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Current US Business Law Developments

Intellectual Property Law

In December, 2011, the United States Patent and Trademark Office (USPTO) announced a final rule change to the newly introduced "Track One" Fast-Track-Patent-Processing rules. Under the rules, an applicant may, for an additional fee, request prioritized examination for applications for which a request for continued examination has been made on, before or after December 19, 2011.

The passing into law of the America Invents Act in September, 2011, includes provision for prioritized examination of patent applications. The goal of prioritization is to provide a final disposition within twelve months of prioritized status having been granted.

In his annual speech in November, 2011, David J. Kappos, Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office, announced that: "During 2011, the USPTO issued its' eight millionth patent and reduced the backlog of patent applications awaiting first action to 'well below' 700,000. A milestone achieved through a series of initiatives undertaken to improve the speed and quality of patent processing."

In May, 2010, the United States Patent and Trademark Office (USPTO) had announced the expansion to all applicants of its “Project Exchange” program, which was expected to substantially reduce the backlog of unexamined patents pending before the Office.

Under the expanded Project Exchange, any applicant with more than one application, filed prior to the inception of the program could receive an expedited review of one application in exchange for withdrawing an unexamined application.

The expanded Project Exchange gave all applicants with multiple filings greater control over the priority in which their applications were examined and enabled priority applications to be examined on an expedited basis.

By providing incentives for applicants to withdraw unexamined applications that were no longer important to them, the USPTO hoped that Project Exchange would appreciably reduce the backlog of unexamined patent applications.

The expanded Project Exchange was limited to 15 applications per entity, although the scheme was only temporary and closed at the end of 2010.

Whereas new patent applications are normally taken up for examination in the order they are filed, applications prioritized under this pilot were advanced in the examination queue.

As of August 2009, the USPTO had a patent application backlog of more than 770,000. Moreover, there are long waiting periods for patent review, and the office has information technology systems that are regarded as outdated and an application process in need of modernization.

According to a study by London Economics released on behalf of the UK Intellectual Property Office, the cost to the global economy of the delay in processing patent applications may be as much as USD11.5bn each year, preventing hi-tech businesses in sectors such as telecoms, aviation and engineering from getting to market as quickly as they otherwise could.

In December, 2008, the Recording Industry Association of America made a decision to drop its independent prosecutions of online copyright violators, instead making it the sole responsibility of the Internet Service Providers concerned. The RIAA believes its decision will enable a wider spectrum of illegal file sharers to be caught and prosecuted, with a graduated series of sanctions being dealt out by the ISPs.

Under the move, the RIAA will reach agreements with ISPs, allowing it to work in the background to identify those individuals it believes to be illegally downloading and sharing music files online, and will then send emails detailing its findings to the ISPs in question.

It will then be the job of the ISPs to impose appropriate punishments based upon the extent of the copyright infringements.

The first step will normally be to contact an offender with an official warning. If this is ignored, however, then the ISP will have the power to slow down the individual's internet connection to deter them from downloading, and ultimately, if both these measures fail, then the ISP will simply disconnect the individual and permanently block their internet access. Individuals will have the right to challenge ISPs' actions under an administrative procedure to be set in place.

The RIAA has adopted this new approach as a drastic last-ditch attempt to challenge the unremitting level of copyright abuse which has been continuing since 2003.

The past five years has seen over 35,000 American individuals successfully convicted and punished on the basis of copyright infringement, yet this has done little to reduce the overall number of people taking part in the activity on an annual basis.

In July 2007, the US Senate Judiciary Committee adjusted the terms of the Patent Reform Act of 2007, limiting infringement damages, and seeking to put an end to 'forum shopping' for patent disputes.

The legislation, introduced earlier in the year, updates current patent laws to provide reforms for patent seekers and patent holders alike.

Among many important reforms, the bipartisan, bicameral bill would create a pure "first-to-file" system to bring clarity and certainty to the US patent system. The bill also attempts to create a more "streamlined and effective" way of challenging the validity and enforceability of patents, by allowing reviews to be undertaken of patents after they have been granted.

An amendment put forward by the Chairman of the Senate Judiciary Committee, Patrick Leahy (D-Vt) would limit the amount of infringement damages that could be claimed "unless the claimant shows that the patent's specific contribution over the prior art is the predominant basis for market demand for an infringing product or process".

Meanwhile, ranking Committee member, Arlen Specter (R-Penn) proposed linking the forum in which a patent dispute can be heard to the plaintiff's place of residence or business, or the area in which the infringement is alleged to have primarily taken place.

The bill is co-sponsored by Senator Leahy and Senator Orrin Hatch (R-Utah), with the lower House companion bill sponsored by Rep. Howard Berman (D-Cal).

Although Senator Leahy was keen to get the bill approved and onto the Senate floor as soon as possible, several of the panel members called for more time to discuss the proposed changes to the legislation.

The bills were subsequently approved by both the Senate and House Judiciary Committees.

While the legislation has the strong support of the technology sector (which sees itself as more vulnerable to patent infringement actions as a result of the amount of patented technology contained in hi-tech products), pharmaceutical and biotechnology firms are less supportive, arguing that the labour and cash-intensive process of developing a new drug requires cast-iron patent protection, over as long a period as possible.

In May 2007, US Attorney General Alberto R. Gonzales highlighted the Justice Department’s ongoing efforts to protect intellectual property rights, and unveiled a comprehensive legislative proposal, entitled the “Intellectual Property Protection Act of 2007”, to members of the US Chamber of Commerce Coalition Against Counterfeiting and Piracy.

In addition to the proposed legislation, the Department’s ongoing commitment to combating intellectual property includes measures for implementing valuable resources, and aggressively prosecuting counterfeiters, both elements of the government-wide Strategy Targeting Organized Piracy (STOP) Initiative.

The Intellectual Property Protection Act of 2007 submitted to Congress by AG Gonzales aims to enhance the Justice Department's ability to prosecute crimes and protect the intellectual property rights of citizens and industries.

Among its many provisions, the Act includes measures that would:

  • Increase the maximum penalty for counterfeiting offenses from 10 years to 20 years imprisonment where the defendant knowingly or recklessly causes or attempts to cause serious bodily injury, and increase the maximum penalty to life imprisonment where the defendant knowingly or recklessly causes or attempts to cause death;
  • Provide stronger penalties for repeat-offenders of the copyright laws;
  • Implement broad forfeiture reforms to ensure the ability to forfeit property derived from or used in the commission of criminal intellectual property offenses;
  • Strengthen restitution provisions for certain intellectual property crimes (e.g., criminal copyright and DMCA offenses); and
  • Ensure that the exportation and transhipment of copyright-infringing goods is a crime, just as the exportation of counterfeit goods is now criminal.

Introducing the proposed legislation, Gonzales observed that:

"IP theft is not a technicality, and its victims are not just faceless corporations — it is stealing, and it affects us all. Those who seek to undermine this cornerstone of US economic competitiveness believe that they are making easy money; that they are beyond the law. It is our responsibility and commitment to show them that they are wrong."

Also in May 2007, the US Supreme Court delivered a key decision on the role that the 'obviousness' of an invention which contains pre-existing technologies should have in the granting, or otherwise, of a patent.

The case of KSR International Co. v. Teleflex Inc centred on gas pedals manufactured and supplied by KSR to General Motors, which contain technology allowing them to be adjusted according to the height of the driver, in addition to containing an electronic engine control system.

Teleflex took infringement action against KSR in 2002, arguing that it owned the patent for such a combination of technologies. KSR countered that the obviousness of the combination should invalidate Teleflex's patent.

KSR won its case in Federal District Court in Detroit, but that decision was rejected by the United States Court of Appeals for the Federal Circuit in 2005.

The Supreme Court's verdict reversed the appeals court decision and the case was sent back to the Detroit District Court, in a move which could have far-reaching implications for the granting of patents in the United States.

Writing on behalf of his peers, Justice Anthony Kennedy reportedly observed that:

"Granting patent protection to advances that would occur in the ordinary course without real innovation retards progress and may ... deprive prior inventions of their value."

Earlier that month, The Office of the United States Trade Representative on Monday published that year's edition of the Special 301 report on the perceived adequacy and effectiveness of intellectual property rights (IPR) protection by US trading partners.

“Innovation is the lifeblood of a dynamic economy here in the United States, and around the world. We must defend ideas, inventions and creativity from rip off artists and thieves,” explained US Trade Representative Susan C. Schwab, adding:

“This report underscores the Administration’s scrutiny in pinpointing challenges in protecting IPR and signals to our trading partners that effective IPR protection will remain a critical focus in US policy.”

As in previous years, the USTR’s Special 301 report highlighted the prominence of concerns with respect to China and Russia, in spite of some evidence of improvement.

The USTR explained that:

"Russia remains a focus of US trade policy in the area of intellectual property. Large-scale production and distribution of IP-infringing optical media and minimally-restrained Internet piracy are among the major problems that require more enforcement action."

