A Day of Fashion Law Friday, February 8, 2013 9:00 AM to 4:45 PM

NYCLA-CLE I n s t i t u t e Waterhouse Coopers; Inc.; toward certification inciviltriallaw, criminaltriallaw, workerscompensation lawand/ormatrimonial law. hours oftotalCLE credit.Ofthese,0qualify ashoursofcreditforEthics/Professionalism, and0qualify ashoursofcredit This programhas beenapprovedbytheBoard ofContinuingLegalEducation oftheSupremeCourt NewJerseyfor8 Board foramaximumof8 Transitional &Non-Transitional credithours:5PP/LPM;3Skills This coursehasbeenapproved inaccordancewiththerequirementsofNew Hostetler LLP; Lebowitz Silverman&KlestadtLLP; Lauder CompaniesInc.; Counsel, GiltGroupe, Inc.; Senior Vice President -Business Affairs, GeneralCounsel&Secretary, MICHAEL KORS; Funk; Dyan Finguerra-DuCharme, Theodore C.Max, A StevenR.Gursky, Prepared inconnectionwithaContinuingLegalEducationcoursepresented at New York CountyLawyers’ Association, 14 Vesey Street, New York, NY 8 D D TRANSITIONAL &NON-TRANSITIONAL Frances Hadfield, Claudia Ray, NYCLA’s Entertainment,Intellectual Property &SportsSection own Vejay G.Lalla, ay Sheppard MullinRichter&HamiltonLLP; MarkJosephson, RitaOdin, OlshanFrome Wolosky LLP; Olivera Medenica, Kirkland &EllisLLP; presented onFriday, February8,2013.

NYCLA’s FashionLawSubcommittee of GrunfeldDesiderioLebowitzSilverman&KlestadtLLP Wahab, PryorCashmanLLP; P r g o r

WilliamJelinek, Davis &GilbertLLP; P P the r g o r r g o r Vice President, Trademarks, TheEsteeLauderCompanies,

Wahab &Medenica LLC a Murray&JosephsonCPAs; F m a C a m Wahab &MedenicaLLC m ashion o F C - HowardZ.Robbins, C A S R h p I A William M.Funk, Vice President andLegalCounsel,TheEstee o u n l s r FrancesHadfield, t Allison Lucas, s r o s y unway : : : York State ContinuingLegalEducation Heather J.McDonald, MCLE CREDITS: MichaelKhorsandi, Proskauer; VP and Associate General L Law Officeof William Grunfeld Desiderio Grunfeld Desiderio aw : Lee S. Sporn, LeeS.Sporn,

Kaiser

Baker & Baker & Price Price

Information Regarding CLE Credits and Certification Down the Runway: A Day of Fashion Law Friday, February 8, 2013 9:00 AM to 4:45 PM

The New York State CLE Board Regulations require all accredited CLE providers to provide documentation that CLE course attendees are, in fact, present during the course. Please review the following NYCLA rules for MCLE credit allocation and certificate distribution.

i. You must sign-in and note the time of arrival to receive your course materials and receive MCLE credit. The time will be verified by the Program Assistant.

ii. You will receive your MCLE certificate as you exit the room at the end of the course. The certificates will bear your name and will be arranged in alphabetical order on the tables directly outside the auditorium.

iii. If you arrive after the course has begun, you must sign-in and note the time of your arrival. The time will be verified by the Program Assistant. If it has been determined that you will still receive educational value by attending a portion of the program, you will receive a pro-rated CLE certificate.

iv. Please note: We can only certify MCLE credit for the actual time you are in attendance. If you leave before the end of the course, you must sign-out and enter the time you are leaving. The time will be verified by the Program Assistant. Again, if it has been determined that you received educational value from attending a portion of the program, your CLE credits will be pro-rated and the certificate will be mailed to you within one week.

v. If you leave early and do not sign out, we will assume that you left at the midpoint of the course. If it has been determined that you received educational value from the portion of the program you attended, we will pro-rate the credits accordingly, unless you can provide verification of course completion. Your certificate will be mailed to you within one week.

Thank you for choosing NYCLA as your CLE provider!

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

Down the Runway: A Day of Fashion Law Friday, February 8, 2013

Program Co-Chairs: Olivera Medenica, Wahab & Medenica LLC and Frances Hadfield, Grunfeld Desiderio Lebowitz Silverman & Klestadt LLP

Program Co-sponsors: NYCLA's Entertainment, Intellectual Property & Sports Section and NYCLA's Fashion Law Subcommittee

AGENDA

9:00 AM – 9:10 AM Introductions and Announcements

9:10 AM – 10:10 AM PANEL I: The Business Foundation: Panelists: William M. Funk, Law Office of William Funk Mark Josephson, Murray & Josephson CPAs Kaiser Wahab, Wahab & Medenica LLC

10:10 AM – 11:10 AM PANEL II: The Business of Fashion Panelists: Steven R. Gursky, Olshan Frome Wolosky LLP Howard Z. Robbins, Proskauer Lee S. Sporn, Senior Vice President - Business Affairs, General Counsel & Secretary, MICHAEL KORS

11:10 AM – 11:20 AM BREAK

11:20 AM – 12:20 PM PANEL III: Classifications, Value, Labeling and Border Control Issues Panelists: Frances Hadfield, Grunfeld Desiderio Lebowitz Silverman & Klestadt LLP Michael Khorsandi, Price Waterhouse Coopers

12:20 PM – 1:20 PM LUNCH (Provided) KEYNOTE: Combatting Counterfeiting in the NYC Fashion Industry, Keynote Speaker: Brian O'Neill, Commanding Officer, Organized Crime Investigations Division, NYPD

1:20 PM – 2:20 PM PANEL IV: Intellectual Property Panelists: Dyan Finguerra-DuCharme, Pryor Cashman LLP Theodore C. Max, Sheppard Mullin Richter & Hamilton LLP Heather J. McDonald, Baker & Hostetler LLP

2:20 PM – 3:20 PM PANEL V: Brand Building Panelists: Rita Odin, Vice President, Trademarks, The Estee Lauder Companies, Inc. Claudia Ray, Kirkland & Ellis LLP

3:20 PM – 3:30 PM BREAK

3:30 PM – 4:30 PM PANEL VI: Talent, Advertising and Web 3.0 Panelists: William Jelinek; Vice President and Legal Counsel, The Estee Lauder Companies Inc. Vejay G. Lalla, Davis & Gilbert LLP Allison Lucas, VP and Associate General Counsel, Gilt Groupe, Inc.

4:30 PM – 4:45 PM Closing Remarks

New York County Lawyers’ Association

Continuing Legal Education Institute 14 Vesey Street, New York, N.Y. 10007 • (212) 267-6646

Down the Runway: A Day of Fashion Law Friday, February 8, 2013

Program Co-Chairs: Olivera Medenica, Wahab & Medenica LLC and Frances Hadfield, Grunfeld Desiderio Lebowitz Silverman & Klestadt LLP

Program Co-sponsors: NYCLA's Entertainment, Intellectual Property & Sports Section and NYCLA's Fashion Law Subcommittee

Table of Contents

PANEL I: The Business Foundation • The Basics of Choosing a Business Structure, By Mark Josephson, Murray & Josephson CPAs • Basics of Selling Securities to Finance Your Venture, By Kaiser Wahab, Wahab & Medenica LLC • Tax Issues in Private Placements, Debt and Equity, By William M. Funk, Law Office of William Funk

PANEL II: The Business of Fashion • Retail Leasing, By Steven R. Gursky, Olshan Frome Wolosky LLP • Travel Retail, By Lee S. Sporn, Senior Vice President - Business Affairs, General Counsel & Secretary, MICHAEL KORS • Website Accessibility, By Howard Z. Robbins, Proskauer

PANEL III: Classifications, Value, Labeling and Border Control Issues • Importing Fashion Articles, By Frances Hadfield, Grunfeld Desiderio Lebowitz Silverman & Klestadt LLP • Hot Topics in Fashion, By Michael Khorsandi, Price Waterhouse Coopers

KEYNOTE: Combatting Counterfeiting in the NYC Fashion Industry • Counterfeit in Chinatown

PANEL IV: Intellectual Property • Intellectual Property Protection and Fashion in the United States, By Dyan Finguerra- DuCharme, Pryor Cashman LLP, Theodore C. Max, Sheppard Mullin Richter & Hamilton LLP, and Heather J. McDonald, Baker & Hostetler LLP

PANEL V: Brand Building • Brand Building, By Rita Odin, Vice President, Trademarks, The Estee Lauder Companies, Inc. and Claudia Ray, Kirkland & Ellis LLP

PANEL VI: Talent, Advertising and Web 3.0 • Talent, Advertising and Web 3.0, By William Jelinek; Vice President and Legal . Counsel, The Estee Lauder Companies Inc, Vejay G. Lalla, Davis & Gilbert LLP and Allison Lucas, VP and Associate General Counsel, Gilt Groupe, Inc.

HYPOTHETICAL

Luxe Brand has recently decided to expand the reach of its marketing efforts to reach its consumers through a more holistic marketing approach. For Luxe Brand’s Autumn/Winter (“AW”) 2013 collection, it has decided to recruit Lena Dunham, the creator and star of the HBO series Girls, as the face of its brand. In addition to featuring Dunham in advertising for the AW collection, Luxe Brand will be hosting series of in-store events at its store locations in New York, Los Angeles and Miami where media and consumers can meet Dunham. To generate buzz around the new collection, Luxe Brand has created the hashtag #luxelena, which it will encourage consumers and media to use in all social media posts on Facebook, Instagram, Twitter and Pinterest involving Dunham and the new collection, including pictures with Dunham taken at the in-store events. Dunham has also agreed to take five photographs of herself at the in-store events and post them to her social media pages with text copy promoting the collection and the hashtag. Luxe Brand will search hashtagged consumer posts to re-post them on its own social media pages.

Luxe Brand further plans to relaunch its website by including an interactive section with a blog modeled after the Sartorialist where consumers can post photos of themselves and their friends wearing the new collection. The blog will feature consumer-submitted content, and it will also feature the best #luxelena and Luxe Brand-hashtagged posts that Luxe Brand finds on Twitter, Facebook, Pinterest and Instagram. The website will also feature a page where consumers can post text and video reviews of their favorite pieces of the collection. Luxe Brand plans to encourage consumers to submit posts by giving out gift cards at the in store events and through Luxe Brand’s public relations agency. Finally, Luxe Brand will use the public social media names and handles of all of the new consumers it engages through the campaign to build consumer profiles of its newly active consumer base. To do this, Luxe Brand will contract with a data aggregator to match the publically available information with any available personal information in order to re-target those consumers with online advertisements.

DOWN THE RUNWAY A DAY OF FASHION LAW Friday, February 8, 2012

Presented by:

Mark A. Josephson Esq, CPA, CFP, CFE 425 Madison Avenue 9th Floor New York, N.Y. 10017 TEL: (212) 644-2100 X202 FAX: (212) 644-9802 [email protected] www.murrayjosephson.com

The material in this handout is designed to provide general information prepared by professionals in regard to the subject matter covered. Although prepared by professionals, this material should not be utilized as a substitute for professional services in specific situations. Due to the certainty of continuous current developments, this material is not appropriate to serve as the sole authority for any opinion or position. It must be supplemented for such purposes by reference to other current authoritative materials. If legal advice or other expert assistance is required, the services of a professional should be sought. Copyright 2012 1

Murray and Josephson CPA’s LLC 425 Madison Avenue 9th Floor New York, N.Y. 10017

Mark A. Josephson Esq, CPA, CFP, CFE

Mark A. Josephson Esq, CPA, CFP, CFE, is a founder and senior partner of Murray & Josephson, CPAs, LLC. Previously, Mark worked for BDO Seidman, a leading national public accounting firm. Mark received his bachelor's degree in Accounting and Finance from Boston University and is also a graduate of New York Law School. He is a member of the bar in the states of New York, New Jersey and Florida. In addition to his CPA and law degree, Mark has earned a certification in Financial Planning from the College for Financial Planning and is a member of the Association of Fraud Examiners.

Mark is a recent winner of the New York Enterprise Report Best Accountants and Attorneys Award. He has appeared as a lecturer in a series of Education Seminars for various organizations and is an adjunct professor at New York University.

He serves on many professional committees, including the Estate Planning, and Trust and Estate Administration committees of the New York State Society of Certified Public Accountants. He is a member of the National Academy of Television Arts & Sciences. He is a member of the Business Valuation and Forensics of Litigation Services section of the American Institute of Certified Public Accountants and of the Small Law Firm Management Committee for the Association of the Bar of the City of New York. He is on the Board of Savvy Ladies and on the Planned Giving Advisory Council of Lighthouse International.

He is also a Board member of the Family & Divorce Mediation Council of Greater New York, a member of the New York State Council of Divorce Mediation, a Founding member of the Academy of Professional Family Mediators, and a member of the New York Association of Collaborative Professionals, and the International Academy of Collaborative Professionals.

Mark assists lawyers, mediators and collaborators with business, tax and accounting advice for their practices, as well as their clients. This powerful combination of accounting, legal and financial planning achievements has enabled Mark to assist the firm's clients in nearly every facet of business and personal growth. 2 The Basics of Choosing a Business Structure

The Basics of Choosing a Business Structure

• Decision will affect How much tax you pay Amount of paperwork your business is required to file Personal liability you face and your ability to borrow money

• Sole proprietorships (including single member LLC’S) and corporations file an income tax return

• Partnerships and S Corporations file an information return

The Basics of Choosing a Business Structure

• The owner’s of sole proprietorships, partnerships, LLC’S, LLP’S and S Corporations are "pass-through" tax entities, which means that all of the profits and losses pass through the business to the owners, who report these amounts on their personal income tax returns

• A C Corporation is a separate paying tax entity and is taxed at the corporate level using corporate income tax rates

• If hiring employees, all entity types must comply with certain federal and state employment regulations and employments taxes must be paid

5 Sole Proprietor

• Most common form of business organization

• Easy to form and offers complete control to the owner

• Owner is also personally liable for all financial obligations and debts of the business

• Sole proprietors are responsible for: Income Tax Self- Employment Tax Estimated Tax 6 Sole Proprietor

• Do not have taxes withheld from their business income

• Quarterly estimated tax payments are needed if a profit is expected

• Estimated payments include both income tax and self-employment taxes for Social Security and Medicare

• New York State and New York City (if residing in the city) income tax should also be paid quarterly

• If operating in NYC a sole proprietor may also be subject to the NYC Unincorporated Business tax 7

Partnerships

• An association of two or more persons or entities

• Three general types of partnership arrangements General Partnership Limited Partnership Joint Ventures

• General Partnership Profits, losses, liability and management duties are divided equally among general partners If you opt for an unequal distribution, the percentages assigned to each partner must be documented in the partnership 8 agreement

Partnerships

• Limited Partnership Includes one or more general partners who are responsible for the ongoing operations and at least one limited partner who is an investor and does not participate in management Only the general partners are liable for debts of the partnership In exchange for giving up the right to direct partnership activities, the limited partner’s liability for partnership debts is limited to what that partner has invested in the partnership

• Joint Ventures Act as general partnerships, but for only a limited period of time or for a single project Partners in a joint venture can be recognized as an ongoing 9 partnership if they continue the venture Partnerships

• To form a partnership you must: Register with the Secretary of State Establish a business name Obtain any necessary licenses and permits relevant to your business Not legally required, a partnership agreement is typically created to document how business decisions will be made

• Each partner shares directly in the organization's profits and shares control of the business operation (unless a limited partnership interest exists)

• The partners are jointly and independently liable for any legal actions and the partnership's debts (unless a limited partnership 10 interest exists)

Partnerships

• Partners in the partnership may be responsible for: Income Tax Self-Employment Tax Estimated Tax

• A partnership must file an “annual information return” to report the income, deductions, gains and losses from the business’s operations

• The business itself does not pay income tax (certain fees may apply at the state and local level)

• Profits or losses are "passed through" to its partners. Partners will include their respective share of the partnership's income or loss on their own personal or entity tax return 11

Limited Liability Companies

• A hybrid type of legal structure that provides the limited liability features of a corporation and the tax efficiencies and operational flexibility of a partnership

• Protect their “members” from entity-level liabilities and claims, while allowing them to allocate and distribute profits and losses under various economic standards

• Setting up an LLC is more complex : An LLC is governed by state statute “Articles of Organization” must be filed in the state under which the LLC is formed States like New York require a formal publication announcing the LLC formation 12 Fees applicable to LLC’s vary amongst the states

Limited Liability Companies

• An LLC will be taxed based on their business entity classification as follows: Single Member – SMLLC Partnership - LLP/LLC C-Corporation and S-Corporation - LLC

• By default a “single member” (SMLLC) is a disregarded entity for tax purposes and is taxed as a sole proprietorship

• An LLC formed by more than one person will have a “default” classification for tax purposes of a partnership 13 Limited Liability Companies

• If the entity wishes to have a classification other than its “default” classification they will need to file Form 8832, Entity Classification Election to elect to be treated as a corporation

• An LLC will file and pay tax based on their classification: Single Member LLC - A single-member LLC files Form 1040 Schedule C like a sole proprietor Partners in an LLC - Partners in an LLC file a Form 1065 partnership tax return like owners in a traditional partnership LLC filing as a Corporation - An LLC designated as a corporation files Form 1120, the corporation income tax return (Form 1120-S will be filed if an S-Election is made) 14 C Corporations

• Corporations are formed under the laws of each state and are more complex than other business structures because they tend to have costly administrative fees and complex tax and legal requirements

• The corporation itself, not the shareholders that own it, is held legally liable for the actions and debts the business incurs

• Characteristics of C Corporation: Separate entity tax filing required Owners pay taxes on profits “Double taxation” Separate state and local tax filing requirements 15

C Corporations

• A corporation is a separate paying tax entity subject to corporate income tax at the federal, state and in many cases, local level

• The owners will also pay taxes at the individual level on profits they actually receive in the form of salaries, bonuses, and dividends which are taxed at individual tax rates on their personal tax returns

• Choosing to operate as a C corporation could lead to “double taxation” since profits are taxed at corporate income tax rates and then taxed to owners at their personal rate when distributions are made

16 Subchapter S Corporations

• An S corporation has the same corporate structure as a standard corporation

• It is a legal entity, chartered under state law, and is separate from its shareholders and officers

• There is generally limited liability for corporate shareholders

• An S corporation files an election on Form 2553, Election by a Small Business Corporation, to be treated differently for federal tax purposes. A separate election may also be required for state purposes 17 Subchapter S Corporations

• Characteristics of Subchapter S Corporation: Annual Information return required Shareholder Compensation Requirements State treatment of S-corporations varies. Some states do not recognize S-Corporation status.

• Similar to a partnership, the S-corporation is a “pass through” entity which allows income or losses to be passed through to individual tax returns. • Unlike a partnership, the net profits that flow to a shareholder are not subject to self-employment tax or the new .9 percent “Medicare surcharge” (effective 2013 the “surcharge” applies to individuals with adjusted gross income above $200,000 or $250,000 for joint 18 filers).

