In light of Tax Day (note that it’s on the 18th of April this year due to a holiday on the 15th) we want to point out a curious ramification from a federal case concerning online gambling, tax reports, and foreign accounts.
In United States v. Hom , the defendant, John C. Hom, was an online poker player who had money in player accounts situated outside America. Accounts such as these are used for depositing funds, wagering them on the site, and withdrawing whatever remains; they are not generally treated as “bank accounts” proper, and Hom did not bother to file a tax return on them. Surprisingly, the court said he should have.
As explained by the court in its decision, an individual is mandated to file an FBAR (a Report of Foreign Bank and Financial Accounts) for a reporting year if all of these requirements are satisfied:
(1) he or she is a United States person;
(2) he or she has a financial interest in, or signature or other authority over, a bank, securities, or other financial account;
(3) the bank, securities, or other financial account is in a foreign country; and
(4) the aggregate amount in the accounts exceeds $10,000 in U.S. currency at any time during the year.
Id. at 1178.
In Hom’s case, three of the requirements were clearly satisfied: the defendant was a U.S. citizen (1), the accounts, like the gaming companies holding them, were located in a foreign country (3), and the aggregate amount in those accounts exceeded $10,000 (4).
Requirement (2) was the sticking point. Could an online poker account really clear the definition of “other financial account,” thus compelling Hom to file an FBAR? His team argued that it didn’t: the funds weren’t held in a bank or securities account and the defendant’s actions were limited to making deposits and withdrawals. Strikingly, the court ruled that it was a financial account because “he opened up all three accounts in his name, controlled access to the accounts, deposited money into the accounts, withdrew or transferred money from the accounts to other entities at will, and could carry a balance on the accounts.” Id. at 1179. The ability to deposit and withdraw at will sufficed to make the gaming companies “function as institutions engaged in the business of banking. Accordingly, defendant’s accounts are reportable even under the current regulations.” Id.
This is a very broad expansion of what passes for a financial institution, and it begs the question of how far it can go. For example, are funds in an attorney escrow account, or other escrowed accounts for a foreign transaction, FBAR reportable? After all, they, too, permit the client to make withdrawals and deposits and carry a balance—and possibly even control access.
Hom is only one case; other courts aren’t bound by it. However, they could still be influenced by this decision. It is therefore prudent to file an FBAR on gambling accounts located overseas that exceed $10,000. Furthermore, one should wonder whether other courts will borrow this reasoning and apply it to other forms of escrow accounts. These questions are very pertinent in light of the IRS’s continuing emphasis on the disclosure of foreign accounts.
 United States v. Hom, 45 F. Supp. 3d 1175 (N.D. Cal. 2014)
This article first appeared February 29, 2016, on FEE.org – you can access this version here.
Remember Martin Shkreli, the “pharma bro” notorious for raising the price of his company’s life-saving drug by some 5,000 percent? Did you know he was recently arrested for securities fraud (completely unrelated to the drug hike)? It didn’t take long for the Justice Department to go after the universally unpopular rapscallion.
Big government gets a bad rap for being inefficient, but it can cut to the chase rather swiftly when it wants to. In order to stop, or at least dramatically curb, behavior that goes against law or policy — or perhaps just opinion — government enforcement agents know how to employ a show of force and to make an example of someone they deem a wrongdoer. The punishment is public and can be severe.
Setting an Example
A recent show of force can be seen in federal actions against the dietary supplement industry. The industry has exploded in recent years, thanks in large part to the public’s growing love for health and homeopathy. The popularity has, predictably, attracted moneymakers of both the scrupulous and unscrupulous kind.
The government wants to rein in the industry, so to set an example it has come down hard on one company. USPlabs was one of more than 100 makers and marketers of dietary supplements against whom the Justice Department announced it was pursuing civil and criminal cases. But the company had the unfortunate luck to become the government’s example of what it can do to wrongdoers. Not only did the DOJ charge the company; it also indicted several of its executives and froze their assets — from investment accounts to homes to automobiles.
Do the Ends Justify the Meanness?
The government’s heavy hand on USPlabs is the kind of crackdown you expect against organized crime or large drug rings. What were the criminal defendants at USPlabs alleged to have done? Not exactly Sopranos-level stuff: importing ingredients with false certificates of analysis and false labeling, misrepresenting the source and nature of product ingredients, selling products without determining safety, and continuing to sell products after they told agents they would stop.