"The coming months will be a critical period, as Russia moves to implement a variety of legal and law enforcement improvements to which it committed as part of a bilateral agreement with the United States on Russia’s eventual accession to the World Trade Organization (WTO). Implementation of these commitments will be essential to completing the final multilateral negotiations on the overall accession package."

However, the department added that:

"Russia made ambitious commitments to improve its IPR protection and enforcement. As part of the Special 301 report, USTR is also announcing an out-of-cycle review to evaluate Russia’s progress."

Similar out-of-cycle reviews will be carried out with respect to Brazil, the Czech Republic and Pakistan.

The Special 301 report also provided an opportunity for the US to recognize progress. Brazil is being moved to the Watch List (from Priority Watch List), reflecting significant improvements in copyright enforcement, and five other trading partners – Bahamas, Bulgaria, Croatia, the EU, and Latvia – are being removed from the Special 301 listing altogether.

This year’s Special 301 report places 43 countries on the Priority Watch List (PWL), Watch List (WL) or the Section 306 monitoring list.

Countries on the Priority Watch List are not deemed to provide an adequate level of IPR protection or enforcement, or market access for persons relying on intellectual property protection. In addition to China and Russia, 10 countries are on the PWL in this year’s report: Argentina, Chile, Egypt, India, Israel, Lebanon, Thailand, Turkey, Ukraine, and Venezuela.

Thirty trading partners are on the lower level Watch List, meriting bilateral attention to address the underlying IPR problems. The Watch List countries are: Belarus, Belize, Bolivia, Brazil, Canada, Colombia, Costa Rica, Dominican Republic, Ecuador, Guatemala, Hungary, Indonesia, Italy, Jamaica, Korea, Kuwait, Lithuania, Malaysia, Mexico, Pakistan, Peru, Philippines, Poland, Romania, Saudi Arabia, Taiwan, Tajikistan, Turkmenistan, Uzbekistan, and Vietnam.

Paraguay will continue to be subject to Section 306 monitoring under a bilateral Memorandum of Understanding that establishes objectives and actions for addressing IPR concerns in that country.

In April 2007, the US Trade Representative announced that the United States would be making two requests for World Trade Organization (WTO) dispute settlement consultations with the People’s Republic of China: one over deficiencies in China’s legal regime for protecting and enforcing copyrights and trademarks on a wide range of products, and the other over China’s barriers to trade in books, music, videos and movies.

"Piracy and counterfeiting levels in China remain unacceptably high,” Ambassador Schwab explained, continuing:

“Inadequate protection of intellectual property rights in China costs US firms and workers billions of dollars each year, and in the case of many products, it also poses a serious risk of harm to consumers in China, the United States and around the world. We acknowledge that China’s leadership has made the protection of intellectual property rights a priority and has taken active steps to improve IPR protection and enforcement."

"However, while the United States and China have been able to work cooperatively and pragmatically on a range of IPR issues, and China has taken numerous steps to improve its protection and enforcement of intellectual property rights, we have not been able to agree on several important changes to China’s legal regime that we believe are required by China’s WTO commitments."

"Because bilateral dialogue has not resolved our concerns, we are taking the next step by requesting WTO consultations. We will continue to welcome dialogue with China in an effort to resolve these issues. We also look forward to continuing fruitful bilateral discussions with China on other important IPR matters we have been working on together, since achieving comprehensive IPR protection requires concerted efforts on many fronts. Ultimately, it is in the best interest of all nations, including China, to protect intellectual property rights.”

The US Trade Representative added:

“In the same vein, we have discussed with China in detail the harm to US industries, authors and artists who produce books, journals, movies, videos, and music caused by limiting the importation of these products to Chinese state-owned entities, and the problems caused by Chinese laws that hobble the distribution of foreign home entertainment products and publications within China. These products are favorite targets for IPR pirates, and the legal obstacles standing between these legitimate products and the consumers in China give IPR pirates the upper hand in the Chinese market.”

“As we continue to have an open dialogue with China in an effort to resolve these particular issues with the help of the WTO dispute resolution mechanisms, we will of course also continue to put serious efforts into our joint work with China on innovation policy, intellectual property protection strategies, and the range of other important matters in our bilateral economic relationship through the U.S. – China Strategic Economic Dialogue and the Joint Commission on Commerce and Trade.”

The USTR announcement came despite the decision that week by the Chinese Supreme People's Court to reduce the threshhold levels for music and movie piracy, effective immediately.

Following the decision, anyone possessing more than 500 pirated DVDs or CDs (down from 1,000) will face criminal prosecution with gaol terms of up to three years, instead of fines, while possession of more than 2,500 pirated items (down from 5,000) will triggers more severe penalties of up to seven years in prison.

BACK TO TOP

Media Law

In April, 2010, the United States Court of Appeals ruled that the US Federal Communications Commission (FCC) did not have the authority to dictate an internet service provider’s network management practices but, in a statement a month later, the FCC announced that it believes it has found the way to continue its broadband regulatory role.

In 2007, several subscribers to Comcast’s high-speed internet service discovered that the company was interfering with their use of peer-to-peer (P2P) networking applications. P2P programmes allow users to share large files directly with one another without going through a central server. Such programs also consume significant amounts of bandwidth, and Comcast argued that it had an obligation to manage its network capacity for its customers.

The FCC then attempted to enforce “net neutrality” principles and barred Comcast from interfering with its customers’ use of P2P networking applications by exercising an authority within the Communications Act. It said that its action was “reasonably ancillary to the... effective performance of its statutorily mandated responsibilities.” However, the court decided that the FCC had failed to tie its assertion of ancillary authority over Comcast’s internet service to any such responsibility, and found for Comcast.

The Comcast court decision created a serious problem for the FCC to continue its broadband policies, including reforming the Universal Service Fund to provide broadband to all Americans, protecting consumers and promoting competition by ensuring transparency regarding broadband access services, safeguarding the privacy of consumer information and preserving the free and open internet. There was uncertainty about the FCC’s ability to perform the basic oversight functions it felt to be essential and appropriate.

Therefore, since the decision, the FCC has been searching for a way forward. Its chairman, Julius Genachowski, however, announced on May 6 that it believes it has found a way to continue its role.

The court decision had, he said, cast serious doubt on the particular legal theory the FCC had used since 2002 to justify its backstop role with respect to broadband internet communications. The FCC had then decided to classify a broadband internet access service not as a “telecommunications service” for purposes of the Communications Act, but as something different - an “information service.”

That decision had led to broadband becoming the type of service over which the FCC could exercise only the indirect “ancillary” authority judged inadequate in the Comcast case, as opposed to the clearer direct authority exercised over telecommunications services.

While the FCC could, at this stage, fully reclassify internet communications as a “telecommunications service,” thereby restoring the FCC’s direct authority over broadband communications networks, but also imposing on providers of broadband access services dozens of new regulatory requirements, Julius Genachowski said that the FCC’s lawyers had found another option.

Under this option, the FCC will only recognize the transmission component of broadband access service as a telecommunications service, and apply only the handful of provisions under Title II of the Communications Act that, prior to the Comcast decision, were widely believed to be within the FCC’s purview for broadband.

It will also forbear from application of the many sections of the Communications Act that it considers are unnecessary and inappropriate for broadband access service, and put in place up-front forbearance and meaningful boundaries to guard against regulatory overreach.

Genachowski said that this approach will place federal policy regarding broadband communications services on the soundest legal foundation, thereby eliminating as much of the current uncertainty as possible, and would restore the status quo. It will not change the range of obligations that broadband access service providers faced pre-Comcast.

However, it is now being said in some quarters that the treatment of broadband as a “telecommunications service” will, in itself, create uncertainty over the extent of the FCC’s powers in the future. While the current FCC may exercise forbearance, for example, over net neutrality, the FCC might well be able to extend its reach in the future by widening the scope of its regulatory powers under the Act.

Google reached a November, 2008, agreement with the Authors Guild and the Association of American Publishers (AAP) under which the firm will pay USD125m to resolve outstanding legal actions against it in relation to its Google Book search service, which offers full-text searching facilities to users.

The agreement, reached after two years of negotiations, and which is subject to approval by the US District Court for the Southern District of New York. would resolve a class-action lawsuit brought by book authors and the Authors Guild, as well as a separate lawsuit filed by five large publishers as representatives of the AAP’s membership. These lawsuits challenged Google’s plan to digitize, search and show snippets of in-copyright books and to share digital copies with libraries without the explicit permission of the copyright owner.

The money will be used to establish the Book Rights Registry, to resolve existing claims by authors and publishers and to cover legal fees. Holders worldwide of US copyrights can register their works with the Book Rights Registry and receive compensation from institutional subscriptions, book sales, ad revenues and other possible revenue models, as well as a cash payment if their works have already been digitized.

Google says that the agreement would:

  • Provide more access to out-of-print books by generating greater exposure for millions of in-copyright works, including hard-to-find out-of-print books, by enabling readers in the US to search these works and preview them online;
  • Further expand the electronic market for copyrighted books in the US, by offering users the ability to purchase online access to many in-copyright books; and
  • Provide free, full-text, online viewing of millions of out-of-print books at designated computers in US public and university libraries.

