VOLUME 7 ISSUE 12 | DECEMBER 2010

Baker Botts Office

INTELLECTUAL PROPERTY REPORT

Articles

Recent Developments In Internet Law

Joshua Sibble

I. Introduction

The Internet changes quickly, and in an ideal world, the law that governs it would adapt just as fast. In reality, though, Internet regulation is often reactive, and as a result, the Internet can seem to present a somewhat chaotic legal landscape. But the Internet is governed by a network of laws and regulations addressing a multitude of topics, some limited to specific jurisdictions, some applicable world wide. Like the Internet itself, these areas of law are constantly changing. This article discusses four such topics: sales taxes, keyword searching, privacy and domain names.

II. Internet Sales Tax

A. Background

It is well known that online retailers often do not charge sales tax, and many consumers take advantage of this apparent discount.1 Although there is a trend among online retailers to collect sales tax on shipments to all states that impose sales tax, there are still many that only collect sales tax on products shipped to states in which they have physical locations.2 This does not mean, however, that online sales are tax exempt. A typical state sales tax law requires retailers operating in-state to collect sales tax on the state’s behalf and remit the proceeds to the government. States supplement their sales tax with a “use tax,” which requires residents to pay for the in-state use of goods purchased out of state. Unfortunately, enforcement of use taxes depends predominantly on voluntary self-reporting by consumers, and as a result, use taxes generally go uncollected.3 Because of this gap in enforcement, states lose billions of dollars of tax revenue every year.4

In the past, states have attempted to remedy this problem by requiring out-of-state retailers to collect sales tax for goods shipped into the state. However, in Quill Corp. v. North Dakota, the U.S. Supreme Court held that a retailer can only be required to collect a state’s sales tax if it has a “substantial nexus” with the taxing state.5 The Court defined “substantial nexus” as a physical presence; merely sending goods into the state was held insufficient.6

To overcome this obstacle to broad out-of-state taxation, some states have tried to reach out-of-state retailers by focusing on their in-state activities. For example, in 2008, the New York Tax Law was amended to require out-of-state retailers who solicit business in New York through in-state agents, including over the Internet, to collect New York sales tax.7 The law, commonly known as the “Amazon Law,” appears to have been carefully crafted to satisfy the Quill nexus requirement. The law does not require sales tax collection unless a retailer’s in-state agent engages in active solicitation in New York. For example, merely hosting links to Amazon.com does not trigger the law.8

In addition to its narrow scope, New York’s Amazon Law also has a “safe harbor” provision that allows out-of-state retailers to rebut the presumption of in-state solicitation that triggers the collection requirement. To do so, retailers need only include a provision in affiliate agreements prohibiting solicitation in New York. By taking this step, out-of-state retailers can avoid collecting sales tax on goods sent to New York consumers.9

Despite the safe harbor provision, Amazon.com and Overstock.com challenged the law’s constitutionality shortly after it was passed, alleging violations of the Commerce Clause, Equal Protection and Due Process.10 The Supreme Court of New York upheld the law and dismissed the plaintiffs’ claims entirely.11 On appeal, the Appellate Division affirmed the Supreme Court’s dismissal of the plaintiffs’ facial challenges to the law, but remanded for factual findings for the as-applied challenges.12 The case will go back to the trial court for fact-finding and a decision on the as-applied challenges. There will then likely be at least one more appeal in state court. If the plaintiffs are unsuccessful in state court, they may petition the U.S. Supreme Court for a writ of certiorari to decide the constitutional issues.

