Tax Deductions for Creatives

As Tax day approaches its important to take into account targeted deductions that benefit Creatives. One such deduction is the Domestic Production Activities Deduction (AKA Section 199 deduction) which was meant to encourage U.S. job creation. The deduction was created in 2004 as a part of the American Jobs Creation Act of 2004 and is one of those nice benefits that is targeted at small businesses operating as sole proprietors, partnerships, LLC, or S Corps.

So What?
For many creative based businesses, this deduction may provide a significant deduction on gross income, based on the amount of W-2 wages spent in the production of their work. The deduction specifically singles out wages paid out in the sound recording, software (including websites), and film (excluding porn) industries, as well as producers of personal tangible items (clothing, books, etc.) for an additional tax credit against profits.

What to do?
Simple – if you are engaged in one of these categories, had a profit, and paid W-2 wages, make sure that your tax preparer is aware that you may have this additional 6% deduction available to you, or if you prepare your own taxes, be sure to look though the instructions for Form 8903 .

IRS Circular 230 Notice:
United States Treasury Regulations require me to disclose the following: Any tax advice included in this document is not intended or written to be used, and it cannot be used, for the purpose of avoiding penalties under the Internal Revenue Code.

Forum Selection in Creative Commons Licenses

Users of Creative Common’s licenses beware!

Chang v. Virgin Mobile USA, LLC
2009 WL 111570 (N.D.Tex. January 16, 2009)

Texas plaintiffs posted a photo to a popular picture sharing website using a Creative Commons licenses. The photo was then down loaded by an Australian company who used the photo inconsistent with the Creative Commons 2.o license and Plaintiff’s wishes. Plaintiff sued Defendant in a Texas court and Defendant moved to dismiss for lack of jurisdiction. While many factors were considered, of particular note is how to court pointed out that the license did not require the license to take place in Texas.

In fact, the Creative Commons license used specifically does not contain either a forum selection clause or a choice of law clause that would outline where cases should be heard and under what state law a dispute will be analyzed. T he Creative Commons FAQ specifically notes that the selection of jurisdiction in the license

These clauses are commonly used in most transactions to provide some guidance to the parties to know where and under whose laws a dispute will be heard – to avoid problems such as the one in the Chang case.

While I understand the passion for Creative Commons licensing, it is this type of outcome that highlights for me why licensing parties should take a step back and make sure they really understand what they are doing when using these licenses. It also raise the question in my mind of whether licensors should consider making some additions to these terms such as adding in something stating the residency of the licensor, that the license is entered into under the laws of licensor and that all disputes will be heard in the licensor’s state/forum.

Business and the Law Seminar

This evening I had the pleasure of giving a presentation at Women Venture to several women working to develop and start new businesses. I gave a presentation entitled Business and the Law which covered a variety of issues related to protecting the business owner’s rights and managing their liability risks.

While it is easy to focus on the doom and gloom of the big picture economy, hearing the plans of these business women highlights the importance of not allowing the stories in the news to prevent businesses from moving forward. Opportunities do exist -people simply need to keep an eye out for the right situations. People wiling to take the risk at this point will be well situated when better economic times come along.

For more information on Women Venture and their programs, go to www.womenventure.org.

Barbie v. Bratz: Scope of employment and tainted copyrights

Think that idea that you put together in your free time is free for you to use? Think again. While not binding in any court here in Minnesota, the legal battles between Barbara Millicent Roberts (Yes, that’s her full name) and Cloe, Sasha, Yasmin, and Jade recently took a turn for the worse for Bratz manufacturer MGA Entertainment Inc. and are a good example of why creative professionals need to understand what their employers view as their work responsibilities, and why companies hiring creatives need to make sure they know the origins of those great ideas coming from new employees.

After a large number of Mattel employees, including Bratz designer Carter Bryant, defected and came to work at MGA and MGA launched its Bratz line, Mattel filed suit claiming the Bratz dolls were designed on their dime and therefore they held the copyright for their design. After a jury trial that resulted in a jury finding that the original four Bratz dolls where the property of Mattel, District court Judge Stephen Larson ordered MGA to stop producing MOST of its dolls and accessories and to stop selling them in February 2009 (with remaining stock to be recalled and destroyed). Additionally, Judge Larson (who earlier this year wrote a decision involving the heirs of Superman co-creator Jerry Siegel) ordered that early drawing produced by Carter Bryant that were created while he was employed at Mattel be turned over to Mattel.

