor of Dolman. The Court rejected, as a matter of law, the defendants argument that the publication of the motion picture, without separate copyright notice for the songs, caused the underlying songs to fall into the public domain. The court awarded $23,333.33 plus costs, and enjoined Agee from further infringing.225 On appeal, the Ninth Circuit took up the issue regarding the publication of the motion picture.226 The court had to address whether the Laurel & Hardy motion pictures had been published. If the films were never published, then there was no need to determine whether the underlying songs fell into the public domain as a result. The court looked to prior case law for a definition of publication. [P]ublication occurs when by consent of the copyright owner, the original or tangible copies of a work are sold, leased, loaned, given away, or otherwise made available to the general public.227 The court continued, [h]owever, mere performance of or exhibition of a work does not constitute a publication of a work. . . . [A] motion picture exhibition where the viewing audience is merely permitted to see the work is not itself a publication.228The court also reiterated the proposition that stronger affirmative steps are needed to divest one of copyright protection than to invest one with protection.229 The court, therefore, found that the copyrights in the songs were valid and infringed. While the Ninth Circuit affirmed the lower courts holding, it did not fully resolve the status of the musical compositions had the motion pictures been published; it was able to skirt the issue by finding that the Laurel & Hardy movies had not been published.
44

If sound recordings cannot be copies of the underlying musical compositions because they are not in human-readable form, by analogy the same should apply to motion pictures. If the only way that musical compositions could have been published (or registered for copyright protection, for that matter) under the 1909 Act was in musical notation, then the inclusion of music in a motion picture should not be a publication of the underlying song.

The issue of publication of underlying works has

been a troubling and confusing issue for most of the last century. After disagreement among the appellate courts, and refusal by the Supreme Court to resolve an issue that had profound effects upon one the major industries in the United States, it took an act of Congress to merely reinforce the status quo in the case of sound recordings and musical compositions. Courts have attempted to apply marketplace logic instead of following the statutory guidance. The same problem is occurring now with respect to motion pictures. Statutory language, Copyright Office internal procedures, and industry practice and expectations lead to the conclusion that an unpublished musical work and a motion picture that incorporates the work should have separate protection. Just as a registered underlying or incorporated work does not fall into the public domain upon the expiration of the derivative work, neither should the unpublished work. Consistency and symmetry with respect to musical compositions is extremely important. The Courts inability to apply these principles to the law of music publication has forced Congress to clarify what the law has actually been for years. Even with Congressional action, however, the elusive concept of publication still promises to generate future problems in other media. x

1 Professor of Law, Georgia State University College of Law, Atlanta, GA; J.D., University of Pennsylvania. The author would like to thank Susan Speer, Jerry McNally, and Malene Ehlers for their assistance with this article. The author would also like to thank Brenda Seiton for her never-ending patience and understanding while the author burned the midnight oil. 2 White Smith v. Apollo, 209 U.S. 1 (1908). 3 White-Smith v. Apollo is discussed in detail, See id. 4 Interestingly, although the specific subject matter at issue in White-Smith was player- piano rolls, the opinion refers to the rolls as records and also includes record of the graphophone within its purview. Id. at 30. 5 La Cienega v. Z.Z. Top Music Co., 53 F.3d 950 (9th Cir. 1995), cert. denied, 516 U.S. 927 (1995). 6 See Rosette v. Rainbo Record Mfg. Corp., 354 F. Supp. 1183 (S.D.N.Y. 1973), affd per curiam, 546 F.2d 461 (2d Cir. 1976). 7 See La Cienega, 53 F.3d 950. 8 516 U.S. 927 (1995). 9 See Copyright Act of 1976, 17 U.S.C. 303(b) (1976). 10 The Copyright Act of 1976 became effective on January 1, 1978. 11 See 17 U.S.C. 101 et seq. 12 It is therefore imperative that one who practices or follows copyright law in 1997 must be conversant in the 1976 Act as well as the 1909 Act. 13 Investiture is the term that is used when the publication triggers federal copyright protection and extinguishes common law copyright protection. 14 Divestiture is the term that is used when the publication is without copyright notice and causes the work to fall into the public domain, also extinguishing the protection under common law copyright. 15 Section 303(a) of the 1976 Copyright Act provides as follows: Copyright in a work created before January 1, 1978, but not theretofore in the public domain or copyrighted, subsists from January 1, 1978, and endures for the term provided by section 302. In no case, however, shall the term of copyright in such a work expire before December 31, 2002; and, if the work is published on or before December 31, 2002, the term of copyright shall not expire before December 31, 2047. Section 303(a) was amended on October 28, 1998 by Pub. L. 105 - 298 (The Sonny Bono Copyright Term Extension Act). Protection was extended twenty years from 2027 to 2047. Copyright Act of 1976, 17 U.S.C. 303(a) (1976) (amended 1998). 16 Section 10 of the Copyright Act of 1909 provides as follows: Any person entitled thereto by this title may secure copy45

right for his work by publication thereof with the notice of copyright required by this title; and such notice shall be affixed to each copy published thereof published or offered for sale in the United States by authority of the copyright proprietor, except in the case of books seeking ad interim protection under section 22 of this title. 17 Section 12 of the Copyright Act of 1909 provides as follows: Copyright may also be had for the works of an author, of which copies are not reproduced for sale, by the deposit, with claim of copyright, of one complete copy of such work if it be a lecture or similar production of a dramatic-musical, or dramatic-musical composition; of a title and description, with one print taken from each scene or act, if the work be a motion-picture photo play; of a photographic print if the work be a photograph; of a title and description, with not less than two prints taken from different sections of a complete motion picture, if the work be a motion picture other than a photoplay; or a photograph or other identifying reproduction thereof, If it be a work of art or a plastic work or drawing. But the privilege of registration of copyright secured hereunder shall not exempt the copyright proprietor from the deposit of copies, under sections 13 and 14 of this title, where the work is later reproduced in copies for sale. Copyright Act of 1909, 17 U.S.C. 12 (1909) (amended 1947). 18 Under legislation that went into effect on January 1. 1996, as a result of the United States signing the GATT, foreign works that are protected in their home or source countries that have fallen into the public domain in the United States through failure to comply with a statutory technicality, such as affixation of copyright notice, may have their protection in the United States restored pursuant to 104A of the Copyright Act of 1976. 17 U.S.C. 10A (1996). 19 U.S. CONST. art. I, 8, cl. 8. 20 PAUL GOLDSTEIN, COPYRIGHT 3.2.2, at 236-37 (1989). Professor Goldstein further comments that the concept of publication under the 1909 Act was a tradeoff between these competing interests and that [an] author could enjoy perpetual protection for her work so long as she did not seek economic rewards though the works dissemination. Id. 21 Id. Professor Nimmer states that [t]he Constitutional means of adjusting these conflicting demands was found in permitting authors a limited monopoly. MELVILLE B. NIMMER & DAVID NIMMER, NIMMER ON COPYRIGHT 4.03, at 4-18 (1999). 22 GOLDSTEIN, supra note 20 . 23 Id. 24 Nimmer suggests that a definition of publication was deliberately left out of the 1909 Act because of the difficulty of defining the term with respect to works of art where no copies are reproduced. See NIMMER, supra note 21, at 4.04, 4-20 n.5. 25 Copyright Act of 1909, 17 U.S.C. 26 (1909). 26 Id. The use of by the proprietor or copyright or under his

authority was used to make it clear that an unauthorized distribution by a third party was not a publication. Therefore, the unauthorized distribution of copies without the copyright notice should not have a divestiture effect to the proprietors detriment under section. 22. This is also an issue in Estate of Martin Luther King, Jr., Inc. v. CBS, Inc., 194 F.3d 1211 (11th Cir. 1999) (case remanded for a determination of whether Dr. King authorized the inclusion of the text of his I Have A Dream speech in the Southern Christian Leadership Conference (SCLC) newsletter). 27 Section 24 of the Copyright Act of 1909 provides: The copyright secured by this title shall endure for twenty-eight years from the date of first publication, whether the copyrighted work bears the authors true name or is published anonymously or under an assumed name: Provided, That in the case of any posthumous work or of any periodical, encyclopedia, or other composite work upon which the copyright was originally secured by the proprietor thereof, or of any work copyrighted by a corporate body (otherwise than as assignee or licensee of the individual author) or by an employer for whom such work is made for hire, the proprietor of such copyright shall be entitled to a renewal and extension of the copyright in such work for the further term of twenty-eight years when application for such renewal and extension shall have been made to the copyright office and duly registered therein within one year prior to the expiration of the original term of copyright: And provided further, That in the case of any other copyrighted work, including a contribution by an individual author to a periodical or to a encyclopaedia or other composite work, the author of such work, if still living, or the widow, widower, or children of the author, if the author be not living, or if such author, widow, widower, or children be not living, then the authors executors, or in the absence of a will, his next of kin shall be entitled to a renewal and extension of the copyright in such work for a further term of twenty-eight years when application for such renewal and extension shall have been made to the copyright office and duly registered therein within one year prior to the expiration of the original term of copyright: And provided further, That in default of the registration of such application for renewal and extension, the copyright in any work shall determine at the expiration of twentyeight years from first publication. Copyright Act of 1909, 17 U.S.C. 24 (1909) (amended 1947). 28 ROBERT A. GORMAN & JANE C. GINSBURG, COPYRIGHT FOR THE NINETIES: CASES AND MATERIALS 361 (4th ed. Michie 1993) [hereinafter Gorman & Ginsburg] (citing Cardinal Film Co. v. Beck, 248 F. 368 (S.D.N.Y. 1918)). 29 Academy of Motion Picture Arts and Sciences v. Creative House Promotions, Inc., 944 F.2d 1446 (9th Cir.1991) (citing Burke v. National Broadcasting Co., 598 F.2d 688, 691 (1st. Cir), cert. denied, 444 U.S. 869 (1979)). 30 See Burke 598 F.2d at 692; see also White v. Kimmell, 193 F.2d 744 (9th Cir. 1952) ([The authors] only apparent purpose was to enable any persons interested to obtain a copy of the manuscript. No other motive is discernible. Such a purpose, we think, is too broadly 46

general and indefinite to satisfy the test of a limited publication); Jewelers Mercantile Agency Ltd. v. Jewelers Weekly Publg Co., 49 N.E. 872 (N.Y. 1898). 31 Id. 32 See Academy of Motion Picture Arts and Sciences, 944 F.2d at 1452 (quoting White v Kimmell, 193 F.2d at 746-47). 33 King v. Mister Maestro, 224 F. Supp. 101 (S.D.N.Y. 1963). 34 Id. at 107. 35 Id. at 108; cf. Public Affairs Associates v. Rickover, 284 F.2d 262, 270-71 (D.C. Cir. 1960) (advance distribution of text of speech to both the press and to anyone who desired a copy was held to be a general, not a limited publication). Dr. Kings I Have a Dream speech became the subject of copyright litigation again when Dr. Kings estate sued CBS over including live film footage of the speech in its documentary series, TWENTIETH CENTURY WITH MIKE WALLACE. See Estate of Martin Luther King, Jr., Inc. v. CBS, Inc., 194 F.3d 1211 (11th Cir. 1999). It should also be noted that there was also a performance issue both in King v. Mister Maestro and Estate of Martin Luther King, Jr., Inc. v. CBS, Inc., owing to the fact that the speech was presented live to an audience of over 200,000 in Washington, D.C. and millions of others via the various media. 36 944 F.2d 1446 (9th Cir. 1991). 37 126 F. Supp. 54 (S.D.N.Y. 1954). In Mills Music, however, the sale of the recordings was deemed by the District Court to be a divesting publication. Mills Music, being a case from the Southern District of New York, was effectively overruled with respect to the issue of publication resulting from the sale of records by the Second Circuit in Rosette v. Rainbo Record Mfg. Corp., 354 F. Supp. 1183 (S.D.N.Y. 1973), affd per curiam, 546 F.2d 461 (2d Cir. 1976), discussed infra. 38 See Mills Music, 126 F.Supp. at 63. 39 598 F.2d 688 (1st Cir. 1979). 40 Id. at 690. 41 Id. at 693. 42 Id. at 690. 43 Id. at 693-94, distinguishing Rickover, supra note 35. 44 GOLDSTEIN, supra note 20, at 253-54. 45 17 U.S.C. 301 (1994). 46 Id. at 101. 47 Id. at 102. The Act protects original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. Id. 48 Id. at 304. Any copyright, the first term of which is subsisting

on January 1, 1978, shall endure for 28 years from the date it was originally secured. Id. 49 Transitional and Supplementary Provisions of 1976 Copyright Act 103, 90 Stat. 2599 (1976). 50 H.R. REP. NO. 94-1476, 52. The House Report further states that a works fixation would no longer be dependent on its form, manner, or medium. Id. 51 Transitional and Supplementary Provisions of 1976 Copyright Act 103, 90 Stat. 2599 (1976). 52 H.R. Rep. No. 1476, at 130. The history further stated that 301 would provide the limited protection called for by the Constitution, without the distortion created by the traditional concept of publication. Id. This provision is found in 17 U.S.C. 301 (1994). 53 Benjamin Kaplan, Publication in Copyright Law: The Question of Phonograph Records, 103 U. PA. L. REV. 469, 473 (1955) (hereinafter Kaplan). 55 223 U.S. 424 (1912). 56 See Kaplan, supra note 54, at 479. 57 See Gorman & Ginsburg, supra note 28, at 361 for a discussion of the Ferris Rule. 58 259 F. 364 (S.D.N.Y. 1919). 59 154 F.2d 480 (2d. Cir. 1946). 60 12 Misc. 78, 201 N.Y.S. 20 (N.Y. Sup. Ct. 1923). 61 31 F.2d 236 (2d Cir. 1929). 62 8 F.Supp. 358 (D. Mass. 1934). 63 224 F.Supp. 101 (S.D.N.Y. 1963) (live delivery and radio and television broadcasts of Dr. Martin Luther King, Jr.s I Have A Dream speech was not a publication. 64 Though performances are not protected, live events are protected by simultaneous videotaping or filming. This is the primary means of protecting the broadcast of sporting events. 65 224 F. Supp. at at 107 (citing Melville Nimmer, Copyright Publication, 56 COLUM. L. REV. 185, 195 (1956). Professor Nimmer does, however, in the same article admit that the issue of the sale of recordings is a subject of serious debate. Id. 66 When the 1976 Act took effect, it contained provisions eliminating common law protection and providing federal protection beginning on January 1, 1978 for works that were created but neither published nor copyrighted. Section 303 of the 1976 Act provides: Copyright in a work created before January 1, 1978, but not theretofore in the public domain or copyrighted subsists for the term provided by section 302. [life of the author plus 70 years] In no case, however, shall the term of copyright in such work expire before December 31, 2002; and if the work is published on or before December 31, 2002, the term of copy47

right shall expire not before December 31 2047. 17 U.S.C. 303(a) (amended by Pub. L. 105-298 (October 28, 1998)). 67 The language of 303 of the 1976 Copyright Act does not provide any retroactive cut-off date. Thus, it appears as though any unpublished work protected by common law copyright would now be protected until at least 2001, and 2027 if later published. This means that unpublished letters or manuscripts from the 1700s and 1800s could potentially be protected. Because of section 303, one should never assume that a work has fallen into the public domain merely because it is old. 68 209 U.S. 1 (1908). 69 Id. 70 The copyrights were duly obtained on March 17, 1897. Id. at 9. 71 Interestingly, piano rolls are similar to a prototype of computer punch cards. By having perforations placed in strategic locations on the roll, the player-piano operates under a binary format similar to that of computer programs. 72 The case was brought under 4952 of the Copyright Act as amended in 1897, which was the predecessor Act to the 1909 Act. (See 3 U.S. Comp. Stat. Sup. 1907, 1021). Under 4952, the author, inventor, designer or proprietor of any book, map, chart, dramatic or musical composition [has] the sole liberty of printing, reprinting, publishing, completing, copying, executing, finishing and vending the same. White-Smith, 209 U.S. at 9. 73 See White-Smith, 209 U.S. at 12 (citing Kennedy v. McTammany, 33 F. 584 (I cannot convince myself that these perforated sheets of paper are copies of sheet music within the meaning of the copyright law. They are not made to be addressed to the eye as sheet music, but they form part of a machine. They are not designed to be used for such purposes as sheet music, nor do they in any sense occupy the same field as sheet music.)); see also Stearn v. Rosey, 17 App. D.C. 562 (We cannot regard the reproduction, through the agency of a phonograph, of the sounds of musical instruments playing the music composed and published by the complainants, as the copy or publication of the same within the meaning of the act. The ordinary signification of the words copying, and publishing, etc., cannot be stretched to include it.). 74 See Boosey v. Whight, 1 Ch. 122, 81 L.T.R. 265 (1900) (The plaintiffs rights are not infringed except by an unauthorized copy of their sheets of music. . . . The only question we have to consider is whether the defendants have copied the plaintiffs sheets of music.). 75 The Berne Convention of 1886 provides in pertinent part: It is understood that the manufacture and sale of instruments serving to reproduce mechanically the airs of music borrowed from the private domain are not considered as constituting musical infringement. The Berne Convention for the Protection of Literary and Artistic Works (Berne Convention) provides reciprocal protection and rights to member signatory states. The United States officially became a member of the Berne Convention in 1989. 76 See White-Smith, 209 U.S. at 17.

77 Id. 78 Id. at 17-18. 79 It is interesting to note that the Court referred to the player piano rolls as records. 80 Id. at 18. 81 Id. at 18-19. 82 Id. at 20. 83 White-Smiths holding that a mechanical reproduction was not a copy was later directly applied to sound recordings, albeit of spoken words instead of musical compositions, in Corcoran v. Montgomery Ward & Co., Inc., 121 F.2d 572 (9th Cir. 1941), cert. denied, 314 U.S. 687 (1941). It is interesting to note that Corcoran is a Ninth Circuit case. The Ninth Circuit, in creating the inter-circuit split in La Cienega, 53 F.3d 950 (9th Cir. 1995), cert. denied, 516 U.S. 927 (1995), ignored its own earlier precedent. 84 H.R. REP. NO. 60-2222, at 4 (1909). 85 S. REP. NO. 59-6187, at 2, 3 (1907). The Senate Report reads as follows: It seems obvious to this committee that if the musical composition is entitled to protection it is not only against the reprinting of a musical score, but against any publication or reproduction of the composers work. The musical composers work is meant to be uttered in sound, and if science has discovered a method of reproducing that sound, thus taking possession of the very soul and essence of a musical composers work without the medium of actual printing, the musical composer is entitled to protection against this new and more complete form of appropriation. Id. at 4. 86 Id. at 3. 87 S. REP. NO. 59-6187, pt. 2, at 4 (1907), reprinted in 6 LEGISLATIVE HISTORY OF THE 1909 COPYRIGHT ACT, R4 (1976). 88 Id. at 3. 89 H.R. REP. NO. 59-7083, at 3 (1907), reprinted in 6 LEGISLATIVE HISTORY OF THE 1909 COPYRIGHT ACT, P3 (1976). 90 Id. at 9. 91 H.R. REP. NO. 60-2222, at 9. 92 S. REP. NO. 59-6187, pt. 2, at 1-2. 93 Id. at 2-3. 94 Id. at 2. 95 S.R. REP. NO. 6187, at 3-4.. 96 Id. 48

97 H.R. REP. NO. 60-2222, at 7. 98 H.R. REP. NO. 59-7083, pt. 2, at 7. 99 Id. 100 Id. 101 Id. at 4. 102 Id. at 5. 103 Id. at 4-5. 104 Id. 105 S.R. REP. NO. 59-6187, pt. 2, at 3. 106 H.R. REP. NO. 59-7083, pt. 2, at 4. 107 Id. 108 Id. 109 Id. at 2-3. It was further stated that [t]he extensive use of automatic musical instruments is by far the most important change in the conditions affecting the workings of the copyright law. 110 Id. 111 Id. 112 Id. 113 H.R. REP. NO. 60-2222, at 6-7 (1909). 114 Id. 115 17 U.S.C. 1(e) (repealed January 1, 1978). 116 H.R. REP. NO. 60-2222, at 9. 117 Id. 118 ALAN LATMAN, THE COPYRIGHT LAW 119 (5th ed. 1979). 119 H.R. REP. NO. 92-487, at 1570 (1984). The Sound Recording Act did extend the definition of copies to include phonorecords, but only to constitute protection for the sound recording and not for the underlying musical work. 120 Id. 121 H.R. REP NO. 92-487, at 1566-67. 122 17 U.S.C. 102 (1994). Further, the legislative history of 301, dealing with common law preemption, of the current act reveals that Congress intended to both prevent pre-1972 sound recordings from enjoying perpetual protection under common law and to prevent such works from immediately falling into the public domain. H.R.

REP. NO. 1476, at 133. 123 H.R. REP. NO. 92-487, 1566-1568.

142 Id. at 1189. 143 Id. 144 Id. at 1190. 145 Id. at 1189-90. 146 The Universal Copyright Convention, to which the United States is a party, provides that works of nationals of any Contracting State shall enjoy in each other Contracting State the same protection as that other State accords to works of its own nationals, as well as the protection specifically granted by the Convention. See Universal Copyright Convention, Article II. 147 Rosette, 354 F. Supp. at 1189. 148 Id. 149 37 C.F.R. 202.8(b)(1975). 150 Rosette, 354 F. Supp. at 1192. Registration is another of the formalities in copyright law; under the 1909 Act, publication of the work with proper notice triggered statutory protection. However, once a work was published with notice, 13 of the 1909 Act required the prompt deposit of two complete copies of the best edition then published in the Copyright Office. 17 U.S.C. 13 (amended through 1976). Statutory protection for unpublished works was also available by way of depositing one complete copy of such work. Id. at 12. 151 Rosette, 354 F. Supp. at 1190-91. 152 Id. at 1191. 153 Id. 154 Id. at 1192-93. These royalty provisions concerning the mechanical reproduction of underlying musical compositions were as follows under the 1909 Act: [W]henever the owner of a musical copyright has used or permitted or knowingly acquiesced in the use of the copyrighted work upon the parts of instruments serving to reproduce mechanically the musical work, any other person may make similar use of the copyrighted work upon the payment to the copyright proprietor of a royalty of 2 cents on each such part manufactured. 17 U.S.C. 1(e) (1909 Act). 155 Rosette, 354 F. Supp. at 1193. Professor Nimmer has criticized the Rosette courts conclusion that such a limit could be placed on common law protection when the explicit language of Section 2 of the 1909 Act provides that nothing in this title shall be construed to . . . limit common law copyright in an unpublished work. NIMMER, supra note 21, at 4.05[B], 4-28. 156 Rosette, 546 F.2d at 462-63 n.1 (2d Cir. 1976). 157 643 F. Supp. 1153 (S.D.N.Y. 1986). 158 Id. at 1154. 49

124 91 F. Supp. 472, 475 (N.D. Ill. 1950). 125 Id. at 475.

126 Id. 127 Id. Judge Igoe, commenting on the nature of the mass distribution of phonorecords, stated that [w]hen phonorecords of a musical composition are available for purchase in every city, town and hamlet, certainly the dissemination of the composition to the public is complete, and is as complete as by sale of a sheet music reproduction of the composition. 128 Id. 129 126 F. Supp. 54, 69 (S.D.N.Y. 1954). 130 Id. at 69-70. Judge Leibell stated that [t]he manufacture and sale of phonograph records in this country by a person or corporation duly authorized . . . would have constituted a publication of his composition. Id. It should be noted that Mills Music was a Southern District of New York case, and therefore would have been overruled by Rosette v. Rainbo Record Mfg. Corp., 354 F. Supp. 1183 (S.D.N.Y. 1973), affd per curiam, 546 F.2d 461 (2d Cir. 1976), over twenty years later. 131 Mills Music, 126 F. Supp. at 70. At that point, the judge cited to RCA Mfg. Co. v. Whiteman, 114 F.2d 86 (2d. Cir. 1940), cert. denied 311 U.S. 712 (1940), and also to Shapiro Bernstein & Co. Id. In Whiteman, which actually concerned performance, Judge Learned Hand made references to the sale of records as a possible publication. Whiteman, 114 F.2d at 88. 132 166 F. Supp. 681 (S.D. Cal. 1958). 133 Id. at 682. 134 Id. 135 Id. at 682-83. 136 LATMAN, supra note 118, at 119 (5th ed. 1979). 137 Nom Music, Inc. v. Kaslin, 227 F. Supp 922, 926 (S.D.N.Y. 1964), affd, 343 F.2d 198 (1965). 138 354 F. Supp. 1183 (S.D.N.Y. 1973), affd per curiam, 546 F.2d 461 (2d Cir. 1976). 139 Id. at 1185, 1188. 140 Id. at 1188. The plaintiff contended that it was not a publication but a performance of an unpublished work. 141 Id.

159 Id. at 1156. 160 Id. at 1158-59. The court noted that Rosette was not followed in other circuits but stated that only the Court of Appeals could change the law in its circuit. 161 53 F.3d 950 (9th Cir.), cert. denied, 516 U.S. 927 (1995). 162 Id. at 953. 163 546 F.2d 461 (2d Cir. 1976). 164 La Cienega, 53 F.3d at 952. 165 Id. 166 Id. Bernard Besman is the sole proprietor of La Cienega. Johnny Lee Hooker assigned all rights to Boogie Chillen to Mr. Besman. Id. 167 Id. at 953. 168 Id. at 954. The court, commenting that a failure to renew at the end of the 28 years of statutory protection places a work in the public domain, noted that the 1948 and 1950 versions would have fallen into the public domain in 1976 and 1978, respectively. Id. 169 Id. at 953. 170 Id. at 954. 171 Id. 172 Id. at 953. 173 Id. 174 Id. The court cited Professor Nimmer as identifying the Rosette holding as the minority view. 175 Isnt almost unanimous when applied to a few an oxymoron? 176 La Cienega, 53 F.3d at 953. 177 Had the court been thorough in its research, it would have found an earlier Ninth Circuit case, Corcoran v. Montgomery Ward & Co., 121 F.2d 572 (9th Cir), cert. denied, 314 U.S. 687 (1941), which followed White-Smith, and held that a phonograph recording was not a copy. In addition, even overlooking Corcoran, the court is being disingenuous about the statement. It did not find any circuit court cases other than Rosette, because no other appellate courts had the opportunity to address the issue. 178 La Cienega, 53 F.3d at 955. 179 Id. 180 Id. 181 Id. 50

182 64 U.S.L.W. 3262, 3270 (1995) (No. 95-72). 183 Donna Petrozzello, Supreme court asked to rule on copyrights. (music), BROADCASTING & CABLE, Vol. 125, No. 39, at 39. 184 Id. 185 Petition for A Writ of Certiorari (July 12, 1995), at 14-15. The petition was denied at 516 U.S. 927, (1995); see also Brief Amici Curiae of the National Music Publishers Association et al (July 14, 1995) at 14 (sellers of catalogs of copyrights in musical works could face claims by purchasers for alleged breach of representations and warranties.). 186 See 17 U.S.C. 10, 19 (1909) (repealed by Copyright Act of 1976). 187 See 17 U.S.C. 24 (1909) (repealed by Copyright Act of 1976). 188 In July of 1992, renewal became automatic. Therefore, the need to actively file a renewal in order to prevent the work from falling into the public domain was eliminated. The change applies to all works that were created between 1964 and the end of 1977. The legislative change was not, however, retroactive. United States works created prior to 1964 that had not been renewed and were in the public domain would remain there forevermore. 189 See The Sound Recording Act of 1971, Pub. L. No. 92-140, 85 Stat. 391. 190 960 F. Supp. 1302 (M.D. Tenn 1997). 191 The position of the Copyright Office is discussed in detail below. 192 Universal Copyright Convention, Article IV. 193 Id. (citing Borsch, Universal Copyright Convention, 83 (1958)). 194 See Arthur E. Farmer, Report to Section of Patent, Trademark and Copyright Law of American Bar Association, September 15, 1952, at p. 11; John Schulman, A Realistic Treaty, The American Writer, Vol. 1, No. 218, at p. 23 (November, 1952); Sydney M. Kaye, Duration of Copyright and the Concept of Dedication, Bulletin of the Copyright Society of the U. S. A., Vol. 2, No. 4, p. 93 at pp. 95-96 (February, 1955). 195 See Legislative History of the 1909 Act, supra notes 84-118. 196 The United States has not always followed suit with other nations. It took the United States years before it changed to a life of the author-based term of copyright. In addition, despite it being a long tradition under the Berne Convention, the United States did not adopt any moral rights protection until it passed the Visual Artists Rights Act of 1990, adding 106A to the Copyright Act of 1976. 197 See Motion of National Music Publishers Association, Inc. et al, for Leave to File Brief Amici Curiae in Support of Petition and Brief Amici Curiae (July 14, 1995) at 6 (hereinafter Brief). 198 Benjamin Kaplan, Publication in Copyright Law: The Question of Phonograph Records, 103 U. PA. L. REV. 469, 472 n.20 (1955).

199 NIMMER, supra note 21, at 4.05[B] at 4-27 (Matthew Bender 1994) [hereinafter Nimmer.] 200 Id. at 4-35. 201 ASCAP Amicus Brief, supra note 199, at 3. 202 U.S. Copyright Office Circular No. 50, Musical Compositions. 203 Certificate of Registration of a Claim of Copyright (quoted in Petition for a Writ of Certiorari, Attorneys for Plaintiff (July 12, 1995) at 22 [hereinafter Cert. Petition.]). 204 37 C.F. R. 202.8 was repealed when the 1976 Act became effective. Under the registration requirements effectuated by the 1976 Act, either a copy meaning musical notation or a sound recording may be used for registration and deposit purposes. See United States Copyright Office Circular 50, Musical Compositions. 205 37 C.F.R. 202.8(a). 206 Id. at. 202.8(b). 207 Id. at 202.8(a). 208 See 17 U.S.C. 12 (1909). 209 See Act of Oct. 15, 1971, Pub. L. No. 92-140, 85 Stat. 391. 210 211 emphasis added.

219 166 F.3d 821 (6th Cir. 1999). 220 Id. at 830 (internal citations omitted). 221 157 F.3d 708 (9th Cir. 1998). 222 Id. at 710. 223 Id. at 710-11. 224 Id. at 711. 225 Id. 226 Id. at 708. 227 Id. (citing American Vitagraph, Inc. v. Levy, 659 F.2d 1023, 1027 (9th Cir. 1981)). 228 Id. (citing American Vitagraph, 659 F.2d at 1027); see also NIMMER, supra note 21, at 4.11(A), 4-53. 229 Id. at 714. (It takes more in the way of publication to invalidate any copyright, whether statutory or common law than to validate it.) (quoting American Vitagraph, 659 F.2d at 1027).

The Register of Copyrights is referring to legislation that would increase the term of copyright protection by an additional twenty years. On October 28, 1998, President Clinton signed Pub. L. 105 298, The Sonny Bono Copyright Term Extension Act, adding an extra twenty years of protection to works. Works created after January 1, 1978 are now protected for life-plus-seventy years. Works copyrighted under the 1909 Act are now protected for a total of 95 years (28 + 67). 212 17 U.S.C. 12 (1909) (repealed in 1978 when the Copyright Act of 1976 took effect). 213 17 U.S.C. 10 (1909)(repealed in 1978 when the Copyright Act of 1976 took effect). 214 See 54 PTCJ (BNA) 178 (June 26, 1997). 215 17 U.S.C. 303(b). 216 See 55 PTCL (BNA) 56 (November 20, 1997). 217 17 U.S.C. 303(b). (The distribution before January 1, 1978 of a phonorecord shall not for any purpose constitute a publication of the musical work embodied therein.). 218 There is a difference between changing and clarifying or correctly interpreting. It is the authors view that in the 1997 amendment to section 303(b), Congress correctly interpreted what was thought to be the law. 51

$$ $$
music

payforplay
52

n the late 1980s, artists such as Bruce Springsteen and Prince were on top of the music world.1 Some radio stations, however, were playing their music for reasons other than quality or popularity.2 Independent record promoters supplied radio programmers with cocaine, prostitutes, and hundreds of thousands of dollars in exchange for airplay for these and other artists.3 Such illicit deals may seem inconceivable to easy listeners, but, in the high stakes music industry, songs must get airplay if artists and record labels are to survive. For record labels, radio is the most powerful promotional tool to sell albums.4 Many people buy albums based solely on what they hear on the radio.5 Radio airplays link to album sales provides record labels powerful incentives to ensure broadcast of their songs. Accordingly, record labels devise various marketing and promotional strategies to secure radio station airplay. Such tactics range from T-shirt giveaways, contests, and free concerts offered in conjunction with radio stations to paid vacations, cash, and even illegal goods provided to radio programmers. In all of these promotional practices, the goal is the same: gain exposure for a song by promising radio stations greater revenues, increased listenership, and untraceable kickbacks for programmers. Despite the prevalence of these practices, promotional strategies

involving payola the payment of cash, drugs, or any other consideration to radio stations and their employees in exchange for airplay are generally illegal under federal law. Theoretically, these laws prohibit only undisclosed payola practices. Payola scandals of the late 1980s, however, illustrate that such practices have not ended.6 In fact, the Telecommunications Act of 1996 (the Act) created an environment in

ments for broadcasts which are properly disclosed under the law.

the environment
The term payola was originally coined by the publication Variety in 1938 to refer to the music industry practice of paying money to people in exchange for promoting a particular piece of music.8 Today, the term refers to bribery and corrupt practices in any business, though its use in the music industry refers to payments of any type made in exchange for broadcast of material. Payola has always existed in the music industry in various forms. The practice never garnered widespread attention from the public at large until the 1950s and 1960s. During that period, disc jockeys became powerful gatekeepers who determined what music the public heard. Some in the music industry exploited this concentration of power by bribing disc jockeys to play certain songs. The practice grew into a scandal involving rival parties accusing each other of illicit activities. This scandal resulted in probing Congressional and Federal Communications Commission investigations into the activities of many disc jockeys and their stations. Federal laws were soon passed to address the scandal and deal with the payola situation, but the practice persisted. In fact, the 1980s witnessed a resurgence of the practice through independent

an old tactic

in a new environment
By Douglas Abell
which pay-for-play, a disclosed and fully legal form of payola, could thrive.7 The possibility of returning to practices reminiscent of illegal payola has, however, sparked debate as to whether record labels should ever pay radio stations to play their music, legally or illegally. This Note resolves the debate by examining the history, current practices, and legality of record companies promotional practices. This Note concludes that the music business may be better served by engaging in explicit pay53

record promoters. These promoters paid to have a song included on the playlist of various stations. This practice influenced charts in trade publications and other station playlists that tracked the charts. The primary impetus behind the practice in the 1960s, 1980s, and today is the fact that there are more songs being produced than can be heard by the public. Supply and demand is and always has been a basic imbalance for the music industry.9 The Telecommunications Act of 1996, however, has added additional pressures to the normal market environment of the music industry. As a result, payola is not only increasing in use but is taking on new forms that are arguably illegal and, at a minimum, fuel anti-payola sentiments.

tions.12 The new regulations set forth the number of stations one entity may own, adjusting that number based on the size of the applicable market. For example, in a radio market with 45 or more commercial radio stations, a party may own, operate, or control up to 8 commercial radio stations, not more than 5 of which are in the same service (AM or FM).13 In addition, the FCC is authorized to permit a person or entity to own, operate, or control, or have a cognizable interest in, radio broadcast stations if the Commission determines that such ownership, operation, control, or interest will result in an increase in the number of radio broadcast stations in operation.14 The Act, therefore, creates a deregulated environment in which more radio stations may operate while ownership of those stations becomes concentrated in fewer hands. As a result, a few companies now dominate a majority of radio stations in a given market.15 Clear Channel Communications Inc. and AMFM Inc., for example, recently agreed to merge, forming the worlds largest radio company with 830 stations in small, medium, and large cities around the United States and reaching more than 100 million listeners weekly.16 Such consolidation has made a large impact on the music industry, essentially redefining the environment in which record labels and radio stations operate. The consolidation not only enables stations to cut costs by eliminating duplicative operations, but the stations gain leverage in negotiating programming, advertising, and other deals through their control of a larger segment of the audience.17 Prior to the Act, ownership of stations was more diverse and provided record labels
54

numerous outlets for their products. For example, whenever one station in a market refused to air a song, other stations were available as outlets. In the new environment, however, multiple stations in the same market are controlled by the same entity, effectively reducing the number of outlets available.18 One group of stations may refuse to play a song and preclude access to an entire market. Thus, consolidation of radio stations has concentrated negotiating power and essentially produced fewer outlets for record labels in each market. This outlet shortage is not new.19 Recording companies are aware that all songs can never reach all listeners. It is exactly this problem that produces payola. The deregulated environment created by the Act, however, exacerbates this scarcity by reducing the already inadequate number of independent outlets. The increased competition to gain access to these outlets only heightens the temptation for record labels to turn to payola. This moral hazard now tempts radio stations as well. Consolidation in station ownership has left station owners in debt, desperate for ways to service the debt and provide a return on the purchase of the stations.20 The result is pressure on individual stations to increase revenue through advertising and other sources.21 One untapped revenue stream is the record labels.22 In the 1960s and 1970s, record labels devoted much of their marketing/promotion budgets to radio stations.23 In recent years, the record labels have directed these budgets away from radio to other media such as television and print.24 Payola is an effective means of attracting these marketing dollars back to radio. Whether it is a legiti-

impact of the 1996 telecommunications act

The Telecommunications Act of 1996 has a clearly stated purpose: To promote competition and reduce regulation in order to secure lower prices and higher quality services for American telecommunications consumers and encourage the rapid deployment of new telecommunications technologies.10 The deregulation of the telecommunications industry proposed by the Act required the deregulation of broadcast ownership. Pursuant to the Communications Act of 1934, the Federal Communications Commission enforces regulations concerning broadcast stations.11 In 1996, Congress ordered the FCC to modify its regulations concerning the ownership of AM and FM broadcast sta-

mate means is another question. and necessary practice.26 In the late Though payola has always been 1950s, booze, broads, and bribes present in some form in the music came to signify the situation.27 As industry, the new environment has investigations by the government elevated it from a helpful promotion- uncovered rampant use of payola, al aid to a necessary tactic for sur- kickbacks, and bribes, the practice vival in an industry plagued by became associated with promotion of scarce airtime and tight revenues. Furthermore, the new environment makes the telecommunications act of payola more effective. Consolidated owner1996 . . . has added additional ship creates the possibility of securing pressures to the normal marnational airplay for one price as opposed to ket environment of the music separate payments to numerous local disc industry. . . . jockeys and record promoters. Payola, payola is not only increasing however, is illegal if undisclosed.25 In in use but is taking on new order to circumvent this legal barrier, forms that are arguably illegal record labels and radio stations are and, at a minimum, fuel antideveloping new strategies, such as pay-forpayola sentiments. play, and other innovative practices. The essential purpose behind these strategies is to substandard music, perjury, and tax secure increased exposure for the evasion.28 In the 1970s and 1980s, labels and increased money for the these activities were replaced by illicstations. Fearing the stigma of pay- it payments involving increasingly ola practices of the past, the music large sums of money, drugs, and industry has not openly supported prostitutes.29 Though many are such tactics but has entered an ongo- appalled by under-the-table influing debate as to whether record ence and its effects, the memories of labels should offer radio stations con- related activitiesmore so than the sideration in exchange for airplay. act of paying for airplay itselfevoke

gal activities. Proponents, while shunning illegal payola and its related activities, want to engage in practices clearly permitted under payola laws. Despite this underlying concern with payola and its stigma, the current debate rarely focuses on policies underlying payola regulations, such as consumer/public protection and prevention of bribery, tax evasion, and other illicit activities. Instead, the music industrys debate focuses on how such payments affect the players in the industry and the music itself.

