Corporation, Securities
& Business Law Forum
October 2000 Vol. 46, No. 1
(Notice to librarians: The following issues were published in Volume 45 of this newsletter during the fiscal year ending June 30, 2000: October, No. 1; April, No. 2; June, No. 3.)
Statements or expressions of opinion or comments appearing herein are those of the editors or contributors, and not necessarily those of the association or section.
Contents
* The SEC opens the door to electronic "road shows"
Welcome to the first issue of the Corporation, Securities and Business Law Section Council newsletter for the upcoming bar year. I am both honored and privileged to serve as chair to the section council. My predecessors have set a high standard to follow and I strive to further enhance the services and programs provided CS&B Section members. We recognize one of the biggest benefits we can provide members is our newsletter that highlights new cases, statutes and practice tips that are often helpful. One of my goals this year is to attempt to provide five newsletter publications. In addition, it is our section goal to present at least one Continuing Legal Education seminar.
Additional information on these projects will be forthcoming in future announcements. I invite all section members to provide input on any way in which we can enhance our services to you. We always welcome contributions to our newsletter. In addition, if you would like to recommend that the CS&B Council review, initiate or oppose specific legislation, please contact me.
A special thanks to Mary E. Faupel, chair of the 1999-2000 term, for all of her hard work and dedication in promoting the CS&B Section and its programs last year, as well as those many council members whose valuable assistance made the services we provide possible.
I encourage each of you to take the time to check out our ISBA Web site and explore the opportunities and information that are available to you as a member of this section. In addition, we invite all comments and assistance in making the year a meaningful one for all CS&B Section members.
A. Jay Goldstein
Fagel & Haber
Chicago, Illinois
This edition of the newsletter has several interesting articles, with a focus on the internet, including a look at the new Anti-cybersquatting Consumer Protection Act, and a thoughtful analysis of doing an IPO "road show" over the Internet.
In addition, we present an informative article on recent developments in the "apparent authority" doctrine. This issue also contains a review of investments by venture firms for the first sixth months of this year. This edition also contains our regular column--BusinessLaw Flash Points (also available at IICLE's website www.IICLE.com)
Finally, as always, we look forward to your comments and suggestions. We also welcome your submissions to the newsletter.
Robert C. Knuepfer, Jr.
Baker & McKenzie
130 East Randolph Drive
Chicago, Illinois 60601
312/861-8913
robert.c.knuepfer.jr@bakernet.com
By Dutro E. (Bruce) Campbell, Esq., Husch & Eppenberger, LLC
©2000 Husch & Eppenberger, LLC
Over the last few years, the Internet has drastically changed the way business is conducted in the U.S. Companies rely on the World Wide Web to reach millions of individuals who can easily access information on the Internet by entering the appropriate domain name that directs the consumer to a desired Web page.
Domain names are commonly comprised of the name or logo of a company, followed by the suffix ".com." Therefore, it is typical for Internet users to search for information relating to a particular company, individual, or organization by typing in the company's, individual's or organization's name, followed by the suffix ".com."
Domain names are obtained from registrars, such as Network Solutions, Inc., who assign domain names on a first-come, first-serve basis upon payment of a modest registration fee. To register a domain name does not require the registrant to actually own trademark rights, or any other rights, in the desired domain name.
As a result of the ease with which anyone can register a domain name, and the lack of any regulatory control over the registration of domain names, a practice known as "cybersquatting" has become increasingly common over the course of the last few years. Cybersquatting is the act of registering a well-known trademark as a domain name by someone other than the trademark owner, who then attempts to sell the domain name to the trademark owner for usually a large sum of money. Cybersquatters prevent the use of domain names by trademark owners, who often are willing to pay a significant price to obtain use of their own trademark as a domain name.