If the allegations are true, the defendants’ actions were wrong. But public arrests and asset seizure are extreme. How often do people accused of false labeling get perp walked? The DOJ’s tactics look like shock-and-awe theater for the benefit of others.
If there is any doubt whether the government wanted to use its hard-line approach against USPlabs as an example for other companies, look no further than this statement by FDA Deputy Commissioner Howard Sklamberg: “The criminal charges against USPlabs should serve as notice to industry that if products are a threat to public health, the FDA will exercise its full authority under the law to bring justice.”
In other words, makers and marketers of dietary supplements: beware!
You may think the Justice Department performed a public service by coming down so hard on Shkreli and USPlabs. Why should we care if the government crushes some scalawags and discourages others in the process?
What if the government’s show of force comes at the cost of a defendant’s due process rights? Shkreli has said that the feds targeted him because of the drug price hike, looking for anything to stop him. Now he’s been fired and his company has filed for bankruptcy. That’s a pretty high price to pay for being obnoxious.
While deterrence may be an acceptable basis for punishment, it doesn’t justify punishment that exceeds the crime. Arresting executives and seizing their personal bank accounts, homes, and cars in an instance like this is excessive. More commonly in cases like USPlabs, prosecutors will settle with the company, levy a fine against it, require it to institute controls to avoid further wrongdoing, and perhaps require it to be monitored for a while to ensure controls are being observed.
Going after the individual executives as if they were Mafia kingpins goes beyond the pale. Freezing or seizing assets is something that prosecutors more commonly do when those assets are being used to carry out criminal behavior, or when there is a great risk those assets will be disposed of before judicial proceedings. Chances are slim that the executives in the USPlabs matter were planning on liquidating their family homes or cars.
Yet Another Slippery Slope
For those who think the government is on the right side in its show of force, ask yourselves whether the government isn’t pursuing its initiatives (even reasonable initiatives like reining in fraud) a bit brutishly. Making an example of an alleged wrongdoer even before the wrongdoer’s day in court harkens back to techniques used by conquerors in days of old who put heads on pikes to show the subjugated just who was in charge.
And what if the government decides to crack down on behavior not so clearly reprehensible? Say the government decides to put speeding in check by jailing a few folks going modestly over the limit. How many of us would feel safer?
Even when we dislike the targets of prosecutorial zeal, supporting justice is in our self-interest. When the government sets aside due process and proportionality to set an example of other would-be wrongdoers, they are sacrificing justice for the sake of regulatory expediency.
FBI Director James Comey took a rare break from the posturing typical of investigators and prosecutors in the current showdown between Apple and the FBI. While prosecutors argue that Apple’s privacy concerns are a smokescreen to avoid “assist[ing] the effort to fully investigate a deadly terrorist attack,” Comey posted a statement over the weekend in which he took the position that the tension between security and privacy “should not be resolved by corporations that sell stuff for a living. It also should not be resolved by the FBI, which investigates for a living. It should be resolved by the American people deciding how we want to govern ourselves in a world we have never seen before.”
Comey’s statement highlights a crucial problem with the development of privacy law: it often is developed in the context of important criminal cases. This comes at a real cost. We all know that Syed Farook committed a horrific crime, and any rights he once had against government searches are now forfeit. But though Apple may have chosen to serve as a limited proxy for its consumers in the San Bernardino case, often the interests of private citizens are wholly absent from the courtroom (or, often, judge’s chambers) when issues of fundamental privacy are debated.
This leads to a serious imbalance: Apple is talking about the diffuse privacy rights of its consumers and the risks of potential incursions by more restrictive, less democratic governments such as China. On the other hand, Manhattan District Attorney Cyrus Vance can point to 175 Apple devices that he cannot physically access even though those devices may contain evidence helpful to the government.
New York Police Commissioner Bill Bratton and one of his deputies put an even finer point on it in an Op-Ed in The New York Times, citing a specific case of a murder victim in Louisiana (more than one thousand miles outside of Mr. Bratton’s jurisdiction) whose murder is unsolved because officers cannot unlock her iPhone, which is believed to contain her killer’s identity. “How is not solving a murder, or not finding the message that might stop the next terrorist attack, protecting anyone?” asks Bratton.
