LawTalk Blog

IRA Funded LLCs

The trend towards IRA investment is increasing, particularly in the realm of having an IRA fund your LLC.  One of the main advantages to having an IRA funded LLC, is that you are able make investments more freely.  The IRA funded LLC allows you to maintain checkbook control, meaning you can write checks for investments without the need for a custodian.  This is advantageous because it reduces the fees paid to a custodian and frees you from the need for custodian approval for each check written.      

In order to have your IRA fund your LLC, the first thing to do is to open a self-directed IRA account, which is a type of IRA where an IRA owner makes all the investment decisions and instructs a custodian to act.  Pursuant to IRS regulations, either a qualified trustee or custodian must hold the IRA assets on behalf of the IRA owner.  Various companies, such as Pensco, Sterling Trust, and Equity Trust, all act as IRA custodians. Once you have chosen a custodian, you must instruct the custodian to transfer your IRA assets to the new self-directed IRA account.  Be aware that while the IRS does not mandate what transactions you may engage in, there are certain prohibited transactions outlined in IRC § 4975(c)(1), which are either direct or indirect:

•   Sale or exchange, or leasing of any property between a plan and disqualified person;
•   Lending of money or other extension of credit between a plan and a disqualified person;
•   Furnishing goods, services, or facilities between a plan and a disqualified person;
•   Transfer to, or use by or for the benefit of, a disqualified person of the income or assets of a plan;
•   Act by a disqualified person who is a fiduciary whereby he deals with the income or assets of a plan in his own interest of for his own account; or
•  Receipt of any consideration for his own personal account by any disqualified person who is a fiduciary from any party dealing with the plan in connection with a transaction involving the income or assets of the plan.

For purposes of this statute, a disqualified person is the IRA owner, the IRA owner’s spouse, ancestors, lineal descendents, spouses of lineal descendents, investment advisors, fiduciaries (those providing services to the plan) and any business entities, in which any of the persons previously mentioned have a 50% or greater interest in.  However, pursuant to Swanson v. Commissioner, 106 T.C. 76, the IRA LLC strategy is not considered a prohibited transaction. 

After opening a self-directed IRA account, you must then register your business entity as a limited liability company (LLC) with the Secretary of State in the state you plan on incorporating in. After your LLC is properly registered, the next step is to prepare an operating agreement, which meets all of the requirements for a self-directed IRA LLC mandated by the Secretary of State, such as specific language relating to the fact that the LLC is set up for your IRA.

After preparing a complete and accurate operating agreement, the next step is to set up a bank account for your LLC.  Then, when you are ready to invest into your LLC, instruct the custodian to place the IRA assets into the bank account or brokerage account for the LLC.  As manager of the LLC, you will have what is referred to “checkbook control,” which gives you the ability to execute transactions on the LLC level without the involvement of the IRA custodian.  In other words, once the LLC is funded, you no longer need the custodian to write the checks. 

The Right of Publicity

In recent years, consumers have been able to easily satisfy their celebrity cravings through mobile applications on their phones.  With these applications, mobile phone users can see images of their favorite celebrities right from the palm of their hand.  However, there are serious legal issues implicated as the result of the unauthorized use of a celebrity image, more specifically, a violation of their rights of publicity and privacy.

While the right of publicity is not a new area of law, in the mobile application world it bleeds into a new context.  The contours of the right vary from state to state, but the right of publicity generally includes the ability to control, direct and commercially use one’s own name, voice, signature, likeness or photograph. Moreover, the right of publicity seeks to prevent the unjust enrichment from the unauthorized use of another’s good will.  In order to lawfully publish a celebrity photograph, you must receive authorization and clearance from that celebrity.  Applications using the image of a celebrity in any such manner must be licensed or they are operating illegally.  

