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The Mishpat-Update #17

Welcome to the seventeenth issue of the weekly Mishpat Update, Law 
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In this issue:

1. Introduction
2. Diamond's MP3 victory
3. Cyberlaw Updates
4. News from the Microsoft Antitrust trial


1. Introduction

I would like to welcome the 12 new subscribers who joined the list this

As promised last week, the main article describes the Rio MP3 music
player decision, issued by the Ninth Circuit U.S. Court of Appeals on
June 15th.

Our site redesigning, including a bigger and faster legal links
database, is taking longer than planned, and will hopefully be done by
the end of August. In the meantime we will start offering some new
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will be announced in Mishpat Update #19 (in two weeks).

The Mishpat Update archive (issues 1-15) is available at:

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2. Diamond's MP3 victory

Diamond Multimedia won an important federal appeals court ruling
against the Recording Industry Association of America (RIAA), that
paves the way for MP3 (the most popular digital audio compression
format in use on the Internet) device makers to continue shipping
products despite opposition from the recording industry.

The Ninth Circuit U.S. Court of Appeals ruled that Diamond Multimedia
Systems' Rio PMP300 player does not fall within the "digital recording
device" definition used in the Audio Home Recording Act (AHRA),
requiring manufacturers of digital audio recording devices to implement
code systems to curb serial re-recordings of copyrighted music. 

* What is the Rio *
The Rio, which sells for , is roughly the size of an audio
cassette. It plugs into a computer and can transfer an hour of music in
MP3 format within minutes, using software that compresses and stores
digital versions of music recordings. Users can download near CD
quality music from any one of the many MP3 Internet sites into personal
computers for replay, listen to them elsewhere using headphones or,
with widely available software, transfer it to another computer. 

Prior to the invention of devices like the Rio, MP3 users had few
options other than to listen to their downloaded digital audio files on
their computers, playing them from their hard drives. The Rio renders
these files portable. Once an audio file has been downloaded onto a
computer hard drive from the Internet or some other source (such as a
CD), separate computer software provided with the Rio allows the user
to further download the file to the Rio itself. The Rio device is
incapable of effecting such a transfer, and is incapable of receiving
audio files from anything other than a personal computer equipped with
a Rio Manager.

Generally, the Rio can store approximately one hour of
music, or sixteen hours of spoken material. The Rio's sole output is an
analog audio signal sent to the user via headphones. The Rio cannot
make duplicates of any digital audio file it stores, nor can it
transfer or upload such a file to a computer, to another device, or to
the Internet.

* MP3 *
With digital recording there is almost no degradation in sound quality,
no matter how many generations of copies are made. Digital copying thus
allows thousands of perfect or near perfect copies (and copies of
copies) to be made from a single original recording. Music "pirates"
use digital recording technology to make and to distribute near perfect
copies of commercially prepared recordings for which they have not
licensed the copyrights.
MPEG-1 Audio Layer 3 (commonly known as MP3) is the most popular
digital audio compression algorithm in use on the Internet. The
compression it provides makes an audio file "smaller " by a factor of
twelve to one, without significantly reducing sound quality.

These technological advances have occurred, at least in part, to the
traditional music industry's disadvantage. Various pirate websites
offer free downloads of copyrighted material, and a single pirate site
on the Internet may contain thousands of pirated audio computer files.
The music industry, with their distribution channels firmly
established, also viewed the Internet as a threat to their business
with its cheaper alternative distribution means of legal copies. 

* The Audio Home Recording Act *
The Audio Home Recording Act of 1992 (AHRA) provides that "no person
shall import, manufacture, or distribute any digital audio recording
device ... that does not conform to the Serial Copy Management System
["SCMS"] or a system that has the same functional characteristics." and
that "no person shall import into and distribute, or manufacture and
distribute, any digital audio recording device ... unless such person
records the notice specified by this section and subsequently deposits
the statements of account and applicable royalty payments." 

* The lawsuit *
The case stemmed from a lawsuit filed by RIAA (that represents major
record companies), alleging that Rio violated AHRA, that is was made
for the illegal pirating of copyright music distributed over the
Internet, and it could drain away billions of dollars in royalties from
artists and publishers. The RIAA wanted the Rio declared illegal and
taken off the marketplace. 
U.S. District Judge Audrey Collins of Los Angeles denied an injunction
last fall that would have prohibited distribution by the manufacturer
Diamond Multimedia Systems. The RIAA appealed that decision to the The
Ninth Circuit U.S. Court of Appeals

* The Ruling *
The court ruled that the act applies to recordings made from digital
audio tapes or CDs, but not to recordings made from the hard drives of

The courts' reasoning delivered by Judge Diarmuid O'Scannlain, was that
under the plain meaning of the Act's definition of digital audio
recording devices, computers (and their hard drives) are not digital
audio recording devices, because their "primary purpose" is not to make
digital audio copied recordings. Unlike digital audio tape machines,
for example, whose primary purpose is to make digital audio copied
recordings, the primary purpose of a computer is to run various
programs and to record the data necessary to run those programs and
perform various tasks.
In turn, because computers are not digital audio recording devices,
they are not required to comply with the SCMS requirement and thus need
not send, receive, or act upon information regarding copyright and
generation status.
Thus, the Rio appears not to make copies from digital music recordings,
and thus would not be a digital audio recording device under the Act's
basic definition unless it makes copies from transmissions. The Rio can
only directly reproduce files from a computer hard drive via a cable
linking the two devices which is obviously not a transmission.