But in assuming that private citizens have no greater fear than whether the police can investigate and prevent crimes, Bratton begs the question. In reality, citizens may see law enforcement as a threat of itself. Learning that the NSA was engaging in comprehensive warrantless surveillance likely has given many law-abiding Americans a greater incentive to protect their data from being accessed by the government. Indeed, in light of the NYPD’s record over the last few years—including a finding by a federal judge that they were systematically violating the rights of black New Yorkers and a lawsuit over religion-based spying on Muslims—it is not hard to see why citizens might want protection against Bratton’s police force.
But even if the police were the angels they purport to be, opening a door for a white hat can easily allow access to a black one. Less than a year ago, hackers used a “brute force” approach to exploit a flaw in iCloud’s security, and dozens of celebrities had their private photos shared with the world. These sex crimes are all but forgotten in the context of the San Bernardino shootings, even though the security weakness the FBI wants installed in Farook’s iPhone is markedly similar to that exploited with respect to iCloud.
Nor do those who wish for privacy need to invoke hackers or criminals. A private, intimate moment with a spouse or loved one; a half-finished poem, story, or work of art; or even a professional relationship with a doctor or mental health professional cannot exist unless they can remain private. Once these interactions took place in spoken, unrecorded conversations or on easily discarded paper; now many of our daily activities are carried out on our mobile devices. Even if one has nothing to hide, many citizens might balk at the prospect of having to preserve their private conversations in a format readily accessible by the police.
But if Mr. Comey has shown unusual insight, Mr. Bratton’s one-sided, myopic question illustrates the importance of Apple’s position and the inability of law enforcement officials to be objective about the interests at stake. Police and prosecutors are not always your friends or your defenders. Their goals are—and always will be—investigating and solving crimes and convicting suspected criminals. The less an officer knows, the harder it will be to investigate a case. As a result, privacy rights—even when asserted by innocent, law-abiding citizens—make their job more difficult, and many officers see those rights as simply standing in their way.
This is hardly news. Nearly sixty years ago the Supreme Court observed that officers, “engaged in the often competitive enterprise of ferreting out crime,” are simply not capable of being neutral in criminal investigations. For precisely that reason, the Fourth Amendment requires them to seek approval from a “neutral and detached magistrate” before a search warrant may issue.
That is why Mr. Comey’s acknowledgement that the FBI is not a disinterested party is so refreshing. Pro-law-enforcement voices have been clamoring to require Apple to compromise the security it built into the iPhone, invoking their role as public servants to buttress their credibility. But when it comes to privacy, the police do not—and cannot—represent the public interest. As Comey acknowledged, they are “investigators,” and privacy rights will always stand as an obstacle to investigation.
It is a well-known maxim that “bad facts make bad law.” And as anybody even casually browsing social media this week likely has seen, the incredibly tragic facts surrounding the San Bernadino attacks last December have led to a ruling that jeopardizes the privacy rights of all law-abiding Americans.
First, it is important to clearly understand the ruling. After the horrific attack in San Bernadino on December 2, 2015, the FBI seized and searched many possessions of shooters Syed Rizwan Farook and Tashfeen Malik in their investigation of the attack. One item seized was Farook’s Apple iPhone5C. The iPhone itself was locked and passcode-protected, but the FBI was able to obtain backups from Farook’s iCloud account. These backups stopped nearly six weeks before the shootings, suggesting that Farook had disabled the automatic feature and that his phone may contain additional information helpful to the investigation.
Under past versions of iOS, the iPhone’s operating system, Apple had been able to pull information off of a locked phone in similar situations. However, Farook’s iPhone—like all newer models—contains security features that make that impossible. First, the data on the phone is encrypted with a complex key that is hardwired into the device itself. This prevents the data from being transferred to another computer (a common step in computer forensics known as “imaging”) in a usable format. Second, the iPhone itself will not run any software that does not contain a digital “signature” from Apple. This prevents the FBI from loading its own forensic software onto Farook’s iPhone. And third, to operate the iPhone requires a numeric passcode; each incorrect passcode will lock out a user for an increasing length of time, and the tenth consecutive incorrect passcode entry will delete all data on the phone irretrievably. This prevents the FBI from trying to unlock the iPhone without a real risk of losing all of its contents.