Subchapter S Corporations

• A shareholder employee is expected to take “reasonable compensation” and pay the related payroll taxes

• As with some states, New York City does not recognize S- Corporations

• All S-Corporations “doing business” in New York City are subject to the same General Corporation tax imposed on C Corporations

19 Capitalization and Growth Considerations Based on Business Structure

20 Capitalization and Growth Considerations

• The entity choice selected will impact the options available to raise capital

• C corporations and LLC’s offer more flexibility than S-Corporations

• Partnerships are limited to its capital raised from its partners

• Sole proprietorship’s in general often find it difficult to raise capital

21 Sole Proprietorship

• Limited to one owner, they do not have stock to sell so therefore they will not be able to raise capital from outside investors

• A sole proprietor will have unlimited liability, as the business and the business owner are indistinguishable in this environment

• May be difficult for a sole proprietor to obtain financing without being personally liable

22 Partnerships

• Offer increased flexibility as to ability to raise capital when compared to sole proprietorships

• Raise money by requesting partners to make additional contributions or by admitting new partners

• Selling limited partnership interests may be more attractive to investors since a general partnership interest will carry unlimited liability

• The limited liability will restrict the partner from taking an active role in the partnership 23 Partnerships

• Raising capital through partnership contributions has limitations. If 50% or more of the total interest in capital and profits in a partnership changes hands within a year, the partnership will terminate (unless it is an electing large partnership)

• The partnership can also raise money by applying for a bank loan. In terms of credit, a partnership’s ability to obtain a loan will be dependent on the credit history of the partners

24 C Corporations

• The C Corporation offers the maximum flexibility in terms of the ability to raise capital

• A C Corporation can raise funds by selling financial instruments like stocks and bonds and there are no limitations on the size or type of ownership interest offered

• There can be different classes of stock to reflect the desire for only some shareholders to participate in company business

• Helpful to keep decision-making in one class but enable participation in earnings with an additional class 25 C Corporations

• Two other special tax-related provisions may assist a corporation in raising capital:

Code Sec. 1244 Allows a “small business” corporation to designate the first $1 million of original issue capital stock as “Code Sec. 1244 stock” Losses related to qualifying section 1244 stock are deductible as ordinary losses up to $50,000 ($100,000 on a joint return) Any excess losses on such stock each year are capital loss

26 C Corporations

Code Sec. 1202 A non-corporate taxpayer can exclude from gross income 50 percent of any gain from the sale or exchange of qualified small business stock “QSBS” held for more than five years The Small Business Jobs Act of 2010 temporary increased the exclusion to 100 percent The 2012 Tax Relief Act renews and extends this 100 percent exclusion period until January 1, 2014 Corporations engaging in personal services do not qualify

27 Subchapter S Corporations

• A popular choice for entrepreneurs and other small businesses, it comes with regulatory limitations that do not make it a feasible vehicle for raising venture capital

• Some of these limitations are as follows: S Corporations may only have one class of stock; Venture capital firms may require preferred stock in return for their investment

S Corporation stockholders may include individuals, certain trust and estates. Partnerships, corporations and non-resident aliens cannot be shareholders. Most venture capital firms are organized as limited partnerships and less frequently as LLCs but both legal entity types are not eligible S corporation shareholders 28

Subchapter S Corporations

• Some of these limitations are as follows: Startup capital would not be able to be obtained from foreign investors

S Corporations cannot have more than 100 stockholders. This stockholder maximum will be limiting if the company grows and begins issuing stock and stock options to employees

Must be a domestic corporation

29 Sources

• Internal Revenue Website www.irs.gov

• Internal Revenue Service Publication 541 - Partnerships

• U.S Small Business Administration website www.sba.gov online article “Choose Your Business Structure.”

• U.S Small Business Administration website www.sba.gov online article “5 Reasons to be a C Corporation”, by Barbara Weltman, May 23, 2012.

• CCH Contemporary Tax Practice: Research, Planning & Strategies, Chapter 15, “Business Planning - Choice of Entity

• AICPA related website www.journalofaccountancy.com online article March 2007 “The Choice of Entity Maze.”

• CCH Tax Briefing, “2012 Year-End Tax Planning” October 4, 2012 30 • CCH – Updates to U.S. Master Tax Guide 2013

Thank You!

Q&A

31 Fashion Law CLE Basics of Selling Securities to Finance your Venture

WAHAB & MEDENICA LLC KAISER WAHAB 125 MAIDEN LANE, SUITE 208 NEW YORK, NY 10038 [email protected] WWW.WRLAWFIRM.COM 212-785-0070

Since You want Money, at Some Point, You’ll Sell “Securities” • All business at some point want to raise $$ • All businesses will at some time sell pieces of the company to “investors” to get that $$ • Hence many businesses will sell “securities” at some point – In Plain English a Security is: • Some instrument for sale by a company (shares, units, notes, etc.) • That Instrument offers $$ “upside” if the company does well • And that instrument rarely offers “downside” protection or refund if the company does badly, or worse, goes under • Finally, the instrument gives the purchaser little to no control over the management of the company • The entire process of selling securities is heavily regulated under State & Federal Securities law • Knowing the very basics of securities for startups and private companies can save your reputation, your brand, and in the best case, jail time Selling Securities w/o Heeding Rules can Lead to Severe Consequences • Many startups + mature companies simply sell pieces of their co. without heeding securities laws • As a result, the principals are potentially exposed to personal liability for “fraud” • So if the company goes under, even if investor monies were legitimately spent, an investor could latch on to the company’s failure to follow securities laws and get the state and federal governments to: – 1) Get the $$ back from the principals personally (i.e., ignore the entity) – 2) Blacklist the principals so they can’t raise investor money in the future – 3) Impose criminal sanctions No to IPO: a Private Process to Sell Securities • Not all companies can/want to go the route of Google and go through an IPO (time, expense (thousands if not millions of dollars), regulatory overview) • What can smaller companies and startups do instead? • Follow the securities law framework for so called “private offerings” of securities Private Offerings

• For startups and private companies, instead of “going public”, they can offer a “private placement” of securities • Again, just selling securities “willy nilly” can lead in the worst case, to jail • A “Private Placement” (aka “Private Offering”) can enable the company to sell securities, so long as the company plays by the securities laws rules • Those rules are laid out by the securities laws under so-called Regulation D Regulation D • Startups and private companies that don’t want to go “public” can still sell securities • They will have to abide by Regulation D exemption from registration under the Securities Act of 1933 • This federal regulation lays out a framework that if followed can insulate the company and its principals from violating the law and accusations of “fraud” if things go “bad” The FIVE Features of a Regulation D Offering • There are five major features to a regulation D private placement offering • Those features are: 1. Private 2. Disclosure 3. Restricted 4. Blue Sky Notices 5. Accredited investors (i.e., rich people) Five Features--Private

• Private: – this basically means you don't take out ads in the newspaper and you don't sell the security to just anybody off the street space (generally this means you are selling securities to people with whom you have a substantially pre-existing relationship); – this is essentially the opposite of a public offering where, for example, Google can selling securities on an exchange to basically anyone who wants to buy them Five Features—Disclosure (anti-fraud) • Disclosure: – If you're going to do a private placement simply "telling" an investor your basic idea is insufficient – You generally have to provide a prospectus: a detailed document that lays out in detail all of the risks, the potential downside, description of the industry, the people involved, and a variety other data that an investor would reasonably need to make an investment – In the private offering, that prospectus is generally called “Private Placement Memorandum" – Failure to have a PPM can lead to accusations of "fraud", even though you may not have told a "lie" – Under securities laws, "fraud" can be tantamount to omitting facts an investor needs to understand, (i.e., risk factors)

Five Features—Restricted

• Restricted: Securities – simply, when you sell securities under a private placement, you have to let the investor know he or she can't just resell it to anybody as they see fit – This is fundamentally different from a share in a public company, like Google, which can be sold to another party the minute you bought it – So generally speaking, when securities are sold through a private offering they are "illiquid“ – Hence, an investor buys securities in a private offering for the "long run", they are not buying it for the opportunity to resell but for the overall growth opportunity Five Features—Blue Sky • Blue Sky Notices: – you generally have to advise various states in which the investors reside that you are engaged in a private placement offering so that you are “on their radar” – Failure to do so can result in blowing all of the hard work that you put in to create a private placement to avoid being ensnared by the securities laws – For example, if you are trying to raise $500K from investors who live in New York and New Jersey, you likely will have to file so-called blue sky notice filings in both states advising those states that you're trying to raise $500K from residents who live there – Note: there are fees that accompany Blue Sky filings Five Features—Accredited Investors • Accredited Investors: – Generally, best to sell private securities to investors who are relatively "wealthy" – Under the law there is a technical definition for who is "wealthy", that definition is referred to as "accredited investor" • individuals who earned $200,000 or more in the past two years, with a reasonable expectation of earning the same amount of money or more in the year in which the investment is made – A secondary definition: the individual investor has $1 million or more in assets, not including their primary residence (take note those with New York apartments that have skyrocketed in value) – It is possible to take money from non-accredited investors but law protects them with higher degree of scrutiny, make sure to take care of other four pillars, in particular disclosure, because failure could have higher consequences – Also, numerical limitations on the number of unaccredited investors that you can take in (generally the highest number being 35) – There are other/related accredited investor definitions for institutions, etc.

Some Best Practices; Timing • There is a timing to how the private placement process should play out • You generally can't/shouldn’t talk to investors about investment propositions (i.e., soliciting them to invest in your securities) before you have taken care of the five pillars) • Companies going the private placement route should spend time money and effort in gathering the materials necessary to satisfy the five pillars before they pull the trigger and solicit investors • Planning ahead is the key Complexity Beyond Presentation

• The previous slides were very a basic intro to private placements • Some other factors that should be considered when engaging in a private placement are: the amount of money being raised, the type of securities being offered (debt, equity, hybrid, etc.) • There are many more complexities that can impact the various parameters discussed • Any company looking to do a private placement really needs to leverage competent counsel who knows this area of the law Crowdfunding • Crowdfunding is of course interest any company looking to raise money • Under the law now (but not for long due to JOBS Act), crowdfunding enables all sorts of people from all over the world to basically give but not "invest" money to a venture so that the company can do great things • Currently crowdfunding does not allow companies to sell "upside" to these third-party donors • Instead, the company that relies “Kick Starter", is basically selling the product or certain other favors to the donor instead the revenue stream of the company or upside if the company were ever to be sold • People who give money to third-party companies via crowdfunding are generally not "investors" in the traditional sense and therefore lack many of the incentives that come with being an "investor" • Under the JOBS ACT that will change but how exactly that will change is still up in the air • In any event, the basics of private offerings will still apply even in the crowdfunding context so it's good to become familiar the previous slides Tax Issues in Private Placements, Debt and Equity New York County Lawyers’ Association February 8, 2013

William M. Funk, Esq. (212) 973-1100 [email protected] Circular 230 Notice

The information presented herein should not be considered legal advice. Communication of this information does not and cannot establish an attorney-client relationship. Any U.S. federal tax discussion contained in this communication is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

. Introduction: . Publicly-Traded Partnerships (and Private Placements) . Debt-Equity Overview . Debt – Equity in Disguise? . Equity – Debt in Disguise?

. When appearances can be deceiving.

− Partnerships that look like corporations and vice-versa.

− Debt that looks like equity and vice-versa.

. Partnerships (including limited liability companies) usually are not taxed.

− "Publicly-traded partnerships” (“PTPs”) may be taxed as corporations (at 35 percent).

• Exception for PTPs whose income is at least 90 percent from “passive” sources (interest, dividends, real property rents, capital gains, and, strangely enough, production of minerals, oil and gas and other natural resources).

. PTPs -- Defined

− A PTP is a partnership if:

• Its interests are traded on an established securities market; or

• Its interests are “readily tradable” on a secondary market or equivalent.

Public trading:

Regular plan of redemptions, repurchases or other reacquisitions by issuer.

Listing interests on an exchange.

Determining whether interests traded on secondary market or equivalent.

Regular quotation of prices by market-makers;

Regularly made available to the public;

Readily available, regular and ongoing opportunity to sell through public means; or

Regular and continuous opportunity to buy and sell partnership interests.

Safe-harbor exceptions to PTP status. .Private placement (1933 act exemption and no more than 100 partners) in the U.S. .Activity that is deemed not to be trading. .Redemption and repurchase agreements. .Lack of actual trading (less than 2% of interests traded during the year).

Activity deemed not to be trading (private transfers) .Block transfer (more than 2% of interests). .Closed-end redemption and repurchase program. .Redemption and repurchase program for former service- providers. .Gifts/transfers at death/intrafamily transfers. .Distributions from IRA or qualified retirement plan. .Qualified matching services (limited to transfers of 10 percent of interests in a year).

Redemption and repurchase agreements .Redemption or repurchase requires 60 days written notice; .Redemption or repurchase price cannot be established either (1) more than 4 times during the year or (2) until 60 days after receipt of written notice. .No more than 10 percent of interests transferred during the taxable year.

Stakes .Interest deductions for issuer. .S corporation restrictions (100 owners, 1 class of stock). .Withholding tax rates for foreign investors. .Timing of taxable income (return of basis). .Attribution of entity income, losses, deductions or credits. .Phantom income (original issue discount). .Loss Deductions.

What is debt? Factors: . Unconditional promise to repay; . Priority of rights over general creditors; . Label; . Regulatory treatment (i.e. non-tax law); . “Thin capitalization” (high ratio of debt to equity); . Lack of right to participate in management; . Degree of overlap between equity holders and creditors; . Rights of holders to enforce payment of principal and interest.

DEBT-EQUITY

What is [partnership] equity? . Primarily an interest that carries a “meaningful intention to share in the profit and losses.” . Sharing gross revenue or costs is not sufficient.

Debt arrangements that may be reclassified:

Repayment is contingent or may be cancelled based on business performance.

Interest is computed partly or fully based on a percentage of net profits.

. Equity arrangements that may be reclassified.

− ”Too Good to Be True” Arrangements • Guarantees that protect the investor from realistic possibility of losses.

• Guaranteed returns (not the same thing as “guaranteed payments”).

− Certain preferred stock that is limited as to growth.

• May be required to take in “Preferred Stock OID”.

William M. Funk, Esq. Law Office of William M. Funk 275 Madison Avenue, 11th Floor New York, NY 10016 Phone: (212) 973-1100 Fax: (917) 210-3513 E-mail: [email protected] www.funklawsite.com

• Travel Retail, By Lee S. Sporn, Senior Vice President - Business Affairs, General Counsel & Secretary, MICHAEL KORS

• Website Accessibility, By Howard Z. Robbins, Proskauer Retail Leasing

Top Consideration – Location, location, location • Co-tenancies/adjacencies • Size of store • Visibility • Relocation – to be resisted

Kick-Off of Leasing Process Letter of Intent – points to be covered here and in lease • Description of the leased premises • Term of the lease • Possession date and condition of premises on delivery • Identity of the parties • Base rent • Percentage rent, if any

Kick-Off of Leasing Process (continued) Letter of Intent • Additional charges • Permitted use • Security deposit, if any • Rent commencement date/free rent • Tenant improvement allowance • Assignment and subletting

Team

Other Experts – Who rounds out the team? • Broker • Real Estate • Architect • Designers • Accountant

Specialized Lease Provisions

• Exclusive use • Radius restriction • Sale of fashion brand Travel Retail General Considerations

• Is it wholesale/retail/licensee distribution? • Carve it out of territorial licensing agreement? • Operational issues. •Who builds and operates? •Staffing •Inventory •Marketing •Landlord Issues What (and where) is travel retail?

• Definitions. Whenever used in this Agreement, the following words and phrases, unless the context otherwise requires, shall have the following meanings: • “Duty Free” shall mean any store or other channel of trade in which goods are sold free of any national tariffs, duties or taxes on the condition that the purchaser will not bring such goods back into the country (or designated country of origin) in which they are purchased. • “Excluded Channels” shall mean (i) direct mail, Internet e-commerce sites, and all other direct-to-consumer channels of distribution; (ii) bases, exchanges, embassies and consulates of the Armed Forces; and (iii) airports or other transportation hubs (including, but not limited to, train stations, cruise ships and other international ports-of-entry) or Duty Free channels of distribution whether within or outside of an airport or other transportation hub, all distribution and other rights with respect to any of the foregoing being expressly reserved by Licensor. • “Travel Retailer” shall mean any person or entity that operates any retail location in an airport or other transportation hub (including, but not limited to, train stations, cruise ships and other international ports-of-entry) or any Duty Free operator whether within or outside of an airport or other transportation hub.

Carve out of Territorial License

• Rights Not Granted. This Agreement is not an assignment or grant to Licensee of any right, title or interest in or to the Trademarks or IP Rights, other than the grant of rights to use the Trademarks and IP Rights in connection with Licensed Products in the market segments in the Territory specifically set forth herein. Subject to Licensee's rights in accordance with Section __ hereof, Licensee acknowledges that Licensor, its Affiliates, manufacturers, and/or licensees may, without violating Licensee's rights hereunder, distribute, sell, advertise and promote in the Territory: (i) Products in any market segment other than the Collection, Bridge and Better segments under any trademarks other than the Trademarks, and (ii) any products other than Products under the Trademarks or any other trademarks in the Territory. Licensee further acknowledges that Licensor, its Affiliates and licensees may manufacture or authorize the manufacture of Licensed Products in the Territory for sale exclusively outside of the Territory. Licensor expressly retains the right to operate, either directly or through its Affiliates or licensees or their Affiliates, Internet e-commerce sites and other direct-to-consumer businesses (including, but not limited to, mail order) under the Trademarks. Licensee shall not have the right to sell, offer for sale or distribute any Licensed Products (x) to bases, exchanges, embassies and consulates of the Armed Forces or (y) to Travel Retailers. All rights not specifically granted herein to Licensee are reserved to Licensor, which may at all times fully and freely exercise the same.

Website Accessibility: Disability Law Compliance In the Digital Age

Howard Z. Robbins, Partner Proskauer Rose LLP February 8, 2013 General Sources of Accessibility Obligations

2 The Americans with Disabilities Act

• Title I: Private Employers • Title II: Public Entities • Title III: Places of Public Accommodation • “Disability” defined as: - (a) a physical or mental impairment that substantially limits one or more major life activities; - (b) a record of such an impairment; or - (c) being regarded as having an impairment • In 2008, Congress passed the ADA Amendments Act adopting a series of definitional alterations, modifying previous standards, and nullifying several Supreme Court decisions, with the ultimate result of shifting the focus of ADA analysis from whether a person has a disability to whether a reasonable accommodation or modification exists

3 ADA Title I

• Prohibits private employers from discriminating against qualified individuals with a disability in regard to employment • Requires employers to provide reasonable accommodations to qualified individuals with a disability who can perform the essential functions of the job with or without accommodation, unless doing so would constitute an “undue hardship” - 2008 ADA Amendments Act (“ADAAA”) and 2011 EEOC ADAAA regulations direct employers to focus their efforts on reasonably accommodating employees with disabilities, so long as the worker can perform the essential functions of the job

4 ADA Title III

• Governs places of public accommodation - Own, operate, control, lessor/lessee • Places of public accommodation include: - inns, hotels, motels, or other places of lodging - restaurants, bars, or other establishment serving food or drink; - a motion picture house, theater, concert hall, stadium, or other place of exhibition or entertainment; - an auditorium, convention center, lecture hall, or other place of public gathering; - a bakery, grocery store, clothing store, hardware store, shopping center, or other sales or rental establishment;

5 Title III of the ADA is a Civil Rights Law

• Title III guarantees individuals with disabilities the “full and equal enjoyment of the goods, services, facilities, privileges, advantages or accommodations of any place of public accommodation” (42 U.S.C. §12182(a))

6 ADA Title III: General Prohibitions

• General Prohibitions: - Denying participation or opportunity to participate - Providing unequal benefits - Providing separate benefits - Not having an integrated setting - Discrimination because of a relationship or association with an individual with disability

7 State and Local Laws

• Most states and many localities have human rights/anti- discrimination laws prohibiting discrimination on the basis of disability

8 Website Accessibility

9 Federal Obligations for Websites of Private Entities: Title III of the ADA

• Title III prohibits places of public accommodation from discriminating on the basis of disability - Requires “full and equal enjoyment” - However, it does not explicitly define whether a place of public accommodation must be a physical place or facility, nor does it directly address whether it could be read or interpreted to apply to a non-physical place or facility • Currently, tension exists regarding whether Title III applies to websites and if it does, what it means to be accessible - Court decisions on the issue – both generally and specific to websites – have been decided both ways - Presently, no universally required standards for achieving web accessibility

10 Scope of Title III’s Coverage: Judicial Decisions

Decisions Holding That “Places of Accommodation” are Limited to Physical Places • Stoutenborough v. Nat’l Football League (6th Cir. 1995) (“plaintiffs’ argument that the prohibitions of Title III are not solely limited to ‘places’ of public accommodation contravenes the plain language of the statute”) • Ford v. Schering-Plough Corp. (3d Cir. 1998) (“plain meaning of Title III is that a public accommodation is a place. . . . This is in keeping with the host of examples of public accommodations provided by the ADA, all of which refer to places”) • Weyer v. Twentieth Century Fox Film Corp. (9th Cir. 2000) (“[t]he principle of noscitur a sociis requires that the term, ‘place of public accommodation,’ be interpreted within the context of the accompanying words, and this context suggests that some connection between the good or service complained of and an actual physical space is required.”)