The Federal Trademark Dilution Act of 1995
In several cases over the past few years, trademark owners have sued cybersquatters, claiming trademark dilution under the Federal Trademark Dilution Act of 1995 (FTDA). The federal dilution statute provides that "the owner of a famous mark shall be entitled ... to an injunction against another person's use in commerce of a mark or trade name, if such use begins after the mark has become famous and causes dilution of the distinctive quality of the mark..." 15 U.S.C. § 1125. In order to prevail in a trademark dilution case, the plaintiff must show that the mark is famous and that the defendant's use is a commercial use that is likely to cause dilution. Intermatic, Inc. v. Toeppen, 947 F.Supp. 1227, 1238 (N.D. Ill. 1996). The FTDA contemplates that courts should find a mark to be famous if the mark has been used over a long period of time, taking into account the degree of mark recognition in the relevant markets, the extent of promotional efforts made, the relative uniqueness of the mark, and several other facts. 15 U.S.C. § 1125(c). Furthermore, the Act specifically provides that non-commercial use of the mark is not actionable. 15 U.S.C. § 1125(c)(4)(B).
Although some trademark owners have been able to stop cybersquatters in their tracks by way of trademark dilution lawsuits, the FTDA has proven to be somewhat limiting in cybersquatting cases. For example, the FTDA provides protection only for famous marks. However, over time courts have become increasingly reluctant to classify marks as famous for dilution purposes. Also, some dilution lawsuits have failed due to the plaintiff's inability to meet the "commercial use" requirement of the FTDA. In at least one case, the court rejected the plaintiff's dilution theory, noting that there was no showing that merely registering the domain names for third parties was "commercial use" under the FTDA. See Academy of Motion Picture Arts and Sciences v. Network Solutions, Inc., 989 F.Supp. 1276, 1279 (C.D. Cal. 1997).
The Anti-cybersquatting Consumer Protection Act
Trademark owners breathed a collective sigh of relief when the Antic-yberquatting Consumer Protection Act (ACPA) was passed in November 1999. The ACPA amended the Trademark Act of 1946, creating a specific federal remedy for cybersquatting. The ACPA provides that any person, who with bad-faith intent to profit from the goodwill of a trademark or service mark of another, registers or uses an Internet domain name that is identical to, or confusingly similar to, or dilutive of such a mark, shall be liable in a civil action by the owner of the mark. 15 U.S.C. § 1125(d)(1)(A). Under the ACPA, a court may award an injunction, requiring the cybersquatter to forfeit the domain name and transfer ownership of the domain name to the trademark owner. 15 U.S.C. § 1125(d)(1)(C). Furthermore, the ACPA provides that a plaintiff may elect to recover punitive damages in the amount of $1000 to $100,000 per domain name.
The ACPA provides a highly subjective list of factors to be considered in determining the question of bad faith, including: intention to divert consumers from the mark owner's online location to another site; registration of multiple domain names that are identical or similar to a particular trademark; an offer to sell the domain name to the mark's owner, without having established a bona-fide use of the mark; other intellectual properties in the domain name; and fair use of the mark in the site.
The ACPA was intended to solve the problems encountered by trademark owners who have become cybersquatting victims, yet cannot make the requisite showing of "commercial use" of the domain name by the cybersquatter as required under the FTDA, i.e., where a cybersquatter registers a domain name, but does not actually use the name in commerce or otherwise. Furthermore, the ACPA was intended to provide protection for marks that are merely distinctive, and that do not meet the rigorous criteria of a famous mark under the FTDA. According to the opinion of the U.S. Court of Appeals for the Second Circuit in the case of Sporty's Farm L.L.C. v. Sportsman's Market, Inc., 98-7542, distinctiveness refers to inherent qualities of a mark and is a completely different concept from fame. The court added that, "a mark may be distinctive before it has been used--when its fame is non-existent."
Since the passage of the ACPA, several lawsuits have been filed under this new law. Actions have been filed by entertainers such as John Tesh and Brad Pitt, to protect their names from cybersquatters. Harvard University has sued an individual who registered a number of domain names that include the names "Harvard" and "Radcliffe," simply for the purpose of selling the registrations to others and making a profit. Other similar lawsuits have been filed pursuant to the ACPA by the National Football League, the New York Yankees, and Petersen Publishing Co., the publisher of Teen Magazine.
The ACPA has also provided protection to trademark owners against individuals who register domain names that are one letter short of a famous company name, thereby diverting unwitting internet surfers who are searching for a company's Internet site. In one particular ACPA lawsuit filed shortly after the act became law, a federal judge in New York issued a preliminary injunction prohibiting a cybersquatter from operating a Web site registered as "barginbid.com." The case was filed by Bargain Bid, a New York company that registered the domain name "bargainbid.com." The plaintiff, Bargain Bid, claimed that the cybersquatter's intent was to confuse customers and divert them away from Bargain Bid's on-line business.
