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GUEST POST: Start-Ups and the Unpaid Internship – The legal balancing act

Posted on June 10, 2013 by Travis Crabtree

As the summer arrives in full force, I am watching a lot of my start-up friends take advantage of the unpaid internship to help with some needed coding, design or marketing projects they haven’t gotten to.   These kids are smart, hungry, can use the experience and wouldn’t it be nice to have someone pick up coffee and donuts for you once in awhile?

As my Looper Reed colleague Michael Kelsheimer explains in a prior post on his Texas Employer Handbook blog, you have to be careful when using unpaid labor.

UNPAID INTERNS, VOLUNTEERS AND TRAINEES

Who, What, Why . . .
Who does it apply to: Every employer who has or intends to hire unpaid interns.
When must an intern be paid: All “employees” of a business must be paid at least minimum wage unless they are a “trainee” under the law, regardless of whether they are called an “intern.”  So, what makes a trainee? The United States Department of Labor (DOL) has established a six-factor test couched in terms of – you guessed it – training – to determine whether an unpaid intern should be considered an employee or trainee under the Fair Labor Standards Act (FLSA):
  • the training is similar to that which would be given in a vocational school (even though it includes actual operation of the facilities of the employer);
  • the training is for the benefit of the trainees;
  • the trainees do not displace regular employees, but work under their close observation;
  • the employer that provides the training derives no immediate advantage from the activities of the trainees, and on occasion operations may actually be impeded;
  • the trainees are not necessarily entitled to a job at the conclusion of the training period; and
  • the employer and the trainees understand that the trainees are not entitled to wages for the time spent training.
When can I hire an unpaid intern or volunteer: The six-factor test is primarily used in the, “for profit,” private sector. State and local government agencies and non-profit organizations can generally utilize interns or volunteers without an obligation to pay them under the FLSA. It is important, though, that the volunteers understand they are not to be paid for their time. Volunteer work at non-profit, religious, charitable, and civic organizations have specifically been cleared by the Texas Workforce Commission.
What about true student interns: Student interns are not evaluated differently by the DOL. They should easily meet the trainee test. That said, there are special rules for individuals who have completed a professional degree like physicians, attorneys, and therapists, generally allowing them to volunteer their time as they choose.
What do these factors really mean: The more an internship program can be structured around a classroom or academic type experience the better. It is better if the employer can provide the individuals with skills applicable to various employment settings, not just skills particular to the employer’s business. Essentially, the employer needs to provide the intern or volunteer with valuable training. Ideally, the training would make them more marketable in the open job market. The employer must pay any intern or volunteer that is used as a replacement for a regular employee or to reduce their workload. The intern or volunteer should receive more supervision than a regular employee.  If the employer would have to hire additional employees if the intern or volunteer were not performing certain work, the intern or volunteer would be considered an employee. Don’t rely on unpaid interns to do work of any real significance to your business. The work done by an unpaid intern should be secondary to their training. An intern that is hired by an employer on a trial basis with the expectation that they will eventually be hired full time will likely be considered an employee under the FLSA. Employers should indicate prior to the start of the internship that there is no guarantee or expectation of hiring the interns upon completing the internship. A written agreement indicating this is advisable. Employers should indicate prior to the start of the internship that there is no intention to pay the intern. A written agreement indicating that the intern will not be paid and does not expect to be paid is advisable.
What happens if I don’t follow the test: An employer violating the rule is subject to the same damages available to an employee who is not paid all of the wages they are owed. This may include minimum wage and overtime for all hours worked, plus an equal amount in liquidated damages for all interns over the past two or three years.
What about discrimination laws: It depends on whether the person in question receives “significant remuneration” for their efforts. The EEOC has stated that things like a pension, group life insurance, workers’ compensation, or access to professional certifications constitute significant remuneration. However, Courts have determined that things like academic credit, practical experience, and scholarly research do not constitute significant remuneration. Because this point is subject to interpretation, however it is best to treat all interns and volunteers as though they are employees with respect to discrimination laws.
Common Situations:
Required training: Safety First is ready to hire a new class of security guards.  The company requires that security guard trainees receive 40 hours of training prior to performing any regular work under their service contract.  According to their contract, the training is focused on “company practices, policies, and rules.” Does Safety First have to pay the trainee security guards even though they are not yet performing regular work?  Yes. These trainees would be considered employees because: (1) the employer is directly benefiting from their training, (2) the training is given to security guards who will work on contract, and (3) Safety First can only employ specifically trained guards.
Homegrown hiring: Maverick Finance hires interns each summer.  Maverick’s intern program is structured much like an academic program.  The interns do not do the work of regular employees and are heavily supervised.  The interns are not paid and are aware there is no guaranty of employment.  However, Maverick hires its first year analysts almost exclusively from the unpaid interns it has each summer. Does the FLSA require Maverick to pay these interns at least minimum wage? Probably.  Although Maverick substantially satisfies the six factor test, its practice of hiring analysts from the intern pool is likely enough to tip the balance against the company in the face of a DOL audit.
What should I do:
Good: Paying minimum wage to all interns probably is the safest bet. You avoid the risk of an audit of all your employment practices because of one dissatisfied intern that calls the DOL.  If you go the trainee route, be sure to meet all the factors.
Better: If you have true “trainees” taking into consideration all the factors, it makes sense to put that understanding in writing in a short half-page agreement outlining the factors. If you use volunteers, it makes sense to have them sign a one-paragraph agreement acknowledging their status as a volunteer without expectation of pay or other “significant remuneration” to avoid the possibility of an EEOC complaint.
Best: In addition to the items above, require that the trainees keep track of their hours so you have a record of how much they might be entitled to if the DOL audits and rules them employees. Be sure they do not work more than 40 hours to avoid increasing the risk to include overtime. Have the trainees and their supervisors keep a log of their activities so that there is no confusion regarding the type of work they did.