Some mobile applications depict celebrities in a poor light.  In a particular popular application from the iTunes App Store, celebrities are featured in bikinis amongst images of non –celebrities who are similarly scantily clad.  In the event that their identity is used without permission, for some celebrities, this could cause grave harm to their public image.  This scenario implicates of a violation of a celebrity’s right of privacy, more specifically the tort of false light.  Although not recognized in every state, a false light claim is raised when a false image of a person is painted that would be offensive to a reasonable person.  In other words, if a celebrity is depicted in a false light, in an offensive manner such as in the above-mentioned mobile application, and a reasonable person is offended, the celebrity may raise a claim for the tort of false light.

With the increasing popularity of mobile applications and the profitability they generate for their developers, the use of celebrity images, without their authorization, is problematic.  In the event that these images are properly licensed, there should be no problems.  However, if they are not, mobile application developers face the threat of a lawsuit, which could result in an injunction and damages. 

Software Escrow Agreements

Businesses relying on intellectual property assets sometimes require specialized tools to protect against potentially business ending problems.  The software escrow agreement is one such tool.  Software escrow agreements protect critical intellectual property assets (“IP”) and provide continuity of use by making the IP available to both parties under certain conditions, including bankruptcy.  Essentially, the software escrow agreement permits the customer access to the licensed product and simultaneously safeguards the vendor’s IP and proprietary information.  

Typically such agreements are set up as 3rd party agreements in which an escrow agent stores the vendor’s underlying intellectual property in a location under the control of a third party where it is accessible to the licensee under certain circumstances. For example, software source code deposited to an escrow account under third party control can be updated, serviced or customized by the developer/vendor, but can also be utilized by the licensee, even if the licensee does not have access to the protected source code itself.  Escrowing software source code is the most typical use of such agreements, but MasurLaw has also applied them to other intellectual property including domain names, or proprietary information, like business plans, to which both parties should have access, but to which the providing party wants to maintain control.  This is a developing area of law which is particularly relevant in the Web 2.0 or cloud computing space, in which nearly all information, content and software is kept under the management and control of third parties.  

Why use software escrow agreements?  As a licensee, protecting a crucial part of your business against the risk of suddenly losing access to critical intellectual property deserves an extra measure of assurance.  If the vendor becomes bankrupt, sells its assets or otherwise passes out of existence, the customer will be ensured continual access to the underlying intellectual property assets necessary for its success.  Without a software escrow agreement, your business may be damaged as the essential technology will be cut off.  MasurLaw uses software escrow agreements in situations like the one described above, or in other circumstances when the inability to access, work with, or use mission critical intellectual property or equipment could jeopardize your business.

AP Responds in Shepard Fairey Case

Popular artist Shepard Fairey recently filed a lawsuit against the Associated Press, looking to declare his use of an AP photo to create his iconic "Obama Hope" poster as "fair use."

In its answer, the AP argues that Fairey was "drawn to the unique qualities of this particular photograph," including the photographer's deliberate selection of a specific moment in time to capture Obama's expression, choice of lens and light, and the careful composition of the photograph."

The AP criticizes Fairey's artistic method, attacking him for misappropriating images in other works, such as Black Panther, Obey, and a silkscreen by the artist Rupert Garcia.

The AP accuses Fairey of having a "hypocritical approach to intellectual property rights," having sent cease-and-desist letters upon alleged infringement of his "Obey" art, violating Google's explicit user policies in the downloading of the photograph off of Google Images, and defrauding the U.S. Copyright Office in a copyright application. The AP demands statutory damages upon counterclaims of copyright infringement, contributory copyright infringement, and violation of the DMCA. [Source: THR, Esq.]

  

Facebook Reverses Newest Terms of Service After Outcry From Users

On February 6, Facebook announced its newest changes to their terms of service. The new version removed a clause which terminates Facebook’s license when the user terminates their account. As a result, the new TOS granted far broader license rights that many Facebook users opposed. The TOS granted Facebook:

“an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to (a) use, copy, publish, stream, store, retain, publicly perform or display, transmit, scan, reformat, modify, edit, frame, translate, excerpt, adapt, create derivative works and distribute (through multiple tiers), any User Content you (i) Post on or in connection with the Facebook Service or the promotion thereof subject only to your privacy settings or (ii) enable a user to Post, including by offering a Share Link on your website and (b) to use your name, likeness and image for any purpose, including commercial or advertising, each of (a) and (b) on or in connection with the Facebook Service or the promotion thereof.”

