Court Finds Poker Game Management Patents Valid Under Section 101

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In denying a motion for summary judgment of invalidity under Section 101, the court stated: "An inability to articulate an abstract idea to which claims are directed may be a clue that those claims satisfy Section 101." The patent claims at issue related to management of online poker. Defendant challenged the validity based on lack of patentable subject matter under Section 101 in light of the recent Alice decision, alleging the claims related to the abstract idea of a "customer loyalty program direct to poker, " (i.e. a player rewards system within a poker room), without adding significantly more. The court refused to buy this argument because the independent claims did not even include a customer loyalty or compensation system.

It is always easy to say that a claim relates to an abstract idea, but that is not the proper legal test. The focused is on what is actually claimed. As stated in Alice, a claim that recites an abstract idea must include "additional features" to ensure "that the [claim] is more than a drafting effort designed to monopolize the [abstract idea]." To the extent the claims do recite an abstract the question is whether there are other ways to use the abstract idea.

Despite the furor over the Alice decision, properly drafted software and game patents are still patent eligible.

Another Court Declares Terms of Service Provisions Unenforceable - Are Yours?

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Too many companies/lawyers treat website Terms of Service (TOS) as boilerplate agreements that no one reads. Many companies simply put a link at the bottom of the homepage. This approach continues to prove ineffective, as courts are more frequently refusing to enforce TOS absent properly drafted terms and a requirement that the user read and/or affirmatively accept the terms. In a recent 9th Circuit Appeal, the court ruled against Barnes&Noble stating that "where the link to a website's terms of use is buried at the bottom of the page or tucked away in obscure corners of the website where users are unlikely to see it, courts have refused to enforce the browse-wrap agreement."

The Court further held: "where a website makes its terms of use available via a conspicuous hyperlink on every page of the website but otherwise provides no notice to users nor prompts them to take any affirmative action to demonstrate assent, even close proximity of the hyperlink to relevant buttons users must click on--without more--is insufficient..."

The result in this case was that the court decided there was no binding agreement, and therefore B&N could not enforce the arbitration clause contained in the TOS. However, in other cases, even more significant problems can arise. Similar problems can cause modifications to a TOS to be ineffective.

The bottom line is that if properly drafted and implemented, a TOS can provide significant protection for companies and can minimize legal liability to customers. If not, courts will likely not enforce those terms.

If you have not recently reviewed your TOS, you should have a lawyer do so soon.

Lawsky Comments on Update to NY Bitlicense Regulation

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In comments on October 14, 2014, Ben Lawsky commented on changes to the proposed bitlicense regulations. The main points he made were these:
  • Regarding who will be required to obtain a bitlicense, he said the focus will be financial intermediaries, not software developers or individual users.
  • To the extent that company may need both money transmitter and virtual currency licenses, for example - which is possible - the process will be streamlined to avoid duplication.
  • Regarding concerns that banks were exempted, he said that is untrue. Banks cannot start providing virtual currency services without prior approval from DFS, and they will have to comply with any requirements that are otherwise imposed on virtual currency businesses.
  • Mining, per se, will not be regulated. To the extent a miner engages in other virtual currency services, however - for example, hosting wallets or exchanging virtual currency - a license may be required for those activities.
  • Consideration is being given to how to avoid excessive regulatory costs for startups - but no specific proposal was provided. He said the goal is not to stifle technological innovation, but if a software company is also taking on the responsibility of actually safeguarding customer money, it is a much more difficult calculation.

To read the rest of Superintendent Lawsky's remarks click here.

FDA Draft Guidance Would Ease Regulatory Burdens for Certain mHealth Applications

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On August 1, 2014, the Food and Drug Administration (FDA) released draft guidance that would exempt from premarket 510(k) review many low-risk medical devices--including certain mobile applications that can convert a cell phone into a medical device, such as a thermometer or a stethoscope. Although the guidance is not yet legally enforceable, the FDA also announced its intention not to enforce compliance with premarket review requirements for these devices and noted that it did not expect manufacturers to submit 510(k)s for these devices prior to adoption of a final rule or order. The FDA's recognition that these devices are sufficiently well understood and do not present risks that require premarket review to ensure their safety and effectiveness--and its corollary decision to exercise enforcement discretion as to these devices--eases the regulatory burden on medical application developers and expands opportunities for continued development and dissemination of important mobile tools for improving patient care and physician practice.


For more information, check out the Client Alert.