Will there be an “eraser button” on social media for teens?

Posted on June 7, 2013 by Travis Crabtree

There are two bills (SB 568 and SB 501) working their way through the California Legislature that may require social media sites to erase the content of minors.

Oops . . . I shouldn’t have posted that.

California Senate Bill 568, which has already passed the Senate, would allow minors to request websites to remove that picture the teen thought would be awesome to post at 2:30 in the morning, but no longer looks good while you are applying for jobs or a spot at Harvard.  It only applies to content actually posted by the minor and not those pictures posted by the teen’s friends who have less scruples.

Before minors celebrate by temporarily posting offensive jokes or pictures, the bill wisely provides that there is no guarantee removal by the initial website ensures complete elimination of the materials from the entire web.  The law states the removal process:

does not ensure complete or comprehensive removal of the content or information submitted to or posted on the operator’s Internet Web site, service, or application by the user.

The existing federal COPPA regulations provide for a similar removal process of content for children under 13 by the parents, but this law would force websites to add the process for those up to 17 and allow the request to come from the minor.  Considering most social media reputational harm is likely to happen in college (let’s just say I’m glad I went through college before smartphones and social media), I am sure there are some who like this to be law for people of all ages?

And now, a word from our sponsor.

Another interesting part of SB 568 prohibits websites from marketing a product or service to a minor, if the minor cannot legally purchase the product or participate in the service in the State of California.  This prohibition applies to all sites and apps “directed to minors” or if the operators “has actual knowledge that a minor is using its” service.

This “directed to” or “actual knowledge” is also a similar COPPA concept which is why certain sites like Facebook do not allow users under 12, but do allow users 13 and above.  Because Facebook has actual knowledge of its users between 13 and 17, it would not be allowed (or possibly allow others) to market alcohol or possibly even R-rates movies.

Dude, my mom erased my PII!

California SB 501, meanwhile, would require websites to remove personally identifiable information about minors upon the request of the minor OR the parent within 96 hours of the request.

As opposed to the first bill, this one would only apply to a “Social networking Internet Web site” which is defined as:

an Internet Web-based service that allows an individual to construct a public or partly public profile within a bounded system, articulate a list of other users with whom the individual shares a connection, and view and traverse his or her list of connections and those made by others in the system.

Why do I care?

These bills are not likely to become law in the next couple months (S.B. 568 would not go into effect until January 1, 2015).  Even if you are not running Facebook, you should care.  To the extent you advertise on social media adult products or services, you need to pay attention and be prepared for any changes.

If you have a website “directed” to minors or with actual minors using it, the law will require certain disclosures and procedures.  Simply failing to have the listed disclosures can get you in trouble.  You will have to be careful in how you accumulate and store information so that you can respond to requests timely to avoid related civil penalties.  Perhaps, between now and when (or if) these bills become law, you will have to consider what value the 13-17 year old market means to you in light of these changes?