11 Scope of Title III’s Coverage: Judicial Decisions (cont’d)

Decisions Holding That “Places of Accommodation” are Not Limited to Physical Places and Thus May Be Covered By Title III • Carparts Distrib. Ctr., Inc. v. Automotive Wholesaler’s Ass’n of New England (1st Cir. 1994) (“The plain meaning of the terms do not require ‘public accommodations’ to have physical structures for persons to enter. Even if the meaning of ‘public accommodation’ is not plain, it is, at worst, ambiguous. This ambiguity, considered together with agency regulations and public policy concerns, persuades us that the phrase is not limited to actual physical structures.”) • Doe v. Mut. of Omaha Ins. Co. (7th Cir. 1999) (Title III “plainly enough” encompasses the concept that “the owner or operator of a store, hotel . . . Web site, or other facility (whether in physical space or electronic space) . . . that is open to the public cannot exclude disabled persons from entering the facility . . .”) • Pallozzi v. Allstate Life Ins. (2d Cir. 1999) (rejecting defendant’s argument that goods or services that are not actually used in places of public accommodation do not qualify as goods and services of a place of public accommodation)

12 Key Decisions Directly Addressing Title III’s Applicability to Websites

• Access Now, Inc. v. Southwest Airlines Co. (S.D. Fla. 2002; 11th Cir. 2004) - Plaintiffs alleged that Southwest Airlines’ website – www.southwest.com – separate and apart from any physical facilities – was inaccessible to individuals who are blind and thus violated Title III - Plaintiffs did not argue a “nexus” theory of liability - The District Court held that it was the role of Congress, and not the court, to expand the ADA’s definition of “public accommodation” beyond physical structures, to include “virtual” places of public accommodation such as websites - “Thus, because the Internet website, southwest.com, does not exist in any particular geographical location, Plaintiffs are unable to demonstrate that Southwest’s website impedes their access to a specific, physical, concrete space such as a particular airline ticket counter or travel agency.” - The 11th Circuit dismissed the appeal because, in lieu of challenging the lower court’s holding that www.southwest.com itself is not a public accommodation, Plaintiffs attempted to introduce new facts and a new legal theory (nexus between Southwest Airlines as a travel service and its website) not alleged in either the Complaint or presented to the district court - In dicta, stated that Southwest Airlines was not covered by ADA, but rather, Air Carrier Access Act

13 Key Decisions Directly Addressing Title III’s Applicability To Websites (cont’d)

• Nat’l Federation of the Blind vs. Target Corp. (N.D. Cal. 2006) - Addressed whether Title III covers only physical “brick and mortar” structures or does it also cover the internet - NFB alleged that Target violated Title III, California’s Unruh Act, and California’s Disabled Persons Act because Target.com – which offered a variety of store-related services – was inaccessible to the blind and thus Plaintiffs were denied full and equal access to Target stores - Target asserted that the ADA and California state laws only cover access to physical spaces, such as Target’s brick-and-mortar stores, and that Target.com is not a physical space and thus not a “place of public accommodation.” - Also asserted that Plaintiffs were not denied full and equal access to the Target stores because the services were provided via alternative means

14 Target (cont’d)

- The Court held that Title III covers websites in situations where a nexus exists between the website and a physical place of public accommodation. - “The statute applies to the services of a place of public accommodation, not services in a place of public accommodation.” - Many of the benefits and privileges of Target’s website – such as online information about store locations and hours and printable coupons that are redeemed in the stores – were “heavily integrated with the brick-and- mortar stores.” - Did not rule on whether alternative measures provided by Target (e.g., telephone line, in-store assistance) were effective alternatives - Regarding the state law claims, the Court found that, since the plaintiffs stated a claim under the ADA and ADA claims are per se claims under the Unruh Act and the DPA, it would not reach Target’s challenges to the plaintiffs’ state law claims. - Nevertheless, the Court stated in dicta that part of plaintiffs’ claim was “that Target.com is a service of a business establishment, and therefore defendant’s argument that a website cannot be a business establishment is unavailing.”

15 Target (cont’d)

- Ultimately resulted in a court- approved class settlement agreement in which Target agreed to: - Establish a $6 million fund from which members of the state settlement class could make claims; - Take the steps necessary to make its website accessible to the blind by early 2009 and obtain “certification” from NFB; - Pay NFB to train all its employees who work on its website; and - Pay attorneys’ fees and costs

16 The Post-Target Landscape

• Increased (threats of) litigation on this issue • Significant number of settlements and “cooperative agreements” between advocacy groups and/or state and/or federal government agencies and major companies regarding website accessibility • Increased attention from DOJ and other Regulators • Increased reliance upon the World Wide Web Consortium/Website Accessibility Initiative’s Web Content Accessibility Guidelines

17 Key Post-Target Litigation

• Ouellette v. Viacom (D. Mont. Mar. 31, 2011) - Plaintiff alleged, among other things, that various websites including Google.com, YouTube.com and MySpace.com violated the ADA by failing to accommodate his reading disability as part of its fair use policies and dispute procedures - Claimed these “online theater[s]” were places of public accommodation under the ADA - The court dismissed these claims on the grounds that, “[n]either a website nor its servers are ‘actual, physical places where goods or services are open to the public,’ putting them within the ambit of the ADA.” (citing Weyer)

18 Post-Target Litigation (cont’d)

• Young v. Facebook, Inc. (N.D. Cal. May 17, 2011) - Revisited the applicability of Title III to private websites and, in doing so, suggested it was not prepared to expand the holding in Target - Plaintiff, a woman with bipolar disorder, alleged that Facebook violated the ADA, the Unruh Civil Rights Act, and California Disabled Persons Act, by failing to provide reasonable customer services to assist her after it terminated her account for various purported abuses of Facebook’s Statement of Rights and Responsibilities - The court restated that websites on their own do not constitute places of public accommodation under Title III and, therefore, a “nexus” must exist between a website’s services and a physical place of public accommodation for Title III obligations to apply to the website - District Court Judge Jeremy Fogel wrote, “Facebook operates only in cyberspace, and is thus is [sic] not a ‘place of public accommodation;’ as construed by the Ninth Circuit. While Facebook’s physical headquarters obviously is a physical space, it is not a place where the online services to which Young claims she was denied access are offered to the public.” - The court found that even applying the nexus theory set forth in Target, plaintiff failed to allege a sufficient “nexus” between Facebook and any physical place of public accommodation

19 Post-Target Litigation (cont’d)

• Earll v. eBay, Inc. (N.D. Cal. Sept. 7, 2011) - Plaintiff, who is deaf, brought a putative class action under the ADA, California Disabled Persons Act (“DPA”), and state unfair competition law alleging that eBay’s seller verification system is inaccessible to the deaf community - Plaintiff sought to amend her complaint to add a claim under California’s Unruh Civil Rights Act, but eBay argued that it would be moot because it was wholly derivative of her ADA claim - Judge Fogel found that while the ADA could not afford a remedy to plaintiff because its definition of “places of public accommodation” is limited to actual physical spaces, plaintiff could assert an independent Unruh Act claim because “[b]oth the Unruh Act and the [Disabled Persons Act] apply to websites ‘as a kind of business establishment and an accommodation, advantage, facility, and privilege of a place of public accommodation, respectively. No nexus to . . . physical [places] need be shown.’” - quoting Nat’l Fed. of the Blind v. Target (N.D. Cal. 2007) (certifying California sub-class alleging lack of website accessibility violated California’s Unruh Act and the DPA) - Plaintiff’s First Amended Complaint failed to state a claim under the Unruh Act (no allegation of intentional discrimination) and the Disabled Persons Act (no allegation of a particular California provision or regulation requiring higher standards of website accessibility than the ADA) and was dismissed (N.D. Cal. Aug. 8, 2012)

20 Post-Target Litigation (cont’d)

• Greater Los Angeles Agency on Deafness, Inc. et al. v. Time Warner Inc. (N.D. Cal.) - Complaint filed June 15, 2011 in state court; removed to N.D. Cal. July 14, 2011 - Allegation that CNN’s failure to include captions on videos posted on CNN.com violates Unruh Civil Rights Act and DPA - N.D. Cal. denied CNN’s motion to strike the complaint - CNN argued complaint is designed primarily to chill the exercise of CNN’s First Amendment rights (anti-SLAPP statute) (Cal. Code Civ. P. §425.16(b)(1)) - U.S.M.J. Laurel Beeler found that CNN failed to show that its refusal to provide captioning on CNN.com is “conduct . . . in furtherance of” its broadcast activities; therefore failed to make a prima facie anti-SLAPP showing - CNN is currently appealing to 9th Cir. - CNN’s brief filed Sept. 12, 2012 - Plaintiffs’ opposition brief filed Oct. 23, 2012 - CNN’s reply brief filed Nov. 30, 2012 - Amicus briefs filed by other news media groups and advocacy groups

21 Netflix Cases Demonstrate the Impact of the Circuit Split

• Nat’l Assoc. of the Deaf v. Netflix, Inc. (D. Mass. June 19, 2012)

- Alleged that Netflix’s failure to provide closed captioning on their “Watch Instantly” streaming video programming website violated ADA - In ruling on the motion for judgment on the pleadings, the court held that 1st Circuit precedent, Congressional intent, and the plain language of the ADA clearly supported a finding that accessibility obligations are not limited to physical places: - “Carparts’s reasoning applies with equal force to services purchased over the Internet, such as video programming offered through the Watch Instantly web site. In a society in which business is increasing conducted online, excluding businesses that sell services through the Internet from the ADA would ‘run afoul of the purposes and would severely frustrated Congress’s intent that individuals with disabilities fully enjoy the goods, services, privileges and advantages, available indiscriminately to other members of the general public.’” - “The ADA covers services ‘of’ a public accommodation, not services ‘at’ or ‘in’ a public accommodation.” (citing Target) - Judge Ponsor wrote that Netflix’s Watch Instantly website could fall into several categories listed in the ADA: - “service establishment”: provides customers with the ability to stream video programming over the Internet - “place of exhibition or entertainment”: displays movies, television programming, and other content - “rental establishment”: engages customers to pay for the rental of video programming - However, a ruling on whether Netflix has the power to provide the captioning that Plaintiffs seek (i.e. copyright issues) was procedurally premature - Judge Ponsor wrote that Netflix could revisit the issue in a summary judgment motion

22 Netflix Cases (cont’d)

• Entered into a consent decree (Oct. 9, 2012) in which Netflix agreed to, among other things,: - Maintain list of on-demand streaming content with captions until Oct. 1, 2014 - Ensure that at least 90% (by Sept. 30, 2013) and 100% (by Sept. 30, 2014) of on-demand streaming content has captions or subtitles - Ensure that captions are available within an average of 15 days (by Sept. 30, 2014) and 7 days (by Sept. 30, 2016) after content’s on-demand launch - Submit confidential written reports describing its compliance with staggered deadlines - The parties agreed to “waive any rights that [the parties] might have under Section 1542 of the California Civil Code or under any similar statute or legal theory.” - Netflix to provide training within 6 months; will consider NAD’s training proposals - Pay $755,000 in attorneys’ fees and costs - Pay NAD $40,000 for compliance monitoring

23 Netflix Cases (cont’d)

• Cullen v. Netflix, Inc. (N.D. Cal. July 13, 2012)

- Alleged that Netflix’s failure to provide closed captioning on their “Watch Instantly” streaming video programming website violated ADA - The court held that 9th Circuit precedent controlled, finding that plaintiff could not rely on a violation of the ADA to state per se violations of the Unruh Act and the Disabled Persons Act, and granting Netflix’s motion to dismiss with leave to amend to state independent causes of action under the Unruh Act and Disabled Persons Act - “The Netflix website is not ‘an actual physical place’ and therefore, under Ninth Circuit law, is not a place of public accommodation. Because the website is not a place of public accommodation, the ADA does not apply to access to Netflix’s streaming library.” (citing Weyer) - Netflix made motion to dismiss Third Amended Complaint

24 U.S. Department of Justice

• DOJ takes the position that Title III as written applies to the websites of private places of public accommodation: • “Although the language of the ADA does not explicitly mention the Internet, the Department has taken the position that title III covers access to Web sites of public accommodations. The Department has issued guidance on the ADA as applied to the Web sites of public entities, which includes the availability of standards for Web site accessibility. . . .” - Preamble, Final rule, Nondiscrimination on the Basis of Disability; Accessibility of Web Information and Services of State and Local Government Entities and Public Accommodations, 75 Fed. Reg. 43465 (published Sept. 15, 2010) • DOJ has made its position clear in various forms: - amicus briefs; - guidance publications; - letters and testimony before Congress; - settlements agreements; and - ANPRM (and its hearings).

25 The ANPRM

• July 26, 2010 ANPRM – Nondiscrimination on the Basis of Disability; Accessibility of Web Information and Services of State and Local Government - Referenced in 2010 DOJ Standards - Contemplating amending Title II and Title III regulations - Public hearings held throughout Fall/Winter 2010/2011 - Public comment period ended January 24, 2011 - Formalizes intent to adopt standards expressly covering websites owned, operated, and controlled by entities covered by Titles II and III

26 The ANPRM (cont’d)

- Scope of web accessibility standards most likely limited to public accommodations that offer goods and services, either exclusively on the Internet (e.g. Amazon.com) or in conjunction with a physical location (e.g. Target stores) - DOJ: “[R]emoving . . . Web site barriers is neither difficult nor especially costly, and in most cases providing accessibility will not result in changes to the format or appearance of a site. . . Web designers can easily add headings, which facilitate page navigation using a screen reader, to their pages. They can also add cues to ensure the proper functioning of keyboard commands and set up their programs to respond to assistive technology, such as voice recognition technology.”

27 The ANPRM (cont’d)

• Proposed staggered compliance deadlines - A newly created or completely redesigned website would be required to comply with new regs within six (6) months of final rule’s effective date - New pages on an existing website may have to comply “to the maximum extent feasible” - DOJ is also considering that existing websites be granted a period of two (2) years after the effective date to achieve compliance • NPRM is currently expected to be published in 2013

28 Website Accessibility: Disability Law Compliance In the Digital Age

Howard Z. Robbins, Partner Proskauer Rose LLP February 8, 2013 PANEL III: Classifications, Value, Labeling and Border Control Issues • Importing Fashion Articles, By Frances Hadfield, Grunfeld Desiderio Lebowitz Silverman & Klestadt LLP

• Hot Topics in Fashion, By Michael Khorsandi, Price Waterhouse Coopers

Importing Fashion Articles

Frances P. Hadfield, Esq. [email protected] Tel. 212.973.7755

Importing Fashion Articles 1 Importing Overview

A. Apparel and Footwear Imports B. Entry of Goods – The Administrative Agencies C. Tariff Classification D. Customs Valuation 1. First Sale 2. Duty Free Agreements E. Other Importing Concerns

Importing Fashion Articles 2 The Importance of the Fashion Industry

• In 2012, the fashion industry (i.e., textiles) accounted for 47% of all Customs duties (i.e., taxes) collected. • The average duty rate for textiles is about 16%. • There are approximately 68,000 importers of textile products.

Importing Fashion Articles 3 A. Apparel and Footwear Imports The Fashion Industry Increasingly Contributes to the U.S. Economy

Volume of Imports 2008 • Apparel - $70 Billion • Footwear - $17 Billion

Change in Volume of Imports • In 2010 –increased to $104.2 billion • In 2012 – the textile industry imported more than $94 billion. • These amounts do not account for other fashion articles like purses.

Importing Fashion Articles 4 B. Entry Process: How Fashion Articles are Imported into the United States Entry • Apparel and Fashion articles are not legally “entered” into the United States until after the shipment has arrived within the port of entry, delivery of the merchandise has been authorized by CBP, and estimated duties (i.e., taxes) have been paid.

Ports of Entry • Ports of entry conduct the daily, port-specific operations like clearing cargo, collecting duties and other monies associated with imports, and processing passengers arriving from abroad. Full port list available at http://www.cbp.gov/xp/cgov/toolbox/ports/

Importing Fashion Articles 5 -The Administrative Agencies: The Usual Suspects (or Importing is a PRIVILEGE* not a Right) • CBP - U.S. Customs and Border Protection. – Overall responsibility for importer activities • F&W - U.S. Fish and Wildlife. – Endangered and protected species (permits) • FTC – Federal Trade Commission. – Fiber Content/Components of the Apparel and its Origin • CPSC – Consumer Product Safety Commission. – Jewelry (lead content) and Children’s Apparel

* “As a result of the complete power of Congress over foreign commerce, it necessarily follows that no individual has a vested right to trade with foreign nations….” Buttfield v. Stranahan, 192 U.S. 470, 493 (1904). Importing Fashion Articles 6 C. Tariff Classification

• Pursuant to 19 U.S.C. § 1202, every article imported into the United States, including all fashion articles, must be classified and assessed duty at the applicable rate (even if that rate is duty free).

• Articles are classified through use of the Harmonized Tariff Schedule of the United States. The tariff is available online at http://hts.usitc.gov/

Importing Fashion Articles 7 HTSUS Classification – Festive Article (Costume) Example

Importing Fashion Articles 8 D. Customs Valuation

Imported articles are entered at an appraised value. Pursuant to 19 USC 1401a, there are five different appraisement methods: – Transaction Value – Transaction Value of Same or Similar Items – Computed Value – Deductive Value – Fallback Method

Importing Fashion Articles 9 D. Customs Valuation Cont.

• Transaction Value is the appraisement method principally used for fashion articles.

• Transaction Value is defined as “the price paid or payable by the buyer to the seller when the merchandise is sold for export to the United States.”

Importing Fashion Articles 10 Putting Classification and Value Together: Which one is a Costume and which one is a Dress?

Style 62621 Style 30248

Fictitious Cost of Manufacture: $10.00/unit Quantity Imported into U.S. for Halloween – 100,000 units Duty Rate – Costumes are Free Duty Rate - Girls’ Dresses are 16% One of these costs $160,000 in duties to import – the other may be imported Duty FREE

Importing Fashion Articles 11 Classification

Festive articles in 9505.90.60, HTSUS, are costumes of a flimsy nature and construction, lacking in durability, and generally recognized as not normal articles of apparel. Style 62621 Style 30248

Which one is a normal “dress” article of apparel or would you send your daughter to school in it?

Importing Fashion Articles 12 Valuation Costume Dress Style 62621 Style 30248

FREE $160,000

Style 62621’s Duty Rate – Free (Costume) Style 30248’s Duty Rate - 16% (Girl’s Dress)

Importing Fashion Articles 13 D. Customs Valuation Cont.

Certain costs must be added to the appraised value of the fashion article if not included in the payment to the seller:

– Selling Commissions – Packing Charges – Resale Charges – Assists – Certain Royalties

Importing Fashion Articles 14 D. Customs Valuation Cont. 1. First Sale • Nissho Iwai American Corp. v. United States, 982 F.2d 505 (Fed. Cir. 1992).

• Where there are back-to-back sales from: – A factory to a middleman; and – From the middleman to the importer;

• The “first sale doctrine” allows the importer to treat the middleman’s profit and overhead as a non- dutiable expense.

Importing Fashion Articles 15

Customs Valuation Cont.

$10 $15

Middleman Sells Dress Department Store Imports Factory to U.S. Buyer Dress from Middleman. Manufactures for $10 Duty Rate is 16%. How Dress and Sells to much in duties does the Middleman for $5 importer pay? Grunfeld, Desiderio, Lebowitz, Silverman & Klestadt LLP Importing Fashion Articles 16 D. Customs Valuation Cont.

• Some Important First Sale Questions: • Is the your seller actually manufacturing the merchandise or are they a trading company? • Are there back-to-back sales from the factory to a middleman? • Are the goods destined for the United States when they are manufactured? • Are the factory and the middleman related? • If used properly, the First Sale from Manufacturer is used and 16% duty rate is applied to $10 sale.

Importing Fashion Articles 17 2. Duty-Free Programs

Examples of Free Trade Agreements – Bahrain, CAFTA-DR (El Salvador, Costa Rica, Guatemala, Honduras, Nicaragua, Dominican Republic), Chile, NAFTA (Mexico & Canada), Israel, Jordan, Singapore, Australia, Morocco,, Oman, Peru, Korea, Colombia, Panama

– The Case of the Million Dollar Pocket Fabric

Importing Fashion Articles 18 D. Customs Valuation Cont. 2. Duty Free Programs • More than $17 billion worth of textile articles and wearing apparel claim preferential tariff treatment at importation. Accordingly, the Fashion and Apparel Industry is considered to be at high risk for non- compliance by CBP. • Very complicated eligibility rules. • Rules differ from program to program. • Intensive documentation requirements. • Burdensome claim verification process. – Not enough to comply with the rules but must be able to demonstrate compliance.

Importing Fashion Articles 19 E. Other Importing Concerns… U.S. Fish & Wildlife and U.S. Department of Agriculture or Don’t Forget the Buttons

The United States is a party in the Convention on International Trade in Endangered Species of Wild Fauna and Flora, commonly known as CITES.

This treaty regulates trade in endangered species of wildlife, plants and their products. International trade in species listed by CITES is illegal unless authorized by permit.

Items prohibited by CITES include, but are not limited to, articles made from whale teeth, ivory, tortoise shell, reptile, fur skins, coral, and birds. Permits to import CITES/Endangered Species into the United States are issued by the Office of Management Authority of the U.S. Fish and Wildlife Service.

All items made from wood, feathers, or bone may be subject to endangered species regulations

Importing Fashion Articles 20 E. Other Importing Concerns… CPSC – Fashion and Apparel Product standards: • Under the Consumer Product Safety Improvement Act of 2008, a wide range of fashion consumer products are subject to a uniform safety standard. These include such items as:

• Children’s Metal Jewelry: Lead content limit of 600 ppm

• Children’s clothes with rhinestones, metal or vinyl snaps, zippers, closures or appliqués.