This case illustrates two interesting issues in copyright law. (1) if you are an employee, work performed in the course of your employment is the property of your employer; and (2) ownership of a copyright includes the right to make derivative works.

Scope of Employment
Under U.S. Law, works created in the scope of your employment are considered to be the property of your employer. Seems fairly cut and dried, but for Carter Bryant the issue was a little more convoluted. Mr. Bryant’s design responsibilities at Mattel were limited to hair and fashion design. After leaving Mattel in 1998 for a stint in retail sales, Bryant claims to have conceived the dolls, he then returned to Mattel in 1999, only to defect with other Mattel employees in 2000. While eventually coming to the conclusion that the original Bratz were developed during Bryant’s employment with Mattel, it is interesting to note that the jury felt that these designs fell into the scope of his employment of hair and makeup design.

Derivative Works
In his ruling, Judge Larson said “Mattel has established its exclusive rights to the Bratz drawings, and the court has found that hundreds of the MGA parties’ products, including all the currently available core female fashion dolls Mattel was able to locate in the marketplace, infringe those rights,” Even though only four dolls were found by the jury to be the original property of Mattel, the fact that hundreds of subsequent derivative products were created based on those products means that ownership in the copyrights belong to Mattel.

This result of this case illustrates that while internal segmentation of job responsibilities exist in large corporations, companies may not rely on such designations when it comes to claiming ownership of multi-billion dollar product lines, and that once the door is open and a product line has been tainted with an infringing copyright, the entire product lines might end-up being destroyed and the manufacturing floor will go silent.

Liability for Withholding Passwords

Update (6/8/10): Terry Childs was found guilty of one felony count of denying computer services.

Does your company have a clear policy concerning who may receive admin passwords? The city of San Francisco apparently has some problems in this area.

Terry Childs

IT manager Terry Childs was arrested earlier this year for refusing to provide administrative passwords for the city’s computer network. The city alleges that he was setting up a network that he could take over remotely and take down at his whim – Mr. Childs claims that the policies of the city did not allow him to provide the passwords to his managers and that once he turned them over to the Mayor, the management simply didn’t understand the technology enough to understand how to use them.

Apparently out of fear that his release will result in a melt down of the city’s computer network, the judge in the case has set bail at 5 million dollars, as opposed to a lower bail such as one million as is common for murder suspects.

Password Policies

While the facts are clearly in dispute, the case demonstrates: 1) the need to thoughtfully consider your password policies and those of companies you are dealing with, 2) the need to have clear documentation on systems available for others to understand how your systems operates, and the need to consider whether to make sure that your contracts address liability issues related password and access issues.

For a good article discussing the case go to www.infoworld.com

Jacobsen v. Katzer – Open Source infringment

In August, the Court of Appeals for the Federal Circuit issued a ruling (Jacobsen v. Katzer) that has been widely discussed as acknowledging the rights of developers of open source software. This opinion, while not necessarily binding in Minnesota, is helpful in illustrating important issues that relate not only to open-source software licensing and development but to general contracts that apply to everyone.

The dispute involved an open-source developer and a company that used the open-source code as a part of their own software. Despite a license that required that the open-source developer be credited and copyright information retained in subsequent use of the code, the defendant stripped out this information. The issue was whether failing to provide this information caused the subsequent software to be an infringement of the plaintiff’s copyright, or whether it was simply a breach of contract – the difference meaning considerably different remedies.

The opinion contained an extensive discussion on the importance of “conditions” verses “covenants” in copyright agreements. The court found that the language found in the agreement requiring that copyright information for the open-source developers be provided in subsequent iterations of the code was not simply a promise (covenant) to do something, but rather it was a conditional requirement for the license. The court also noted that while copyright law only protects economic interests (rather than moral rights), the requirement of attribution and copyright notification in open-source licenses is in fact related to the economic interest of promoting the open-source community and in promoting the services of many of its participants.