The ACPA: a solution or a new problem?
Some have hailed the ACPA as a beneficial means by which trademark owners can combat bad faith domain name piracy. However, others have criticized the ACPA has having "gone too far." Critics of the ACPA fear that the law gives too much power to big businesses, who may use the ACPA to intimidate smaller businesses and individuals who may legitimately register domain names. Critics also have questioned the highly subjective standards for determining bad faith under the ACPA, which arguably makes it virtually impossible for a lawyer to advise an accused cybersquatter that they have a likelihood of success in defending a lawsuit filed under the new law.
Although a number of cases have been filed under the ACPA to date, it is still too early to assess the effectiveness of the ACPA. At this point, most experts are reserving judgment. Only time will tell whether the ACPA will in fact effectively bring cybersquatters to justice, without providing big businesses a means to bully small businesses and individuals into giving up legitimately registered domain names.
The SEC opens the door to electronic "road shows"
By James J. Moylan, Arnstein & Lehr, Chicago
I. Introduction
The U.S. Securities and Exchange Commission ("SEC" or "Commission") staff recently issued a "no-action" letter, (i.e. the staff will not recommend the initiation of enforcement action to the Commission), to Charles Schwab & Co., Inc. ("Schwab") in connection with its plan to present a "road show" over the Internet prefatory to an initial public offering of securities. Schwab sought the SEC staff's concurrence that such a presentation does not constitute a "prospectus" within the meaning of section 2(a)(10) of the Securities Act of 1933 ("Securities Act" or "'33 Act").
Schwab also requested the SEC staff to make a policy determination as to whether such electronic transmissions over the Internet constitute written or oral communications. This is a critical issue with respect to the application of sections 2(a)(10) and 5(b) of the '33 Act in the securities registration process. The SEC staff declined to announce a position noting that the Commission is currently considering the use of electronic communications in the capital raising process. See, Charles Schwab & Co., Inc. [Current][ (CCH) Fed.Sec.L.Rep. ¶77,650 (SEC No Action Letter, November 15, 1999). [Hereinafter, "Schwab (CCH)."]
II. Background
Schwab sought the "no-action" letter in connection with its' proposal to make "road show" meetings available as live presentations or as recordings through a "password protected" Internet environment, to specific Schwab clients meeting defined financial and suitability criteria.
"Road shows," Schwab noted, began as meetings between an issuer and the potential underwriting syndicate and selling group members. See, Schwab CCH, at page 76, 311. The road show enabled the issuer to educate the potential selling group participants on the company, the offering, etc., and enabled the potential selling group to evaluate the issuer and the merits of participating in the offering. The "road show" also provided the first step in the due diligence process which would serve as an affirmative defense to a statutory underwriter's liability under sections 11 and 12 of the '33 Act.
III. Evolution of the road show
As part of its request, Schwab traced the history and development of the "road show." Schwab noted the initial basis for the "road show," as set forth above, and went on to observe that by the mid-1980's institutional investors were increasingly invited to attend. In a more recent development, select individual "accredited investors" have become likely "road show" invitees.
The legal issue surrounding the "road show" is the application of section 5(b) of the Securities Act. This provision prohibits sales of securities during the "waiting period" before a securities registration statement is declared effective, thereby permitting the public sale of the securities under section 5(a) of the '33 Act. "Road shows" are deemed permissible under section 5(a) as oral communications and thus are not a statutory prospectus as defined in section 2(a)(10) of the Securities Act.
As the "road show" evolved and its benefits to the capital raising process became accepted, the idea of recording the "road show" for presentation to those unable to attend took hold. Schwab noted that the amendment to section 2(a)(10) of the '33 Act, adding to the definition of "prospectus," the phrase, "...or by radio or television ...," did not occur until the 1954 Securities Act amendments. See, Schwab CCH, at page 26, 311.