Even if you are so uncool that your site does not want to deal with teens (and won’t be deemed “directed” towards teens based on your content), you should at least adjust your terms of service to prohibit use by anyone under 18 to avoid having to deal with these proposals.

Google and Facebook are fighting this law, so perhaps there will be some changes or they will die.  For more on these bills and the implications, read the Privacy and Security Matters Blog.

 

Texas Leg 2013 Wrap-Up – Texas Does Not Take the Lead on Social Media Issues

Posted on May 29, 2013 by Travis Crabtree

Although the Governor called a special session extending the Texas Legislative session, the topics to be addressed are political ones and not the ones we have been tracking.  We can therefore wrap-up our watch of the three bills we were monitoring.

First, bring out your dead!

HB 318/SB 118 social media passwords

A bill that would have prohibited employers from demanding social media passwords from its employees and applicants garnered much attention, was passed by the house, but then died.  Texas will not join about a dozen other states who have passed similar laws to provide what I think is a solution to a non-existent problem.  I seriously doubt that between now and 2015, employers will run amok demanding social media passwords — especially with the pro-employment attention Texas has been getting (shameless plug for my hometown).  The National Conference of State Legislatures has a good page on the efforts by various states.

HB 1989 service by social media

This bill also generated attention, but did not get very far.  It would have allowed judges to authorize service of a lawsuit via social media.   The existing rules allow judges to authorize substituted service when necessary which could include social media assuming certain due process protections are in place.  This bill would have given judges more comfort with the idea, but its death does not mean it can’t still be done.   This Outside Counsel article by Michael Lynch suggests service of process via social media may become more common without extra rules or laws.

The lone survivor

Only SB 94 was passed and will become law on September 1, 2013.  It allows for private civil lawsuits against websites that allow advertisements for what the law calls “compelled prostitution,” better known as sex trafficking.  As explained in my initial post, there is a serious legal question of whether the Texas law would run afoul of Section 230 of the Communications Decency Act which generally shields website operators from liability for user generated content.  Hopefully, it is a purely academic discussion and this law is little used because of the lack of necessity.  If a website is sued, it will make for an interesting defense.

The Legislature now focuses on redistricting – expect some fireworks and perhaps another escape.

You “like” me, you really “like” me – Looking at the legal effect of Facebook likes and friends

Posted on May 23, 2013 by Travis Crabtree

Is liking something expressive activity protected by the First Amendment?  Does being a Facebook “friend” create the appearance of impropriety requiring the judge to recuse himself from the case?  Leave it to Facebook to make us answer these questions.

You don’t like me, you just want my coupon . . .

The Fourth Circuit Court of Appeals is wrestling with the question of whether liking something on Facebook is protected First Amendment activity in the case of Bland v. Roberts.  A jailer in Virginia liked his boss’s opposition during a campaign for sheriff.  The incumbent won and the plaintiff was fired.  The sheriff said it was for competency issues, but the plaintiff said retaliation was the motivating factor for the termination.

Public employers, and some private employers in some states, cannot retaliate against an employee for taking part in Constitutionally protected activity that does not interfere with work.  In other words, you can’t fire a public employee just because they spoke out on a issue or supported a candidate.

So, it seems like a slam dunk case for our fired jailer.  The district court dismissed his case because the court ruled “liking” something on Facebook did not amount to a “substantive statement” worthy of protection.  The court determined that without more, the simple act of making one-click on Facebook does not reveal that someone is engaging in protected speech.  While it is true half of the people on Facebook would like Osama bin Laden to get a 15% discount at Target, “liking” a candidate or a cause is political speech.

It’s dangerous to predict the outcome of an appeal based on oral argument, but according to this report from Bloomberg, I would put my money on a reversal.

“Carter clicked the Like because he liked something,” U.S. Circuit Judge Stephanie Thacker said to a lawyer for Hampton Sheriff B.J. Roberts during the 40 minute hearing. “How is that any different than perhaps putting a sign in the yard saying ‘I Like Ike’?” she asked.

Facebook, which got a few minutes at the hearing to argue for a reversal, made similar arguments.

The opinion should be issued in a few months and will tell us whether the over 3 billion “likes” a day on Facebook are entitled to First Amendment protection.

It is not likely your “like” will make its way to the Supreme Court.  The lesson is to be careful of making employment decisions based on what you see on Facebook.  The issue is more problematic for public employers, but as we have discussed before even non-union private employers need to make sure their social media policies and employment decisions do not upset the NLRB.  ”Liking” a complaint from a co-worker about working conditions cannot be the basis of a termination.  ”Liking” Coke when you work at Pepsi in an at will state probably can be.