B. Streamlined Sales And Use Tax Agreement/Main Street Fairness Act

While laws such as New York’s Amazon Law attempt to squeeze every dollar from the existing tax framework, there are even more ambitious efforts being made to change the current interstate tax system to allow more direct taxation of out-of-state retailers. The Streamlined Sales and Use Tax Agreement (“SSUTA”) is a compact entered into by a voluntary organization of states and the District of Columbia aimed at simplifying and harmonizing state tax laws. One of the SSUTA’s specific goals is to require out-of-state retailers to collect tax on in-state sales. Under the current state of the law (Quill), however, states would need authorization from Congress to reach outside their jurisdictions to impose such a requirement.13

The Main Street Fairness Act was a bill introduced in the U.S. House of Representatives that, if enacted into law, would have given congressional approval to the SSUTA. It would have authorized member states to require sellers to “collect and remit sales and use taxes with respect to remote sales.” Small Internet businesses would have been exempt from these requirements. Because the Constitution gives Congress broad power to regulate interstate commerce (something the states cannot do on their own), the Main Street Fairness Act would have been more difficult to challenge in court than state tax laws such as the New York Amazon Law.

Although the bill had the support of state governments and small businesses, it was never reported out of the Judiciary Committee of the 111th Congress. Similar bills have been introduced in the last four sessions of Congress, but none have made it out of committee. It is likely a similar bill will be introduced in 112th Congress, but whether it has any more success than its predecessors is unclear. With so many states facing budget shortfalls, it is possible such a bill, which would raise state tax revenues, could see more support than in the past.

III. Keywords

Another important aspect of Internet commerce is advertising. Unlike passive media such as television and radio, where consumers are exposed to advertising at regular intervals, the interactivity of the Internet allows users to skip and avoid advertising much more easily. Consequently, advertising on the Internet tends to be done on a smaller scale to allow advertisers to pay reduced rates for this reduced exposure.

One of the most successful Internet advertisers to use this approach has been Google. Its AdWords program allows companies to use “keywords” to optimize search engine results.14 When a user searches for an advertiser’s keywords, AdWords may display the associated ad on the search results page.15 Advertisers only pay when users click their ads (“pay per click”).16 Although AdWords has been a big success for Google, one thorny issue that has arisen is the use of third-party trademarks in the ads.17

Google’s current policy in the U.S. is to allow advertisers to select third-party trademarks as keywords for their own advertisements.18 In 2004, the insurance company GEICO sued to force Google to stop allowing third parties to use GEICO’s trademarks as keyword triggers.19 The trial court held that Google’s mere use of the trademarks as keywords did not infringe the trademarks per se, but that allowing third parties to place ads incorporating GEICO’s trademarks would infringe.20 The parties eventually settled.21

More recently, Google was sued by Rosetta Stone, the language learning software company, in the U.S. District Court for the Eastern District of Virginia.22 The facts were similar to GEICO v. Google. As in GEICO, the trial court held that there was no likelihood of confusion.23 However, in Rosetta Stone, the court also held that Google was not liable for advertisers’ potentially-infringing use of trademarks in Google ads.24 Rosetta Stone has appealed to the Court of Appeals for the Fourth Circuit.25 Several amicus briefs have been filed, the majority of which are in support of Rosetta Stone.26

Meanwhile, Google is also expanding the use of trademarks by third parties in AdWords internationally, establishing new world-wide policies as of September 14, 2010. In Canada, the UK and Ireland, the policy is the same as in the U.S.: Advertisers can use third-party trademarks as keywords, and can even use trademarks in descriptive text of the ads.27 In European jurisdictions outside the UK and Ireland, advertisers can use third-party trademarks as keywords, but cannot use trademarks in the text of ads.28 This proviso is the result of judicial guidance from the European Court of Justice.29

IV. Privacy

In addition to trademark problems, Google has also run into a host of privacy debates, particularly in Europe. In February of 2010, three Google executives were convicted of violating Italian privacy law.30 Google Video had allegedly hosted a video showing several Italian youths bullying a schoolmate.31 Although the executives had no direct involvement with the video, the court found that by allowing the video to be hosted, they had themselves violated the law.32 The three convicted executives received suspended sentences, but Google’s Chief Legal Officer, David Drummond, one of the convicted executives, said the case “sets a chilling precedent.”33 The case was widely criticized,34 and the executives are appealing the decision.35 Whether or not the conviction is upheld on appeal, the case sends a strong message to Internet companies to take European privacy laws seriously.