“This historic settlement is a win for everyone,” said Richard Sarnoff, Chairman of the Association of American Publishers. “From our perspective, the agreement creates an innovative framework for the use of copyrighted material in a rapidly digitizing world, serves readers by enabling broader access to a huge trove of hard-to-find books, and benefits the publishing community by establishing an attractive commercial model that offers both control and choice to the rightsholder.”

“Google's mission is to organize the world's information and make it universally accessible and useful. Today, together with the authors, publishers, and libraries, we have been able to make a great leap in this endeavor,” said Sergey Brin, co-founder & president of technology at Google. “While this agreement is a real win-win for all of us, the real victors are all the readers. The tremendous wealth of knowledge that lies within the books of the world will now be at their fingertips.”

“It’s hard work writing a book, and even harder work getting paid for it,” said Roy Blount Jr., President of the Authors Guild. “As a reader and researcher, I’ll be delighted to stop by my local library to browse the stacks of some of the world’s great libraries. As an author, well, we appreciate payment when people use our work. This deal makes good sense.”

In July 2007, John Lefebvre, the founder and former president of payment services company Neteller, pleaded guilty to charges that he conspired with others to promote illegal gambling by providing payment services in the United States to offshore internet gambling businesses.

According to Michael J. Garcia, the United States Attorney for the Southern District of New York, the Neteller Group provided payment services to internet gambling businesses located outside the United States, so those businesses could take bets from gamblers in the United States, where such betting is now illegal.

Lefebvre and fellow co-founder Stephen Lawrence, both Canadian citizens, were arrested in connection with the charges in January.

Neteller PLC, formerly known as Neteller, Inc., is an internet payment services company that was founded by Lawrence and Lefebvre in 1999. Neteller is based in the Isle of Man and its shares are listed on the London Stock Exchange, although trading in the company's stock has been suspended.

Neteller began processing internet gambling transactions in approximately July 2000. Internet payment services companies like Neteller allow gambling companies to transfer money collected from United States customers to bank accounts outside the United States. According to Neteller’s 2005 annual report, Lawrence and Lefebvre, through Neteller, provided payment services to more than 80% of worldwide gaming merchants.

Both defendants held senior positions within Neteller; Lawrence served as the company's chief executive officer until December 2002, its executive director from 2001 until mid-2003 and as chairman until May 2006. Lefebvre was president of the company from 2000 until 2002 and a board member until approximately December 2005.

Neteller has revealed that as of 18 January 2007, US customers were no longer able to transfer funds using its services to or from any online gambling site. The company's board made the decision in the light of the passing of the Unlawful Internet Gaming Enforcement Act of 2006 (UIGEA) by Congress last year, and the attendant.

In 2005, it is said that Neteller processed over $7.3 billion in financial transactions, and prosecutors alleged that 95% of the firm's revenue was derived from money transfers involving internet gambling companies.

Lefebvre pleaded guilty to a number of charges, including: one count of conspiracy to use the wires to transmit in interstate and foreign commerce bets; conducting illegal gambling businesses; engaging in international financial transactions for the purpose of promoting illegal gambling; and operating an unlicensed money transmitting business.

Lefebvre, 55, faces a maximum sentence of 5 years’ imprisonment and a fine of $250,000, or twice the gross gain or loss from the offense, when he is sentenced before United States District Judge P. Kevin Castel on October 29, 2007. Lawrence also admitted to forfeiture allegations, requiring him to forfeit $100 million.

In a related case, Lawrence pleaded guilty on June 29, 2007 to participating in the same conspiracy and also admitted to a forfeiture allegation of $100 million, for which he is jointly responsible with Lefebvre.

In June 2007, the government of Antigua and Barbuda argued that it is entitled to compensation of US$3.4 billion from the United States to rectify the damage to its economy caused by the long-running e-gaming dispute between the two countries.

If given the go-ahead by the World Trade Organisation, Antiguan finance minister Errol Cort said in a statement that the compensation would take the form of withdrawing intellectual property protection for US trademarks, patents and industrial designs.

"We feel we have no other choice in the matter, we have fought long and hard for fair access to the US market and have won at every stage of the WTO process," said Cort. "Until such time as the United States is willing to work with us on achieving a reasonable solution to this trade dispute, we will continue to use every legitimate remedy available to protect the interests of our citizens."

The WTO’s Dispute Settlement Body was set to review Antigua & Barbuda's request at its end of July sitting and decide whether such sanctions are reasonable. If approved, the sanctions could be put into place immediately thereafter. However the US also has the right to refer the issue to further arbitration and was expected to exercise this option, thus stringing out the protracted dispute for at least another three to four months, with the dispute panel's decision not expected to come until the end of the year.

The dispute between the two countries began when the US decided to block banks and credit card companies from processing payments made by US residents to online gaming companies based offshore, citing both moral and security justifications. A huge proportion of the global e-gaming market was thus wiped out at a stroke for the 32-registered online casinos in Antigua & Barbuda, a move which also threatens the jurisdiction's attempts to diversify its economy. According to the Antiguan government, income has fallen to $130 million a year from $1 billion among the jurisdiction's online casinos in 2000, when earlier US restrictions on online gaming were imposed.

The United States decision to withdraw from one of its WTO commitments after it finally lost its battle with Antigua and Barbuda provoked a storm of outrage and concern. The previous month, it emerged that the United States had decided to sidestep the ruling by the WTO dispute resolution panel in favour of Antigua by simply rescinding one of its services agreements. "We did not intend and do not intend to have gambling as part of our services agreement," stated Deputy US Trade Representative John K. Veroneau, in an announcement that shocked many observers. "What we are doing is just clarifying our commitments."

The WTO treaty allows a country to withdraw commitments to open its services market to foreign investors. However, the US could potentially have to renegotiate with any of the other 149 member countries if they raise objections to its decision. Member countries affected by the US ban on offshore online gaming firms may also have a case to claim compensation from the US government.


In April 2007, Rep. Barney Frank (D-MA) has introduced legislation into the House of Representatives that would create an exemption to the ban on online gambling for properly licensed operators, allowing Americans to lawfully bet online.

The Internet Gambling Regulation and Enforcement Act of 2007 establishes a federal regulatory and enforcement framework to license companies to accept bets and wagers online from individuals in the US, to the extent permitted by individual states, Indian tribes and sport leagues. All such licenses would include protections against underage gambling, compulsive gambling, money laundering and fraud.

“The existing legislation is an inappropriate interference on the personal freedom of Americans and this interference should be undone,” said. Rep. Frank, who is Chairman of the House Financial Services Committee.

In 2006, the House passed the Unlawful Internet Gambling Enforcement Act, restricting the handling of payments by US financial institutions for unlawful forms of internet gambling. That law prohibits the use of payment instruments by such institutions to handle the processing of any form of internet gambling that is illegal under US federal or state law.

Frank argued that traditional forms of legalized gambling already exist in nearly every state and by continuing to prohibit internet gambling in the US, Americans who choose to gamble online are without meaningful consumer protections. He said that the proposed legislation would institute practical and enforceable standards to bring transparency to internet gambling and provide consumers the protections they expect and deserve.

In March 2007, the Recording Industry Association of America launched a new and strengthened campus anti-piracy initiative that significantly expands the scope and volume of its deterrent efforts, while offering a new process that gives students the opportunity to avoid a formal lawsuit by settling prior to a litigation being filed.

The RIAA, on behalf of the major record companies, sent 400 pre-litigation settlement letters to 13 different universities. Each letter informed the school of a forthcoming copyright infringement lawsuit against one of its students or personnel.

The RIAA requested that universities forward those letters to the appropriate network user. Under this new approach, a student (or other network user) can settle the record company claims against him or her at a discounted rate before a lawsuit is ever filed.

The initial wave of the new initiative included letters in the following quantities sent to: Arizona State University (23 pre-settlement litigation letters), Marshall University (20), North Carolina State University (37), North Dakota State University (20), Northern Illinois University (28), Ohio University (50), Syracuse University (37), University of Massachusetts – Amherst (37), University of Nebraska – Lincoln (36), University of South Florida (31), University of Southern California (20), University of Tennessee – Knoxville (28), and University of Texas – Austin (33).

The RIAA, on behalf of the major record companies, will pursue hundreds of similar enforcement actions against university network users each month.

“We have transformed how we do business, and online music has experienced a sea change compared to three years ago,” observed Mitch Bainwol, Chairman and CEO of the RIAA.

He continued:

“A legal marketplace that barely existed in 2003 is now a billion dollar business showing real promise. Many rogue sites have gone under and fans have a far better understanding of the right and wrong ways to enjoy music. No matter how much we adapt, though, any new business model must always necessarily rely upon a respect for property rights. That’s why we must continue to enforce our rights.”