More importantly, when describing the balance between copyright and
personal private use, Judge O'Scannlain said that: "In fact, the Rio's
operation is entirely consistent with the Act's main purpose -- the
facilitation of personal use. As the Senate Report explains, "[t]he
purpose of [the Act] is to ensure the right of consumers to make analog
or digital audio recordings of copyrighted music for their private,
noncommercial use."

* The Future *
The Secure Digital Music Initiative, a recording industry venture,
seeks to create an encrypted version of MP3 that would be immune to
illicit copying. Participants hope to unveil a Walkman like digital
stereo alternative to the Rio by Christmas, these players will be able
to distinguish between approved and unapproved copies. 

Diamond Multimedia also plans to provide a security device in a future
version of the Rio. 

These methods of distributing legal copies of popular music will
probably change the traditional methods of music consumption by

The full verdict can be found at:

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3. Cyberlaw Updates

Each week Mishpat-Update brings you the latest news about
online and computer law, with links to the full reports available
on the web.

* ACLU attacks Michigan Internet content law *
The American Civil Liberties Union (ACLU) filed a federal challenge to
Michigan's new Net content restrictions law. The law makes it a felony
to disseminate or display online "sexually explicit matter" to those
younger than 18. Violators could face up to two years in jail and
,000 in fines.
Supporters of such legislation say the Net makes it too easy for
youngsters to explore sexually explicit content. But opponents say that
"harmful to minors" laws include speech about art, literature, health
care, sex education, gay and lesbian, and women's rights issues.
Aside from the First Amendment free speech argument, the ACLU contends
that the law violate the Commerce Clause of the American constitution,
which prohibits states from regulating activity outside of their

* Proposed US bill will make Cybersquatting a crime *
US Senator Spencer Abraham proposed a bill to outlaw the practice of
cybersquatting (registering domain names including someone else's
trademark). Abraham introduced the Anti-Cybersquatting Consumer
Protection Act which would make it illegal to register someone else's
trademarked domain name with the intent of selling it later.  The
proposal follows in the footsteps of the World Intellectual Property
Organization (WIPO), which in May outlined anti-cybersquatting tactics
for use by the Internet Corporation for Assigned Names and Numbers
(ICANN) which would crack down on cybersquatters who want to register
".com," ".net" and ".org" domain names. 
Critics of the bill argue that it has the potential to make the problem
worse because people threatened with hefty fines or jail time would
more likely give up a domain name they actually deserve.
(Free registration with the NY Times required)
I wish to thank Mishpat Update reader Eran Bareket for pointing out the
above article.

* DOJ investigate electronic stamps antitrust claims *
Following two lawsuits against online stamp service rivals E-stamps and (reported last week in the Mishpat Update) the US Department
of Justice's (DOJ) antitrust division has launched an inquiry into
anti competitive conduct by postage meter company Pitney Bowes.,1087,3_141821,00.html

* Judge want's Microsoft and Sun to settle *
U.S. District Judge Ronald Whyte once again asked Sun Microsystems Inc.
and Microsoft Corp. to settle their ongoing legal dispute over Java.
The judge said he feared that without a settlement, Sun and Microsoft
will litigate indefinitely.,6061,2282898-2,00.html

* FTC fights online health fraud *
The US Federal Trade Commission (FTC) started a new crackdown on web
sites selling "health products" such as shark fins as a cure for AIDS
and snake oil remedies. The FTC said its investigators have identified
800 Web sites making deceptive health claims.
The agency also announced settlements with four companies accused of
making unsubstantiated health claims about products marketed on their
web sites. The companies have agreed to settle the charges but didn't
admit to any wrongdoing.,4,38362,00.html

* Office Depot Settles Y2K Lawsuit *
Florida based Office Depot, one of the largest retailers of computer
products, has agreed to settle the first Y2K (year 2000 computer bug)
related lawsuit against retailers of consumer products (the suit was
filed in California). Under the settlement Office Depot has agreed to
take certain affirmative steps to advise its current and past customers
of the need to determine whether their computer systems are Y2K
compliant, including providing notification in their California stores,
in advertisements and on their web site.