the price of payola

Critics of payment for broadcast contend that the practice would infect the relationship between record labels and radio stations, resulting in mediocre radio, declining listenership, and falling advertising revenues. Payment for broadcast would result in the airing of unproven songs.30 Rather than being selected by research, sales, marketing, and requests, the music would be determined by the parties with the deepest pockets.31 Furthermore, payments would transform music from artistic expression to an infomercial.32 Such a system would make broadcast choices akin to advertising, wherein each paid and disclosed song evidences a commercial exchange.33 In addition to the fear of infomercial-ridden radio, many critics believe that because some labels are willing to pay for broadcast, radio stations will begin to charge all record labels.34 In effect, radio stations would extort money from record

the debate
Historically, actors in the music industry have publicly shunned and denied the existence of payola, though privately it was an accepted

the negative reactions to any and all forms of payola. These past abuses now animate both sides of the current payola debate. Critics of payola want to avoid any practices, legal or not, reminiscent of past payola scandals and related ille55

labels just to do their job.35 The first signs of this are payments for backannouncing, the traditional radio practice of informing the listeners of the name and album of songs just played. Most in the industry believe back-announcing is a basic element of a stations job, not a source of additional compensation.36 With this increased emphasis on money and possibility of extortion, new artists and independent labels will find it even more difficult to gain exposure.37 Without the clout and economic resources of the large record labels, payment for broadcast could drive small independent acts into extinction.38 Thus, payment for broadcast threatens the quality of music and the survival of those making it.

the power of payola

Proponents of payment for broadcast argue that paying for radio stations to play songs, accompanied by legally required disclosures, will not destroy the music industry but may help it. They claim that payment for broadcast is standard practice in the music industry. With payments for broadcast already influencing, if not determining, songs played, it is unlikely that disclosed payments for broadcast will suddenly make radio more commercial. In fact, widespread use of disclosed pay-for-play makes radio more honest. Rather than spending resources on trips, free records, and other promotional gimmicks, record labels may spend money more efficiently by securing airplay directly, the best marketing and sales tool in the music industry. Limiting promotional budgets to payments for broadcast helps rein in the spiraling costs of these promotions as well as costs of independent consult-

ants, tip sheets, and new technologies.39 Rather than paying all of these costs in hope of receiving airplay, the record labels can simply pay for a broadcast and receive guaranteed exposure. This direct money payment system is also better for the radio stations. Instead of T-shirts, trips, or free concerts that may or may not increase listenership and advertising revenues, the stations receive cash that goes directly to helping the bottom line. With disclosed payment for broadcast, the labels get airplay and the stations get revenue, benefiting all the parties, even small independent record labels. Independent record labels lack capital to fully participate in promotional pay-for-play such as free concerts, trips, and giveaways. With disclosed payment for broadcast, however, they are guaranteed a return on their investment. These independents recognize that they cannot pay the high price involved with many promotional/marketing practices currently used to pay for broadcasts.40 As Don Rose, president of the independent label Rykodisc, says, If I had the opportunity to bet on my song, right now Ive got to put money on the table, and it may or may not get played [But] if I had an opportunity to actually put the money on the table and let it get out there and let the consumer decide, to me thats more attractive than allowing the system to decide.41 The direct payment option removes the current speculation regarding the promotional costs that often result in no exposure for small labels. Pay-for-play is simply a more certain market transaction. In the end, pay-for-play allows limited funds to be spent in a more effective manner, benefiting these inde56

pendent labels. In addition, payment for broadcast would reduce exploitation in the artist/label/radio relationship. Securing airplay with payments gives the labels a bigger return on promotional dollars while avoiding promotional gimmicks that harm artists. Free concerts, for example, are a promotional gamble that labels provide to radio stations in hope of gaining exposure for their artists. Such concerts, however, exploit and often harm the artists. Though the acts gain exposure, the quality of the exposure is questionable and often comes at a cost.42 In free concerts, the artists usually must perform brief sets, often inferior shows that leave a negative impression among fans who expect a full-blown event.43 New artists are unable to develop as touring acts, and established artists must often skip free concert cities when on their actual tour.44 These events are costly, harming the bottom line of the bands, their managers, agents, and promoters.45 Considering the costs and the minimal airplay gained from this method, artists are much better served if this money is directed at payments for broadcast. It improves their position and helps reduce the exploitation in the artist/label/radio relationship. Proponents also point out that the biggest advantage to payment for broadcast is its positive effect on the quality of the music. Disclosed payments creates a self-regulating system that nurtures music as an art form while openly negotiating the economic realities of the music business. The ability to guarantee airplay allows record labels to take some risks and provide artistically advanced or different material that, absent payment, radio shuns in favor

of proven standards.46 With the guaranteed play, labels can be more innovative in what they send to radio and can nurture artistic freedom in the artists. In the end, the consumer, not a program director favoring the security of the status quo, determines the hits of today and the stars of tomorrow. Record labels may initially be tempted to pay for all their material, from the innovative to the inferior. Radio stations, however, can not afford to fill airtime with too many substandard or inappropriate songs. Any station that plays unlikable songs alienates listeners and risks traditional advertising revenues. Furthermore, any record label that supplies such unlikable songs loses consumer support. The commercial reality of the music business, therefore, demands the airing of good songs. Most consumers purchase albums based solely on what they hear on the radio, functionally making every song a short but vital infomercial for the album. Proponents embrace this economic reality, arguing that it forces record labels to supply good music in order to appease radio listeners and effectively market/sell albums. Payment for broadcast enables radio stations and record labels to address economic matters and needs while continuing to nurture and expand music as an art form. In sum, detractors of payment for broadcast claim that introducing widespread use of such payments would harm the music industry, potentially plaguing the musical landscape with past scandals. Proponents of payment for broadcast argue that the musical landscape is already plagued by illegal payola. Making payments for broadcast a market transaction would avoid illic-

it abuse and ensure the viability of the business and the quality of the music. Though these arguments present a near unresolvable industry conflict, the law regarding payments for broadcast holds the secret to resolving the debate.

the law
The Communications Act of 1934 was passed for the purpose of regulating interstate and foreign commerce in communication by wire and radio so as to make available . . . a rapid, efficient, nationwide, and world-wide wire and radio communication service with adequate facilities at reasonable charges .47 With this pronouncement, the federal government assumed the task of regulating wire and radio communications throughout the country.48 To further this purpose, authority was centralized in a newly created commission, the Federal Communications Commission.49 Despite this concentration of federal communications regulation, only an investigation by the House of Representatives would eventually force the FCC to deal with payola.50 In the late 1950s, the House Special Subcommittee on Legislative Oversight held an investigation into the fixing of quiz shows on television. When the investigation into the television quiz shows ended, the committee focused on payola in the music industry. The investigation, however, focused on rock and roll, small record companies, and disc jockeys, purposely overlooking the major labels. Nevertheless, the investigation revealed numerous cases of bribes to disc jockeys, tax evasion, and outside influence on radio station programming.51 As a result,
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Congress amended the Communications Act of 1934, changing an existing payola provision and adding a new section.52 Prior to these changes, only payments received by radio stations in exchange for broadcasting certain material were regulated.53 Payments to other parties, such as disc jockeys, were not addressed.54 The Communication Act Amendments of 1960, however, altered this regulatory landscape. The Amendments were enacted on September 13, 1960.55 One of the stated purposes was to require disclosure of payments made for the broadcasting of certain matter.56 This particular purpose demonstrated Congressional intent to fashion anti-payola regulations.57 The result was an expanded 317 addressing radio station duties to disclose payments for broadcast and a new 508 addressing disclosure of payments to individuals connected with broadcasts. Pursuant to 317, All matter broadcast by any radio station for which any money, service or other valuable consideration is directly or indirectly paid, or promised to or charged or accepted by, the station so broadcasting, from any person, shall, at the time the same is so broadcast, be announced as paid for or furnished, as the case may be, by such person [t]he licensee of each radio station shall exercise reasonable diligence to obtain from its employees, and from other persons with whom it deals directly in connection with any program or program matter

for broadcast, information to enable such licensee to make the announcement required .58 In addition, 508 now requires any employee of a radio station who accepts or agrees to accept from any person (other than such station), or any person (other than such station) who pays or agrees to pay such employee, any money, service or other valuable consideration for the broadcast of any matter over such station shall, in advance of such broadcast, disclose the fact of such acceptance or agreement to such station.59 Thus, a record label may not pay, give, or promise a radio station money or any other valuable consideration in exchange for airplay unless the payment is properly disclosed.60 Likewise, disc jockeys and other radio station employees may not receive such payments unless they or the paying party discloses the fact of the payments to the radio stations, which, in turn, must disclose such payments at the time of broadcast.61 The law further requires that the radio stations exercise reasonable diligence to ensure that this statutory duty is met.62 Radio stations, therefore, may not engage in undisclosed payments for broadcast and must monitor their employees to insulate them from the lure of illegal payments.63 When evaluating potential violations, the FCC examines the substantial evidence in the record.64 Whether the actions of the parties

affected the choice of broadcast material is a question of fact for the FCC.65 The FCC, therefore, has the discretion to make factual findings in determining if the actions violate the regulations and, if so, what penalty is warranted.66 Stations that violate the 317 disclosure requirements are subject to fines and license revocation.67 Record labels and station employees who violate 508 disclo-

Radio stations . . . may not engage in undisclosed payments for broadcast and

the selection and presentation of material.71 In fact, the FCC has stated that The basic principle underlying statutory provisions is, as we have often stated, that the public is entitled to know by whom it is persuaded and to this end, Congress adopted Sections 317 and 508 .72 In ruling on a challenged transfer, the FCC must determine two issues: whether payment for broadcast has occurred and, if so, whether any accompanying disclosure was sufficient to immunize it.

fcc determination of payment made

The threshold issue in determining illegal payola is if a payment for broadto insulate them from the lure cast actually occurs. Without payment, of of illegal payments. course, no disclosure is necessary. FCC decisions have set forth factors such sure requirements are subject to as explicit agreements and inducecriminal penalties of up to one year ments for evaluating payments that in jail and fines up to $10,000.68 mandate disclosures. Thus, whether the violating party is The primary question is whether a radio station, a station employee, an explicit agreement has been made or a paying party, there is substan- to pay for a broadcast.73 Explicit tial risk in payola.69 exchanges of some consideration for Though Congress intended these a broadcast require disclosure.74 regulations and penalties as anti- According to the FCC decision In re payola measures, the parties may General Media Assocs., Inc., even nevertheless participate in payment payments to a third party for the for broadcast as long as the material inclusion of certain matter in a probroadcast is accompanied by a proper gram requires disclosure.75 Though disclosure.70 In carrying out its obli- the broadcasting party did not gation to execute and enforce these receive payment, the FCC required regulations, the FCC does not cate- disclosure nonetheless, reasoning gorically forbid record labels from that had the consideration for the paying radio stations and their inclusion of the broadcast matter employees to play songs. Instead, been received by the radio stations the FCC only requires that the public instead of General Media they would be informed of payments affecting have been required to make an

must monitor their employees

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appropriate sponsorship identification .76 This situation involved a hidden payment to a third party explicitly for a particular broadcast. Thus, an explicit exchange of money for the broadcast of certain matter requires disclosure, regardless of whether the transaction involves the broadcaster or a secret third party. Exchanges involving nominal amounts of money or consideration with questionable value also require disclosure.77 The FCC has found a payola violation when listeners dedicated songs and sent nominal amounts of money to the stations disc jockeys to ensure airing of the song.78 Though the payments were minimal and created no pecuniary benefit to the paying listeners, disclosure was required. The FCC found that a practice of a licensee permitting its announcers to keep money sent by listeners constitutes payments to the announcers in lieu of additional salary, wages, or bonuses, and constitutes indirect consideration to the station .79 In a case involving payments to help an individual gain exposure as an announcer, the FCC held the language of the act is clear and includes all matter broadcast for which payment is made . [B]enefit derived by the purchaser of the broadcast time is not the determinative factor as to whether an announcement should be made.80 The FCC again focused primarily on the fact a payment occurred rather than the value of the payment. The FCCs emphasis on the act of paying consideration, regardless of the value, suggests that the key factor is merely the presence of an exchange for any consideration.81 The fact that a radio station is willing to exchange valuable airtime for

an item implicitly casts the item as valuable consideration. The statutes valuable consideration requirement, therefore, appears to be a catch-all term that permits the FCC wide latitude in evaluating facts. Thus, if a station solicits consideration of any type or a party pays consideration of any nature to broadcast certain material, the FCC will likely find a payment for broadcast and require a disclosure.82 Though sometimes an explicit agreement provides consideration to secure airplay, it is often difficult to determine if the consideration is directly or indirectly paid, or promised to or charged or accepted by the radio station.83 A record label could provide consideration to a radio station without explicitly demanding airplay. The record company may simply hope to secure airplay without a formal agreement. Such implied payments for broadcast have been addressed by the FCC. In a public notice issued prior to the Communications Act Amendments 1960, the FCC stated that the commission is of the view that the receipt of any records by a station which are intended by the supplier to be, or have the practical effect of being an inducement to play those particular records or any other records on the air, and the broadcast of such records, requires an appropriate announcement pursuant to Section 317.84 This standard covers the common practice of supplying radio stations with free records without any agreement as to the broadcast of those records.85 Despite the absence of an explicit agreement, the FCC asserts that a payola disclosure is necessary if the records were intended to induce or have the practical effect of inducing broadcast.86 This standard
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specifically addressed records. The Amendments, however, have altered the status of records as payment for broadcast, permitting record labels to supply records to build a radio stations catalog of music.87 In the same public notice, the FCC applied the same standard to other forms of consideration, items unaffected by the Amendments. In considering record hops or radio station promotions involving door prizes and live entertainment supplied by record labels, the FCC stated that although ostensibly it may appear that money, services, or other valuable consideration is being provided gratuitously for use in some aspect of the presentation of the record hop itself, where such consideration is, in fact, provided for the purpose of or has the practical effect of inducing on-the-air mentions or record spins, the accompanying announcement shall clearly state that such consideration is being provided, and by whom, in exchange for the broadcast .88 The application of this standard to a different form of consideration suggests that it extends beyond free records to all forms of consideration that may induce broadcast, even though ostensibly offered for reasons other than broadcast. Thus, the FCC will consider the parties intent and the practical effect of their actions to determine whether the choice of broadcast material has been influenced, even in the absence of an explicit agreement.89 Building on this inquiry, the FCC has articulated an additional standard for agreements inducing broadcast that on their face merely involve the exchange of consideration for other goods and services. The FCC addressed this situation in In re Broadcast of Living Should be

Fun.90 In that case, a radio station purchased a program from the creator, Food Plus. The creator then purchased advertising on the station. This advertising indirectly reimbursed the stations cost of purchasing the program. According to the FCC, The purchase of the program and the sale of spot announcements were parts of one transaction in which Food Plus reimbursed the station for all or a substantial portion of its costs for the program, and thus, at least indirectly, paid for the program. Thus, the FCC ruled that some offers to buy advertising can be improperly coupled with inducements to purchase and air a program. Therefore, the FCC requires that radio stations disclose promises and agreements to purchase advertising time made as an inducement to broadcast. In In re Mattel, Inc., the FCC further clarified regulation of advertising promises for programming.91 In that case, Mattel offered to purchase advertising on radio stations that had previously purchased rights to use one of its programs. The cost to Mattel to buy the advertising was equal to the amount the stations spent to buy the rights to the show, thereby reimbursing the stations. Though the advertisements ran before and after the program rather than within it, the FCC found the facts involved in the transaction indicated two simultaneous offers. The FCC emphasized the timing of the transaction, noting that since Mattel is making a simultaneous offer to purchase advertising on those stations which buy the program at a rate equal to that which the station pay for the program the purchase of the program and the sale of spot announcements were

parts of one transaction.92 The Living Should be Fun and the Mattel decisions demonstrate that payments purportedly for advertising, marketing, or another service or good but which actually induce a station to broadcast a program require disclosure under the statute.93 The decisions emphasize that some inducements, though seemingly separate transactions, can be recharacterized as a single transaction in which a party agrees to purchase advertising and the radio station agrees to air a program.94 Each situation, however, is fact-intensive. In Mattel, the FCC emphasized that it has reviewed carefully the facts and is unable to distinguish the basic facts in this case from those which characterized other payola arrangements.95 Thus, not every advertising arrangement functions as an inducement to broadcast. The analysis turns on timing, intent, and the relationship of the parties in each case. The FCCs application of the standard set forth in Living Should Be Fun and Mattel helps illustrate the difference between innocent business transactions and improper inducements. Explicit agreements and inducements are not the only forms of payola. Pursuant to both 317(c) of the Communications Act and 73.1212(b) of the FCCs rules, each licensee is required to exercise reasonable diligence to obtain from its employees, and from other persons with whom it deals information to enable the licensee to comply with the disclosure requirements of the Act.96 For example, In re Carter Publications, Inc. a disc jockey owned songwriting royalties in a song he was playing and promoting.97 Though no consideration for the
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broadcast was actually paid, the conflict of interest created questions about his motivation behind broadcasting certain material and doubts about who was actually influencing the listening public. The FCC scrutinizes such situations, generally requiring additional safeguards rather than immediately penalizing a statutory violation. In that case, the radio stations were required to implement new policies to insure that all stations program material continues to be selected on the basis of its merit and that those associated with program material are not in any way influenced by their personal interests in making the decisions.98 No specific policies were promulgated, but the FCC stated that it may fall short of reasonable diligence if the licensee does nothing more than require its employees to execute affidavits stating that they will not violate laws and regulations prohibiting payola.99 Furthermore, the reasonable diligence standard can require a higher duty of care by stations whose formats or other circumstances make them more susceptible to payola.100 Such stations would include those reporting to record charting services.101 Thus, in determining whether improper influence has been exercised, the FCC must examine both the institutional station policies and the individual motivations of its employees. Analysis of possible payment for broadcast situations must begin with the facts. The FCC determines whether the facts of the situation indicate that the actions affected the choice of broadcast material. To make this determination, the FCC looks for explicit agreements or inducements that result in payment for broadcast. In evaluating induce-

ment situations, the standard requires the consideration to either be intended to or have the practical effect of inducing a broadcast. In considering advertisements and marketing agreements ostensibly unrelated to payment for broadcast, the FCC focuses on the timing of the transactions. If a payment for broadcast is found, the analysis shifts to the existence and adequacy of on-air disclosures.

fcc regulation of sponsorship identification

In its rules, the FCC sets forth requirements regarding sponsorship identification. The rules essentially mirror the statute but contain more specific disclosure requirements. According to the FCC, payment for broadcast disclosures must state that the broadcast material is sponsored, paid for, or furnished, either in whole or in part, and by whom or on whose behalf such consideration was supplied.102 The rules specifically state that the term sponsored shall be deemed to have the same meaning as paid for.103 This standard is rigorously enforced. In early cases, the FCC indicated that the exact wording of the identification was to be left to the discretion of the radio station, though the announcement should at least state in language understandable to the majority of viewers that suppliers of goods or services have paid to display or promote the products and each supplier should be properly identified.104 Identification merely consisting of This has been a [Sponsors Name] production was insufficient.105 The FCC wanted the disclosures to convey to the listener the fact that the program was

paid for or furnished by the sponsor.106 The FCC refined this requirement in later cases. The FCC reiterated that mere mention of the name of the sponsor was inadequate, requiring announcements to give some indication that the program is in fact sponsored or paid for.107 The FCC further emphasized this position when it rejected announcements using the words presented by. The FCC found that the term presented by does not clearly inform the audience that it is hearing or viewing matter which has been paid for, thereby failing to state in language understandable to a majority of the audience that the station has received consideration for the matter broadcast and from whom consideration was received.108 According to the FCC, Such an identification is subject to differing interpretations and could lead to public confusion and misunderstanding.109 Public confusion about the true nature of the broadcast defeats the statutes purpose and the FCCs goal of ensuring that the public is informed of any otherwise undisclosed private financial interest affecting the selection and presentation of program matter.110 The FCC decisions do not give a clear-cut answer to the question of what is and always will be an adequate disclosure. In fact, the FCC has said that the public interest would be better served by continuance of our policy of dealing with the subject on a case-by-case basis.111 Nevertheless, an FCC attorney has provided examples of a disclosure sufficient to immunize deals involving possible payments for broadcast: The law requires identifying who sponsored, paid for, or furnished the song. That precise wording is exactly what we want to hear.112
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Furthermore, the announcement must be aired at the time of the broadcast. Thus, an adequate disclosure announcement would air at the time a song is played and say sponsored by, paid for by, or furnished by the name of the party paying for the broadcast. Though this is an apparently simple statement to make at the time of broadcast, it is nonetheless vital to ensuring a payola violation does not occur.

industry practices challenging the law

Despite the numerous interpretations and FCC guidelines concerning permissible payments for broadcast, record labels and radio stations push the limits of the law by continuing traditional industry practices and devising new strategies that involve undisclosed payments for broadcast. Record labels and radio stations claim that these practices are not and do not require disclosures. Close scrutiny of the facts surrounding certain industry practices, however, reveals that these practices generally involve payment for broadcast that should be disclosed.

free albums
One traditional practice in the music industry is for record labels to supply radio stations with free albums.113 According to a report from the United States House of Representatives, supplying albums should not be considered a per se violation of the statute.114 A record distributor furnishes copies of records to a broadcast station or a disc jockey for broadcast purposes. No announcement is required unless the supplier furnished more copies of a particular recording than are needed

for broadcast purposes.115 Though broadcast purposes is not defined, non-broadcast uses may be identified by the quantity of records provided. For example, should the record supplier furnish 50 or 100 copies of the same release an announcement would be required because consideration beyond the matter used on the broadcast was received.116 Albums and other consideration provided for the personal use and retention of radio station personnel also require disclosure. For example, if a perfume manufacturer gives five dozen bottles to the producer of a giveaway show, some of which are to be identified and awarded to winners on the show, the remainder to be retained by the producer constitute[s] payment.117 Thus, depending on the quantity and purpose of the albums supplied, disclosure may be and usually is required.118 In addition to broadcast purposes, radio stations also receive free albums and other goods for use in contests and other promotions to generate publicity and help attract sponsors.119 In some cases, the impropriety of such promotional payola is clear. For example, record labels often underwrite radio station contests, such as flying winners to meet a top band, in exchange for the stations airing of the labels new acts.120 In other situations, however, the agreements are not as explicit and only involve consideration that is nominal in value, such as Tshirts.121 Nevertheless, in both cases, broadcasts made in exchange for such consideration must be accompanied by the proper disclosure.122 Stations often defend themselves by arguing that songs received airplay before the free items arrived and before the promotions and tie-ins

began.123 This is a factual argument that must be decided upon the evidence. The FCC scrutinizes album giveaways, contests, and promotional tie-ins to determine if they have the practical effect of inducing radio stations to play a record labels music.124 If the FCC finds such influence, a disclosure is required regardless of whether a deal guarantees airplay or only involves songs already on the playlist. An Emmis Communications station in Chicago, for example, created a promotional package alleged to include explicit promises of airplay as part of the deal. Emmis chairman claimed, however, that the deal permitted promotions only after a song had been added.125 In either situation, however, a disclosure would be required. If there is an explicit agreement to broadcast a song or if the stations are induced to play songs, such deals violate the statute absent disclosure. Thus, contests, tie-ins, and other promotional deals that have the practical effect of inducing airplay or that are designed to solicit payment for broadcast require disclosure.

payment for broadcast arise at the moment the band is hired to play at the event. To ensure the success of the free concert, some stations guarantee increased airplay to a band in exchange for a concert appearance.130 The program director at New Yorks Z-100, for example, admitted that a tacit term of such deals is that the stations will play the single of the starring bands. However, the station denied ever offering to play a bands songs in exchange for its appearance at the stations concerts.131 When the station bears the cost of the free concert, its own self-interest dictates that it should play the bands music.132 Such stations hope to realize a financial benefit from these events through increased ratings and advertising revenue.133 Promotion of the event through music played on the station increases the turn-out, adding financial incentives.134 The stations financial interest, therefore, conflicts with the 317 requirement that stations insulate the program selection process from potential conflicts of interest.135 As a result, a disclosure must be made to satisfy the statute. Payola may also occur when the record label pays the costs of a free concert or the band performs for a reduced rate. The bands and the record labels are pressured by radio stations to provide performances at these events.136 Often the stations refuse to air a bands latest releases unless it commits to a free concert performance.137 In some cases, the stations have even threatened to ban all of a record labels upcoming releases if the label fails to persuade the band to perform.138 Thus, to get a song played, the bands and the record labels must sometimes grace

free concerts
Another promotional tool radio stations utilize is the free concert.126 Free concerts are generally large events promoted by a single radio station that rents a venue and hires a band.127 The radio station or the label may cover the costs associated with the bands performance, or, as is becoming the trend, the bands will actually perform for free or reduced rates.128 No matter who pays, a bands appearance at a stations free concert is routinely accompanied by an increase in the airplay of the bands music.129 Concerns regarding
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radio stations with a free concert appearance.139 Though the concert appearances secure radio airplay, in many instances the song is only played for several weeks prior to the concert and dropped immediately after the event.140 Based on past FCC scrutiny of record hops which also involved free performances, free concerts alone appear to be inducements to broadcast.141 In fact, one FCC official has said, If a broadcaster is getting something valuable, like an artist performing at the stations concert, in exchange for playing the artists song and they dont identify the sponsor of the record, then they are in violation of the law.142 This requirement does not mean that artists free concert appearances must cease. A performer may, without any disclosure, perform at a concert or show for free because the performer likes the show, although the performer normally commands a much higher announcement fee.143 If the FCC determines that a performance has the effect of inducing airplay or favorable mentions, however, disclosure must be made.144

tions.145 These vacation-like business trips often involve artist performances and showcases.146 Record labels contend that these events are not payola but are merely events featuring artists and their music in a special environment favorable to the songs.147 They add that the trips are simply designed to make a memo-

The FCC scrutinizes album giveaways, contests, and promotional tie-ins to determine if they have the practical effect of inducing

tions.150 The FCC finds itself compelled to reject the contention that no announcement is required because such favors are normal business practices.151 Furthermore, the FCC has found situations where consideration [for example, a trip to a resort] is provided as an inducement to the licensee or its employees or independent contractors to broadcast certain matter sufficient to require disclosure.152 In a case involving a television broadcast, the FCC found that free rooms and food, as well as entire trips, qualified as consideration offered to influence programming choices.153 In CBS, Inc.,

free trips
Though record labels and bands receive pressure from radio stations to supply free albums, support contests, and appear at free concerts, record labels engage in similar tactics to secure airplay. It is common practice for record labels to fly program directors and other radio station personnel to resort destina-

network employees were provided substantial consideration in the radio stations to play a record form of free rooms, food, and beverages by a labels music. If the FCC hotel.154 In exchange for these free items, the telefinds such influence, a vision producer permitted scoreboard identifications disclosure is required . . . . of the hotel to be placed in a manner which rable impact on the radio person- insured frequent on-camera exponel.148 In fact, radio stations claim that sure. Such a tactic not only violated these and other payola activities are the broadcasters policy limiting exempt as normal business practices. identification of host hotels, but, The essential purpose of these according to the FCC, required a disvacation trips, however, is to con- closure under the statute. The decivince executives to play the labels sion suggests that all payments for records. Under FCC standards, the broadcast must be disclosed, whether mere fact that such trips were they result in a simple increase of onoffered to stations by labels suggests camera exposure of a providers that they were intended to induce or name or in a substantial influence on had the practical effect of inducing a a stations programming.155 broadcast, thereby requiring disclosure.149 In addition, the FCC explic- the mega-deal itly rejects the idea of any normal In addition to standard industry business practice exemption charac- practices involving free albums, conterizing such trips as payola viola- certs, and trips, the record labels and
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radio stations have developed a new industry tie-in, the mega marketing deal.156 These deals have record labels paying large sums of money to the radio stations in exchange for advertising time.157 Though advertising is not in itself a violation of the payment for broadcast laws, this new breed of marketing deals creates the same hazard facing many of the standard industry practices: inducement. In Re Mattel, Inc. and In Re Broadcast of Living Should Be Fun both involved marketing agreements that exchanged advertising purchases for airplay.158 In those situations, the FCC explained how the purchase of advertising and the purchase of the program were two sides of one transaction.159 Whether the transactions are simultaneous and whether the actions affect broadcasting choices are issues the FCC resolves on a case-by-case basis.160 In addition to examining the transaction, the FCC also focuses on whether the consideration in the marketing deals is intended to, or has the effect of inducing, airplay of the advertising partys songs.161 As with exchanges involving free records, free concerts, and free trips, the intent and the practical effect of marketing agreements is suspiciously favorable to both sides.162 For example, in an agreement between A&M Records and Chancellor Media Corporation, the owner of more than 400 radio stations nationwide, A&M paid $237,000 for a marketing campaign to support a song through a series of commercials and contests.163 The FCC has consistently held that if airplay occurs as a result of a promotional agreement, the issue of inducement is at least raised.164 Though the record label is ostensibly

only paying for marketing, the radio stations may be playing the song because they received the high revenues and hope for more. As in Living Should Be Fun and Mattel, this arrangement could lead to a FCC finding that the deals involved a simultaneous exchange of marketing dollars for an airplay guarantee. Furthermore, a deal worth $237,000 involving the marketing of a song is intended to or at least has the practical effect of inducing airplay. This induced play is illegal payola and requires disclosure.165 Certain facts may, however, disprove the existence of illegal payola in such a case. For example, a high level of airplay prior to the marketing agreement suggests that the song was aired as a broadcasting decision and not in exchange for payment. In the timing of the A&M/Chancellor deal, the facts suggested that the song was played as a result of the marketing deal. The song, Bryan Adams On A Day Like Today, quickly hit the charts and as quickly fell off the charts.166 Despite the decline in ratings, the song continued to receive airplay at four stations all owned by Chancellor.167 Though Chancellor executives contended that the record company paid for marketing, not airtime, industry commentators have suggested that the song continued to receive airplay because of the marketing agreement.168 Paying such a large amount for a song suggests intent. This factor is not conclusive, however. After all, had more stations played the song and had it been a hit, no one would have questioned the stations motives. Even absent illegal intent, the large marketing dollars paid to promote this song had the practical effect of inducing airplay.
64

The economic incentive of marketing revenue, coupled with the fact that the only stations playing the song were the ones most benefited, suggests inducement. In addition to the lucrative marketing agreement, there were other inducements for play in this case. As part of the marketing deal, winners from other Chancellor stations were flown to attend a Bryan Adams concert in which he waived his performance fee.169 As noted earlier, any airplay received as a result of this free concert must be disclosed. The critical factor, once again, is whether the airplay was exchanged for the consideration, be it a free concert or advertising revenue. Under the standards set forth in FCC decisions and notices, this free concert/contest may or may not be intended to induce airplay, but it very likely has the practical effect of inducing such play.170 Accordingly, the trip, the concert, and the entire marketing deal should have been disclosed when the song was played.

the name game

In addition to the marketing agreements exemplified by the A&M/Chancellor deal, there is another type of marketing technique gaining popularity. This technique, often referred to as pay-to-name, occurs when a record label pays a radio station to air an advertisement immediately before or after one of its songs is aired.171 Pay to name advertisements generally backannounce information about the song such as the title and the artist.172 The advertisements are also intended to add information such as the name of the songs album and also where the album can be purchased.173 Some music industry

commentators believe that it should Nashville song now, radio stations be standard practice for radio sta- may receive advertising revenues if tions to announce such informa- the song becomes a hit and could be tion.174 To ensure the listeners have induced to play the songs. Although enough information to purchase the the intent may not be to secure airmusic they want, the argument goes, play, the potential advertising revpay-to-name advertisements are hard- enues could have the practical effect ly improper and may even be neces- of inducing play. sary.175 Supporters of these advertisements maintain that such payments the need for change do not influence airplay but rather only influence the buying public. Though the legal analysis sugThe details surrounding the typi- gests that complete marketing disclocal pay-to-name agreement indicate sure should be required, the history that record labels indeed may be only of FCC regulation indicates that this paying to inform the public of the move will not occur. The FCC has artists name and album. Recently, generally been lax in enforcing the Capitol Nashville paid CBS-owned payment for broadcast laws.179 The radio stations to air 10-second ads situation involving Bryan Adams, for before or after selected records announcing the artists, the song, the album, and retail locaillegal payola not only results 176 tions for purchase. The ads were designed in for songs that were already playing and had in been proven successful on the charts.177 An but it also misleads a announcement stating that the ads were paid trusting audience. for accompanied the 10-second spots, disclosing the payment for broadcast regarding the example, has been investigated withpaid advertisements but not regard- out reprimand.180 In addition, the ing the song itself.178 The presence of FCC lacks the resources to investithe disclosure and the songs popu- gate every potential instance of paylarity prior to the paid advertising ola. After all, mass illegal promoindicate that such tactics were pure tional practices involve far less marketing and not payments to money than the mega-promotion broadcast songs. However, the risk deals. The reality of lax enforcement of inducement still exists even if the suggests that mandatory disclosure record labels do not explicitly dictate of all payments for broadcast is which songs will be played but implausible. Some in Congress, howinstead tie advertising dollars to air- ever, are unwilling to accept this. In play. This connection can create an reaction to reports of new tactics for incentive for a station to play the circumventing the payment for labels music. By adding a Capitol broadcast laws, Sen. Paul Wellstone
65