As Apple CEO Tim Cook has explained, this system was created deliberately to ensure the security of its users’ personal data against all threats. Indeed, even Apple itself cannot access its customers’ encrypted data. This creates a unique problem for the FBI. It is well-settled that, pursuant to a valid search warrant, a court can order a third party to assist law enforcement agents with a search by providing physical access to equipment, unlocking a door, providing camera footage, or even giving technical assistance with unlocking or accessing software or devices. And, as the government has acknowledged, Apple has “routinely” provided such assistance when it has had the ability to access the data on an iPhone.
But while courts have required third parties to unlock doors, they have never required them to reverse-engineer a key. That is what sets this case apart: to assist the government, Apple would have to create something that not only does not exist, but that it deliberately declined to create in the first instance.
On February 16, Assistant U.S. Attorneys in Los Angeles filed an ex parte motion (that is, without providing Apple with notice or a chance to respond) in federal court seeking to require Apple to create a new piece of software that would (1) disable the auto-erase feature triggered by too many failed passcode attempts and (2) eliminate the delays between failed passcode attempts. In theory, this software is to work only on Farook’s iPhone and no other. This would allow the FBI to use a computer to simply try all of the possible passcodes in rapid succession in a “brute force” attack on the phone. That same day, Magistrate Judge Sheri Pym signed what appears to be an unmodified version of the order proposed by the government, ordering Apple to comply or to respond within five business days.
Though Apple has not filed a formal response, CEO Tim Cook already has made waves by publicly stating that Apple will oppose the order. In a clear and well-written open letter, Cook explains that Apple made the deliberate choice not to build a backdoor into the iPhone because to do so would fatally undermine the encryption measures built in. He explains that the notion that Apple could create specialized software for Farook’s iPhone only is a myth, and that “[o]nce created, this technique could be used over and over again, on any number of devices. In the physical world, it would be the equivalent of a master key . . . .”
This has re-ignited the long-standing debate over the proper balance between individual privacy and security (and the debate over whether the two principles truly are opposed to one another). This is all to the good, but misses a key point: Judge Pym’s order, if it stands, has not only short-circuited this debate, it ignores the resolution that Congress already reached on the issue.
Indeed, a 1994 law known as the Communications Assistance for Law Enforcement Act (“CALEA”) appears to prohibit exactly what the government requested here. Though CALEA preserved the ability of law enforcement to execute wiretaps after changing technology made that more complicated than physically “tapping” a telephone line, it expressly does not require that information service providers or equipment manufacturers do anything to open their consumers to government searches. But instead of addressing whether that purpose-built law permits the type of onerous and far-reaching order that was granted here, both the government and the court relied only on the All Writs Act—the two-century-old catch-all statute that judges rely on when ordering parties to unlock doors or turn over security footage.
Though judges frequently must weigh in and issue binding decisions on fiercely contested matters of great importance, they rarely do so with so little explanation, or after such short consideration of the matter. Indeed, when the government sought an identical order this past October in federal court in Brooklyn, N.Y., Magistrate Judge James Orenstein asked for briefs from Apple, the government, and a group of privacy rights organizations and, four months later, has yet to issue an opinion. Yet Judge Pym granted a similar order, without any stated justification, the same day that it was sought.
An order that is so far-reaching, so under-explained, and so clearly legally incorrect is deeply concerning. And yet, but for Apple’s choice to publicize its opposition, this unjustified erosion of our privacy could have happened under the radar and without any way to un-ring the bell. Fortunately, we appear to have avoided that outcome, and we can hope that Apple’s briefing will give the court the additional legal authority—and the additional time—that it will need to revisit its ruling.
Despite the old saying “the customer is always right,” the law places limits on customer service in the casino industry. Normandie Casino has found this out the hard way. The operator of the casino has agreed to plead guilty to charges that it violated anti-money laundering provisions of the Bank Secrecy Act, according to a Department of Justice press release.
Normandie Casino is one of the few remaining family-owned casinos in the country and one of the original card clubs in California. In the 1980s, the casino expanded its offerings and now features Seven-card Stud, Texas Hold-em, Five-card Draw, Blackjack, Pai Gow Poker, and Super 9, among other games and entertainment.