Dell Joins a Growing List of Retailers Accepting Bitcoin

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On Friday, Michael Dell, CEO of Austin-based Dell Inc., announced on twitter that Dell.com is now accepting Bitcoin as a direct payment option for consumers and small businesses in the U.S.  Other major companies, such as Overstock and Expedia, began accepting Bitcoin earlier this year and have reported favorable results, including that a majority of Bitcoin purchases were made by brand new customers.  To offer Bitcoin as a payment option, Dell partnered with Coinbase, a U.S.-based Bitcoin exchange and payment processor.  Dell's terms and conditions highlight one of Bitcoin's unique characteristics, i.e., that once you initiate a Bitcoin transaction, you cannot change or cancel it.  Dell does, however, offer a limited refund process that requires a Coinbase account or remittance of a check in U.S. dollars, depending on the circumstances.

Austin has become a hub of Bitcoin activity.  Several emerging Bitcoin-focused companies, such as CoinTerra and Cloudhashing, are located in Austin, and, in February, Robocoin installed the first U.S.-based Bitcoin ATM in a popular bar in downtown Austin.

FCC Workshop on Social Media and Accessibility to People With Disabilities

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The Federal Communications Commission's Accessibility and Innovation Initiative will host an "Accessing Social Media" event on Thursday, July 17, 2014 from 9 a.m. to 4 p.m. in the Commission Meeting Room in its headquarters located at 445 12th Street, S.W., Washington, D.C.  The event will be webcast without open captioning.   The event is open to the public, however, RSVPing for in-person attendance is encouraged. 

The FCC's stated purpose of the event is "to facilitate a collaborative, cross-sector exchange of information about making social media tools and content accessible to people with disabilities, including information about authoring tools, client apps and best practices."  The event will include panels of industry, consumer and government representatives and feature technology demonstrations in an exhibit area.

New Canadian Anti-Spam Rules to Take Effect July 1, 2014

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Today, we, along with our colleague Michael Heuga, published our client advisory titled New Canadian Anti-Spam Rules to Take Effect July 1, 2014. If your business uses "commercial electronic messages" to market to your customers and prospective customers in Canada, please be aware of Canada's new anti-spam rules, which require, among other things, the sender of the electronic message to obtain consent from the recipient before sending the message and the message itself to identify the sender and provide instructions enabling the recipient of the message to withdraw consent to receive such messages.

Additional Source:  Canada's Anti-Spam Law

Bitcoin Mining Firm Consistently Attaining Control of the Market

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Bitcoin mining firm GHash is reportedly consistently attaining over 51% of all of the hashing power of all Bitcoin miners.  As a decentralized currency, Bitcoin depends on an open ledger called the "block chain" to track every transaction using the Bitcoin protocol.  The integrity of the block chain is generally maintained because many different entities are competing to summarize the entire block chain as quickly as possible.  When many entities agree on the state of the block chain, that agreed upon state becomes for all intents and purposes, fact.  When a miner is able to consistently control 51% of the "votes" in the mining pool, it can theoretically control the state of the block chain.  GHash has released a press release stating that it will not attempt to use its hashing power to manipulate the market, but the Bitcoin community remains cautious of how GHash will wield its market share in the coming weeks. 

 

For advice on how this development may impact you, contact us.

U.S. Government Begins First Ever Bitcoin Auction

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As reported in our earlier post, the U.S. Government has begun its first ever auction of Bitcoins.  The Bitcoins to be auctioned were seized in connection with the shutdown of the Silk Road - the "dark net" site that served as a marketplace for illegal goods.  The U.S. Marshals Service has announced that 29,656.51306529 bitcoins will be auctioned in this initial round.  The reported value of the Bitcoins to be auctioned, at the time of the announcement, is approximately $18 million U.S. Dollars.

California Issues Recommendations for Privacy Policies

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The California Attorney General recently published recommendations for developing meaningful privacy policies that comply with the California Online Privacy Protection Act of 2003 (CalOPPA), including recommendations for complying with "Do Not Track" disclosure requirements.  According to the Attorney General, a meaningful privacy policy is one that addresses significant data collection and use practices, uses plain language, and is presented in a readable format.  While the recommendations are not regulations, mandates, or legal opinions, they do identify certain best practices for privacy policies that satisfy the minimum legal requirements.