MAKING “FRIENDS” WITH THE JUDGE

Meanwhile, the court of appeals here in Texas held that being “friends” with a judge on Facebook should not be the basis of a criminal conviction reversal.

In Youkers v . Texas, the criminal defendant was accused of violating the terms of his parole supervision which sent him to jail for eight years.  On appeal, Youkers argued the father of the victim in the underlying crime was Facebook friends with the judge and sent the judge a Facebook message.  Therefore, the defendant argued, there was an improper bias and the conviction should be overturned.

The Facebook message

When you only hear part of the story, things look bad.  Yes, there was an ex parte Facebook message from the victim’s father to the judge.  The message, however, sought leniency for the defendant.  The judge also disclosed the message to everyone without any objection and warned the father not to do it again.

The Facebook “friendship”

The more interesting question is whether merely being friends with a judge on Facebook provides even an appearance of impropriety.  I’ve had interesting discussions about this topic at various ethics CLE’s with judges and private practitioners.  And, yes, I am Facebook friends with several judges.

The court of appeals ruled judges are not prohibited from using social media.  In Texas, unfortunately, we elect our judges.  The court realized the judges need to be on social media.

As pointed out in Professor Goldman’s Technology and Marketing Law Blog:

Merely designating someone as a “friend” on Facebook “does not show the degree or intensity of a judge’s relationship with a person.” ABA Op. 462. One cannot say, based on this designation alone, whether the judge and the “friend” have met; are acquaintances that have met only once; are former business acquaintances; or have some deeper, more meaningful relationship. Thus, the designation, standing alone, provides no insight into the nature of the relationship.

Without more, the defendant could not prove there was an improper evidence.

The ABA cautions judges to use social media within the existing ethical rules (endorsing political candidates is a tough one) and this case should give lawyers here in Texas a little more comfort about friending judges.  The practicing bar has a little more freedom.  Yet, the existing ethical rules still apply to our social media use.  For instance, we cannot imply we hold any sway with a particular jurist and a simple Facebook friendship does not do that – particularly when the elected judge is friends with hundreds of lawyers.

A lot of the judges are our friends.  Before they got on the bench, they were our colleagues.  Once on the bench, they are still our neighbors, our kids’ coaches and friends.  We socialize with them outside the courthouse.  With Facebook, there is just a record.

Are The Legal Rules For User Generated Content Becoming More Nuanced?

Posted on May 15, 2013 by Travis Crabtree

The general legal advice to website operators who allowed User Generated Content (UGC) in the form of comments, videos or pictures used to be relatively easy.  The Digital Millennium Copyright Act protected you from copyright and Section 230 of the Communication Decency Act protected you from defamation and other liability.  Recent developments are bringing a little more grey into what was previously a black and white world.  Good news for lawyers; bad news for business.

The DMCA

The DMCA provides web hosts and internet service providers a “safe harbor” from copyright infringement claims resulting from content provided from others if certain procedures are followed. If the safe harbor qualifications are met, only the customer or user can be liable and not the actual website operator.

To qualify for the safe harbor protection, the site must: (1) notify the customers of its policy; (2) follow proper notice and take down procedures; (3) designate a copyright agent with the U.S. Copyright Office; (4) not have knowledge that the material or activity is infringing or of the fact that the infringing material exists on its network.

For a new web-based start-up that is going to have UGC, taking advantage of the DMCA is a no brainer.

Was that Sly and the Family Stone in the Background?

A recent decision against music-sharing website Grooveshark suggests that sound recordings prior to 1972 may not be covered by DMCA safe harbor protections.  Universal Music Group sued Grooveshark in New York state court for copyright infringement.  The trigger legal response is that the DMCA means Grooveshark is immune.

Easy, case dismissed.  Then, the New York appellate court reversed the dismissal late last month.  The legal issue hinges on whether the DMCA provides for a “safe harbor” for sound recordings before 1972 because these recordings are governed by state law and not U.S. copyright law or the DMCA.

If you want the legal details which focus on the definition of copyright, you can read this post from Professor Goldman’s Technology and Marketing Law Blog.  The simple answer is the DMCA needs to be fixed by Congress.  This recent decision directly conflicts with another prior decision so it is likely there will be further appeals that may take several years to resolve absent Congressional action.