(D-Minn) and Rep. John Conyers (DMich) have voiced concern about payfor-play and criticized the concentration of power resulting from radio station conglomerates.181 In fact, they have recently requested the FCC to open a review of broadcasting deals.182 The FCC has refused. Despite FCC reluctance, some legislators growing impatience with the lack of competition in broadcasting, its effect on consumers, and the appearance of impropriety of the new payment for broadcast schemes suggests that the landscape in the music industry is not through changing. In fact, further alteration of the current landscape is the only way to end the questionable uses and abuses of payola. Though businesses in other industries commonly entertain clients and partners to generate business, such practices in the music industry are prohibited in poor music and exploitation order that the public know by whom it is perthe music industry, suaded.183 Nevertheless, record labels and broadcasting companies routinely engage in practices that test the limits of the law. An application of the payment for broadcast regulations to current industry trends has demonstrated that most promotional practices in the industry violate the purpose if not the language of the law. Despite the current debate, the industry is already mired in illegal payola and would be better served by engaging in explicit payment for broadcasts if properly disclosed under the law. Currently, illegal payola allows powerful radio conglomerates to demand money and other consideration in return for airplay. Though large record labels could benefit from

this, small labels are unable to compete and artists are exploited by station demands such as free concerts. When airplay is determined solely by money and power, small labels and artists are exploited and the music suffers. Without incentives to foster artistic freedom or nurture new styles, the music becomes less of an innovative entertaining art form and more of a manufactured product sent to radio with guaranteed airplay. Despite these negative effects, illegal payolas most harmful effect falls on listeners and consumers. Not only are they deprived of music aired on such merits as artistic value, but they are deceived. They believe songs aired on the radio are chosen by experts with an interest in identifying and playing the best music. In reality, however, money determines what songs are on the air, defrauding listeners and consumers and undermining the policy of informing the public by whom it is persuaded. Thus, illegal payola not only results in poor music and exploitation in the music industry, but it also misleads a trusting audience. To end these and other effects of undisclosed payments on the music industry and the uninformed public, disclosure of all record label/radio station promotions and marketing deals from free T-shirt giveaways and free concerts to advertising purchases and luxury artist showcases should be disclosed in accord with FCC sponsorship identification standards. Such a rule would require industry practices that explicitly and implicitly influence broadcast matter to be disclosed, satisfying the FCC goal of informing the public by whom it is persuaded. Furthermore, the mass disclosure would improve the music industry. By requiring all pro-

motional deals between stations and labels to be disclosed, the rule creates incentives to move away from free concerts and the like to outright pay-for-play. By engaging in explicit payment for broadcast, the stations could continue to receive the equivalent of advertising revenue while the labels could maximize airplay, their most effective marketing mechanism. Critics will likely claim that such a rule harks back to the days of payola and will promote substandard music and illicit activities related to payola. The primary effect of the rule, however, would be to end all undisclosed payments for broadcast. In addition, the economic incentives involved under such a rule not only prevent airing of substandard music but foster music as an art form. Furthermore, pay-for-play empowers all record labels, especially independents, by bringing a better return on dollars spent for promotion. As a result, labels are empowered to test the limits of the current music market and create new markets, fostering artistic freedom and innovative music which ultimately benefits music audiences. Despite the advantage of moving to industrywide pay-for-play, there may be unforeseen consequences. Record labels, economically influenced by spiraling pay-for-play costs, may expand into radio station ownership; radio stations, empowered by the revenues from pay-for-play, may end normal advertising and air payfor-play music twenty-four hours a day; or pay-for-play, predominantly utilized by record labels, may expand to include managers, promoters, publishers, songwriters, and any other parties having an interest in a songs airplay.184 These and other conse66

quences should, however, be addressed as they arise. If pay-forplay greed spirals out of control, new regulations setting a statutory price limit on airtime can be implemented. For now, radio station consolidation has changed the music landscape and the industry faces a crisis. Though the debate over pay-for-play will continue to rage in the music industry, it is clear that radio station consolidation resulting from the Telecommunications Act of 1996 has greatly altered the music industry. Consolidation has shifted the focus from the music to revenues. This emphasis compels radio to eschew artistic innovation in favor of status quo cookie cutter acts that have proven to secure listeners. Though this helps maintain advertising revenues, it does little to grow the market, leaving revenue-hungry stations dependent on record labels for additional revenues. By taking artistic risks, stations could be instrumental in breaking the next big act and thereby increase their bottom line through more productive and fanfriendly means. The economics of the current environment, however, do not permit it. The power held by the station conglomerates enables them to essentially demand perks and easy revenues from record labels. In this environment, the only way to balance power among the parties is pay-forplay, in which airtime has a price that all are equally free to pay. Whether or not the environment is altered or disclosed pay-for-play becomes the standard, in the end, the success of the music industry depends on providing listeners a choice and letting them choose which new acts they want to take to superstardom. x

1 See generally KERRY SEGRAVE, PAYOLA HISTORY, 1880-1991, 214 (1994). 2 Id. 3 Id.

IN THE

MUSIC INDUSTRY:A

29 See id. at 211-12. 30 Taylor, supra note 22. 31 Id. 32 David Hinckley, Pay-For-Play Gets Plug / With Proper Disclosure, Its Kosher, Says Trade Mag, NEWYORK DAILY NEWS, July 7, 1999, at 75; Strauss, supra note 23. 33 Id. 34 Strauss, supra note 23. 35 Id. 36 Taylor, supra note 22. 37 John Mainelli, Pay-For-Play Again - Radio Is Swapping Record Cos. Ads For Airplay, NEW YORK POST, Dec. 21, 1998, at 82; Taylor, supra note 22. 38 Id. 39 Taylor, supra note 22. 40 Id. 41 Id. 42 See Philips, supra note 4. 43 Id. 44 Id. 45 Id. 46 Strauss, supra note 23. 47 47 U.S.C. 151. 48 Id. 49 Id. 50 Segrave, supra note 1 at 100. 51 Id. at 119. 52 H.R. Rep. No. 86-1800 (1960) reprinted in 1960 U.S.C.C.A.N. 3516. 53 Id. 54 Id. 55 Communications Act Amendments 1960, Pub. L. No. 86-752, 74 Stat. 889. 56 Id. 57 Segrave, supra note 1. 58 47 U.S.C. 317 (1999). 59 47 U.S.C. 508 (1999). 60 47 U.S.C. 317 (1999). 67

4 Chuck Philips, Radio Pushes Bands For Freebies, LOS ANGELES TIMES, Nov. 5, 1998, at A1. 5 Id. 6 Segrave, supra note 1 (examining payola abuses of the 1980s despite the presence of federal regulation on the activity) at 195-221. 7 Tara Eck, Pay-For-Play Issue Among Topics of Upcoming Seminar, NASHVILLE BUSINESS JOURNAL, Feb. 23, 1998. 8 Segrave, supra note 1 at 1. 9 See generally id. at x. 10 Telecommunications Act of 1996, Pub. L. No. 104-104, 110 Stat. 56 (1996). 11 47 U.S.C. 151. 12 Telecommunications, supra note 10. 13 Id. 14 Id. 15 Eck, supra note 7. 16 Katherine Young, Texas Merger To Create Largest Radio Company; Clear Channel To Buy Hicks AMFM, THE DALLAS MORNING NEWS, Oct. 5, 1999, at A1. 17 Steve Knoll, Good News For Owners, but What About Listeners, NEW YORK TIMES, Dec. 30, 1996, at D5. 18 See id. 19 Segrave, supra note 1 at vii - x. 20 Patrick M. Reilly, Radios New Spin On An Oldie: Pay-For-Play, WALL ST. J., Mar. 16, 1998, at B1. 21 Eck, supra note 7. 22 Chuck Taylor et al., Paid Play Changing Biz Landscape: Rise of Direct Label/Radio Pacts Sparks Wide-ranging Debate, BILLBOARD, May 9, 1998, at 1. 23 Neil Strauss, Pay-For-Play Back On The Air But This Rendition Is Legal, NEW YORK TIMES, Mar. 31, 1998, at A1. 24 Id. 25 47 U.S.C. 317 (1999); 47 U.S.C. 508 (1999) (requiring disclosure of any payments for broadcast). 26 See generally Segrave, supra note 1 at x. 27 Id. at 98. 28 See id. at 119, 158, 165.

61 47 U.S.C. 508 (1999). 62 47 U.S.C. 317 (1999). 63 Commission Warns Licensees About Payola and Undisclosed Promotion, 4 F.C.C. Rcd. 7708 (1989). 64 Southeast Florida Broadcasting Ltd. Partnership v. F.C.C., 1991 WL 222114, (D.C. Cir., Oct. 28, 1991). 65 Id. 66 Id. 67 47 U.S.C. 503 (1999). 68 47 U.S.C. 508 (1999). 69 Id. 70 In re Termination of Plugola Rulemaking and Affirmation of Disclosure Requirement, 76 F.C.C.2d 227 (1980). 71 Id. 72 Id. 73 In re General Media Assocs., Inc., 3 F.C.C.2d 326, 327 (1966). 74 Id. 75 Id. 76 Id. 77 In re KMAP, Inc., 44 F.C.C.2d 971, 974-75 (1974). 78 Id. 79 Id. 80 Sponsorship Identification Of Broadcast Material, F.C.C. 60-239 Public Notice 85460 (1960). 81 Id.; see also In re KMAP, Inc., supra note 77. 82 In re General Media Assocs., Inc., supra note 73. 83 47 U.S.C. 317 (1999). 84 Sponsorship Identification, supra note 80 (emphasis added). 85 Id. 86 Id. 87 H.R. Rep. No. 86-1800, supra note 52. 88 Sponsorship Identification, supra note 80 (emphasis added). 89 Id. 90 See generally In re Broadcast of Living Should Be Fun, 33 F.C.C. 101 (1962). 91 See generally In re Mattel, Inc., 40 F.C.C. 159 (1963). 92 Id. 68

93 In re Broadcast of Living Should Be Fun, supra note 90; In re Mattel, Inc., supra note 91. 94 Id. 95 In re Mattel, Inc., supra note 91. 96 Commission Warns, supra note 63. 97 In re Carter Publications, Inc., 45 F.C.C.2d 115 (1974). 98 Id. 99 Commission Warns, supra note 63. 100 Id. 101 Id. 102 47 C.F.R. 73.1212 (1999). 103 Id. 104 In re National Broadcasting Co., 27 F.C.C.2d 75 (1970). 105 United Broadcasting Co. of New York, Inc., 45 F.C.C. 1921 (1965). 106 Id. 107 In re Midwest Radio-Television, Inc., 49 F.C.C.2d 512 (1974). 108 Application of Sponsorship Identification Rules, 66 F.C.C.2d 302 (1977). 109 Id. 110 See generally In re Termination of Plugola Rulemaking and Affirmation of Disclosure Requirement, supra note 70. 111 Id. 112 Reilly, supra note 20 (quoting FCC attorney Chuck Kelly). 113 H.R. Rep. No. 86-1800, supra note 52. 114 Id. 115 Id. 116 Id. 117 Id. 118 Id. 119 Sponsorship Identification, supra note 80. 120 Strauss, supra note 23. 121 See generally id. 122 Sponsorship Identification, supra note 80. 123 Mainelli, supra note 37. 124 Sponsorship Identification, supra note 80.

125 Mainelli, supra note 37. 126 Philips, supra note 4. 127 Id. 128 Id. 129 Id. 130 Id. 131 Id. 132 Sponsorship Identification, supra note 80. 133 Id. 134 Id. 135 In re Carter Publications, Inc., supra note 97 at 166. 136 Philips, supra note 4. 137 Id. 138 Id. 139 Id. 140 Id. 141 Sponsorship Identification, supra note 80. 142 Philips, supra note 4. 143 H.R. Rep. No. 86-1800, supra note 52. 144 Sponsorship Identification, supra note 80. 145 Taylor, supra note 22. 146 Id. 147 Id. 148 Id. 149 Sponsorship Identification, supra note 80. 150 Id. 151 Id. 152 Id. 153 CBS, Inc., 67 F.C.C.2d 969, 974 (1978). 154 Id. 155 Id. at 971. 156 Taylor, supra note 22. 157 Id. 158 In re Broadcast of Living Should Be Fun, supra note 90; In re Mattel, Inc., supra note 91.

159 Id. 160 Southeast Florida Broadcasting v. F.C.C., supra note 64. 161 Sponsorship Identification, supra note 80. 162 Sponsorship Identification, supra note 80; H.R. Rep. No. 86-1800, supra note 52. 163 Jim Abbott, Radio Deal Puts Spin On Airplay Why Are Chancellor Stations Playing A Song That Is Not A Hit? Critics Say A Marketing Deal Equals Payola, ORLANDO SENTINEL, Dec. 19, 1998, at C1. 164 See In re Broadcast of Living Should Be Fun, supra note 90; In re Mattel, Inc., supra note 91. 165 Sponsorship Identification, supra note 80. 166 Abbott, supra note 163. 167 Id. 168 Id. 169 Taylor, supra note 22. 170 Sponsorship Identification, supra note 80. 171 Jerry Crowe, Label Running Ads To Name Its Tunes Pop Beat: A new advertising campaign in which Capitol Nashville Records is paying for spots before or after a songs airplay is stirring debate, LOS ANGELES TIMES, Apr. 11, 1998, at F1. 172 Id. 173 Id. 174 Id. 175 Id. 176 Tom Roland, Capitol Radio Ad Campaign Draws Fire, THE TENNESSEAN, Apr. 17, 1998, at E1. 177 Id. 178 Strauss, supra note 23. 179 Kevin Baxter, Arts and Entertainment Reports From The Times, News Services, and The Nations Press, LOS ANGELES TIMES, July 24, 1999, at F2; Mainelli, supra note 37. 180 Frank Saxe, FCC Green-Lights Promotional Deals, BILLBOARD, Apr. 3, 1999. 181 Chuck Philips and Michael A. Hiltzik, Two Officials Urge FCC To Probe Possible Payola Music: The lawmakers say radio conglomerates may be trying to skirt laws by cutting promotional deals with labels, LOS ANGELES TIMES, Jan. 14, 1999, at C1. 182 Saxe, supra note 180. 183 In re Termination of Plugola Rulemaking and Affirmation of Disclosure Requirement, supra note 70. 184 Taylor, supra note 22.

69

internet

OF BLACK
AND

holes
growing) community of people who spend their time thinking about law and policy in cyberspace, a rather interesting debate taking place. Though it is

DECENTRALIZED LAW-MAKING IN CYBERSPACE

By David G. Post

here is, within the (rapidly-

not always characterized in these terms, it reflects a conflict between competing visions of "order" and "disorder" in social systems. This is by no means a "new" debate, but it takes on a new shape in the rather special conditions of cyberspaceor so, at least, I hope to suggest in what follows.

The Incident
Last January, Professor Tom Field of the Franklin Pierce Law Center

(FPLC), posted the following message to the Cyberprof listserve:1

70

To all: Assuming that this message isnt screened out by the [the server at the University of Texas that hosts the Cyberprof discussion group], you might be interested in a small problem FPLC faces. A few weeks ago, someone bounced some spam off our server. It somehow corrupted our email system, and [now] I am beginning to get messages like this: The message that you sent was undeliverable to the following: ipww@ljx.com Transcript of session follows: MAIL FROM: tfield@fplc.edu refused; see http://maps.vix.com/rbl/ I hope it never happens to you. Meanwhile, any ideas about how to deal with it?2

The Explanation
There were, as it turned out, lots of ideas about how to deal with it but that is getting ahead of myself. First, the facts, as best one can make them out here. Professor Field (tfield@fplc.edu) had sent an e-mail message to an address at ljx.com. But the ljx.com e-mail server had refused to deliver the message to the intended recipient (Mail From: tfield@fplc.edu refused) and returned it undelivered to Professor Field. What had happened? Why had it done so? The explanation is providedelliptically, to be sure by the hyperlink reference (see http://maps.vix.com/rbl) in the message that Professor Field had received. If you do indeed see http://maps.vix.com/rbl you are taken to the home page of something called the Mail Abuse Prevention System (MAPS). MAPS, the primary focus of this tale, is a California non-profit limited liability company.3 It coordinates a kind of group boycott by Internet service providers (ISPs) for the purpose of reducing the flow of what is commonly called spam unsolicited bulk e-mail. It operates, roughly, as follows.4 The managers of MAPS create and maintain what they call the Realtime Blackhole List (RBL), which consists of a long list of Internet addresses.5 They place on the RBL any Internet address from which, to their knowledge, spam has originated.6 They also place on the RBL the address of any network that allows open-mail relay7 or provides spam support services.8 MAPS makes the RBL list available to ISPs and other
71

network administrators on a subscription basis.9 ISPs that subscribe to the RBL can, if they choose, set their mail handlers to delete all e-mail originating from, and/or going to, an address appearing on the list. That is, when an RBL-subscribing ISP receives a request to transmit e-mail to or from a subscriber, it checks the senders numeric Internet address against the list of blackholed Internet addresses; if it finds a match, it deletes the message. The blackholed address thus, in a sense, disappears from the Internet as far as the subscribing ISP (and its customers) are concerned. Apparently, Professor Fields networkfplc.eduhad been placed on the RBLblackholed and ljx.com, the home server of the intended recipient of Professor Fields e-mail, was an RBL subscriber. When the ljx.com mail server received Professor Fields message, it recognized the e-mail as originating from a blackholed address and deleted it, helpfully sending back the message, reproduced above, to Professor Field to inform him what was going on.

The Question
What are we to make of things like the RBL? Here we have a problemthe proliferation of unsolicited mass emailing operationsthat is, we might agree, a serious, or at least a non-trivial, one. At just the moment that email has become an indispensable form of communication, of incalculable commercial and non-commercial importance for a substantial and ever-growing segment of the world community, its value is being undermined by a barrage of unwanted and unsolicited communications.10 But is the RBL a reasonable means of addressing this problem? To what extent can we, and should we, rely on things like the RBL to devise a solution (however we might define a solution) to that problem?

The Debate
The question is, I think, both an interesting and an important one. Legal scholars have recently discoveredor re-discoveredthe important role played by informal systems of decentralized, consensus-based social control in shaping human social behavior.11 It is becoming increasingly clear that systems of rules and sanctions created and administered without reliance on State authority, and outside of any formal State-managed processnormsare powerful determinants of behavior in many contexts. And what is the RBL if not a textbook example of an informal, decentralized, norm-

creation process? The MAPS operators propose a norm, a description of behavior that they consider, for whatever reason, unacceptableallowing open mail relay systems, for example, or providing spam support services.12 They offer to serve as your agentor, more accurately, as the agent for your network administrator or ISPin identifying those who are violating this norm. They offer to keep you informed of those identifications (via the RBL). They propose to sanction norm-violators. The sanction they have in mind is the Ur-Sanction of informal social control processes: shunning. Those who choose to apply the sanction simply turn their backs on offenders, ceasing all (electronic) communication with them. MAPS helpfully provides you with the means to accomplish this sanctionsoftware that will configure your system to delete e-mail to or from blackholed addresses.13 This is not, as it were, your fathers norm-creation process; it has some unusual features missing from realspace norm-creation processes.14 But it is norm-creation; whether or not it can helpfully be described as bottomup,15 it is surely both informal and decentralized. Neither the decision to join (or not join) the group shunning exercise (i.e., to subscribe to the RBL in the first place), nor the shunning sanction imposed on violators of the norm, relies on access to (formal) State-supported enforcement devices or State-imposed legal sanctions,16 and the decision whether to join that exercise is in the hands of a (relatively large) number of independentlyacting agents.17 Conditions in cyberspace do seem to create, in Professor Elkin-Korens words, new opportunities for voluntary normative regimes of this kind.18 Not surprisingly, conflicts between formal and informal, centralized and decentralized, rule-making processes are at the heart of many of the important and challenging cyberspace policy debates. The extraordinary current turmoil in the domain name allocation system is one illustration. The story has been told in detail elsewhere.19 Briefly, in the beginningbefore the Internet became such a Big Dealresponsibility for operating the machines, and the databases on those machines, that correctly route Internet messages fell to the Internet Assigned Number Authority (IANA), an imposing-sounding entity that, in reality, consisted of a small number of dedicated volunteers in southern California. As the Internet began its explosive growth, IANAs ability to maintain the system became increasingly overloaded; beginning in 1993,
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responsibility for maintaining these databases at least, for three of the increasingly popular generic top-level domains*.com, *.net, *.org and the likewas handed over to a private firm, Network Solutions, Inc., under a contract styled a Cooperative Agreementfunded by the U.S. government (first through the National Science Foundation, later through the Commerce Departments National Telecommunications and Information Administration). When that cooperative agreement was due to expire in 1998, the Commerce Department had a decision to make. It could simply walk away from the relationship on the stated expiration date, which is ordinarily what happens when cooperative agreements (or any government contracts) expire. It rejected that option, however, taking the position that it would be irresponsible to withdraw from its existing management role [in the domain name system] without taking steps to ensure the stability of the Internet.20 The Internet naming system, it concluded, needed a more formal and robust management structure, and it called for the creation of a new, not-for-profit corporation formed by the Internet stakeholders themselves to manage the domain name system.21 Shortly thereafter, control of this system was placed in the hands of a single institution now known as ICANN, the Internet Corporation for Assigned Names and Numberswhich would have overall responsibility for setting the rules under which the domain name system would henceforth operate. Putting aside whatever one might think of this decision (or the manner in which ICANN has fulfilled its responsibilities22), the decision to centralize authority over this system in a single, government-authorized entity will inevitably have deep implications for the Internet as a whole. The debate over the normative implications of these informal processes has become a lively one indeed. In one corner are commentators, myself included, who find these systems normatively attractive, on both legitimacy and efficiency grounds.23 Legitimacy justifications rest on the view that informal private ordering schemes like the RBL are a superior alternative to centralized government models in that [they are] the most consistent with autonomy and freedom.24 By these lights, MAPS is normatively attractive inasmuch as it constrains individuals behavior only to the extent, and precisely to the extent, that others share MAPS views on the definition of wrongdoing, the choice of appropriate sanction, the identity of the wrongdoers, etc; the MAPS operators can persuade, cajole, and beg the thousands of ISPs to sub-

scribe to the RBL, but they cannot force them to do so in would we go about building something as ridiculously any meaningful sense of that term. Efficiency justifica- complex as a single interconnected global communications rest on the extraordinary power of decentralized tions network? Who would we place in charge of such a systems to generate, by means of repeated trial-and- project? How would we solve the seemingly impossible error and the pull-and-tug of competing rules and count- coordination problem facing anyone trying to construct er-rules, solutions to complex problems that can be found that global networkconstructing, and getting large no other way.25 numbers of people to adopt, what amounts to a single Others disagree, both with particular reference to global language?28 institutions like the RBL26 and in general,27 arguing Of course, we did, somehow, solve it, without any both that the efficiency benefits of these cyberspace authority in charge of bringing it into being, in a norm-creation processes are overblown and that such remarkably short period of time, and to the surprise of processes systematically exclude public values from virtually everyone.29 A decentralized process of developbeing incorporated into ing consensus among the norms they generate. larger and larger numIt is a rich debate that bers of geographically-diswill, I suspect, be one of persed individuals some[C]onflicts between formal and informal, the enduring legacies of how managed to get us the study of the law of here. Emergent institucyberspace. I want to put tions like the Internet centralized and decentralized, ruleaside, for purposes of this Engineering Task Force30 essay, the many difficult, (whose motto, We reject even profound, substanKings, Presidents, and making processes are at the heart of tive questions raised in voting; we seek rough conthis debate, in order to sensus and working code, focus a little attention aptly captures its decenmany of the important and challenging instead on the metatralized orientation), the debate, on questions World Wide Web 31 about the ways in which Consortium , the cyberspace policy debates. the substantive questions Internet Assigned themselves can be Numbering Authority32, explored and evaluated. and the likeinstitutions We like to think, at least at a conceptual level, that we with no authority whatsoever to act on anyones behalf, conduct this debate by placing decentralized rule-making no fixed address or membership, no formal legal exisprocesses (like the RBL) on the table, dissecting their tencesomehow got hundreds of millions of individuals features, and comparing them, on whatever normative or across the globe to agree on a common syntax for their descriptive criteria we choose, with alternative processes. electronic conversations. The protocols of the global netBut there are serious impediments to our ability to do work, like the natural languages they so closely resemthat, impediments that skew the inquiry into the virtues ble, emerged from a process that was at its core (or lack thereof) of decentralized processes. Let me try to unplanned and undirected. Though we can certainly explain the sorts of things I have in mind. point ex post to many individuals and institutions who First, I would suggest that we understand littlefar played particularly important roles in its emergence, ex less than we need toabout the processes of self-ordering ante there was no one we could have pointed to as and informal coordination. The rise of the Internet itself charged with creating the set of rules we now know as shows us, I think, how little we know about the ways that the Internet, any more than we can point to any one indidecentralized, trial-and-error, consensual processes can vidual or institution charged with creating the set of build stable structures of literally unimaginable com- rules for English syntax. plexity and power. If cyberspace did not exist, we would Could it have been built any other way? My instinct is all probably agree that it could not exist. How, after all, that it could not have, that only an authority-free
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process of this kind could have constructed this system, location is of little significance, have long since passed that no one with the authority to build the Internet could into cliche; but that doesnt mean that they are not real have done so.33 If Im right, this is of considerable impor- problems. Whose rules regarding spam should we be tance to the normative debate, for it obliterates the dis- comparing to MAPS? The Virginia legislatures36? The tinction between the normative and the descriptive United States Congress37? The International aspects of the debate; if we were trying, circa 1965, to Telecommunications Unions? UNESCOs? ICANNs? find the best way of constructing the protocols for the The task of identifying the alternative rule-makers for Internet, we would not lay alternative centralized and purposes of normative comparison is made even more difdecentralized decision-making models side-by-side for ficult than this because cyberspace, having emerged from comparison, for there would be no centralized model to decentralized disorderfrom the primordial ooze of the examine that could accomplish the task. But this is, I Internet Engineering Task Force may well create conadmit, just instinct; I do not know of any analytic vocab- ditions that favor the growth of powerful centralizing ulary or framework within which I could make that argu- forces.38 The State of Virginia will soon discover that its ment. Even if my instinct is correct, how would we have anti-spam statute has little effect on the amount of spam known that in 1965? How that its citizens receive, would we know it now? because while spam origiSecond, and relatedly, I nating anywhere on the believe that conditions in network can easily make The decentralized process that built the cyberspace make it diffiits way into Virginia, cult to specify the alternaspam originating elsetive processes with which wherei.e., outside of Internet protocols and the domain decentralized processes Virginias bordersis are to be compared as part largely immune to 39 of this policy calculus. No Virginias control. The name system cannot, ex ante, ensur[e] one, of course, suggests same will be true in that decentralized regard to a federal antiprocesses like the one of spam statute (if such a the stability of the Internet. which the RBL is a part statute is enacted), just on constitute rule-making a grander scale. We can Nirvana. The relevant already write the headnormative question is always whether processes of this line: Use of Offshore E-Mail Servers Hinders kind are betterhowever one chooses to define better Enforcement of Federal Spam Statute; Government Calls than available alternatives.34 for International Cooperation to Solve Serious Problem. We need, in other words, to be debating whether the We will, inevitably (and, since were on Internet Time, process of which RBL is a part is better thanthan sooner than we think), hear calls for international harwhat? As I look over the contributions to this debate Im monization of spam regulation, replicating the pattern not always sure I can fill in that blank. Some of this is currently spreading across the cyberspace legal specmere rhetorical device; it is always tempting to seize the trum. How can we factor this into the normative comrhetorical high ground by demonstrating the substantial parisons we are trying to make? distance between an opponents position and perfection Third and finally, if all this werent confusing enough, 35 itself. But there is a deeper problem here. Cyberspace decentralized processes are fundamentally, and irreis particularly, and genuinely, tricky on this score. What ducibly, unpredictable. No one can say ex ante what kind are the alternative rule-making processes or institutions of anti-spam rules will emerge from the RBL process, or that should be placed on the analytic table alongside the how the domain name allocation system would today be RBL? The problems posed by the borderless features of operating had the Commerce Department chosen to step this new medium for traditional rule-making institu- aside in 1998, because that information does not exist tions, faced with the problem of mapping territorially- unless and until the process itself generates it. No one can based legal regimes onto a medium in which physical say whether MAPS initiative will, or will not, cause open
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mail relay systems to disappear, because that depends upon the response of thousands of individual system administrators; no one can say whether alternative and as yet untried and perhaps unthought-of means of deterring spammers will prove more popular than MAPS; no one can say how spammers will react to the absence of open-mail relay (or to these other alternatives) or how the anti-spammers will react to those reactions, etc. Because we can not see, or imagine, where the RBL might take usthe rule(s) of spamming that the RBL and its variants could producewe cannot lay these rules side-by-side with their centralized alternatives for purposes of analysis, deliberation, and debate. Our analytic table contains only, as it were, the bad news: the inherently disordered and aggravating messiness of decentralized processes, mail that doesnt reach its intended destination, disruptions of service, and the like. It all makes for an apparently simple policy choice: order versus chaos. During all of the discussionswhich can only be described as frenziedleading up to the decision to grant ICANN the authority to manage the domain name system, I was continually struck by the impossibility of discussing rationally the course of action whereby the government would just walk away from the entire thing. The Commerce Department set forth a number of principles to guide its decision; the domain name system should support competition and consumer choice, reflect, as far as possible, the bottom-up governance that has characterized development of the Internet to date, and reflect the diversity of [the Internets] users and their needs by ensur[ing] international input in decision making.40 But one principle was primus inter pares: The U.S. government should end its role in the Internet number and name address systems in a responsible manner. This means, above all
1 Cyberprof is a listserve discussion group moderated by Professor Mark Lemley of the University of California-Berkeley. 2 E-mail from Tom Field, Professor, Franklin Pierce Law Center, to Cyberprof Discussion Group, Jan. 28, 1999 (thanks to Professor Field for his permission to quote the message here) (copy on file with the author). 3 See Robert McMillan, What Will Stop Spam? (last modified Nov. 20, 1999) <http://www.sunworld.com/sunworldonline/swol-121997/swol-12-vixie.html>. See generally Mail Abuse Prevention System (visited Nov. 19, 1999) <http://mail-abuse.org>; Maps Realtime Blackhole List (visited Nov. 19, 1999) <http://maps.vix.com/rbl>. 4 See generally, Mail Abuse, supra note 3. 75

else, ensuring the stability of the Internet. The Internet functions well today, but its current technical management is probably not viable over the long term. We should not wait for it to break down before acting. Yet, we should not move so quickly, or depart so radically from the existing structures, that we disrupt the functioning of the Internet. The introduction of a new system should not disrupt current operations, or create competing root systems.41 The decentralized process that built the Internet protocols and the domain name system cannot, ex ante, ensur[e] the stability of the Internet. If that is indeed the goal, that option is off the table. Because there is no way to answer the question What kind of domain name system would we have today had the Commerce Department stepped aside in 1998?, that course of action could not be taken seriously. My fear is that this leads to a policy-making catastrophe of significant proportions. A stable Internet is one locked in place, incapable of generating innovative responses to the very problems that it is itself bringing into existence. The very existence of the Internet should caution us against dismissing too quickly the notion that there are some problems that are best solved by these messy, disordered, semi-chaotic, unplanned, decentralized systems, and that the costs that necessarily accompany such unplanned disorder may sometimes be worth bearing.42 But which problems? How can we know? x
Postd@erols.com: An earlier version of this paper was originally presented at the Yale Information Society Project Conference on Private Censorship/Perfect Choice, April 9, 1999. Thanks to Bill Scheinler for research assistance, and to the Temple Law School summer research grant fund for support in completing this paper.

5 The RBL currently has approximately 1,400 entries. E-mail from Nick Nicholas, Executive Director, Mail Abuse Prevention System, to David G. Post (Oct. 6, 1999) (on file with author). Most of these entries consist of only a single numeric Internet address; some, however, consist of the address of what is commonly called a Class C network, which itself contains 255 individual addresses. See Paul Vixie, MAPS RBL Candidacy (visited Nov. 19, 1999) <http://maps.vix.com/rbl/candidacy.html>. 6 See Vixie, supra note 5. Removal from the list requires a showing by the blackholed address, or the appropriate network administrator, that the spammer is no longer at the address in question and/or that a stronger Terms of Use agreement has been put in place for the network on which the spammer was located. Id.

7 Open-mail relay refers to a practice whereby Internet mail servers process and transmit e-mail messages in circumstances in which neither the sender nor the recipient is an authenticated local user; that is, it allows strangers to access its mail handling facilities. Spammers, apparently, utilize open-mail relay sites to launder their e-mail; by using an open relay, their e-mail will appear to have originated from a source other than the true source, thereby making it difficult to trace or filter the messages. See Better Network Security Through Peer Pressure: Stopping Smurf and Spam (visited May 31, 1999) <http://securityportal.com/cover/coverstory19990531.html>; Paul Hoffman, Allowing Relaying in SMTP: A Series of Surveys (visited Nov. 19, 1999) <http://www.imc.org/ube-relay.html>; Chip Rosenthal, MAPS TSI: Anti-Relay: What is Third-Party Mail Relay? (visited July 31, 1999) <http://maps.vix.com/tsi/ar-what.html>; Vixie, supra note 5. 8 MAPS includes in this category such activities as hosting web pages that are listed as destination addresses in bulk e-mail, or providing e-mail forwarders or auto-responders that can be used by bulk e-mailers. See Vixie, supra note 5. 9 There is currently no charge to subscribe to the RBL. See Nick Nicholas & Chip Rosenthal, MAPS RBL Participants (visited Nov. 19, 1999) <http://maps.vix.com/rbl/participants.html>. The RBL currently has over 180 registered subscribers who receive full, frequently updated copies of the RBL for storage and use on their own routers and servers. These subscribers are required to execute a license agreement with MAPS, the terms of which are not publicly available. Id. In addition, there are several thousand other users who either receive the RBL via EBGP4 Multi-Hop, a protocol used by routers on the Internet, or through direct queries on specific numeric Internet address to MAPS RBL servers. Id. 10 Some have suggested plausibly that the explosion of mass email is undermining the viability and even the existence of many open discussion forums (in particular, many Usenet newsgroups) one of the Internets earliest and most remarkable innovations. See Paul K. Ohm, Comment, On Regulating the Internet: Usenet, A Case Study, 46 UCLA L. REV. 1941, 1951 (1999) (noting that spam causes a dramatic decrease in Usenets signal-to-noise ratio and is therefore considered a major threat to [Usenets] continued popularity). 11 See generally, ROBERT ELLICKSON, ORDER WITHOUT LAW: HOW NEIGHBORS SETTLE DISPUTES (1991) (arguably the start of the rejuvenation of the study of norms within legal scholarship.) The Symposium on Law, Economics, and Norms, 144 U. PA. L. REV. 1643 (1996), maps out much of the recent terrain. 12 MAPS provides an extensive rationale for its proposed norms. See Paul Vixie, Our Rationale for the MAPS RBL (last modified July 12, 1999) <http://maps.vix.com/rbl/rationale.html>. 13 The RBL has apparently become popular enough that many of the vendors of the most popular mail server configuration software provide support for RBL implementation in their products. See Paul Vixie, (visited Jan. 5, 2000) <http://maps.vix.com/rbl/usage.html>. 14 The implementation in software of this particular norm is surely an unusual feature of this process that has no clear analogue in realspace norm-creation schemes. Enforcement of norms by code is, as Professor Lessig has demonstrated, a large, and a most fundamental change. See LAWRENCE LESSIG, CODE AND OTHER LAWS OF CYBERSPACE (1999). Cyberspace, in Lessigs words, . . . demands a new understanding of how regulation works and of what regulates life there. It compels us to look beyond the traditional lawyers scope beyond 76

laws, regulations, and norms. . . . In cyberspace we must understand how code regulates how the software and hardware that make cyberspace what it is regulate cyberspace as it is. As William Mitchell puts it, this code is cyberspaces law. Code is law. Id. at 6 (emphasis in original). 15 Margaret Radin and R. Polk Wagner criticize what they describe as a false dichotomy between characterizations of top-down and bottom-up ordering. See Margaret Radin & R. Polk Wagner, The Myth of Private Ordering: Rediscovering Legal Realism in Cyberspace, 73 CHI.-KENT L. REV. 1295, 1297 (1998). Any rule-making regime, they suggest, can be characterized as either [top-down or bottom-up], depending upon how you look at it. Id. at 1298. The point is an important one; rule-making processes are always top-down when seen from one level of the hierarchy of social institutions and bottom-up when seen from a different level. MAPSs decision-making process is top-down from the perspective of, say, the MAPS webmaster, who receives from higher up a list of sites to put on, or take off, the RBL each morning. This top-down process is simultaneously a component of a bottom-up process from the perspective of someone looking at the responses of the Internet community as a whole to the proliferation of commercial e-mail. This is a feature of all networks (including social networks) consisting of embedded hierarchies; any element in the network is simultaneously at the top of some hierarchy(ies) and at the bottom of others. See David G. Post & Michael B. Eisen, How Long is the Coastline of the Law? Thoughts on the Fractal Nature of Legal Systems, 29 J.L.S. 545 (2000) (describing this dizzying characteristic of embedded hierarchies as a consequence of their fractal structure). 16 You are not, in other words, subject to any sanction enforced through the formal State-created processes if you choose to join, or not to join, the MAPS exercise. If for any reason you do not approve of MAPS particular definition of unacceptable behavior, their choice of sanction, the means they have chosen to implement that sanction, or their method of detecting violators subject to the sanction, you can ignore them (or, if youd like, to propose your own). MAPS can persuade, cajole, and beg the thousands of ISPs out there to join the group of RBL subscribers, but it cannot use State-sanctioned force to get them to do so. 17 Professor Elkin-Koren defines decentralized norm-creation processes as those in which the power to create and shape . . . rules is not concentrated in the hands of any individual group, or institution [and which is] spread among various social agents. Niva ElkinKoren, Copyrights in Cyberspace Rights Without Laws?, 73 CHI.KENT L. REV. 1155, 1161 (1998). As of June, 1999, there were over 6,000 ISPs in the United States alone offering Internet connectivity, See Jason Oxman, The FCC and the Unregulation of the Internet, FCC Office of Plans and Policy Working Paper No. 31 (last modified July, 1999) <http://www.fcc.gov/Bureaus/OPP/working_papers/oppwp31.pdf>, and countless other network administrators in a position to subscribe (or not) to the RBL. 18 Elkin-Koren, supra note 17, at 1161-62 (Cyberspace significantly reduces the costs of communicating and collecting information regarding individuals preferences. It also facilitates fast and cost-effective information processing that allows real-time feedback on public preferences and choices. Cyberspace, thus, opens up opportunities for effective participation of individuals in defining the rules.). 19 See A. Michael Froomkin, Of Governments and Governance, 14 BERKELEY TECH. L.J. 617 (1999); Milton L. Mueller, Internet Domain Names: Privatization, Competition, and Freedom of Expression, Cato

Briefing Paper No. 33 (last modified October 16, 1997) <http://www.cato.org/pubs/briefs/bp-033.html>; Jon Weinberg, Testimony of Jon Weinberg, Professor of Law, Wayne State University before the U.S. House of Representatives Commerce Committee, Subcommittee on Oversight and Investigations, Domain Name System Privatization: Is ICANN Out of Control? (last modified July 22, 1999) <http://www.law.wayne.edu/weinberg/testimony.pdf>. The Department of Commerces White Paper, Management of Internet Names and Addresses (visited January 24, 2000) <http://www.ntia.doc.gov/ntiahome/domainname/6_5_98dns.htm>, has a comprehensive summary of the history of domain name and number administration on the Internet. 20 See Department of Commerce, supra note 19. 21 Id. 22 My own views have been set forth at length elsewhere. See David G. Post, Governing Cyberspace: Where is James Madison when we need him?(last modified June 6, 1999) <http://www.icannwatch.org/archives/essays/930604982.shtml>; David G. Post, Elusive Consensus (last modified July 21, 1999) <http://www.icannwatch.org/archives/essays/932565188.shtml>; David G. Post, ICANN and Independent Review (last modified Aug. 1999) <http://www.icannwatch.org/reviewpanel/index.shtml>; David G. Post, Cyberspaces Constitutional Moment, THE AMERICAN LAWYER, Nov. 1998, at 117. 23 See, e.g., Tom W. Bell, Fair Use v. Fared Use: The Impact of Automated Rights Management on Copyrights Fair Use Doctrine, 76 N.C. L. REV. 557 (1998); Llewellyn Joseph Gibbons, No Regulation, Government Regulation, or Self-Regulation: Social Enforcement or Social Contracting for Governance in Cyberspace, 6 CORNELL J. L. & PUB. POLY 475 (1997); I. Trotter Hardy, The Proper Legal Regime for Cyberspace, 55 U. PITT. L. REV. 993, 995-96 (1994); Maureen A. ORourke, Copyright Preemption After the ProCD Case: A MarketBased Approach, 12 BERKELEY TECH. L. J. 53, 80 (1997); David Post & David R. Johnson, And How Shall the Net Be Governed? A Meditation on the Relative Virtues of Decentralized, Emergent Law, in COORDINATING THE INTERNET, (Brian Kahin & James Keller eds., 1997); David G. Post & David R. Johnson, Chaos Prevailing on Every Continent: Towards a New Theory of Decentralized Decision-Making in Complex Systems, 73 CHI.-KENT. L. REV. 1055 (1998); David R. Johnson & David G. Post, The New Civic Virtue of the Internet: Lessons from a Model of Complex Systems for the Governance of Cyberspace, in THE EMERGING INTERNET (1998 Annual Review of the Institute for InformationStudies) (C. Firestone ed., 1998). The distinction between the legitimacy and efficiency justifications for decentralized Internet rule-making comes from Elkin-Koren, supra note 17, at 1166-79. 24 Elkin-Koren, supra note 17, at 1172. 25 Decentralized decision-making processes, in the language of complexity theory, are powerful algorithms for finding high points on the fitness landscape (i.e., solutions to problems defined over complex, interdependent spaces). See Post, Chaos Prevailing on Every Continent, supra note 23, at 1081-86. The problem-solving power of decentralized systems is well-documented and reasonably non-controversial in mathematical, physical, and biological systems, underlying phenomena as diverse as parallel processing algorithms in computational mathematics and natural selection in the design of living things. See id. at 1083-1093.