Later in the year, Google became involved in another European imbroglio when it was alleged that the data collectors for Google’s Street View program had been inadvertently intercepting private WiFi data.36 In the U.S., the FTC has not been particularly harsh on Google, and has already dropped its inquiry into the matter.37 Response to the controversy from the European Union and individual European states, however, has been highly critical of Google,38 and could lead to stricter privacy laws in Europe.39

Google’s impact on European privacy law is not limited to Street View. Europe is also seeking to strengthen individual privacy rights relating to personal data as well. The EU is pushing to update the 1995 Data Protection Directive to add a “Right to Be Forgotten.”40 The update would require Internet companies to get consent before storing personal data, and delete it on request.41 Google’s CEO Eric Schmidt has argued against this type of online anonymity: “In a world of asynchronous threats, it is too dangerous for there not to be some way to identify you.”42 Unlike the EU, Schmidt envisions a future in which “you don’t forget anything. . . . [Y]ou’re never lost. . . . We will know your position down to the foot and down to the inch over time.”43 If implemented, the EU Directive update could have a significant impact on companies that operate by collecting and storing personal information.

Although support for greater online privacy may be stronger in Europe, it is not without its proponents in the U.S. The Federal Trade Commission has recently proposed strengthening U.S. Internet privacy law by establishing a “Do Not Track” mechanism that would allow consumers to “choose whether to allow the collection of data regarding their online searching and browsing activities.”44 The plan is similar to the existing “Do Not Call” list that aims to protect the public from unwanted telemarketing.45

V. New Generic Top-Level Domains

The Internet Corporation for Assigned Names and Numbers (“ICANN”) has developed a new system of generic top-level domains (“gTLDs”) that will allow companies to register unique top-level domains, such as “.xyzcorp.”46 The price for these individualized gTLDs will be $185,000.47 In addition, new group-based gTLDs (similar to .com, .org, etc.) will also be available, for example, “.nyc” or “.bank.” Individual companies will be able to register second-level domain names for their own brand within the new group-based gTLD, for example, “xyzcorp.nyc.”48

ICANN plans to register around 500 new gTLDs.49 This raises new issues regarding domain name disputes and abuse. Cybersquatting is still a problem today, even with only a few top-level domains available for use (e.g., .com, .org, etc.). For example, in 2009, a dispute settled by ICANN’s Uniform Domain Name Dispute Resolution Policy (UDRP) involved the bad-faith registration of over 1,000 domain names (all variations of freecreditreport.com).50 Also in 2009, a federal judge ordered an accused cybersquatter to pay over $33 million in statutory damages (at $50,000 per violation).51

The expansion of gTLDs will create more opportunities for potential abuse and disputes, and ICANN has included dispute-resolution policies to address this problem, particularly for trademark holders.52 Parties will be able to object to the registration of a gTLD if the mark would infringe on that party’s legal rights.53 Disputes will be settled by the Arbitration and Mediation Center of the World Intellectual Property Organization.54 Even brand owners not interested in registering new domain names may consider preparing to protect their brands from abuse when the new system is launched.

Although the new gTLD system was scheduled to be launched early next year, implementation of the plan has been delayed.55 The delay is meant to give ICANN’s Governmental Advisory Committee more time to consider issues such as trademark protection and domain name abuse.56 Assuming no further delays, ICANN could begin taking applications for new gTLDs in July or August of 2011.57

VI. Conclusion

The topics discussed in this article are just a few examples of the ever-changing laws and regulations governing the Internet and those who do business on it. One of the most difficult challenges in the future will be navigating the various and disparate laws relating to the Internet throughout the world. For example, as American and European concepts of individual privacy and data ownership continue to diverge, transactions costs could increase, and some businesses may even be driven out of certain markets. Of course, not all changes will be so drastic, but the ability to adapt to the changing legal landscape will be critical to success for Internet-based business in the future.