BACK TO TOP

Financial Law

In late March, 2012, the US Chamber of Commerce published the 2012 Financial Regulatory Reform Card. The report card evaluates the progress made by regulators in implementing Dodd-Frank rules. The four categories graded are:

  • Protecting diversity of capital formation;
  • Reforming corporate governance;
  • Ensuring U.S. competitiveness through financial regulatory reform and;
  • Preserving the integrity of accounting and auditing.

Each category contains a number of subcategories that are also graded. The report includes 'suggestions to improve the grade and how regulators and Congress can complete the task to ensure that the ultimate outcome of regulatory reform is a robust capital formation system that benefits consumers, investors, and job creators.
Failure to get it right will deprive job creators of the investments, loans, and other forms of credit they need.'

In May, 2010, the United States Senate approved legislation which would lead to the most radical shake-up of US financial regulation since the 1930s.

The Restoring American Financial Stability bill has been drawn up to prevent a repeat of the events which led to the financial crisis and the deepest economic recession since the Great Depression. The legislation scraped through the Senate on the afternoon of May 20 after securing vital Republican votes. It must now be reconciled with companion legislation pending in the House of Representatives before President Obama can sign the legislation into law.

The main provisions of the bill include:

  • The creation of an independent consumer protection watchdog, housed at the Federal Reserve which will be tasked with ensuring that American consumers receive clear and accurate information when shopping for mortgages, credit cards, and other financial products, and protecting them from hidden fees, abusive terms, and deceptive practices;
  • Tough new capital and leverage requirements on 'too big to fail' financial institutions in a bid to prevent the taxpayer from having to bail out failed banks, including new rules on how failed financial firms are liquidated and more rigorous standards and supervision on the financial industry;
  • The creation of a new council to identify and address systemic risks posed by large, complex companies, products, and activities and to provide an 'advanced warning system' of looming systemic threats;
  • Tougher transparency requirements for certain unregulated and over-the-counter financial instruments;
  • A streamlined federal banking supervision system which will supposedly protect smaller community banks;
  • Giving shareholders a greater say on executive compensation practices;
  • Tougher transparency rules for credit ratings agencies; and
  • Stronger oversight and enforcement powers for regulators to allow them to pursue cases of fraud, conflicts and manipulation more aggressively.

The bill is based largely on the blueprint for financial regulatory reform announced by the President earlier this year, and Obama welcomed the Senate vote.

"Our goal is not to punish the banks, but to protect the larger economy and the American people from the kind of upheavals that we’ve seen in the past few years. And today’s action was a major step forward in achieving that goal," he commented shortly after the Senate vote.

"There will be no more taxpayer-funded bailouts -- period. If a large financial institution should ever fail, we will have the tools to wind it down without endangering the broader economy. And there will be new rules to prevent financial institutions from becoming 'too big to fail' in the first place, so that we don’t have another AIG," he added.

The President sought to counter claims that the legislation would strangle the US financial industry and reduce its international competitiveness.

"The reform I sign will not stifle the power of the free market. It will simply bring predictable, responsible, sensible rules into the marketplace. Unless your business model is based on bilking your customers and skirting the law, you should have nothing to fear from this legislation," Obama argued.

However, many Senate Republicans continued to criticize the proposed law. Nevada Senator John Ensign said that the Wall Street bill could create "unintended consequences" which could ultimately "bring more damage" on the US economy, while Texas Senator John Cornyn fears that the bill would punish "small business owners and community bankers who had little or nothing to do with the economic crisis."

Warnings were voiced at a November, 2008, Bermuda insurance conference over the threat posed by US Congressman Richard Neal's legislation to Bermuda’s thriving insurance market.

Growing concern has mounted following the Congressman’s proposal, introduced into the House of Representatives in September, which would end the advantage of offshore reinsurance entities over American companies. The bill disallows deductions for excess reinsurance premiums with respect to US risks paid to affiliated insurance companies that are not subject to US tax. The legislation also provides the US Treasury with authority to prevent avoidance of the provisions of the bill.

At the recent conference XL Capital CEO Michael McGavick warned that the move would have a huge impact on the Bermudan insurance industry saying, “the threat to Bermuda's insurance industry coming from some quarters in Washington was more than just rhetoric.”

The threat was further emphasised by Finance Minister Paula Cox who said “the US tax issue is a real threat to Bermuda's national economic interests and a threat we take seriously,” although she added that the Bermuda government and insurance industry are lobbying hard to put their case across.

Bermudan insurers feel the move is unfair arguing that the reason why insurance firms are so prominent in Bermuda is because of the complexity of the US regulatory system, and the added complexity of having to file separate forms for each state.

Bradley Kading, President of Association of Bermuda Insurers and Reinsurers has described the move as a triple economic whammy for US citizens wishing to get insured and a straightjacket for insurers needing capital:

“The likely outcome of this discriminatory tax legislation would be to make it more expensive and difficult for US consumers to get insurance protection. This is not what American consumers need when they are also dealing with housing market chaos, financial instability and record high gas prices," he said in September.

According to Neal, since 1996, the amount of reinsurance sent to offshore affiliates has grown dramatically, from a total of USD4bn ceded in 1996 to USD34bn in 2007, including USD19bn alone to Bermuda affiliates. There has also been a steep rise in premiums written in the US by offshore entities, which have doubled in the last decade, representing USD54bn in direct premiums written in 2006. Again, Bermuda-based companies represent the bulk of this growth, although Switzerland is also a favourable jurisdiction due to its network of tax treaties.

In July 2007, the US Securities and Exchange Commission voted unanimously to adopt a new antifraud rule under the Investment Advisers Act that will clarify the Commission's ability to bring enforcement actions under the Advisers Act.

"This rule applies to investment advisers not only of hedge funds, but also of private equity funds, venture capital funds, and mutual funds. Collectively, these funds hold trillions of dollars of investors' assets and play an important and growing role in our capital markets," explained SEC Chairman Christopher Cox.

"The rule will give the Commission an important tool to help us police this market — to deter misconduct and to call to task those who breach their obligations to investors."

The new rule will make it a fraudulent, deceptive, or manipulative act, practice, or course of business for an investment adviser to a pooled investment vehicle to make false or misleading statements to, or otherwise to defraud, investors or prospective investors in that pool.

The rule will apply to all investment advisers to pooled investment vehicles, regardless of whether the adviser is registered under the Advisers Act.

Under the new rule, a pooled investment vehicle will include any investment company and any company that would be an investment company but for the exclusions in Sections 3(c)(1) or 3(c)(7) of the Investment Company Act.


Also in July 2007, it emerged that the United States Supreme Court had agreed to hear a case involving the deductibility of fees incurred by trust managers, with the verdict promising to have widespread ramifications for the US trust industry.

The case of Knight v. Commissioner of Internal Revenue, comes to the Supreme Court on appeal from the Second Circuit US Court of Appeals in New York. The outcome of the case rests on whether the court decides that trustees may deduct fees paid to outside advisors in the course of managing assets in the trust, and if so, how much.

Trustees may deduct fees, known as trustees' commissions, for managing trusts, but the lower courts have been unable to agree whether fees paid to investment advisors such as banks are deductible. The issue is complicated by the fact that the law seems to be being applied differently across the states, with some allowing the trustee to fully deduct the outside advisory fee, and others arguing that the expenses don't qualify as above-the-line deductions, and are subject to the standard 2% miscellaneous deductions limitation, as stipulated in the Internal Revenue Code.

The case was brought by Michael Knight, trustee of the Rudkin Trust, who claimed a full deduction for the trust's investment management fees based on an earlier decision by the Sixth Circuit Court of Appeals. However, he subsequently lost the case in the US Tax Court, and an appeal to the Second Circuit was dismissed.

While the case was not anticipated to have a great effect on the US trust industry in terms of lost business, the verdict is expected to reach far and wide in terms of how trustees and their accountants approach the issue of tax.


In June 2007, it emerged that new legislative proposals that would tax as corporations all publicly traded partnerships that directly or indirectly derive income from investment adviser or asset management services would leave the majority of US venture capital firms unaffected.

Responding to the introduction of a bill that aimed to tax such funds at 35% instead of 15%, Mark Heesen, president of the National Venture Capital Association (NVCA), said in a statement that "almost no" venture capital firms would be affected by the proposals since they are aimed at funds which are publicly traded.

"The Bill proposed by Senators Baucus (D-MT) and Grassley (R-IA) is directed at publicly-traded partnerships," Heesen stated. "As almost no venture capital firms are publicly held, this proposed legislation does not impact our business."

Heesen added that the NVCA has met with staff members of the Senate Finance Committee, Joint Tax, and the House of Representatives Ways and Means Committee over previous months to explain how the venture capital model is "taxed correctly".

"We remain hopeful that lawmakers will continue to demonstrate an understanding that the existing venture capital tax structure is appropriate and critical to economic growth in the US," Heesen stated.

The National Venture Capital Association (NVCA) represents approximately 480 venture capital and private equity firms. According to a 2006 Global Insight study, venture-backed companies accounted for 10.4 million jobs and $2.3 trillion in revenue in the United States in 2006.

