Corporate Spotlight Category

IRS Ruling Affects Media (and Other) Businesses Dabbling in Bitcoin Use

Scott R. Flick

Posted March 26, 2014

By Scott R. Flick

While it has been around since 2009, Bitcoin has seen substantial media coverage in the past few months. Media outlets (as well as many other businesses) have been increasingly dabbling in the Bitcoin world, if for no other reason than to show they are up to date with the latest consumer fixations.

While numerous businesses have begun accepting Bitcoin transactions, the most likely place to find them in the media world is as contest prizes or as part of an advertiser promotion. Of course, one of the principal reasons for the novelty of Bitcoin is its goal of being an electronic currency unregulated by governments. As a result, how businesses have been treating their usage of bitcoins from an accounting and legal perspective is highly variable, since it is in many ways a new frontier.

That frontier changed significantly yesterday, when the IRS ruled that virtual currencies like Bitcoin are to be treated as property for federal tax purposes, with transactions using virtual currency subject to much the same tax treatment as those involving U.S. currency. Our own Jim Gatto, head of Pillsbury's Social Media and Games Team, distributed a Pillsbury Client Alert discussing the ruling. In that Alert, Jim notes that the impact of the IRS ruling includes:


  • Wages paid to employees using virtual currency are taxable to the employee, must be reported by the employer on a Form W-2, and are subject to federal income tax withholding and payroll taxes.

  • Payments using virtual currency made to independent contractors and other service providers are taxable and self-employment tax rules generally apply. Normally, payers must issue IRS Form 1099.

  • The character of gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in the hands of the taxpayer.

  • A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.

  • For purposes of computing gross income, a taxpayer who receives virtual currency as payment for goods or services must include the fair market value of virtual currency received as measured in U.S. dollars, as of the date that the virtual currency was received.
The Client Alert provides additional detail, but if you are using bitcoins for any type of transaction, whether as contest prize, currency for purchases on your website, or payments to employees and vendors, the IRS has made clear that you will need to follow the same procedures (and pay taxes) as though the transaction had occurred in dollars.

While that is a big issue for businesses doing large Bitcoin transactions, businesses dabbling in small and occasional Bitcoin transactions will need to pay even closer attention than they would to a transaction using traditional currency. For example, if the prize in a station contest is one bitcoin, the station will need to assess whether awarding the prize triggers the need for issuing IRS Form 1099 to record the awarding of the prize. In a cash prize contest, that is straightforward, since the Form 1099 currently specifies a prize of $600 or more as the threshold for needing to issue the form. As I write this, however, the current Bitcoin exchange rate is roughly $582 U.S. dollars per bitcoin. That means a one bitcoin prize would not trigger the need for a Form 1099, but a two bitcoin prize would.

Similarly, yesterday's IRS ruling seems to indicate that the bitcoin must be valued for tax purposes at the time it is received. As a result, the station holding the contest would need to check the value of a bitcoin on the day the prize is awarded to see if it is above or below the $600 threshold for tax purposes. Of course, given the volatility of the Bitcoin exchange rate, this raises other questions, such as how do you value the bitcoin for tax reporting if the exchange rate was below $600 for part of that day and above $600 for part of that day, or if the day the prize is "sent" is not the same day as the prize winner receives or "cashes" it.

Like so many things, Bitcoin appears to be another example of something meant to simplify life, but which is turning out to only make life more complicated. Look for life to get even more complicated as individual states formally adopt a similar approach in treating virtual currency transactions as taxable events.


Recent Decisions Make Too Much Employee Confidentiality a Problem

Scott R. Flick

Posted January 22, 2013

By Scott R. Flick

Being businesses built upon the value of information, and working constantly to create new business models aimed at monetizing that information, the communications industry tends to be very careful about letting any form of information leave the building. That, along with the highly competitive nature of the industry, means many industry players keep a very tight grip on all business-related information. As a result, the communications industry often ranks up there with defense contractors in imposing broad confidentiality restrictions on their employees, either by contract or through general corporate policy.