Many sources speculated that the expanded license was a result of a new operating strategy, which Facebook hoped to pursue regarding commercial revenue. However, after many users protested and blogs and newspaper outlets raised concerns with the change, Facebook reviewed its position and reverted back to the former version of the TOS. NY Times

Ringtone Rate to Hit 24 Cents as of March 1st

Following the recent publication of last year's Copyright Royalty Board ruling in the Federal Register, the royalty rate for ringtones under the section 115 compulsory license will be raised to 24 cents. Physical phonorecord and digital phonorecord deliveries will remain at the rate of 9.1 cents or 1.75 cents per minute of playing time or fraction thereof. Also, under the compulsory license statute, a late fee of 1.5% per month will go into effect for any payment received by the copyright owner after monthly accountings are due (on the 20th of the following month). 

The decision also establishes rates and terms of royalty payments for interactive streams and limited downloads of musical works by subscription and nonsubscription digital music services in accordance with the provisions of the compulsory license. The ruling details the methodology used to determine these rates. Also, the rates are subject to minimum royalties and subscriber-based royalty floors for specific types of services. 

The effective date of these changes will be March 1, 2009. Rates and terms for the section 115 license remain in effect until new rates and terms are set. The next Copyright Royalty Board proceeding to set rates and terms for the section 115 license will commence in 2011. However, Marybeth Peters, the Register of Copyrights, has also issued a written review of the decision, noting potential errors in the decision, including the Board’s failure to refer novel questions of law to her office. Register Peters also questioned the finality of the ruling, which represents the second time in history that a United States government body other than Congress has established royalty rates to be paid for reproductions of musical works by copyright users.

Participants including groups such as the National Music Publishers' Association, Apple, AOL, RealNetworks, Napster, the Digital Media Association, Yahoo!, MTV Networks, the RIAA, will have 30 days to appeal the decision. The proceeding began in late 2006 and included live testimony from a wide variety of industry executives, songwriters, technologists, academics, and lobbyists.

This update was also published on the Mobile Entertainment Forum website at http://www.m-e-f.org.

High Court Supports Third Circuit in Striking Down COPA

In July 2008, the Third Circuit affirmed a lower court ruling striking down COPA, the Child Online Protection Act, a 1998 law intended to protect children from sexual material and other objectionable content on the Internet.

Today, the Supreme Court, without comment or any noted dissents, refused the government’s request to review the Third Circuit’s decision.  WSJ

NAILING THE BALANCE:

Why We Need Strong Rights to Fair Use of Intellectual Property

*  Steven Masur, January 2009:  Developed from Presentation at DCIA Peer to Peer Summit at CES:  Panel on developing a market for Peer to Peer content sales

Introduction

For many years there has been a battle over peer to peer networks.  It is often posited that the battle is polarized between two sides:  1) copyright holders who believe they should be paid for content to which they own the rights, and 2) pirates who feel that content should be free to the public and that creators of copyrights can make their money other ways, for example, by charging for live performances, selling merchandise, or licensing to advertisers.  This polarized dichotomy has always been false.  It reflects neither the way most people feel or behave, nor the balance the copyright clause of the Constitution of the United States established for science and the useful arts.  The stalemate this worldview has created has far reaching international implications in that it threatens to throw off the balance articulated in the copyright clause, discourage the financial incentive to create new works, and create a competitive advantage for countries with more liberal rules regarding fair use.

Although there is previous law relating to protecting intellectual property, many credit the Copyright Clause in the United States Constitution as really accelerating the creation of a body of law around the concept that people should be able to make money from their ideas.  The Copyright Clause empowers Congress:

“To promote the Progress of Science and useful Arts, by securing for limited Times to Authors and Inventors the exclusive Right to their respective Writings and Discoveries.”