Senate Finance Committee Chairman Baucus and ranking committee Republican Chuck Grassley introduced the bill because, in the words of Grassley, some firms are "pretending to be something they’re not to avoid most, if not all, corporate taxes".

"It’s unfair to allow a publicly traded company to act like a corporation but not pay corporate tax, contrary to the intent of the tax code," he said upon the bill's introduction, adding: "If left unaddressed, the tax concerns presented by the public offerings of investment managers, like private equity and hedge fund management firms, could fundamentally erode the corporate tax base."

Earlier in June 2007, a former United States Treasury Secretary suggested that fund managers receiving pay through performance fees were not paying their fair share of tax, adding fuel to the debate as to whether curbs should be placed the escalating sums earned by the top fund managers.

Sitting as a panelist at a tax reform conference organised by the Hamilton Project, part of the Brookings Institution, Robert E. Rubin, a Treasury Secretary during the Clinton administration, was asked whether it would be more appropriate for fund managers earning profits from managing others' money, known as carried interest, to pay income tax at rates of up to 35%, instead of capital gains tax, which can be taxed at 15%.

“It seems to me what is happening is people are performing a service, managing peoples’ money in a private equity form, and fees for that service would ordinarily be thought of as ordinary income,” Rubin said. He went on to state that the issue should be examined “with great seriousness” by the Congressional tax committees.

Currently, the standard basic fee structure for managers of hedge and private equity funds is 20% of gains made by the fund, plus a 2% management fee. This has helped to fuel some massive pay increases for the heads of the most successful funds. According to Alpha magazine, the average pay of the 25 top performing fund managers was $570 million last year. The highest paid of these fund managers was James Simons, chairman of Renaissance Technologies, who earned $1.7 billion.

In May 2007, the US Departments of Treasury, Justice, and Homeland Security joined together in issuing the 2007 National Money Laundering Strategy, a report detailing continued efforts to dismantle money laundering and terrorist financing networks.

"The 2007 National Money Laundering Strategy is a direct result of close cooperation by the Departments of Justice, Treasury and Homeland Security, along with our foreign counterparts, and signifies our collective commitment to fight money laundering," announced Assistant Attorney General Alice S. Fisher, of the Justice Department's Criminal Division.

She continued:

"Implementation of this strategy will greatly assist in efforts to seize and forfeit millions in illegal proceeds that flow through the international financial system."

The 2007 Strategy addresses the priority threats and vulnerabilities identified by the Money Laundering Threat Assessment released in 2006.

The Assessment – the first government-wide analysis of its kind – brought together the expertise of regulatory, law enforcement, and investigative officials from across the government, culminating in a comprehensive analysis of specific money laundering methods, patterns of abuse, geographical concentrations, and the associated legal and regulatory regimes.

The 2007 Strategy builds on initiatives and programs pioneered in preceding National Money Laundering Strategies, and places an emphasis on bolstering the efficiency of the anti-money laundering processes currently in place.

"In every type of case, from human smuggling and drug trafficking to intellectual property rights violations and illegal alien employment schemes, the need to hide and move ill-gotten gains is a constant. ICE's anti-money laundering initiatives are at the forefront of attacking existing and emerging money laundering threats" observed Julie L. Myers, Assistant Secretary for Immigration and Customs Enforcement at the Department of Homeland Security.

She added: "ICE's trade transparency unit, bulk cash smuggling initiative and programs targeting illegal money service businesses and stored value card schemes are making it less profitable to commit these crimes."

Additionally, the 2007 Strategy focuses on "leveling the playing field internationally", according to the US Treasury, by "helping to ensure U.S. financial institutions are not disadvantaged through the implementation of controls and standards to combat money laundering and terrorist financing".

The Department concluded:

"Indeed, money laundering is a global threat the United States is working to address through international bodies, including the Financial Action Task Force (FATF), and through direct private sector outreach in regions around the world."

In February 2007, bipartisan legislation was reintroduced into Congress that aimed to close the supposed $17 billion capital gains tax gap by making the tax code fairer and simpler for taxpayers, but placing more reporting requirements on brokers and mutual funds.

The Simplification Through Additional Reporting Tax (START) Act, first introduced in March 2006 was sponsored by Senators Evan Bayh (D-IN) and Tom Coburn (R-OK) and Congressmen Rahm Emanuel (D-IL) and Walter Jones (R-NC).

The legislation will require brokerage houses and mutual fund companies to track and report to taxpayers and the Internal Revenue Service investment information related to capital gains taxes. The lawmakers say that this will make it easier for taxpayers to file their tax returns and help the IRS tackle would-be cheaters who intentionally under-report capital gains, as well as taxpayers who make innocent mistakes on their tax returns.

The most common error, deliberate or otherwise, made by taxpayers when calculating gains from the sale of securities is mis-stating the original purchase price. The new legislation, which is supported by President Bush, would take the reporting out of the taxpayers' hands and require brokers to track the purchase price and report the adjusted-cost basis to the IRS.

In 2005, 32 million taxpayers reported a capital gain or loss.

The lawmakers are forecasting that the legislation would bring in $7 billion in tax revenues over ten years.

"No business would succeed if it failed to collect $17 billion in sales every year, and the United States government can't afford to operate that way either," Bayh observed.

Bayh has said that the START Act makes the tax code fairer by ensuring that the IRS receives an independent verification of individuals' investment value, as currently occurs with wages. Americans cannot underpay their taxes related to wages because their employers submit wage information reports, W-2 forms, to the IRS. No comparable reporting occurs with stocks and capital gains income.

"Reducing the deficit and simplifying the tax code is a win-win for the 130 million taxpayers who are confused by a tax code that becomes more complex and burdensome every year," Bayh concluded.

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Law For Lawyers

In July 2007, US District Judge Lewis Kaplan dismissed charges against more than a dozen former executives of accounting firm KPMG, in a legal ruling that dealt a blow to the US government's crackdown against illegal tax shelters.

In a 64-page opinion, Judge Kaplan ruled that he had little choice but to dismiss the charges against 13 former senior KPMG officials because the government had denied them their constitutional right to counsel by pressuring their former employer to cut off payment of legal fees.

While Judge Kaplan stated that his ruling had been made "with the greatest reluctance", he decided that the Justice Department had "foreclosed these defendants from presenting the defenses they wished to present and, in some cases, even deprived them of counsel of their choice".

"This is intolerable in a society that holds itself out to the world as a paragon of justice," Kaplan wrote.

The case will proceed against against three other former KPMG staff who weren't entitled to have their legal fees covered by the firm, and also against two lawyers who did not work for KPMG.

In August 2005, KPMG agreed to pay $456 million in penalties to cover former clients who participated in tax shelters known as Blips, Flip, Opis and Short Option Strategy. Under the agreement, prosecution was deferred, with the government agreeing to drop charges after 31st December 2006 if KPMG submitted to outside monitoring and discontinued some types of tax-related activity. The withholding of legal fees to the defendants was a condition of this settlement.

The former KPMG employees and two others were accused of helping to structure and sell the tax shelters, which were deemed abusive by the Internal Revenue Service. The agency has estimated that the tax shelters helped investors avoid some $2.5 billion in taxes.

The government has said that the case is the largest criminal trial in US history, and the ruling will be seen as a setback in its fight to stamp out abusive tax sheltering. Prosecutors have admitted that Judge Kaplan had little choice but to throw out the charges, but this could clear the way for the government to reinstate the charges on appeal.

In a statement, Michael J. Garcia, the United States Attorney for the Southern District of New York, revealed that he "respectfully disagrees" with Judge Kaplan as to whether there was any constitutional violation in this case. "We will continue to pursue appellate review," Garcia concluded.

In April 2007, a Senate Finance Committee hearing on the prevalence of tax fraud and identity theft highlighted the need for tighter control of the loosely-regulated US tax preparation industry, according to Chuck Grassley, Committee ranking member.

“Taxpayers, beware,” Grassley said. “Sharks are in the water. The predators feed on the hope of making easy money. The ease of stealing identities and the lack of federal oversight of paid tax preparers are just chum for tax cheats. Be very careful with your personal financial information. If you use a paid preparer, choose someone you really trust.”

Grassley argued that the IRS needs to pay aggressive attention to the filing of false tax returns using stolen identities. “Identity theft is one of the fastest-growing crimes in the United States, and it is increasingly being used in the filing of false returns. Yet the IRS has no systematic way of identifying cases involving claims of identity theft or the impact of these cases in terms of the dollar value of refunds issued."

He added: "Resolution of cases involving identity theft can be time consuming, frustrating and difficult for the victims. But instead of reaching out to help the taxpayers who fall victim, sometimes the IRS interrogates them as though they were the crooks.”

Grassley said in 2006, more than 62% of all individual taxpayers used a paid preparer to complete their tax return. As a result, these preparers have a direct, substantial impact on tax compliance.

“Most tax return preparers are honest, knowledgeable individuals who serve the community well in providing sound financial advice, but there are clearly some sharks in the water,” Grassley stated. “These sharks are preying on innocent taxpayers, either through bad advice, incompetence, or downright fraud.”