However, amid all these offerings, it appears the casino failed to consistently observe the banking regulations. Under the Bank Secrecy Act, casinos are required to take measures to prevent criminals from using the casino for money laundering. In particular, casinos must report transactions involving more than $10,000 by any one gambler in a 24-hour period.
Under the agreement with the Department of Justice, Normandie Club, which operates Normandie Casino, has agreed to plead guilty to two felony offenses. In the agreement, Normandie will admit that the casino used independent gambling “promoters” to locate high-rollers. Once the high-rollers were at the casino, high-level employees would help the high-rollers avoid transaction reporting requirements. Normandie would use the name of the promoter on the Currency Transaction Report, rather than the high-roller, and also structure the payments to make them appear to fall under the federal transaction reporting requirements.
Normandie has agreed to pay a $500,000 fine per charge, for a total of $1 million, plus the casino will forfeit the nearly $1.4 million it received in 2013 when failing to file accurate Currency Transaction Reports.
While the casino industry runs on making its customers happy, the casino must also do so within the bounds of the law. Gamblers may seek anonymity, but casinos cannot guarantee this to high-rollers who are making significant transactions.
As a matter of course, federal prosecutors often pile on charges in order to strong-arm defendants into entering a favorable guilty plea quickly. Those who exercise their jury trial right and put the government to its proof often receive harsh sentences based on these overreaching indictments. But last week, a federal judge in Oklahoma took a rare stand against this practice.
United States v. King, a fifty-nine-defendant prosecution, appeared to be following the typical pattern. Though the only unlawful conduct seemed to be violations of the payment-processing provisions of the Unlawful Internet Gaming and Enforcement Act (“UIGEA”), the government had charged the defendants with gambling, money laundering, and even racketeering offenses carrying lengthy prison sentences. Several defendants entered favorable guilty pleas, likely because of sticker shock at the relevant sentencing guidelines.
However, many other defendants chose to go to trial and several jury trials were held before the Honorable Stephen P. Friot, resulting in convictions on one or more counts. Having given up their chance for a favorable plea, it appeared that those who went to trial would be sentenced harshly under laws intended to combat organized crime. But before sentencing, Judge Friot took the unusual step of issuing “Preliminary Findings and Comments with Respect to Sentencing” in which he took a critical eye to typical charging and sentencing practices.
Judge Friot’s focus was the requirement under federal law that a sentence be “sufficient, but not greater than necessary,” to punish offenders and deter future crimes. To give meaning to this vague standard, Judge Friot took the unusual step of quoting from a letter that was written by the jury foreman in one of the trials, who said:
The way I look at it, with all the “legal” sports gambling that goes on the U.S.[,] coupled with the fact that no one was physically harmed and nobody was forced to place bets, I see no threat to society by allowing both Mr. Dorn and Mr. Korelewski [sic] to avoid prison time. I truly believe that our taxpayer money is better spent on these “criminals” by allowing them the opportunity to make a legal living outside of prison walls. I strongly support some sort of deferred sentence or probation.
Though Judge Friot said that this letter was not “determinative,” he also refused to rely on the government’s charging decisions in deciding how to sentence those convicted, focusing instead on “the real conduct that should be punished.” He concluded by saying that he was “particularly interested in what the government may have to say about” why those particular defendants should be imprisoned. In light of this skepticism, it is not surprising that his subsequent sentences were for probation or time served, not further imprisonment.
The ability of prosecutors to charge minor offenses as if they were serious crimes often turns the constitutional right to a jury trial into a very risky proposition. Judge Friot’s thoughtful opinion recognizes that even if defendants can be punished for their role in unlawful gambling, they should not be penalized for the decision to roll the dice before a jury.
If you’ve ever let your kids sign into your Netflix or HBO Go account, or given your marketing department access to your Twitter feed, you may be committing a federal crime, depending on how the Ninth Circuit rules on a case argued before it just last month.
The case, United States v. Nosal, is the latest chapter in a series of cases in which federal prosecutors have used a thirty-year-old anti-hacking statute to turn seemingly routine business disputes into federal felony cases. The statute, known as the Computer Fraud and Abuse Act (CFAA), contains broad prohibitions on accessing a computer system “without authorization” or in a way that “exceeds authorized access.” Though intended to prevent malicious hacking and espionage, those prohibitions have repeatedly been applied to disgruntled former employees who logged back into company databases to access proprietary information after their termination and when their authorization to access those files had been revoked.