Importing Fashion Articles 21 www.pwc.com Hot Topics in Fashion: CBP IP Rights and FTC Labeling

Michael J. Khorsandi February 8, 2013

NYCL Fashion Law Seminar Agenda

US Customs and Border Protection - CBP’s Mission and IP Protection - Trademark Recordation - Benefits of Recordation

Federal Trade Commission - Bamboo Textile Claims – Recent Agency Fines - Fur Labeling Requirements - State Faux Fur Labeling Requirements

PwC 2 CBP and IP Protection

PwC 3 CBP’s Mission

• US Customs and Border Protection (CBP) is a pretty busy organization. • Besides safeguarding the borders and protecting the homeland against terrorism, the agency facilitates over $2 trillion in trade annually.

PwC 4 IPR is a CBP Priority Trade Issue

“The trade in counterfeit and pirated goods threatens America’s innovation economy, the competitiveness of our businesses, the livelihoods of U.S. workers, and, in some cases, national security and the health and safety of consumers. The trade in these illegitimate goods is associated with smuggling and other criminal activities, and often funds criminal enterprises. CBP protects businesses and consumers every day through an aggressive IPR enforcement program.”

PwC 5 CBP’s Seizure Statistics

The MSRP of seized goods increased from $1.11 billion in FY 2011 to $1.26 billion in FY 2012, with an average seizure value of more than $10,450. • Handbags and Wallets – 40% • Watches and Jewelry – 15% • Wearing Apparel – 11% • Footwear – 8%

IPR Seizure Statistics, available at http://www.cbp.gov

PwC 6 TWO Important Questions Importers should Determine BEFORE Bringing Goods to the US

1. Whether your merchandise or its packaging uses any trademarks or copyrighted material or are patented? If so, can you establish that you have a legal right to import those items into and/or use them in the United States?

2. If you are importing goods or packaging bearing a trademark registered in the United States, have you established that it is genuine and not restricted from importation under the “gray-market” or parallel-import requirements of United States law (see 19 C.F.R. 133.21), or that you have permission IN WRITING from the trademark holder to import the merchandise?

PwC 7 Gray Market Goods and US Trademark Protection

‘‘Restricted gray market goods’’ include goods bearing a genuine trademark which is:

(1) Independent licensee. Applied by a licensee (including a manufacturer) independent of the U.S. owner, or (2)Foreign owner. Applied under the authority of a foreign trademark or trade name owner other than the U.S. owner, a parent or subsidiary of the U.S. owner, or a party otherwise subject to common ownership or control with the U.S. owner (see §§ 133.2(d) and 133.12(d) of this part), from whom the U.S. owner acquired the domestic title, or to whom the U.S. owner sold the foreign title(s); or (3)‘‘Lever-rule’’. Applied by the U.S. owner, a parent or subsidiary of the U.S. owner, or a party otherwise subject to common ownership or control with the U.S. owner to goods that the CBP has determined to be physically and materially different from the articles authorized by the U.S. trademark owner for importation or sale in the U.S. (as defined in § 133.2 of this part). 19 C.F.R. 133.23

PwC 8 Gray Market Goods and US Trademark Protection (con’t)

Customs regulation 19 CFR 133.23 provides that all restricted gray market goods imported into the United States shall be denied entry and subject to detention.

Exception: (b) Labeling of physically and materially different goods. Goods determined by the CBP to be physically and materially different, bearing a genuine mark shall not be detained where the merchandise or its packaging bears a conspicuous and legible label designed to remain on the product until the first point of sale to a retail consumer in the United States stating that: ‘‘This product is not a product authorized by the United States trademark owner for importation and is physically and materially different from the authorized product.’’ The label must be in close proximity to the trademark as it appears in its most prominent location on the article itself or the retail package or container. Other information designed to dispel consumer confusion may also be added.

PwC 9 Registration v. Recordation

Registration relates to filing a trademark with the U.S. Patent & Trademark office (PTO), or a copyright with the U.S. Copyright Office. Recordation refers to bringing a valid, registered right to Customs IPR Branch in order to protect against infringing imports. https://apps.cbp.gov/e- recordations/ . This distinction is important because recorded trademarks and copyrights are entitled to greater protection from Customs than non-recorded trademarks and copyrights. Only to be used for “new” recordations; Request for renewals should be submitted via e-mail to: [email protected]. Since CBP is not requiring the registration certificate at time of filing, the right holder must retain the certificate and provide it to CBP upon request.

PwC 10 Intellectual Property Rights e-Recordation

PwC 11 Intellectual Property Rights e-Recordation

PwC 12 PwC 13 PwC 14 PwC 15 PwC 16 Benefits of Recordation

PwC 17 Benefits of Recordation

Disclosure of Information for Certain Intellectual Property Rights Enforced at the Border 1. Detention Notice within 5 days of determination to detain. 2. Importer has 7 working days to demonstrate mark is not counterfeit. 3. Customs has 30 days (can be extended) to make a determination as to admissibility. 4. After that time, Customs releases information to the IP rights holder.

19 C.F.R. Part 133 CBP Dec 12-10, 77 F.R. 24375 (April 24, 2012)

PwC 18 Benefits of Recordation

Counterfeit Marks - Detention Once a notice of detention is issued, CBP will disclose to the owner of the mark the following information, if available, within thirty days (excluding weekends and holidays) from the date of detention: ◦ The date of importation; ◦ The port of entry; ◦ The description of the merchandise from the entry; ◦ The quantity involved; and ◦ The country of origin of the merchandise.

Redacted Samples CBP may provide to the owner of the mark images or a sample of the detained merchandise or its retail packaging, provided that identifying information has been removed, obliterated, or otherwise obscured. Opportunity for Unredacted Samples Unredacted samples may be made available to the owner of the mark prior to seizure when the owner furnishes CBP a bond in the form and amount specified by the port director.

PwC 19 Benefits of Recordation

Counterfeit Marks - Seizure CBP will disclose to the owner of the mark additional information, within thirty days (excluding weekends and holidays) from the date of the notice of seizure: • The quantity involved; • The name and address of the manufacturer; • The name and address of the exporter; and • The name and address of the importer.

Samples made available to the owner of the mark after seizure At any time following a seizure of merchandise bearing a counterfeit mark under this section, CBP may provide a sample and its retail packaging, in its condition as presented for examination, to the owner of the mark for examination, testing, or other use in pursuit of a related private civil remedy for trademark infringement.

PwC 20 FTC and Bamboo Labeling

PwC 21 FTC and Bamboo Labeling

January 3, 2013 FTC Penalties Issued Federal Trade Commission (“FTC”) announced that $1.26 million in penalties will be paid collectively by four national retailers to settle charges that the companies mislabeled various textile products. February 2010 FTC Warns 78 Retailers, Including Wal-Mart, Target, and Kmart, to Stop Labeling and Advertising Rayon Textile Products as "Bamboo“ Seventy-eight companies nationwide receive FTC letters warning that they may be breaking the law by selling clothing and other textile products that are labeled and advertised as “bamboo,” but actually are made of manufactured rayon fiber. The letters allow the companies can take corrective steps to avoid Commission action, but also warned that failure to correct improper labeling or advertising of textile products could subject the company to civil penalties of up to $16,000 per violation. The FTC’s guidelines provide that use of the term “bamboo” is not appropriate to describe a fiber which is derived from bamboo via a chemical process. Such processing generally results in a rayon, viscose or other man-made fiber due to the chemical transformation of the bamboo. PwC 22 PaPaPage 22ge 22

FTC and Bamboo Labeling

August 2009 FTC Announces Three Settlements and One Administrative Action Against Marketers Improperly Labeling and Advertising Rayon Textile Products as “Bamboo.”

FTC issues a Business Alert – “How to Avoid Bamboozling Your Customers” • This alert warned marketers that unless a product is made entirely with bamboo fiber – often called “mechanically processed bamboo” - it can’t be called bamboo. • Marketers need competent and reliable evidence, such as scientific tests to demonstrate that the marketed articles are actually made of bamboo. • They cannot simply rely on the claim of others.

PwC 23 FTC and Bamboo Labeling

What’s the big deal anyway?

Rayon is manufactured from cellulose by taking purified cellulose from a plant source, also called a cellulose precursor, and converting it into a viscous solution by dissolving it in one or more chemicals, such as sodium hydroxide. The chemical solution is then forced through spinnerets and into an acidic bath where it solidifies into fibers.

Many plant sources may be used as cellulose precursors for rayon fabric, including cotton linters (short cotton fibers), wood pulp, and bamboo. Regardless of the source of the cellulose used, the manufacturing process involves the use of hazardous chemicals, and the resulting fiber is rayon and not cotton, wood, or bamboo fiber. See 40 C.F.R. Part 63 (“National Emissions Standards for Hazardous Air Pollutants: Cellulose Products Manufacturing”).

“[H]azardous air pollutants (HAP) emitted from cellulose products manufacturing operations” include carbon disulfide, carbonyl sulfide, ethylene oxide, methanol, methyl chloride, propylene oxide, and toluene. 40 C.F.R. § 63.5480.

PwC 24 FTC and Bamboo Labeling

It is an unfair or deceptive act or practice in violation of both Section 5 of the FTC Act and the Textile Act: 1. to falsely or deceptively stamp, tag, label, invoice, advertise, or otherwise identify any textile fiber product with respect to the name or amount of constituent fibers contained therein, see Verrazzano Trading Corporation, et al., 91 F.T.C. 888 (1978); H. Myerson Sons, et al., 78 F.T.C. 464 (1971); Taylor-Friedsam Co., Inc., et al., 69 F.T.C. 483 (1966); Transair, Inc., et al., 60 F.T.C. 694 (1962); and 2. to fail to affix to a textile fiber product a stamp, tag, label or other means of identification showing in words and figures plainly legible the true percentage of each fiber present, by its true generic name, if the weight of such fiber is 5 per cent or more of the total weight of the product, see Verrazzano Trading Corporation; H. Myerson Sons; Delco Carpet Mills, Inc., 70 F.T.C. 1706 (1966); Taylor-Friedsam Co., Inc.; Transair, Inc., et al., 60 F.T.C. 694 (1962).

PwC 25 FTC and Bamboo Labeling

Useful Resources

• http://business.ftc.gov/documents/bus21-threading-your-way-through-labeling- requirements-under-textile-and-wool-acts • http://www.ftc.gov/bamboo • http://ftc.gov/bcp/business.shtm • Textile Fiber Products Identification Act, 15 U.S.C. § 70, et seq. (“Textile Act”) • 16 C.F.R. Part 303 (“Textile Rules”) • Section 5 of the Federal Trade Commission Act, 15 U.S.C. § 45(a)

PwC 26 FTC and Fur Labeling

PwC 27 FTC and Fur Labeling

What are the labeling requirements for products with fur? 1. For any product containing fur (apparel, footwear, accessories, etc) the FTC requires a permanent label with the following information: Animal name, according to the fur product name guide. 2. Name or Registered Identification Number (RN) of the manufacturer, importer, marketer or distributor 3. Country of origin for imported fur written as “Fur Origin: Country” 4. If the fur is pointed, dyed, bleached or artificially colored 5. If the fur product is composed in whole or substantial part (more than 10% of surface area) of pieces, such as paws, tails, bellies, sides, flanks, ears, throats, heads, scraps, or waste fur 6. If the fur is used or damaged 7. The fiber content of any other materials used in the product

The Fur Products Name Guide lists common animal names allowed on fur labels and is presenting undergoing changes to incorporate provisions of a fur labeling law passed by Congress in 2010, the Truth in Fur Labeling Act of 2010 (TFLA). Comments on proposed changes were due in November 2012.

PwC 28 Faux Fur Labeling

What are the labeling requirements for products with faux fur? State Law not FTC is at issue.

For Apparel: Several states including New York, Massachusetts, Wisconsin, Delaware, and New Jersey have their own regulations that state if an item appears to be fur but is not the label should clearly state that it is “faux fur” and provide the actual material content. For Footwear: Footwear does not usually require material content on the label. However, several states including New York, Massachusetts, Wisconsin, Delaware, and New Jersey have their own regulations that state if an item appears to be fur but is not the label should clearly state that it is “faux fur” and provide the actual material content.

Most retailers require the faux fur label in all products so that a product that can be sold in any state.

PwC 29 Thank you

For further information, please contact:

Michael J. Khorsandi (646) 471-6109 [email protected]

This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PricewaterhouseCoopers LLP, its members, employees and agents do not accept or assume any liability, responsibility or duty of care for any consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

© 2013 PricewaterhouseCoopers LLP. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers LLP which is a member firm of PricewaterhouseCoopers International Limited, each member firm of which is a separate legal entity. KEYNOTE: Combatting Counterfeiting in the NYC Fashion Industry

Keynote Speaker: Brian O'Neill, Commanding Officer, Organized Crime Investigations Division, NYPD Counterfeit in Chinatown Wed. Jan 18, 2012

By Tiffany Ap

The Brooklyn Ink http://thebrooklynink.com/2012/01/18/40288-counterfeit-in-chinatown/

I’m trying to keep up with Jack as he scurries down Lafayette Street in the busy district of Chinatown. I have no idea where he’s taking me. In fact, I feel like I’m following a white rabbit down a hole, except instead of a rabbit, I’m chasing a Chinese man in his twenties, speckled complexion, and hair that stands up at least four inches.

I met Jack a few days ago while shopping for knockoff goods. He works as a shop assistant in a Canal Street store selling counterfeit goods. When he heard me complain that the counterfeits weren’t real looking enough, he furtively followed me out of the shop, yanked me inside a bakery to ask if I wanted to get “the good stuff, A-quality bags.” The shop he worked at didn’t have the best quality fakes he said, but he could show me more authentic looking ones. I agreed to not to mention it to the shop owner he worked for and made plans to meet him three days later.

What I didn’t tell him is that I’m doing this shopping for a story. I want to get a clear look at the business of counterfeiting, from the customer’s point of view. The poor quality fakes, with labels such as Cucci instead of Gucci, were on sale at the store for as little as 30 bucks; I wanted to get to the really authentic imitations kept at a secret storehouse. The illegal knockoffs with quality and trademarks are almost indistinguishable from the real thing. I’d spent most of my life in China, the largest manufacturer of fake goods and knew more or less how they worked.

Anticipating it could involve following strange men to unknown places, I asked my friend Rose to accompany me just in case.

Thankfully, we don’t have to go far. Jack leads my friend and me to a Dunkin’ Donuts on Lafayette Street and sits us down. Several more young Chinese men who are styled exactly like Jack—black faux-leather jackets, dyed hair, jeans, and gruffed up converses—are idling inside near the doorway.

Jack reaches into his pocket for his iPhone and then angles it to face me. He flicks through photo after photo of expensive designer bags and accessories—it’s an impressive range of Chanel, Hermes and Louis Vuitton. Besides their signature totes and shoulder bags, he has small accessories like key pouches and makeup bags.

“Which one do you want?” He asks.

I feign indecision for a few seconds then ask for a Chanel 2.55 in black—one of the most coveted Chanel purses. Jack takes out a walkie-talkie device and repeats my request in southern- inflected Mandarin, and adds, “Shi zhong guo ren, zhong guo ren. (She’s Chinese, Chinese.)” I took that as reassurance for the person on the other end of the line.

It takes a few minutes for them to bring the bag down from the storeroom and I use that time to take in the situation. It’s not a busy day in Dunkin’ Donuts. I tally up Jack and his crew and the other women they bring in to show fake bags—we outnumber the actual customers of the Dunkin Donut’s. We’re taking up the whole front section of the shop, but the staff doesn’t seem to care.

The bag finally arrives covered by a cloth bag and under the arm of another young Chinese man who walks in and hands it to Jack.

I uncover the Chanel and check it out. “No, I wanted the purse made of lambskin, not this material.” Jack walkie-talkies his buddy again. A few more minutes go by then another guy comes into the store with the second handbag.

We go back and forth a few more times but all of a sudden Jack says, “Follow me,” and heads for the doors. My friend and I are a bit slower at grabbing our things and when we exit the shop, he is nowhere to be seen. One of his partners is standing outside the store but ignores us.

After a bit I see Jack waving to me from across the road, looking slightly peeved. He’s holding a new bag. I cross the street and hurry to keep up with him as he darts ahead.

He brings us into a Ten Ren’s teashop and we sit down again.

I size up the bag he shows me. “Where is the other bag for my friend?” I say since we’d asked to see two different colors. Jack replies he’ll bring that one down only after I view this one. After a few minutes in the Ten Ren’s, he grows impatient with me and it’s clear he wants to close the deal. He throws a few prices at me. $300. $280. Deciding I’d seen enough, I start to leave but Jack makes one last offer: $150. I decline by pointing out a slight flaw in the inner lining. I apologize to Jack and leave.

But not a bad price, I note to myself, for a very convincing replica of a $4,000 Chanel purse.

A vendor selling bags and other goods in Chinatown. (Tiffany Ap / The Brooklyn Ink)

Type in the terms “fake bags” and “New York” into any search engine and the first page of results that pop up will all direct you right to Chinatown. Many times, clicking into a website will show Internet users a step-by-step guide on how to buy a fake Rolex or designer handbag and may even go as far as including pictures and prices.

Indeed, Chinatown has become equated with the sale of counterfeit goods. But knockoff Prada and Kate Spade purses are “not the authentic Chinatown” and it is the local community that is bearing the brunt of these illegal activities, says Kelly Magee, communications director for Councilmember Margaret Chin’s office who oversees the area.

Residents complain the counterfeit trafficking means “people standing outside their building until all hours of the night, noise, public urination, fighting and turf wars, just a general feeling of lawlessness and crime that people don’t want on their doorsteps.”

For businesses, it means the loss of revenue. Or it could simply mean feeling insulted when tourists and other shoppers assume that they are counterfeiters too. He Liting and her husband run a small accessories shop on Canal Street. They say they shoo away every fourth customer because they come in looking for fake goods. “They always think they can bargain here. I tell them my prices are listed and what you see is what I sell. I don’t have a fake wall that will open up to a mountain of LV [Louis Vuitton].”

A few days later, I contact the manager at the Dunkin’ Donuts where Jack brought me to try and find out how aware the store is of the problem and to ask what they are doing about the counterfeit sellers. The manager, a man named Aris, picks up the phone and as soon as I bring it up he thanks me. He has been trying to get rid of them but without success. “We’re calling the cops. We told them so many times [to leave],” he says, his voice full of frustration.

One time Aris says the cops did show up but the counterfeit sellers were still one step ahead of the police. “They don’t carry goods with them on the spot. They have their partners get them and they have lookouts. They frisked him [counterfeit seller] and found nothing. He says, ‘Oh, I’m not doing anything.’”

It’s a relatively new problem or at least something Aris has never noticed in his store before three weeks ago. He connects it to the holiday season. “We’re losing business so we are trying hard to correct that problem. I’ve had complaints from my guests, regular guests,” he says in pained tones.

According to a 2004 report released by the city comptroller, counterfeiting accounts for the loss of an estimated $1 billion in tax revenue—$380 million in unpaid sales taxes, $360 million in personal income taxes and $290 million in business income taxes. And when combined with lost state tax revenue from the sale of counterfeit goods across the state, the total loss of tax revenue reaches over $2.6 billion a year. It’s also costing the designer brands a pretty penny. LVMH, the parent company of Louis Vuitton, reportedly employs 40 lawyers and 250 independent investigators and spends in excess of $20 million each year in efforts to combat counterfeiting of their goods.

Despite the police’s constant efforts, the illegal counterfeiting trade persists. The tactics I saw that day with Jack were in many ways the evidence of the authorities past effectiveness. The crackdown on open selling forced many vendors underground—they operate out of vans, secret backrooms, or in Jack’s case in a variety of unwillingly involved local businesses.

Now, “it’s an indoor problem,” says Lt. Capone, special operations head of the NYPD’s Fifth precinct, “We need probable cause to go in and search. It’s not as easy as it seems.”

An intersection in Chinatown where vendors can be found selling counterfeit items, such as fake designer handbags. (Tiffany Ap / The Brooklyn Ink)

Capone says the rings are tremendously well organized and have their people keep tabs on the police movements at all times. “They know all our Chinese officers. They have guys hanging out outside the precinct watching who comes and goes.”

Even if they were to arrest someone like Jack, chances are he’d quickly be back out on the street. Fashion design is not offered a great deal of protection by the law. The idea of trademarking certain colors, material on a dress, a buckle placement, a style of stitching or any combination of the above presents an immense legal challenge. Unable to prove trademark infringement, sellers typically are able to get away with a slap on the wrist. Sellers view the fines as a pre-calculated cost of doing business.

Further underlying that is the widespread culture of acceptance for trademark counterfeiting. Unlike an infraction such as drunk driving where people can directly see the potential harm, buyers often assume that counterfeiting is a victimless crime. Many don’t understand that counterfeit goods are tied to illegal drugs, human trafficking and international terrorism. In a 2007 press conference, police commissioner Raymond Kelly revealed that parts of the counterfeiting industry were directly linked to the 2004 Madrid bombings and were known to provide funding for Hezbollah, a militant group in Lebanon.

