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Editors Note:  The following is a research paper from one of the students in my Entertainment Law & Licensing class I teach at Belmont University’s Curb School of Music.

tivo_logo_man-744939-790582 On July 30, 1998 Tivo Inc. registered a patent for their multimedia time warping system that allows a user to store selected television programs while simultaneously watching or reviewing another program. They patented their process for making this then phenomenon so as to protect their discovery and to become the exclusive financial beneficiaries of this technology. In 1999 it was announced by Dish Network that along with their affiliate Echostar would soon have the time shifting abilities that Tivo was spearheading. This was the warning sign of what would end up being years of court battles between Tivo and the Echostar-Dish Network team.

Tivo filed suit for patent infringement in January of 2004, once they realized that the patent they obtained was being violated, to seek financial retribution and an injunction against Echostar to halt the production of infringing DVR systems that they were producing. Tivo alleged that Echostar was infringing two software claims, “The process for the simultaneous storage and play back of multimedia data, and the apparatus as well” (Tivo v. Echostar, 2). In addition to the software claims, Tivo asserted that Echostar was violating their hardware patent as well.

The suit was first filed with the United States District Court for the Eastern District of Texas. The court found Echostar to be in violation of both claims by Tivo. The judge issued a permanent injunction against EchoStar ordering them:

(1) to stop making, using, offering to sell, and selling the receivers that had been found infringing by the jury and (2) to disable the DVR functionality in existing receivers, with the exception of select receivers that had already been placed with its subscribers”

(Tivo v. Echostar, 3). In addition, the court awarded Tivo $74 million in lost profits.

echostar-to-dish At that time, Echostar did not appeal the permanent injunction imposed by the court, but it also did not discontinue providing the DVR service. In response, Tivo requested that the district court hold Echostar in contempt. Echostar claimed that it redesigned its product so that it was not infringing any longer.

The district court evaluated EchoStar’s modifications to the infringing DVR software and concluded that the modifications were also infringing. The court concluded

Even if EchoStar had achieved a non-infringing design-around, EchoStar would still be in contempt because it had failed to comply with the disablement provision in the district court’s order requiring it to disable DVR technology completely from the receivers

(Tivo v. Echostar, 4-5).

Dish and EchoStar had argued that it was entitled to a trial to determine if its altered products infringe the patent. The company said it “paid 15 engineers to spend 8,000 hours on the redesign, which took a year” (Decker and McQuillen). Tivo argued against this point saying that the changes made to their DVR players do not make a “colorable” difference.

The court agreed with Tivo stating,

We have made it clear that a lack of intent alone cannot save an infringer from a finding of contempt”

( Tivo v. Echostar, 12).

Echostar claimed that the injunction was unclear, but Tivo claimed the opposite and the record of the court reflected the clarity of the injunction. Also important to note is that the DVR’s time warping software was the only aspect of the boxes required to be disabled; not all of the actual units and hardware, the DVR functionality is just one of many functions that the Echostar Broadcom and 50X receivers performed. Since Echostar never directly appealed the injunction it was judged as a lost cause for them and the court fined them nearly $90 million and amended the previous injunction requiring EchoStar to seek the court’s approval before implementing future DVR software.

The final decision by the Federal Court of Appeals was to uphold the decision made by the district court in a divided 2-1 decision. TiVo said it will be entitled to a total of about $300 million in damages and contempt sanctions through July 1, 2009, and it will seek additional cash for continued infringement after that date. That’s in addition to $100 million Dish paid TiVo after the original appeals court ruling (Decker and McQuillen). While it is a victory for Tivo, they only got a portion of the $1 billion they were seeking.

This case made a huge impact on the DVR industry as well as Tivo’s stock, which skyrocketed following the May 4th decision by the federal court. Tony Wible, an analyst with Janney Montgomery Scott LLC in Philadelphia, wrote in a note today. “The courts have ruled in TiVo’s favor numerous times over the past five years, which should help the company in the company’s litigation against AT&T, Verizon and Microsoft” (Decker and McQuillen).