 

1 See, e.g., How to Shop Tax Free Online, EHOW, (last visited Dec. 21, 2010).
2 See Top 50 US Online Stores: Sales Tax Policy Reference, HOW TO BE WEBSMART, (last visited Dec. 21, 2010).
3 The major exception is the out-of-state purchase of cars, which states can monitor with vehicle registration at the DMV.
4 Donald Bruce et al., State and Local Government Sales Tax Revenue Losses from Electronic Commerce, 52 STATE TAX NOTES 537 (2009), available here (estimating annual losses of $11.4 billion by 2012).
5 Quill v. North Dakota, 504 U.S. 298, 311 (1992).
6 Id. at 317-18. The Court based its decision on the “Dormant Commerce Clause.” Id. at 311. The Commerce Clause of the Constitution gives Congress plenary power to regulate interstate commerce. See Gibbons v. Ogden, 22 U.S. 1 (1824). The courts have also inferred a “dormant” component of the Commerce Clause that bars states from imposing unreasonable burdens on interstate commerce. See id. In Quill, the court noted that Congress was free to remove this barrier to interstate taxation by states. 504 U.S. at 318. So far, it has not.
7 See Amazon.com v. New York, No. 601247/08, 2010 WL 4345742, at *1 (N.Y. App. Div. Nov. 4, 2010).
8 Id. at *2.
9 Id.
10 Id. at *3.
11 Id. at *4.
12 Id. at *14.
13 See supra note 6.
14 GOOGLE ADWORDS, (last visited Dec. 21, 2010).
15 Id.
16 Id. (follow “Costs and payment” hyperlink).
17 See Ashley Tan, Google AdWords: Trademark Infringer or Trade Liberalizer?, 16 MICH. TELECOMM. L. REV. 473, 477-79 (2010).
18 Update to U.S. Ad Text Trademark Policy, GOOGLE.COM (May 14, 2009, 3:38 PM).
19 GEICO v. Google, Inc., 330 F. Supp. 2d 700 (E.D. Va. 2004).
20 GEICO v. Google, Inc., No. 1:04CV507, 2005 WL 1903128, at *7 (E.D. Va. Aug. 8, 2005).
21 Kevin Newcomb, Geico, Google Settle Trademark Dispute, CLICKZ, (Sep. 8, 2005).
22 Rosetta Stone Ltd. v. Google Inc., No. 1:09cv736, 2005 WL 1903128 (E.D. Va. Aug. 3, 2010).
23 Id. at *11.
24 Id. at *13-*16 (rejecting Rosetta Stone’s arguments for contributory and vicarious infringement).
25 Notice of Appellate Case Opening, Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Sep. 1, 2010).
26 Brief of Amicus Curiae, Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Nov. 1, 2010) (filed by Int’l Trademark Ass’n in support of Rosetta Stone); Brief for Amicus Curiae, Carfax, Inc., et al., in Support of Plaintiff-Appellant Rosetta Stone Ltd., Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Nov. 1, 2010); Brief of Amicus Curiae in Support of Appellant Rosetta Stone Ltd., Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Nov. 1, 2010) (filed by Ass’n for Competitive Tech., et al.); Brief of Amicus Curiae, ConvaTec, Inc., et al., Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Nov. 1, 2010) (supporting Rosetta Stone); Brief of Amicus Curiae, Volunteers of America, Inc. in Support of Appellant Rosetta Stone Ltd., Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Nov. 1, 2010); Brief of Amicus Curiae, UK I.P. Law Soc’y in Support of Neither Party, Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Nov. 24, 2010); Brief of Amicus Curiae, EBay Inc. and Yahoo! Inc. in Support of Google Inc., Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Dec. 6, 2010); Brief of Amicus Curiae, Public Knowledge and Electronic Frontier Foundation in Support of Appellee Google, Inc., Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Dec. 6, 2010); Brief for Public Citizen as Amicus Curiae Urging Affirmance, Rosetta Stone Ltd. v. Google, Inc., No. 10-2007 (4th Cir. Dec. 6, 2010).