While this opinion is useful to illustrate many important principles, it must be kept in mind that it does not provide a blanket cause of action for infringement merely because software contains open-source code. What it does do is to show the importance of controlling the origination of code and providing appropriate attribution. Additionally, while not as clear in the opinion, businesses licensing software or other intellectual property should pay attention to the specific language and terms of the agreement, as it can be paramount in controlling whether the agreement is controlled under copyright law verses contracts.

Morals Clause

What does a “morals clause do?

Morality

The basic idea is simple – if you are in the public eye and you do something stupid and doing that stupid thing makes the purpose of the contract frustrated, then the other party can say I’m canceling the deal. For example, lets say the Queen of England enters into a contract with a department store to endorse its new clothing line “Queen.” She might have a clause in her deal that says something like

    Queen agrees to conduct herself with due regard to public conventions and morals, and agrees that she will not do or commit any act or thing that will tend to degrade her in society or bring her into public hatred, contempt, scorn or ridicule, or that will tend to shock, insult or offend the community or ridicule public morals or decency.

She then gets arrested for soliciting men in a downtown Minneapolis hotel. The Department store has an interest in protecting its image and can cancel the deal by invoking the morals clause. A few real life examples include: Kate Moss – Chanel – photographed allegedly snorting cocaine – Michael Nade (“All My Children”) – ABC – cocaine arrest Sidney Ponson – Baltimore Orioles – third arrest for alcohol-related violations But wait, if you think this is a concern just for those big name types, think again, these clauses can pop up all kinds of places, from local TV weathermen, to mechanical contractors.

Reverse Morals

So is turn about fair play? Some folks think so and are putting “reverse morals clauses” into their deals so that if the company is tainted by scandal, they endorser can get out of the deal. Same concept applied to other types of arrangements such as naming rights, think Enron, but the same applies to smaller deals as well.

Non-compete is based on customers, not location.

While worker non-competes have are generally construed against the employer, the standard of enforceability in the sale of a business in more liberally interpreted in favor of the party seeking to enforce, as it is focused on whether the restriction is reasonable to protect the goodwill of the business that was sold.

When selling his optometry business, Jay Peterson agreed not to “participate, compete or be engaged in the business of optical goods . . . within a five-mile radius of . . .” the location of his former business. After a dispute arose concerning the terms of the sale, Peterson opened a new practice ten miles away, which would have been fine except for the fact that he then took out advertising in the newspaper located in his old town encouraging clients to come and see him at the new location. In February, the Minnesota Appellate court ruled that the Peterson could be prevented from placing those advertisements even though the business itself was outside of the designated geographic area. Interestingly, the court noted that while they felt a limited restriction was appropriate, it should not be seen as placing a general ban on advertising that may have incidental exposure to the geographic area. In relevant part the court noted –

. . .the Court will not restrain publications with large circulation areas that happen to enter the five mile area (e.g. Minneapolis Star and Tribune). We agree with the district court’s reasoning. Advertising in the Yellow Pages and the Internet, which have large circulation areas that only incidentally enter the restricted geographic areas, therefore, would not be prohibited by the non-compete agreement. Rather, the prohibition is limited to advertisements “specifically targeted” at persons in the restricted geographic areas.

Sealock v. Petersen, No. A06-2479 (Minn. App. 2/5/2008) (Minn. App., 2008).

This case provides a nice illustration of how you should look at the intent of the agreement to not solicit customers, rather than trying to circumvent the intent based on the literal geography of the agreement. However, in this age of mass circulation, this decision highlights a distinction that the court is willing to make between specifically targeted marketing efforts and marketing nets cast by much broader means.

The Human Side of the Deal

It was recently speculated that the settlement of a $60 million dollar royalty lawsuit against EMI by the Apple Corp. was partially driven by a desire of Paul McCartney to begin having Beatles music available for downloads, which in turn was also a factor in the exit of Beatle’s executive Neil Aspinall who, according to reports, had largely opposed allowing the Beatles catalog to go online. [See]

This just goes to show that business may be business, but it also has a very human aspect. Business decisions are made by people, who make decisions for business purposes — but in the end, decisions are often driven by factors outside the business. In this case the divorce and lack of antenuptual agreements by Paul McCartney may, as is speculated, been a factor the ouster of a top executive, driving the settlement of a multimillion dollar lawsuit, and a future milestone in digital distribution.

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