However, the Nosal case goes a step further, and a ruling in favor of the United States threatens to criminalize password sharing of all kinds. Nosal was an executive at the recruiting firm Korn Ferry International (KFI). After he left the firm, he obtained the help of several former colleagues to obtain protected KFI data to start a competing business. Although several of the charges against Nosal were thrown out in an earlier case, he was still prosecuted for accessing KFI files using his former assistant’s login information, which she had given him willingly.
According to prosecutors, Nosal’s former assistant was not authorized to give him access to KFI’s systems under the company’s computer usage policy, and so his use of that password was “without authorization” by the proper authorities. Upholding that argument could have a broad reach because so many password-protected services have prohibitions against password sharing in their user agreements, including Netflix, LinkedIn, Facebook, and HBO Go, to name a few. For that reason, a ruling that the CFAA prohibits password sharing when not authorized by these agreements could turn us all into criminals.
Following argument, this case is difficult to handicap. Although Judge McKeown seemed particularly concerned with the fact that Nosal clearly had engaged in wrongful conduct when he knew his authorization had been revoked, Chief Judge Thomas and Judge Reinhardt clearly recognized the scope of the issue at stake, and all three panel members were concerned by the government’s apparent lack of a limiting principle.
A ruling can be expected in the next few months. Until then, all we can do is hold our breath, and hope that the court ensures that the next time we share an account with the others in our household, we won’t end up living an episode ofOrange is the New Black instead of just watching it.
Beating their chests and breathing fire to rouse the polity, the Department of Justice recently came out with an announcement as earth shattering as the sun rising. The DOJ proclaimed it has adopted new policies to prioritize the prosecution of individuals for white-collar crime.
Deputy Attorney General, Sally Q. Yates, was quoted in the New York Times: “It’s only fair that the people who are responsible for committing those crimes be held accountable. The public needs to have confidence that there is one system of justice and it applies equally regardless of whether that crime occurs on a street corner or in a boardroom.”
What’s the hoped-for public response? Probably something like this: “And the crowd goes wild. Finally, after years of corporate executives sporting Teflon and sliding past investigators, the government is going to put its fist down and make the wrongly rich execs pay for their nefarious acts of fraud, insider trading, embezzling, racketeering, and tax evasion! “
But things look a little different in the actual world of white-collar criminal investigations and defense. In fact, prosecutors from the Southern District of New York and across the country are zealously prosecuting employees accused of white-collar offenses, and their companies are never shy about providing the backup data regulators request.. What’s more, convicted offenders are often subject to penalties far exceeding their crimes, as U.S. District Judge Jed Rakoff noted in the 2012 sentencing of Rajat Gupta.
The fact of the matter is that the DOJ doesn’t need to announce a new policy to go after individuals for white-collar crimes. The reality on the ground is we deal with employees being investigated and indicted all the time.
So why did Washington make the announcement? It sounds more like a PR stunt than anything else. Perhaps the Administration is gearing up for the next election cycle, which includes some obvious key elections. The DOJ wants to have a strong response to public outcries for accountability at the opportune time of impending regime change. In prior election cycles, administrations have taken some sort of hard stance on crime and punishment, whether it is increasing sentencing guidelines or messaging prosecutors about white-collar plea agreements.
From our viewpoint, it’s a little hard to take the DOJ’s new policy announcement at face value. We don’t see any recent motivation (outside PR). However, it’s also true that the wheels of Justice move slowly and this may just be a reflection from public dissatisfaction after the 2008 economic crisis, which saw corporations, but few Wall Street execs, held accountable. Regardless, we see the DOJ’s announcement much ado about nothing.
A Canadian federal court recently released an opinion holding that meta tags, at least in some circumstances, are not entitled to copyright protection. Although the precedent is not binding in American courts, the well-reasoned opinion provides an excellent logical analysis on why meta tags may or may not be afforded copyright protection.