There are times, however, when the government has determined that public policy considerations outweigh the need of a business for secrecy. The most obvious exceptions come in the form of subpoenas and search warrants. However, there are also more subtle exceptions, one of which is addressed today in a Pillsbury Client Alert from our employment and litigation practices. The Client Alert addresses a number of decisions that have been coming out of the National Labor Relations Board, several of which found that the respective employer's confidentiality policies violated the National Labor Relations Act because the policies could be read to prohibit employees from discussing wages, benefits, or other terms and conditions of employment with anyone else.

Under the National Labor Relations Act, such confidentiality restrictions are illegal, largely because they impede employees from engaging in collective bargaining or other employee protection activities. For those who are about to breath a sigh of relief after thinking to themselves "this doesn't affect me since my business isn't unionized," hold that breath for a moment. As the Client Alert points out, while it is true that the National Labor Relations Act, and the National Labor Relations Board, are known mostly for their union-related jurisdiction, the National Labor Relations Act applies to all private employers that affect interstate commerce, not just union shops.

As the federal government's regulation of much of the communications industry, particularly broadcasting, is based upon the interstate nature of those businesses (even where a station's service area is entirely within a single state), it is safe to say there are few in the communications industry that are not subject to these recent rulings. In fact, while I won't attempt to summarize the Client Alert here, as it is brief and well worth taking the time to read, I will note that one of the decisions discussed involves a player in the communications industry whose confidentiality policy was actually found to be acceptable.

In light of these recent decisions, all businesses should take a look at their confidentiality policies to determine whether they can be read to prohibit, for example, employees from discussing their salaries, raises and bonuses with each other. If the confidentiality policy is written so broadly as to unintentionally prohibit such activities, a rewrite of that policy is in order. In contrast, if the very notion of employees discussing their salaries with each other gives you heartburn, and your confidentiality policy is specifically targeted at preventing such conversations, then you have a more extensive policy rewrite ahead of you, and a lot more heartburn coming.


Drawing the Line Online: Employers' Rights to Employees' Social Media Accounts

Julia E. Judish Thomas N. Makris Amy L. Pierce James G. Gatto

Posted October 17, 2012

By Julia E. Judish, Thomas N. Makris, Amy L. Pierce and James G. Gatto

With the unprecedented popularity of social media, employees have increasingly used LinkedIn and other online forums to network for business and social purposes. When the line between personal and business use is blurred, litigation may ensue. A federal court recently ruled that an employer did not violate federal computer hacking laws by accessing and altering its recently departed CEO's LinkedIn account, but that the former CEO could proceed to trial on her state law misappropriation claim. In addition, California, Illinois, and Massachusetts recently joined Maryland in enacting laws prohibiting the practice of requesting access to prospective employees' password-protected social media accounts.

In Eagle v. Morgan, et al., Linda Eagle, former CEO of Edcomm, Inc. ("Edcomm"), filed a complaint in U.S. District Court in Pennsylvania alleging that Edcomm hijacked her LinkedIn social media account after she was terminated. While Eagle was CEO of Edcomm, she established a LinkedIn account that she used to promote Edcomm's banking education services, to foster her reputation as a businesswoman, to reconnect with family, friends and colleagues, and to build social and professional relationships. Edcomm employees assisted Eagle in maintaining her LinkedIn account and had access to her password. Edcomm encouraged all employees to participate in LinkedIn and contended that when an employee left the company, Edcomm would effectively "own" the LinkedIn account and could "mine" the information and incoming traffic.