26 Professor Lessig has written, in discussing the spam wars, that: . . . these battles [between spammers and anti-spammers] will not go away. The power of the vigilantes will no doubt increase, as they hold out the ever-more-appealing promise of a world without spam. But the conflicts with these vigilantes will increase as well. Network service providers will struggle with antispam activists even as activists struggle with spam. Theres something wrong with this picture. This policy question will fundamentally affect the architecture of email. The ideal solution would involve a mix of rules about spam and code to implement the rules. . . . Certainly, spam is an issue. But the real problem is that vigilantes and network service providers are deciding fundamental policy questions about how the Net will work each group from its own perspective. This is policy-making by the invisible hand. Its not that policy is not being made, but that those making the policy are unaccountable. . . . Is this how network policy should be made? The answer is obvious, even if the solution is not. Lawrence Lessig, The Spam Wars (last modified Dec. 31, 1998) <http://www.thestandard.com/articles/display/0,1449,3006,00.html> (emphasis added). This view not only that we should not rely on the interplay [a misnomer, perhaps] between spammers and antispammers to make network policy, but that it is obvious that we should not do so seems to be widely shared. In the course of the most enlightening discussion of these questions on the Cyberprof listserve, skepticism about bottom-up processes in general, and certainly about the RBL, was widespread. Cyberprof Listserve (selected postings Jan. 29-30, 1999) (copies on file with author). For example: These private blacklists however virtuous the maintainers might be are a perfect example, in my humble opinion, of where bottom up doesnt work. The externality from this boycott is huge. Yet there is no body that can reckon that externality. [My company] fell victim to [the RBL] during last summer. Given the nature of our proprietary architecture, making the fixes they wanted wasnt an option. While they eventually were forced to acknowledge this, we were blackholed for an unacceptable period of time while we tried to make them understand why we couldnt comply. The lack of formal process on their end seriously hampered our ability to get them to understand. Many of our customers had major problems arise during that time period because they couldnt use our service to get mail out to users on ISP who subscribed to the Vixie list. The average RBLd site with an open mail relay is like a neighbor who allows members of the public open access to his yard, whence they deposit all sorts of trash into *my* yard. . . . Why cant I allow access to my yard without fear that some members of the public will abuse it to litter both mine and my neighbors yards? Moreover, I wonder how many generations of locks and lock pickers we have yet to endure. Something is amiss in this let-itall-hang-out picture. Professor Field himself, it might be noted, shared this skepticism: I regard email as a tool, not a career. I appreciate that some are otherwise inclined, but neither I nor many other people are interested in its history and arcana. My point was and remains: Public policy should not require them to delve deeply to send a simple message and avoid 77

what amounts to vandalism and vigilante responses thereto. See also Jon Swartz, Anti-Spam Service or McCarthyism? Internet Group Puts Some ISPs on a Blacklist (last modified May 10, 1999) <http://www.sfgate.com/cgibin/article.cgi?file=/chronicle/archive/1999/05/10/BU76824.DTL> (describing MAPS activities as a sort of Cyber-McCarthyism). 27 Three of the contributions to the recent symposium on The Internet and Legal Theory focused on the deficiencies of informal Internet rule-making systems. See Elkin-Koren, supra note 17; Mark. A. Lemley, The Law and Economics of Internet Norms, 73 CHI.-KENT L. REV. 1257 (1998); Margaret Radin & R. Polk Wagner, supra note 15. See also LAWRENCE LESSIG, CODE AND OTHER LAWS OF CYBERSPACE (1999). 28 The Internet is, at bottom, that language, the set of grammatical rules (the Internet protocols and related transmission and communication standards) that allow machines to exchange information with one another. Lawrence Lessig, Open Code and Open Societies: Values of Internet Governance (last modified May 11, 1999) <http://cyber.law.harvard.edu/works/lessig/kent.pdf>; David G. Post, What Larry Doesnt Get: A Libertarian Response to Lessigs Code and Other Laws of Cyberspace, STAN. L. REV. (forthcoming). 29 See The Death of Distance, THE ECONOMIST, Sept. 30, 1995, at 35 (probably the best general description of the striking inability of politicians, social theorists, and even some very savvy players within the computer industry itself to predict ex ante the emergence and growth of this medium). 30 Internet Engineering Task Force (visited Nov. 18, 1999) <http://www.ietf.org>. 31 World Wide Web Consortium (visited Nov. 18, 1999) <http://www.w3.org>. 32 Internet Assigned Number Authority (visited Nov. 18, 1999) <http://www.iana.org>. 33 The failure of the official standard-setting bodies the International Organization for Standardization (ISO) and the International Telegraph and Telephone Consultative Committee (CCITT) (now the International Telecommunications Union (ITU)) to gain acceptance for their OSI internet working protocols is a nice case in point. See KATIE HAFNER & MICHAEL LYON, WHERE WIZARDS STAY UP LATE: THE ORIGINS OF THE INTERNET 246 - 251 (1996) (describing the battle between the OSI protocols and the ultimately-triumphant-and-dare-I-call-it-bottom-up TCP/IP protocols); Peter Salus, Protocol Wars: Is OSI Finally Dead?, 6 Connexions 16 (1995). See also John Lamouth, Understanding OSI (last modified Nov. 11, 1997) <http://www.salford.ac.uk/iti/books/osi/osi.html>; OSI (last modified May 16, 1998) <http://webopedia.internet.com/Standards/Networking_Standards/OSI .html>. But one data point does not a theory make. See Elkin-Koren, supra note 17, at 1188 (private ordering should not be examined in the abstract, but rather in comparison to its alternatives); Lemley, supra note 27, at 1261 (noting, by implication, the difficulties of analyzing questions of comparative institutional governance). 35 This is a common enough technique to have its own name: the Nirvana Fallacy. See, e.g., Harold Demsetz, Information and Efficiency: Another Viewpoint, 12 J. L. & ECON. 1 (1969). 36 The John Marshall Law School maintains a useful database of 78 34

state efforts to curb unsolicited bulk e-mail. See (last modified Mar. 5, 1999) <http://www.jmls.edu/cyber/statutes/email/state.html>. In 1998, for example, Virginia amended its computer trespass statute to provide that it is unlawful to [f]alsify or forge electronic mail transmission information or other routing information in any manner in connection with the transmission of unsolicited bulk electronic mail through or into the computer network of an electronic mail service provider or its subscribers. VA. CODE ANN. 18.2-152.4 (Michie 1999). 37 Numerous bills to regulate or proscribe certain types of e-mail were introduced in the 106th Congress alone, including: Unsolicited Mail Act of 1999, H.R. 3113, 106th Cong. (1999); Can Spam Act, H.R. 2162, 106th Cong. (1999); E-Mail User Protection Act, H.R. 1910, 106th Cong. (1999); Inbox Privacy Act of 1999, S. 759, 106th Cong. (1999); and Telemarketing Fraud and Seniors Protection Act, S. 699, 106th Cong. (1999) and its House counterpart, Protection Against Scams on Seniors Act of 1999, H.R. 612, 106th Cong. (1999). 38 See LAWRENCE LESSIG, CODE AND OTHER LAWS OF CYBERSPACE 206 (1999): Just as there was a push toward convergence on a simple set of network protocols, there will be a push toward convergence on a uniform set of rules to govern network transactions. This set of rules will include not the law of trademark that many nations have, but a unified system of trademark, enforced by a single committee [citation omitted]; not a diverse set of policies governing privacy, but a single set of rules, implicit in the architecture of Internet protocols; not a range of contract law policies, implemented in different ways according to the values of different states, but a single, implicit set of rules decided through click-wrap agreements and enforced where the agreement says. See also David G. Post, Governing Cyberspace, 43 WAYNE L. REV. 155, 163-64 (1997). That is, I realize, a somewhat controversial claim. See A. Michael Froomkin, The Internet as a Source of Regulatory Arbitrage, in BORDERS IN CYBERSPACE: INFORMATION POLICY AND THE GLOBAL INFORMATION INFRASTRUCTURE (Brian Kahin & Charles Nesson eds., 1997) (available at <http://www.law.miami.edu/~froomkin/articles/arbitr.htm>); Jack L. Goldsmith, Against Cyberanarchy, 65 U. CHI. L. REV. 1199 (1998). Doctrinal impediments to Virginias assertion of extraterritorial jurisdiction over out-of-boundary spammers includes the Commerce Clause, see American Library Assn v. Pataki, 969 F. Supp. 160, 161 (S.D.N.Y. 1997), and limitations on Virginias jurisdiction to prescribe extraterritorially and limitations on the Virginia courts ability to exercise personal jurisdiction over persons and entities residing elsewhere; even Professor Goldsmith, the most forceful critic of the notion that there are such impediments, agrees that in both the domestic and international arenas the enforceable scope of any jurisdictions laws is relatively narrow, extending only to individual users or system operators with presence or assets in the enforcement jurisdiction. Jack L. Goldsmith, Against Cyberanarchy, 65 U. CHI. L. REV. 1199, 1220 (1998). 40 Department of Commerce, supra note 19. 41 Id. 42 Virginia Postrel captures an important dimension of this battle between those of different faiths regarding these matters in her discussion of the difference between dynamists and stasists. See VIRGINIA I. POSTREL, THE FUTURE AND ITS ENEMIES: THE GROWING CONFLICT OVER CREATIVITY, ENTERPRISE, AND PROGRESS (1998). 39

internet

By William DeCoste

sender
systems has been increasing at an ever-accelerating rate. Communication via the Internet and World Wide Web continues to grow geometrically, with estimates projecting that approximately 40 million Americans1 will send over 60 billion e-mail messages during the year 2000.2 As of the turn of the millennium, one calculation predicted that some one billion people worldwide would be online.3 This enormous growth is reflected among both consumers and businesses, as organizations of virtually all sizes are forced to utilize some
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beware
The Discoverability and Admissibility of E-Mail

se of e-mail and electronic messaging

form of electronic communication, internal or external, to survive in a truly wired business environment. These profound changes in communication and data exchange increasingly present issues in litigation. Given the sudden and largely unexpected proliferation of e-mail in recent years, courts have faced many difficult questions. Awaiting the methodical, deliberate

development of a jurisprudence governing electronic mail, courts and attorneys have had little guidance in deciding difficult questions of law, conducting litigation, and advising clients.4

Faced with a dearth of authority on point, judges have frequently drawn legal analogies between electronic media and classic forms of evidence, such as paper documents.5 Similarly, attorneys have found themselves caught between clients desires to maintain the confidentiality of their e-mail communications and lawyers obligations to facilitate the discovery of any potentially relevant material, including electronic material. In addition, federal legislation governing the acquisition and use of electronic communications has created novel interpretive issues. Moreover, attorneys continue to face the additional problem of whether they themselves may communicate confidential client information via email while still adhering to their ethical obligation to take reasonable measures to ensure the confidentiality and security of that information. As the courts have increasingly considered questions involving the discoverability and admissibility of email, a jurisprudence of electronic communications has developed. This body of case law leads to the inevitable conclusion that, as a general proposition, electronic mail is governed by the same rules and framework as paper material. Providing the backdrop for this position is an earlier body of jurisprudence which has resolved that computerized business records are no different from paper records, both for purposes of admission and protection. The courts have built upon this foundation to keep the law current as organizational and personal use of computers has grown beyond databases and record-keeping to encompass broad interpersonal communication. Fortunately for attorneys and corporations, the case law now provides

a degree of certainty which was previously lacking. Attorneys should advise their clients, both organizational and individual, that anything which they commit to electronic mail may be used against them in civil or criminal proceedings, even if they believe that they have deleted the messages at issue. Corporations and other organizations are well-advised to encourage their personnel to use the utmost prudence and caution in what they write in electronic communications, because it may be the basis for potentially massive organizational liability. This advice may be all the more pertinent and urgent in view of the casual, careless manner in which many users approach electronic mail and the common misconceptions as to whether it can be obtained by hostile parties and admitted as evidence. Furthermore, developments in federal statutory law provide additional guideposts as to under what circumstances e-mail may by intercepted, accessed, or disclosed, and the ramifications of violations of these statutory restrictions. This Note will explore the current body of jurisprudence concerning the discoverability and admissibility of email in both the civil and criminal contexts. Beginning with a brief explanation of the relevant forms of information technology and electronic communication, it will examine the common misconceptions that fuel the ongoing imprudent use of e-mail. It will then trace the development of the case law, from the foundational cases that first confronted electronic evidence to recent precedent specifically addressing the various forms of contemporary e-mail. Federal statutory law regulating the acquisition and use of electronic communications will also be discussed. This Note will
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then examine the special implications of attorney use of electronic mail to communicate confidential client information. Finally, it will make recommendations concerning how to counsel clients on matters of e-mail policy and liability as well as how attorneys may protect themselves from ethical violations resulting from e-mail use.

Electronic Communication, the Internet, and the World Wide Web

n order to fully understand both the confusion and difficulties faced by judges and attorneys, it is necessary to have a basic understanding of the most common forms of electronic communication. The use of electronic messaging systems within organizations, for the most part, preceded use among consumers. The earliest, and still very common, type of these systems involves a wholly internal system which resides on an organizations mainframe computer or computer network. Traditionally used for business and personal matters, these messaging systems enable employees to communicate with one another electronically by sending messages between desktop workstations in real time. These internal email systems often link multiple facilities spanning disparate geographic locations using cables, telephone lines, or satellite links. Since internal systems have existed for a number of decades, a significant portion of the jurisprudence of electronic communication has developed around these systems without specific reference to the Internet or World Wide Web. The Internet, in contrast, is an

external, public electronic communi- Service Providers (ISPs). OSPs, cation structure that connects organ- such as America Online (AOL), are izations and individuals throughout private commercial communication the world. The Advanced Research networks within which subscribers Projects Agency (ARPA) of the can correspond via electronic mail Department of Defense created the among themselves, participate in Internet with a decentralized archi- chat rooms, and access other subtecture consisting of multiple hosts scriber-only content. ISPs are servicand communication routes, specifi- es which provide access to the cally designed to survive a nuclear Internet and the World Wide Web, attack.6 ARPAs goal was to create and through which users can send an electronic pathway whereby sci- and receive Internet e-mail. OSPs, entists could share use of the limited number of supercomputers in the late 1960s.7 Now While many users preadministered by a consortium sume that their messages of information technology organizations, the Internet has are private and entitled enjoyed phenomenal growth during the 1990s. Today, the to protection from the Internet allows users througheyes of the public or hosout the world to communicate by routing data between comtile litigants, . . .There is at puters using standardized promost a reduced expectatocols.8 E-mail is one of the most common uses of the tion of privacy for elecInternet.9 The World Wide Web is a global hypertext systronic messages, and tem that runs on the Internet maybe none at all. enabling users to send and receive textual, graphical, video, and audio materials in real time by use of interconnected in addition to providing private servdata files, or hyperlinks.10 ices, frequently also offer Internet As the Internet has proliferated, access to their subscribers. organizations have begun to employ external e-mail, either by installing Common Misconceptions Internet communication software alongside their internal messaging uch of the legal confusion sursystems or by utilizing software that rounding the discoverability and combines both systems. Hence, admissibility of e-mail and electronic employer-provided e-mail now fre- records results from serious user quently enables employees to com- misconceptions. Two misconceptions municate both with co-workers as predominate: the effect of deleting a well as with the outside world. message and the expectation of priThe 1990s also witnessed the vacy as to e-mail. While users often rapid growth of both Online Service presume that deleting a message on Providers (OSPs) and Internet their computer makes it disappear

permanently, virtually every deleted electronic message continues to exist in at least one location.11 Through sophisticated detection and retrieval tools, ostensibly deleted messages remain subject to discovery and use in litigation.12 Most computer systems, whether in-house or ISPs, utilize some type of back-up on a regular basis.13 Organizations typically save all data on their mainframes or client-server networks on a routine basis, often daily.14 Furthermore, when these back-ups are performed, all data contained in the computer systems files during the relevant period is generally captured, even messages that were sent, received, and deleted within a short time frame on the same day. This back-up storage, which takes the form of disks or tapes, is frequently preserved for long periods of time or even indefinitely.15 Aside from the availability of back-up materials, deletion by a user does not erase a message from the users hard drive. Rather, it only indicates that the spot which the messages occupies on the hard drive is available to be overwritten.16 Utilizing specialized software, computer experts are frequently able to find and retrieve purportedly deleted messages on desktop hard drives with relative ease.17 Contrary to the common perception, then, the act of deleting electronic messages is merely a logistical command relating to a computers memory or disk space rather than an actual erasure of a message. Overly confident of the delete command, many users unknowingly leave an electronic trail. Another common misunderstanding is the expectation of privacy with

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respect to e-mail.18 While many users presume that their messages are private and entitled to protection from the eyes of the public or hostile litigants, at least some courts have held that there is at most a reduced expectation of privacy for electronic messages, and maybe none at all.19 This limited expectation of privacy inheres in all internal systems and Internet e-mail and is not enhanced by employer promises to the contrary.20 Furthermore, this reduced privacy level also applies to World Wide Web chat rooms.21 Falsely reassured by these critical misconceptions, and lured by the casual nature and ease of use of email, users can become complacent and imprudent about the contents of their communications. As one commentator observes, Descriptions of e-mail communication styles include freewheeling, candid, unfiltered, not modulated, raw and off the cuff. . . . [T]hese very attributes, which lend themselves to easy, casual and seemingly efficient communication have stung many companies and individuals whose transmissions have returned to haunt them.22 Another e-mail commentator agrees: [U]nlike paper memorandums [sic], whose corporeal existence makes people think twice about committing questionable thoughts to paper, the transitory nature of e-mail makes it a perfect example of out of sight, out of mind.23 As a result, judges often face hotly contested disputes involving the discoverability and admissibility of material in the electronic document trail, information which in many cases would never have been preserved were it not for the existence of these technologies. Similarly, attorneys find themselves in difficult situ-

ations, trying to protect clients who have carelessly exposed themselves to potentially significant liability but who, once those mistakes have been made, find themselves duty-bound to preserve and produce the potentially damaging material.24

What is Discoverable
n addressing the discoverability of electronic material, courts often begin with the premise that, as in the case of paper, discovery rules are broad in scope.29 In Daewoo Electronics Co. v. United States,30 the United States Court of International Trade examined a previous order compelling the Department of Commerce (Commerce) to provide Zenith Electronics Corporation (Zenith) with the raw data, in the form of computer tapes, which Commerce used in reaching a final decision in a review of an anti-dumping order.31 The court affirmed the general policy that information which is stored, used, or transmitted in new forms should be available through discovery with the same openness as traditional forms.32 However, the court further broadened the scope of discovery of electronic material by ordering Commerce to also provide Zenith with the final refined forms of the data on the original computer tapes, translated into a format usable by Zeniths computers, and required that Commerce [r]ender to Zenith[] . . . such cooperation and reasonable assistance as is necessary to enable them to process the computerized data.33 The court based its holdings upon two theories which have broad applicability to discovery of electronic material. First, the court acknowledged the relative novelty of electronic technology and the difficulty of ensuring that discovery orders precisely list all of the further electronic refinements and embodiments of taped computer data. Accordingly, the court required that parties comply with the spirit, rather than the

Case Law Development

Discoverability
s its use has proliferated, electronic mail has led to a virtual treasure trove for attorneys seeking discovery of an adversarys internal and external communications.25 Studies have revealed that 20 to 30 percent of the data residing on computers is never generated in hard copy form.26 This statistic includes electronic messages, as users often delete or forward them without ever reducing them to paper. As with many areas of the law, technology has preceded legislation and jurisprudence; accordingly, courts first decided questions of electronic mail discovery on a largely ad hoc basis.27 However, as the number of cases in which this technology plays a role has grown, a body of law concerning e-mail has developed, providing attorneys and litigants with some degree of guidance. From electronic mails earliest days, in the absence of provisions in the Federal Rules of Civil Procedure or other statutory law addressing electronic material, the courts have analogized it to paper documents for purposes of discovery.28 However, because of the inherent differences between electronic and traditional media, novel questions invariably arise which cannot readily be answered by resorting to existing doctrines.
82

most literal possible reading, of such discovery orders.34 Thus, an order for computer tapes . . . [was held to cover] all forms of data which are uniquely subject to manipulation by computers.35 Furthermore, the court stated that the use of new forms of technology should not serve as a basis for avoiding compliance with discovery orders simply because of excessive technical distinctions. In fact, [i]t would be a dangerous development in the law if new techniques for easing the use of information become a hindrance to discovery or disclosure in litigation.36 The court stated that application of the broad principles of discovery which have long governed non-electronic material to computer data is . . . in consonance with Rule 34 of the Federal Rules of Civil Procedure.37 Second, the court held that a discovery order may require a litigant to perform a normal and reasonable translation of electronic data into a form usable by the discovering party[, absent] . . . a showing of extraordinary hardship.38 Along with this, the responding party must also provide the requesting party with a normal and reasonable degree of direct communication and assistance, within the same hardship limitation.39 Both of these, the court concluded, are the ordinary and foreseeable burden of a respondent.40

(CIBA), the class plaintiffs sought discovery of internal electronic mail generated and stored within CIBAs computer system.42 Producing the requested messages would require creating a retrieval program which would be used to search some 30 million pages of electronic correspondence then stored on back-up tapes.43 The data retrieval program would be required to search the email data for names of particular individuals and to eliminate duplicate messages, at an estimated cost of between $50,000 and $70,000.44 As a preliminary matter, it is noteworthy that CIBA did not object to the discoverability of this electronic mail, and the court expressly affirmed the principle that computer-stored information is discoverable under the same rules that pertain to tangi83

Hearsay Considerations
In U.S. v. Ferber, 966 F. Supp. 90 (D. Ma. 1997), the government was confronted with a herasay objection when it sought the admission of incriminating e-mail messages. The government first argued that e-mail was admissible as a business record under Rule 803(6) of the Federal Rules of Evidence, laying a foundation that the printout of the message was authentic and accurate, and that it was the defendant companys practice to send E-Mail messages to co-workers immediately following an important telephone conversation with a client. The court, however, concluded that this foundation was insufficient to warrant admission of the E-Mail as a business record exception to the hearsay rule. While it may have been routine business practice to send such messages, the court held that was not enough: The plaintiff had to prove that the company required the maintenance of such records. The government then attempted to have the message admitted as an excited utterance under Fed. R. Evid. 803(2). Yet the detail and length of the message, among other factors, led the court to conclude that there had been ample time for the author of the E-mail to reflect and fabricate the record. It thus declined to apply this second exception to the hearsay rule. In the end, however, the court did allow the introduction of the E-Mail evidence by accepting the governments third argument that the message was a present sense impression. The court held that since the message explained the event immediately after it happened, it was admissible under Fed. R. Evid. 803(1).

Balancing Benefits and Burdens

n In Re Brand Name Prescription Drugs Antitrust Litigation,41 the United States District Court for the Northern District of Illinois built upon the principles established in Daewoo. In this class action litigation against, among other corporate defendants, CIBA-Geigy Corporation

ble, written materials.45 However, a dispute arose as to whether the class plaintiffs or CIBA should bear the costs of creating the data retrieval program and carrying out the search. The court resolved this question by using a balancing test. First, it stated the threshold principle that the mere fact that the production of computerized data will result in a substantial expense is not a sufficient justification for imposing the costs of production on the requesting party.46 In addition, the court stated, it should consider whether the relative expense and burden in obtaining the data would be greater to the requesting party as compared to the responding party, and whether the responding party will benefit to some degree in producing the data in question.47 While acknowledging that complying with this discovery request was expensive, the court nevertheless held that CIBA should bear the cost.48 Key to the courts decision was that CIBA not only chose to utilize an electronic storage system, but also that it selected the specific software and tape back-up systems which it employed. Since part of the burden attendant to searching its storage files results from the limitations of the software which CIBA used, the court considered it unfair to impose these costs on the class plaintiffs, who had no control over what data storage system CIBA used.49 Another case that utilized a similar balancing approach reached a contrary result. In Fennell v. First Step Designs, Ltd.,50 the United States Court of Appeals for the First Circuit affirmed a district court holding that prohibited discovery of a defendants computer hard drive. The plaintiff, alleging retaliatory dis-

charge for filing a sexual harassment claim, sought discovery of the defendants hard drive in order to determine whether a memo slating her for layoff was actually written on the date claimed by the defendant. As the appellate court formulated the balancing test, the district court . . . balanced the costs, burdens, and delays that the proposed discovery entailed, as well as the likelihood of discovering [useful] evidence[,] . . . against the obvious importance of the evidence sought.51 In order to analyze the hard drive, the plaintiffs computer experts would have to create a mirror copy of the entire hard drive, which then would be examined at the experts facilities.52 The district court determined that such a procedure involved significant costs and risks. The costs would involve the necessary down time which the defendant would have to endure while the mirroring occurred.53 Risks consisted of the difficulties in protecting other information on the hard drive, such as work product relating to the litigation and privileged attorney-client communications.54 Furthermore, the court was concerned that the mirroring process might adversely affect the defendants computer system, warning that [t]he lack of detail in Fennells . . . [proposed method of mirroring and analyzing the hard drive] cast[s] . . . doubt on the soundness of the technical basis for the discovery venture.55 Accordingly, the district court concluded, and the First Circuit affirmed, that the numerous and substantial risks and the significant costs of the plaintiffs proposed discovery of the hard drive outweighed the potential benefits. Therefore, discovery was denied.56
84

In these noteworthy electronic discovery cases, the courts have promulgated this balancing approach in determining whether discovery should be permitted and who should pay. Ultimately, the discoverability of electronic material tends to be ad hoc and fact-specific.57 Nevertheless, Brand Name Prescription Drugs and Daewoo make clear that, should computer material be deemed discoverable, a responding partys obligation may not be satisfied by merely turning over raw data or files in the format used by the responding party. Organizations with large amounts of stored electronic material may be obliged to create retrieval software at their own expense, perform searches and compile the results, transform the data into a format readable by the requesting partys computers, and provide a reasonable degree of technical assistance to facilitate the requesting partys access to the information, all at its own cost.58 Therefore, organizations would be well-advised to consider these potentially high costs and significant obligations not only with respect to formulating e-mail policy but also when making strategic decisions as to what types of electronic data storage and retrieval systems to invest in and utilize. Technology should be easily adaptable once litigation has begun and discovery orders have been issued. Wise technology decisions may make compliance with discovery smooth and affordable; poor strategic planning can make it onerous and expensive.

Admissibility of Electronic Communications and Records

he foundation for the admissibili-

interstate transportation of a was electronic data regarded as decisions as to what types stolen automobile owned by the the evidentiary equivalent of Hertz Corporation (Hertz). paper material, but the court of electronic data storage In establishing that the vehicle also followed a policy of adaptwas stolen, the prosecution ing admissibility rules to track and retrieval systems to relied on information from a modern business practice. By invest in and utilize. Hertz computer system which this view, information generatindicated that the car was not ed through the use of highly rented or leased to anyone durefficient innovations should not ing the time when, according to the tion. These protections include the be rendered inadmissible simply defendant, he had only borrowed it preliminary requirement that the because of differences between the from a friend who was supposedly prosecution lay a sufficient founda- new technology and more traditional leasing it from Hertz.61 Hertz used tion for the trustworthiness of the modes of record-keeping.71 this computer system to maintain all evidence under Federal Rule of Consistent with this line of reasonof its automobile rental and lease Evidence (FRE) 104(b) and that ing, various other circuits have coninformation in lieu of any paper the opposing party is given the same firmed the admissibility of computerrecord-keeping system.62 The court opportunity to inquire into the accu- ized business information.72 held that it is immaterial that . . . [a] racy of the computer and the input In recent years, several significant business record is maintained in a procedures used, as he would have to cases have squarely addressed the computer rather than in company inquire into the accuracy of written admissibility of electronic mail. One books.63 The Ninth Circuit addressed business records.67 Accordingly, in such case of note was Strauss v. the admissibility of business informa- addressing computerized business Microsoft Corp.,73 a sexual discrimition under the relevant portion of the records, the court promulgated the nation suit in which the plaintiff Federal Business Records Act far-reaching principle that computer sought to admit e-mail messages that
85

ty of electronic mail was laid by cases (FBRA), 28 U.S.C. 1732(a),64 data would be treated as indistinthat addressed computerized busi- which establishes the admissibility guishable from written material for ness records.59 Long before e-mail in federal courts of any writing or evidentiary purposes. Four years later, in United States came into common use, organizations record, made as a memorandum or began using computers to store and record of an act or transaction, as v. Russo,68 the Sixth Circuit followed compile business data, such as evidence of such act or transaction if this analysis. In Russo, a physician accounting and transactional infor- made in the ordinary course of busi- challenged the admission of a 1967 mation. As computers came into ness.65 The court stated that the computer compilation of statistical widespread use in organizational FBRA does not require that, to be data used to obtain his conviction of environments, the key question fac- admissible, the record must be in mail fraud for falsely obtaining paying a number of courts was whether writing.66 Moreover, the court con- ments from Blue Shield of Michigan. there was any qualitative difference, cluded that the same protections Echoing De Georgia, the court held for evidentiary purposes, between exist with respect to electronic that the FBRA, though it does not computerized business records and records as exist for paper documenta- expressly address electronic data, data recorded on paper. The necessarily includes such mateanswer to this question would rial.69 Noting the extent to provide the basis for determinwhich businesses today depend [O]rganizations would be ing whether the traditional on computers for a myriad of rules of admissibility would functions, the court stated well-advised to consider apply equally to paper and electhat the FBRA should never tronic material. be interpreted so strictly as to these potentially high costs In the 1969 case of United deprive the courts of the realiand significant obligations 60 ties of business and professionStates v. De Georgia, a defenal practices.70 Thus, not only dant appealed his conviction of . . . when making strategic

were both profoundly embarrassing and potentially damaging to Microsoft. Through discovery, the plaintiff obtained electronic mail in which her supervisor dubbed himself the president of the Amateur Gynecology Club and referred to another female employee as the Spandex Queen.74 Additionally, the supervisor sent messages to other staff members which respectively contained a news report on a proposal to institute a sex holiday in Finland and a parody of a play entitled A Girls Guide to Condoms. The latter message ultimately was forwarded to the plaintiff.75 Microsoft objected to the admission of this material on the bases of relevance under FRE 401 and prejudice under FRE 403.76 Ultimately overruling Microsofts objections, the court analyzed each in light of long-standing American jurisprudence on these two evidentiary provisions, without making any special distinction or modifying the analysis because the messages were in electronic form.77 In so doing, the court treated electronic material as indistinguishable from other forms of evidence, at least with respect to basic admissibility questions of relevance and prejudice. Accordingly, this noteworthy case, decided in the midst of the Internet revolution, held that e-mail is both discoverable and admissible in civil cases, indicating that courts will generally analyze e-mail under the same rules and framework as paper and other non-electronic communications. The criminal context presents similar developments. In United States v. Maxwell,78 one of the broadest and

most far-reaching opinions relating to e-mail, the United States Court of Appeals for the Armed Forces categorically analyzed the level of expectation of privacy, if any, to which a party is entitled with respect to three of the most popular types of electronic mail.79 In Maxwell, the defendant challenged his conviction of knowingly transporting child pornography and other obscene material in interstate commerce through the use of his computer. The defendant contended that, among other things, the seizure and admission of e-mail messages transmitted via AOL violated

[W]hereas traditional discoverability and admissibility rules are only triggered during the course of litigation, the ECPA applies to disclosure of electronic communications in all situations.

vacy disappears absent some legal privilege.83 Similarly, [while] the maker of a telephone call has a reasonable expectation that police officials will not intercept and listen to the conversation[,] . . . the conversation itself is held with the risk that one of the participants may reveal what is said to others.84 The court first applied these doctrines to e-mail among users of a common, private electronic communications service such as AOL. The court held that the transmitter of an e-mail message enjoys a reasonable expectation that police officials will not intercept the transmission without probable cause and a search warrant from the time that the message is sent until the moment it is received and open[ed] by the recipient.85 However, once the message is viewed, the recipient is then free to forward it on to others or to share its contents, even with law enforcement authorities, as may the recipient of postal correspondence or the other party to a telephone conversation.86 Thus, the expectation of privacy present upon the initial transmission of the electronic message is substantially reduced or, for practical purposes, effectively disappears once it is received and opened.87 Moreover, the court stated that this framework is not changed by the risk that a hacker or an AOL employee, contrary to company policy, might intercept or read private messages.88 While such actions may be illegal or violative of contractual obligations, this is not the same as the police commanding an individual to intercept the message.89 The court also distinguished mes-

his Fourth Amendment expectation of privacy.80 The court analogized electronic communications to its more traditional counterparts, postal mail and telephone.81 Citing long established case law, the court explained that a sender of a sealed letter in the mails has a reasonable expectation that the contents of the letter will remain private (absent probable cause and a search warrant) during transit.82 However, once the letter is received and opened, any expectation of pri86

sages sent within private, self-contained electronic mail services such as AOL from e-mail sent via the Internet. The former enjoy a greater, albeit still reduced, expectation of privacy than the latter. In the case of AOL, the messages are privately stored for retrieval on AOLs centralized and privately-owned computer bank and AOLs policy was not to read or disclose subscribers e-mail to anyone except authorized users, thus offering its own contractual privacy protection in addition to any federal statutory [or constitutional] protections.91 The Internet, on the other hand, has a less secure e-mail system, in which messages must pass through a series of computers in order to reach the intended recipient.92 Thus, while a sender of Internet e-mail may enjoy some limited expectation of privacy, that expectation is necessarily lower than within a private commercial service such as AOL due to the absence of a contractual privacy provision. Finally, the court contrasted ostensibly private messages, whether transmitted within a private online service or via the Internet, with chat rooms. The court reasoned that the more open the method of transmission, such as the chat room, the less privacy one can reasonably expect.93 The court concluded that chat rooms, like e-mail messages which are forwarded many times, are [m]essages sent to the public at large and therefore lose any semblance of privacy.94 In sum, the Maxwell court established the far-reaching principle that the jurisprudence of electronic communications parallels that of more traditional forms of communication. Consequently, some forms of electronic mail possess only a very limit-

ed reasonable expectation of privacy.95 The court determined the bounds of this expectation in the varied forms of e-mail through the foundational concept that [e]xpectations of privacy in e-mail transmissions depend in large part on the type of e-mail involved and the intended recipient.96 A more recent district court case has followed this reasoning. In United States v. Charbonneau,97 a defendant charged with transportation and possession of child pornography sought to suppress evidence of incriminating chat room transmissions on Fourth Amendment grounds.98 Provided through AOL, these chat rooms were arguably private in the sense that they were maintained by private users and contained many users interested in trading graphic files with pictures of child pornography.99 The court, following Maxwell, held that e-mail generally parallels letters sent through the mails with respect to privacy expectation and that, despite the ostensibly private aspects of chat rooms, the openness of the chat room [further] diminishes [ones] reasonable expectation of privacy.100 Moreover, analogizing online chat rooms to oral conversations susceptible to eavesdropping, the court held that users of chat rooms have no Fourth Amendment expectation of privacy with respect to undercover agents who might be logged on at any As the district court time.101 explained, this is a risk that all users of chat rooms undertake in view of their public nature.102 Another district court has held even more starkly that certain e-mail communications are simply unprotected. Smyth v. Pillsbury Co.103 involved the interception and inspection of private employee e-mail. The
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plaintiff/employee, relying on employer assurances that messages sent on the companys e-mail system would be confidential and privileged and would not be intercepted and used . . . against . . . employees as grounds for termination or reprimand, made inflammatory statements about sales management in email communications with his supervisor.104 Despite these assurances, the defendant/employer intercepted these e-mails and discharged the plaintiff because of their inappropriate and unprofessional contents.105 The court dismissed the plaintiffs wrongful discharge claim, holding that there is no reasonable expectation of privacy in e-mail communications voluntarily made . . . over . . . [a] company e-mail system notwithstanding any assurances that such communications would not be intercepted by management.106 In addition, the court stated that even if a reasonable expectation of privacy were found to exist, private employee e-mail would still be afforded no protection because a companys interest in preventing the use of its e-mail system for inappropriate and unprofessional comments or even illegal activity . . . outweighs any privacy interest the employee may have in those comments.107 While Smyth did not directly involve questions of adversarial discovery or admissibility in a legal proceeding, it removed any doubt that no reasonable expectation of privacy inheres in employee e-mail. Hence, with little and consistently lagging statutory guidance as to the admissibility of electronic evidence, judges have applied long-standing legal doctrinesoriginally developed for traditional forms of data and communicationto electronic material

unimaginable when these traditional doctrines came into being. As illustrated by cases such as Strauss, Maxwell, Charbonneau, and Smyth, this jurisprudence continues to be refined and adapted to new developments in technology. The analogy between non-electronic material and its electronic counterparts is necessarily becoming more complex as online communication becomes increasingly nuanced. However, parallels continue to be drawn and applied. Generally, in both civil and criminal cases, electronic material is admissible if it satisfies the conditions requisite for the admission of equivalent material in non-electronic form. This applies equally to business and personal messages, including internal and external e-mail and Web chat room communications. Any statutory or constitutional limitations or privileges which exist for

material in traditional form likewise exist for electronic material. Furthermore, cases such as Maxwell and Charbonneau set out useful distinctions between the various forms of e-mail and Web communications now widely in use, and the extent to which key legal doctrines apply to each. These cases are among the main legal guideposts available today.