It is a good that courts are protecting intellectual properties such as Tivo’s patent in this case, so as to discourage the stealing of ideas and encourage the promotion of innovative thinking. The court’s decision to find EchoStar in violation was a good decision, as Tivo should be the sole beneficiaries of their intellectual property, i.e., the patent.

To play devil’s advocate, however, such decision does stifle competition in the industry, namely, EchoStar was the only true competing DVR provider with any clout.  Generally speaking, it is not good to promote a monopolist environment in any industry. This is essentially the state of the DVR industry until Tivo’s patent expires in 2018.

This decision confirms the principal that the twenty years of exclusive ownership granted by patent law is a positive thing—without that right someone could easily profit off of another’s innovation and inventive nature.  It is reassuring to see that judges like those in this case are still interested in the protection of important intellectual discoveries such as Tivo’s time warping technology. It also also reinforces the fact that courts will enforce their injunctions against parties and do not take it lightly when a defendant tries to skirt the injunction or slyly work around it. EchoStar’s was penalized an extra $90 million because they tried to do things their own way and work around the court.

These proceedings took over five years, but Tivo still has many legal proceedings ahead of them, probably enough to last the entirety of their patent ownership and beyond! Nonetheless, the EchoStar decision is the most positive sign that Tivo could have received in the midst of the myriad of legal battles they are still facing. This case proves that if one want to protect valuable ideas and methods they had better be ready to fight tooth and nail in the court system for years on end—luckily the reward can be great.

Works Cited

Tivo v. Echostar. No. 2009-1374. U.S. Court of Appeals for the Federal Circuit. 4 March 2010.

Decker, Susan, and William McQuillen. "TiVo Wins Court Ruling Against Dish, EchoStar (Update4)." Businessweek.com. Ed. David E. Rovella. Bloomberg, 4 Mar. 2010. Web. 11 Apr. 2010.

gg Grant Guinane is a recent graduate of Belmont University.  He obtained a B.A. in Entertainment Industry Studies with a focus in writing and music, as well as a minor in marketing.  Originally from St. Joseph, Michigan, Grant came to Nashville to pursue music.  He currently lives in Detroit, Michigan.

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The U. S. District Court for the Southern District of New York ruled against LimeWire and its parent company, Lime Group, finding them liable for inducement of copyright infringement based on the use of their service by subscribers. 

U.S. District Judge Kimba Wood issued the 59-page decision Wednesday, siding with the 13 record companies that sued Lime Wire LLC and founder and Chairman Mark Gorton through the RIAA claiming copyright infringement and unfair competition.lime_220x147

In finding the company liable, Wood opined that LimeWire had optimized its application to "ensure that users can download digital recordings, the majority of which are protected by copyright," and that the company actively "assists users in committing infringement."  Wood also found that the defendants knew their technology was being used to download copyrighted tunes and took no "meaningful steps" to prevent the infringement. In addition, Lime Wire marketed its software to people "predisposed to committing infringement" and assisted those people, the judge ruled.

Major labels, as represented by the RIAA, were predictably thrilled with the outcome.  "This definitive ruling is an extraordinary victory for the entire creative community.  The court made clear that LimeWire was liable for inducing widespread copyright theft," RIAA chairman and CEO Mitch Bainwol relayed.

Lime Wire Chief Executive George Searle issued a statement saying the company "strongly opposed the court’s recent decision."  The statement continued:

"Lime Wire remains committed to developing innovative products and services for the end-user and to working with the entire music industry, including the major labels, to achieve this mission," Searle said.

Searle did not say whether Limewire would appeal the ruling.

The Recording Industry Association of America proclaimed the decision was "an important milestone" in the battle against online copyright infringement, because Gorton was found personally liable, in addition to the company of which mitch-bainwol-riaa he was the chairman.  Personal liability against a corporate director is rare.

"The court has sent a clear signal to those who think they can devise and profit from a piracy scheme that will escape accountability," Mitch Bainwol, chairman and chief executive of the RIAA, said in a statement.