After Eagle was terminated, Edcomm, using Eagle's LinkedIn password, accessed her account and changed the password so that Eagle could no longer access the account, and then changed the account profile to display Eagle's successor's name and photograph, although Eagle's honors and awards, recommendations, and connections were not deleted. Eagle contended that Edcomm's actions violated the federal Computer Fraud and Abuse Act ("CFAA"), Section 43(a) of the Lanham Act, and numerous state and common laws. In an October 4, 2012 ruling on the company's summary judgment motion, U.S. District Judge Ronald L. Buckwalter dismissed Eagle's CFAA and Lanham Act claims against Edcomm but held that Eagle had the right to a trial on whether Edcomm had violated state misappropriation law and other state laws.

The Eagle case is just one example of how the absence of a clear and carefully drafted social media policy can lead to protracted and expensive litigation. This area of law appears to be garnering increasing attention on the legislative front as well as the judicial front, as three more states recently enacted laws prohibiting employers from requiring, or in some cases even requesting, access to prospective employees' social media accounts. The attached chart includes more detail about the California, Illinois, Massachusetts and Maryland laws and the provisions of similar legislation pending in the various states and in the U.S. Congress.

A common theme connects the Eagle case with the recent password access legislation: the importance of defining the lines of ownership and demarcating the boundary between the professional and the personal. If Edcomm, for example, had established a LinkedIn account for its CEO's use and had asserted its property interest in the account at the outset of the employment relationship, Edcomm's CEO would have had no reasonable expectation of ownership in it. Under that scenario, Edcomm likely would not be facing trial on a misappropriation claim. Similarly, the social media password legislation definitively declares that employers and prospective employers have no right to access the social media accounts that applicants and employees have established for their personal use.

In addition, as explained in our recent Client Alert on enforcement actions under the National Labor Relations Act in connection with employer discipline of employees for social media postings, employer responses to employee use of social media can also result in government agency action against employers. These developments all point to the same message: employers wishing to avoid legal risk should be proactive in implementing well-defined policies and procedures relating to the LinkedIn, Pinterest, Twitter, Facebook and other social networking and media accounts of prospective, current and former employees, including clearly identifying rights to those accounts when the employee leaves the company.

A PDF version of this article can be found here, which includes a chart summarizing State and Federal Social Media Bills.

To read prior Client Alerts related to this subject, click on the links below:

Client Alert, First NLRB Decisions on Social Media Give Employers Cause to Update Policies, Practices

Client Alert, Employ Me, Don't Friend Me: Privacy in the Age of Facebook


Increase in HSR Thresholds Makes More Room for Larger Communications Transactions

Miles S. Mason

Posted February 9, 2012

By Miles S. Mason

While the FCC gets to have a say in nearly every sale or merger in the communications industry, no matter how small, the Department of Justice and the Federal Trade Commission will also be called upon if a transaction is large enough. The test for when a transaction is large enough to require a filing with the DOJ or the FTC is whether it exceeds the minimum financial thresholds of the Hart-Scott-Rodino ("HSR") Act.

Because of inflation and other factors, however, the HSR thresholds must be annually adjusted to accurately separate small deals from big deals. This separation is critical because the DOJ and the FTC have limited resources to investigate transactions, and therefore only require advance notification of transactions that involve companies or transactions above a certain minimum size. Transactions that fall below the HSR reporting thresholds, however, are not immune from antitrust scrutiny even after they are consummated if they are likely to have an anticompetitive effect in any relevant market.

On February 27, 2012, the HSR thresholds will increase significantly, with the "minimum size-of-transaction test" threshold increasing from $50 million to $68.2 million. If the value of the proposed transaction is above $68.2 million but below $272.8 million (up from $200 million), reporting is required only if the ultimate parents of the acquiring and acquired entities meet certain "size-of-person" tests, the thresholds for which will also increase on February 27, 2012. Subject to a myriad of exemptions, transactions valued at over $272.8 million under the HSR regulations must generally be reported. If that sounds complicated (and it can be), Pillsbury's Antitrust lawyers recently published an Advisory with more details on these changes.