The Senate Finance Committee ranking member went on to add that the IRS and the Department of Justice need to pick up the pace on preparer cases. He also said Congress needs to take action to ensure that paid preparers are competent and ethical enough to maintain the integrity of the tax system. Last year, the committee passed a bill that would regulate paid preparers and provide better taxpayer protection and assistance, but it did not come before the full Senate for a vote.

“We need to look at getting a similar bill passed this year,” Grassley argued. “I understand that no amount of regulation is going to prevent outright fraud, but Congress and the IRS can do much more to protect taxpayers. Anyone can hang a shingle and call himself a tax preparer. Taxpayers are paying for professional service, and they should get it.”

Grassley urged the IRS to impose stringent oversight of the paid tax preparation community, and where applicable, impose penalties and prevent the practitioner from preparing returns and representing taxpayers before the IRS. He also said that the agency should consider whether current law provides adequate protection to prevent identity theft used in the filing of false tax returns, and what can be done to better assist identity theft victims in resolving their cases with the IRS.

In addition, Grassley suggested that the IRS should consider whether it is fulfilling its obligation to help taxpayers understand and comply with their tax obligations. This includes determining whether free electronic filing methods are effective in assisting taxpayers to determine their correct tax liability, and if not, determining the IRS’ proper role in ensuring that such a method exists.


In January 2007, the Dubai International Financial Centre (DIFC) announced the issuance of the first license to a US law firm, Akin Gump Strauss Hauer & Feld LLP, to open an office at the DIFC.

Operating from the DIFC, Akin Gump will have access to a broad range of emerging markets stretching across Africa, the Middle East and South Asia.

Akin Gump, a firm with 15 offices around the world and a well-established Middle East presence, is now registered by the Dubai Financial Services Authority and authorised to provide legal services to financial institutions operating in the DIFC.

Akin Gump’s Chairman, R. Bruce McLean, commented: “We entered the Dubai market to advise our clients on increasing investment to and from the Middle East. The area’s dramatic growth and continued development has further solidified our commitment to the region. We are very pleased to be the first US law firm to be licensed in the DIFC, and we hope that others will follow our lead.”

Nasser Alshaali, Chief Executive Officer of the DIFC Authority, stated that: “The ability to provide specialist legal advice is an important part of the infrastructure we are creating within the DIFC. As we continue to grow both horizontally and vertically, the DIFC is strengthening its many core competencies, including legal advice. The continued rapid growth of the DIFC proves that this centre has become a truly international gateway for capital, which benefits Dubai, the UAE and the wider Middle East. In this regard, we are especially pleased to welcome Akin Gump.”

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Company Law

In May, 2010, bill HB-314 completed its journey through the Delaware General Assembly to update the state's captive insurance legislation. This legislation adds provisions to Chapter 69 of Title 18 of the Delaware Code that will expressly provide for the licensing of agency captives and branch captives.

Michael Teichman, chair of the Delaware Captive Insurance Association's (DCIA’s) Legislative Committee, said that Delaware’s existing statute provided the flexibility to license agency and branch captives through its special purpose provisions "and, indeed, we have licensed one agency captive in that manner."

"But, by adding these express provisions to Chapter 69, we let the marketplace know that Delaware is open for business to agency and branch captives, and we think our new agency and branch captive provisions provide advantages that you will not find in any other domicile,” Teichman explained.

Delaware has a longstanding history of regularly updating its corporate and business entity laws to keep these laws abreast of changes in the marketplace.

HB-314 was signed into law by Governor Jack A. Markell, who said: “This bill passed with overwhelming support from both parties in both chambers of our state legislature. I am happy to sign this bill into law and I look forward to seeing even more growth from our captive insurance industry here in Delaware.”

Representative Gregory Lavelle, a Republican, welcomed the new law, observing that “the passage of this legislation demonstrates the steadfastness of Delaware lawmakers in making Delaware a superior place to form a captive.”

Representative Thomas Kovach, also a Republican, pointed out the bipartisan nature of HB-314, noting that the bill passed unanimously in the House and nearly so in the Senate. "This legislation demonstrates the willingness of lawmakers on both sides of the aisle to come together to improve Delaware’s business friendly environment,” he said.

An increasing number of company finance professionals in the United States would consider adopting International Financial Reporting Standards (IFRS) sooner than on the path recently outlined by the Securities and Exchange Commission in its proposed IFRS roadmap, according to a December, 2008, survey from Deloitte.

Almost half (42%) of more than 200 finance professionals representing companies of various sizes and industries surveyed by Deloitte in November indicated they would consider implementation of IFRS sooner than 2014, if that were permitted under the mandated adoption date proposed by the SEC recently. This represents a significant increase from a similar Deloitte IFRS study performed earlier in 2008 that showed 30% of respondents would consider adopting IFRS, if given a choice.

“We’ve observed a steady increase in interest around IFRS from all types of US companies, not just multinationals and not just large companies. Company executives are beginning to understand and recognize the potential benefits that will likely result from reporting in IFRS,” said D.J. Gannon, leader of Deloitte’s IFRS service offering in the United States.

“But there’s a lot of work to be done and executives really need to begin to understand the impact that IFRS will have on their organizations," he added.

Among the leading factors driving companies’ interest in considering adopting IFRS sooner was simplified financial accounting and reporting and, separately, improved financial reporting and transparency. Both of these factors were cited by 37% of the companies surveyed by Deloitte that would consider earlier adoption.

According to the survey, the top perceived challenges among respondents that would consider adopting early include: lack of accounting technical guidance (33%) and lack of skilled personnel (32%). Eighteen percent recognized the cost of conversion as a significant challenge.

Companies in the survey that would consider adopting IFRS at an earlier date are predominantly in the technology, media and telecommunications (TMT), manufacturing and financial services industries. Fifty-seven percent of respondents from companies operating in the TMT industry would consider adopting before 2014. For financial services, 42% of respondents would consider early adoption.

Forty-five percent of respondents from companies with revenues between USD1bn and USD10bn indicated they would consider switching to IFRS before 2014; meanwhile 25% of respondents from companies with more than USD10bn in revenues stated they would consider adopting at an earlier date. And, interestingly, 50% of respondents from companies with USD1bn or less in revenues also expressed interest in early adoption.

Seventy-three percent of respondents from companies with more than half of their operations outside the United States also voiced interest in early IFRS adoption, while a third of respondents with less than 50% of their operations outside the United States indicated they would consider adopting prior to 2014.

In June 2007, a Senate subcommittee hearing on the vexed issue of executive stock options has concluded that new tax and accounting rules are needed to bring more transparency for investors regarding CEO pay, and to rein in huge and undeserved salaries enjoyed by some bosses at non-performing companies.

The hearing, held by the Senate’s Permanent Subcommittee on Investigations examined corporate accounting and tax rules that require corporations to report one set of stock option compensation figures to investors on their financial statements and completely different figures to the Internal Revenue Service on their tax returns.

Three Fortune 500 companies that were among the nine who helped the Subcommittee with its calculations contributed to the hearing, along with the Acting Commissioner of the IRS Kevin Brown, the SEC Director of Corporation Finance, and three stock option experts.

“Stock options are a major factor in the growing gap – now chasm – between executive pay and average worker pay,” said Sen. Carl Levin (D - Mich), subcommittee chairman. “Companies pay their executives with stock options in part because, right now, those stock options often generate huge tax deductions that are 2, 3, even 10 times larger than the stock option expense shown on the company books."

Levin said that nine companies examined by the subcommittee claimed stock option tax deductions over five years that exceeded their stock option expenses by more than $1 billion, or 575%, even after using tougher new accounting rules to calculate the book expense.

New IRS data, examining tax returns for periods ending between December 2004 to June 2005, shows a stock option book-tax gap of $43 billion, "which means US companies legally reduced their taxes by billions of dollars for that period by claiming $43 billion more in stock option tax deductions than the stock option compensation amount shown on their books," Levin stated.

"Those companies did not break the law," he continued. "They are benefiting from an outdated and overly generous stock option tax rule that produces tax deductions that often far exceed the companies’ reported expenses.”

Stock options give employees the right to buy company stock at a set price for a specified period of time, usually 10 years. According to Forbes magazine, in 2006, the average pay of the chief executive officers of 500 of the largest US companies was $15.2 million. Nearly half of that amount, 48%, came from exercised stock options that produced average gains of about $7.3 million. On the high end, one CEO cashed in stock options for $290 million, another for $270 million. Forbes also published a list of 30 CEOs in 2006, who each had at least $100 million invested stock options that had yet to be exercised. In the United States, average CEO pay has grown from100 times average worker pay to nearly 400 today, according to Levin.

“Stock options are valuable and legitimate incentive tools used to reward and retain high performing executives,” said Norm Coleman (R - Minn), ranking member of the subcommittee. “However, anything can be problematic in excess, and I fear we have reached that point. It is clear that favorable tax and accounting rules have caused companies to issue far too many stock options on far too generous terms, greatly contributing to the meteoric rise in executive pay."