LimeWire, launched in 2000, is one of the largest remaining commercial peer-to-peer services left on the Web. The company claims to have more than 50 million monthly users.  The company has managed to defend itself against major label legal action for years.  

In issuing her opinion, Wood relied heavily on the 2005 Grokster ruling, in which the Supreme Court said that a file-sharing service was liable when customers were induced to use it for swapping songs and movies illegally.  The test established by the Supreme Court in MGM v. Grokster for provider liability is whether the company actively induced users to commit infringing activities.  While LimeWire argued that it did not, Judge Wood noted that the company actively  “markets LimeWire to users predisposed to committing infringement.”

The record companies that sued Lime Wire included Arista, Atlantic, BMG Music, Capital, Elektra, Interscope, LaFace, Motown, Priority, Sony BMG, UMG, Virgin and Warner Brothers.

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Written by guest blogger,  Joshua Johnson 

Producer/songwriter Rob Fusari recently filed a $30.5 million lawsuit against Team Love Child, LLC and Mermaid Music, LLC, two companies co-owned by the Grammy Award-winning pop star, Stefani Germanotta, professionally known as Lady Gaga, currently a ladygaga very popular and controversial pop artist.

The complaint alleges that Lady Gaga “froze” him out of her career and is reneging on  their business arrangement despite the fact that he played a pivotal role in launching her career in the early years – i.e., co-writing songs, creating her stage name, and helping her obtain her record deal with Interscope Records. Specifically, the suit alleges claims of breach of contract and fiduciary duty.

In the facts, Fusari claims to have worked with Germanotta for  several months in “radically reshaping her approach” as an artist, shifting her from rock to dance-pop. While Germanotta and Fusari were co-writing important songs like "Paparazzi" and "Beautiful, Dirty, Rich" for her debut album, Fame, Fusari would greet Germanotta with his rendition of Queen’s “Radio Ga Ga.”

According to the lawsuit, this is how Lady Gaga’s name was created:

“One day when Fusari addressed a cell phone text to Germanotta under the moniker ‘Radio Ga Ga,’ his cell phone’s spell check converted ‘Radio’ to ‘Lady.’ Germanotta loved it and ‘Lady Gaga’ was born.”

In response to this claim, Germanotta, stated:

"The realization of Gaga was five years ago, but Gaga’s always been who I am…I always dressed like that before people knew me as Lady Gaga. I was always that way…I stuck out like a sore thumb."

The lawsuit further claims that Lady Gaga and Fusari’s relationship turned romantic and then ultimately became a business partnership in May 2006. It was around this time that they created Team Love Child, LLC. In the formation of this joint venture, Fusari and Germanotta agreed to allow Fusari to collect producer fees in addition to 20% of the earnings from Germanotta’s first four albums. While Fusari acknowledges that he received checks totally rob_fusari--300x300approximately $611,000, he nonetheless claims that he has been denied what the Team Love Child, LLC agreement entailed. Essentially, the lawsuit is mainly fighting for the aforementioned agreement.

Last month, Germanotta’s attorneys fired back at Fusari by filing a second lawsuit in Supreme Court of the State of New York. The suit claims that the Team Love Child, LLC contract with Fusari should be deemed null and void because, among other things, Fusari forced Germanotta into the agreement. Supporting argument include that the agreement violates employee protection laws that prevent "predatory and financial abusive practices by employment agencies” and that Fusari is attempting to collect “unlawful compensation.”

Alternatively, if the court does not nullify the agreement, the complaint seeks a declaration that Fusari is only entitled to a percentage of net compensation, that he is not entitled to a percentage of merchandising income, and that he Lady Gaga is not required to use him to produce future albums.

This case is ongoing and Fusari’s answer in the latter case has not yet been filed.

The Lady Gaga complaint can be downloaded here.