27 Update to Canadian, UK and Ireland Ad Text Trademark Policy, GOOGLE.COM (Aug. 4, 2010, 2:00 AM).
28 Updates to AdWords Trademark Policy, GOOGLE.COM, (last visited Dec. 21, 2010).
29 See id. (“Google’s position is in line with the principles set out in the European Court of Justice (ECJ) judgment in joined cases C-236/08 to C-238/08, which was published in March 2010.”).
30 Google Bosses Convicted in Italy, BBC NEWS, (last updated Feb. 24, 2010).
31 Id.
32 Id.
33 Id.
34 See, e.g., Italy’s Google Miscarriage, WALL ST. J., Feb. 26, 2010, at A14; Sam Diaz, Google Execs Wrongly Convicted by Italian Court over an Uploaded Video, ZDNET (Feb. 24, 2010, 9:37 AM); Paul McNamara, Conviction of Google Execs in Italy Sheer Madness, PC WORLD (Feb. 24, 2010, 6:24 AM); JR Raphael, Italy’s Google Convictions Set a Dangerous Precedent, PC WORLD, (Feb. 24, 2010, 3:06 PM).
35 See Google Bosses Convicted in Italy, supra note 30.
36 See WiFi Data Collection: An Update, OFFICIAL GOOGLE BLOG (May 14, 2010, 1:44 PM).
37 See Cecilia Kang, Satisfied with Google’s Promise to Restrain Street View, FTC Drops Privacy-Breach Probe, WASHINGTON POST (Oct. 27, 2010, 9:20 PM).
38 See id.
39 See EU Minister: Google Street View Controversy Shows Need For Uniform Privacy Standards In Europe, SEARCH ENGINE LAND (Dec. 1, 2010, 9:30 AM).
40 Press Release, Eur. Comm’n, European Commission Sets Out Strategy to Strengthen EU Data Protection Rules (Nov. 4, 2010), available here.
41 Id.
42 Valentina Pop, EU to Press for “Right to Be Forgotten” Online, EUOBSERVER.COM (Nov. 11, 2010, 6:26 PM).
43 Id.
44 Press Release, Fed. Trade Comm’n, FTC Staff Issues Privacy Report Offers Framework for Consumers, Businesses, and Policymakers: Endorses “Do Not Track” to Facilitate Consumer Choice About Online Tracking (Dec. 1, 2010), available here.
45 Edward Wyatt & Tanzina Vega, F.T.C. Backs Plan to Honor Privacy of Online Users, N.Y. TIMES, Dec. 2, 2010, at A1, available here.
46 New gTLDs–Frequently Asked Questions, ICANN.ORG, (last updated Oct. 24, 2008).
47 Id.
48 Id.
49 ICANN’s New gTLD Draft Applicant Guidebook Gives Added Protection to Trademark Holders, DOMAINNEWS (June 7, 2010).
50 ConsumerInfo.com, Inc. v. Netcorp, LLC, FA0909001283469 (Nat’l Arb. Forum Nov. 11, 2009).
51 Verizon Cal. Inc. v. OnlineNIC, Inc., 647 F. Supp. 2d 1110 (N.D. Cal. 2009).
52 See New gTLDs–Frequently Asked Questions, supra note 46; see also ICANN’s New gTLD Draft Applicant Guidebook Gives Added Protection to Trademark Holders, supra note 49.
53 See New gTLDs–Frequently Asked Questions, supra note 46.
54 Id.
55 ICANN Delays New gTLDs, Again, To Consider Public Comment, DOMAINNEWS (Dec. 11, 2010).
56 Id.
57 New gTLDs Delay Sees August Launch Date Likely, DOMAINNEWS (Dec. 17, 2010).

 

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