The Electronic Communications Privacy Act

itle III of the Omnibus Crime Control and Safe Streets Act of 1968 (Omnibus Act) created national standards for governmental and private electronic surveillance of wire and oral conversations.108 As time passed, the

ty.112 First, the ECPA specifically regulates electronic communications.113 It creates both civil (private and governmental) and criminal causes of action for the unauthorized interception, accessing, and disclosure of e-mail.114 Second, whereas traditional discoverability and admissibility rules are only triggered during the course of litigation, the ECPA applies to disclosure of electronic communications in all situations.115 Therefore, it is important to understand how the ECPA affects the maintenance and disclosure of electronic communications even absent pending litigation. Title I of the ECPA regulates the intentional interception of wire, oral, and electronic communications.116 The scope of communications addressed by the ECPA is broad,117 and likewise, the definition of intercept is broadly worded.118 Title I, however, regulates only intentional actions and thereby raises the inherent difficulties of proving an alleged violators subjective intent. Further, even under Title I, government agents may still intentionally intercept e-mail so long as they obtain a court order that strictly complies with requirements as to minimization, duration, and the types of crimes that may be investigated.119 Therefore, so long as the government makes a specific showing for the information it is seeking, it may obtain the material in spite of Title I. In addition, case law has limited Title Is scope to the acquisition of the contents of communications . . . contemporaneous with their transmission,120 effectively constraining the statutes broad definition of intercept. Therefore, the statute and limited case law greatly restrict the breadth of this title.

Omnibus Acts definitions failed to address technological advances in communication.109In re-sponse, Con-gress amended the Omnibus Act with the Electronic Com-munications Privacy Act of E-Mail is also valuable in that the 1986 (ECPA) to regulate the surelectronic source document may veillance of eleccontain valuable information that tronic communicawould not appear in hard copy: file tions, including email.110 This names; comments in headers or amendment refooters; indexing information; flected the inrouting information; and the time creasingly pervasive role of comthe message was last accessed. It is puters in the no wonder then that requests for business and home production of electronically stored environments.111 The ECPA difinformation, including email, have fers in application become standard procedure. from the common Source: Paul Frisman, E-Mail: Dial E For Evidence, N.J. law jurisprudence LAW J., Dec.25, 1995, at 12. of discoverability and admissibili-

Is Nothing Sacred?

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In contrast to contemporaneous acquisitions, Title II of the ECPA regulates, inter alia, whoever . . . intentionally accesses without authorization a facility through which an electronic communication service is provided . . . and thereby obtains, alters, or prevents authorized access to a wire or electronic communication while it is in electronic storage. . . .121 Also under Title II, the governments ability to reach stored e-mail is limited by the statutes requirement that a warrant (within 180 days of storage or after 180 days but without required notice), subpoena or court order (outside 180 days with the required notice)122 issue to reach the stored communications. With respect to court orders, Title II provides that an order shall issue only if the government offers specific and articulable facts showing that there are reasonable grounds that the contents of a[n] . . . electronic communication . . . are relevant and material to an ongoing criminal investigation.123 While the jurisprudence of the Omnibus Act interpreted intercept to only apply to the acquisition of communications in transit,124 e-mail posed a unique difficulty. Unlike telephone and oral communications, there is often a significant time delay between the moment an e-mail message is sent and when it is opened and read by the recipient. During this period, the e-mail service provider (ISP, OSP, or other provider) typically stores the messages. Thus, the question becomes whether Title I or Title II covers unopened, yet stored messages. In the seminal case applying the ECPA, Steve Jackson Games, Inc. v. United States Secret Service, the Fifth Circuit addressed whether the

unauthorized seizure of e-mail messages that have been transmitted but not yet opened by the recipient constitutes a Title I interception or a Title II accessing of stored messages.125 In Steve Jackson Games, the United States Secret Service (Secret Service) seized a computer operated by an electronic bulletin board service. At the time of seizure, the computer contained 162 e-mail messages that had not yet been retrieved; Secret Service staff then read these messages.126 The appellants argued that the messages in question were intercepted because the governments actions acquired the messages prior to delivery and, in fact, prevented their delivery.127 The court, however, held that the inclusion of e-mail within the scope of the ECPA did not change the longstanding requirement of contemporaneous action for an interception under the Omnibus Act.128 Because the e-mails were stored on the seized computer and were not in transit, the court held that they were stored rather than intercepted for purposes of the ECPA.129 The Fifth Circuits e-mail analysis under Title I and Title II has potentially very broad effects. First, the case sets the precedent for extending traditional temporal notions of interception to technologies that may incorporate significant time delays before receipt of communications. Second, the governments procedural requirements for intercepting electronic messages require a more particularized showing than for the accessing of stored communications.130 Therefore, holding that disclosure of unretrieved messages falls under Title II permits governmental access to most e-mail under more lenient . . . standards [than those] for
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governmental access to intercepted . . . communications, such as data streams and telephone conversations.131 As a result, e-mail is effectively afforded less protection from government interference than many other types of communication regulated by the ECPA.132 Aside from the interception issue, government access to stored information from service providers has raised a number of noteworthy issues. McVeigh v. Cohen addressed whether a government agencys duty to obtain a warrant, subpoena, or court order to access stored electronic communications service records is violated when a service provider voluntarily discloses the information to an unidentified member of that governmental agency.133 The case also addressed whether the duty of nondisclosure is on the service provider.134 This case involved a United States Navy investigation into whether the plaintiff had made homosexual statements online in violation of the statutory policy colloquially known as Dont Ask, Dont Tell, Dont Pursue.135 A naval legal employee contacted AOL and, without identifying himself or possessing a warrant, subpoena, or court order, requested and received the identity of an AOL subscriber.136 The United States District Court for the District of Columbia interpreted Title II, Section 2703(c)(1)(A) as establishing reciprocal requirements on both the government and the service 137 provider. Without the information obtained through violation of the ECPA, the naval discharge proceedings against the plaintiff could never have been brought; therefore, the court granted a preliminary injunction against discharge.138 On the other hand, Jessup-

Morgan v. America Online, Inc. addressed whether a service providers disclosure of a subscribers identity to a private party violated Section 2702 of the ECPA.139 In this case, the plaintiff (Morgan) posted a message to a bulletin board inviting members of the board to call a woman (Smith) concerning her desire to have sex.140 Smith obtained Morgans identity pursuant to a subpoena served on AOL.141 Among other claims, Morgan challenged the validity of the subpoena and claimed that AOLs disclosure violated the ECPA.142 Section 2702 prohibits disclosure of the contents of an electronic communication to any person or entity or to the government without first meeting certain restrictions.143 In reviewing the information disclosed by AOL, the court determined that the contents of a communication includes any information concerning the substance, purport, or meaning of that communication, not information concerning the identity of the author of the communication.144 Therefore, independent of the contents of a communication, a service provider can disclose the identity of an author to a private party without liability under the ECPA. Hence, while the ECPA applies to a wide range of electronic material, any acquisition that does not fall within the narrow statutory language lies outside the ECPAs coverage and common law doctrine applies. In proceedings in which the admissibility of e-mail is contested, attorneys should assess whether the ECPA applies to the particular situation. This conclusion is critical in determining whether to invoke a statutory and/or common law argument for excluding the material.

Furthermore, this analysis may indicate the availability of a cause of action seeking damages for the intrusion.

Attorneys, Confidential Client Information, and E-Mail

hile e-mail presents serious risks to clients, it also carries unique dangers for attorneys. In addition to advising business and individual clients as to the risks inherent in email, attorneys also face the potentially more vexing problem of whether to use e-mail themselves to communicate confidential client information. While advice to clients on e-mail policies seeks to minimize potential liability, the propriety of communicating confidential clientrelated material through electronic mail involves issues even closer to home for attorneys. Incorrect appraisal of a lawyers duty to take reasonable steps to prevent the unauthorized disclosure of confidential client information can lead to a violation of disciplinary rules.145 The American Bar Association Standing Committee on Ethics and Professional Responsibility (Committee) recently promulgated a Formal Opinion addressing the confidentiality of unencrypted Internet e-mail and the ethical obligations of attorneys with respect to the transmission of confidential client information via unencrypted email.146 The Committee concluded that unencrypted e-mail involves a reasonable expectation of privacy and, therefore, an attorney does not violate his or her duty under the Model Rules of Professional Conduct by sending confidential client information by this mode.147 The Committee compared four
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common types of e-mail to other media and analogized the expectations of privacy for each with what the Committee believed to be their traditional counterparts. First, the Committee addressed direct e-mail, whereby a lawyer and a client or other third party exchange information by a direct modem connection.148 Not e-mail in the everyday sense, such messages are transmitted digitally through land-line telephone wires in the same way as facsimiles. Both because no third party routers are involved in the exchange of information as well as because of the technical sophistication required to tap and decipher a digital data stream, the Committee determined that direct e-mail carries a reasonable expectation of privacy with respect to confidential information.149 Similar to direct e-mail is private system e-mail, typically an intra-organizational system connecting employees at a single site or at multiple sites by land-based telephone lines. The Committee concluded that private system e-mail carries the same reasonable expectation of privacy as direct e-mail for the same reasons.150 The Committee then addressed two types of electronic mail that fall more within the contemporary understanding of e-mail: e-mail provided by OSPs, such as AOL and CompuServe, and Internet e-mail.151 OSP e-mail was deemed to entail a reasonable expectation of privacy despite three inherent concerns: the risks of misdirection of messages to other service users, of external access to user e-mail boxes, and of potential interception and inspection of messages by service providers.152 The Committee found the risk of misdirection to be equivalent to a similar

risk inherent in faxes.153 The dangers of external access and OSP inspection, the Committee believed, are mitigated by password and encryption protection and by federal limitations on OSPs ability to inspect messages.154 However, the Committee acknowledged that, unlike a misdirected message in a direct or private system environment, a recipient of a misdirected OSP e-mail message has no duty of confidentiality and nondisclosure.155 Finally, the Committee concluded that attorneys also enjoy a reasonable expectation of privacy when using unencrypted Internet email.156 This type of e-mail is the most commonly understood variety today: e-mail sent between users via the Internet rather than through proprietary OSP systems. Unencrypted Internet e-mail necessarily involves greater risks of interception and disclosure than any of the other forms, since it is transmitted across a quasi-public network and is directed and routed by a number of ISPs while in transit.157 Moreover, the non-proprietary, open nature of the Internet renders it particularly vulnerable to hackers seeking to intercept messages. In addition, Internet e-mail is also susceptible to computer viruses, some of which have the capability of causing the users document to be propagated to unintended recipients.158 As with OSP e-mail, the Committee considered the risk of interception by ISPs, although permitted in certain circumstances, to be rendered insignificant by the legal limitations on this practice.159 It dismissed the risk of hackers because of criminal prohibitions and the potential for civil

liability and because of the supposed fragmentation of individual messages sent via the Internet.160 The danger of propagation by viruses, the Committee believed, could be eliminated by an updated anti-virus software application.161 Hence, the Committee concluded that unencrypted Internet e-mail carries a reasonable expectation of privacy, and that attorneys may properly use it to communicate client-related material.162 This conclusion, however, is highly questionable. First, the Committee underestimates the magnitude of the risk of interception not

Perhaps the most difficult challenge may be dispelling the commonly held and dangerous misconceptions, which lull users into a false sense of privacy.
only by ISPs but also by hackers. The public nature of the Internet and the land-based telephone lines over which messages travel render Internet e-mail particularly vulnerable to third party interception. While the Committee found the legal limitations regulating under what circumstances ISPs can intercept and read messages sufficient to ensure the security of Internet e-mail, the unique position of ISPs, both as hosts and routers, provides them and their employees with especially easy access to Internet e-mail. While the Committee correctly recognized that Internet e-mail messages are typical91

ly separated into segments or fragments during transmission, thus reducing the possibility of interception by intermediate ISPs, complete copies of messages may be handled by providers or carriers on each end of a transmission.163 These handlers increase the risk of interception. Similarly, although the Committee considered legal prohibitions on hacking to be a viable means of protection, the open architecture of the Internet serves as an invitation for hackers to ply their skill. Indeed, the proliferation of illegal computer hacking in a variety of environments reveals that the mere existence of legal prohibitions will not deter unauthorized access to private information. Furthermore, the Committees reasoning does not take account of noteworthy case law to the contrary. Maxwell, Charbonneau, and Smyth clearly held that various types of email carry little to no reasonable expectation of privacy.164 The Committees statement that an expectation of privacy . . . [in unencrypted Internet email] is reasonable runs directly contrary to this precedent.165 Another weakness in the Committees reasoning is its failure to recognize the significance of backup systems. Nearly all electronic messages are saved through some type of back-up media, often for long periods of time.166 Thus, not only does an attorney run the almost-certain risk that ostensibly deleted messages continue to exist in some form, but the ongoing existence of e-mails containing confidential information creates the consequential danger of unauthorized access and disclosure. Moreover, even the Committee itself

acknowledged that a number of state bar ethics opinions continue to recommend that lawyers either secure client permission before using unencrypted Internet e-mail to communicate confidential information or refrain from its use altogether.167

NAVIGATING THE UNCERTAIN LANDSCAPE OF ELECTRONIC COMMUNICATIONS

s currently unanticipated forms of electronic communication develop, attorneys may be best advised to follow the processes set out in these and similar cases. Prudence suggests a meticulous analysis of the nature of the new communication technology relative to both currently established forms of electronic messaging as well as to doctrines applicable to traditional forms of communication. This task has been made significantly easier since the foundational principle has now been laid: Electronic evidence is qualitatively no different from non-electronic evidence. While there is no strictly legal difference, the significance of the former lies in what it might reveal: workplace gossip, liability-incurring offensiveness, and criminal activities. All of these are communications that users may assume to be erasable and unrecoverable. But they clearly may be recovered, may be the subject of legitimate discovery, and may be admissible. For attorneys and organizations, the careless communication engendered by e-mail, combined with its longevity and ease of retrievability, renders it worthy of urgent attention. Perhaps the most difficult challenge may be dispelling the commonly held and dangerous misconceptions, which lull users into a false sense of privacy. In any event, attor-

neys are well-advised to make their clients, both individuals and organizations, aware that most anything which they communicate via computer may be traced, recovered, and used against them in civil or criminal proceedings, subject only to the same protections which apply to paper material. Hence, it is best to advise clients to exercise caution and to refrain from put[ting] anything in email [or on the World Wide Web] that . . . [they] wouldnt want a jury to see[] or want published on the front page of . . . [their] newspaper.168 Corporations and other organizations should establish clear guidelines as to what constitutes inappropriate content for electronic communications, informing employees that their use of electronic mail at work may subject both them and their employers to liability. Caution, care, and prudence appear to be the best guidelines with respect to e-mail. Attorneys should also fully understand the additional restrictions and remedies created by the ECPA. Although narrow in scope, this statute may provide clients with a means of preventing the admission of evidence procured in violation of its terms in civil and criminal proceedings. Moreover, it may also enable clients to attain relief when material is illegally obtained outside of the discovery framework. Attorneys themselves face their own risks in how they choose to communicate with clients and transmit confidential client information. While the Committee may have provided some guidance, its conclusions rest on an uncertain foundation and run contrary to some legal precedent. Attorneys should constantly bear in mind the unique dangers to which Internet communications are vulner92

able. Even forms of e-mail which have clear non-digital parallels may be more risky than their traditional analogues because the very nature of the Internet magnifies many dangers. In addition, the lack of unanimity among state bar ethics panels plainly shows how the question of the relative security of e-mail remains uncertain.169 This alone strongly counsels extra caution on the part of lawyers. Furthermore, while the Committees findings may lend some credibility to a reasonable expectation of privacy argument, an attorney cannot ignore the existing contrary case law. All of these considerations demonstrate that, if attorneys choose to use e-mail to communicate confidential client information, they should consider the use of encryption technology or, at a minimum, discuss the dangers of unencrypted Internet email with individual clients to determine their acceptable level of risk. By obtaining informed, knowledgeable permission from clients before using unencrypted e-mail for these purposes, attorneys can both provide the communication convenience and efficiency so important to many clients today while at the same time avoiding the ethical uncertainty and risk otherwise inherent in the use of unencrypted Internet e-mail. For both clients and attorneys, email can be a minefield of legal liability and ethical danger. Latent, forgotten messages can suddenly arise from the deleted file as the smoking gun of damaging evidence. By understanding the discoverability and admissibility of e-mail, and by grasping the technology that underlies it, attorneys can disarm such landmines long before they become legal and ethical hazards. x

1 Samuel A. Thumma, Electronic Mail in the Workplace: Litigation Trends for 1997, INTERNET NEWSLETTER, Dec. 1997, at 1. 2 Monte E. Sokul & Philip P. Andriola, Cyberspace Becomes Ground Zero in Discovery Process and at Trial, THE NEW YORK LAW JOURNAL, Dec. 1, 1997, at 5. 3 Ron Chepesiuk, Trial by E-Mail, STUDENT LAWYER, Sept. 1998, at 36. 4 Id. 5 Id. 6 Edward Kershenbaum & Joseph Kershenbaum, The Internet v. the World Wide Web: Whats the Difference?, NEW YORK STATE BAR JOURNAL, Dec. 1998, at 24. 7 Id. 8 Id. 9 Id. 10 Id. 11 See Wendy J. Rose, The Revolution of Electronic Mail, THE LEGAL INTELLIGENCER, Jan. 21, 1997, at 7-14; Paul Frisman, E-Mail: Dial E For Evidence, NEW JERSEY LAW JOURNAL, Dec. 25, 1995, at 4-6. 12 Rose, THE LEGAL INTELLIGENCER at 7-14; Frisman, NEW JERSEY LAW JOURNAL at 4-6. 13 Rose, THE LEGAL INTELLIGENCER at 8; Frisman, NEW JERSEY LAW JOURNAL at 4-6. 14 Id. 15 Rose, THE LEGAL INTELLIGENCER at 10; Frisman, NEW JERSEY LAW JOURNAL at 6. 16 Rose, THE LEGAL INTELLIGENCER at 13. 17 Id. at 13-14. 18 Id. at 5. 19 See United States v. Maxwell, 45 M.J. 406, 417-19 (C.A.A.F. 1996) (reduced or no expectation of privacy depending upon medium of electronic communication used); Smyth v. Pillsbury Co., 914 F. Supp. 97, 98, 101 (E.D. Pa. 1996) (no reasonable expectation of privacy in employer-provided e-mail). 20 See Smyth, 914 F. Supp. at 98, 101. 21 See United States v. Charbonneau, 979 F. Supp. 1177, 1184-85 (S.D. Ohio 1997) (no reasonable expectation of privacy in online chat rooms). 22 Rose, THE LEGAL INTELLIGENCER at 3. 23 Frisman, NEW JERSEY LAW JOURNAL at 10. 24 Thumma, INTERNET NEWSLETTER at 13. 25 See Sokol & Andriola, THE NEW YORK LAW JOURNAL at 1. 26 Id.; James J. Marcellino & Anthony A. Bongiorno, E-Mail is the Hottest Topic in Discovery Disputes, THE NATIONAL LAW JOURNAL, Nov. 3, 1997, at 10.

27 See Marcellino & Bongiorno, THE NATIONAL LAW JOURNAL at 16. 28 See, e.g., Sokol & Andriola, THE NEW YORK LAW JOURNAL at 5; Frisman, NEW JERSEY LAW JOURNAL at 18. 29 See, e.g., Daewoo Elecs. Co. v. United States, 650 F. Supp. 1003, 1005 (Ct. Intl Trade 1986); Marcellino & Bongiorno, THE NATIONAL LAW JOURNAL at 13. 30 650 F. Supp. 1003 (Ct. Intl Trade 1986). 31 Id. at 1004. 32 Id. at 1006. 33 Id. at 1005-07. 34 Id. at 1006. 35 Id. 36 Id. 37 Id. 38 Id. 39 Id. 40 Id. 41 Nos. 94 C 897, MDL 997, 1995 WL 360526 (N.D. Ill. June 15, 1995). 42 Brand Name Prescription Drugs Antitrust Litig., 1995 WL 360526, at *1. 43 Id. at *1-*2. 44 Id. at *1. 45 Id. 46 Id. at *2. 47 Id. 48 Id. 49 Id. 50 83 F.3d 526 (1st Cir. 1996). 51 Id. at 532. 52 Id. at 532. 53 Id. at 532-33. 54 Id. at 533. 55 Id. 56 See id. at 533, 537. 57 Marcellino & Bongiorno, supra note 26, at 16. 58 Daewoo Elecs., 650 F. Supp. at 1006-07; Brand Name Prescription Drugs Antitrust Litig., 1995 WL 360526, at *2. 59 See United States v. Russo, 480 F.2d 1228 (6th Cir. 1973), cert. 93

denied, 414 U.S. 1157 (1974); United States v. De Georgia, 420 F.2d 889 (9th Cir. 1969). 60 420 F.2d 889 (9th Cir. 1969). 61 Id. at 891. 62 Id. 63 Id. at 893 n.11. 64 Id. at 891-92. 65 Russo, 480 F.2d at 1239. 66 De Georgia, 420 F.2d at 891 n.5. 67 Id. at 893. 68 480 F.2d 1228 (6th Cir. 1973), cert. denied, 414 U.S. 1157 (1974). 69 Id. at 1240. 70 Id. 71 Id. 72 See, e.g., United States v. Catabran, 836 F.2d 453, 458 (9th Cir. 1988) (finding a long-standing rule that general ledgers are themselves business records rather than mere summaries held to apply equally to data compiled by general ledger software and computergenerated records are not inherently inaccurate and untrustworthy and [a]ny question as to accuracy[,] whether resulting from incorrect data entry or the operation of the computer program, as with inaccuracies in any other type of business records, affect[s] only the weight of the [evidence,] not [its] admissibility); United States v. Fendley, 522 F.2d 181, 187 (5th Cir. 1975) (a computer printout [is] not intrinsically unreliable and [is] admissible as a business record[,] provided that requirements of the FBRA are met; even if proponent of computerized records fails to lay a proper foundation, such evidence is not so intrinsically unreliable as to make its introduction clear error). 73 No. 91 Civ. 5928 (SWK), 1995 U.S. Dist. Lexis 7433 (S.D.N.Y. June 1, 1995). 74 Id. at *10. 75 Id. at *11. 76 Id. at *11, *13. 77 Id. at *10-*14. See also Frisman, supra note 11, at 11. 78 45 M.J. 406 (C.A.A.F. 1996). 79 Id. at 417-19. 80 Id. at 414 n.2. 81 Id. 82 Id. at 417. 83 Id. 84 Id. at 418. 85 Id. 86 Id. at 417-18. 94

87 Id. at 419 ([E]-mail that is forwarded from correspondent to correspondent lose[s] any semblance of privacy. Once these transmissions are sent out to more and more subscribers, the subsequent expectation of privacy incrementally diminishes.). 88 Id. at 418. 89 Id. 90 Id. at 417. 91 Id. 92 Id. 93 Id. 94 Id. at 419. 95 Id. at 418-19. 96 Id. 97 979 F. Supp. 1177 (S.D. Ohio 1997). 98 Id. at 1183. 99 Id. at 1179. 100 Id. at 1184. 101 Id. at 1185. 102 Id. at 1184-85 (citing Hoffa v. United States, 385 U.S. 293 (1966)). 103 914 F. Supp. 97 (E.D. Pa. 1996). 104 Id. at 98 (referring to sales management, the e-mails contained threats to kill the backstabbing bastards and referred to the planned Holiday party as the Jim Jones Koolaid affair). 105 Id. at 98-99. 106 Id. at 101. 107 Id. 108 See Omnibus Crime Control and Safe Streets Act of 1968, 18 U.S.C. 2510-2520 (1970). 109 RICHARD C. TURKINGTON & ANITA L. ALLEN, PRIVACY LAW: CASES MATERIALS 230 (1999). 110 Id. 111 H.R. Rep. No. 99-647, at 21-23 (1986). 112 See 18 U.S.C. 2517 (1994) (authorizing disclosure of a communication in an official proceeding only when the interception complied with the Acts requirements); 18 U.S.C. 2702(b) (1994) (authorizing disclosure of a communications contents under limited circumstances). 113 Electronic Communications Privacy Act of 1986, 18 U.S.C. 2510(12) (1994) (electronic communication means any transfer of signs, signals, writing, images, sounds, data or intelligence of any nature transmitted in whole or part by a wire, radio, electromagnetic, photoelectric or photooptical system that affects interstate or foreign commerce, but does not include (A) any wire or oral communication [as defined and regulated in other sections]; (B) any communication

AND

made through a tone-only paging device; (C) any communication from a tracking device; or (D) electronic fund transfer information.). 114 18 U.S.C. 2511, 2520, 2701, 2707 (1994) (providing for criminal sanctions and civil causes of action). 115 See 18 U.S.C. 2511, 2701. 116 18 U.S.C. 2511. 117 See 18 U.S.C. 2510(1) (1994) (providing the definition of wire communication); 18 U.S.C. 2510(2) (1994) (providing the definition of oral communication), 18 U.S.C. 2510(12) (1994) (providing the definition of electronic communication). 118 See 18 U.S.C. 2510(4) (1994). 119 Steve Jackson Games, Inc., v. United States Secret Service, 36 F.3d 457, 463 (5th Cir. 1994). See 18 U.S.C. 2518 (1994). 120 Id. at 460 (citing United States v. Turk, 526 F.2d 654 (5th Cir. 1976), cert. denied, 429 U.S. 823 (1976)). 121 18 U.S.C. 2701(a). 122 18 U.S.C. 2703(a)-(b) (1994). 123 18 U.S.C. 2703(d) (1994). 124 See Steve Jackson Games, 36 F.3d at 463. 125 Id. at 457. 126 Id. at 459. 127 Id. at 460. 128 Id. at 461-62. 129 Id. 130 Id. at 463-64 & n.10. 131 TURKINGTON & ALLEN, supra note 2, at 267. 132 Id. 133 McVeigh v. Amer. Online, Inc., 983 F. Supp. 215, 216 (D.D.C. 1998). 134 Id. at 220. 135 Id. at 216. 136 Id. at 217. 137 Id. at 220. 138 Id. at 222. 139 Jessup-Morgan v. Amer. Online, Inc., 20 F. Supp. 2d 1105, 1107 (E.D. Mich. 1998). 140 Id. at 1106. 141 Id. at 1107. 142 Id. 143 Id. at 1108. 144 Id. 95

145 See MODEL RULES OF PROFESSIONAL CONDUCT Rule 1.6 (1998), cited in ABA Standing Comm. on Ethics and Professional Responsibility, Formal Op. 99-413 (1999) at A and n.4 (Model Rule 1.6(a) imposes a duty on a lawyer to take reasonable steps in the circumstances to protect [confidential client] information against unauthorized use or disclosure. Reasonable steps include choosing a means of communication in which the lawyer has a reasonable expectation of privacy.). 146 ABA, supra note 145, at A. 147 Id. 148 Id. at C, 1. 149 Id. 150 Id. at C, 2. 151 Id. at C, 3-4. 152 Id. at C, 3. 153 Id. 154 Id. 155 Id. 156 Id. at C, 4. 157 See id. 158 Id. at C, 4 n.35. 159 Id. at C, 4. 160 Id. 161 Id. at C, 4 n.35. 162 Id. at C, 4. 163 See id. 164 Maxwell, 45 M.J. at 417; Charbonneau, 979 F. Supp. at 1184; Smyth, 914 F. Supp. at 101. 165 ABA, supra note 146, at C, 4. 166 Rose, supra note 11, at 8; Frisman, supra note 11, at 4-6. 167 ABA, supra note 146, at C, 4 n.40 (citing Iowa Bar Assn Op. 1997-1 (1997) (confidential information should not be transmitted via any form of e-mail absent client consent, encryption, or equivalent security precautions); Pa. Bar Assn Comm. on Legal Ethics Op. 97130 (1997) (client information should not be transmitted via unencrypted e-mail without client consent); State Bar of Arizona Advisory Op. 97-04 (1996) (advising lawyers to warn clients of risks or consider encryption prior to use of e-mail to transmit confidential client information); N.C. State Bar Opinion 215 (1995) (warning against using email and recommending the use of the mode of transmission that will best protect confidential client information)). 168 Rose, supra note 11, at 33 (internal quotation marks omitted). 169 See supra note 167.

sports

The Changing Role The

New NBAof Collective

Agents in Professional Basketball
By Bappa Mukherji

for the National Basketball Association (NBA). Michael Jordan, the leagues most popular player and one of the worlds most recognized athletes, led his Chicago Bulls to six world championships in the decade and the NBA finals to higher television ratings. Even though Jordan announced his retirement in 1998, the league does not suffer from a lack of superstars poised to take his place. While the league may have lost Larry Bird as a player, it later regained him as a coach. Ervin Magic Johnsons retirement due to contracting HIV could have proven difficult for the league; instead, he was hailed as a hero for courageously

he 1990s were a period of unmitigated success

96

speaking out on his disease. The players themselves shared in this success. The average players salary in 1998 exceeded $2.2 million, the highest average for any professional team sport.1 Contracts with values totaling over $50 million were commonplace. The Atlanta Hawks signed Dikembe Mutombo to a five-year contract that will pay him $56 million over its life;2 the Orlando Magic re-signed Horace Grant to a five-year, $50 million contract; and the Portland Trailblazers signed Kenny Anderson to a sevenyear, $50 million contract.3 The sports page headlines

game due to a labor dispute, ended its streak. The lockout ended six months after it began, resulting in a shortened season and a new six-year collective bargaining agreement, or CBA.12 This Article will discuss the status of agents for NBA players after the adoption of the new collective bargaining agreement (the 1999 Agreement). First, this Article will summarize the relevant provisions of the prior collective bargaining agreement (the 1996 Agreement) and illustrate how application of these provisions led the owners to declare a lockout. Next, it will review key pro-

Bargaining Agreement
screamed blockbuster deal after blockbuster deal. Seattle re-signed Gary Payton to a seven-year, $85 million contract;4 the Washington Wizards agreed to a seven-year, $105 million contract with Juwan Howard;5 the Miami Heat awarded Alonzo Mourning a seven-year contract worth $105 million;6 and Shaquille ONeal inked a sevenyear, $120 million deal with the Los Angeles Lakers. This parade of record deals culminated with Kevin Garnetts six-year, $125 million contract with the Minnesota Timberwolves.7 The owners profited as well, despite paying these astronomical salaries, as they entered into lucrative television contracts with NBC and TNT in 1997. NBC purchased exclusive over-the-air network rights to the NBA through the 2001-02 season at a cost of $1.74 billion.8 Time-Warner subsidiary Turner Broadcasting entered into a four-year contract extension with the league, granting it exclusive national cable television rights at a cost of $890 million.9 The contracts more than doubled what the two companies has paid for the previous fouryear contracts10 and will net each franchise about $23 million over each of the four contract years.11 Despite these positive factors or perhaps due to them, the NBA and the Players Association recently went to war over how to divide the enormous revenues being generated by the league. The sides could not settle their differences and so the owners elected to lock out the players at the end of the 1997-98 season. The lockout dragged on through the summer and was not resolved prior to the scheduled beginning of the 1998-99 season. The NBA, which had taken great pride in never having missed a
97

visions of the 1999 Agreement. It will conclude by discussing how the new CBA and the recent consolidation in the sports representation business will affect agents.

Provisions in the 1996 Collective Bargaining Agreement

The NBA Salary Cap
The concept of a team salary cap in professional sports is not new. As the name implies, a salary cap places a limit on the combined salary one team can pay its players in a given year. A cap serves two main purposes. First, imposing an upper limit on a teams largest operating expense provides team owners with some degree of cost certainty. Second, at least in theory, a cap promotes parity among the teams in a league by preventing one team or a small group of teams from signing all of the best (and presumably most expensive) players. A salary cap has a long history in professional basketball. In its 1946-47 inaugural season, the league instituted a $55,000 salary cap and has maintained one since. The structure for the modern-day salary cap was introduced in the 1983 NBA Collective Bargaining Agreement. The innovation contained in the 1983 Agreement was a salary cap based on a percentage of the leagues gross revenues, which consisted of gate receipts, local and national broadcast revenue, and preseason and postseason revenue.13 The 1987 Collective Bargaining Agreement continued the use of a salary cap and guaranteed that aggregate player salaries would equal at

least 53 percent of the leagues revenues. Spurred by the emergence of such stars as Magic Johnson, Larry Bird, and Michael Jordan, the popularity of the NBA skyrocketed. Hand in hand with its growing popularity came new sources of revenue. When the time came to negotiate a new agreement with the league in 1996, the players demanded a share of these new revenue streams. As a result, the 1996 Agreement expanded the definition of gross revenues (which was termed Basketball Related Income or BRI) to include a portion of the revenue generated from luxury suites, international television, and arena signage. The salary cap was equal to 48.04 percent of BRI under the 1996 Agreement.

Exceptions to the Salary Cap

Unlike the hard cap in the NFL, the NBAs version contained exceptions that allowed a team to exceed the salary cap under certain circumstances. For example, the 1996 Agreement contained the $1 Million Exception. This clause allowed teams already over the salary cap to sign one or more players to one- or two-year contracts, provided that their aggregate first-year salary was less than $1 million. A team could utilize this exception only every other year. The primary exception to the cap, however, dealt with what the CBA termed Qualified Veteran Free Agents. This provision became popularly known as the Larry Bird exception. In short, the Bird exception allowed teams to ignore the cap and re-sign certain veteran players at any price. In pertinent part, the rule reads: A team may re-sign its own free agent for any amount if he played for the team for some or all of each of the prior three consecutive seasons (or, if he changed teams, he did so only by assignment or by signing with his prior team during the first of the three seasons).14 In an era when star players in other sports jump from team to team chasing the highest salary, the purpose of this rule was to create an incentive for marquee players to stay with a single team. The manner in which the 1996 Agreement dealt with rookies compounded the potential player cost problem associated with the Bird exception. The league wanted to ensure that a team could always sign a first-round draft pick regardless of the teams cap situation, limit the amount that teams had to pay to unproven rookies, and give a players team the ability to re-sign him to a longer
98

term contract if the team desired. To this end, the 1996 Agreement also instituted a three-year rookie salary scale that limited payments to first-round draft picks. A team could pay this rookie salary regardless of whether the team had room under the salary cap.15 Furthermore, a club had the exclusive right to renegotiate with its own first-round draft choice after the player had completed two years of his initial three-year contract. Designed to control costs, the rookie provisions backfired. The rookie renegotiation clause placed enormous pressure on teams to extend the contracts of valued rookies before they became free agents. Furthermore, the rookie scale contract lasted for a term of three years, while a player who had played for one team for three consecutive years qualified for the Bird exception. Thus, a team could extend the rookie scale contract without being hampered by the salary cap. The Bird exception allowed player salaries to skyrocket. The salary cap for the 1997-98 season was $26.9 million per team. Utilizing the Bird exception, the Chicago Bulls were able to pay Michael Jordan $33.14 million during the 1997-98 season more than the amount 17 teams paid for their entire rosters. The rookie-related provisions allowed Kevin Garnett to negotiate a six-year contract with the Minnesota Timberwolves during his second year in the league for $125 million. Meanwhile, veteran Alonzo Mourning inked a seven-year, $105 million contract with the Miami Heat, and Shawn Kemp signed a seven-year contract with the Cleveland Cavaliers that will pay him $107 million.16 These examples demonstrate that the exceptions defeated both purposes of the NBA salary cap. The owners had no cost certainty. During the 1997-98 season, the final year of the former collective bargaining agreement, 24 of the 29 teams exceeded the salary cap of $26.9 million per team.17 Additionally, there was no real parity in the league. The Chicago Bulls, led by Michael Jordan and his $33 million plus salary, dominated the competition by winning six world championships in the 1990s.