While transactions that meet these thresholds must be reported whether or not they are communications-related, the thresholds can be particularly relevant to large broadcasters, since broadcasters that enter into a transaction requiring an HSR filing need to be aware that they may not be able to implement a local marketing agreement or similar cooperative arrangement in conjunction with an anticipated acquisition until the HSR filing has been made and the mandatory post-filing waiting period has either passed without action by the DOJ/FTC, or the DOJ/FTC have agreed to terminate the HSR waiting period early.

With communications transactions starting to heat up again, the increase in the HSR thresholds is welcome, and may simplify transactions that fall above the current HSR thresholds, but below the new ones.


FCC Enforcement Monitor

Scott R. Flick Christine A. Reilly

Posted January 31, 2012

By Scott R. Flick and Christine A. Reilly

Pillsbury's communications lawyers have published FCC Enforcement Monitor monthly since 1999 to inform our clients of notable FCC enforcement actions against FCC license holders and others. This month's issue includes:

  • Failure to Refresh Tower Paint Garners $8,000 Fine
  • FCC Levies $25,000 Fine for Failure to Respond
  • $85,000 Consent Decree Terminates Investigation Into Unauthorized Transfers of Control
Tower Owners Receive Harsh Reminder Regarding Lighting and Painting Compliance The FCC, citing air traffic navigation safety, has fined many tower owners for noncompliance with Part 17 of the Commission's Rules. Part 17 includes regulations pertaining to the registration, maintenance and notification obligations of tower owners. The base fine for violating Part 17 requirements is $10,000.

Part 17 supplements the notification obligations imposed by the Federal Aviation Administration ("FAA"). Section 17.7 of the FCC's Rules requires that certain tower structures, including most structures over 200 feet in height and those near airports or heliports, be registered with the FCC. Section 17.21 mandates that most towers over 200 feet be lit and painted in accordance with the FAA's recommendations. These recommendations include the use of orange and white paint (alternating bands) and red or white flashing, strobe or static lights.

With the recent release of two Notices of Apparent Liability ("NAL"), the FCC continued its pursuit of those who fail to comply with its tower rules, including Section 17.50, which mandates that any tower required to be painted in accordance with the FAA's guidelines or the FCC's Rules must be cleaned or repainted as often as necessary to maintain good visibility.

In the first of the two NALs, agents from the Dallas Field Office inspected a 402-foot tower located in Quanah, Texas and determined that the existing paint, which was faded, scraped, peeling or missing in certain areas, was insufficient. The NAL indicates that the agents were unable to distinguish between the orange and white bands from a "quarter mile from the [tower]", thereby "reducing the structure's visibility."

Shortly after the Quanah inspection, agents from the Dallas Field Office also inspected a 419-foot tower located in Durant, Oklahoma. The agents found a similar situation, where the tower's paint was faded, scraped, peeling or missing in certain areas. The agents were again unable to distinguish between the orange and white bands from "800 feet away from the [tower]", once again "reducing the structure's visibility."

The FCC levied the full base fine of $10,000 against each tower owner. The FCC also mandated that no later than 30 days after the release of the respective NAL, a "written statement pursuant to Section 1.16 of the Rules signed under penalty of perjury by an officer or director of [the tower owner] stating that the [tower] has been painted to maintain good visibility" be delivered to the Dallas Field Office.

Continue reading "FCC Enforcement Monitor"


Should Media Lenders Feel Less Secure?

Miles S. Mason

Posted September 15, 2011

By Miles S. Mason

In an uncertain economy, obtaining financing for business transactions can be a challenge. It can be even more challenging for FCC licensees, since FCC rules prohibit granting a security interest in an FCC license. Because lenders want an enforceable lien on all of a borrower's assets, when those assets include FCC licenses, agreements must be structured carefully to give a lender all of the economic benefits of holding a security interest in the FCC license, without taking a security interest in the license itself.