Joshua Johnson Josh is a Knoxville, Tennessee native who attends Belmont University’s Mike Curb School of Music Business.  He is currently a student in Mr. Shrum’s Entertainment Law & Licensing class.  Upon graduation in May 2010, he and his wife, Nicole, plan to devote all of their efforts in pursuit of their music career as folk/pop duo, Elenowen.

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By all accounts, EMI’s Grammy party at the Hollywood “W” Hotel was impressive.  But one there was one significant absentee from the celebration:  Guy Hands, Chief Executive of Terra Firma, the inhands vestment that purchased EMI in 2007.

EMI is a British company with a 113 year history of making music.  Globally, EMI is home to such well-known acts as Coldplay, Norah Jones, Snoop Dog, The Spice Girls, and even, yes, the Beatles.  EMI’s Nashville-based labels are home to, among others, the Nashville’s successful talent, such as Lady Antebellum, Darius Rucker, and Keith Urban, not to mention old faithfuls such as singer-songwriter, Guy Clark, while the Nashville-based publishing arm of EMI is home to Tom Shapiro, John Paul White and Steve McEwan, to name a few.  And then, there is the Nashville-based Christian side of the business, EMI’s Christian Music Group.   Despite these success stories, in the days following the extravagant Grammy celebration, events transpired which called into question the financial stability, nay, even the very future, of those organizations as separate entities.

The winds of change started blowing way back in 2007, when the struggling entertainment empire was purchased by Hands and his citi1 venture capital firm, Terra Firma, for somewhere around 6.5 billion U.S. dollars.   The VC firm had a reputation for turning around troubled companies, including a roadside gas station company, an aircraft-leasing business, Australian cattle ranches, and a natural-gas network.

Some of the $6.5 billion purchase price was funded by the investment group, but the remaining balance, somewhere in the range of 4 billion, was financed by Citigroup.  Citigroup’s agreement to lend out that much money was contingent upon performance level targets.  The current consensus is that, despite over 13 million in sales of the old Beatles catalog, EMI has failed, and will continue to fail, to meet the performance targets, unless Terra Firma comes up with additional $200 million in capital contributions by the end of the summer.  If that doesn’t happen, Citigroup, itself struggling from the weight of bad debt and government scrutiny, could take the keys to the company and then, likely flip it into the waiting arms of Warner Music CEO, Edgar Bronfman, who has long wanted the EMI proGUY-HANDS perties, changing the landscape of the music industry.

It is rumored that when Hands first met the EMI executive team, he told them if he didn’t make the deal work, he would lose over $310 million.  So, for obvious reasons, Guy Hands didn’t attend the recent EMI soirée, choosing instead, I imagine, to remain in his lavish estate on the Isle of Guernsey in the English Channel, where taxes are almost non-existence, making it a popular financial center for British venture capitalists.  Regardless of where Hands is now,  however, this entire power struggle will likely play out by the end of the summer. 

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A little history:

February 22, 1990: Pop sensations Fabrice Morvan and Rob Pilatus, a/k/a Milli Vanilli, who achieved international acclaim as a result of their Arista release, Girl You Know It’s True,  win the Grammy for “Best New Artist.”    Soon, the rumors began to swirl that Morvan and Pilatus were not actually singing on the records as had beeimage n reported in the press.  So intense were these rumors that on November 12 of that same year, Frank Farian, creator and producer of the Milli Vanilli project, confessed that Morvan and Pilatus did not actually sing on the records.  Four days later, Milli Vanilli’s Grammy was “withdrawn,” and Arista dropped them.  After the details emerged, the controversy spurned over 26 different lawsuits across the country under various consumer protection laws.

Early 1992: New Kids on the Block’s song If You Go Away peaks at #16 on Billboard as an associate producer on one of their earlier albums allege that the band lip-syncs to performances by Maurice Star, and that Star actually sang many of the parts on their albums.   As the story develops, the band cuts short a tour to appear on The Arsenio Hall Show to perform a medley of their hits.  During the subsequent interview, the band admits to using Star’s vocals as a backup track during their live performances, and admit that Star sang harmonies on some of their background vocals.   The band never recovered from the backlash, and their record sales steadily declined from that moment.