The NBA Lockout

Escalating Player Salaries
Blaming escalating player salaries, team owners publicly lamented that 15 of 29 teams lost money during the 1997-98 season. Russ Granik, Deputy Commissioner of the NBA, stated that the league was becoming unprof-

itable as a result of player salaries increasing faster than revenue growth.18 The owners claimed that the leagues profitability had steadily declined over the four years prior to the lockout.19 They further claimed that, overall, the league had posted a negative cash flow for the 199798 season.20 The owners clearly implied that, unless salaries were reigned in, the financial viability of the league was seriously in question. Other sources did not paint the picture quite so bleakly. The Players Association, which receives annual audited financial statements for the league and the teams, concluded that only four clubs posted losses during the 1997-98 season.21 Analysis conducted by FORBES indicated that only ten NBA teams were in the red.22 While not privy to the financial statements of the teams, the FORBES analysts relied on publicly available information and informed estimates in reaching their conclusions. They noted that owners exclude most of the revenues from key sources when calculating profitability. Specifically, owners omit a portion of the revenues from arena naming rights, luxury suites, and team merchandise stores. Once the profits generated from these revenue streams are added, some of the unprofitable teams suddenly showed a profit.23

mated 57.2 percent of BRI almost $1 billion during the 1997-98 season.26 The NBA Board of Governors, by a 27 to 2 margin, voted to exercise its right to re-open the former CBA on March 23, 1998.27

The Owners Positions vs. The Players Positions

While other issues were addressed,28 the greatest divide between the league and the Players Association concerned money. The owners sought to enact a hard salary cap, as in the NFL. A hard cap would necessarily eliminate the Bird exception. Naturally, the players wanted to keep the Bird exception and other exceptions to the salary cap. They argued that the Bird exception was necessary to reward the leagues best players. Moreover, the players lobbied to introduce another exception to the cap similar to the $1 Million Exception, but with the exception amount tied to the average player salary in the league. The 1996 Agreement contained a three-year rookie salary scale, giving clubs the exclusive right to renegotiate with their draftees during the second contract year. The Kevin Garnett signing proved just how financially taxing the prior system could be. To put the deal in perspective, Garnett alone received $21 million per year while the new television deal paid each team about $23 million annually. To allow teams more time to assess young players before deciding to sign them to long-term contracts, the league argued it needed to extend the length of rookie contracts. The Players Association agreed that a disproportionate amount was being paid to young players and hoped to see those funds redistributed to increase veterans salaries. Further, the players wanted the league minimum salary to be tied more directly to the number of years a player had been in the league. The owners were willing to increase minimum salaries for veterans. Finally, the two sides clashed over what percentage of the leagues growing revenues should be paid to players. Obviously, the Players Association wanted the largest percentage possible, noting that the NFL pays its players over 63 percent of its revenues. The league countered

The owners clearly implied that,

unless salaries were reigned in,

the financial viability of the league was

seriously in question.

The players union responded that if the owners were in fact losing money, they had no one to blame but themselves.24 After all, the teams had agreed to pay the salaries that they later claimed were so onerous. The collective bargaining agreement only guaranteed that aggregate player salaries would exceed 48.04 percent of Basketball Related Income; the owners essentially volunteered to pay the players more. As National Basketball Players Association Executive Director G. William (Billy) Hunter summarized: We dont see any need to change the current process. Our position is, if you dont want to pay it, dont do it. Just say No.25 The same agreement that secured the salaries also empowered the owners to declare a lockout. The 1996 Agreement provided that owners could re-open the Agreement if aggregate player salaries exceeded 51.8 percent of BRI approximately $900 million. This threshold was exceeded with players collecting an esti99

Maximum Player Salaries

Ray Allen negoaitated a 6-year, $70.9 million contract with the Milwaukee Bucks. This table demonstrates the structure of Allens contract and other maximum six-year contracts under the current salary cap. The maximum salary applies to the first year of a contract. A Qualifying Veteran Free Agent or Early Qualifying Veteran Free Agent (i.e., players with Bird rights) may have his salary increase in each subsequent year by an amount up to 12.5% of the players salary in the first year of the contract. 1-6 Years 1st year 2nd year 3rd year 4th year 5th year 6th year
Total Salary
* in millions

6-9 Years $11.000 $12.375 $13.750 $15.125 $16.500 $17.875 $86.625

10+ Years $14.000 $15.750 $17.500 $19.250 $21.000 $22.750 $110.250

$9.000* $10.125 $11.250 $12.375 $13.500 $14.625 $70.875

that the NFLs definition of revenues was much more narrow than its definition of Basketball Related Income. The owners conceded, however, that player salaries should increase in proportion to league revenues.

The New Collective Bargaining Agreement

On January 6, 1999, the NBA and the Players Association reached an agreement that ended the sixmonth lockout and entered into a new collective bargaining agreement. The players approved the new agreement by an overwhelming 179 to 5 ratification vote on January 7, 1999.29 The Board of Governors voted in favor of the agreement the following day.

percent of BRI.33 To help enforce the aggregate salary limits, the 1999 CBA established an escrow system that will become effective in the fourth year of the Agreement.34 Under this system, ten percent of player salaries will be placed in escrow, with the players able to decide who among them must pay the escrow tax.35 If aggregate player salaries exceed 55 percent of BRI, the league will be reimbursed (with interest) the amount of the overage by the escrow fund. Any money remaining in the escrow fund will be returned to the players with interest. If the overage exceeds the amount in the escrow fund, teams whose spending exceeds the combined percentage of the revenue split plus the escrow will pay a dollar-for-dollar tax to the league for redistribution on a league formula.

Salary Cap and Escrow System Player Salaries

The new CBA raised the salary cap to $30.0 million for the 1998-99 season and to $34.0 million for the 19992000 season.30 Thereafter, the salary cap will be based on BRI; specifically, the cap will be equal to 48.04 percent of the projected BRI for the year.31 However, the salary cap for the 2000-01 season is guaranteed to be at least $35.5 million.32 Since exceptions to the salary cap were retained, teams may still exceed the cap. To protect teams against spiraling salaries, the new CBA limits aggregate player salaries to 55 percent of BRI in years four, five, and six of the agreement. If the league exercises its option on the seventh year, the players would be limited to receiving 57 The new CBA is unique among collective bargaining agreements in professional sports because it establishes a maximum salary that a player may be paid. Although a hard salary cap indirectly limits a players salary, no professional sports union had ever agreed to a maximum salary for an individual player.36 The impact of placing a ceiling on payments to a player was softened by the fact that the CBA guarantees that NBA players shall have the highest average salary for any professional team sport.37 Additionally, no player was required to take a pay cut. A grandfather clause allows any player to sign for 105 percent of his salary in the last year of his prior contract.38

100

The maximum salary that a player may be paid is based on the number of years he has been in the league. In the first year of a contract, a player with fewer than six years in the league may be paid up to $9 million. If the salary cap for the first year of his contract exceeds $36.0 million, however, the player may be paid up to 25 percent of the salary cap for the first season.39 A player with six to nine years in the league may be paid up to $11 million in the first year of his contract. If the salary cap exceeds $36.67 million that year, however, the player may be paid up to 30 percent of the amount of the salary cap in the first year.40 Finally, players with ten or more years in the league may be paid up to the greater of $14 million or 35 percent of the salary cap in effect at the time the contract is executed.41 The new CBA continues to contain a three-year rookie scale. A first-round draft picks salary will be determined solely by his draft position. However, the new CBA extends the length of rookie contracts. Teams would hold an option for the fourth year and a right of first refusal in the fifth year. Teams would have the exclusive right to renegotiate in the third year.42 If a team elects to exercise its fourth-year option, the players salary is predetermined for that year as well. The new CBA dramatically raises the minimum salary levels as well. The entry-level minimum salary was increased. Under the new system, a players minimum salary increases each year he is in the league. Rookies are guaranteed $287,000 and veterans entering their eleventh year are guaranteed at least $1 million. Minimum salaries above $500,000 will be paid from a league-wide fund. The purpose of the fund is to protect older players from getting cut in order for teams to save money.43

The Mid-Level Salary Exception differs from the $1 Million Exception in three main respects. The first difference is the calculation of the exception amount for the final three years (and the option year) of the Agreement. Instead of a fixed number, the exception amount for the Mid-Level Salary Exception is tied to the average player salary in the league. Thus, as the average salary in the league increases, the exception amount correspondingly grows. Second, contracts signed pursuant to the new exception may be up to six, rather than two, years in length. Finally, a team may utilize the Mid-Level Salary Exception every year instead of once every other year.

Effect of the 1999 Agreement on the Players

Under the first year of the new CBA, the average NBA salary increased from $2.37 million to $2.64 million.45 The median salary increased from $1.4 million to $1.68 million. Salaries as a whole increased 17 percent.46 The players received 59 percent of BRI in 1999, up from 57 percent in 1997-98.47 Now, 71 percent of all players earn in excess of $1 million, up from 61 percent.48 Fifty percent of all players earn between $1 million and $4 million annually, up from 44 percent.49 Fifteen players signed contracts under the new Mid-Level Salary Exception.50 Aside from the ten players going into the final year of their rookie scale contracts who signed six-year, $70.9 million extensions, only two players, Rik Smits of Indiana and Jayson Williams of New Jersey, received the maximum allowable salary.51

Trends Emerging in the Sports Representation Business

Ray Allen Negotiates His Own Salary
Shortly after the new CBA became effective, Ray Allen chose to fire his agent Mason Ashe and represent himself in contract negotiations with the Milwaukee Bucks.52 The former University of Connecticut guard negotiated directly with team owner Herb Kohl. Allen believed that he deserved the maximum salary the team could offer and Kohl was willing to pay Allen the maximum. The two agreed that Allen would be awarded a six-year, $70.9 million dollar contract extension, the maximum salary allowed for a third-year player under the new CBA.53 In that respect, Allens contract is almost identical to the contracts signed by other rising stars Kobe Bryant,54

Exceptions to the Salary Cap

Bowing to player demands, the 1999 Agreement created a new exception to the salary cap. The Mid-Level Salary Exception operates in much the same manner as the $1 Million Exception44 but with higher exception amounts. The exception provides that a team may sign one or more players during each year of the Agreement who call for an aggregate salary not in excess of the enumerated exception amount in the first year of the contract(s). For the 1998-99 season, the exception amount was $1.75 million. The exception amount increases to $2.0 million in the second year and climbs to $2.25 million for the 2000-01 season.

101

Application of the Mid-Level Salary Exception

How a Contract Might Be Structured
Example 1 depicts a player entering the 2000-01 season. The Example 1 Example 2 computation assumes that the player signs for the entire exemption amount, signs for the maximum six-year term, and gets the First Season of Contract 2001-02 2000-01 maximum annual increase. The maximum annual increase is 10% of Exemption Amount $3,000,000 (est) $2,250,000 the salary for the first season of the contract. Thus, the players salary may increase by an amount up to $225,000 each year. $3,300,000 Year 1 $2,250,000 Example 2 assumes that a player is entering the 2001-02 season, the $3,600,000 $2,475,000 Year 2 first season that the exemption amount is based on the average player salary. The average player salary for 1999-2000 was $2.64 $3,900,000 $2,700,000 Year 3 million. If we assume that player salaries increase by an annual rate of 8%, the average player salary will climb to approximately $2.85 $2,925,000 $4,200,000 Year 4 million for the 2000-01 season. The 1999 Agreement provides that $3,150,000 the exemption amount for the 2001-02 season shall be 108% of the $4,500,000 Year 5 average player salary for the previous season. As a result, the $3,375,000 Year 6 $4,800,000 exemption amount for the 2001-02 season would be just over $3 million. Again, the computation assumes that the player signs for $27,300,000 $16,875,000 Total Contract Value the entire exemption amount, signs for the maximum six-year term, and gets the maximum annual increase. The foregoing examples demonstrate the largest contracts that a player could receive utilizing the
Mid-Level Salary Exemption. The same amounts could be split between two or amog several players.

Allen Iverson, Shareef Abdur-Rahim, and Antoine Walker. Once the essential terms of the contract were finalized, Allen hired a team of representatives to review the deal. Allen utilized the services of two attorneys Jeremiah DeBerry and high-profile litigator Johnnie Cochran his business manager Mark Christie and accountant Michael Horsey. Instead of paying these representatives a commission based on the size of the contract, he paid them all an hourly rate of up to $500. Allen said of this arrangement: I dont need somebody skimming millions off the top.55 As he explained later, It was merely a good business decision. I dont need an agent. I know how much money Im going to make. If youre smart, and know what youre doing, you can negotiate what youre worth.56 Other players have taken Allens lead. Charlotte Hornets all-star guard Eddie Jones has reportedly fired his agent Sal Difazio and plans to hire an attorney to help him negotiate his next contract.57 Some recent draft picks such as former Utah standout Andre Miller also are forgoing agents in favor of attorneys.58 Shortly after signing a maximum salary deal under the new CBA, Allen Iverson of the Philadelphia 76ers fired high-profile agent David Falk. Iverson said that he could have negotiated the deal himself, stating: I fired him because I felt that with the new collective bargaining agreement, all I needed was [sic] my lawyers.59

Although Allen has been much ballyhooed in the press as a pioneer, he was not the first player to either represent himself or utilize the hourly services of an attorney to negotiate a contract. New York Knicks forward Buck Williams represented himself during the latter stages of his 17-year basketball career. Two-time league MVP Karl Malone hired an agent for the first time in 1998 after 13 years in the NBA.60 Grant Hill has never utilized the services of an agent; instead, he is the client of Washington attorney Lon Babby. Tim Duncan, Jerome Williams, Christian Laettner, Cherokee Parks, and Pat Garrity are all also clients of Babby.61 Even Allen himself admits: Its nothing new. Thats why it struck me as odd everybody was so surprised. Ive seen and heard about guys doing it without agents before.62

Consolidation of Sports Representation Firms

It is clear that the economics of player representation are changing. Recently, SFX Entertainment (SFX) and Assante Corporation (Assante) have made aggressive entries into the sports representation business through rapid strings of acquisitions. Both companies proclaim the advantages of their size and ability to offer a wide range of services to clients. SFX seeks to represent athletes, teams, leagues, sports properties, and corporations in areas as diverse as talent representation and market-

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ing, stadium and arena naming rights, television production and programming, licensing and public relations, event management, and online services.63 Assante, on the other hand, boasts that it offers full-service talent representation, business management, and personal support services to its clients.64 Over a period of 18 months, SFX has acquired 14 sports marketing and management agencies and consolidated them into the SFX Sports Group.65 In 1998, SFX began by acquiring high-profile basketball agent David Falks agency, Falk Associates Management Enterprises or FAME, for a little over $120 million.66 The company then quickly followed up by purchasing The Marquee Group, an international sports marketing firm, in an allstock deal valued at almost $100 million.67 Prior to the SFX buyout, Marquee had acquired ProServ, the sports representation agency founded by tennis star Donald Dell. SFX also has acquired such firms as Integrated Sports International (ISI), Tellen & Associates, Hendricks Management Company, and SME Design. Assante, a Canadian entertainment and financial management company, announced its entry into the sports agency business by acquiring the business of Leigh Steinberg, one of the nations leading agents, for up to $120 million.68 Assante completed the acquisition of Steinberg, Moorad & Dunn effective November 9, 1999.69 Assante teamed Steinberg, Moorad & Dunn with business managers NKS Management, Inc.70 and Philpott, Bills & Stoll71 to create Assantes Sports and Entertainment Group.72 Less than two months later, Assante acquired Eugene Parker & Associates, Inc., which does business as Maximum Sports Management.73 Prior to its acquisition, Maximum Sports Management had grown into the third largest representation firm of professional football players and represented over 60 football and basketball players.74

Players Question the Need for a Traditional Agent

Many athletes perceive agents as a necessary evil.75 They view agents as providing the single service of negotiating their contracts. Were it not for that one albeit important function, they would never employ agents at all. To the extent that an agent procures endorsement deals for the player, the agent is paid a separate commission. Not surprisingly, many players with this mindset believe that agents are overpaid. Obviously, commission-based compensation encourages agents to negotiate top dollar for their clients. The 1999 Agreement, however, diminishes the force of such incentives by pre-determining how much certain classes of players will be paid. First, the maximum salary for a marquee veteran now has a ceiling. The maximum salary limitation, of course, will only apply to a select number of players each year.76 While no player is guaranteed a maximum salary contract, most of the leagues premier players will no doubt seek and be awarded one. The majority of these players, like Ray Allen, will be aware of their market value without consulting an agent. Were Allen to have paid the maximum four percent commission to negotiate his contract extension, the commission would have topped $2.8 million. Since it is not uncommon for players to ask their agents to reduce their commission rates, it is unlikely that Allen would have paid the maximum commission had he utilized an agent. For example, he paid his agent Lee Fentress $12,000 to negotiate his first contract, well below the four percent maximum. Under the 1999 Agreement, star players will have even greater reason to insist on lower agent fees. Next, minimum salaries have been dramatically raised. Over 20 percent of players would have been paid the league minimum entering the 1998-99 season. By raising minimum salary levels for veterans, even greater numbers of players may be playing for the higher minimums in the future. The idea of paying a commission to receive the minimum salary is not particularly attractive to athletes.77 Finally, every rookie drafted in the first round will be paid a set salary for his first three years in the league. Regardless of representation, the first player selected in the year 2000 draft will sign a three-year, $9.5408 million contract with a first year salary of $2,947,200; the final player selected in the first round of the year 2000 draft will be eligible to receive a three-year, $1.9 million contract.78 Similarly, the 1999 CBA spells out each first-

How the New Agreement Will Affect the Player-Agent Relationship

The NBA Players Associations Agent Regulation Program provides that an agent may be paid up to four percent of a players contract. While the new CBA does not change the maximum percentage that agents can charge, changes in the 1999 Agreement may dramatically affect the manner in which they are compensated. Specifically, agents offering only contract negotiation services may be paid a smaller commission or by the hour.

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round draft picks salary in his fourth year, if his team exercises its option. What was once a matter of negotiation is now a matter of consulting a table.

Agents as Full Service Advisors

Certain agents do focus solely on contract negotiation and endorsements. The majority, however, provide a broad array of other services to their clients. They may provide tax planning and preparation; cash flow management and budgeting; retirement and estate planning; investment and trust management; insurance planning; assistance buying homes and automobiles; and other business management services such as liaising between the player and team management, banks, accountants, and attorneys. Agents also may help players establish charitable foundations and plan for life after sports. Most agents provide personal management services as well. They may help coordinate travel arrangements; schedule personal appearances and press conferences for public relations and marketing; coordinate off-season workouts, training, and dieting; buffer the player from the outside world; and provide personal advice of all types. The types of services that agents provide is limited only by personality. Whether getting tickets to a jazz concert, hiring a cleaning service to take care of the players house, ensuring that the players pet is cared for during a vacation, or reminding a player to change the oil in his car, an agent is a counselor in the broadest sense. While an attorney may be fully equipped to negotiate a contract or endorsement deal, establish a charitable foundation, or provide tax and estate planning advice, few attorneys are equipped to provide the full range of business and personal services required by many professional athletes. Under the 1999 Agreement, it would seem that a rookie has little reason to pay an agent a commission for negotiating his contract. The 1996 Agreement also contained a rookie salary scale providing the same reason to reduce the fees paid to an agent.

Under the 1999 Agreement, star

players will have

even greater reason to insist on lower agent fees . . . .

What once was a

matter of negotiation is now a matter of

consulting a table.

Nevertheless, many rookies still paid their agents the maximum allowable commission. Presumably, then, some players truly do value the additional services provided by their agents or believe that a good agent can bolster their draft position. If he so chooses, an athlete can get most of the services offered by an agent from other sources. An attorney can negotiate contracts and endorsements, provide tax and estate planning advice, and provide career and personal counseling. An accountant or financial advisor can prepare tax returns, pay bills, assist with purchasing homes or automobiles, create a retirement plan, and help acquire insurance. Investment advisors can manage a players portfolio. Of course, all of these service providers must be compensated. To the extent that most professionals are paid by the hour, clients seek to minimize their services. Thus, an athlete may fail to seek advice or counsel even when necessary to avoid the associated cost. More often, however, a young athlete may not even realize that he should seek counsel on a particular issue. Paying a trusted advisor a fixed fee or commission, on the other hand, eliminates the disincentive to seek advice when appropriate. Good agents are proactive; they initiate contact with their clients in order to discover and anticipate potential problems. An athlete can feel comfortable relating his experiences, simply chatting or discussing his concerns at length with his agent without fear of being invoiced for the conversation later.

Large, Consolidated Representation Company vs. Boutique Agency

Despite the rapid consolidation in the industry, there will always be a place for the small boutique agency in the world of professional sports. Economic necessity will force the large, consolidated agencies to focus on attracting established players and highly sought-after young players. They will not be able to justify devoting ade-

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quate resources to maintain smaller or less promising accounts. While almost all agents attempt to stay in close contact with their clients, an agent with just one superstar may actually travel with his or her client during the season. This level of service is something that a large agency with numerous clients will never be able to offer. Additionally, most players will never have the renown to take advantage of the marketing leverage promoted by the large agencies. It is unlikely that one of the large corporate clients represented by SFX Sports Group will center an advertising campaign around a second-string small forward. The typical professional athlete must focus on smaller local endorsements in the teams city or the players hometown. That player may be able to make an appearance at a local electronics store in exchange for a new stereo system. The one-stop shopping approach taken by these large agencies suffers from other disadvantages as well. An athlete who entrusts one company to manage all aspects of his career from contract negotiation to endorsements, from marketing to cash and investment management will have a lack of diversity of opinions. For example, intelligent people may differ on whether an athlete should endorse a particular product or seek to be traded to a different team. If all of a players career advice comes from a single source, there is a danger that the player will not have all sides adequately presented. Another disadvantage is the absence of checks and balances. A player would be better served having a team of professional advisors including an agent, an accountant, and an independent financial advisor watching out for the player and watching each other, rather than trusting a single organization to police itself. After weighing the advantages of a large, consolidated company against a small boutique agency, many athletes from superstars to minimum salary players will choose the smaller firm. Thus, small boutique agencies promising strong personal service will continue to thrive. In fact, more of these agencies may spring up due to the valuations given to sports representation firms in this recent trend of consolidation. Some top agents and young agents with promising futures who are currently working

for recently-acquired firms will likely open their own agencies, hoping for a lucrative buy-out offer.79

The Evolving Role of Agents in the NBA

As the NBA adjusts to the new agreement, more players are likely to engage attorneys to negotiate their contracts. Given the level of compensation some NBA players receive, the idea of paying an hourly fee instead of a commission is too attractive to ignore. Ray Allen may be perceived as the first, but he will certainly not be the last. This trend by no means signals an end to agents or commissions. The 1999 Agreement reduces the uncertainty associated with contract negotiations, weakening the rationale to pay a commission for contract negotiation services. The emphasis now has shifted to the other services that an agent offers and the value of those services. Thus, agents who currently only negotiate contracts and secure endorsements will face enormous pressure to reduce commissions, work for a flat or hourly fee, or broaden their services. A wave of consolidation has already begun, fueled by this desire to expand the services offered to athletes. These large, consolidated agencies will attempt to leverage their client base to create new revenue streams. Their impressive array of services and resources may appeal to many players. Instead of squeezing out the smaller firms, however, the rise of the mega-agency will open an opportunity for more boutique agencies promising to deliver strong personal service. A small firm, working in conjunction with other service providers, will be able to mirror the services of its larger competitors but have the advantage of diverse viewpoints and a more vigilant system of checks and balances. Ray Allens success in negotiating his own contract may lead other players to believe that they would not benefit from employing a zealous advocate or, more importantly, other professionals to help them manage their business affairs. Instead, the lesson that players should learn is not necessarily to fire their agents, but to become better-educated consumers of their representation services. x

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1 If a full 82-game season had been played in 1998-99, the average NBA player salary would have been $3.0 million. See Tom Enlund, Stern Takes His Case to Players: Commissioners Memo Outlines Owners Offer, MILWAUKEE JOURNAL SENTINEL, Dec. 18, 1998, at 1, available in LEXIS, News Library. 2 Chris McCosky, Pistons Notebook: Hawks Please Mutombo with $56-Million Contract, THE DETROIT NEWS, Dec. 5, 1996, available at <http://www.detroitnews.com/96/sports/9612/05/12050207.html>. 3 News from July 16 (visited Feb. 11, 2000) <http://www.ecsintl.com/~patricia/nba-daily/older/96-97/scores7 16.txt>. 4 See id. 5 Roscoe Nance, Ruling on Howard Sends a Warning-Team Officials Say Message is that Rules Will Be Enforced, U.S.A. TODAY, Aug. 14, 1996, at 9C, available in LEXIS, News Library. 6 Chris Sheridan, Millions Keep Flowing as NBA Stays Busy, THE STANDARD TIMES, July 15, 1996, available in <http://www.st.com/daily/07-96/07-15-96/d01sp083.htm>. 7 Michael K. Ozanian, Fields of Debt, FORBES 174, Dec. 15, 1997, available in LEXIS, News Library. 8 Sean Wolfe, NBC, Turner Re-Sign with NBA at Double the Cost, MEDIA CENTRAL, Nov. 12, 1997, available in <http://www.mediacetral.com/Magazines/MediaDaily/OldArchives/199 711/1997111201.html>. 9 See id. 10 See id. 11 David Stern and Russ Granik Teleconference (posted Mar. 23, 1998) <http://www.nba.com/news_feat/00634674.html>. 12 The league has the option to extend the Agreement for an additional year. See 1999 NATIONAL BASKETBALL ASSOCIATION COLLECTIVE BARGAINING AGREEMENT, art. XXXIX, 2 (Jan. 1999) [hereinafter 1999 NBA CBA]. 13 Robert Bradley, Labor Pains Nothing New to the NBA (visited Feb. 12, 2000) <http://members.aol.com/_ht_a/apbrhoops/labor.html>. 14 Jeannie Roberts, New Bird Rule Would Limit Increases in Stars Pay (posted Nov. 24, 1998) <http://www.aa.mlive.com/pistons/stries/19981124birdrule.html>. 15 The 1999 Agreement contains a similar Rookie Exception to the salary cap. See 1999 NBA CBA, supra note 12, at art. VII, 6(f). 16 See Ozanian, Fields of Debt, supra note 7; Sheridan, supra note 6; Tribute to Shawn Kemp (visited Feb. 12, 2000) <http://www.citynet.com/~kammerer/kemp.html>. 17 Mike Monroe, NBA at a Standstill: Owners Call a Lockout, THE DENVER POST, June 30, 1998, at D-1, available in LEXIS, News Library. 18 Vote Re-Opens Collective Bargaining Agreement (posted Mar. 23, 1998) <http://www.nba.com/news_feat/00634302.html>. 19 David Stern and Russ Granik Teleconference Transcript (visited Feb. 12, 2000) <http://www.nba.com/news_feat/stern_granik_980629.html>. 20 See Michael K. Ozanian, Selective Accounting, FORBES, Dec. 14, 1998, available in

<http://www.forbes.com/forbes/98/1214/6213124a.htm>; David Stern and Russ Granik Teleconference Transcript, supra note 19. 21 See David Stern and Russ Granik Teleconference Transcript, supra note 19. 22 See Ozanian, Selective Accounting, supra note 20. 23 See id. 24 John Donovan, League at a Crossroads: NBA on Shaky Ground as Owners, Players Fight Over Money (posted Oct. 30, 1998) <http://www.cnnsi.com/basketball/nba/1998/labor/news/1998/10/30/lock out/index.html>. 25 Id. 26 See Vote Re-Opens Collective Bargaining Agreement, supra note 18. 27 See id. 28 For example, the league asked for changes in the drug policy. Only heroin and cocaine were covered in the former drug agreement; marijuana was not on the list of banned substances. Owners sought to ban marijuana and institute mandatory or random drug testing. While the Players Association opposed mandatory drug testing in general, it conceded that it would be flexible on the point. On the other hand, the Players Association believed that the league overstepped its authority when it voided Latrell Sprewells contract. It sought to more clearly spell out what authority the league and the commissioner had to discipline players. See generally, 1999 NBA CBA, supra note 12, at art. XXXIII, 9. 29 NBA, Players Agree on Deal, Save Season, ROSWELL DAILY RECORD ONLINE (Jan. 7, 1999) <http://www.roswellrecord.com/010799/spt4.html>. 30 See 1999 NBA CBA, supra note 12, at art. VII, 2(a)(3)-(4). 31 See id. at 2(a)(1)-(2). 32 See id. at 2(d)(1). 33 See id. at 12(c)(3). 34 See id. at 12(a). 35 Although the Agreement defines which players must contribute, it provides that in the event the Players Association proposes to the NBA an alternative definition of Adjustment Player that does not affect the NBAs ability to recover the [amount of the overage], then, subject to the NBAs approval, which shall not be unreasonably withheld, such alternative definition shall be used in lieu of the preceding definition. Id. at 12(b)(1) (defining an Adjustment Player as a player who must contribute to the escrow). 36 See NBA, Players Agree on Deal, Save Season, supra note 29. 37 The Agreement provides: If with respect to the 1999-2000 NBA Season, or any Season thereafter during the term of this Agreement, the Players Association establishes in a proceeding before a System Arbitrator that the Average Player Salary for such Season was less than the average player salary for the last fully-compensated season in Major League Baseball (MLB), the National Football League (NFL) or the National Hockey League (NHL), it shall have the right the [sic] terminate this Agreement. 1999 NBA CBA, supra note 12, at art. XXXIX, 4(a). 38 See id. at art. II, 7. 106

39 See id. at 7(a)(1). 40 See id. at 7(a)(2). 41 See id. at 7(a)(3). 42 See id. at art. VII, 7(c)(1). 43 See Mark Asher, Details of the NBAs Labor Agreement, WASH. POST, Jan. 7, 1999, at D6, available at <http://stylelive.com/spsrv/sports/nba/daily/jan99/07/ agreement7.htm>. 44 The 1999 Agreement retained the $1 Million Exception. See id. 45 See Average Salaries Jumped Last Season (posted July 6, 1999) <http://sports.excite.com/nba/news.990706/sl-sports-nba-1165330>. 46 See id. 47 See id. 48 See id. 49 See id. 50 See id. 51 See id. 52 Allen was represented by agent Lee Fentress of Advantage International when he entered the league in 1996. See Asher, supra note 43. 53 Specifically, the contract pays Allen $9 million in the first year with annual increases of $1.1 million (12.5 percent). He will earn $14.6 million in the final year of the contract. See id. 54 See Bryant Signs Six-Year Deal with Lakers; Third-Year Guard Wants to Stay in Los Angeles (posted Jan. 29, 1999) <http://channel3000.com/sports/stories/sports-990129-190214.html>. 55 Roscoe Nance, Allen Still Surprised by Fuss His No-Agent Deal Stirred Up, USA TODAY, Feb. 25, 1999, at 10C. 56 Patrick Hruby, Free Agents?: New NBA Rules Alter Player Reps Roles, WASH. TIMES, June 29, 1999, at B1. 57 See D. Orlando Ledbetter, Deals Like Allens Wont Mean End of Sports Agents (posted Feb. 14, 1999) <http://www.jsonline.com/sports/sday2/dled21499.asp>. 58 See Hruby, supra note 56. 59 Falk still stands to make a four percent commission, or over $2.8 million, for negotiating Iversons contract. Additionally, it is difficult to determine whether paying Falk such a large commission under the new CBA was the primary reason that Iverson fired Falk. Iverson also reported other reasons for being displeased with the services provided by Falks agency, including unhappiness with endorsement deals. See Stephen A. Smith, Iverson Fires Agent David Falk, PHILA. ENQUIRER, Mar. 22, 1999. 60 See Nance, supra note 55. 61 See id. 62 Allen was, however, the first player to negotiate his own contract under the new CBA. See id. 63 See Brian J. Murphy, SFX Buys FAME, Partners Paid $120

Million (posted May, 1998) <http://www.sportinggoodsresearch.com/PreviewSamples/ The_Sports_Marketing_Letter_Sample.htm>. 64 See Assante Corporation Completes Acquisition of Sports Representation Powerhouse Steinberg Moorad and Dunn (posted Nov. 9, 1999) <http:// www.assante.ca/media/nr24.cfm>. 65 See Murphy, supra note 63. 66 Falk and his partners, Curtis Polk and Michael Higgins, received a payment of $83 million in cash and $37.75 million worth of SFX stock. See id. 67 See Jill Goldsmith, Marquee Player: SFX Buys Group for $100 Mil, HOLLYWOOD REPORTER, July 24-26, 1998. 68 See Sports Agent Steinberg Agrees to Sell His Firm, WALL ST. J., Oct. 28, 1999, at 18B. 69 See Assante Corporation Completes Acquisition of Sports Representation Powerhouse Steinberg Moorad and Dunn, supra note 64. 70 Assante acquired NKS Management, Inc., a Los Angeles-based business management firm representing entertainment, sports, and executive clients, effective June 30, 1999. See Assante Corporation Completes Acquisition of the Business Management Firm, NKS Management Inc. (posted July 6, 1999) <http:// www.assante.ca/media/nr16.cfm>. 71 Assante acquired Philpott, Bills & Stoll, a California-based business management firm specializing in representing entertainment industry clients, effective August 1, 1999. See Assante Corporation Completes Acquisition of Second Business Management Firm for Sports and Entertainment (posted Aug. 3, 1999) <http://www.assante.ca/media/nr17.cfm>. 72 See Assante Corporation Completes Acquisition of Sports Representation Powerhouse Steinberg Moorad and Dunn, supra note 64. 73 Assante announced the acquisition on December 22, 1999. See Assante Acquires Another Major Sports Management Company; Acquisition of Eugene Parker and Associates, Inc. Vaults Assante Into Industry Leadership Position (posted Dec. 22, 1999) <http://www.assante.ca/media/nr27.cfm>. 74 See id. 75 See Hruby, supra note 56. 76 For the 1998-99 season, the first under the 1999 Agreement, only 12 players received the maximum allowable salary; of these, ten were rookies going into the final year of their rookie scale contracts. See Average Salaries Jumped Last Season, supra note 45. 77 One might argue that an agent is particularly valuable to these players since they would not play in the NBA except at a league minimum salary. Thus, an agent has earned his fee by simply securing the player a spot on a team. However, most players being paid the league minimum in the NBA could play in Europe for more money if they so chose. See Jackie MacMullan and Phil Taylor, Lock-out Limbo: The Journeyman (posted July 14, 1998) <www.cnnsi.com/features/1998/weekly/ 980720/nbalock_journeyman.html>. 78 See 1999 NBA CBA, supra note 12, at Exhibit B-3. 79 See Murphy, supra note 63.

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sports Using Child Support Trusts to Prepare Both Father and Child for Life After Professional Sports

Planning for the

Future
By Thomas C. Quinlen

nbeknownst to a National Basketball Association superstar who insisted on wearing a condom, a woman he had just slept with took the used condom and put it in her refrigerator, hoping to artificially inseminate herself later. The womans goal was to bear this mans child, knowing that if she won a paternity suit, it would mean a huge support award for her and her child.1 This was the rumor that circulated among NBA players during the 1997-98 season, and whether apocryphal or not, it represents the worst fears of professional athletes.2

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They fear that women are preying on them, hoping to seduce them, get pregnant by them, and sue them for hundreds of thousands of dollars in child support. Despite their perceived victimization, athletes often are not sympathetic characters either: many are overpaid, immature, and egotistical. Many athletes are not exactly slamming the door when these women come calling. The sexual exploits of Magic Johnson, Shawn Kemp, and Wilt Chamberlain are known all over the world. Even ignoring the current epidemics of AIDS and other sexually transmitted diseases, these excesses are not without consequences, as these celebrities father and abandon a string of children. Unfortunately, in this battle between promiscuous parents, it is the children who are most harmed. Rather than being providers of stable, loving relationships, these parents, who were either greedy or foolish or both, are not prepared to take on the responsibility of raising a child. Thus, the next stop after the delivery room is the courthouse, where one parent tries to pass off a share of the expense of raising the child to the non-custodial parent. In the case of athletes in the four professional leagues, the courts can help ensure that the child at least gets financial support from the millionaire father. But as all child support regimes allow for changes in circumstances, the courts cannot guarantee the financial welfare of the child if the father experiences a dramatic decrease in income at the end of his playing days.3 While this might be the proper result under the applicable child support statutes, a straightforward application of the laws would seem to leave the child without the financial support beyond the term of the fathers athletic career. In order to avoid this riches-to-rags story, courts, attorneys, and agents must engage in financial planning for the best interests of the child before the opportunity to provide for the future is lost. Although parents will occasionally have the foresight to engage in this type of planning, the large initial support payments are often too tempting and end up being squandered. Thus, courts are in the best position to secure these childrens future financial situations by designing trusts to hold funds for future educational expenses and supplementing support payments once the fathers income is reduced. Such trusts would release funds only to educational institutions and to the parent or child as the trustee determines is necessary for the childs health, maintenance, and welfare. This provision will preserve funds for the childs benefit well after the fathers playing days are over, and

also act as a reserve account for the father once the child or children are no longer dependants.