FTC Calls for Action on Big Data

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Following an 18-month investigation into the practices and operations of data brokers, the Federal Trade Commission has issued a voluminous report calling for legislation to regulate the industry in the interests of consumer privacy.  The report, called Data Brokers: A Call for Transparency and Accountability, identifies "data brokers" as "companies that collect consumer's personal information and resell or share that information with others," and notes that in today's economy, "Big Data is big business."  The report recounts that the privacy issues that data brokers present today were first addressed back to the 1970's when Congress enacted the Fair Credit Report Act (FCRA) to regulate the collection and use of consumer data in connection with credit, housing, employment and similar decisions.  The FTC has been active in enforcing the provisions of the FCRA, but has also argued for similar types of protections even where the FCRA does not apply, such as where data is collected for marketing purposes, fraud prevention purposes, and people search products.  In its March 2012 report "Protecting Consumer Privacy in an Era of Rapid Change: Recommendations for Businesses and Policymakers", the FTC noted that prior self-regulatory efforts by the industry had not addressed its concerns with transparency and called for the industry to create a web portal to provide consumers with more information about and access to information that data brokers hold about them.  In addition, an FTC Commissioner has spearheaded a "Reclaim Your Name" campaign urging the industry to adopt self-regulatory reforms to educate consumers as to how information is collected and used and to allow consumers access to the data that brokers hold, correct any errors in it, and opt out of its use for marketing purposes. 

Noting that the industry has not moved on past suggestions such as these, the report calls for legislation that would require data brokers to provide the consumer with access to the data they hold regarding the consumer and to permit consumers to opt-out of the sharing of that information for marketing purposes.  The FTC reiterates its suggestion that a central web portal be created where data brokers identify themselves and their information collection and use practices and allow consumers access to their data and to opt out of certain uses.  The report also calls for legislation that would require data brokers to disclose to consumers that they not only use raw data that they collect, but whether they combine that data with other information and draw conclusions based on it such as determining a consumer's interests based on magazine subscriptions, previous purchases, or website visits.  To facilitate consumer education, the report suggests that all consumer-facing entities be required to disclose if they sell consumer information to data brokers, provide opt out options concerning this sharing, and to provide the names of the specific data brokers with which the information is shared and a link to the web portal where consumers can learn more about the data brokers and their data access and opt out rights.  With respect to risk mitigation products, the report recommends extending FCRA-like notices to the consumer where, for example, the consumer is denied a cellular phone contract not because he or she is a credit risk, but because risk mitigation information indicates that he or she is an identity thief.  The notice would identify the data broker from which the information was obtained and the data broker in turn would provide the consumer with access to the data and a right to correct it if it is inaccurate.  In connection with people search products, the report recommends not only that consumers have the ability to access their data and opt out of certain uses, but that limits on those opt outs be clearly identified and that the data broker's sources of information be identified.

The report concludes with a recommendation that all data brokers adopt the principles in the Commission's 2012 report that they adopt "privacy by design" and incorporate consumer privacy into all aspects of their operations. 

Game Business and Legal Affairs 2014

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Join Pillsbury's Social Media & Games team leader, Jim Gatto, at the Game Business and Legal Affairs 2014 conference May 19-20 where he will present "Gamblification," on May 19 during the Finance Section. This section will present a look at Bitcoin, examples of when game design is dictated by gambling and sweepstakes regulations related to tokens, credits, and faux-gambling mechanics, and why FinCEN can view game publishers and developers as banks, subject the same regulations.

Game Business and Legal Affairs 2014 represents the definitive conference for international practitioners of interactive entertainment law. Drawing the largest audience of in-house counsel from game publishers and developers, the annual event matches a senior audience and expert speakers for two days of dynamic discussion and socialization among peers.

He Said, She Said, They Said

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More and more federal and state agencies are weighing in on virtual currency.  Here's what they are saying:

Financial Crimes Enforcement Network (FinCEN):

Continue reading "He Said, She Said, They Said" »

The Real Issues with Virtual Currency: April 22, 2014

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Join members of Pillsbury's leading Virtual Currency practice, partners, James Gatto, and Deborah Thoren-Peden, to understand and analyze some of the key legal and business issues related to Bitcoin and other crypto-currencies. This webinar will highlight the history of Bitcoin and other digital currencies and associated unique business models. They will also address the latest developments in digital currency regulation and enforcement.

Topics will include:
  • Background on Bitcoin and other crypto-currencies and the use of emerging, virtual currency-based business models
  • Overview of the virtual currency legal issues (federal, state, international)
  • Ramifications of recent IRS ruling
  • Update on FINCEN Guidelines
  • Recent enforcements and regulatory actions

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Tuesday, April 22, 2014
12:00 pm PT
3:00 pm ET

Webinar

RSVP by April 21
Please register for this complimentary presentation to receive log-in/dial-in information.