November 6, 2009: Hundreds of angry fans in Perth, Australia, walk out of Brittany Spears’ Circus concert when it becomes apparent that she is lip-syncing to her songs.

Fast forward to:

January 31, 2010: Taylor Swift wins four Grammys: Album of the Year and Best Country Album for Fearless, Best Female Country Vocal Performance and Best Country Song for White Horse.  Swift, who is by all accounts an extremely talented songwriter, gave a stunningly weak vocal performance during her duet with Steve Nick’s that drew starkly negatives reviews from professionals and amateur press/bloggers alike.  For example, Bob Lefsetz described her image performance as “dreadful” and opined that she may have single-handedly imperiled her career with this one performance.  The general consensus is that her Grammy performance is not an isolated incident.  Truth is, most professionals in Music City are aware of Swift’s inferior vocal talents – almost every conversation about Swift in this city includes one or more references to “auto-tune” technology.

The query then is this: is there a significant difference between a digitally-created rendition of a vocal performance and using a superior vocal performance from an singer who is not marketable to front a more attractive and marketable duo, a/k/a Milli Vanilli or to using a backup track (even of your own vocal as in Spears’ case) to enhance your live performance.  Isn’t the former example simply a modern, technological replacement for the latter?  If so, then the question becomes why is today’s society not as outraged at Taylor Swift as past society was at Milli Vanilli, New Kids and Spears?

In his response to criticism of the Grammy performance, Scott Borchetta, president and CEO of Swift’s record label Big Machine Records, offers this explanation for this discrepancy:

Maybe she’s not the best technical singer, but she is the best emotional singer. Everybody gets up there and is technically perfect people don’t seem to want more of it. There’s not an artist in any other format that people want more of than they want of Taylor. I think (the critics) are missing the whole voice of a generation that is happening right in front of them. Maybe they are jealous or can’t understand that. . . .   No one is perfect on any given day. Maybe in that moment we didn’t have the best night, but in the same breath, maybe we did.

Borcetta gets no argument from almost anyone I know in the industry that perhaps Swift is not the best technical singer.  But I’m not sure the explanation that Swift is the “voice of a generation” does much to address the underlying issue: The Grammy for Best Female Country Vocal Performance went to singer who, even her label head admits, is not the best technical singer!  Swift’s Fearless live performance tour is sold-out!  In her defense, Borchetta goes on to say “If you haven’t seen her live performance, you’re welcome to come out as my guest to a Taylor Swift show and experience the whole thing, because it’s amazing.”  But if the show’s audio is auto-tuned, how does this amazing experience differ from a Brittany Spears’ lip-synced performance, if at all?  Let’s not forget, in their days, the fans also “wanted more” of Milli Vanilli, New Kids on the Block and Brittany Spears.

Someone else once phrased it this way:

“It’s not about being authentic anymore, it’s about being entertaining.” 

Interestingly, this was a quote from Morvan of Milli Vanilli in a USA Today article in 2010.   Morvan goes on to say

“Twenty years later, what we were crucified for you see everywhere.”

He right, is he not?  Let’s be honest.  In America, at least, pop music has almost always produced a certain amount of, shall we call it, “manufactured product” – performers who were either assembled, created or otherwise the entertainment value.  My first disillusionment with this came in the form of The Monkees when I discovered that they were a band “assembled” by Bob Rafelson and Bert Schneider as an American “Beatles” alternative, i.e., as a means of capitalizing on the success of the Beatles.  As technologies become more and more sophisticated, this trend toward entertainment value over authenticity is naturally going to increase.  It used to be a little more difficult to go back and “overdub” a particular performance which was out of tune or offbeat, because the engineer had to physically rewind the tape, record the alternative part on a separate recording track, and then sync the new part into the old one.  A bit more time consuming.  Now, we have software which can independently correct not just the pitch, but an isolated note out of a chord which may be out of tune for one reason or another.  It’s a matter of moving the mouse over the note, highlighting it, and correcting it.  Wow!