The standard approach has been to provide the lender with a security interest in the "proceeds" of a license sale. That approach was called into question last October after a decision by the Colorado Bankruptcy Court (In re Tracy), which held that a security interest in the proceeds of an FCC license does not survive bankruptcy. While many communications lawyers saw this decision as an aberration, and the New York Bankruptcy Court (In re Terrestar Networks) rejected it outright in reaching an opposite conclusion last month, just a few days after that New York decision, on appeal, the Colorado U.S. District Court affirmed the reasoning in Tracy, once again opening the issue to debate.

Continue reading "Should Media Lenders Feel Less Secure?"


Client Advisory: Preserving and Maximizing Insurance Claims in the Aftermath of Hurricane Irene

Posted September 6, 2011

By Peter M. Gillon, Vince Morgan and James P. Bobotek

9/6/2011

Hurricane Irene has caused immense damage to the East Coast with loss estimates in the billons. Those affected face many challenges as they begin the recovery process, including impaired utility services, water damage, accessibility problems and supply-chain disruptions. Fortunately, many corporate policyholders have insurance coverage available to assist in the aftermath of this tragic event. Taking a few proactive steps will help maximize that coverage.

Insurance claims arising out of natural disasters such as Hurricane Irene can be very complex, both in terms of sheer scope and the legal issues involved. Irene caused not only billions of dollars in property damage through wind, rain, and flooding, but also exacted a heavy toll on commercial business operations as a result of power outages, evacuations, and transportation route closures. To help with the claim process, we have prepared this Advisory to provide a basic outline of some key issues to keep in mind as restoration and recovery efforts continue.

Continue reading "Client Advisory: Preserving and Maximizing Insurance Claims in the Aftermath of Hurricane Irene"


February 22, 2011: James Gatto and John Nicholson of Pillsbury to Speak on Privacy Risks of Social Media

Posted February 22, 2011

As social media, including location-based services, become increasingly popular and a part of everyday business, corporations face a host of new privacy risks and concerns from virtually all sides: clients, employees and government regulators. On Tuesday, February 22nd, 2011, at 12:00 pm ET, James Gatto and John Nicholson of Pillsbury will address new privacy risks created by social media in a Pillsbury webinar. Those wishing to learn more about the webinar, or register to attend, can do so here.


Who Owns Your Operation's Custom Software?

Posted April 28, 2010

By Scott R. Flick

One of the benefits of practicing law in a multifaceted law firm is the opportunity to work with lawyers in every area of law. It is always a good learning experience, as you get to explore the often hazy areas of law that dwell at the nexus of multiple practice areas. For example, many communications facilities, and particularly towers, create both environmental and communications law issues. Over the years, we have worked on numerous matters involving RF radiation and bird strike issues at transmission tower sites. Issues like that involve multiple governmental agencies and protocols, and it is great to have a mix of lawyers with the right experience to address the various aspects of such a problem.

I therefore read with interest an Advisory published today by Pillsbury Intellectual Property lawyers Jim Gatto, Cydney Tune, and Jenna Leavitt. While not directed specifically at communications companies, it discusses an IP matter that is certainly relevant to such companies. Like most businesses, those in the communications sector use a lot of off the shelf software. However, communications companies also license a lot of specialized software (e.g., traffic systems for ad placement), and often have to hire coders to adapt the software to their specific needs or to create entirely new software for highly specialized tasks. Sometimes, such entities have new software created because they are not satisfied with what is commercially available.

As a general rule, when you hire a contractor to produce a "work for hire", the copyright in that work remains with you rather than the contractor. However, in their Advisory with the catchy title Work Made for Hire Doctrine Does Not Generally Apply to Computer Software, the authors note that software does not fall under the types of works considered work for hire. As a result, the copyright in the software would remain with the contractor (even if the parties had agreed it would be a "work for hire") unless proper contracts are put in place to alter that result. The Advisory goes into detail on how this works and what the implications are, but suffice it to say that many communications companies may be surprised to learn that they don't hold the copyright in their own software.