* Did AOL steal a domain name? *
Cybele Emanuelle, owner of WebmasterFX Digital Systems said she
registered the domain in September 1998 and subsequently
built a site at that address called African American OnLine Search. Her
site stood in the way of plans by AOL (America Online) to launch a new
search engine covering both the Web and its proprietary content. 
Last April, Emanuelle received a notice by e-mail from an attorney
representing AOL, accusing her of violating AOL's trademark rights and
demanding that she transfer the domain to AOL. After she
refused, Emanuelle heard little else on the matter until receiving an
automatically generated e-mail template from NSI (the domain registrar)
asking her approval for transferring the domain to AOL. Emanuelle
contacted NSI to stop the transfer and to ask for an explanation.
However, the URL stopped working a week later. According
to internic records, the domain had become the property of America
Online Inc.,1087,3_143441,00.html

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4. News from the Microsoft trial
Mishpat Update brings you a summary of last weeks events in the
Microsoft antitrust trial, that ended the rebuttal phase.
Testimony in the case ended this week after 76 days of presentations to
District Judge Thomas Penfield Jackson. Both sides will now prepare
"findings of fact," which are essentially summaries arguing their case.
The two sides may return to court for oral arguments late this summer
or in the early fall. 
Judge Jackson is widely expected to go against the company when he
issues his findings later this year.

* Microsoft's economic expert testifies *
Richard Schmalensee, dean of the Massachusetts Institute of
Technology's Sloan School of Management and the expert economic witness
for Microsoft attacked the U.S. government's conclusion that the
software giant charges monopoly prices for its Windows operating
system. Schmalensee said the government's economist underestimated the
average price of PCs and other figures in making his calculations about
the cost of Windows to consumers. Schmalensee testified that the true
monopoly price of Windows would be around  per copy. Microsoft
charges around  per copy to computer manufacturers. 

Government attorney David Boies introduced a document that includes
comments made by Microsoft Chairman and CEO Bill Gates at a Dec. 14,
1998, meeting. The notes say: "Platform threat -- AOL doesn't have it
in their genes to attack us in the platform space." Boies used the
notes to challenge Schmalensee's credibility. Schmalensee has testified
that the Netscape browser and AOL pose a potential platform threat to
Microsoft. But Boies asked Schmalensee why he didn't consider these
notes in forming his view. Was it because, Boies asked, he was only
seeking information that "is supportive of your position?" 

Schmalensee also testified that Microsoft's Windows was potentially
under siege from a host of new technology that could run on the Web,
regardless of the underlying operating system. But he acknowledged
under cross-examination that he had done no study, had no projections
of numbers, and had no knowledge about the authors or details of the
technologies he cited in his testimony.

* How much was the expert paid? *
First Schmalensee testified that he could not remember how much the
company had paid him for his services. After repeated questions from a
government lawyer, Schmalensee finally said Microsoft paid him more
than ,000 over seven years. Under yet more questioning, he said
Microsoft paid him more than ,000 in the last two years and that
his consulting firm threw in an additional ,000 bonus. Schmalensee,
who charges  an hour for consulting work, said that he may have
made even more.,4,38265,00.html

* What was Microsoft's intent *
Schmalensee argued that although Microsoft had spent  million
annually developing Internet Explorer it had made the money back
legally through increased sales and higher prices for Windows.
Microsoft also integrated its Web browser into Windows, so that all
Windows PC purchasers got Internet Explorer.

The government says Microsoft integrated its Web browser to compete
unfairly. But Schmalensee said that trying to gauge intent was
"slippery and fraught with peril. It is difficult to know the intent of
a multiperson corporation." The judge replied: "The courts do every day
... intent might be relevant.",4,38113,00.html

* Did Microsoft and the DOJ try to settle *
The Wall Street Journal reported that William Neukom, Microsoft's
general counsel, and Joel Klein, the Justice Department's antitrust
chief, held a secret meeting three weeks ago. The meeting, during the
first week of rebuttal testimony, did not produce a breakthrough. But
an insider said the sides agreed to meet again.

* News from the Bristol antitrust front *
Connecticut based Bristol Technology makes a product called Wind/U,
which acts as a bridge between developers writing software for
computers based both on Microsoft's Windows operating system and on
Unix. Bristol claims that Microsoft used its Windows Interface Source
Environment (WISE) program to gain a foothold in the departmental
server and workstation markets and then kill off competition from the
Unix operating system. Though the Bristol case is not related to the
federal lawsuit brought by the DOJ, it makes the similar claim that
Microsoft is using its monopoly in the market for desktop operating
systems to crush competition.

Microsoft lawyers called senior vice president Jim Allchin as the first
witness to fend off Bristol's allegations. Allchin outlined for the
jury how Microsoft developed its first operating system for big
corporate customers, Windows NT 3.1, in the early 1990s. He said that
"We used the classical Microsoft business model ... ship it in high
volumes at a ow price, to win business.",4,38301,00.html

If you know of any cyberlaw updates, please send them to

That's all for this time,
see you next week

Yedidya M. Melchior 

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