In Red Label Vacations Inc. v. 411 Travel Buys Limited, the plaintiff travel business implemented meta tags including its registered trademarks: “redtag.ca,” “redtag.ca vacations,” and “Shop. Compare. Payless!! Guaranteed.” The defendant is a competing travel business in the Canadian market. In 2009, Red Tag experienced a drop in sales and noticed that search engine results for its company were returning results for its competitor, 411 Travel Buys. Upon further inspection, Red Label found that 411 had apparently copied its metadata including content, ordering, and misspellings. Red Label informed 411 of the violation and 411, being Canadian, immediately removed the content. Nevertheless, Red Label brought suit for lost profits during the period it was active.
In analyzing the duplicated meta tags, the court concluded that the tags were substantially derived from a list of Google keywords which were incorporated into phrases describing travel. The court held that there was little evidence of any degree of skill, judgment, or creativity in creating the meta tags at issue in the case. The court noted that there may be circumstances in which meta tags are so creative and original so as to qualify for copyright protection, but they were not present here.
The court further found that there was not substantial copying when viewing the website as a whole. Defendant 411 copied 48 pages out of approximately 180,000 on Red Tag’s website. The court considered substantial similarity between the original work and the allegedly infringing work when viewed as a whole, and did not find that a substantial reproduction had occurred.
Even though 411 used Red Tag’s trademarks in its meta tags, the court held that no trademark violation had occurred because the meta tags were not visible to the site’s visitors, but were rather used by search engines. The court found that even if a patron had reached the 411 site by searching for Red Tag terms, once visitors arrived at the website they would have no doubt that they were at the site of 411. Notably, the Canadian court identified a substantial difference between its law and trademark law in the US. In the US, a court may find a trademark violation occurred where trademark use causes “initial interest confusion” where a patron searching for one company diverts their business to what the patron realizes is a different company offering a similar product or service. Regardless, the Canadian court indicated that it wouldn’t find a trademark violation even under the initial interest confusion test, because when search engines use meta tags they return a list of links that customers may choose from at will, rather than directing the viewer to a particular competitor.
Despite the Canadian court’s thoughtful and in-depth analysis, in the six years since the events of the case meta tags have increasingly become a relic of the past as search engines increasingly use their own algorithms to determine search results. However this is still a claim that many plaintiffs include when throwing in the kitchen sink in a trademark case, and it would not be surprising to see US courts cite to the reasoning of our neighbors to the north in future decisions.
The government has voluntarily dismissed its case against Jae Shik Kim, the South Korean businessman for whom Ifrah Law obtained a motion to suppress in federal court. In 2012, Mr. Kim was stopped by federal agents as he tried to board a plane to South Korea from LAX. The government seized his laptop and copied his hard drive based on suspicion that he had engaged in illegal activity years earlier. The government indicted Mr. Kim based on evidence it found on the laptop relating to past transactions.
Everyone who has been through a security checkpoint at an airport knows that the government has wide latitude to conduct certain warrantless searches at the border without any suspicion of illegal conduct. However, the U.S. District Court for the District of Columbia concurred with Ifrah Law’s argument that the government’s latitude is wide, but it is not unbounded. In order to conduct a non-routine search of electronics at the border–including copying a hard drive for the government to conduct a later search unbounded in time and scope—the government must have reasonable suspicion that the owner is presently engaged or will imminently engage in illegal activity. An ongoing investigation of suspected past criminal activity is not a sufficient basis on which to perform such a search. To use a border search for that purpose is an illegal attempt to circumvent the warrant requirements imposed by the Fourth Amendment to obtain evidence in an ongoing investigation, and any evidence obtained in that manner cannot be used to convict the defendant.
The government understood that when the court suppressed the evidence obtained from Mr. Kim’s laptop, it did not have a case on which it could obtain a conviction. Shortly after the court granted Ifrah Law’s motion to suppress, the government filed an interlocutory appeal of the court’s order. The government hoped that the Court of Appeals would reverse the order and allow the government to present evidence obtained from the laptop in order to secure a conviction.
This week, the government reversed course. The government not only dropped its appeal on the suppression issue, but moved to dismiss the indictment entirely, resulting in an event all too rare in the criminal justice system—a dismissal of all charges against the defendant. The government’s action implicitly acknowledges restrictions on its authority to conduct non-routine searches at the border when there is no suspicion of present criminal activity. It is a big win not only for our client, but for the ongoing effort to preserve our right to privacy.