This is not just an issue for large companies with complex computer systems and extensive programming. It applies just as readily to a small market radio station that asks a college student to design its website. Without the proper agreements in place, the copyright would remain with the student rather than the radio station. Now might be a good time to consider what software you have had contractors produce for your operation, and whether you know who actually owns it.


Another Downside of Downsizing

Posted April 12, 2010

By Scott R. Flick

Like many other FCC license holders, broadcast stations constantly navigate numerous laws and regulations while filing a multitude of reports and applications by required deadlines. Many of these are required quarterly, but some are annual, biennial, quadrennial, or octennial (once every eight years, and the only time I'll get to use that word this year). While stations are usually very good about completing their quarterly reports, the less frequent reports require a special level of attention or they can be forgotten in the rush of business.

In the past few months, I have noticed a surge in calls from stations wanting to talk to a lawyer because they have belatedly discovered that they failed to create multiple reports over the past few years. I've received these types of calls regularly for more than two decades, but the accelerated pace of these calls definitely caught my attention. When a station calls the lawyer in a panic after making this discovery, the lawyer's first job is to talk them down off the ledge. In the case of small station groups, you are often talking directly to the owner, who is rightly concerned about the direct financial impact of fines and license renewal challenges. With larger groups, it is often a GM worried about his or her future employment if the problem spins out of control. Fortunately, if addressed promptly, the damage can be greatly limited or avoided.

What is interesting, however, is that the common thread in nearly every one of these calls was the downsizing of the station employee "who did all that" before the problem commenced. While the recent "mega-recession" resulted in downsizing in nearly every industry, the precipitous drop in advertising revenues caused tremendous downsizing in the media industry. As downsizing usually requires that one person do the work formerly handled by multiple people, it is not surprising that a report that is required to be filed once a year, or only during odd-numbered years, gets lost in the mix. Of course, the loss of institutional memory is always a problem when an employee departs. However, the problem is intensified in a downsizing, where the departing employee is not too happy with the soon-to-be-former employer, and is probably not feeling very enthusiastic about training their successor.

As a result, while it is always wise to vigilantly monitor regulatory due dates and keep them on a multi-year calendar, it is equally important to ensure after a downsizing that there remains one employee who is clearly charged with ensuring that the required reports/filings are timely completed. You also need to ensure that employee has not just the responsibility of getting the job done, but the training and resources to make it happen. A top-notch conscientious employee who has no idea what an EEO Midterm Report is, and when that particular station's report is due, is of little use.

Focusing a little bit of attention on that issue now will save you loads of distraction later when you try to undo the damage. Keep in mind that where a missed report may result in a fine, a missed license renewal application (the "once in eight years" filing for broadcasters) has caused the FCC to delete the station from its database and charge the licensee with illegal operation for the time it operated the station after its license expired. It's best not to find that out firsthand.


Managing Debt Covenants in Hard Times

Posted March 4, 2009

By Scott R. Flick and >Miles S. Mason

TVNewsDay

3/4/2009
To say that current economic conditions are challenging for broadcasters is akin to noting that the Ice Age was chilly.

Like many industries, consolidation and growth was fueled by the easy availability of capital, and now broadcasters struggling under the weight of reduced advertising sales and large debt payments must also struggle to meet their loan covenants.

For those of us involved in both the regulatory and transactional sides of the industry, 2009 threatens to be the year that bankruptcies, loan workouts and alternative financing arrangements exceed all other major transactions.

In working with both broadcasters and their creditors seeking to navigate these dark waters, we have crafted some basic "rules of the road" that make it easier to both assess and preserve your options going forward.

At the outset, the most obvious piece of advice -- and advice that is too often ignored -- is that in today's difficult financial environment, broadcasters need to continually focus on their relationships with their lenders.

Rather than avoiding such conversations as the risk of violating a loan covenant grows, broadcasters should actively engage their lenders, even if they find such discussions uncomfortable.

Continue reading "Managing Debt Covenants in Hard Times"