In May 2007, Senator Hilary Rodham Clinton, one of the many candidates to have put themselves forward as potentially the next Democratic president of the United States, proposed that tax breaks should be cut for large corporations and that President Bush's tax cuts rolled back for the wealthy, to restore income equality in America.

In a speech at the Manchester School of Technology in New Hampshire, she called for a return to shared prosperity and tax fairness, while expanding access to quality education and healthcare for all Americans.

"I believe that one of the most crucial jobs of the next President is to define a new vision of economic fairness and prosperity for the 21st century -- a vision for how we ensure greater opportunity for our next generation," Clinton said. "I consider myself a thoroughly optimistic and modern progressive. I believe we can grow our economy in the face of global competition -- and in a way that benefits all Americans. I believe we can curb the excesses of the marketplace -- and provide more opportunities for more Americans to succeed."

Clinton outlined her 'Nine Point Plan' which includes leveling the playing field and reducing special breaks for big corporations, eliminating incentives for American companies to ship jobs and profits overseas, reforming the governance of corporations and the financial sector, and restoring fiscal responsibility to government by rolling back income tax cuts.

If elected President in November 2008, Clinton would also scale back oil and gas subsidies and change parts of the tax code which reward companies for offshoring jobs by enabling them to defer paying American taxes for as long as they hold the money abroad, a policy she said puts companies that create jobs in America at a competitive disadvantage.

"Let's once and for all get rid of the incentives for American companies to ship jobs and profits overseas. It is one thing for the marketplace to encourage overseas investment. It's another for our own tax code to do so," she said, adding: "We actually put companies that want to create jobs here on our shores at a disadvantage to those who ship jobs to tax havens."

Clinton also wants to toughen further rules of corporate governance and provide for greater scrutiny of CEO pay. "The way I see it, allowing CEOs to escape with golden parachutes while their companies abandon workers' pensions does not honor our values. We need to open up CEO compensation to public scrutiny and public challenge and ensure that boards of directors are independent when determining CEO pay. And we need to update our regulations to confront the emerging problems in our sub-prime and private equity markets."

Also in May 2007, new legislation increasing the federal minimum wage by more than two dollars per hour and providing small businesses with a number of offsetting tax relief measures was approved by the United States Congress.

The measure, included in a supplementary military spending bill, increases the federal minimum wage to $7.25 per hour over two years. The supplemental bill was approved in the house with a final 280-142 vote, and in the Senate with a 80-14 vote.

The minimum wage is designed to go up in three stages: from the current $5.15 to $5.85 60 days after enactment; to $6.55 one year later; and to $7.25 one year after that. According to Sen. Edward Kennedy (D - Mass.), the principal advocate for the increase in Congress, an estimated 13 million Americans will benefit from the move.

The bill also contains a $4.84 billion package of tax relief to help small firms swallow the increase in the minimum wage - much less than desired by Republicans and half of the amount originally voted for in the Senate.

Initially one of the Democrats' priorities after taking control of Congress following last November's mid-term elections, the minimum wage legislation repeatedly stalled as lawmakers haggled over the amount of accompanying tax relief. Once agreed, the measures were delayed further when included in a previous military spending bill that was vetoed by President Bush because it set an artificial deadline for troop withdrawal from Iraq. Democrats have been forced to compromise with the new supplemental bill, which removes such commitments.

“While there are many aspects of this conference report that I cannot support, I am pleased that it will finally allow us to get a minimum wage bill to the President’s desk," said Kennedy.

"This increase is long overdue. The minimum wage bill passed the House and Senate in January and February of this year. Unfortunately, Republicans prevented the bill from going to conference until they could make sure it included a big enough tax giveaway for businesses. We’ve overcome many obstacles – and faced every procedural trick in the book – to get this minimum wage increase across the finish line. Democrats stood together, and stood firm, to say that no one who works hard for a living should have to live in poverty," he added.

Governors in six states in April 2007 recommended that their state adopt a key reform to outlaw a variety of 'abusive' income-tax-avoidance strategies practiced by large corporations, a report by the Center on Budget and Policy Priorities showed.

According to the report by the nonpartisan research organization and policy institute, eighteen states had already adopted the reform, known as “combined reporting,” as of the start of 2007. In recent weeks, the governors of Iowa, Massachusetts, Michigan, New York, North Carolina, and Pennsylvania all proposed the reform as part of their new budgets.

New York’s legislature approved this proposal on April 1, while on March 10, West Virginia’s legislature enacted a combined reporting bill that was not initiated by the governor, but which he is expected to sign.

“Six governors decided this year, independently of one another, that it’s time to make their corporate tax systems fairer and stronger by adopting this reform,” said Michael Mazerov, a senior fellow at the Center and the report’s author. “Tax experts have long urged states to take this step, and this year a growing number of states are listening.”

The Center's study reported that, to avoid state corporate income taxes, a number of large, multistate corporations have devised strategies to move profits out of the states in which they are earned and into states in which they will be taxed at lower rates - or not at all. They do this by creating subsidiaries largely or solely as tax shelters in “tax haven” states like Delaware and then artificially shifting funds to them in the form of royalties or rent.

The report cited as an example the case of retailer Wal-Mart, which has transferred ownership of all of its stores to a Wal-Mart subsidiary. In most states, this enables Wal-Mart to deduct the “rent” it pays the subsidiary (i.e., the rent it pays itself) from the income that is subject to state corporate taxes. The subsidiary receiving the rent isn’t taxed because it qualifies as a tax-exempt Real Estate Investment Trust under federal and state law.

The Center argues that this practice is wrong because it costs states billions of dollars in revenue, forcing individuals and small businesses which lack the resources to exploit the loophole to pay higher taxes than would otherwise be necessary. They also give multistate corporations an unfair tax advantage over in-state corporations and smaller businesses, the Center said.

Combined reporting is considered to create a level playing field for all businesses by treating a parent corporation and most of its subsidiaries as a single corporation for income tax purposes; the state taxes a share of the entities’ combined nationwide income, depending on how much of the corporation’s total activity takes place in that state.

The report noted that sixteen states have mandated and successfully used combined reporting for decades, but this group has only recently begun to expand, even after the US Supreme Court ruled in 1983 that combined reporting was both fair and constitutional.

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Compliance Law

As the explosive revelations from the Bernard Madoff investment scandal continue to reverberate across the financial world, investors who have lost money in Madoff's funds may be able to reach for one crumb of comfort in the form of the US tax code, it emerged in December, 2008.

With many investors still counting the cost of putting their trust - and substantial sums of money - into what has allegedly turned out to be Wall Street's largest-ever Ponzi scheme, tax advisors are pointing to certain sections of the US tax code which could allow investors to recoup significant sums through 'theft loss' provisions.

Under the theft loss rules, taxpayers can deduct a loss against 90% of their adjusted gross income, plus USD100. Therefore, an investor with an income of USD100,000 who lost USD1m would - theoretically - be able to deduct USD989,900. Also, because of the nature of the loss, taxpayers affected by the scam are entitled to claim an 'ordinary' (as opposed to a 'capital') loss deduction under section 165 of the US tax code, and therefore carry back unused losses by three years (as opposed to two). They can also carry forward unused losses to the next 20 tax years.

Whether the Internal Revenue Service would allow such a claim is another matter entirely. At the very least, taxpayers seeking such deductions, and especially those adjusting previous tax returns, can expect an IRS audit for their troubles.

"These victims of investment fraud may qualify for a little known tax break that until now, not many people have been eligible for," said Michael Rozbruch, founder and CEO of Tax Resolution Services. However, he warned that: "To recover your losses, you will need to go back and amend your tax returns, which means you will inevitably be audited." Rozbruch added that professional advice is essential for taxpayers in such scenarios.

Given the current economic climate and the likelihood of falling tax revenues in the year ahead, the IRS, which could face tax revenue losses in the billions of dollars (as much as USD17bn according to one estimate), is unlikely to want to become an unwitting victim of the Madoff scandal too. Therefore, it remains questionable at present whether the agency would uphold such substantial theft loss claims.

Since the December 11 arrest of the seventy-year-old Madoff, the list of companies and individuals facing steep financial losses based on their dealings with Madoff and companies affiliated with or controlled by him has grown to include individuals and institutions across the United States. In addition, Madoff's fund obtained money from some of Europe's largest banks, including institutions in the United Kingdom, Spain, France and Italy, and their clients.

"If this were a traditional bank robbery, the eyewitness reports would say that Madoff walked out with billions of dollars as someone held the door open for him," says Jeffrey Zwerling, a founding partner of Zwerling, Schachter and Zwerling, which has been retained by individuals and entities allegedly duped by Madoff.

"If it's true, it's just amazing in terms of the audacity, if nothing else," Zwerling observed.

In July 2007, the Securities and Exchange Commission published for public comment a proposal to eliminate the current requirement that foreign private issuers filing their financial statements using International Financial Reporting Standards (IFRS), as published by the International Accounting Standards Board (IASB), also file a reconciliation of those financial statements to US Generally Accepted Accounting Principles (GAAP).