In the Spotlight
The issue of professional athletes siring children out of wedlock was first thrust into the national conscience in an article in SPORTS ILLUSTRATED in May 1998.4 The SI piece was followed by several newspaper articles in various cities around the country, but like most hot news topics, it was quickly forgotten as the nation moved on to more pressing issues. This Note aims to revisit this issue with an eye towards practical and legal resolution of this pervasive problem, suggesting ways that lawyers and agents can establish child support trusts to represent their clients interests and provide the best result for any children involved. First, this Note will discuss generally why a trust is a good solution to the problems of deadbeat dads, short careers, and long-term childrearing costs. Then, it will examine the laws of four particularly relevant states regarding child support and the use of trusts, looking specifically at successful implementations of trusts and at the potential pitfalls that practitioners can avoid. The Note will then move on to describe the structure of the optimal fund for this situation and how to choose a trustee. And finally, it will discuss the considerable tax implications of creating such a trust and how to diffuse potential tax problems. While the principles contained in this Note apply to any situation, the problem involving professional athletes is gender specific. First, this problem has not surfaced yet in womens professional sports. Second, biology dictates that men can produce many more children much more quickly than women a woman can only get pregnant once at a time, no matter how many men she sleeps with, while a man can father as many children as there are women to sleep with him.

Making the Payments

The concern of this Note is athletes and babies, specifically, professional athletes with out-of-wedlock babies. Children of divorced parents do not present the same problems for courts in setting support amounts, because divorces natural antecedent is marriage, and marriage provides background the courts can examine the marital home and see how the mother and children lived. One-

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night stands and short-term lovers, however, do not impart the same sense of stability and continuity. In these extremely short-term relationships, the mother has a difficult time claiming personal damage or reliance. After all, both parties bear equal responsibility for a pregnancy, barring fraud.5 So, if the father owes little or nothing to the mother, the question of what is owed to the child becomes a more difficult one to answer. Further complicating the issue is the fathers ability to pay. Athletes fortunes shift from season to season, and they can quickly go from having more than enough income to support several families to having insufficient income to support even themselves. Athletes are differ-

Hollywood.8 Furthermore, retired musicians and actors usually can expect royalty payments over the course of their lifetime, while few athletes are recognizable enough to profit off of their celebrity after their playing days are over. Simply put, these athlete fathers must care for the children they bring into this world, even if only financially.9 Despite the large salaries that professional athletes earn, they often do not pay child support, even in the face of court orders directing them to pay.10 James Brooks, a former All-Pro running back for the Cincinnati Bengals, and Ron LeFlore, who led Major League Baseball in stolen bases in 1980 with the Detroit Tigers, provide two recent cases in point. On September 2, 1999, James Brooks was arrested in Atlanta and taken to Cincinnati for his failure to pay child support.11 Despite having earned $1 million per year at the height of his career, Brooks owed $107,705 in back child support.12 Brooks did not pay the money and remained in jail until the resolution of the case13 in November of 1999, when he was sentenced to six months in jail plus 300 hours of community service after pleading no contest to the charges against him.14 One would assume that if Brooks had the money, he would rather pay than sit in a Cincinnati jail cell. By way of contrast, Ron LeFlore was arrested in Detroit on September 28, 1999, after attending the closing ceremonies at Tiger Stadium.15 LeFlore was charged with failure to pay more than $50,000 in back child support.16 When LeFlore was ordered to pay $3,000 or go to jail, LeFlore, unlike Brooks, came up with the cash the same day and immediately fled from Michigan.17 Brooks represents, presumably, the results of poor planning and money management, while LeFlore represents what the general public hates about deadbeat dads who have the money but refuse to pay. This Note attempts to eliminate both problems by constructing a flexible system, wherein the father is motivated to pay by assurances that the mother will not be able to squander the money and by the fact that any remainder will revert back to him. A further benefit is that the payment structure is entirely elastic, thus allowing the court to get the money from fathers like LeFlore in one lump sum payment.

Athletes fortunes shift from season to season, and they can quickly go from having more than enough income to support several families to having insufficient income to support even themselves.

ent from other people, or even other entertainers, as their careers are extremely limited in duration. Even the most talented and resilient athletes rarely have careers exceeding 15 years,6 with the average pro career lasting three to five years.7 Compare that figure to Sean Connery or B.B. King, who have been performing for more than 40 and 50 years, respectively. Additionally, musicians and actors are not subject to the same whims of fate as athletes. Injuries generally do not threaten non-athletes careers, as non-athletes are not dependent on their bodies being in top physical condition. Christopher Reeves has proven that even near-total paralysis need not be a bar to continuing a career in

Defining Child Support Trusts

Fathers who fail to pay child support frequently claim futility of such payments, arguing that mothers will use child support money mainly to support themselves.18

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These fathers feel that the money they are paying in child support should go to the child, not the mother.19 This belief is often validated, as even in divorce settings, and contrary to popular perception, spousal support is not awarded in the vast majority of divorces.20 States are not interested in one parent living off the other parents income, regardless of the couples former marital status.21 A partner from a one-night stand or a shortterm relationship with a pro athlete will have no claim for support because she has not been married, has not lived with the father and has not shared his lifestyle. The designation of support only for the child, while legally proper, only increases the temptation for the mother to raid the support payments for her own uses. A trust, properly implemented, will protect the support money from misuse, and ensure funds are available into the future. The law in California, on the other hand, does not share fathers concerns that child support awards will be diverted to improve mothers standards of living.22 In fact, California explicitly states that a proper use of child support is to improve the overall standard of living in a childs residence.23 Californias policy, then, is to allow the custodial parent to benefit from the child support money, having determined the benefit to the child outweighs the problem of giving money to the mother. While the custodial parent is entitled to use some of the money for the whole household, the obligor still wants to know that the child is actually receiving the intended benefit of the money. A trust arrangement will at least ameliorate these concerns and promote timely payment of the obligation. The trust accomplishes this because of its standing in the law. In general terms, a trust is the legal term for any property or money that is placed in the control of a trustee, and a trustee is one who is bound by law to manage the trust in the best interests of the beneficiary. The benefit of a trust is that legal control of the corpus, or the assets that are held in trust, resides solely with the trustee. For example, if a wealthy person wanted to leave a large sum of money to a young, financially irresponsible relative, the money could be put into trust with instructions for the trustee to pay only certain sums or for certain expenses. The profligate beneficiary, while receiving the benefit of the inheritance, cannot squander the money. The benefits in a child support situation are similar the custodial parent can spend the money only in specified amounts and for specified expenses. Some states make specific provisions for trusts, while

others laws are vague enough to allow the courts to invent fund schemes. In the case of professional athletes, with relatively short careers and possibly distant relationships with their children, trust arrangements are particularly beneficial. In dealing with out-of-wedlock child support situations, a court would already be involved, with the purpose of ensuring the childrens financial security. The player, through his lawyer and agent, must preempt the court if the player wants to have the best possible outcome both for himself and the child. The court is always going to seek the best possible outcome for the child, but there exist multiple ways to reach that goal which may not be as beneficial to the father. If the father does not take the initiative, then all decisions rest solely with the court. The people who could best construct and implement these plans for both parties are the athletes agents and lawyers. They have the expertise as professionals, personal knowledge of the athletes financial affairs, and as spousal support is not an issue, there is no conflict of interest. As a consequence of helping their clients and the clients children, agents and lawyers are also helping themselves by ensuring that their clients will be comfortably solvent and able to pay their bills. It should be noted here that not every plan will be the same. Players salaries are different, and the expected lengths of their careers are different. Perhaps the most important factor of all is variance in state laws; while the states seem generally amenable to the use of trusts, care must be taken to understand what each jurisdiction is looking for in a child support plan.

State Laws
The federal Aid to Families with Dependent Children Act requires each state to have a single state-wide guideline for child support.24 The Act predicates funding for child support enforcement upon states complying with this provision. Each state is able to enact its own specific guidelines, and though the similarities among these statutes often are more striking than their differences, they still produce a wide range of results.25 As a sample of state laws dealing with how child support payments are calculated and awarded, this Note examines the laws of Texas, California, Florida, and Tennessee. These states were chosen because they contain franchises representing 29 percent of the National Football League (NFL), 34 percent of the National Basketball

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Getting the Plan

Implemented
Before being able to implement the trust plan suggested in this Note, a practitioner may have to explain to the father why he should part with so much of his money, explain to the mother why she should waive her other remedies for collecting support, or explain to a court why it should deviate from the statutory guidelines. Sports agents, attorneys and judges all play different roles in this process. Kyle Rote, Jr. is a prominent sports agent with Athletic Resource Management, the agency that manages such star athletes as Reggie White, Scottie Pippen, and Isaac Bruce. Rote describes the agents role in the child support process this way: Our line is to provide clients with a framework of responsibility.1 They need to take care of their children, both as a moral matter and from a public relations viewpoint. Finding the right solution is a balancing act: We dont want to unjustly enrich a mother or her live-in boyfriend, but we also dont want to take the hard line approach.2 The agents role is a little different than that of the pure advocate lawyer, who has a 100 percent commitment to the clients case . . . . We [agents] can be the judge and provide a moral and ethical framework for our advice. We are not advancing a position against an opponent as a lawyer is. We can achieve a gray result.3 Once the client decides to step up and make certain provisions for his child, then it is the responsibility of the lawyers to achieve the best possible result for the client.4 Rick Landrum is in-house counsel for Athletic Resource Management. He states that, ideally, the relationship between the parents will be amicable or at least civil. When the parents are capable of talking together rationally, the athletes representatives should try to work out a consent decree, whereby the parents sign an agreement stating how child support will be handled.5 Child support can be handled informally, and probably is in many cases. However, having a court-approved agreement is preferable, not only because it is enforceable against the obligor, but also because the order offers stability and predictability to the obligor.6 In practice, we have used both revocable and irrevocable trusts as part of child support plans.7 When asked why a mother would agree to a plan utilizing a revocable trust, Landrum replied, I dont know, but once you communicate the idea of the trust, they will agree on that basis. Also, with the court enforcement mechanism in place, its not like youre taking advantage of the mother. A revocable trust just gives my

Association (NBA), 25 percent of the National Hockey League (NHL), and 30 percent of Major League Baseball (MLB).26 Though Tennessee only has two franchises, both of which are new to Tennessee,27 state regulations dealing with the calculation of child support contain specific provisions for dealing with high income obligors and feature trusts as part of that scheme, making Tennessee an excellent model.28

Texas
Texas child support laws are designed to provide the child with a standard of living commensurate with that of the parents.29 In pursuit of this goal, the Texas Family Code sets out guidelines that allocate percentages of the payors income to child support, based on the number of children being supported.30

The Texas Family Code provides that where an obligors net resources exceed $6,000 per month, the court shall presumptively apply the percentage guidelines to the first $6,000 of the obligors net resources... [and] may order additional amounts of child support as appropriate, depending on the income of the parties and the proven needs of the child.31 The Texas statute goes on to say that, in no event may the obligor be required to pay more child support that the greater of the presumptive amount or the amount equal to 100 percent of the proven needs of the child.32 The reasoning here is clear obligors cannot be made to pay more than the children need. However, this reasoning assumes a somewhat steady stream of income from which the obligor can pay support, and such an assumption fails when applied to professional athletes. Any future extraordinary expenses are, by definition,

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client more flexibility.8 If the mothers counsel thinks a revocable trust is a bad idea, then they should not agree to it. The biggest problem, whether in an adversarial proceeding or in entering a consent decree is educating the judges on the special considerations of professional athletes.9 For example, in Arkansas, the rules governing child support are very strict. The presumption in favor of the guidelines is extremely strong, so the judges always want to go strictly by the guidelines. When the percentages are applied strictly that way, you end up with the mother getting too much money at one time and you dont plan for the future reduction in income.10 According to Judge Andrew Shookhoff, lawyers would be wise to heed Landrums advice about trying to educate the judges who hear their cases.11 Shookhoff was the trial judge in Nash v. Mulle, and sitting in Nashville, he frequently had occasion to hear cases involving musical celebrities. He offered some insight into how judges view these cases. Basing his comments on his experience with Nash, Shookhoff said, What you want to look at is the underlying policy of the law. In the case of Tennessee, the guidelines assume that the non-custodial parent exercis-

es a certain amount of visitation. Where the parent is not visiting, you are supposed to consider an increase in the child support award.12 The law has a dual purpose to ensure the child is not neglected financially and to compensate for the missing parent. However, it is unfair to underwrite the custodial parent just because the non-custodial parent earns a lot of money.13 These types of rationales for not applting the guidelines need to be articulated to the judges.
1 Telephone interview with Kyle Rote, Jr., CEO of Athletic Resource Management (Feb. 11, 2000). 2 Id. 3 Id. 4 Id. 5 Telephone Interview with Joseph E. (Rick) Landrum, General Counsel and Director of Client Services for Athletic Resource Management (Feb. 10, 2000). 6 Id. 7 Id. 8 Id. 9 Id. 10 Id. 11 Interview with Judge Andrew Shookhoff, former juvenile court judge in Davidson County, Tenn., current faculty member at Vanderbilt University School of Law, and the Senior Research Associate at the Center for Child and Family Policy of the Vanderbilt Institute of Public Policy Studies, in Nashville, Tenn. (Feb. 7, 2000). 12 Id. 13 Id.

speculative and cannot be considered a proven need of the child. This interpretation would mean that the creation of an educational trust would be beyond the authority of a Texas court. The law does not preclude the use of trusts altogether, though. In the case of In the Interest of Regina Gonzalez, the trial court ordered the use of a trust which required the wealthy Mexican father to make a lump sum payment to cover all child support payments from the time the parents separated until the child reached majority.33 The Court of Appeals of Texas held that the trial court was within its discretion in deciding that the father should make a lump sum payment, representing the present value of all the support payments from the time of the decision until the child reaches majority age.34 The Court of Appeals also held that any funds remaining in trust at termination would revert to the father,35 and that the trial court may give full admin-

istrative power over the trust to the trustee.36 Gonzalez shows that trusts can be used in Texas, and the case highlights the biggest reason for using trusts they act as insurance. If one were to substitute a Dallas Maverick for Gonzalezs father, and substitute fear of injury for fear of Gonzalezs father fleeing to Mexico, then the case is a perfect example of how trusts can ensure ready funds to meet the childs needs.37 For a practitioner seeking to implement a trust plan in Texas, the trust would have to be structured within the bounds of the statute. In setting the amount to be paid in, the mother would need proof of the expected length of the fathers career and his projected earnings, and she would have to prove the childs future needs. Unlike some jurisdictions, Texas law does not allow the court to err on the side of caution, putting in extra money as insurance against a career ending prematurely. As for

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future educational expenses, the case law does not provide any direct illumination. However, including private university tuition in the calculation might be possible, if the custodial parent can show that the child is likely to attend an expensive private university and can persuade the court with an argument similar to the one in Nash v. Mulle, infra page 119.38

California
The California Family Code sets up an impressively intricate and comprehensive calculation for determining child support awards based on each parents income, who earns more, and which parent has custody.39 No maximum income level is set, and the formula is intended to apply to all situations. However, under 4057, the code outlines a few circumstances under which the presumption of correctness may be rebutted by admissible evidence showing that application of the formula would be unjust or inappropriate in the particular case, consistent with the principles set forth in Section 4053.40 Of particular note to professional athletes is 4057(b)(3), which creates an exception for obligors who have an extraordinarily high income and the amount determined under the formula would exceed the needs of the children.41 Shortly after these Family Code provisions were enacted in 1993, actor Emilio Estevezs former girlfriend sought modification of a child support order entered in 1987.42 Estevez stipulated that his annual income exceeded $1.4 million, and that he could pay any reasonable child support award.43 The California trial court directed that Estevez produce information and documentation regarding his income and expenditures, despite his stipulation, in order to perform the statutory calculation.44 Upon appeal, however, the court held that Estevez fit within the extraordinarily high income exception, and that he therefore should not be required to produce any documents relating to his financial situation, as the only issue for the trial court to decide was what the childrens needs were.45 Estevez was willing and able to pay any reasonable award.46 After Estevez, there is no need for a father to reveal his income or expenditures in court, so long as he is willing to stipulate that he can pay any reasonable child support award.47 This ruling produced two important points for any practitioner who represents a high-income earner in a child support hearing. The first benefit is that the trial court cannot calculate the award based on

any percentage and must focus only on the childs needs. If the obligor thinks the award is too high, it can be challenged, but at that point, financial data must be disclosed.48 The second benefit is a consequence of the first: cutting down on discovery and the amount of admissible evidence makes for a shorter and less expensive hearing. The cases involving baseball players Kevin Mitchell and Barry Bonds provide a fairly broad overview of how the California system operates for athletes.49 In 1986, Mitchell was a member of the World Champion New York Mets, and in 1989 he was named the National Leagues Most Valuable Player while playing with the San Francisco Giants. By 1994, however, Mitchell had been traded twice, suspended once, put on the disabled list, and finally let go as a free agent in October of that year.50 During this troubled time, he petitioned to have his child support payments reduced, and the court obliged.51 His obligation was reduced from $5,000 per month to $4,000 per month, with $500 per month going into an educational trust.52 In 1995, Mitchell signed to play in Japan, where his contract paid him an annual base salary of $3 million and a $900,000 signing bonus.53 Afterwards, Ronna Rojas, Mitchells ex-wife and mother of his child, filed for another review hearing, and the trial court ordered Mitchell to pay $5,000 in cash as restitution for the period of reduced payments. The court also restored the original $5,000 obligation, and added on a requirement that Mitchell continue the payments into the educational trust.54 The opinion did not set out what the formula amount would have been, but it noted that the award of $5,500 per month was less than the formula would have dictated.55 An award of $60,000 per year seems quite substantial, and an additional $6,000 per year for an educational trust could grow into a fairly substantial fund over time. However, the court did not consider Mitchells profession or where his career was headed. When Major League Baseball resumed play in the 1996 season, Mitchell was signed by the Boston Red Sox.56 Boston sent Mitchell down to one of its minor league affiliates and then traded him again.57 He was then let go as a free agent, and the Cleveland Indians picked him up.58 Mitchell played the 1997 season in Cleveland, mainly as a designated hitter, batting .152 and making two errors in two appearances in the field.59 He played the 1998 season in Oakland, having a better year in the field and at the plate, but he still hit only .228.60 Mitchell was not able to sign with any team for the 1999 season.61 After his

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last four years of baseball, Mitchell had paid $24,000 into the trust and $240,000 in regular child support. By then, any further opportunity to provide for the childs future was gone. How could the court have done better? Clearly, $24,000 is not going to pay for any private education, as one year at a private university would likely exhaust the entire principal amount. In issuing its order the court should have considered the fragile nature of a professional athletes career. The court should have realized the distinct possibility that Mitchell would lose the ability to provide so easily for his childs needs. If the court had ordered Mitchell to pay $100,000 per year into trust, representing only 3.3 percent of his 1995 annual income, the trust would have contained over $400,000. The income alone on this trust, assuming a conservative ten percent annual return, could generate support payments of $40,000 per year, leaving the principal amount as an ample insurance policy. Barry Bonds is not Kevin Mitchell. Bonds is a marquee player, holding or sharing various Major League records for most bases on balls in a season and career.62 His father is Bobby Bonds, a baseball legend in his own right,63 and Barrys godfather is the incomparable Willie Mays.64 Barry Bonds has been named MLB Player of the Year once, the National League (N.L.) Most Valuable Player three times, an N.L. All-Star outfielder six times, and has won seven N.L. Gold Gloves as an outfielder.65 Bonds children are also the result of a marriage.66 In the lengthy court battle of Bonds v. Bonds, Susan Margreth, Bonds ex-wife, appealed the divorce courts decision awarding her $10,000 per month in child support for each of the couples two children.67 Combined with a temporary spousal support award, the total award was $30,000 per month, $360,000 per year.68 The guideline formula would have produced a child support award of $67,043 per month, and thus Margreth appealed, claiming an abuse of discretion.69 Clearly, Margreth could not be expected to feed and clothe her two growing children on such a pittance! Citing Estevez, the Court of Appeal quickly dispensed with Margreths complaints about the child support award, explaining, This argument is remarkable for its lack of merit. Sun [Margreth] cannot seriously argue that $20,000 a month would only provide for her childrens bare necessities.70 The trial court certainly provided ample support for the Bonds two children. By not creating a trust or guardianship account, however, as was done in Rojas, the

court missed an important opportunity to protect the funds for the childrens future use. Under 4053(f) of the California Family Code, Margreth legally may use child support money to improve the entire households standard of living.71 Margreths spousal support award terminated in December 1998,72 and this case was finally put to rest in May 1999.73 And where the plaintiff thought $360,000 a year would provide only for bare necessities and is now receiving only $240,000 a year, it seems the trial court was short-sighted in not protecting the funds. Even if a custodial parent has good intentions, he or she may choose to improve the childrens standard of liv-

[In California] . . . there is no need for a father to reveal his income or expenditures in court, so long as he is willing to stipulate that he can pay any reasonable child support award.

ing too much now, not properly accounting for future expenses. Using a trust takes child support money out of both parents hands, keeping it safe for the childs future use. Californias policy of allowing mothers to use child support money for the entire home is not flawed; it is merely a decision about proper uses of support money. The mistake lies in not looking at the parents long-term career prospects and not providing protection when the funds are at risk and at a time when the obligor can easily pay for it.

Florida
Florida uses a schedule of payment levels based on income and the number of children, not on a fixed percentage.74 This guideline may be adjusted by several

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Why Not a Conservatorship

or Guardianship?
Trusts generally are preferable to conservatorships or guardianships for situations involving professional athletes. While the two appear to by synonymous, judging by the definitions in Blacks Law Dictionary, these two devices have one main difference, at least in Tennessee.1 A conservator is a person or persons appointed by the court to provide partial or full supervision, protection and assistance of the person or property or both of a disabled person, while a guardian is a person or persons appointed by the court to provide partial or full supervision, protection and assistance of the person or property or both of a minor.2 Since children under the age of 18 are commonly considered to be under a legal disability,3 the distinction seems to be one of verbal convenience rather than substance. Thus, for convenience sake, for the rest of this sidebar, guardianship shall refer to both terms. One aspect of a guardianship that generally may be an advantage, but a turns out to be a disadvantage in the case of professional athletes, is the bonding requirement. In order to assure proper management of the fund, the guardian is required to take out an insurance policy equivalent to twice the value of the wards property, and the premium is approximately $10 per thousand covered.4 While this protection is valuable if an individual, such as a family member or friend, is acting as the guardian, a large fund of the type considered in this Note could require $5,000 or more in premiums each year, with the premium paid out of the fund.5 If the guardian is institutional, such as a bank, however recovery for mismanagement is not an issue. More troublesome are the management and accounting requirements imposed on a guardianship. The management requirements dictate that the corpus be invested only in ways approved by the state.6 Each year, the guardian must file an property management plan with the court, outlining how the guardian intends to invest the wards property.7 Additionally, no investment may be changed without court approval8 and property may not be sold without court approval.9 Financial institutions, however, are not required to get approval for changing investments.10 Again, these requirements are in place to protect the ward, but they are unnecessary, particularly with a financial institution, and merely increase transaction costs while forcing overly conservative investing.

enumerated factors,75 and if the monthly income exceeds $10,000, a percentage of the income above $10,000 is awarded.76 The statute states that the guideline amount is presumptively correct, giving deference to the legislature and allowing the court only limited discretion to implement its own schemes.77 When Geri Finley filed a paternity suit against former Orlando Magic guard/forward Dennis Scott, the Florida courts were faced with a very interesting and potentially explosive issue.78 The issue, as framed by the Fifth District Court of Appeal, was whether parents were required to pay child support needed to cover the childs proven day-to-day needs, and fund future, unspecified needs.79 Dicta in the earlier case of Miller v. Schou spoke of children having a right and entitlement in their parents wealth.80 If children have a property right in their parents wealth, then custody and marital status are

taken out of the picture. Children living with married parents arguably could sue for their fair share of the parents wealth. When the state Supreme Court addressed Schou in the Finley v. Scott opinion, it made three important decisions regarding child support payments by high-income parents. The first point from Finley is that the child should enjoy a standard of living commensurate with that of the paying parent.81 In the case of Dennis Scotts child, the basketball star should provide sufficient money for clothing and other necessities, and he also should provide for the best available medical care, education, and extra-curricular activities.82 The trial court had ordered Scott to pay $5,000 per month in child support.83 Of that amount, $2,000 was to go directly to Finley for the childs day-to-day needs and the rest into a guardianship account.84 As the Supreme Court of Florida points out in

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Besides filing an annual property management plan, the guardian must also file an annual accounting with the court.11 The accounting must contain all financial statements and documentation of any purchases or sales, as well as a statement to the court concerning the need for continuing the guardianship.12 In his book Estate Planning and Drafting, Regis Campfield describes the additional burden of court supervision as: an expensive and time-consuming process . . . . Investment of the wards property . . . on so-called legal lists . . . [means] investments that have little or no appreciation potential but that are seen as safe.13 Given that fewer restrictions are placed on institutional guardians, it seems clear that even the cautious jurisdictions realize that financial institutions pose little risk to wards. While a guardianship is not a terrible result, to be avoided at all costs, a trust is simply more efficient. The trustee is still bound by a fiduciary duty, just as a guardian is, but a trust is free of the court supervision required in the guardianship context. This freedom reduces costs, saves time, and allows for higher risk/return investment. If the grantor wants to restrict the types of investments that can

be made, he is free to do so. In the end, the trust gives the drafter control over the terms, and takes mandatory court intervention out of the picture, producing a more efficient, customized result.
1 BLACKS LAW DICTIONARY 211, 488 (6th ed. 1991). 2 TENN. CODE ANN. 34-11-101(4), (11) (1999). 3 REGIS W. CAMPFIELD, ESTATE PLANNING 1995). 4 Id. at 93. 5 Id. 6 Id. at 94; see also TENN CODE ANN. 34-11-115(a) (1999). 7 TENN. CODE ANN. 34-11-115(b) (1999). 8 Id. at 34-11-115(c). 9 Id. at 34-11-116(a). 10 Id. at 34-11-115(d). 11 Id. at 34-11-111. 12 Id. 13 CAMPFIELD, supra note III, at 94.
AND

DRAFTING, 92 (2nd ed.

Schou, even though obligor parents earning $200,000 and $10 million are both earning well above the highest guideline amount, their obligations will be quite different, reflecting the standard-of-living consideration.85 The second point flows from the first. While children are entitled to share in their parents standard-of-living, children do not have a right to their parents property.86 The court in Schou, probably unintentionally, opened the door for a childs right to a non-custodial parents property, though the concurrence tried to clarify the point.87 When Finley reached the Supreme Court of Florida, however, the court stated that while children of high-income parents should share in their parents standard-of-living, and that this proposition allows the trial court to award more than the childs actual needs, the trial court may still find the guideline amount of support to be too high. The court then revived the trial courts use of a

separate fund to set aside the non-necessary money for future expenses.88 The third point from Finley is that child support money is only to benefit the child.89 The Finley court makes an excellent case for the use of trusts or guardianship accounts. First, the court said that something must be done with the money awarded in excess of the childs day-to-day needs, and that establishing an external, managed fund is well within the trial courts discretion.90 Further, the court stated that the mother and any other children she may have by another father are not to benefit from the child support payments.91 Finley had already shown a propensity to augment her income and lifestyle using child support money.92 Where, as in the Finley case, the court is concerned with the custodial parent diverting the childs money, an outside trustee or guardian can give the obligor parent some peace of mind

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about how the child support money is being spent.93 From the obligors point of view, a trust is preferable to a guardianship because a trust is more flexible and incurs lower administrative costs, and because the trustee may be chosen whereas a guardian is court-appointed. With the final disposition of Finley, Florida law appears to stand firmly on the ground of reason. The guideline amounts of support are presumptively correct, giving deference to the legislative process; however, the courts are allowed to use their judgment in unusual cases, so long as they make written findings.94 Particularly with high-income parents, such discretion makes very good sense. Additionally, trial courts are not limited to needs only awards; courts are free to increase awards above the level of day-to-day needs by establishing funds for future expenses. There exists a potential hole in the Florida scheme, and it is the same hole that Texas and California failed to properly fill. When the Finley case started out as a paternity suit and child support action in 1993, Dennis Scott was playing for the Orlando Magic. His team would go to the NBA finals in 1995, and he was averaging over 30 minutes per game between 1990 and 1997.95 By the time the Supreme Court of Florida decided the case in 1998, however, Scott had been traded to Dallas and was about to be traded to Phoenix, which would eventually let him go to free agency.96 New York signed Scott midseason in 1999, but waived him six weeks later.97 Finally, the Minnesota Timberwolves signed him for the remainder of the 1999 season.98 In the 1997-98 and 1998-99 seasons, Scotts minutes-per-game and points-per-game fell rather dramatically.99 This season, Scott is on the roster of another non-powerhouse, the Vancouver Grizzlies.100 Scott missed the first 14 games of the current season with an injured hamstring.101 What do these statistics have to do with child support? Scott, like Kevin Mitchell, is near the end of his lucrative playing days. While the Florida scheme recognizes Scotts enormous income, it does not acknowledge the fact that a professional athletes career, and therefore his income, is always on a tightrope. One injury or bad season can knock a player off. Taking the high-wire analogy a step further, the Florida trial court made an intelligent, reasoned decision in spreading the safety net of a guardianship account, but it did not go far enough in considering all of the factors. The net might prove to be too small. In this respect, the Tennessee courts have cast a broader net, which is more likely to catch any athlete

who is knocked from the tightrope.

Tennessee
Tennessee law provides set percentages of net income, up to $10,000, which will be awarded for child support.102 When the net income of the obligor exceeds $10,000 per month, the court may consider a downward deviation from the guidelines if the obligor demonstrates that the percentage applied to the excess of the net income above $10,000 a month exceeds a reasonable amount of child support based on the best interest of the child and the circumstances of the parties.103 This provision for dealing with high-income situations is quite similar to the ones already outlined from Texas, California, and Florida. The seminal case in Tennessee regarding child support and high-income parents is Nash v. Mulle.104 In Nash, the father was ordered by the trial court to pay the statutory rate of 21 percent on all his income, some of which would be placed into an educational trust.105 The trial court interpreted the Tennessee rules and regulations to say that income above the threshold level would only be excluded from the support calculation if the father could show why inclusion would be inequitable.106 The Tennessee Supreme Court remanded the determination of child support back to the trial judge, explaining that once the threshold level has been reached, any deviation from the guidelines is purely within the discretion of the court, to be determined on a case-by-case basis.107 The Nash opinion then turned to the issue of the educational trust the trial court created to pay for the daughters college education.108 The father claimed it was unconstitutional to require him to pay for his daughters education after she had reached the age of majority. However, the court held that the father was not being required to pay anything after his daughter reached majority. Rather, the payments were made while she was still a minor, and only the benefits accrued to her after her majority.109 The court then embarked on a quest to list every state, including Alabama, Illinois, Indiana, Iowa, New Hampshire, New York, Oregon, Pennsylvania and Washington, which had handed down a decision or passed a statute advancing the appropriateness and even the necessity of requiring non-custodial parents to provide for their childrens higher education.110 The courts exhaustive defense of its position on the educational fund demonstrates the high priority

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assigned such plans. The court recognized and seized a rare opportunity to take an unfortunate situation, a divided home, and used it to create as much stability as possible for the children involved. In fact, the court ensured more stability, financially at least, as the court has no control over undivided families. Money for school is not a substitute for having a whole and happy family, but it is much better than the alternative. A case on point for athlete-fathers is Lee v. Askew, which deals with NBA swingman Vincent Askew.111 Askew fathered a son out of wedlock in 1986.112 In 1987, after his junior year at Memphis State, he entered the NBA draft.113 Askew was a star in high school, college, and was twice named league Most Valuable Player in the Continental Basketball Association.114 In the NBA, however, Askew was a role player, known to coaches for his hard work, unselfish attitude, and tenacious defense.115 Despite Askews role as a reserve coming off the bench, it is clear from the record that he did quite well financially, making $2 million in the 1996-97 season.116 When a paternity suit was filed, the trial court awarded child support to Linda Jones Lee according to the guideline percentage. The court further required Askew to put money into a trust to pay for the extraordinary expenses of the minor child during his minority, and for college expenses if thereafter necessary.117 The trust would be managed by the Probate court as a guardianship account.118 The Askew case is significant to the development of Tennessee law for three reasons. First, it reaffirms that income above the statutory threshold will be included in the calculation of child support only insofar as the court believes it necessary.119 The custodial parent has no right to that money, as was established in Nash, though Lee argued strenuously that she was entitled to the guideline percentage.120 Second, Askew challenged the trial courts order that the trust be managed by the probate court.121 He reasoned that going through the probate court would increase costs, be cumbersome, and generally slow down the administration of the trust. Further, the trust could obtain a greater return under a private manager. The court recognized that resort to the Probate Court is somewhat unusual, but found nothing wrong with the order, as the probate court is fully capable of managing the trust.122 This ruling should put practitioners on notice that if they are not prepared with an acceptable trust plan, the trial court might devise a plan that is

unsatisfactory to the obligor. An appeal will have no effect, as there is no error. When a guardianship is created instead of a trust, the funds come under the direct supervision of the probate court. All decisions regarding the investment and use of the funds are subject to the courts discretion. Further, guardianship accounts are limited in the types of investments that may be made.123 Third, Askew establishes that the property held in trust belongs to the obligor.124 Lee argued that upon termination of the trust, the child should receive the trust assets.125 The court, however, held that the property was Askews and would revert to him upon termination.126 The court is not explicit, but one can infer that the court viewed Askews legal obligation of support to be

The

courts

exhaustive

defense of its position on the educational strates the fund high demonpriority

assigned such plans . . . . Money for school is not a substitute for having a whole and happy family, but it is much better than the alternative.

satisfied by his monthly payments, intending the trust only as a supplemental or stopgap measure. It is important to note here that the court did allow for invasion of the trust if Askews income ever declined to such a level that he could no longer make support payments at the level he was then making.127 The court thereby protected funds through the guardianship account, which guaranteed money for the childs support and education, and provided Askew with financial security in the future.

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Trust Administration
A trust is preferable to a guardianship or conservatorship, because the latter two methods come under the supervision of the court. While court supervision might seem desirable having an official overseer to make sure the funds are administered properly this is not the case. A trustee is bound by a fiduciary duty to properly administer the fund and can be sued for violating that duty. Further, court supervision places extra restrictions on how the fund is managed. Therefore, the parties

sponding decrease in support payments. Given the option, the latter method is probably preferable in the professional athlete setting.

Payment Structure
When considering how much these athlete parents should pay, two factors must be considered: the size of the salary and the likelihood of that level of income continuing for a number of years. The structure should be in a trust form, since a guardianship account, while effective, is more restrictive and costly.129 As the SPORTS ILLUSTRATED article pointed out, the average salary in the NBA was $2.2 million for the 19971998 season.130 In Tennessee, the statutory provision for determining child support payments states that for one child, the father must pay 21 percent of his income.131 So, an athlete who makes $2.2 million and has a child in Tennessee would be paying over $400,000 per year in child support, if a court chose to strictly follow the statutory guidelines. This may seem a bit excessive, until we consider the athletes future earning potential and how the payments might be structured. The likelihood of a short career also should be considered in making child support allocations. Injuries strike athletes without warning or pattern. Since professional athletes bodies are the source of their income, any loss in ability to perform physically is felt directly in the checkbook. Most athletes are unable to be recognized and sell products after their sporting careers are over.132 While just a tiny silhouette of Michael Jordans body, flying to the basket, easily identifies Nikes Jordan line, Vincent Askew, Kevin Mitchell, and even Barry Bonds, along with the vast majority of professional athletes, lack such marketability that transcends their active careers. So while $400,000 in child support may seem absurd, it is necessary to ensure support over the course of a childs minority. Rather than hand these giant sums over to the custodial parent and child en masse, the non-necessary money should be placed in a trust fund for the childs well being after the athletes career is over. This type of planning goes beyond simply putting money away for college. The continuation of child support payments is assured in the event the fathers income decreases to a level where he can no longer make such large support payments. While setting money aside for educational expenses is a good reason to create a trust, a more comprehensive reason is

If a substantial fund is created, then when the fathers income decreases, any reduced child support payments can be supplemented by the income the trust earns, preventing the childs financial fortunes from being tied to the fathers career.

should be prepared beforehand with a trust and a trustee to present to the court. Agreement in this area benefits both parties, as a trust has the potential to grow more quickly and has fewer administrative constraints. How much can be put into the trust is also a function of state law. States such as Texas will require evidence of how much a child will need. Some states do not allow for the creation of higher education trusts because they require parents to pay support beyond the childs minority.128 Other states will allow judges to use their discretion, as the judge in Askew did, putting enough into the trust so that in the future, when Askews income decreased, the child would not have to endure a corre-

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to maintain the high level of child support that will be established when the father is still in his playing days. If a substantial fund is created, then when the fathers income decreases, any reduced child support payments can be supplemented by the income the trust earns, preventing the childs financial fortunes from being tied to the fathers career. Further, as was seen in Gonzalez and Askew, any remainder belongs to the father, so a well endowed and well managed fund would provide the father with an infusion of already-taxed cash upon termination of the trust. The money put into the trust is taxed when it is earned as salary, and the income generated from the trusts investments is taxed each year. Therefore, whatever amount remains in the trust at its termination goes directly to the father without additional tax liability. If the father has suffered a dramatic reduction in income, the termination of the trust would provide a large infusion of ready capital.

ments, it would only do so to the level originally determined by the court. The child would never receive more than the father was required to pay while he was a professional athlete.