That disconnect in the buyer’s mind is why Councilmember Margaret Chin, who represents many of the worst problem areas, such as SoHo and Chinatown, is trying to push through a bill that will nip the problem from an entirely different angle: the demand.

Current laws regarding copyright trademark infringement are lopsided—they only punish the manufacture and sale of counterfeit merchandise, not the purchase. But as Councilmember Chin explains, “to stem the tide of counterfeit goods production and sale in our city, our laws must be comprehensive.”

On April 28 of this year, she proposed LS1430, an amendment that would make purchasing a fake product in the city a Class A misdemeanor with fines up to $1000 and/or a year in jail. If passed, the law would make it illegal for a person to buy a counterfeit product when they know or should know, based factors including quality, price, or condition of seller and sale location, that the good is fake.

Heather McDonald, a partner at Baker Hostetler, represents numerous fashion and consumer brands and has been involved in many counterfeiting cases over the past 25 years. She says, “If buyers are penalized for supporting criminal activity when buying fake goods, the demand for these goods will decrease dramatically, and if the demand decreases, so will the supply.” Because New York City is a central distribution point for counterfeit goods the measure would mean improvement all across the country.

Though the initial reaction towards the bill generated discontent from some buyers who feel that only the vendors should be targeted, the bill is also aimed in large part to address safety concerns for would-be customers.

“You see large groups of especially women and young girls following these men into a van, up to an apartment, which they would never do in other situations,” says Magee, “but this lure of the bag or the good whatever it is making them let their guard down.”

Magee says right after LS1430 was introduced she received phone calls from women who wanted to report their dicey experiences buying fake goods. “A few women [called me and] said, ‘You know, I’ve been buying counterfeit bags for years. I’ve been following them wherever they went. Then one time, I was in the storeroom buying the bag and they heard the police were coming and they locked everybody in for two hours.’ She was scared out of her mind. It is dangerous. There have been instances where people were injured or hurt.”

The bill is still in its preliminary stages but a hearing is expected early this year. “It’s not going to solve everything,” Magee continues, “but the law will be a powerful tool in the arsenal.” February 8, 2013

Fashion Law: Intellectual Property Protection and Fashion in The United States

The Basics: What is Protected? Copyright Laws

Historical Background:

. Knockoff designs were a problem in the early 1920s and 1930s for the growing fashion and apparel industry. . Fashion Originator’s Guild of America formed in 1932 to combat design piracy. . The Guild consisted of garment manufacturers and retailers who dealt with and used the products of fashion designers. . To eradicate design theft, retailers and manufacturers pledged to only deal in original creations. . If a retailer refused or failed to follow Guild provisions, the retailer was put on "red card" which listed non- cooperating retailers. Other members were forbidden to deal with red-carded retailers . In 1936, The Guild controlled 60% of the dress market selling for $10.75 or more, but only 38% of $6.75 and up dress market.

Historical Background: What is Protected? Copyright Laws United States Supreme Court Outlaws Guild

•Fashion Originator’s Guild of America v. FTC, 312 U.S. 451, 461-62 (1941).

•Holding: Pirating of designs does not justify a combination which restrains trade and possibly influences prices.

•The U.S. Supreme Court found:

• “[T]he reasonableness of the methods pursued by the [Guild] to accomplish its unlawful object is no more material than would be the reasonableness of the prices fixed by unlawful combination.” 312 U.S. at 468; • “Nor can the unlawful combination be justified upon argument that systematic copying of dress designs is itself tortious, or should now be declared so by us...[E]ven if copying were an acknowledged tort under the law of every state, that situation would not justify petitioners in combining together to regulate and restrain interstate commerce in violation of federal law.” Id.

The Basics: What is Protected? Copyright Laws

Copyright Protection . What can be Copyrighted: • Original works of authorship fixed in a tangible medium. . What is Protected: • Visual or sculptural works are protectable as are sound recording, audiovisual works, motion pictures and software programs. The design must be separable from its utilitarian aspects. . NOTICE: © Design LLC 2008. . Advance Registration is Prerequisite: • For Statutory damages, costs and attorney fees. Needed in some jurisdictions to bring legal action. . Issues to be Careful About: • Where did the design come from and can you show independent creation? Keep evidence of creation and documentation, if work-made- for-hire or independent contractor. The Basics: What is Protected? Copyright Laws

• Registration Provides:

• Basis for filing certain infringement claims in Federal Court.

• Protection of embodiment of an idea (especially visual art and sculptural works).

• Evidence of validity and ownership, as well as exclusive right to grant exclusive license to copyrighted works.

• For works created after January 1, 1978: Valid for life of author plus 70 years. For work-made-for-hire: 95 years from publication or 120 from creation, whichever is shorter. The Basics: What is Protected? Copyright Laws Current Copyright Case Law Photographer Sabine Liewald sues Apple stating that her “Eye Close-up” photograph was infringed at the launch of the Apple Retina MacBook Pro in June 2012. Parties settled case on January 2, 2013.

Current Copyright Case Law Jovani Fashion, Ltd. V. Fiesta Fashions: Second Circuit held in a summary opinion that the prom dress artwork of sequins and bead patterns on the bust of the Jovani dress lacked copyrightable elements and dresses not protectable as useful articles. Aesthetic and functional elements were inseparable.

DesignDesign Protection:Protection: AmendingAmending thethe CopyrightCopyright Act?Act?

Protection Against Design Property

. Why are current intellectual property provisions insufficient to adequately protect fashion designs? • Copyright • Trademark (Trademarks, Service Marks, and Trade Dress); and • Design Patent

Design Protection: Amending the Copyright Act?

Design Protection in Europe . France affords broad copyright protection, extending to “all works of the mind, whatever their kind, form of expression, merit or purpose”, including “creations of the seasonal industries of dress and articles of fashion.” French I.P.C., Article L 112-1- 2 . 1994 Societe Yves Saint Laurent Couture S.A. v. Societe Louis Dreyfus Retail Mgmt. S.A., 1994 E.C.C. 512 (Trib. Comm. (Paris)).

Design Protection: Amending the Copyright Act?

The Design Protection Arguments for:

. Promotes creativity by providing protection for creators;

. Protects fledgling designers in particular;

. Evens the field with foreign designers (EC Design Protection);

. Disrupts counterfeiting using imported unlabeled imitations; and

. Avoids distortion of current copyright and trade dress law. Design Protection: Amending the Copyright Act?

The Design Protection Arguments Against:

. Stifles creativity by providing too much protection and threat of liability;

. Fashion is driven by past styles;

. Mass copying creates design obsolescence, which spurs further fashion creativity;

. Knock-offs provide less expensive copies and have economic utility; and

. Induced Obsolescence and Anchoring The Basics: What is Protected? Trademark Law

• Word

• Symbol

• Slogan

That identifies a specific product and distinguishes it from others in the marketplace

The Basics: What is Protected? Trademark Law

A trademark could also be: . Trade dress – the non-functional features of a product’s packaging, appearance or configuration that contributes to the overall commercial impression of the product, e.g., the shape of a Coke bottle. . Symbols, colors, or even sounds, if they distinctively designate the source of the product. • NBC’s chimes were the first sounds ever registered by the USPTO.

TheThe Basics:Basics: WhatWhat isis Protected?Protected? TrademarkTrademark LawLaw

CHANEL VERSACE (U.S. Reg LOUIS VUITTON (U.S. Reg. No. 2,121,984) (U.S. Reg. No. 2,361,695) (U.S. Reg. No. 1,990,760) . No. 626.035)

(U.S. Reg. No. 3,051,235)

(U.S. Reg. No. 1,875,093) (U.S. Reg. No. 3,023,930) (U.S. Reg. No. 3,022,708) POLO BY RALPH LAUREN FENDI (U.S. Reg. No. 167,743) U.S. Reg. No. 1,244,466 (U.S. Reg. No. 3,021,231)

(U.S. Reg. No. 1,212,060) (U.S. Reg. No. 1,770,131) (U.S. Reg. No. 1,214,472) TheThe Basics: Basics: What What is is Protected? Protected? Trademark Trademark Law Law TheThe Basics: Basics: What What is is Protected? Protected? TrademarkTrademark Law Law The Basics: What is Protected? Trademark Law

• Service mark: used to identify services rather than goods

15 U.S.C. §1127 TheThe Basics:Basics: WhatWhat isis Protected?Protected? TrademarkTrademark LawLaw

Goods and Services: IC 035. US 100 101 102. G & S: RETAIL STORE SERVICES FEATURING SHOES, HANDBAGS AND POCKETBOOKS. FIRST USE: 20071116. FIRST USE IN COMMERCE: 20071116

Mark Drawing Code: DESIGN ONLY Serial Number: 77730209 Filing Date: May 6, 2009 Current Filing Basis1A Supplemental Register Date: January 20, 201 Owner(APPLICANT): Stuart Weitzman IP Attorney of Record: Barbara Kolsun

Description of Mark: The color(s) white is/are claimed as a feature of the mark. The mark consists of the Ribbon Store Design is a retail store design that is marked with a large scale ribbon, that inverts and twists, wrapping around the store. The material that creates the illusion of a ribbon is Conan. The ribbon design spans the circumference of the store and often the ceiling, seating, and display areas. The entire pattern creates a stylish and modem atmosphere within the store. The color pallet is neutral, consisting of off-white with light grey accents. The neutral pallet serves as a backdrop highlighting the products being sold. (i.e handbags and shoes).

Type of Mark: SERVICE MARK Register: SUPPLEMENTAL The Basics: What is Protected? Trade Dress – Product Design or Packaging The Basics: What is Protected? Functions of a Trademark

• Indicates the source or origin of goods or services

• Assures consumers of the quality of goods bearing the mark

• Creates business goodwill and brand awareness – Develops loyal customer base – Creates an image in the mind of the ultimate purchaser

The Basics:The Enforcement Basics: What is Protected? Functions of a Trademark

• Trademark Act of 1946 – the Lanham Act – Infringement / Unfair Competition – False Advertising

• Trademark Dilution Revision Act of 2006

• Anticybersquatting Protection Act

The Basics: Enforcement

Likelihood of Confusion . Courts typically apply a multi-factored test. See, e.g., Polaroid Corp. v. Polarad Electronics Corp., 287 F.2d 492, 495 (2d Cir. 1961); AMF, Inc. v. Sleekcraft Boats, 599 F.2d 341 (9th Cir. 1979) . Each test considers similar factors, such as: 1) Similarity of marks 2) Similarity of products 3) Area and manner of concurrent use 4) Degree of care likely to be exercised by consumers 5) Strength of Plaintiff’s mark 6) Whether actual confusion exists 7) Intent of Defendant in selecting its mark The Basics: Enforcement

Dilution •Enables famous trademark owners to prevent the gradual weakening or “whittling away” of the strength of their marks even if the public is not likely to be confused. – Dilution by “blurring” – • Trademark is used by someone other than the trademark owner on products that are very different from those normally produced by the trademark owner • KODAK pianos – Dilution by “tarnishment” • Trademark is used in a way that degrades the mark or presents it in an unsavory context. – PepsiCo stopped a company from modifying PEPSI soda cans to add a hidden compartment for concealing drugs – ToysRUs successfully brought a tarnishment claim against adultsrus.com, a pornographic website. Toys “R” Us v. Akkaoui, 40 U.S.P.Q.2d 1836 (N.D. Cal. Oct. 29, 1996)

Current Fashion Trademark Cases: Louboutin v. Yves St. Laurent, 696 F. 3d 206 (2d Cir. 2012)

• Louboutin owns registration for red lacquered sole

• Proved secondary meaning – 240,000 pairs sold annually – $135 million annual revenues – Pop culture

• YSL sold monochromatic red shoe – YSL claims chose red sole to invoke Chinese design elements

• Court denied injunction

• Second Circuit Reversed

Louboutin: District Court Decision

• In fashion, color serves to advance expressive, ornamental, aesthetic purposes

• Louboutin acknowledged non-trademark functions for choosing red – Give his shoe styles “energy” – Red color is “engaging” – Red is “sexy” – “Attracts men to the women who wear my shoes”

• Outsole of shoe is pedestrian – “To attract, reference, to stand out, to blend in, to beautify, to endow with sex appeal – all comprise non-trademark functions of color in fashion”

• Awarding one shoe designer a monopoly on the color red would hinder competition

Louboutin: Second Circuit Decision

• Court erred in finding that single color could never serve as a trademark in the fashion industry

• Louboutin’s red, lacquered outsole has secondary meaning

• Limits trademark to contrasting uses: – Red Undersole v. Remainder of the Shoe

• Decision allows YSL to sell a monochromatic shoe

• Debate continues over language for description of goods in registration

Current Fashion Trademark Cases: Levi Strauss & Co. v. Abercrombie & Fitch Trading Co., 633 F.3d 1158 (9th Cir. 2011) Levi Strauss & Co. v. Abercrombie & Fitch Trading Co., 633 F.3d 1158 (9th Cir. 2011) • District Court Findings: – The Arcuate design is famous – The Arcuate design is distinctive – The Ruehl design is not “identical or nearly identical” • District court held that Abercrombie did not dilute “Arcuate” design • Ninth Circuit remanded – Standard for dilution is not “identical or nearly identical” – The TDRA defines “dilution by blurring” as the “association arising from the similarity between a mark or trade name and a famous mark that impairs the distinctiveness of the famous mark.”

Current Fashion Trademark Cases: Adidas- America, Inc. v. Payless ShoeSource, 2008 WL 4279812 (D. Or. 2008) • Alleged infringement of THREE STRIPES trademark and SUPERSTAR trade dress • Jury awarded Adidas $305M – record trademark infringement verdict . The jury found 267 different styles and colors of Payless shoes infringed

Current Fashion Trademark Cases: In re Lululemon Athletica Canada Inc., Serial No. 77/455,710 (TTAB Jan. 11, 2013)

• Refused to register design mark for “hooded sweatshirts; jackets; coats” -- Merely Ornamental • Applicant may overcome an ornamentality refusal by: – proving inherent distinctiveness – establishing acquired distinctiveness; or – showing that the mark is registered for other goods or services, and thus that the applied-for mark serves as a secondary source indicator. • Lululemon could not meet any of these standards The Basics: What is Protected? Patent Law

United States Patent Act §171 (35 U.S.C. §171 ):

• Grants exclusive rights to novel, non-obvious and ornamental designs

• Confers the right to exclude others from making, using and selling designs that closely resemble the design

• Copyright protection

TheThe Basics: Basics: What What is is Protected? Protected? Patent Patent Law Law Current Patent Case Law: Recent Cases Lululemon Athletic Inc. • Sued Calvin Klein in federal court in Delaware in August 2012 for infringing design patents issued in June and September 2011 for its Astro Pant with its performance compression overlapping wasteband. The case settled late in 2012. Trademark Counterfeiting

What is Trademark Counterfeiting?

The act of manufacturing or distributing a product or service bearing a mark that is identical or substantially indistinguishable from a registered trademark. Protection Tools

• Federal Criminal Statutes • State Criminal Statutes • Civil Statutes • CBP/HSI Enforcement

What can/should you do?

• Register, Record and Renew your IP • Train Your Staff • Tell Everyone • Consider Publicity • Know the Laws and Who to Call • Hire/Train Private Investigators • Have Identification Materials Ready • Prepare your CFO for the Costs of Enforcement • Form Strategic Alliances

Civil Enforcement

• 15 U.S.C. 1116 et. seq. • Seizure Order Civil Enforcement: 15 U.S.C. 1116 et. Seq: Enhanced Remedies

• Treble Damages • Statutory Damages • Seizures • Attorney's Fees Treble Damages

15 U.S.C. § 1117(b)

…according to the circumstances of the case

• Knowledge and intent are key • Reasonable attorneys’ fees also available under § 1117(b) Statutory Damages

• 15 U.S.C. § 1117(c) • $1000-$200,000 per counterfeit mark per type of goods or services and, if willfulness is found, $2,000,000 per counterfeit mark per type of goods or service

Notable Damages Cases

• Shell Co., Ltd. V. Los Frailes Service Station, Inc., 596 F.Supp. 2d 193 (D.D.R. 2008) – Under Lanham Act, only registrant of a mark, including exclusive licensees but not non-exclusive licensees, entitled to damages for infringement • Philip Morris USA, Inc. v. Lee, 547 F.Supp. 2d 685 (W.D. Tex. 2008) – Damages for trademark infringement prescribed by Lanham Act; however, willful violation increases range of damages that may be awarded and right holder has burden of showing that an infringement warrants increased damages • Cartier, Inc. v. Symbolix, Inc., 544 F.Supp. 2d 316 (S.D.N.Y. 2008) – Intentional use of a counterfeit mark entitles a right holder to treble damages Notable Damages Cases

• Coach, Inc. v. Sassy Couture, 2012 WL 162366 (W.D. Tex. Jan. 19, 2012) – Despite finding that defendants willfully engaged in counterfeiting, Court declines to award significant statutory damages in part because plaintiffs’ investigation into defendants’ counterfeiting was limited. Plaintiffs’ investigator visited defendants’ website only once and ordered only one item. • Koon Chun Hing Kee Soy &Sauce Factory, Ltd. V. Star Management, Inc., 628 F.Supp. 2d 312 (E.D.N.Y. 2009) – Court must award treble damages if it finds willful infringement without extenuating circumstances.

Attorney's Fees

• Attorney fees may be awarded in exceptional cases. 15 U.S.C. § 1117(a) and 15 U.S.C. § 1117(b) – Koon Chun Hing Kee Soy &Sauce Factory, Ltd. V. Star Management, Inc., 628 F.Supp. 2d 312 (E.D.N.Y. 2009) • Under § 1117(b), attorneys’ fees are mandatory upon a finding of willful infringement without extenuating circumstances. • Caution: Plaintiff may not be able to recover attorneys’ fees if it elects to recover statutory damages. – K and N Engineering, Inc. v. Bulat, 510 F.3d 1079 (9th Cir.) • Plaintiff who elects to receive statutory damages cannot receive attorneys’ fees under § 1117(b) – Louis Vuitton Malletier, S.A. v. LY USA, Inc., 2012 WL 1034900 (2d. Cir. 2012). • Plaintiff who elects to receive statutory damages is not precluded from receiving attorneys’ fees under § 1117(a)

Personal Jurisdiction

• Chloe v. Queen Bee of Beverly Hills LLC – Out-of-state seller’s single act of shipping an item to New York, combined with substantial business activity involving New York = personal jurisdiction 616 F.3d 158 (2d Cir. 2010) – Corporate employees, regardless of officer status, can be held individually liable for trademark infringement committed 2011 U.S. Dist. LEXIS 9- 100 (S.D.N.Y. 2011)

Standing

• Famous Horse v. Fifth Avenue Photo, 624 F. 3d 106 (2d Cir. 2010) • § 43(a) Unfair Competition Case • Retailer of genuine goods sued wholesaler of counterfeit goods • No claim of Trademark ownership • 2nd Circuit found Plaintiff had standing to sue • 2nd Circuit relied heavily on fact that parties were competitors

Taking it a step further…Third Party Liability

• Locate the property owner • Put third parties on official notice • Monitor the location • Look for other potential Defendants

NY Real Property Law § 231 • In New York, under in N.Y. Real Prop. § 231, Landlords can be held responsible for the illegal conduct of their tenants when put on notice of the illegal activity but fail to act accordingly. They are also given the right to declare a lease void and evict tenants conducting illegal activities. Contributory and Vicarious Liability

NY Real Property Law § 231

Contributory and vicarious liability under § 231 continues to be acknowledged:

NYCHA v. Lipscomb-Arroyo, 866 NYS 2d 93 (2008), citing Normandy Realty, Inc. v. Boyer, 2 Misc.3d 407 (2003)

855-79 LLC v. Salas, 837 NYS 2d 631 (2007), citing St. John Hous. Dev. v. Hernandez, 154 Misc.2d 141, 145 (1992)

Contributory and Vicarious Liability

• Inwood Laboratories (Inwood Labs., Inc. v. Ives Labs., Inc.) 1982 – Any distributor who supplies a product to one whom it knows is engaging in trademark infringement may be held liable itself. • Hard Rock Café (Hard Rock Café Licensing Corp. v. Concession Svcs., Inc.: 7th Cir.) – Willful Blindness • Fonovisa (Fonovisa, Inc. v. Cherry Austion, Inc.): 9th Circuit 1996 – Right to police vendors = vicarious infringement – Cited in A&M Records, Inc. v. Napster (9th Cir. 2001)

Contributory and Vicarious Liability

Key Cases – cont’d • UMG Recordings, Inc. v. Sinnott, 2004 E.D. California – knowledge + control = contributory infringement • Arista Records (Arista Records v. Flea World, Inc.) – 2006, DNJ

Contributory and Vicarious Liability

Key Cases – cont’d • Polo Ralph Lauren Corp. v. Chinatown Gift Shop, 855 F. Supp. 648, 650-51 (S.D.N.Y. 1994) • 165 Broadway Corp. v. Dayana of N.Y. Sportswear, Inc. 633 N.Y.S.2d 724, 726-8 (N.Y. City Civ.Ct. 1995) – Trademark counterfeiting = illegal action – landlord can be held liable. • Polo Ralph Lauren Corp. v. Chinatown Gift Shop, 1996 wl 67700 (S.D.N.Y. 1996)

Contributory and Vicarious Liability

Key Cases – cont’d 1165 Broadway Corp. v. Dayana of N.Y. Sportswear, Inc. 633 N.Y.S.2d 724, 726-8 (N.Y. City Civ.Ct. 1995) • Action by landlord against tenant for eviction pursuant to RPL § 231(2) and RPAPL § 711(5) • Court considered the applicability of Real Property Law 231(2) as a matter of first impression • Court found trademark counterfeiting outlawed in New York in 1992, and therefore illegal conduct under § 231(2) and § 711(5) • Limitations imposed by the Court on the reach of the language “unlawful use, occupancy, trade, manufacture or business.”