The distinguishing characteristic was that the use of a video recorded "road show," played over a television set at some other location was not a broadcast to the public at large, it was merely the use of a technology to bring the road show to a select audience. Schwab relied on several earlier no-action letters which distinguished the use of playing a video cassette in a television from a television broadcast. See e.g., Merchants National Corp., [Washington Service Bureau Summaries 1971-1977] (SEC No-Action, December 12, 1975, Avail. Jan. 12, 1976); Producers Funding Corp. (SEC No - Action, 1982 WL 30515, March 9, 1982); Exploration, Inc., 1986 SEC No-Act LEXIS 2891, (November 10, 1986). The live transmission of a "road show" was addressed in Private Financial Network, [1997 Tfr. Binder] (CCH) Fed.Sec.L.Rep. ¶77, 332 (SEC No Action, March 12, 1997).
Following this precedent accepting this medium, the issue then advances to the sophistication of the intended audience, i.e. to include accredited investors and others. See, Net Roadshow, Inc. [1997 Tfr Binder] (CCH). Fed.Sec.L.Rep. ¶77, 367 (SEC No-Action, July 30, 1997). Bloomberg L.P., [SEC No-Action LEXIS 1023] (Oct. 22, 1997); Thomson Fin. Services, Inc. [SEC No-Action, WSB File No. 091498002] (Sept. 4, 1998).
Schwab lamented that while the audience for "road shows" has expanded and technology has enhanced the "road show" experience, "...only retail investors are discriminated against by being precluded from getting the benefits available from receiving road show information." Schwab, (CCH), at page 76, 312.
IV. The Schwab proposal
Consistent with the advances made in Net Roadshows, Bloomberg and Thomson Fin. Services, supra, Schwab proposed making its electronic "road show" available to its clients serviced by: Schwab Independent Investment Advisers, specific Schwab customers and those Schwab accounts that qualify for the "Schwab Signature Services Gold Level" customers, i.e., those customers with at least $500,000 equity in household investment positions and significant trading experience, i.e. at least 24 trades per year. See, Schwab, (CCH), at page 76,312, fn. 1.
Schwab also represented that access to its Internet road show site would be password protected and would follow the following guidelines:
1. "Road shows" communicated over the Internet for initial public offerings ("IPO's") only, to be underwritten on a firm commitment basis, during the section 5(b) waiting period, and that a preliminary prospectus is available for downloading, with an appropriate "red herring" type legend.
2. The subscriber must agree not to re-transmit the content of the transmission.
3. Third party vendors operate under the same restrictions.
4. The "road show" is actually presented live to an audience of eligible participants or recorded before a live audience.
5. The entire presentation, including the question and answer session is transmitted. Editing is only permitted for "dead time," to update information, etc.
6. Restricted number of showings, times or periods.
7. Single password distribution.
See, Schwab (CCH), at page 76, 313.
V. SEC response
The SEC, in granting Schwab's no action request, also stated: "In addition, we remind you that any offers to buy solicited pursuant to a given IPO roadshow (sic) (or any other means) cannot be accepted at least until after pricing where Rule 430A pricing procedures are used." See, Schwab (CCH), at page 76, 315.
Finally, the SEC staff stated:
Because the Commission is considering various issues arising from the use of electronic communications in capital raising transactions ... we particularly do not address here whether Internet-based or other electronic communications should be treated as "written" or "oral" for purposes of Securities Act regulation. See, Securities Act Release No. 7606A(SEC Nov. 13, 1998). See, Schwab CCH, at page 76, 315.
VI. SEC clarification
On February 9, 2000, the SEC staff issued a clarifying letter. See, Charles Schwab & Co., Inc. (Recon.), (CCH) [Current] Fed.Sec.L. Rep. ¶77,814 (SEC No-Action, February 9, 2000). Specifically, in pertinent part, the SEC staff stated:
... it was and continues to be our understanding, with respect to Point 6 of your incoming request letter ... that Schwab will transmit an electronic roadshow (sic) for a particular offering to the Schwab customers described in your letter only if (a) that roadshow (sic) does not exclude any material information (e.g., earnings projections) that is intended to be included in any other presentation of the roadshow (sic); (b) only one version of the roadshow (sic) is captured for subsequent electronic transmission; and (c) the content of the electron