What you need to know if you have a website with UGC sound recordings is that you may have a problem.  Is it feasible for you to determine whether the uploaded sound recording is Isaac Hayes’ Theme from Shaft (1971) . . .

Marvin Gayes’ Let’s Get it On (1973) . . .

or Don McLean’s American Pie which was recorded in 1971, but became a hit in 1972?

If you start pre-screening for pre-1972 sound recordings do you now have knowledge that the material or activity is infringing or of the fact that the infringing material exists on your network taking you outside of the DMCA safe harbor?

The good news is this case appears to be the outlier.  As long as you know and are willing to accept the risks, you probably do not need to make any wholesale changes.  You have the recent pro-DMCA case in Viacom vs. YouTube, a federal New York decision and a Ninth Circuit Court of Appeals decision that reaches the exact opposite result.

At least I don’t have to worry about defamatory UGC because of Section 230, right?

Section 230 of the Communications Decency Act provides immunity to websites for defamation and related claims based UGC.  It states:

no provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.

This is the law that prevents Facebook from being sued relentlessly for alleged defamatory posts and also allows sites like RipOff Report and The Dirty to survive.  Based on Section 230, we generally advise sites not to worry about liability for anonymous commenters – at least for now.

The United Kingdom recently passed the Defamation Act 2013 which sets up a notice and take down process for website operators to protect themselves from UGC defamation claims in the UK.  Basically, a plaintiff cannot sue unless the plaintiff sends notice to the website and the website refuses to take it down.

Although ripe for abuse, it does not sound too bad until you get to the part of the law that says websites can only take advantage of this protection if the plaintiff can identify the person who actually posted the offending content forcing websites to authenticate its members.  There goes anonymity.  You can read more details on the law here.

It does restrict “libel tourism” so the local pizza shop in Sugar Land can’t take advantage of this against Yelp for the review by the interloper in New Territory.  But, if the offended person can convince a court in the UK the case should be there, you could be subject to a UK judgment.

So, should you require authentication of all users?  Can you set up your site so that all users from the UK have to authenticate their identities?

The answers are no longer so easy.  For example, what do you do if a UK citizen slanders Roberta Flack on your American-based website while uploading a copy of The First Time Ever I Saw Your Face which was originally a 1957 folk song but recorded by Flack originally in 1969, but re-released in 1972 when it became a number one hit?

It could make your head spin, but that’s why lawyers make the big bucks, right?

 

GUEST POST: Internet Sales Tax is Coming

Posted on May 3, 2013 by Travis Crabtree

Looper Reed has a number of good blogs.  My colleagues Jamie Ribman and Cleve Clinton write Tilting the Scales which takes a light-hearted look at some of the more general legal issues of the day.  For my lawyer readers, their hypotheticals will remind you of law school finals.  They recently tackled the Internet Sales Tax debate:

The Tax Man Cometh to Cyberspace

By Jamie Ribman on April 29th, 2013Posted in Money
Rose Pettle is the owner of Florist Gump, a chain of flower shops throughout Texas.  Ever the entrepreneur, Rose launched Bloomarama.com, an internet business selling many floral items in her brick and mortar stores.  Bloomarama.com is a separate Florida corporation with no physical location or offices in Texas.  However, for the convenience of its customers,  Bloomarama.com  has a special relationship with Florist Gump that permits merchandise returns, warranty issues or other complaints to be handled at any Florist Gump store.  Rose is excited to receive her first order through KaBloom.com for a customer in Austin.  Since Bloomarama.com is a separate Florida entity with no physical presence in the State of Texas, Rose does not intend to collect Texas state sales tax from her Austin customer.  Is Rose right?No.  Online retailers have long been able to offer their customers tax free shopping because they do not maintain a physical presence (e.g. employees, warehouses, offices) within the state where the order was placed.  The State of Texas will look to whether some “nexus” or relationship exists between the business and the state.  Because KaBloom.com’s Texas customers may return or exchange purchases at Florist Gump in Texas or have other claims issues handled there, KaBloom is treated as having corporate representatives or affiliates within Texas (a “physical presence”) and must collect Texas sales tax.

Tilting the Scales in Your Favor

Make sure to consult a tax attorney or CPA if you have a “sales” relationship with any entity outside of Texas to make sure that the proper procedures are followed for collecting, reporting and paying state and county sales taxes. Rose’s penalties and interest for not collecting sales tax will be at least 9.25% if paid in 30 days and at least 14.25% if not paid within 30 days.