Third Party Liability Cases

• Coach Services, Inc. v. City of Chicago et al. – Coach sought $2M in damages per counterfeit mark, per type of counterfeit good, and an injunction – Coach notified the City of Chicago numerous times to report sales of knockoffs at a city market – Coach settled with the City of Chicago in November of 2011 • Coach Services, Inc. v. Gata Corp., 2011 WL 2358671 (D.N.H. Jun. 9, 2011) – Willful blindness by flea market operator – Case concluded in February of 2012 with entry of default judgment against the individual defendants Not Just the Seller Anymore

• Who/what can you pursue? – Auction sites – Banks – Credit card companies – Internet registries and registrars – Payment processors – Search engine optimization companies – Webhosts and servers What Other Forum is Available?

The ITC International Trade Commission - Section 337 Claims

• The ITC forum is traditionally used in connection with patent infringement, trade secrets and gray goods. However, ITC Section 337 may also be used in trademark counterfeits claims. Potential Remedies

• Cease and Desist Order • Limited Exclusion Order: An order to exclude infringing items from entry into the United States by the parties to the claim. It may include successors, assigns and affiliates as well. • General Exclusion Order: An order to exclude all infringing items, not just those made by the companies at issue in the case. The broad remedy requires a finding that – a general exclusion from entry of articles is necessary to prevent circumvention of an exclusion order limited to products of named persons; OR – there is a pattern of violation of this section and it is difficult to identify the source of infringing product. • A general exclusion order based on a default carries the additional showing that: – that no person appears to contest an investigation concerning a violation of the provisions of [Section 337]; AND – that such a violation is established by substantial, reliable, and probative evidence.

Enforcement

• Enforcement is done through U.S. Customs. • Formal and informal enforcement proceedings may also be conducted by the Commission through the Office of Unfair Import Investigations, for “any act or omission by any person in possible violation of any provision of an exclusion order, cease and desist order or consent order.” • Commission may initiate a civil action in U.S. district court to obtain judicial enforcement of an exclusion order, a cease and desist order, a consent order or a sanctions order.

Penalty

• Under 19 U.S.C. 1337(f)(2), civil penalties accrue for violations of the cease and desist order or consent order, and accrue to the United States government in an amount of “more than the greater of $100,000 or twice the domestic value of the articles entered or sold on such day in violation of the order.”

LVMH Case (In the Matter of Certain Handbags, Luggage, Accessories and Packaging Thereof, 337-754) • LVMH brought a Section 337 claim against US and Chinese companies that import and sell counterfeit LVMH product. • LVMH requested the relief of:, – A cease and desist order to the respondents and their affiliates, and – A permanent general exclusion order excluding entry into the US of all infringing goods. • The Administrative Law Judge found that a general exclusion order was warranted. It found there were “overwhelming presence of counterfeit and infringing goods in the United States and the existence of countless sellers of the accused products support a finding of a widespread violation” It also found that the products were “difficult to identify”. • On April 12, 2012 the Commission decided not to review the initial determination. • On May 30, 2012 the ITC issued its order granting the remedies requested by LVMH. Thank You For Your Attention

Heather J. McDonald Theodore C. Max Dyan Finguerra-DuCharme Partner Partner Partner Baker Hostetler, LLP Sheppard Mullin Richter & Hampton LLP Pryor Cashman LLP 45 Rockefeller Plaza 30 Rockefeller Plaza 7 Times Square New York, NY 10111 New York, NY 10112 New York, NY 10036-6569 Direct Tel: 212-589-4285 Direct Tel: 212-653-8702 Direct Tel: 212-326-0443 [email protected] [email protected] [email protected]

February 8, 2013

Rita Odin, Esq., The Estee Lauder Companies Inc. Claudia Ray, Esq., Kirkland & Ellis LLP

New York County Lawyers Association 2013 Fashion Law CLE 2 Practical Issues  There are various practical, non-legal issues that both licensor and licensee should consider before entering into a license arrangement.  Obviously, first make sure your business partner is a good fit, is in the right business segment, has the same market focus, intends to target the same types of customers and has similar goals for the overall image of the licensed property.

3 Practical Issues  Investigate your potential partner:  Are they involved in pending lawsuits? Are they litigious?  Licensor should verify that licensee is financially able to manufacture products, pay royalties.  Licensee should verify that licensor owns the rights to the marks, conduct trademark searches, etc.  Licensee should inquire regarding other licensee partners of the licensor, and verify that there will not be conflicts.

4 Practical Issues  Is there an agent bringing the parties together? If so:  Is there a flat fee?  Who pays the fee?  Who is the agent working for?  Does the agent have any bias? Do both parties trust the agent’s judgment that both parties would benefit from the license?  There is no requirement that a trademark owner use its mark in commerce before licensing it. Under the Lanham Act, use by a licensee (even the first use) inures to the benefit of a licensor-applicant.

5 Practical Issues  However, the owner should consider conducting trademark searches to determine whether it has valid claims to the rights it is licensing, if there is any doubt on that issue.  Permitting a licensee to use a mark without a formal license agreement will not necessarily result in abandonment of the rights to the mark.  Although assignments of marks under the Lanham Act must be in writing, a license can be oral or implied by the facts.

6 Practical Issues  In Nestle Co. v. Nash-Finch Co., Nestle claimed that Nash-Finch had abandoned its DELI-QUIK mark because there was no written license with delicatessens using the mark.  But the TTAB found sufficient actual quality control to find that a licensor-licensee relationship existed, and held that the mark had not been abandoned. See 4 U.S.P.Q.2d 1085 (T.T.A.B. 1987).

7 Practical Issues  If the parties act as though a license exists, e.g., paying royalties and exercising quality control, a court might later find that a license exists. Such a finding could prevent a third party from claiming that the owner has abandoned its mark by letting the licensee use it without a written license.  An exclusive copyright license must be in writing to be enforceable. 17 U.S.C. § 204.  A non-exclusive license need not be in writing, and in fact may be implied. See Nimmer on Copyright § 10.03[A][7].

8 9 General Drafting Goals: Clarity  In evaluating the license, consider whether a judge reviewing the license will understand the document reasonably well.  If the document requires further explanation or reference to other documents or persons, then it is not as clear as it might be.  The complex form of an agreement or the particular intricacies of an industry or license negotiations do not excuse a lack of clarity. These only invite the potential for a dispute and litigation.  The ultimate expense of legal and business resources and time to resolve a license dispute will far exceed the expense of seeking and achieving clarity. A license should be precise, simple, consistent and clear.

10 General Drafting Goals: Consistency  Inconsistent contract provisions will often result in unintended consequences because of ambiguity and differing interpretations.  Terms should be defined where possible.  Each of the documents that relate to one another should be defined consistently.  The use of definitions, terms and numbering of sections should be uniform.

11 General Drafting Goals: Consistency (cont’d)

 If boilerplate must be used, care should be taken to ensure that the boilerplate fits the license and the industry of the licensor. Different licenses may require different boilerplate language due to issues that are particular to a client, its industry or the particular transaction.

12 General Drafting Goals: Simplicity  In drafting a license, keep sentences short as possible. It is not a Faulknerian novel with lengthy one-sentence paragraphs.  Break up sentences if necessary so thoughts are expressed simply. If a clause does not fit, create a separate sentence, even if the resulting two sentences are longer than one single sentence.  Avoid legalese if possible – it makes the license difficult to understand and read – and makes it vulnerable to a differing interpretation in later litigation.

13 Key Issues to Consider in Drafting a License  Ownership  Best efforts clause  Grant clause / Exclusivity  Non-compete clause  Control over use  Duration  Quality control (trademarks)  Brand extension  Royalty payments  Conditions for renewal  Audit provisions  Arbitration or mediation  Geographic scope provisions  Restrictions on assignment /  Termination rights sublicensing

14 Ownership  To be safe, the license should clearly indicate that the licensor retains ownership of the licensed marks, e.g.:  OWNERSHIP OF MARKS: Licensee acknowledges Licensor’s ownership of the Marks, agrees that it will do nothing inconsistent with such ownership and that all use of the Marks by Licensee shall inure to the benefit of and be on behalf of Licensor. Licensee agrees to assist Licensor in recording this Agreement with appropriate government authorities. Licensee agrees that nothing in this License shall give Licensee any right, title or interest in the Marks other than the right to use the Marks in accordance with this Licensee and Licensee further agrees that it will not attack Licensor’s title in and to the Marks or attack the validity of this License. McCarthy on Trademarks and Unfair Competition § 18:64

15 Grant Clause  The grant clause states the scope of the use of the marks or works that the licensee is being granted  This may be narrower than the scope of rights acknowledged in the ownership clause.  Example:  GRANT OF LICENSE: Licensor grants to Licensee an exclusive, nontransferable license to use the Marks in connection with the goods and services covered by the applications for trademark registration referred to in Schedule A. McCarthy on Trademarks and Unfair Competition § 18:64

16 Grant Clause  The specifics of the grant can be important if there are questions as to the scope of the use by the licensee.  The grant may define the terms “goods” or “services,” for a trademark license, or whether the licensee may create derivative works based on the licensed works for a copyright license.  Any rights not specifically licensed are by implication reserved by the licensor.

Theodore C. Max, The New Role of Intellectual Property in Commercial Transactions 53

17 Grant Clause  The copyright Act of 1976 rejected the principle of “indivisibility” of copyright an instead describes an owner’s rights as a bundle of individual, exclusive rights.  For copyright, the licensor may specify whether the license will include use in “new media” unknown at the time of the grant.  Disputes still arise over use of a work in “new media.” The resulting litigation has inconsistent results and many disputes are settled by out of court negotiations.

Milgrim on Licensing § 11.04 FN 20 Nimmer on Copyright § 10.10[B]

18 Grant Clause  Relevant copyright decisions:  New York Times Co. v. Tasini, 533 U.S. 483 (2001).  The Supreme Court found that by contributing freelance articles to databases such as LexisNexis, the NY Times had exceeded the rights granted to it by freelance authors who had contracted to contribute articles for a collective work such as a newspaper.  Random House, Inc. v. Rosetta Books LLC, 150 F. Supp. 2d 613 (S.D.N.Y. 2001), aff’d, 283 F.3d 490 (2d Cir. 2002).  The district court found that where the license allowed the publisher to “print, publish, and sell [the work] in book form”, the plaintiff publisher’s motion for a preliminary injunction to prevent a third-party from releasing an e-book of the work failed because e-books were not within the scope of the grant.

19 Grant Clause  Relevant copyright decisions (cont’d):  Faulkner v. National Geographic Enterprises, Inc., 409 F.3d 26 (2d Cir.), cert. denied, 546 U.S. 1076 (2005).  There was no infringement where National Geographic’s back issues DVD included articles as they originally appeared in print versions of magazine.  DVD’s opening sequence and other material not originally present in the magazine was analogous to a new index for a bound volume of past issues and as a result the DVD was a privileged revision.  Greenberg v. National Geographic Society, 244 F.3d 1267 (11th Cir.), cert. denied, 534 U.S. 951 (2001).  Although articles appeared as they did in the magazine, DVD’s opening montage made it “a new product (‘an original work of authorship’), in a new medium, for a new market that far transcend[ed] any privilege of revision or mere reproduction….”

20 Control  Consider including a provision that specifies approved uses of the marks or works, e.g.:  Derivative works;  New media;  Advertising;  Packaging;  Point-of-sales materials; and  Locations and types of stores.

21 Control  The licensee should not be able to use the licensed marks in combination with any other marks without prior approval, e.g.:  FORM OF USE: XYZ agrees to use the marks only in the form and manner and with appropriate legends as prescribed from time to time by Tom, and not to use any other trademark or service mark in combination with any of the Marks without prior written approval of Tom.

McCarthy on Trademarks and Unfair Competition § 18.64

22 Quality Control  To avoid having the license constitute an abandonment of the licensor’s rights in a mark, consider including a quality control provision in the license.  The issue is one of actual quality control, not a contractual right of quality control.  “The absence of an express contractual right of control does not necessarily result in abandonment of a mark, as long as the licensor in fact exercised sufficient control over its licensee.” Stanfield v. Osborne Indus., Inc., 52 F.3d 867 (10th Cir. 1994), cert. denied, 516 U.S. 920 (1995); see also Halo Mgmt., LLC. v. Interland, Inc., No. C-03-1106, 2004 WL 1781013 (N.D. Cal. 2004) (failure to exercise actual quality control resulted in naked license).

23 Quality Control  The parties should draft a detailed quality control clause, since quality control is one of the most essential components of a license relationship.  Courts are willing to impose quality control obligations if they are not written. The parties should agree on the terms rather than risk subjecting themselves to a court’s subsequent determination of what the parties should have done.

24 Quality Control: Affirmative Duty of Licensor  Quality control is critical because its absence can result in the abandonment of the mark.  As Judge Posner explained, “The owner of a trademark has a duty to ensure the consistency of the trademarked good or service. If he does not fulfill this duty he forfeits the trademark.” Gorenstein Enters., Inc. v. Quality-Care-USA, Inc., 874 F.2d 431 (7th Cir. 1989) (emphasis added).

25 Quality Control: Affirmative Duty of Licensor  “[T]he Lanham Act places an affirmative duty upon a licensor of a registered trademark to take reasonable measures to detect and prevent misleading uses of his mark by his licensees or suffer cancellation of his federal registration.... The critical question...is whether the plaintiff sufficiently policed and inspected its licensee[’s] operations to guarantee the quality of the products [the licensee] sold….” Dawn Donut Co. v. Hart’s Food Stores, Inc., 267 F.2d 358 (2d Cir. 1959).

26 Quality Control: Affirmative Duty of Licensor

 “Failure to exercise such control and supervision for a significant period of time may estop the trademark owner from challenging the use of the mark and business which the licensee has developed during the period of such unsupervised use.” Sheila’s Shine Prods., Inc. v. Sheila Shine, Inc., 486 F.2d 114 (5th Cir. 1973) (citations omitted).

27 Quality Control Provisions  When drafting, consider:  The various quality standards that the licensee must meet.  How quality standards will be set.  Specified in the license, or set from time to time by licensor?  Procedures for submitting samples to licensor for approval:  Approval of goods, packaging, advertising.  Standards for approval (e.g., not to be unreasonably withheld). 28 Quality Control  Example:  QUALITY STANDARDS: Licensee agrees that the nature and quality of: all services rendered by Licensee in connection with the Marks; all goods sold by Licensee under the Marks; and all related advertising, promotional and other related uses of the Marks by Licensee shall conform to standards set by and be under the control of Licensor.

McCarthy on Trademarks and Unfair Competition §18:64

29 Quality Control  Example:  QUALITY MAINTENANCE: Licensee agrees to cooperate with Licensor in facilitating Licensor’s control of such nature and quality/ to permit reasonable inspection of Licensee’s operation, and to supply licensor with specimens of all uses of the Marks upon request. Licensee shall comply with all applicable laws and regulations and obtain all appropriate government approvals pertaining to the sale, distribution and advertising of goods and services covered by this License. McCarthy on Trademarks and Unfair Competition §18:64

Royalty Payments  It is important to understand the method for calculating royalties before drafting the license. This will vary for different industries and it is crucial to get input from the business people, regardless of whether you represent the licensor or the licensee.  In defining the payment of royalties, you should consider how royalties are calculated and paid.  E.g., lump sum, percentage, per unit.  A percentage royalty that decreases as sales increase is useful in creating a sales incentive for the licensee.

Theodore C. Max, The New Role of Intellectual Property in Commercial Transactions 56

31 Royalty Payments  You should also consider:  Guaranteed minimums or quotas.  Whether inadequate payment could lead to termination, including:  Whether the missed or delayed payments may give the licensor grounds to terminate the license.  Whether the licensor will give the licensee an opportunity to cure a missed payment.

32 Audit Provisions  Audit provisions are a useful safety valve by which royalty disputes may be resolved short of judicial intervention.  Drafted properly, they can establish a quick, inexpensive, efficient, and non-controversial means of addressing a potentially inflammatory problem.

Theodore C. Max, The New Role of Intellectual Property in Commercial Transactions 62

33 Audit Provisions  Before drafting an audit provision, consult with auditors — what records will they need to conduct an audit? The license should require that the licensee keep the types of records the auditors will need.  You might also consider:  A threshold discrepancy figure up to which the costs of the audit are borne by the licensor;  Naming a neutral auditor in whom both parties have confidence;  Requiring a written notice and demand for an audit, including provisions for reasonable notice; or  Setting a time in which the audit must be completed.

Theodore C. Max, The New Role of Intellectual Property in Commercial Transactions 57

34 Geographic Scope  You might want to include a clause that restricts the geographic scope of the license to avoid potential confusion.  Consider the territorial scope of a licensee’s right to manufacture as well as to sell the products.  “The licensor also has an important stake in making sure that the licensee has adequate territorial breathing room because the licensor tends to benefit from the success of the individual licensees. In considering territorial limitations the parties may wish to focus upon the impact of competitive activities within the area and attempt to devise a territorial boundary that may be expanded if a certain level of competitive saturation occurs within the originally specified territory.” Milgrim on Licensing § 437

35 Geographic Scope  Geographic restriction may be accomplished in three ways:  (1) Location clause.  (2) Designated area of primary responsibility.  ABC could ensure that sufficient sales efforts will be focused near Little City, while not precluding XYZ from selling elsewhere  (3) Pass-over clause.

Theodore C. Max, The New Role of Intellectual Property In Commercial Transactions 53-54

36 Geographic Scope: Pass-over clauses

 A pass-over clause requires one licensee to pay another a fee for sales made in the other’s territory.  These should be carefully drafted solely to compensate the invaded licensee for actual increased costs attributable to another licensee’s exploitation of its territory, e.g. a fee equivalent to the licensee’s advertising and promotion costs.

Theodore C. Max, The New Role of Intellectual Property In Commercial Transactions 54

37 Geographic Scope: Pass-over clauses  Fees that appear punitive may be held anticompetitive.  Response of Carolina, Inc. v. Leasco Response, Inc., 537 F.2d 1307 (5th Cir. 1976) (penalties on licensees who wished to sell in a fellow licensee’s area of primary responsibility violated antitrust law).  Ohio-Sealy Mattress Mfg. Co. v. Sealy, Inc., 585 F.2d 821 (7th Cir. 1978) (excessive charges compensating the invaded licensee for more than its advertising and promotion held anticompetitive), cert denied, 440 U.S. 930 (1979).

38 Geographic Scope: Gray-Market Goods  Another issue to consider: the competition of gray- market goods with domestic goods.  Gray-market goods = products legitimately made by a foreign manufacturer in a foreign country under a license, which are then imported into the US and sold in competition with goods manufactured in the US under a license for the same trademark.

39 Gray-Market Goods  If the goods are identical and both the foreign and domestic trademarks are owned and licensed by the same entity, the importation of competing gray- market goods is permitted because there is no consumer confusion.  NEC Elecs. v. CAL Circuit Abco, 810 F.2d 1506 (9th Cir.), cert denied, 484 U.S. 851 (1987).

40 Gray-Market Goods  If there are material differences between the U.S. and foreign gray market goods, the sale of the gray market goods in the U.S. will be enjoined.  Dan-Foam A/S v. Brand Named Beds, Inc., 500 F. Supp. 2d 296 (S.D.N.Y. 2007) (material differences rendering goods non-genuine may be physical or non- physical).  See also Societe des Produits Nestle, S.A. v. Case Helvetia, Inc., 982 F.2d 633 (1st Cir. 1992) (differences in presentation, variety, composition and price were material).