I suppose the real question, then, is what do we want from our performing artists, whether it be a live performance or a recorded one?  For me, I think I prefer simple honesty.  Or, as Milli Vanilli ironically put it, “authenticity.”  I like to hear performers with technically superior skills performing the music they created.  I do agree with Borchetta that everyone is not perfect, and that many people prefer a live performance that has the feel of being non-technical.  After all, who can forget that off key guitar note at the end of the Allman Brother’s recording of Statesboro Blues (a note which they DO NOT replicate in a live performance), or some of John Bonham’s almost syncopated rhythms on Black Dog?   Those are authentic performances by persons with superior, technical skills. And this is precisely where I think where I differ from Borchetta:  I personally think most people do expect their celebrities to be technically superior, at least with regard to their perceived talents. 

Judging from prior examples such as Milli Vanilli and Brittany Spears, and the audiences’ reaction to those performers, people have an expectation that an artist will be able to actually perform the music that was marketed to them through the media.  In other words, most people expect their performers to be authentic.  Now, maybe Borchetta is correct, that Swift is, in fact, an authentic person who can communicate well through her gift of songwriting – again that’s not the real issue.  The real issue is that Swift is portrayed as more than a songwriter, she is portrayed as the performer with the “Best Female Country Vocal Performance.”   The fact is, Duane Allman, although he might hit an off key note once and awhile, was a technically superior guitarist.  John Bonham, even though that one performance might fade slightly off the beat for a brief moment, was a technically superior drummer.  However, no matter how many tours she sells out and no matter how many millions of CDs she sells, Taylor Swift, while an amazingly-talented songwriter,  will never be a technically superior vocalist.   Not to worry, though, she will most certainly always be the slightly off-key voice of a younger generation of admirers.  Or will she.  Time will tell I suppose.  But lest we put too much stock in past success as an indicator of future fan support, don’t forget, Milli Vanilli’s record was also multi-platinum.

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Rep. John Conyers, Chair of the House Judiciary Committee brought the Performance Rights Act (HR 848) up for markup this morniJohn Conyersng. 

HR 848 created no small amount of disagreement among radio broadcasters, minority broadcasters, trade unions and civil rights groups.  However, a group  of minority artists, including Duke Fakir of the Four Tops, Dionne Farris and Jon Secada, recently sent a letter indicating support for Rep. Conyers and this legislation.  The letters stated in part: 

As minority artists, we support a strong and vibrant local radio industry. We know that minority broadcasters play a vital role in our communities. And we support efforts to create accommodations in the legislation for small, minority-owned stations. But the creation of a fair performance right cannot be delayed further. We have already waited far too long. “Not now” is not an acceptable answer.

To address the concerns of minority broadcasters, Conyers offered the following amendments at today’s markup:

Affordable payment for small, rural, nonprofit, minority, religious and educational broadcasters

· Any station that makes less than $100,000 annually will pay only $500 annually for unlimited use of music

· Any station that makes less than $500,000 but more than $100,000 annually will pay only $2500 (half of the amount in introduced bill) annually for unlimited use of music

· Any station that makes less than $1,250,000 but more than $500,000 annually will pay only $5000 (the amount in introduced bill) annually for unlimited use of music

Relief for current economic situation

· No payment for 2 years by any station that makes less than $5,000,000 annually

· No payment for 1 year by any station that makes more than $5,000,000 annually

Parity for all radio services

· Establishes a “placeholder” standard to determine a fair rate for all radio services that will encourage negotiations between the stakeholders

Cannot hurt local communities

· Assures that this legislation cannot affect broadcasters public interest obligations to serve the local community

Assures consideration of relevant evidence

· Evidence relevant to small, noncommercial, minority, and religious broadcasters and religious and minority royalty recipients must be considered by the Copyright Royalty Judges

Other minority and civil rights groups that sent letters expressing support for the act included the Leadership Conference on Civil Rights, Pennsylvania Legislative Black Caucus, Rhythm and Blues Foundation and the A. Phillip Randolph Institute.