The clause allows owners of intellectual property a limited monopoly to make money on copyrighted works, so there will be a financial incentive for such works to be made.  However, the monopoly is “limited.”  In order for the balance to work, the intellectual property must be able to be copied and used by new makers of intellectual property, for free, so that the progress of science and the useful arts is not stifled.

The Right to Copy – For Free

Everyone believes in the right to make money from intellectual property.  It is one of the central underpinnings in a capitalist economy.  It is the other half of the balance -- the right to copy for free in order to promote creation of new intellectual property -- which is misunderstood by many and downplayed by entrenched interests who wish to keep a lock-hold on their intellectual property forever, so they can continue making money from it forever.  I am not suggesting that intellectual property should be free and copyrights owners should find a new revenue model.  I am saying that if we do not NAIL THE BALANCE between providing copyright holders with the tools to collect money on their copyrights, but allowing enough freedom to copy so that new inventions can be created, we could plunge ourselves into an intellectual property dark age in which no one is able to make money from their intellectual property. 

It is, of course, true, that intellectual property can be licensed in whole or in part, and that this provides a fair market-based structure, which enables a good deal of new intellectual property to be created.  The right to ownership presumes the right NOT to sell for any price.  I am not talking about this main body of trade in intellectual property rights.  I am discussing only the outer limits of use in which the refusal to allow free uses stifles creativity and inhibits progress.

An Intellectual Property Dark Age?

OK, so isn’t it a little melodramatic for me to say that we risk plunging the world into a dark age?  No, it is not, because our world does not end at the borders of the United States or any other country with strong copyright protections.  We live in a world of sovereign nations, which have different degrees of power at different times.  The fact is that from a technology perspective, all intellectual property is discoverable and can be copied with increasing ease.  So this is an international issue.  If it is easy to copy intellectual property, and if in certain territories this is not illegal, or copyright protections are not enforced, then we stand to lose our most valuable intellectual property assets.  Since we cannot count on always being in power, we can’t just rely on might to protect ourselves from this.  Eventually, we must turn to the rule of law.  For the rule of law to work among sovereign nations, it must be within the interest of all parties to sign on to certain principals.  Those principals cannot just be, “our way or the highway,” because it is too easy for territories with varying amounts of power to either say, “no,” or to be lax in their enforcement of rules that are not in their interest to enforce.

A good illustrative example is peer to peer file networks.  The idea of shutting them down and stamping them out is the same as saying that if God had wanted us to fly, he would have given us wings.  Money is being made on content sold on peer to peer networks and peer to peer technologies are legitimate and are not going anywhere.  So when we discuss peer to peer technologies, we should focus not on the money that is NOT being made, but on the money that is being made and how to increase it. 

The seed of the small amount of money that has been made can be grown into a field of wheat.  With smart investment and good execution, the field of wheat can be grown into a worldwide food supply; a vibrant market for intellectual property sold, traded, exchanged and recycled legitimately using all manner of digital distribution technologies.  All it really takes is good laws, which are in the interest of every nation to properly enforce.

As everyone knows, peer to peer technologies have been well been tested and proven to work for the illegal sharing of unprotected files for free.  They are now in the refinement stage.  What has not been tested sufficiently is how to increase the amount of money being made on peer to peer networks.  Major copyright holders have stalled so long in granting licenses, and made it so difficult and expensive to try new business models, that it has choked many early stage companies, and stifled innovation to the degree that the illegal market is stronger than the legal one.  The many young bright eyed entrepreneurs who had previously been attracted to try new ideas and models for selling intellectual property on the internet and mobile devices has been limited to a slow trickle of battle-hardened digital media executives with good relationships in the established industry, or fringe players willing to dabble in the illegal.