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PARTICIPANTS
James G. Gatto, Leader, Social Media, Entertainment & Technology - Pillsbury
Deborah S. Thoren-Peden, Corporate & Securities, Pillsbury

IRS Issues Significant Convertible Virtual Currency Ruling - Bitcoin Community Abuzz

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The IRS has issued its first major ruling on the U.S. federal tax implications of transactions in, or transactions that use, Bitcoin and other convertible virtual currencies. The ruling stresses that it relates to convertible virtual currencies. The legal landscape with respect to Bitcoin and other convertible virtual currency continues to evolve at a more rapid pace. Last March, FinCEN issued its now famous virtual currency guidance. Shortly thereafter, a number of high profile enforcements ensued.  If history is any lesson, it is likely that following this ruling will likely will be followed by some tax enforcements. Therefore, miners, exchanges, businesses transacting in Bitcoin and others dealing with virtual currencies should promptly assess this guidance and ensure compliance.The IRS made clear that penalties apply for failure to timely comply. This should be of particular concern to the extent the ruling is applied retroactively.

We have prepared a complete client alert on this recent IRS ruling. Please click here to access.

Among other things the IRS has stated:

One of the most significant pronouncements of the notice is that the IRS has determined that virtual currency is treated as property for U.S. federal tax purposes and therefore  general tax principles that apply to property transactions apply to transactions using virtual currency.  The notice indicates that this means that:

  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by an employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.
  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply.  Normally, payers must issue Form 1099.
  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.
  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

Additional points made by the IRS include the following:

  • Convertible virtual currency is a virtual currency that has an equivalent value in real currency, or that acts as a substitute for real currency, such as Bitcoin
  • The sale or exchange of convertible virtual currency, or the use of convertible virtual currency to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability.
  • Virtual currency is NOT treated as currency for purposes of determining whether a transaction results in foreign currency gain or loss under U.S. federal tax laws.
  • For purposes of computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of virtual currency received as measured in U.S. dollars, as of the date that the virtual currency was received. 
  • The basis of virtual currency received as payment for goods or services is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. 
  • For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars using the fair market value of virtual currency  as of the date of payment or receipt. 
  • If the fair market value of property received in exchange for virtual currency exceeds the taxpayer's adjusted basis of the virtual currency, the taxpayer has taxable gain. The taxpayer has a loss if the fair market value of the property received is less than the adjusted basis of the virtual currency.
  • A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer and realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer (e.g., inventory and other property held mainly for sale to customers in a trade or business).
  • Mining virtual currency triggers gross income at the fair market value of the virtual currency as of the date of receipt.
  • If a mining of virtual currency constitutes a trade or business, and the "mining" activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self-employment income and are subject to the self-employment tax.
  • Payments in virtual currency received for services performed as an independent contractor constitute gross income, if related to any trade or business carried on by the individual as other than an employee, at the fair market value (in U.S. dollars)  as of the date of receipt and constitutes self-employment income and is subject to the self-employment tax.

  • The fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement.

  •  Payments made using virtual currency is subject to information reporting to the same extent as any other payment made in property (e.g., payments in virtual currency with a value of $600 or more for fixed and determinable income including rent, salaries, wages, premiums, annuities, and compensation).

  • A person who in the course of a trade or business makes a payment of $600 or more in a taxable year to an independent contractor for the performance of services is required to report that payment to the IRS and to the payee on Form 1099-MISC, Miscellaneous Income. 
  • Third party settlement organizations are required to report payments made to a merchant on a Form 1099-K, Payment Card and Third Party Network Transactions, if, for the calendar year, both (1) the number of transactions settled for the merchant exceeds 200, and (2) the gross amount of payments made to the merchant exceeds $20,000.

  • Taxpayers may be subject to penalties for failure to comply with tax laws (e.g., underpayments attributable to virtual currency transactions such as accuracy-related penalties under section 6662, and failure to timely or correctly report virtual currency transactions when required to do so under section 6721 and 6722). However, penalty relief may be available to taxpayers and persons required to file an information return who are able to establish that the underpayment or failure to properly file information returns is due to reasonable cause.

    Conclusion

    If you have any questions, Pillsbury has one of the leading virtual currency practices in the country. Our team of over 70 professionals includes a number of tax specialists. For more information, please contact Jim Gatto, our team leader, or the attorney with whom you regularly interact at Pillsbury. Mr. Gatto can be reached at james.gatto@pillsburylaw.com or 703-770-7754.