The Future of the Taxing of Internet Based Stores

Susan Combs, the Texas Comptroller of Public Accounts says Texas loses roughly $600 million a year from untaxed online sales.  Taxation of internet sales is certain to gain increasing scrutiny from taxing authorities.  Brick and mortar stores have long complained that online retailers have an unfair competitive advantage because of their ability to offer tax free purchases.  States initially turned a blind eye to taxing of online sales and yielded to the complaints of online retailers about the complexity of collecting sales tax in 9,600 jurisdictions. Increasingly, states have become interested in this revenue source to augment shrinking state coffers with some of the hundreds of billions of dollars that Americans spend each year on on-line purchases.  Recently, Amazon.com agreed to start charging sales tax in a number of states including Texas.  The online giant, that had long opposed the requirement that online retailers collect sales tax, believes the issue should be decided at the federal level and has thrown its support behind the Marketplace Fairness Act which seeks to allow states to collect taxes from out-of-state businesses.  While other online retailers, such as ebay and Overstock, oppose the legislation, it appears as though the age of tax free clicks is coming to an end.

 

Texas Leg Watch 2013: Banning Employers from Demanding Social Media Passwords Bill to Hit House Floor Tomorrow

Posted on April 30, 2013 by Travis Crabtree

As part of our continuing coverage of the Texas Legislature Watch (they only meet every other year in Texas), we look at the bill that would prohibit employers from demanding passwords or other access to the social media accounts of employees and prospective employees.  It goes to the House floor tomorrow.

As we originally reported, on December 21, 2012, HB 318 was prefiled and the senate considered the similar SB 118.  You can read my original post for the original version of the bill and my original comments. 

Now that it is through committee, the bill specifically excludes those in the “financial industry.”  It also includes an exception for employers to investigate wrongdoing.  Specifically, it now states:

(c) An employer may access a personal account of an employee if the employer holds a reasonable belief that the employee has violated:

(1) state or federal law, including a federal regulation or any regulatory policy or guidance issued by a federal agency; or

(2) an employment policy of the employer, including a policy governing:

(A) employee usage of an electronic communication device for work-related communications;

(B) the storage of potentially sensitive, nonpublic consumer information or of employer proprietary information;

(C) employee cooperation in a workplace investigation; or

(D) the safety and security of employees and customers of the employer.

While addressing two of the issues we spotted with the original bill, it still does not apply to college or other students.  It also does not provide any immunity for employers for failing to investigate social media profiles.

As explained in this article by Jessica Mendelson of Seyfarth Shaw, Texas looks to join the states of Utah, New Mexico and Arkansas that recently passed similar laws.

Legal Ethics Presentation: Lawyers on Social Media This Thursday

Posted on April 30, 2013 by Travis Crabtree

I will be presenting The Ethics of Lawyers on Social Media this Thursday as part of Texas Lawyer’s Technology Summit 2.0.   Here is the PowerPoint:  Ethics of Lawyers on Social Media – Technology Summit 2.0.  I recently did the ethics of marketing with social media and now I have added a new section on using social media to investigate jurors and witnesses. 

Texas Lawyer Tech Summit 05-02-13

From the Texas Lawyer’s Event Website:

Texas Lawyer’s Technology Summit presents sessions on the best practices to incorporate at your law firm geared toward information technology professionals, chief technology officers and cutting-edge litigators at mid to large law firms. This live, 3.75 hour CLE program will provide you with insight and practical advice from leading technology experts on how to manage your caseload in a cost-effective way.

Includes breakfast, networking time and audience Q&A at the end of each session. 

The event is at the Magnolia Hotel Thursday, May 2, from 7:30 to 1:30.  I have the dreaded right after lunch spot forcing people to stick around to get their ethics credit.  My goal is to avoid the food coma.

Viacom v. YouTube Update: What does it mean for me?

Posted on April 19, 2013 by Travis Crabtree

The district court in New York dismissed Viacom’s lawsuit against YouTube yesterday.  Yes, this case has been on appeal and remanded several times.  You should read the details on Professor Goldman’s Technology and Marketing Law Blog here.  Viacom may appeal the  Second Circuit Court of Appeals once again, so it may not be over.

To summarize the decision, the district court ruled that unless Viacom can prove YouTube has actual knowledge that each uploaded clip is a copyright violation, Google is entitled to the immunity granted it by the Digital Millennium Copyright Act, the DMCA.