41 Gray-Market Goods  Copyright may also prevent the importation of foreign goods if those goods share copyright elements with a good owned by the U.S. party attempting to prevent importation.  The Ninth Circuit allowed a U.S. distributor of foreign perfumes, who was the owner of the packaging copyright, to seek redress for importation of foreign-produced perfumes in the form of a copyright infringement suit. See Parfums Givenchy v. Drug Emporium, 38 F.3d 477 (9th Cir. 1994), cert. denied, 514 U.S. 1004 (1995).  The Supreme Court, in a per curiam decision, affirmed the Ninth Circuit’s holding that the first sale doctrine does not apply to foreign-made gray goods because the foreign first sale does not “exhaust” the copyright. See Costco Wholesale Corp. v. Omega S.A., 562 U.S. ___ (Dec. 13, 2010).

42 Best Efforts Clause  A best efforts clause typically requires that a licensee use its best efforts to promote and sell branded products.  “A best efforts clause should set forth, in definite and certain terms, every material element of the bargain, with a clear set of guidelines... [if] a license contains a best efforts clause but no objective criteria from which “best efforts” may be discerned, the clause may be held void for vagueness.”

Theodore C. Max, The New Role of Intellectual Property in Commercial Transactions 53

43 Best Efforts Clause  Another approach that can be more objective than a best efforts clause is to have a minimum sales requirement and allow the licensor to terminate if the minimums are not met.

44 Good Faith  Another issue is whether exclusivity will be implied; generally it will not.  One way to deal with this situation on behalf of a licensee is to include in the license a provision requiring the licensor to maintain the same quality as is required of the licensee and to impose on the licensor an obligation to maintain similar requirements of its other licensees.

45 Good Faith  Some courts have refused to imply a covenant of good faith and fair dealing unless the license guarantees the licensee exclusive rights. See, e.g., Westowne Shoes, Inc. v. Brown Group, Inc., 104 F.3d 994 (7th Cir.) (licensor has no general duty to its licensees to keep the trademark strong by only using it on high quality goods, unless it contracts to do so), cert. denied, 522 U.S. 861 (1997).  But other courts have held that a licensee is entitled to expect that the licensor will “not act to destroy the right of [the licensee] to enjoy the fruits of the contract.” In re Vylene Enterprises, Inc., 90 F.3d 1472 (9th Cir. 1996) (citation and quotation marks omitted).

46 Non-Assignment Clauses  It is customary for trademark licenses to contain such a provision.  However, a licensee’s right to use a licensed mark is “personal,” and usually cannot be assigned or sub- licensed without the permission of the licensor. In the absence of express authorization, courts usually will not allow a licensee to assign the license.

McCarthy on Trademarks and Unfair Competition §18:43

47 Non-Assignment Clauses  It is also customary for copyright licenses to contain such a provision.  In the case of non-exclusive copyright licenses, as with trademark, courts have found that a licensee’s right to use a licensed mark is “personal,” and usually cannot be assigned or sub-licensed without the express permission of the licensor.  A standard copyright license should still contain an assignment clause, e.g.:  ASSIGNMENT: The license granted to the Licensee is personal and shall not be assigned or otherwise transferred without the prior written consent of the Licensor

763 PLI/Pat 963, “988 (.2004 ) Milgrim on Licensing § 15:02, FORM IVC 48 Restrictions on Assignment  If you do draft an assignment restriction provision, be careful:  Do not condition the grant of a license upon licensee’s agreement not to deal with licensor’s competitors. Such a restriction may be construed as an antitrust violation.  If you draft a right of first refusal to take an assignment of the license, avoid drafting the clause in a way that may be deemed anticompetitive.

49 Non-Compete Clauses  Similar care should be taken in drafting a non- compete clause.  “Any limitations with respect to the time, geographic space, and product scope of such covenants must be reasonable.”

Theodore C. Max, The New Role of Intellectual Property In Commercial Transactions 56

50 Term  Ideally, the term of the license should be specified.  Examples:  TERM: This Agreement shall continue in force and effect for 10 years, unless sooner terminated as provided for herein.  TERM: This Agreement shall continue in force and effect for the terms of the registrations issued for said Marks listed in Schedule A and all renewals thereof, unless sooner terminated as provided for herein.

McCarthy on Trademarks and Unfair Competition § 18:64

51 Term  The Ninth Circuit held that under California law, a license without a stated term is terminable at the will of either party. Rano v. Sipa Press, Inc., 987 F.2d 580 (9th Cir. 1993).  But the Seventh Circuit held under Illinois law that a license without a duration could be held perpetual with no at-will termination rights, and could only be terminated if the contractual grounds for termination applied. See Baldwin Piano, Inc. v. Deutsche Wurlitzer GmbH, 392 F.3d 881 (7th Cir. 2004); see also McCarthy on Trademarks and Unfair Competition § 18:43.

52 Conditions for Renewal  Conditions for renewal of the license should be stated unambiguously.  If renewal is conditioned on sales figures, the means for calculating those figures should be set forth.  The license should also state what will occur if the licensee fails to meet the necessary conditions for renewal, e.g.:  A right to make-up any guaranteed minimums shortfall in order to trigger the renewal.  A reasonable sell-off period if there is no renewal (perhaps with approved price reductions in a close-out sale context).

53 Brand Extension Clause  “Brand Extension” refers to licensing a trademark for use on a new product category.  You can specify in advance that the licensor’s approval is required to authorize any brand extension.  One of the ways this is commonly dealt with is to have a right of first negotiation or a right of first refusal for new products.  Or the license could provide that the licensee is automatically authorized to manufacture branded goods for any classes for which licensor has applied to register the mark.

54 Arbitration  An arbitration clause can provide predictability with respect to:  Selection of forum and applicable law,  Selection of arbitrator(s),  Confidentiality of arbitration proceeding, and  The type, amount and timing of discovery.  Arbitration also usually provides a faster and cheaper resolution than litigation.

Susan Progoff, Why Arbitrate?, Arbitration of Intellectual Property and Licensing Disputes: Artful Drafting and Savvy Advocacy, A Winning Combination (2004).

55 Arbitration  To control costs, the arbitration clause could:  Limit the number of document requests  Prohibit interrogatories, requests for admission, etc., require that the parties stipulate to facts whenever possible  Limit the number and length of depositions  Make depositions available only in exceptional circumstances (e.g., key witness will be unavailable at the hearing)  Although a pre-existing arbitration clause is preferable, there is no reason why the parties cannot subsequently enter into an independent agreement to submit an existing dispute to arbitration, and to forego their rights to go to federal court.

56 Arbitration  The parties could use the AAA’s model post-dispute arbitration clause, which simply incorporates the AAA rules.  Otherwise, the agreement should include all relevant terms, e.g. selection of the arbitrator(s), identification of issues subject to arbitration, terms of discovery, etc.

57 Termination  The conditions for termination of the license should be defined with great precision, because wrongful termination is one of the more common claims asserted by licensees.  Termination is often expressly conditioned upon the happening of a specific event, e.g.:  Exceeding the scope of the grant of rights;  Failure to pay royalties or a guaranteed minimum;  Failure to meet a delivery schedule;  Failure to meet quality standards;  Failure to meet sales figures or quotas;  Expiration of term of years; or  Insolvency or bankruptcy.

Termination  Depending on how much leverage it has, a licensee may insist that the license:  Only allow termination for a material breach.  Provide for notice and an opportunity to cure the alleged breach.  Include a mandatory mediation requirement before the licensor can terminate the license.

59 Termination  Archway Cookies v. Smith Cookie Co., No. CV 03- 895-HA, 2004 WL 1853053 (D. Or. 2004).  A licensing agreement allowed either party to terminate the contract upon the other’s breach upon the provision of notice and a 30-day opportunity to cure to the breaching party.  The court found that the license provision provided a valid basis for termination of the license.

60 Termination  TERMINATION FOR CAUSE: Licensor shall have the right to terminate this Agreement upon thirty (30) days written notice to Licensee in the event of any affirmative act of insolvency by Licensee, or upon the appointment of any receiver or trustee to take possession of the properties of Licensee or upon the winding-up, sale, consolidation, merger or any sequestration by governmental authority of Licensee, or upon breach of any of the provisions hereof by Licensee.

McCarthy on Trademarks and Unfair Competition § 18:64

61 Termination  EFFECT OF TERMINATION: Upon termination of this Agreement Licensee agrees to immediately discontinue all use of the Marks and any term confusingly similar thereto, to destroy all printed materials bearing any of the Marks, and that all rights in the Marks and the good will connected therewith shall remain the property of Licensor.

McCarthy on Trademarks and Unfair Competition § 18:64

62 Termination  A copyright license agreement may include a clause requiring the return or certified destruction of all copies of the work. This is not specific to copyright.  RETURN OR DESTRUCTION: Within thirty (30) days of the effective date of the license granted under this Agreement licensee shall forthwith return to the licensor any copies of the Work. In lieu of such a return of copies of the Work, the licensee may satisfy this obligation by providing to the licensee with a certificate, signed by the [senior officer], to the effect that all such copies have been identified, inventoried, and destroyed, attached to which certificate shall be a complete inventory of all copies so certified to have been destroyed.

Milgrim on Licensing § 27.21

63 Termination  NOTE: Even if you draft a clause providing for termination of the license upon bankruptcy, such a clause might be invalid under the Bankruptcy Code, since the trustee in bankruptcy steps into the shoes of the debtor.

McCarthy on Trademarks and Unfair Competition § 18:64

64 Summary of Drafting Issues to Consider  Ownership of marks  Best Efforts Clause  Grant clause / Exclusivity  Non-Compete Clause  Control over use  Duration  Quality control  Brand extension  Royalty payments  Conditions for renewal  Audit provisions  Arbitration or mediation  Geographic scope provisions  Restrictions on Assignment /  Termination rights Sublicensing

65 February 8, 2013

Rita Odin, Esq., The Estee Lauder Companies Inc. Claudia Ray, Esq., Kirkland & Ellis LLP

New York County Lawyers Association 2013 Fashion Law CLE

Presentation to New York County Lawyers’ Association

Talent, Advertising and Web 3.0

February 8, 2013

Vejay G. Lalla Partner Advertising, Marketing & Promotions 212.468.4975 [email protected]

1740 Broadway, New York, NY 10019 www.dglaw.com

Table of Contents

Tab Alerts/Articles 1

 FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising

 Facebook’s Pages Terms

 Guidelines For Contests On Twitter

 The Twitter Rules

 Twitter Search Rules and Restrictions

 Instagram’s Terms of Use

 Pinterest’s Terms and Privacy Policy

 Pinterest’s Copyright and Trademark Policies

 New York Civil Rights Law Sections 50 & 51

 In the Matter of Reverb Communications, Inc. (No. 102 3055) (FTC 2011)

 Nutrisystem, Inc. (Nutrisystem Pinterest Board), NAD Case Report #5479 (June 29, 2012)

 “The Pinning Rules,” MediaPost, by Vejay G. Lalla and Anne DiGiovanni

 “Artist Sues Twitter Over DMCA Takedown Request,” Davis & Gilbert Advertising, Marketing & Promotions Alert

 “Mobile Marketing and Privacy: New Developments,” Davis & Gilbert Advertising, Marketing & Promotions Alert

 “First NAD Action Involving Pinterest,” Davis & Gilbert Advertising, Marketing & Promotions Alert

 “Facebook Settles ‘Sponsored Stories’ Suit,” Davis & Gilbert Advertising, Marketing & Promotions Alert

 “Facebook-FTC Settlement Resolves Multiple Privacy Complaints With The Dominant Social Network,” Davis & Gilbert Advertising, Marketing & Promotions Alert

Biography 2

 Vejay G. Lalla, Partner, Advertising, Marketing & Promotions

Firm Information 3

 Advertising, Marketing & Promotions Practice Description

TAB 1

FEDERAL TRADE COMMISSION 16 CFR Part 255

Guides Concerning the Use of Endorsements and Testimonials in Advertising

* * * * This document includes only the text of the Revised Endorsement and Testimonial Guides. To learn more, read the Federal Register Notice at www.ftc.gov/opa/2009/10/endortest.shtm.

* * * *

§ 255.0 Purpose and definitions.

(a) The Guides in this part represent administrative interpretations of laws enforced by the Federal Trade Commission for the guidance of the public in conducting its affairs in conformity with legal requirements. Specifically, the Guides address the application of Section 5 of the FTC Act (15 U.S.C. 45) to the use of endorsements and testimonials in advertising. The Guides provide the basis for voluntary compliance with the law by advertisers and endorsers. Practices inconsistent with these Guides may result in corrective action by the Commission under Section 5 if, after investigation, the Commission has reason to believe that the practices fall within the scope of conduct declared unlawful by the statute.

The Guides set forth the general principles that the Commission will use in evaluating endorsements and testimonials, together with examples illustrating the application of those principles. The Guides do not purport to cover every possible use of endorsements in advertising. Whether a particular endorsement or testimonial is deceptive will depend on the specific factual circumstances of the advertisement at issue.

(b) For purposes of this part, an endorsement means any advertising message (including verbal statements, demonstrations, or depictions of the name, signature, likeness or other identifying personal characteristics of an individual or the name or seal of an organization) that consumers are likely to believe reflects the opinions, beliefs, findings, or experiences of a party other than the sponsoring advertiser, even if the views expressed by that party are identical to those of the sponsoring advertiser. The party whose opinions, beliefs, findings, or experience the message appears to reflect will be called the endorser and may be an individual, group, or institution.

(c) The Commission intends to treat endorsements and testimonials identically in the context of its enforcement of the Federal Trade Commission Act and for purposes of this part. The term endorsements is therefore generally used hereinafter to cover both terms and situations.

(d) For purposes of this part, the term product includes any product, service, company or industry.

(e) For purposes of this part, an expert is an individual, group, or institution possessing, as a result of experience, study, or training, knowledge of a particular subject, which knowledge is superior to what ordinary individuals generally acquire. Example 1: A film critic’s review of a movie is excerpted in an advertisement. When so used, the review meets the definition of an endorsement because it is viewed by readers as a statement of the critic’s own opinions and not those of the film producer, distributor, or exhibitor. Any alteration in or quotation from the text of the review that does not fairly reflect its substance would be a violation of the standards set by this part because it would distort the endorser’s opinion. [See § 255.1(b).]

Example 2: A TV commercial depicts two women in a supermarket buying a laundry detergent. The women are not identified outside the context of the advertisement. One comments to the other how clean her brand makes her family’s clothes, and the other then comments that she will try it because she has not been fully satisfied with her own brand. This obvious fictional dramatization of a real life situation would not be an endorsement.

Example 3: In an advertisement for a pain remedy, an announcer who is not familiar to consumers except as a spokesman for the advertising drug company praises the drug’s ability to deliver fast and lasting pain relief. He purports to speak, not on the basis of his own opinions, but rather in the place of and on behalf of the drug company. The announcer’s statements would not be considered an endorsement.

Example 4: A manufacturer of automobile tires hires a well-known professional automobile racing driver to deliver its advertising message in television commercials. In these commercials, the driver speaks of the smooth ride, strength, and long life of the tires. Even though the message is not expressly declared to be the personal opinion of the driver, it may nevertheless constitute an endorsement of the tires. Many consumers will recognize this individual as being primarily a racing driver and not merely a spokesperson or announcer for the advertiser. Accordingly, they may well believe the driver would not speak for an automotive product unless he actually believed in what he was saying and had personal knowledge sufficient to form that belief. Hence, they would think that the advertising message reflects the driver’s personal views. This attribution of the underlying views to the driver brings the advertisement within the definition of an endorsement for purposes of this part.

Example 5: A television advertisement for a particular brand of golf balls shows a prominent and well-recognized professional golfer practicing numerous drives off the tee. This would be an endorsement by the golfer even though she makes no verbal statement in the advertisement.

Example 6: An infomercial for a home fitness system is hosted by a well-known entertainer. During the infomercial, the entertainer demonstrates the machine and states that it is the most effective and easy-to-use home exercise machine that she has ever tried. Even if she is reading from a script, this statement would be an endorsement, because consumers are likely to believe it reflects the entertainer’s views.

Example 7: A television advertisement for a housewares store features a well-known female comedian and a well-known male baseball player engaging in light-hearted banter about products each one intends to purchase for the other. The comedian says that she will buy him a Brand X, portable, high-definition television so he can finally see the strike zone. He says that he will get her a Brand Y juicer so she can make juice with all the fruit and vegetables thrown at her during her performances. The comedian and baseball player are not likely to be deemed endorsers because consumers will likely realize that the individuals are not expressing their own views.

Example 8: A consumer who regularly purchases a particular brand of dog food decides one day to purchase a new, more expensive brand made by the same manufacturer. She writes in her personal blog that the change in diet has made her dog’s fur noticeably softer and shinier, and that in her opinion, the new food definitely is worth the extra money. This posting would not be deemed an endorsement under the Guides.

Assume that rather than purchase the dog food with her own money, the consumer gets it for free because the store routinely tracks her purchases and its computer has generated a coupon for a free trial bag of this new brand. Again, her posting would not be deemed an endorsement under the Guides.

Assume now that the consumer joins a network marketing program under which she periodically receives various products about which she can write reviews if she wants to do so. If she receives a free bag of the new dog food through this program, her positive review would be considered an endorsement under the Guides.

§ 255.1 General considerations.

(a) Endorsements must reflect the honest opinions, findings, beliefs, or experience of the endorser. Furthermore, an endorsement may not convey any express or implied representation that would be deceptive if made directly by the advertiser. [See §§ 255.2(a) and (b) regarding substantiation of representations conveyed by consumer endorsements.

(b) The endorsement message need not be phrased in the exact words of the endorser, unless the advertisement affirmatively so represents. However, the endorsement may not be presented out of context or reworded so as to distort in any way the endorser’s opinion or experience with the product. An advertiser may use an endorsement of an expert or celebrity only so long as it has good reason to believe that the endorser continues to subscribe to the views presented. An advertiser may satisfy this obligation by securing the endorser’s views at reasonable intervals where reasonableness will be determined by such factors as new information on the performance or effectiveness of the product, a material alteration in the product, changes in the performance of competitors’ products, and the advertiser’s contract commitments.

(c) When the advertisement represents that the endorser uses the endorsed product, the endorser must have been a bona fide user of it at the time the endorsement was given. Additionally, the advertiser may continue to run the advertisement only so long as it has good reason to believe that the endorser remains a bona fide user of the product. [See § 255.1(b) regarding the “good reason to believe” requirement.]

(d) Advertisers are subject to liability for false or unsubstantiated statements made through endorsements, or for failing to disclose material connections between themselves and their endorsers [see § 255.5]. Endorsers also may be liable for statements made in the course of their endorsements. Example 1: A building contractor states in an advertisement that he uses the advertiser’s exterior house paint because of its remarkable quick drying properties and durability. This endorsement must comply with the pertinent requirements of Section 255.3 (Expert Endorsements). Subsequently, the advertiser reformulates its paint to enable it to cover exterior surfaces with only one coat. Prior to continued use of the contractor’s endorsement, the advertiser must contact the contractor in order to determine whether the contractor would continue to specify the paint and to subscribe to the views presented previously.

Example 2: A television advertisement portrays a woman seated at a desk on which rest five unmarked computer keyboards. An announcer says, “We asked X, an administrative assistant for over ten years, to try these five unmarked keyboards and tell us which one she liked best.” The advertisement portrays X typing on each keyboard and then picking the advertiser’s brand. The announcer asks her why, and X gives her reasons. This endorsement would probably not represent that X actually uses the advertiser’s keyboard at work. In addition, the endorsement also may be required to meet the standards of Section 255.3 (expert endorsements).

Example 3: An ad for an acne treatment features a dermatologist who claims that the product is “clinically proven” to work. Before giving the endorsement, she received a write-up of the clinical study in question, which indicates flaws in the design and conduct of the study that are so serious that they preclude any conclusions about the efficacy of the product. The dermatologist is subject to liability for the false statements she made in the advertisement. The advertiser is also liable for misrepresentations made through the endorsement. [See Section 255.3 regarding the product evaluation that an expert endorser must conduct.]

Example 4: A well-known celebrity appears in an infomercial for an oven roasting bag that purportedly cooks every chicken perfectly in thirty minutes. During the shooting of the infomercial, the celebrity watches five attempts to cook chickens using the bag. In each attempt, the chicken is undercooked after thirty minutes and requires sixty minutes of cooking time. In the commercial, the celebrity places an uncooked chicken in the oven roasting bag and places the bag in one oven. He then takes a chicken roasting bag from a second oven, removes from the bag what appears to be a perfectly cooked chicken, tastes the chicken, and says that if you want perfect chicken every time, in just thirty minutes, this is the product you need. A significant percentage of consumers are likely to believe the celebrity’s statements represent his own views even though he is reading from a script. The celebrity is subject to liability for his statement about the product. The advertiser is also liable for misrepresentations made through the endorsement.