The executive director of the musicFIRST Coalition, Jennifer Bendall, supported the committee’s decision:

“We applaud Chairman Conyers and Committee members for their work on the Performance Rights Act and for supporting artists, musicians and rights holders in their fight for fair compensation when their music is used by AM and FM radio stations.

The Performance Rights Act will bring fairness to artists, musicians and rights holders and one that’s fair to radio and its counterparts. It also includes accommodations for small and minority-owned broadcasters. musicFIRST looks forward to the next chapter and to Congress to ensure that U.S. artists and musicians receive the performance right they deserve.”

Now that HR 848 has cleared the committee, it will be brought in front of the entire House for debate and vote. 

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By guest author, Cory Greenwell, Esquire*

“The customer is always right” has long been a mantra of the business world. Over the last ten years, consumers within the entertainment and software industries have begun to demand instant access to products off all types. Products such as the Apple iPod®, Sony PSP® and the Amazon Kindle® among countless similar products have created an ever-increasing demand for instant access to media content. As a result, the increase of digital distribution of media content has grown, with iTunes alone accounting for more than $5 billion dollars in the US and the industry continues to grow. As a direct result of the increase in volume of the digital distribution of media content, the distribution of physical media, such as compact discs that are customarily subject to sales tax fell sharply in 2007. The paradigm shift has resulted in a major sector of the entertainment industry acquiring virtually tax-freConstitution2e status or consumers.

In the 1992 landmark decision in Quill v. North Dakota, 504 U.S. 298 (1992), the court found that states cannot require out-of-state retailers to collect taxes from customers who live in states where the retailer does not have a related physical presence or “substantial nexus”. The basis for the decision was to give a “safe harbor” for businesses wishing to avoid the burdens of complying with the numerous state tax laws by transacting business online.

Seventeen states, including Tennessee, have updated their tax code and now impose a tax on digital downloads. The legality regarding the taxation of digital media appears to have been resolved in favor of taxation. After Quill, the responsibility rests on the individual consumer to report the transaction on their annual tax return and pay the appropriate amount of sales tax. Some reports indicate that nationwide state and local governments will have lost more than $500,000,000 in uncollected taxes by 2011.

The court in Quill recognized the importance of the emerging e-commerce sector and declared that alternative means to require retailers to collect sales tax, namely that 1) Congress may require retailers to collect sales tax or 2) States may require retailers to collect taxes provided that Congress has provided a mechanism by which to reduce the burden of retailers to comply with the tax laws of the several states.

Since the Quill decision, twenty-two states including Tennessee have joined together under the “Streamlined Sales Tax Agreement” to create a uniform tax code to reduce the burden of complying with the law of the several states. Among other things, the SSTA have created uniform rules regarding digital media. The National Conference of State Legislatures has called for Congress in its next session to review the Sales Tax Fairness and Simplification Act (H.R. 3396) which gives those states that have complied with the Streamlined Sales Tax Agreement the authority to require out-of-state retailers to collect sales tax for online purchases.

Rather than waiting on Congressional action, New York has attempted to circumvent the requirement of a physical location within the state by interpreting their law to include any “affiliate”. In the case of Amazon, affiliates include anyone who advertises on the website. This interpretation, if adopted by the several states, would negate the benefit of the safe harbor by exposing the online retailer to liability throughout the nation.

In conclusion, as the law presently stands, states may tax digital media, however it cannot require out of state retailers to collect taxes. If Congress adopts the legislation proposed by the members of the Streamlined Sales Tax Agreement as anticipated, the Quill case no longer prevents states from requiring retailers to collect sales tax.

Cory Greenwell *Jonathan “Cory” Greenwell is an intellectual property lawyer who practices in Louisville, Kentucky at the firm of Greenebaum Doll & McDonald.  Cory is the co-founder of the website Backseat SandBar and was featured on the WFPK 91.9 feature, “Off the Record.”

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