DMCA BASICS

The DMCA provides web hosts and internet service providers a “safe harbor” from copyright infringement claims resulting from content provided from others if certain procedures are followed. If the safe harbor qualifications are met, only the customer or user can be liable and not the actual website or ISP, i.e., YouTube.

To qualify for the safe harbor protection, the site must: (1) notify the customers of its policy; (2) follow proper notice and takedown procedures; (3) designate a copyright agent with the U.S. Copyright Office; (4) not have knowledge that the material or activity is infringing or of the fact that the infringing material exists on its network.

Summary of the Ruling

This case has centered on the last prong.  Viacom has been arguing YouTube generally knows copyrighted videos are uploaded and has benefited from a willful blindness to the infringement.  The court ruled there needs to be evidence that YouTube knows each and every individual clip is copyrighted at the time it us uploaded rather than knowing that it generally happens.  Specifically, the court wrote:

knowledge of the prevalence of infringing activity, and welcoming it, does not itself forfeit the safe harbor. To forfeit that, the provider must influence or participate in the infringement.

Viacom admitted there is no technology in place that would give YouTube actual knowledge regarding the copyrights attached to each individual video at the time it is uploaded.

What does it mean?

This ruling confirms the burden to track copyrighted material is on the copyright owner and not the website.  If you have a website that takes user-generated content, you should feel better.  Even if you know you some of your users often upload copyrighted materials, you will not be deemed to “have knowledge that the material or activity is infringing or of the fact that the infringing material exists on its network” until the copyright owner tell you.

As long as you satisfy the other safe harbor requirements, you should be safe.  Viacom may appeal and try to resuscitate the “willful blindness” argument.  There is also some concern that the words “influence” or “participate” in infringement may leave open a hole for copyright owners to go after certain websites more active in seeking and pushing the content.

[Update 4-22-13]  I should have put this ruling in context with the recent Ninth Circuit ruling in UMG v. Veoh.  The Ninth Circuit originally ruled in favor of Veoh, the online video site against the record company UMG, but decided to revisit the decision in the wake of the Second Circuit Court of Appeals’ decision in Viacom which took a slightly more narrow view of the immunity protections.  Last month, the Ninth Circuit ruled again in favor of Veoh affirming a broad support for the initial free flow of information on the Internet.  The Ninth Circuit detailed, however, the precautions Veoh used to prevent the initial downloading of copyrighted materials which raises the questions of whether there is a requirement to employ reasonably available methods to prevent the uploading of copyrighted material in the first place.  You can read more details in this post from Kimberly Herman of Sullivan & Worcester.

In the interest of levity and to show how long this case has been going, enjoy this clip from the Daily Show in 2007 that discussed the case.

 

Social Media for the CEO: Lessons Learned from the Netflix/SEC Tussle and Reg FD

Posted on April 10, 2013 by Travis Crabtree

[Updated on 4/11/13 at the bottom]

Yes, you can use social media to make material public disclosures.  The SEC did not punish Netflix CEO Reed Hastings.  The reality is, however, the SEC gave a warning to executives: we are not going to do anything this time because our rules weren’t clear, but now you are on notice.

The Netflix CEO Facebook Post

On July 3, 2012, Hastings posted on his personal Facebook page:

Congrats to Ted Sarados, and his amazing content licensing team.  Netflix monthly viewing exceeded 1 billion hours for the first time ever in June . . . Keep going, Ted, we need even more.

The Problem

Generally speaking Reg FD prohibits selective disclosure of material information.  We don’t want a select group to get information ahead of the general investing public.  Therefore, material information must be publicly disclosed.  My original post on the SEC investigatation is here.  Reg FD focuses on the terms “public” and “material.”  To comply, most companies issue press releases or make SEC filings to announce material milestones and financial results.

Public?

Yes, Hastings’ Facebook profile was open to the public and he had more than 200,000 friends, many of whom were the same journalists who would have received a press release.

Material?

Materiality generally means it is reasonably foreseeable a person may make a trade based on the information.  For the 30 hours after the Facebook post, the Netflix stock rose almost 16%.  Earlier in 2012, Netflix had touted the number of streaming hours as an important metric of user engagement and therefore an indication of value.  The news was picked up by the mainstream press and analysts.  There was, however, also a Citigroup research report touting the stock just prior to Hastings’ post that also likely affected the stock price.