The Market is Broken

So should we give up on the basic tenants of capitalism and adopt an ISP tax or levy?  No, I don’t think we should.  I trust the market and the innovation that it can create.  I fear a media business that does not overpay stars with a lot of talent and the power to bring it to market, or risk-taking entrepreneurs who want to compete to create better products for our enjoyment. 

I just think the market is broken.  What is broken about it is that we have not nailed the balance, by protecting the outer fringes of copyright -- fair use -- the right to use intellectual property for free in order to promote progress in science and the useful arts.  Under our current regime, it is easier to steal intellectual property and use it illegally than to legally license and pay for it.  We have stifled a great many of the innovators who would have come up with ways to distribute media further, faster, and cheaper.  In so doing, we have left hundreds of millions in potential earnings on the table, and exposed ourselves to being overtaken by innovators in foreign lands, who have no qualms about making use of our intellectual property for free in order to advance their interests.

In the music industry alone, hundreds of millions in venture capital investments have been wasted because major music labels will not license music to new start-ups with good ideas.  There are a host of legitimate reasons not to license against which I do not argue.  But because the music is not licensed, new music services die on the vine, and there is a massive trade in illegal content on file-sharing networks.  The film and book industries are moving in the same direction, they just have not advanced as far down the path.

The legitimate refusal of these companies to license content rights is a classic example of our failure to nail the balance, and illustrates how keeping a lockhold on intellectual property stifles progress.  Because companies with new ideas cannot legally license files without paying advances that are too large to risk on unproven models, only the marginal services that tangentially address the problems of music distribution are created, and no truly groundbreaking new distribution model evolves, except abroad, or on the illegal darknet.

Solutions?

We have done enough for a while in protecting the right to make money on intellectual property.  We’ve done such a good job, that we have broken the market.  Now, we need to fix the market, by quickly evolving rules that implement fair protections for the other half of the balance; the freedom to use intellectual property for free to promote the progress of science and the useful arts.

Doing this is absolutely central to our ability to survive if our primary export is intellectual property.  This is no less important now, than were the adoption of the securities laws, the labor laws, or the antitrust laws in their time.  In each case, these laws were enacted to fix markets that were broken.  If we don’t fix the market for purchase and sale of intellectual property, we stand to lose everything, just as we did after the great depression.  So in a very real way, this is the challenge of our generation.

This article does not attempt to propose a solution.  It is enough for now to articulate the problem, so that we can begin working on a solution.

 

VEOH WINS AGAIN

A few months ago, the user-generated website Veoh successfully persuaded a judge that the website's take-down policies combined with section 512(c) of the Digital Millennium Copyright Act gave it "safe harbor" from liability.

Last week, Veoh won a preliminary motion against Universal Music Group, which also is trying to claim that Veoh should be held liable for infringing works on their website.

However, the court reserved the right to later decide the much larger issue of the ultimate applicability of 512(c) to this case. The court rejected arguments that various activities, including automatically creating different copies after an upload and allowing users to access uploaded videos via streaming or full download, disqualify Veoh from asserting the "safe harbor" defense.

It is unclear whether the Veoh cases will have a material effect on the ongoing Viacom-YouTube dispute. Some opinions suggest that the Veoh decisions could potentially put the pressure on Viacom to get a victory.  

THR, Esq.

AUSTRALIAN COURT APPROVES FACEBOOK FOR FORECLOSURE NOTICES

A court in Australia has approved the use of Facebook to notify a couple that they lost their home after defaulting on a loan.

Last Friday, The Australian Capital Territory Supreme Court approved lawyer Mark McCormack's application to use Facebook to serve the legally binding documents after several failed attempts to contact the couple at the house and by e-mail.

McCormack said he and a colleague found the woman's Facebook page using personal details that she had given the lender including her birth date and e-mail address. The man was listed on her page as a Facebook friend, and neither party had protected their pages using Facebook’s security options.

In the past, Australian courts have given permission for people to be served via e-mail and text messages when it was not possible to serve them in person.