The Commission voted unanimously on June 20, 2007, to issue the proposal for public comment.

SEC staff also published a report containing some general observations about the application of IFRS based on staff reviews of annual reports from more than 100 foreign private issuers containing financial statements prepared for the first time using IFRS.

Under the SEC's current rules, foreign private issuers are required to reconcile to US GAAP the financial statements that they file with the Commission if their financial statements are prepared using any basis of accounting other than US GAAP.

The proposed amendments would:

  • Apply to foreign private issuers that file financial statements that comply with the English language version of IFRS as published by the IASB, and
  • Allow those issuers to file those financial statements in their annual filings and registration statements without reconciliation to US GAAP.

"The Commission has taken a significant step on this important policy matter that was outlined in the 'Roadmap' announced in 2005," announced Conrad Hewitt, SEC Chief Accountant.

He added:

"The staff continues to evaluate the considerations supporting the acceptance of IFRS financial statements and looks forward to receiving public input during the comment period."

The comment period extended for 75 days after the proposal was published in the Federal Register.

In June 2007, US Congressman Charles B. Rangel praised the Department of Homeland Security (DHS) for allowing Americans to temporarily travel to Canada, Latin America and the Caribbean without a passport, as long as they have proof of having applied for one.

"I have to commend DHS for listening to the needs of Americans, who often just wanted to see loved ones abroad or take a well-deserved vacation," said Rangel. "They have shown real leadership in trying to correct a mistake, instead of blindly following a course that is clearly having problems."

On June 8, the US government announced that US citizens traveling to Canada, Mexico, the Caribbean, and Bermuda who have applied for but not yet received passports can nevertheless temporarily enter and depart from the United States by air with a government issued photo identification and Department of State official proof of application for a passport, through September 30, 2007. This was due to longer than expected processing times for passport applications in the face of record-breaking demand, the government said.

The State Department's Western Hemisphere Travel Initiative (WHTI) was intended to strengthen border security and facilitate entry into the United States for citizens and legitimate international visitors, as mandated by the Intelligence Reform and Terrorism Prevention Act of 2004. However, as early as last fall, Rangel and other members of the Congressional Black Caucus had urged the agency to revisit their decision. DHS conceded, and announced that it would delay the implementation of the requirements until June 1, 2009 for land crossings at the borders and for cruise passengers traveling within the Western Hemisphere.

The delay did little to prevent record number of applications and long waiting times since the beginning of the year. Rangel said his offices were being inundated with phone calls from constituents who had applied in some cases as early as February. Rangel said the issue was symptomatic of some of the problems that DHS and immigration officials experience in processing not just passport requests, but visa petitions and citizenship applications.

"We need to wait until we have the technology and personnel in place to process the demand for all these applications," said the Congressman. "Security is not just about regulations. We have to invest the time and money to help provide federal agencies with practical resources that they need to implement these requirements."

DHS officials said that travelers who have not applied for a passport should not expect to be accommodated. The temporary decision also does not affect entry requirements to other countries. Americans traveling to a country that requires passports must still present those documents.

In May 2007, the US Treasury welcomed a statement released by the Securities and Exchange Commission and the Public Company Accounting Oversight Board regarding their votes to address the implementation of Section 404 of the Sarbanes-Oxley Act:

"The SEC and the PCAOB, after carefully considering the effects of Section 404, moved this week to strike the right balance in enhancing financial reporting quality and eliminating unintended costs," announced Under Secretary for Domestic Finance Robert K. Steel. "These key reforms should ensure that Section 404 is implemented in a risk-based and appropriately-scalable fashion, without sacrificing investor protection or diminishing the value of sound internal controls over financial reporting. Now that the regulators have acted, it is critical that public companies and the auditing profession respond to this call."

Steel added: "Treasury congratulates the SEC, the PCAOB and their chairmen, Chris Cox and Mark Olson, for their cooperation in working to uphold investors' confidence in and the competitiveness of America's capital markets."

The previous week, the Securities and Exchange Commission unanimously approved interpretative guidance to help public companies strengthen their internal control over financial reporting while reducing unnecessary costs, particularly at smaller companies. The new guidance will enhance compliance under Section 404 of the Sarbanes-Oxley Act of 2002 by focusing company management on the internal controls that best protect against the risk of a material financial misstatement.

“Congress never intended that the 404 process should become inflexible, burdensome, and wasteful. The objective of Section 404 is to provide meaningful disclosure to investors about the effectiveness of a company’s internal controls systems, without creating unnecessary compliance burdens or wasting shareholder resources,” explained SEC Chairman Christopher Cox. “With the Commission’s new interpretative guidance for management on the evaluation and assessment of its internal controls over financial reporting, companies of all sizes will be able to scale and tailor their evaluation procedures according to the facts and circumstances. And investors will benefit from reduced compliance costs.”

“Our guidance enables companies of all sizes to focus on what truly matters to the integrity of the financial statements – risk and materiality,” added Conrad Hewitt, Chief Accountant. “Providing management with its own guidance for evaluating internal control over financial reporting will ensure an appropriate balance between management's evaluation process and the audit process. While the guidance is intended to help public companies of all sizes, smaller companies, which will begin complying with Section 404 this year, should benefit from its scalability and flexibility. We have also worked closely with the PCAOB to better align our interpretative guidance and the PCAOB’s proposed auditing standard, which the PCAOB will consider for adoption tomorrow.”

The Commission also approved rule amendments providing that a company that performs an evaluation of internal control in accordance with the interpretive guidance satisfies the annual evaluation required by Exchange Act Rules 13a-15 and 15d-15. The Commission additionally amended its rules to define the term “material weakness” as “a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company's annual or interim financial statements will not be prevented or detected on a timely basis.”

The Commission further voted to revise the requirements regarding the auditor’s attestation report on the effectiveness of internal control over financial reporting to more clearly convey that the auditor is not evaluating management’s evaluation process but is opining directly on internal control over financial reporting.

Also in May 2007, the SEC announced that it would host a roundtable discussion in June on the topic of selective mutual recognition.

Selective mutual recognition would involve the SEC permitting certain types of foreign financial intermediaries to provide services to US investors under an abbreviated registration system, provided those entities are supervised in a foreign jurisdiction under a securities regulatory regime substantially comparable (but not necessarily identical) to that in the United States.

The roundtable will explore whether selective mutual recognition would benefit US investors by providing greater cross-border access to foreign investment opportunities, while still preserving investor protection.

The roundtable took place on June 12, 2007, and consisted of a series of panels designed to reflect the views of different constituencies, including investors, exchanges, and broker-dealers. A separate panel also considered the issue of how the SEC can best assess regulatory comparability and convergence.

"The US capital markets are a vital part of the larger global marketplace," explained SEC Chairman Christopher Cox.

He continued:

"Innovations in technology have eliminated many barriers to cross-border access between US and foreign markets. Consequently, it is imperative that the Commission consider the implications of increased US investor demand for foreign investment opportunities."

"At the same time, we are seeing the international coalescence of a group of securities regulators who share many of the same concerns about investor protection and market efficiency that we at the SEC have — a development that I believe could greatly improve investor protection world-wide."

"This roundtable should assist the Commission in developing an appropriate regulatory response to the changing nature of the global market, in a way that allows the SEC to strengthen its investor protection mandate."

In March 2007, the Securities and Exchange Commission published new rules for deregistration by foreign companies, as adopted by the Commission on March 21.

The Commission voted unanimously to adopt changes to the rules that govern when a foreign private issuer may terminate the registration of a class of equity securities, and when it may cease its reporting obligations regarding a class of equity or debt securities.

Under the previous rules, a foreign private issuer may exit the Exchange Act registration and reporting regime if the class of the issuer’s securities has less than 300 record holders who are US residents.

Because of the increased globalization of securities markets since the current rules were adopted, a foreign private issuer may find it difficult to terminate its Exchange Act registration and reporting obligations, despite the fact that there is relatively little interest in the issuer's securities among United States investors.

Moreover, currently a foreign private issuer can only suspend, and cannot terminate, a duty to report arising under Section 15(d) of the Exchange Act.

By eliminating conditions that had been considered a barrier to entry, the amended rules aim to encourage participation in US markets and increase investor choice.

“We believe that the amended rules will better serve the needs of both US investors and foreign private issuers. We recognize the importance of foreign private issuers to the US capital markets and expect that the new deregistration rules should in fact promote capital formation in the US and make our markets more attractive to foreign companies without sacrificing important investor protections,” announced John W. White, Director of the Division of Corporation Finance at the SEC.

He continued:

“These rules represent a key step in the Commission’s continuing efforts to respond to the challenges and needs of our markets’ increasing globalization. This effort includes improving the efficiency and effectiveness of implementation of Section 404 of the Sarbanes-Oxley Act and actively considering eliminating the requirement that foreign private issuers reconcile their IFRS financial statements to US GAAP.”

The effective date of the adopted rules was 60 days from their publication in the Federal Register.

 

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