Trustee
The tougher and more important question involves determining the trustee, since this person will be essential to the financial success of the fund and to the success in convincing the parents that the trust will accomplish what they want it to accomplish. The most efficient choice for trustee would be the custodial parent, who in the pro athletes situation, is the mother. She could take a trustees fee each year, which would supplement her households income, and the father could feel that she was earning the money. The childs household has an increased standard of living, and even though there was no marriage resulting in spousal support, provision is made for the mother. The mother is in the best position to know what the childs extraordinary expenses are and to pay them. After all, as the custodial parent, she is incurring all the expenses. Such an arrangement, however, requires a good relationship between the parents. Many athlete fathers are likely to balk at having a one-night-stand mother in control of their rather large trust. This concern is illustrated by Dennis Scotts experience with Geri Finley. Before the court intervened, she was helping herself to his childrens support money and spending it on herself.134 Further, the mother, although no less than the father, is unlikely to have expertise in managing trust funds. From an efficiency standpoint, the fathers lawyer or agent also could make an excellent trustee. The lawyer/agent is intimately familiar with the details of the fathers finances, and probably has access to the fathers bank accounts, ensuring that the support payments would go into the trust on time. The lawyer or agent would likely be a good manager. At the very least, they would have some experience managing their clients finances. This choice, however, would present a conflict of interest. The lawyer or agent represents the client, but as a trustee, also would have an obligation to look to the best interests of the child. All the while, the client has a longterm interest in the preservation of the trusts assets. Even if the trustee were able to perform all duties faith-

Trust Fund Structure

The structure proposed for this trust is actually quite simple. Since money may be paid out every year, and huge amounts will be paid in, the fund is actually little more than a glorified bank account. The trust should be established as an irrevocable trust which will only terminate either when the child turns 18 or when he graduates from college, whichever comes later. In any event, the trust probably should not survive beyond the childs twenty-fifth birthday; at some point the child needs an incentive to graduate and begin supporting himself. An irrevocable trust is simply property that is placed in the care of a trustee, to be administered for the benefit of the beneficiary, and which cannot be reclaimed by the grantor until the trust self-terminates. In a child support setting, the trust would be set up with a termination date graduation from college or graduate school or upon reaching a certain birthday. At termination, the remainder reverts back to the father.133 The trust income or some portion thereof will satisfy the fathers obligation to pay for private education and/or other extraordinary expenses, and it will supplement support payments if the fathers income declines. This would mean that all the childs needs, as determined by the court, could be met, and that the father would not be required to pay more than the child needed. In other words, though the trust might supplement support pay-

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fully, this situation has too much of an appearance of impropriety. Because the father has a long-term interest in the trust assets, he cannot be the trustee. Even in the unlikely event that the father were qualified to manage the fund, the fathers conflict is too great to be ignored. He has a reversionary interest in the trust, as discussed in Gonzalez and Askew, and while he would have a legal obligation to manage the trust to benefit only the child, the temptation to look after his own interests would be too strong to risk testing. Moreover, just as the father probably would not want the mother to be the trustee, the mother probably would not want the father to be the trustee. In a potentially adversarial situation, forcing the parties to interact is not desirable. Finally, a professional trustee could be used, and this is probably the best solution overall.135 A bank or other institutional trustee is appealing for several reasons. First, a professional trustee with no ties to either parent can be found quite easily, allowing both parties to forget their worries about trustee bias. Professional trustees, by definition, have expertise in managing trusts, and since their careers and fees depend on their funds performance, they are going to be motivated to grow the fund. Maximum efficiency and a high growth rate benefit the father as well, through his reversionary interest. Further, a professional, unlike other trustee candidates, has financial backing in the event of mismanagement or other breach of fiduciary duty. With the concerns of a short career and a drastic reduction in income at the forefront, a good manager is mandatory. Professionals also could be used as co-trustees with either parent; the desirability of such an arrangement would be unique to each case, depending on the relationship between the parents and the feasibility of paying more than one trustee. The questions of trust structure and trustees skirt around one important point ? trusts are designed to grow and generate ever-increasing amounts of income. Ideally, a trust will expand to a point where it is self-sustaining, producing enough income to meet all of the beneficiaries needs. Such a high level of income is certain to attract the attention of the Internal Revenue Service.

in satisfaction of a support obligation, it is taxed to the father.136 Additionally, all income from a trust in which the grantor has a reversionary interest is usually taxed to the grantor.137 Income tax liability for the trust is avoided only when the value of the reversionary interest is less than five percent of the value of the property put into the trust.138 Essentially, there is no way for the father to divest himself of the tax liability for the trust, so he must find a way to cover the tax liability while not receiving the benefit of the income. As long as the father is playing his sport and earning large paychecks, the tax liability is not really a problem; its more of an annoyance made bearable by the thought that the money in the trust will someday come back to him with no additional taxes. Consider, though, that a child support trust should endure 18 to 25 years, almost certainly much longer than the fathers career. Assume one child living in Tennessee has a father who is a professional athlete, making $2.2 million per year. His child support obligation could be up to 21 percent, or $462,000 per year. The court may well decide that the father does not need to pay the entire sum, so let us say for simplicitys sake that he is required to put $300,000 per year into the trust. The trust should have no trouble sustaining a ten percent annual return,139 providing at least an additional $30,000 per year. If the father has been putting in $300,000 per year, for three years, and the trust has been paying out $30,000, then if the fathers career ends, the trust will contain $993,000.140 Assuming the trust continues to earn only ten percent, the trust income for the fourth year will be $99,300. Ignoring any tax deductions or other income, the $99,300 would be taxed in the third highest bracket, for income between $53,500 and $115,000, and the tax liability would be $26,305. Although he had a degree from Auburn University, James Brooks could barely read, and was working at a warehouse for $7 per hour.141 A $26,305 tax liability would loom rather large for an unprepared warehouse security guard. Clearly, if a trust of this magnitude is being built, a very high priority must be given to tax planning. A clause must be included in the trust directing the trustee to pay out to the father an amount equal to the tax liability the father incurs. Because all of the trust income is already taxed to the father, this payment would not generate any new tax liabilities.142 If this clause were not included in the trust, the father would have to find some means of paying the taxes out of his own pocket.

Tax Consequences
The income tax issues presented by this arrangement require careful attention. Since the income is being paid

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Though Brooks situation represents a worst case scenario, many other athletes have spent and invested unwisely, only to come to the end of their careers and find that their millions have somehow evaporated. For example, Rae Carruth recently fell into financial hardship when he was defrauded in an investment scheme.143 Though he denies any financial problems, Carruth allegedly was worried that he would not be able to afford the additional financial burden of his impending fatherhood, and thus allegedly arranged to have his pregnant girlfriend killed.144 Carruth was still playing and earning a very high salary at this time. Subtracting an NFL salary and adding a large income tax liability to the mix could present a real possibility of financial hardship. Done properly, however, the child support trust can be a boon to all those involved. While the trust is in place, the mother and child benefit from the income, but the father also has real value in the trust as well.

A Win/Win Outcome
The trust plan outlined in this Note is intended to address what appears to be a pervasive problem among professional athletes. Professional athletes have gained a reputation for fathering children with multiple women and then moving on without paying child support. Furthermore, even if these fathers wanted to pay their
1 LARRY PLATT, KEEPIN IT REAL 80-81 (1999). 2 Id. 3 See generally, TENN. CODE ANN. 36-5-101(a)(1) (1999). 4 Grant Wahl, Paternity Ward, SPORTS ILLUSTRATED, May 4, 1998, at 62. 5 See Miceli v. Ansell Inc., 23 F. Supp. 2d 929, 932-34 (N.D. Ind. 1998); Liddington v. Burns, 916 F. Supp. 1127, 1130 (W.D. Okla. 1995). Wrongful pregnancy suits may be brought against doctors, pharmacists, and possibly contraceptive manufacturers, but not against a father. A cause of action for a wrongful pregnancy tort arises when a professional or corporation has failed to prevent or terminate a pregnancy through negligence or intentional acts. For example, if a doctor is negligent in performing a pregnancy test or abortion or if a condom is defective, then a claim would arise. 6 Michael Jordans career spanned 15 years, including the two-anda-half seasons he took off to pursue baseball. Kareem Abdul-Jabbar, who had arguably the most prolific career ever in the NBA, played for 20 seasons. Jim Marshall played 20 seasons in the NFL, and Wayne Gretzky played professional hockey for 20 seasons. 7 Joseph Rizza, Kids Ask, SPORTS ILLUSTRATED FOR KIDS, April

support obligations, they are frequently without the financial resources necessary to support their children at the end of their careers. One might think this characterization is a gross over-generalization or malicious stereotyping, but the number of professional athletes is very low, and these stories are very common. To be sure, athletes like Julius Erving and Larry Bird have always supported their children, but these men seem to be in the minority.145 Athletes like James Brooks can be helped by the trust plan outlined in this Note because it acts as a mandatory savings plan. Since the father has the remainder interest in the trust, and since he need not pay the income taxes out of his pocket, the fund ensures that the father will have capital invested and available down the road. On the other hand, children of athletes like Ron LeFlore, whose fathers simply do not honor their obligations, are protected because the money is accumulated quickly, while the athlete has a large salary, and support payments can be made from the fund, independent of the fathers fortunes on the field. At the end of the day, even with a father who would have ignored his obligations, this plan presents a win/win outcome the child enjoys a constant level of support, and the father has a more secure financial future. There is indeed life off the field, and an athletes counsel should take care to protect it. x

1996, at 18. 8 Christopher Reeves, who rose to fame portraying Superman, was paralyzed in 1995 by injuries suffered as a result of falling from a horse. In 1998, he returned to acting, starring in a remake of Alfred Hitchcocks classic movie, Rear Window, a performance that won him rave reviews. 9 See generally, TENN. CODE ANN. 36-5-101(a)(1) (1999). 10 Judith Mcmullen, Prodding the Payor and Policing the Payee: Using Child Support Trusts to Create an Incentive for Prompt Payment of Support Obligations, 32 NEW ENG. L. REV. 439 (Winter 1998). 11 Don Cronin, Jurisprudence, USA TODAY, Sept. 22, 1999, at 19C. 12 Id. 13 Id. 14 Ex-NFL Back Ordered to Start Literacy Class, THE COMMERCIAL APPEAL, Nov. 25, 1999, at D2. 15 Catherine Tsai, Former Tigers Outfielder Arrested, ASSOCIATED PRESS, September 28, 1999. 123

16 Id. 17 Id. 18 Mcmullen, supra note 10, at 450-53. 19 Id. 20 JUDITH AREEN, FAMILY LAW: CASES AND MATERIALS 724 (3d ed. 1992) (quoting Lenore J. Weitzman, The Economics of Divorce: Social and Economic Consequences of Property, Alimony and Child Support Awards, 28 U.C.L.A. L. REV. 1181, 1221-22 (1981)). 21 Id. at 725-26. 22 CAL. FAM. CODE 4053(f) (Deering 1999). 23 Id. 24 Johnson v. Superior Ct., 66 Cal. App. 4th 68, 73 n.4 (Cal. Ct. App. 1998) (citing the Aid to Families with Dependent Children Act, 42 U.S.C. 667). 25 Mcmullen, supra note 10, at 443. 26 These states comprise nine of 31 NFL franchises, ten of 29 NBA franchises, seven of 28 NHL franchises, and nine of 30 Major League Baseball clubs. NFL.com (visited Feb. 15, 2000) <http://www.NFL.com>; NBA.com (visited Feb. 15, 2000) <http://www.NBA.com>; NHL.com The National Hockey League Web Site (visited Feb. 15, 2000) <http://www.NHL.com>; The Official Site of Major League Baseball (visited Feb. 15, 2000) <http://www.majorleaguebaseball.com>. 27 The Houston Oilers/Tennessee Titans moved to Tennessee in 1997 and the Nashville Predators joined the NHL as an expansion team in the 1998-99 season. 28 TENN. COMP. R. & REGS. 1240-2-4-.04(3) (1999). 29 TEX. FAM. CODE ANN. 154.123(b)(17) (West 1999). 30 Id. at 154.125(b). 31 Id. at 154.126(b). 32 Id. 33 In re Gonzalez, 993 S.W.2d 147, 160-61 (Tex. App. 1999). 34 Id. at 160. 35 Id. 36 Id. at 160-61. 37 Id. at 160. 38 See Nash v. Mulle, 846 S.W.2d 803, 806 (Tenn. 1993), infra p. 117. The court in Nash held that payments for higher education were not obligations extending beyond minority, but were merely payments during minority, the benefits of which accrued after minority.

39 CAL. FAM. CODE 4055 (Deering 1999). 40 Id. at 4057(b). 41 Id. at 4057(b)(3). 42 Estevez v. Superior Ct., 22 Cal. App. 4th 423, 426 (Cal. Ct. App. 1994). 43 Id. at 427. 44 Id. at 428. 45 Id. at 431. 46 Id. 47 But see Johnson v. Superior Ct., 66 Cal. App. 4th 68 (Cal. Ct. App. 1998); Philip G. Seastrom and Michelle L. Kusmider, Column; Family Law Corner: Child Support and the High Income Earner, 41 ORANGE COUNTY LAWYER 40, 42-44 (August 1999). In Johnson, the court affirmed the central holding of Estevez, but also said that where there is a dispute between the parents over the non-custodial parents actual income, the court may order limited discovery to determine generally the level of the non-custodial parents net disposable income. Larry Johnson, a forward with the New York Knicks, stipulated to earning over $1 million per year, while the mother claimed he was actually earning more than $12 million per year. The court held that the mother was entitled to discover evidence showing Johnsons income, if she did not already have sufficient evidence, as the resolution of this dispute would materially alter a courts findings of the childs needs. California courts consider the paying parents income in determining a childs needs. 48 Estevez, 22 Cal. App. 4th at 431 n.8. 49 Bonds v. Bonds (In re Margreth), 71 Cal. App. 4th 290 (Cal. Ct. App. 1999) (not citable superseded by grant of review); Rojas v. Mitchell, 50 Cal. App. 4th 1445 (Cal. Ct. App. 1996). 50 The Sporting News Baseball Kevin Mitchell (visited Feb. 10, 2000) <http://tsn.sportingnews.com/baseball/players/3407/index.html>. 51 Rojas, 50 Cal. App. 4th at 1445. 52 Id. 53 Id. 54 Id. 55 Id. at 1450-51. The formula is so complex that only the results are printed in the Rojas and Bonds cases; no mention of how the result was actually calculated is made, and there is no way to reverse engineer the answer, as it is too fact specific. Bonds v. Bonds (In re Margreth), 71 Cal. App. 4th 290, 290 (Cal. Ct. App. 1999) (not citable superseded by grant of review). 56 The Sporting News Baseball Kevin Mitchell, supra note 50. 57 Id.

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58 Id. 59 Id. 60 Id. 61 Id. 62 The Sporting News Baseball Barry Bonds (visited Feb. 10, 2000) <http://www.sportingnews.com/baseball/players/3918/index.html>. 63 Tom Schott, Giants Among Giants (visited Feb. 10, 2000) <http://www.sfgiants.com/HISTORY/GREATEST/greatest_bobby_bond s.html>. 64 Bonds v. Bonds (In re Margreth), 71 Cal. App. 4th 290, 296 (Cal. Ct. App. 1999) (not citable superseded by grant of review). 65 The Sporting News Baseball Barry Bonds, supra note 62. 66 Bonds, 71 Cal. App. 4th at 333. 67 Id. 68 Id. 69 Id. at 334. 70 Id. at 334-35. 71 CAL. FAM. CODE 4053(f) (Deering 1999). 72 Id. at 333. 73 Bonds v. Bonds (In re Bonds), 72 Cal. App. 4th 94 (Cal. Ct. App. 1999). 74 FLA. STAT. ch. 61.30(6) (1998). For example, at an income level of $5,000, the support payment for one child is $1,000, but at $10,000, the support payment is only $1,437. 75 Id. at 61.30(1)(a). 76 Id. at 61.30(6). 77 Id. at 61.30(1)(a). 78 Finley v. Scott, 707 So. 2d 1112 (Fla. 1998). 79 Finley v. Scott, 687 So. 2d 338, 339 (Fla. Dist. Ct. App. 1997) (quashed and remanded by Finley v. Scott, 707 So. 2d 1112 (Fla. 1998)). 80 Miller v. Schou, 616 So. 2d 436, 437 (Fla. 1993). 81 Finley, 707 So. 2d at 1114. 82 Id. at 1117. 83 Id. at 1115. 84 Id.

85 Schou, 616 So. 2d at 438. 86 Id. at 439. 87 Id. 88 Finley, 707 So. 2d at 1117-18. 89 Id. at 1117. 90 Id. at 1117-18. 91 Id. at 1117. 92 Id. at 1114. 93 Id. at 1114-15. 94 Id. at 1116-17. 95 Playerfile: Dennis Scott (visited Feb. 10, 2000) <http://www.nba.com/playerfile/dennis_scott.html>. 96 Id. 97 Id. 98 Id. 99 Id. 100 Id. 101 Id. 102 TENN. COMP. R. & REGS. 1240-2-4-.04(3) (1999). The guidelines provide 21 percent for one child, 32 percent for two children, 41 percent for three, 46 percent for four, and 50 percent for five or more children. TENN. COMP. R. & REGS. 1240-2-4-.03(5) (1999). 103 TENN. COMP. R. & REGS. 1240-2-4-.04(3) (1999). 104 Nash v. Mulle, 846 S.W.2d 803 (Tenn. 1993). 105 Id. at 804. 106 Id. at 805-06. 107 Id. at 806. 108 Id. 109 Id. 110 Id. at 808-09. 111 Lee v. Askew, Appeal No. 02A01-9805-JV-00133, 1999 Tenn. App. LEXIS 290 (Tenn. Ct. App. Apr. 30, 1999). 112 Id. at *1. 113 Paul Gerald, Plugging Along, Issue 415 (Jan. 30, 1997 Feb. 5, 125

1997) <http://www.memphisflyer.com/backissues/ issue415/sport415.htm>. 114 Id. 115 Id. 116 Lee v. Askew, Appeal No. 02A01-9805-JV-00133, 1999 Tenn. App. LEXIS 182 (Tenn. Ct. App. Mar. 17, 1999). 117 Askew, 1999 Tenn. App. LEXIS 290, at *1. 118 Askew, 1999 Tenn. App. LEXIS 182, at *1-2. 119 Id. at *4-5. 120 Id. at *6. 121 Id. at *10. 122 Id. 123 TENN. CODE ANN. 33-3-102 (1999). 124 Askew, 1999 Tenn. App. LEXIS 182, at *7. 125 Id. 126 Id. 127 Id. at *7 n. 15. 128 Mcmullen, supra note 10, at 460-64. While Mcmullens concern is valid, some of the case law she cites is not adverse to the principles in this Note. Acosta v. Acosta predates Askew, and underscores the need to have a plan ready to present to the court; in Acosta the trial court decided to split the remainder interest between the parents, but the obligor did not appeal this part of the ruling. Acosta v. Acosta, 1994 Tenn. App. LEXIS 433, *4. Further, Acosta was a divorce situation which included an alimony award. Mcmullen also wrote before Finley reached the Supreme Court of Florida. 129 See infra p. 118, discussing Askews objections to a guardianship. 130 Wahl, supra note 4. 131 Though Tennessee does not have an NBA team, the example is still illustrative since the NBA has more than its share of Tennessee products. In addition to Vincent Askew, Penny Hardaway, Cedrick Henderson, Todd Day, Lorenzen Wright, David Vaughn, and Elliot Perry are just some of the recent products of Memphis. Also, for tax purposes, Tennessee makes the calculations easier to follow since there is no state income tax. Florida also does not have a state income tax. 132 See generally, John Gibeaut, Image Conscious, A.B.A. J., June 1999, at 47. This article dealt with the issue of celebrities having a trademark in their likeness. The journals cover featured a drawing of Tiger Woods. Outside a very select group of athletes, few people have the power to generate income just by allowing their picture to endorse a product.

133 See Lee v. Askew, Appeal No. 02A01-9805-JV-00133, 1999 Tenn. App. LEXIS 290, at *7 (Tenn. Ct. App. Apr. 30, 1999); In re Gonzalez, 993 S.W.2d 147, 160 (Tex. App. 1999). Both the Texas and Tennessee courts have ruled that the property in trust belongs to the father and is merely being held to ensure continued child support payments. Once the fathers obligations are met, any remainder is released back to the fathers control. 134 Finley v. Scott, 707 So. 2d 1114 (Fla. 1998). 135 See generally, In re Gonzalez, 993 S.W.2d at 161 (noting that the trial court designated a bank as the trustee so that the money would be in the hands of a professional, neutral party). 136 I.R.C. 677 (b) (1999). 137 I.R.C. 673 (a) (1999). 138 By way of example, $100,000 put into trust would have to remain in trust for 57 years before reverting to the grantor for the income to be taxed to the beneficiary. Treas. Reg. 20.2031-7 (1999). Moreover, the beneficiarys life expectancy must be longer than the requisite trust term, or the life expectancy determines the date of reversion for valuation purposes. Id. 139 The Dow Jones Industrial Average has risen almost 30 percent over the last year, and almost 40 percent over the last five years. The NASDAQ composite has almost doubled in the last year. Even given the fact that the 1990s have been an unusually prosperous time for the United States, postulating a ten percent return on a long-term investment hardly seems overly optimistic. 140 $300,000 + (10% * $300,000) - $30,000 = $300,000 ($300,000 + $300,000) + (10% * $600,000) - $30,000 = $630,000 $630,000 + $300,000 + (10% * $930,000) - $30,000 = $993,000 141 Richard Hoffer, Scorecard, SPORTS ILLUSTRATED, Dec. 6, 1999, at 33. 142 Since all the trust income has been taxed to the obligor and he has the reversionary interest, for tax purposes, the money belongs to the father. Therefore, that money can be used to pay his tax liabilities without generating any new tax liabilities. 143 THE TENNESSEAN, Jan. 24, 2000, at 6C. 144 Id. 145 Gwen Knapp, Stevenson Story a Study in Ethics, THE TIMES UNION, July 7, 1999; Wahl, supra note 4.

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art & industry forum

Receiving unsolicited commercial email,

also known as Spam, is like receiving junk mail, postage due. Spam shifts the cost of advertising from the advertiser to the consumer. This imposes enormous costs on Internet Service Providers (ISPs) and their customers. The Spam problem cries out for a legislative solution, and that is why I introduced H.R. 2162, the Can Spam Act.1 The source of the Spam moniker for unsolicited commercial e-mail is apparently attributed to an annoying song in a Monty Python skit. In the skit, actors dressed like Vikings sing the word Spam over and over again, becoming louder and louder throughout the skit, until none of the players can hear each other. Finally, the singing Vikings drown everything out and the skit ends. Unsolicited commercial e-mail is also annoying background noise that is growing louder. The concern is that Spam will finally drown out legitimate e-mail on the Internet. Businesses have increasingly resorted to unsolicited electronic mail to send advertising and promotional materials because they are able to reach millions of Internet users at virtually no cost. Consumers report receiving dozens of unsolicited adver-

spam
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how to

tisements every week.2 The problem is becoming so pervasive that Internet Service

can

By Gary Miller

Providers (ISPs) now hire full-time employees to screen Spam because their systems cannot handle the volume.3 Additionally, ISPs must buy extra bandwidth so that Spam does not cause their systems to crash.4 ISPs pass along those costs to their customers. Also, the individual consumer has the additional costs of sorting through the mail, using computer space for the mail, and paying for download time to receive the unwanted mail.

The fundamental

incentives for

unsolicited commercial e-mail are skewed. Spammers are encouraged to compile an enormous e-mail list because sending one message costs the same as sending a million. As a result, individuals and businesses are forced to pay for advertising they do not want. I personally became involved in this issue when a constituent of mine had to shut down his business for a few days because he was inundated with Spam that crashed his computer system. He was understandably irate. Someone had used his Internet domain name as the false return address for an undesirable e-mail advertisement. As a result, he received almost half a million angry responses. Not only did the Spam damage his equipment and close his business, but there are now a million disgruntled consumers who hate my constituent and his business because they think he sent the message. The Spam was both a trespass onto his private computer property as well as a fraudulent use of his business name. I am not a technology expert, but I do understand the concept of private property and trespassing. Spam is trespass.5 In most cases, Spammers violate the policies of Internet Service Providers and cause them monetary harm through trespassing. Since Spammers are currently able to shift their advertising costs onto the recipient, there is a market incentive for Spammers to trespass. In order to craft sound legislation to fix this market incentive, I turned to the Central Hudson test for government regulation of commercial speech6, existing junk fax law7, and the Ninth Circuits ruling on that law in Destination Ventures v. FCC.8 In 1980, the U.S. Supreme Court created the Central Hudson test to determine when the government may regulate commercial speech without violating the First Amendment.9 Commercial speech that is otherwise legal may be regulated if: the government asserts a substantial interest in support of its regulation, the government demonstrates that its restriction on commercial speech directly and materially advances that interest, and the

regulation is narrowly drawn.10 Existing law regarding unsolicited commercial faxes builds on the Central Hudson test.11 Existing law regarding junk faxes is simple: if a fax is commercial and unsolicited, you cannot send it without obtaining permission from the recipient. In Destination Ventures, Ltd. v. FCC, the Ninth Circuit held that the government has a substantial interest in preventing the shift of advertising costs from sender to recipient.12 The cost for faxes consists of the paper and toner used as well as missed faxes from phone lines being tied up.13 The court concluded that the interest in preventing cost-shifting was legitimately advanced by a total ban on all fax advertisements.14 Commercial electronic mail shifts advertising costs to the recipient in the same way that commercial faxes shift costs. In fact, there is potentially more recipient cost associated with e-mail than with faxes. Computer users have the costs of additional connect time charges to download unsolicited commercial email, additional toll or 800 number charges for some users, and lost productivity due to wasted time filtering and deleting messages and submiting complaints. Internet Service Providers have the costs of additional bandwidth to deal with high-volume traffic, additional computers necessary to protect ISP integrity from theft of service and other inappropriate usage of ISP resources, additional storage for bulk messages, engineering staff resources to implement and maintain filtering capabilities, and system administration staff resources to deal with problems caused by bulk e-mail traffic or retaliation from frustrated recipients. My approach to controlling unsolicited commercial e-mail is less restrictive than current law for faxes. Instead of outlawing unsolicited commercial e-mail altogether, my approach gives Internet Service Providers tools to control their own property. They own the computer servers, so they can decide whether they want to bear the cost of commercial e-mail or not.

H.R. 2162,

the Can Spam Act,

gives Internet Service Providers the power to control Spam by giving them a civil cause of action to recover damages of $50 per Spam, capped at $25,000 per day, for unsolicited commercial electronic messages to and from their system.15 This keeps the government out of regulating the Internet and lets the ISPs and the market decide how to control Spam. If the ISP conspicuously posts a policy prohibiting or limiting Spam on its web-

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page, or through their Simple Mail Transfer Protocol (SMTP) banner, it can use the law to protect its property and customers. ISPs have any option the market supports including: 1) banning Spam completely, 2) allowing all Spam, 3) coming to an agreement with an advertiser that the advertiser will pay a few cents per message to send it to the ISPs customers, or 4) setting up a system with e-stamps where their system will accept any messages with enough postage to make it worth their while. I am sure there are future technologies that will create more options. The crux of the issue is that advertisers must be forced to pay for their advertisements and Internet Service Providers must ensure that their customers are satisfied. The Can Spam Act also has a related, but separate, provision to deal with the fraud rampant in unsolicited commercial e-mail. As in the case of my constituent, many Spammers use someone elses e-mail address as the return address so they do not have to deal with the angry replies or the return e-mail messages from inactive e-mail addresses. This is the equivalent of dumping your trash into someone elses yard, and it harms the names and reputations of others. There are existing laws regarding fraud and trademark infringement, which the Federal Trade Commission (FTC) currently uses against Spammers,16 but I added a provision to the Can Spam Act to clarify the crime of computer fraud through Spam.17 The Can Spam Act would make it illegal to knowingly and without permission steal someone elses domain name.18 The penalties would be a fine for first offense (up to $5,000) and a fine plus less than one year in prison for second offense (up to $100,000 depending on jail time).19 This legislation hinges on the concept that advertisers should not shift the cost of their advertising to the recipients. However, there are additional basic principles that should guide any e-mail legislation. A few months ago I handed a list to all the Members of the House Commerce Telecommunications, Trade and Consumer Protection Subcommittee during a hearing on unsolicited commercial e-mail. It outlined the guiding principles for any Spam legislation:

allows someone free Spam before making it illegal, or in any other way recognizes Spam, would be taking away existing private property rights of ISPs and would be a step backward.

2. Cannot Regulate the Internet

The Internet is an ever-changing medium, relatively free of government regulation. That is why it works so well, is growing so quickly, and is driving our economy. We need to jealously guard the freedom of the Internet and keep the government out of it.

3. Must Protect Free Speech and Pass Constitutional Muster

The Supreme Court has outlined very specific levels of protection of speech from political,22 religious,23 commercial24 to obscene.25 These standards are already in case law. The Ninth Circuit has ruled that laws can be passed to curb commercial speech that transfers costs onto the recipient.26 Outside of correcting cost-shifting in commercial speech, any law that regulates specific speech content may fail a judicial challenge.

4. Cannot Create a New Cost or Tax on the Internet

Most plans to stop Spam would end up costing Internet Service Providers or the government money.

5. Must Guard the Privacy of the Individual

Information is a powerful tool for law-abiding citizens and for those who break the law. Any solution to Spam cannot put personal information, including e-mail addresses, in the public domain, which would put privacy at risk.

6. Cannot Hurt Internet Service Providers

The Internet is a completely new communication tool. Unlike faxes or phones, which are person-to-person communication devices, e-mail is routed through numerous private computers and Internet Service Providers before it reaches its destination. As a result, any legislative solution to Spam must not hamstring the numerous Internet Service Providers that make up the Internet. Anything that would force ISPs to be a party to numerous lawsuits, or would force them to keep special regulated lists, would hurt the entire Internet system. A solution that harms ISPs is worse than the problem.

1. Cannot Legitimize Spam

Currently Internet Service Providers (ISPs) can sue Spammers for trespass.20 While it is very expensive and time consuming to bring these suits, courts have recognized the property rights of ISPs.21 Anything that

7. Must Work
Any solution must be usable for those who have the

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ability and the desire to stop Spam. The Can Spam Act fits within these six guidelines. Yet there are many other issues related to unsolicited commercial e-mail legislation that have been brought up to my office over the last three years.

Some may wonder why

islation covers only commercial speech, but not political

or all unsolicited speech. One easy answer is that politicians who decide to Spam voters will probably be immediately voted out of office. But the real reason we do not address political speech is because we want to make sure this law stands up to any court challenge. By staying within the narrow guidelines of the Central Hudson27 test, existing junk fax law,28 and Destination Ventures v. FCC,29 we are trying to stay on the safest legal ground possible. I am an Internet minimalist, and I want to make sure that the market incentive of Spam is corrected without creating a burden on the Internet. Others have suggested that we regulate only bulk email, since it is volume that harms the Internet. Even though it is the bulk characteristic of Spam that harms the Internet, the concept of shifting costs through each individual Spam message is the philosophical problem. I strongly believe that each unsolicited commercial e-mail message violates the property rights of the recipient, and I believe my position is consistent with existing law and legal precedent. Direct marketers and some state and federal legislators have advocated what is called an opt-out solution to the Spam problem. Opt-out means that when users receive unsolicited commercial e-mail, they are responsible for notifying the sender to stop sending them messages. Legally, opt-out is a step backwards because it accepts the first Spam message as legal, thereby granting the Spammer an extraordinary legal right to the ISPs computer in the first instance. Practically, opt-out does not make sense because the worst Spammers would just change their business name each time they Spam, sell the e-mail address to their unscrupulous partners, claim they did not receive the users request to be removed from the list, or any number of other maneuvers. Once we have granted a Spammer one free bite at the apple, we are better off with no law at all. I have received letters and calls from people asking why e-mail filters or just hitting the delete key cannot take care of the Spam problem. I would prefer that technology and personal actions take care of this problem,

the leg-

but Spam is a problem of cost and scale that technology has not been able to solve. E-mail filters do block some Spam, but the cost has already been incurred by the time the Spam is filtered by the end user. A Spam that is filtered has already used bandwidth, has already passed through the ISPs staff and filters, and has already used the end users hook-up time and computer space. Moreover, filters and hitting the delete key are not solutions that scale. By scale I mean that if a Spammer has fifty percent of its advertisements blocked, then it will just send out twice as many Spam messages without increasing its costs to attain the same number of successful hits. When filters block commercial content, Spam volume only increases and overall costs rise. Internet Service Providers need a new legal tool to protect their property and their customers because technology will not solve this problem. Another concern is existing state law regarding unsolicited commercial e-mail. Many states are considering legislation to limit Spam, and a few states, including my home state of California, already have laws governing Spam. When I was a member of the California State Legislature, I authored the Spam law in California,30 which is almost identical to the act I introduced in Congress. Even when I was working two years ago to pass the state legislation, I knew there needed to be a national solution. First of all, it is difficult for an ISP to indicate that its property is in a certain state. This causes difficulty when it comes to making sure the notice, or no trespassing sign, is posted without creating an undue burden on Spammers, lest a judge throw the lawsuit out. With a national law, there would be no need to demonstrate which state the computer equipment is in, making it easier for the Spammer to know they are violating a law. Also, it does not make sense to burden commerce over the Internet with 50 different state regulatory systems. E-mail has not realized its commercial potential because of the stigma created by abusers of commercial e-mail. We do not want to hurt e-mail further by creating 50 different complicated legal structures. But a national law is not foolproof. Because the nature of the Internet is global, an American law governing Spam would not be enforceable against someone Spamming from outside the United States. The only exception would be a Spammer outside the country who has assets in the United States. Those assets could be seized to pay for a judgment granted by a U.S. court. At this point, a federal solution would be the best, but even-

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tually Internet users would benefit from an international framework to stop cost-shifting on the Internet.

If the Can Spam

law,31

Act becomes

Internet Service Providers will have a powerful new tool to stop unsolicited commercial e-mail. The property rights of computer owners and Internet Service Providers will be clearly stated in law, and it will no longer make financial sense for advertisers to send indiscriminately to huge e-mail lists. E-mail will be much more usable as a method of commerce because people will only receive e-mail messages they request, and they can

complain to their ISP if that is not the case. Once advertisers are forced to obtain permission before they send advertisements through an Internet Service Providers system, the options are limitless. From opt-in whereby the customer requests advertisements for products they are interested in to future technology that allows for e-stamps, technology and the market will bring about creative uses for e-mail that we have not yet contemplated. In sum, no one should be required to subsidize someone elses advertisements. After all, speech is only free if you do not force someone else to pay for it. x

1 See H.R. 2162, 106th Cong. (1999). 2 See Anne E. Hawley, Taking Spam Out of Your Cyberspace Diet: Common Law Applied to Bulk Unsolicited Advertising Via Electronic Mail, 66 UMCK L.REV. 381, 381-82 (1997). 3 See Internet Service Providers Consortium (ISP/C), Unsolicited Commercial Email Position Paper (visited Feb. 9, 2000) <http://www.euro.ispc.org/policy/papers/spam.shtml>. 4 See generally Eric J. Sinrod & Barak D. Jolish, Controlling Chaos: The Emerging Law of Privacy and Speech in Cyberspace, 1999 STAN. TECH. L. REV. 1 (1999). 5 See America Online, Inc. v. LCGM, Inc., 46 F.Supp.2d 444, 451 (E.D. Va. 1998) (holding that the transmission of unsolicited bulk emails can constitute a trespass to chattels); CompuServe, Inc. v. Cyber Promotions, Inc., 962 F.Supp. 1015 (S.D. Ohio 1997) (holding that an online service provider had established a cause of action for trespass to chattels against a company that had repeatedly sent the online service providers subscribers mass quantities of unsolicited email); see also Hawley, supra note 2 at 392 (stating The doctrine of trespass to chattels presents a valid cause of action against spamming). 6 See Central Hudson Gas & Electric Corp. v. Public Service Commission of New York, 447 U.S. 557 (1980). 7 See 47 U.S.C. 227 (1994). 8 See Destination Ventures Ltd. v. FCC, 46 F.3d 54 (9th Cir. 1995). 9 See Central Hudson, 447 U.S. at 563-64, 566. 10 See id. at 566. 11 See Destination Ventures, 46 F.3d at 55-56. 12 See id. at 56. 13 See id. 14 See id. 15 See H.R. 2162.

16 See Lanham Act, 15 U.S.C. 1125 (a)(1) (1994); see also America Online, Inc. v. LCGM, Inc., 46 F.Supp.2d at 449 (stating that [t]he unauthorized sending of bulk e-mails has been held to constitute a violation ofsection [1125(a)(1)] of the Lanham Act). 17 See H.R. 2162. 18 See id. 19 See id. 20 See America Online, Inc. v. LCGM, Inc., 46 F.Supp.2d at 451; CompuServe, Inc. v. Cyber Promotions, Inc., 962 F.Supp. 1015 (S.D. Ohio 1997). 21 See id. 22 See Cohen v. California, 403 U.S. 15 (1971); Brandenburg v. Ohio, 395 U.S. 444 (1969). 23 See Church of the Lukumi Babalu Aye v. City of Hialeah, 508 U.S. 520 (1993); Oregon v. Smith, 494 U.S. 872 (1990). 24 See Central Hudson, 447 U.S. at 566; see also 44 Liquormart, Inc. v. Rhode Island, 517 U.S. 484 (1996). 25 See Miller v. California, 413 U.S. 15 (1973); Paris Adult Theatre I v. Slaton, 413 U.S. 49 (1973). 26 See Destination Ventures, 46 F.3d at 55-56. 27 See Central Hudson 447 at 566. 28 See 47 U.S.C. 227 (1994). 29 See Destination Ventures, 46 F.3d at 55-56. 30 See CAL. BUSINESS
AND

PROFESSIONAL CODE 17511.1 (West 2000).

31 The Act is currently before the House Subcommittee on Telecommunications, Trade, and Consumer Protection. 1999 Bill Tracking H.R. 2162.

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