The SEC Speaks

So last week, the SEC decided they needed to provide guidance on the use of social media.  You can read the report here.  To summarize, the SEC authorized companies to use social media to announce material information, BUT only if the company has notified investors that the company intends to use specific identified social media channels.

Hastings escaped an enforcement action because the SEC realized the novelty of the issue and the absence of clarity.  The next guy may not be so lucky.  The SEC wrote:

Neither Hastings nor Netflix had previously used Hasting’s personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’s Facebook page would be used to disclose information about Netflix. The page was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8 K.

A Few Lessons

Train.

Obviously, disclose what social media channels you intend to use.

Just because it is possible, it does not mean publicly-traded companies should exclusively rely upon social media channels to make material disclosures.  Should a company supplement the traditional approach with social media, the company needs to disclose what social media platforms it will use.  This announcement needs to be done often and through the more traditional channels giving investors time to find and set up their access to these outlets.  No magic language is required, something like:

We routinely post information that may be material investment information on our Investor Relations tab on our website found at ______, on our Facebook page found at __________ and on our Twitter account at @________.  We encourage you to visit these sites and follow them regularly.

Make sure people know where to go so they can register, subscribe or do whatever is necessary to get the information without forcing them to “like” or “friend” any company or individual.  If your company account has very few readers, then it probably would not qualify as a “broad, non-exclusionary distribution of . . . information to the public.”  Build your profiles before you use them to make disclosures.

Use Official Company Accounts.

Official company channels are preferred over individuals.  Presumably, the people authorized to use the official channels have some training and are more equipped to know the limits.  Your investor relations, compliance and legal teams should be involved and monitor the official social media channels.  During the training for the social media team, the adage that if you have to hesitate and ask yourself whether this is material information that could affect our stock price, it probably is, or at least it should be vetted through the entire team.  When it comes to material information, the same rules would apply to Facebook or 140 characters on Twitter that would apply to the more formal press releases.

By using the official company account rather than the individual CEO account, you also keep it easier to separate what accounts belong to the individual and which belong to the company.

Wouldn’t it be easier to ban the executives from discussing any business on social media?

This is the safe way out.  Let the executives talk about their personal life, but don’t let them say anything about the business.  I am guessing that some of my non-legal readers are pulling their hair out and screaming that you have to have your CEO engaged in social media.  David K. Williams and Mary Michelle Scott opined in this Harvard Business Review blog post ”that using social technologies to engage with customers, suppliers, and even with their own employees enables their companies to be more adaptive and agile.”

Regardless of your engagement strategy, even blanket prohibitions against discussing business can create some confusion.  Would commenting that you are on the way to the company Christmas party to celebrate the best year yet violate a blanket ban on business talk?  Would that violate Reg. FD?  Even if you take the more cautious approach, your executives need to be trained on the rules.

Train.

So, does legal have to review every post or Tweet before it goes out?

After all, press releases are closely reviewed before they go out.  This approach goes too far.  The better practice is provide adequate training and implement policies on the front end.  The company policy should allow investor relations/legal/compliance to monitor executive social media accounts.

Do we need to train everyone including the new intern?

Everyone should be trained, or at least aware of the social media policy.  Reg FD really applies only to persons acting on behalf of the issuer or company which includes ”any senior officer of the issuer or any other officer, employee, or agent of the issuer who regularly communicates with securities market professionals or with security holders.”  These folks also need to be aware of the company’s Reg FD policy and training.

Train.

Should we just identify all official channels and the social media profiles of the top executives?

To be safe, a company could identify all of the various social media accounts of all the people listed above.  This would not be a good idea because it make proper disclosures meaningless if you make the information difficult to find.

The identified channel needs to be “a recognized channel of distribution.”  The company Facebook page may apply.  Your CFO’s Pinterest page full of recipes probably does not.  If the disclosures are sporadic, the account won’t garner the broad audience for financial information required by the SEC.  Moreover, to qualify, the account must allow for unfettered access and your executives may not want to open their Facebook accounts.

Train.

Fix it.

Monitoring is important because companies can try to fix mistakes that fall through the cracks.  Reg FD allows for a process of “prompt” disclosure for non-public inadvertent disclosures.  When in doubt, call your lawyer.

Train.

Did I say something about training?

UPDATE ON 4/11/13

Netflix decided to jump right into the mix.  It filed paperwork with the SEC identifying the social media channels it plans on using and Reed Hastings announced on his Facebook page that users had streamed more than 4 billion hours over the last three months. Read more at the Wall Street Journal’s Digits blog here.