MoFo News Item

Lawsuit Filed Against N2K

6/30/1998

Silicon Alley got a reminder that the benefits of raising money through a public stock offering can be accompanied by some perils. On May 8, 1998, a class action was filed against on-line music retailer N2K Inc., alleging that the company disseminated a "materially false and misleading Registration Statement and Prospectus" in connection with its over $100 million secondary offering in April. The complaint charges N2K with violating Sections 11 and 15 of the Securities Act of 1933 by, among other things, failing to include in its offering materials the company's first quarter financial results, which ended on March 31, 1998. When the results were announced on April 23, shortly after the offering, the larger-than-expected per share loss is alleged to have caused a material drop in N2K's stock price.

E-Mail Spammers Face Greater Obstacles

This has not been a good year for commercial spammers.

First, the Senate passed a bill on May 12 (S. 1618) that requires all unsolicited commercial e-mail messages to include the actual name, mailing address, e-mail address and telephone number of the sender, and requires such senders to remove recipients from their distribution lists when asked to do so. The bill was tacked on as an amendment to a bill prohibiting the practice of "slamming," or switching people's long-distance carriers without their permission. The bill has alienated First Amendment proponents who feel that free-speech rights are being impinged.

Second, in March, Bigfoot Partners, L.P., a New York based e-mail forwarding company, obtained a consent decree that severely restricts the activity of Cyber Promotions, Inc., the well-known and much-litigated e-mail spamming service. Bigfoot filed suit in the District Court for the Southern District of New York about six months ago, alleging that Cyber Promotions was, among other things, sending unsolicited e-mail messages in which it falsely identified Bigfoot as the sender. Under the decree, Cyber Promotions is permanently enjoined from sending or causing to be sent any unsolicited e-mail messages "bearing any reference" to Bigfoot's "registered name, the domain name or IP addresses containing the designation bigfoot.com," or any other domain managed by Bigfoot. Bigfoot Partners, L.P. v. Cyber Promotions, Inc., No. 97 Civ. 7397 (S.D.N.Y. Mar. 2, 1998). Violation of the consent decree would impose a $10,000 per day fine on Cyberpromotions, which has greatly limited its spamming activity since a fallout with its Internet service provider in late 1997. In a separate settlement arising out of a lawsuit filed by Earthlink Network Inc. in Los Angeles Superior Court, Cyberpromotions also agreed to refrain from sending unsolicited e-mail advertisements to Earthlink customers, in addition to paying Earthlink $2 million. A seemingly defeated Sanford Wallace, the President of Cyber Promotions, responded to these outcomes, and to the general tide against spamming by "apoligiz[ing] for [his] past actions," and by vowing to "never go back to spamming."

Third, New York Attorney General Dennis Vacco recently announced a crackdown on spamming, especially when it involves fraudulent pyramid schemes. Vacco, who was instrumental in creating the Internet and Computer Unit last year in the AG's office, is supported by Juno Online Services, L.P., an Alley based free e-mail provider. Juno hopes to aid in the effort by using its resources to identify spammers. America Online, Inc. has also been vocal about its desire to rout out spammers, and recently released "AOL's 10 Most Wanted Spammer List."

Finally, software is being launched to help filter out unsolicited e-mail. The software would be installed into a program called Sendmail, one of the most popular programs used in routing and delivering e-mail messages. The new filtering device would recognize spam by identifying known spamming sources and by making it more difficult for spammers to falsify the source of the e-mail. Although First Amendment-minded civil libertarians have voiced their objections against other Internet filtration devices that siphon out "indecent" Web sites, such groups have not yet taken formal action against the anti-spam software.

Emerging Issues in Internet Taxation

The Future of Internet Taxation? Still Uncertain

Although a recent compromise on Internet taxation has eased the tension between state and federal officials on this divisive issue, the two sides are likely to butt heads again before any laws are ultimately passed. Whereas states have generally favored taxing e-commerce businesses in order to increase tax revenues and to prevent on-line vendors from having a cost-cutting advantage over local businesses, the federal government would rather see a tax-free Internet in order to spur the growth of the nascent e-commerce industry.

In March, the National Governors Association agreed to support a re-negotiated House bill sponsored by Rep. Christopher Cox (R - CA) that now imposes a three-year moratorium on new taxes against On-line service providers (OSPs) and electronic commerce. By comparison, the pending Senate bill (the Internet Tax Freedom Act) proposes a six-year moratorium on Internet taxation.

Although the current House bill has wide support, neither side seems to be completely satisfied with the compromise. Reacting to the announcement of the compromise bill, Senator Ron Wyden (D - OR), the sponsor of the Internet Tax Freedom Act, expressed skepticism; on the other side of the debate, state and local authorities appeared to press for further concessions.

As recently as February 26, President Clinton stated that he was prepared to fully support tax legislation that is significantly more generous to e-commerce vendors than that embodied in the compromise bill.

New York Goes Easy On Internet Taxation

A recent decision by the New York State Department of Taxation and Finance granting tax-relief to a Web site developer is an example of how New York is one of the few states (along with California and Virginia) that tends to side with the federal government on the issue of Internet taxation.

In an advisory opinion, the Department ruled that Stone Soup Multimedia, a Silicon Alley design firm, is not subject to New York State and local sales and compensating use taxes for the services that it performs. State of New York Dep't of Taxation and Finance, 1997 N.Y. Tax LEXIS 549 (December 29, 1997).In addition to Web site development, Stone Soup Multimedia also registers and maintains domain names for its clients, services that were also ruled to be exempt from taxation.

 

Internet Legislation and Initiatives

Copyright Bills Clear House Subcommittee

As expected, the 105th Congress started its second session by addressing some of the pending legislation that deal with regulation of the Internet. On May 14, the Senate passed the Digital Millenium Copyright Act (S. 2037), which was strongly backed by Senator Orrin Hatch and which, among other things, exempts Internet Service Providers (ISPs) from being sued for monetary damages for the misconduct of third parties in network functions such as transmission, routing and connectivity.

The Digital Millenium Copyright Act implements two treaties passed by the World Intellectual Property Organization, and its treatment of ISPs is widely viewed as a compromise between ISPs and those who favor widening the net of liability for misconduct on the Internet. Perhaps because the Act represents more of a middle-ground between both camps, its path has been smoother than the House bill titled the "On-Line Copyright Infringement Liability Limitation Act" (HR 3209), which treats ISPs less favorably and which is still awaiting further review in the House.

The Digital Millenium Copyright Act also puts companies more at ease about promoting digital transmissions of music, software and other copyrighted materials by strengthening their intellectual property rights against Internet pirates.

Silicon Alley Continues to Lure New Media Companies

New York lawmakers continue to roll out the red carpet to encourage more new media start-ups to set up shop in the State. On March 4, 1998, Assemblyman Sheldon Silver announced a new set of tax incentives that includes a sales tax exemption for high-tech companies that purchase computer equipment, a refundable credit for new jobs created, and preferential tax treatment of capital gains from investing in New York businesses. The next day, Governor Pataki introduced another set of incentives aimed at reviving ailing high-tech companies in New York. These initiatives closely follow similar initiatives that were recently announced by New York City Council Speaker Peter Vallone.

Mayor Giuliani, however, recently suggested limiting one of the initiatives designed to earmark $30 million in low-cost loans to emerging high-tech companies by expressing a desire to set aside half of that fund for aiding businesses in distress, regardless of the industry sector involved.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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