Example 5: A skin care products advertiser participates in a blog advertising service. The service matches up advertisers with bloggers who will promote the advertiser’s products on their personal blogs. The advertiser requests that a blogger try a new body lotion and write a review of the product on her blog. Although the advertiser does not make any specific claims about the lotion’s ability to cure skin conditions and the blogger does not ask the advertiser whether there is substantiation for the claim, in her review the blogger writes that the lotion cures eczema and recommends the product to her blog readers who suffer from this condition. The advertiser is subject to liability for misleading or unsubstantiated representations made through the blogger’s endorsement. The blogger also is subject to liability for misleading or unsubstantiated representations made in the course of her endorsement. The blogger is also liable if she fails to disclose clearly and conspicuously that she is being paid for her services. [See § 255.5.]

In order to limit its potential liability, the advertiser should ensure that the advertising service provides guidance and training to its bloggers concerning the need to ensure that statements they make are truthful and substantiated. The advertiser should also monitor bloggers who are being paid to promote its products and take steps necessary to halt the continued publication of deceptive representations when they are discovered.

§ 255.2 Consumer endorsements.

(a) An advertisement employing endorsements by one or more consumers about the performance of an advertised product or service will be interpreted as representing that the product or service is effective for the purpose depicted in the advertisement. Therefore, the advertiser must possess and rely upon adequate substantiation, including, when appropriate, competent and reliable scientific evidence, to support such claims made through endorsements in the same manner the advertiser would be required to do if it had made the representation directly, i.e., without using endorsements. Consumer endorsements themselves are not competent and reliable scientific evidence.

(b) An advertisement containing an endorsement relating the experience of one or more consumers on a central or key attribute of the product or service also will likely be interpreted as representing that the endorser’s experience is representative of what consumers will generally achieve with the advertised product or service in actual, albeit variable, conditions of use. Therefore, an advertiser should possess and rely upon adequate substantiation for this representation. If the advertiser does not have substantiation that the endorser’s experience is representative of what consumers will generally achieve, the advertisement should clearly and conspicuously disclose the generally expected performance in the depicted circumstances, and the advertiser must possess and rely on adequate substantiation for that representation.1

1 The Commission tested the communication of advertisements containing testimonials that clearly and prominently disclosed either “Results not typical” or the stronger “These testimonials are based on the experiences of a few people and you are not likely to have similar results.” Neither disclosure adequately reduced the communication that the experiences depicted are generally representative. Based upon this research, the Commission believes that similar disclaimers regarding the limited applicability of an endorser’s experience to what consumers may generally expect to achieve are unlikely to be effective.

Nonetheless, the Commission cannot rule out the possibility that a strong disclaimer of typicality could be effective in the context of a particular advertisement. Although the Commission would have the burden of proof in a law enforcement action, the Commission notes that an advertiser possessing reliable empirical testing demonstrating that the net impression of its advertisement with such a disclaimer is non-deceptive will avoid the risk of the initiation of such an action in the first instance. (c) Advertisements presenting endorsements by what are represented, directly or by implication, to be “actual consumers” should utilize actual consumers in both the audio and video, or clearly and conspicuously disclose that the persons in such advertisements are not actual consumers of the advertised product.

Example 1: A brochure for a baldness treatment consists entirely of testimonials from satisfied customers who say that after using the product, they had amazing hair growth and their hair is as thick and strong as it was when they were teenagers. The advertiser must have competent and reliable scientific evidence that its product is effective in producing new hair growth.

The ad will also likely communicate that the endorsers’ experiences are representative of what new users of the product can generally expect. Therefore, even if the advertiser includes a disclaimer such as, “Notice: These testimonials do not prove our product works. You should not expect to have similar results,” the ad is likely to be deceptive unless the advertiser has adequate substantiation that new users typically will experience results similar to those experienced by the testimonialists.

Example 2: An advertisement disseminated by a company that sells heat pumps presents endorsements from three individuals who state that after installing the company’s heat pump in their homes, their monthly utility bills went down by $100, $125, and $150, respectively. The ad will likely be interpreted as conveying that such savings are representative of what consumers who buy the company’s heat pump can generally expect. The advertiser does not have substantiation for that representation because, in fact, less than 20% of purchasers will save $100 or more. A disclosure such as, “Results not typical” or, “These testimonials are based on the experiences of a few people and you are not likely to have similar results” is insufficient to prevent this ad from being deceptive because consumers will still interpret the ad as conveying that the specified savings are representative of what consumers can generally expect. The ad is less likely to be deceptive if it clearly and conspicuously discloses the generally expected savings and the advertiser has adequate substantiation that homeowners can achieve those results. There are multiple ways that such a disclosure could be phrased, e.g., “the average homeowner saves $35 per month,” “the typical family saves $50 per month during cold months and $20 per month in warm months,” or “most families save 10% on their utility bills.”

Example 3: An advertisement for a cholesterol-lowering product features an individual who claims that his serum cholesterol went down by 120 points and does not mention having made any lifestyle changes. A well-conducted clinical study shows that the product reduces the cholesterol levels of individuals with elevated cholesterol by an average of 15% and the advertisement clearly and conspicuously discloses this fact. Despite the presence of this disclosure, the advertisement would be deceptive if the advertiser does not have adequate substantiation that the product can produce the specific results claimed by the endorser (i.e., a 120-point drop in serum cholesterol without any lifestyle changes).

Example 4: An advertisement for a weight-loss product features a formerly obese woman. She says in the ad, “Every day, I drank 2 WeightAway shakes, ate only raw vegetables, and exercised vigorously for six hours at the gym. By the end of six months, I had gone from 250 pounds to 140 pounds.” The advertisement accurately describes the woman’s experience, and such a result is within the range that would be generally experienced by an extremely overweight individual who consumed WeightAway shakes, only ate raw vegetables, and exercised as the endorser did. Because the endorser clearly describes the limited and truly exceptional circumstances under which she achieved her results, the ad is not likely to convey that consumers who weigh substantially less or use WeightAway under less extreme circumstances will lose 110 pounds in six months. (If the advertisement simply says that the endorser lost 110 pounds in six months using WeightAway together with diet and exercise, however, this description would not adequately alert consumers to the truly remarkable circumstances leading to her weight loss.) The advertiser must have substantiation, however, for any performance claims conveyed by the endorsement (e.g., that WeightAway is an effective weight loss product).

If, in the alternative, the advertisement simply features “before” and “after” pictures of a woman who says “I lost 50 pounds in 6 months with WeightAway,” the ad is likely to convey that her experience is representative of what consumers will generally achieve. Therefore, if consumers cannot generally expect to achieve such results, the ad should clearly and conspicuously disclose what they can expect to lose in the depicted circumstances (e.g., “most women who use WeightAway for six months lose at least 15 pounds”).

If the ad features the same pictures but the testimonialist simply says, “I lost 50 pounds with WeightAway,” and WeightAway users generally do not lose 50 pounds, the ad should disclose what results they do generally achieve (e.g., “most women who use WeightAway lose 15 pounds”).

Example 5: An advertisement presents the results of a poll of consumers who have used the advertiser’s cake mixes as well as their own recipes. The results purport to show that the majority believed that their families could not tell the difference between the advertised mix and their own cakes baked from scratch. Many of the consumers are actually pictured in the advertisement along with relevant, quoted portions of their statements endorsing the product. This use of the results of a poll or survey of consumers represents that this is the typical result that ordinary consumers can expect from the advertiser’s cake mix.

Example 6: An advertisement purports to portray a “hidden camera” situation in a crowded cafeteria at breakfast time. A spokesperson for the advertiser asks a series of actual patrons of the cafeteria for their spontaneous, honest opinions of the advertiser’s recently introduced breakfast cereal. Even though the words “hidden camera” are not displayed on the screen, and even though none of the actual patrons is specifically identified during the advertisement, the net impression conveyed to consumers may well be that these are actual customers, and not actors. If actors have been employed, this fact should be clearly and conspicuously disclosed.

Example 7: An advertisement for a recently released motion picture shows three individuals coming out of a theater, each of whom gives a positive statement about the movie. These individuals are actual consumers expressing their personal views about the movie. The advertiser does not need to have substantiation that their views are representative of the opinions that most consumers will have about the movie. Because the consumers’ statements would be understood to be the subjective opinions of only three people, this advertisement is not likely to convey a typicality message. If the motion picture studio had approached these individuals outside the theater and offered them free tickets if they would talk about the movie on camera afterwards, that arrangement should be clearly and conspicuously disclosed. [See § 255.5.]

§ 255.3 Expert endorsements.

(a) Whenever an advertisement represents, directly or by implication, that the endorser is an expert with respect to the endorsement message, then the endorser’s qualifications must in fact give the endorser the expertise that he or she is represented as possessing with respect to the endorsement.

(b) Although the expert may, in endorsing a product, take into account factors not within his or her expertise (e.g., matters of taste or price), the endorsement must be supported by an actual exercise of that expertise in evaluating product features or characteristics with respect to which he or she is expert and which are relevant to an ordinary consumer’s use of or experience with the product and are available to the ordinary consumer. This evaluation must have included an examination or testing of the product at least as extensive as someone with the same degree of expertise would normally need to conduct in order to support the conclusions presented in the endorsement. To the extent that the advertisement implies that the endorsement was based upon a comparison, such comparison must have been included in the expert’s evaluation; and as a result of such comparison, the expert must have concluded that, with respect to those features on which he or she is expert and which are relevant and available to an ordinary consumer, the endorsed product is at least equal overall to the competitors’ products. Moreover, where the net impression created by the endorsement is that the advertised product is superior to other products with respect to any such feature or features, then the expert must in fact have found such superiority. [See § 255.1(d) regarding the liability of endorsers.]

Example 1: An endorsement of a particular automobile by one described as an “engineer” implies that the endorser’s professional training and experience are such that he is well acquainted with the design and performance of automobiles. If the endorser’s field is, for example, chemical engineering, the endorsement would be deceptive.

Example 2: An endorser of a hearing aid is simply referred to as “Doctor” during the course of an advertisement. The ad likely implies that the endorser is a medical doctor with substantial experience in the area of hearing. If the endorser is not a medical doctor with substantial experience in audiology, the endorsement would likely be deceptive. A non-medical “doctor” (e.g., an individual with a Ph.D. in exercise physiology) or a physician without substantial experience in the area of hearing can endorse the product, but if the endorser is referred to as “doctor,” the advertisement must make clear the nature and limits of the endorser’s expertise.

Example 3: A manufacturer of automobile parts advertises that its products are approved by the “American Institute of Science.” From its name, consumers would infer that the “American Institute of Science” is a bona fide independent testing organization with expertise in judging automobile parts and that, as such, it would not approve any automobile part without first testing its efficacy by means of valid scientific methods. If the American Institute of Science is not such a bona fide independent testing organization (e.g., if it was established and operated by an automotive parts manufacturer), the endorsement would be deceptive. Even if the American Institute of Science is an independent bona fide expert testing organization, the endorsement may nevertheless be deceptive unless the Institute has conducted valid scientific tests of the advertised products and the test results support the endorsement message.

Example 4: A manufacturer of a non-prescription drug product represents that its product has been selected over competing products by a large metropolitan hospital. The hospital has selected the product because the manufacturer, unlike its competitors, has packaged each dose of the product separately. This package form is not generally available to the public. Under the circumstances, the endorsement would be deceptive because the basis for the hospital’s choice – convenience of packaging – is neither relevant nor available to consumers, and the basis for the hospital’s decision is not disclosed to consumers.

Example 5: A woman who is identified as the president of a commercial “home cleaning service” states in a television advertisement that the service uses a particular brand of cleanser, instead of leading competitors it has tried, because of this brand’s performance. Because cleaning services extensively use cleansers in the course of their business, the ad likely conveys that the president has knowledge superior to that of ordinary consumers. Accordingly, the president’s statement will be deemed to be an expert endorsement. The service must, of course, actually use the endorsed cleanser. In addition, because the advertisement implies that the cleaning service has experience with a reasonable number of leading competitors to the advertised cleanser, the service must, in fact, have such experience, and, on the basis of its expertise, it must have determined that the cleaning ability of the endorsed cleanser is at least equal (or superior, if such is the net impression conveyed by the advertisement) to that of leading competitors’ products with which the service has had experience and which remain reasonably available to it. Because in this example the cleaning service’s president makes no mention that the endorsed cleanser was “chosen,” “selected,” or otherwise evaluated in side-by-side comparisons against its competitors, it is sufficient if the service has relied solely upon its accumulated experience in evaluating cleansers without having performed side-by-side or scientific comparisons.

Example 6: A medical doctor states in an advertisement for a drug that the product will safely allow consumers to lower their cholesterol by 50 points. If the materials the doctor reviewed were merely letters from satisfied consumers or the results of a rodent study, the endorsement would likely be deceptive because those materials are not what others with the same degree of expertise would consider adequate to support this conclusion about the product’s safety and efficacy.

§ 255.4 Endorsements by organizations.

Endorsements by organizations, especially expert ones, are viewed as representing the judgment of a group whose collective experience exceeds that of any individual member, and whose judgments are generally free of the sort of subjective factors that vary from individual to individual. Therefore, an organization’s endorsement must be reached by a process sufficient to ensure that the endorsement fairly reflects the collective judgment of the organization. Moreover, if an organization is represented as being expert, then, in conjunction with a proper exercise of its expertise in evaluating the product under § 255.3 (expert endorsements), it must utilize an expert or experts recognized as such by the organization or standards previously adopted by the organization and suitable for judging the relevant merits of such products. [See § 255.1(d) regarding the liability of endorsers.]

Example: A mattress seller advertises that its product is endorsed by a chiropractic association. Because the association would be regarded as expert with respect to judging mattresses, its endorsement must be supported by an evaluation by an expert or experts recognized as such by the organization, or by compliance with standards previously adopted by the organization and aimed at measuring the performance of mattresses in general and not designed with the unique features of the advertised mattress in mind.

§ 255.5 Disclosure of material connections.

When there exists a connection between the endorser and the seller of the advertised product that might materially affect the weight or credibility of the endorsement (i.e., the connection is not reasonably expected by the audience), such connection must be fully disclosed. For example, when an endorser who appears in a television commercial is neither represented in the advertisement as an expert nor is known to a significant portion of the viewing public, then the advertiser should clearly and conspicuously disclose either the payment or promise of compensation prior to and in exchange for the endorsement or the fact that the endorser knew or had reason to know or to believe that if the endorsement favored the advertised product some benefit, such as an appearance on television, would be extended to the endorser. Additional guidance, including guidance concerning endorsements made through other media, is provided by the examples below.

Example 1: A drug company commissions research on its product by an outside organization. The drug company determines the overall subject of the research (e.g., to test the efficacy of a newly developed product) and pays a substantial share of the expenses of the research project, but the research organization determines the protocol for the study and is responsible for conducting it. A subsequent advertisement by the drug company mentions the research results as the “findings” of that research organization. Although the design and conduct of the research project are controlled by the outside research organization, the weight consumers place on the reported results could be materially affected by knowing that the advertiser had funded the project. Therefore, the advertiser’s payment of expenses to the research organization should be disclosed in this advertisement.

Example 2: A film star endorses a particular food product. The endorsement regards only points of taste and individual preference. This endorsement must, of course, comply with § 255.1; but regardless of whether the star’s compensation for the commercial is a $1 million cash payment or a royalty for each product sold by the advertiser during the next year, no disclosure is required because such payments likely are ordinarily expected by viewers.

Example 3: During an appearance by a well-known professional tennis player on a television talk show, the host comments that the past few months have been the best of her career and during this time she has risen to her highest level ever in the rankings. She responds by attributing the improvement in her game to the fact that she is seeing the ball better than she used to, ever since having laser vision correction surgery at a clinic that she identifies by name. She continues talking about the ease of the procedure, the kindness of the clinic’s doctors, her speedy recovery, and how she can now engage in a variety of activities without glasses, including driving at night. The athlete does not disclose that, even though she does not appear in commercials for the clinic, she has a contractual relationship with it, and her contract pays her for speaking publicly about her surgery when she can do so. Consumers might not realize that a celebrity discussing a medical procedure in a television interview has been paid for doing so, and knowledge of such payments would likely affect the weight or credibility consumers give to the celebrity’s endorsement. Without a clear and conspicuous disclosure that the athlete has been engaged as a spokesperson for the clinic, this endorsement is likely to be deceptive. Furthermore, if consumers are likely to take away from her story that her experience was typical of those who undergo the same procedure at the clinic, the advertiser must have substantiation for that claim.

Assume that instead of speaking about the clinic in a television interview, the tennis player touts the results of her surgery – mentioning the clinic by name – on a social networking site that allows her fans to read in real time what is happening in her life. Given the nature of the medium in which her endorsement is disseminated, consumers might not realize that she is a paid endorser. Because that information might affect the weight consumers give to her endorsement, her relationship with the clinic should be disclosed.

Assume that during that same television interview, the tennis player is wearing clothes bearing the insignia of an athletic wear company with whom she also has an endorsement contract. Although this contract requires that she wear the company’s clothes not only on the court but also in public appearances, when possible, she does not mention them or the company during her appearance on the show. No disclosure is required because no representation is being made about the clothes in this context.

Example 4: An ad for an anti-snoring product features a physician who says that he has seen dozens of products come on the market over the years and, in his opinion, this is the best ever. Consumers would expect the physician to be reasonably compensated for his appearance in the ad. Consumers are unlikely, however, to expect that the physician receives a percentage of gross product sales or that he owns part of the company, and either of these facts would likely materially affect the credibility that consumers attach to the endorsement. Accordingly, the advertisement should clearly and conspicuously disclose such a connection between the company and the physician.

Example 5: An actual patron of a restaurant, who is neither known to the public nor presented as an expert, is shown seated at the counter. He is asked for his “spontaneous” opinion of a new food product served in the restaurant. Assume, first, that the advertiser had posted a sign on the door of the restaurant informing all who entered that day that patrons would be interviewed by the advertiser as part of its TV promotion of its new soy protein “steak.” This notification would materially affect the weight or credibility of the patron’s endorsement, and, therefore, viewers of the advertisement should be clearly and conspicuously informed of the circumstances under which the endorsement was obtained. Assume, in the alternative, that the advertiser had not posted a sign on the door of the restaurant, but had informed all interviewed customers of the “hidden camera” only after interviews were completed and the customers had no reason to know or believe that their response was being recorded for use in an advertisement. Even if patrons were also told that they would be paid for allowing the use of their opinions in advertising, these facts need not be disclosed.

Example 6: An infomercial producer wants to include consumer endorsements for an automotive additive product featured in her commercial, but because the product has not yet been sold, there are no consumer users. The producer’s staff reviews the profiles of individuals interested in working as “extras” in commercials and identifies several who are interested in automobiles. The extras are asked to use the product for several weeks and then report back to the producer. They are told that if they are selected to endorse the product in the producer’s infomercial, they will receive a small payment. Viewers would not expect that these “consumer endorsers” are actors who were asked to use the product so that they could appear in the commercial or that they were compensated. Because the advertisement fails to disclose these facts, it is deceptive.

Example 7: A college student who has earned a reputation as a video game expert maintains a personal weblog or “blog” where he posts entries about his gaming experiences. Readers of his blog frequently seek his opinions about video game hardware and software. As it has done in the past, the manufacturer of a newly released video game system sends the student a free copy of the system and asks him to write about it on his blog. He tests the new gaming system and writes a favorable review. Because his review is disseminated via a form of consumer-generated media in which his relationship to the advertiser is not inherently obvious, readers are unlikely to know that he has received the video game system free of charge in exchange for his review of the product, and given the value of the video game system, this fact likely would materially affect the credibility they attach to his endorsement. Accordingly, the blogger should clearly and conspicuously disclose that he received the gaming system free of charge. The manufacturer should advise him at the time it provides the gaming system that this connection should be disclosed, and it should have procedures in place to try to monitor his postings for compliance.

Example 8: An online message board designated for discussions of new music download technology is frequented by MP3 player enthusiasts. They exchange information about new products, utilities, and the functionality of numerous playback devices. Unbeknownst to the message board community, an employee of a leading playback device manufacturer has been posting messages on the discussion board promoting the manufacturer’s product. Knowledge of this poster’s employment likely would affect the weight or credibility of her endorsement. Therefore, the poster should clearly and conspicuously disclose her relationship to the manufacturer to members and readers of the message board.

Example 9: A young man signs up to be part of a “street team” program in which points are awarded each time a team member talks to his or her friends about a particular advertiser’s products. Team members can then exchange their points for prizes, such as concert tickets or electronics. These incentives would materially affect the weight or credibility of the team member’s endorsements. They should be clearly and conspicuously disclosed, and the advertiser should take steps to ensure that these disclosures are being provided.

Facebook Pages Terms

The following terms, as well as our Data Use Policy and Statement of Rights and Responsibilities, apply to all Pages on Facebook. Additionally, all content on Pages must comply with our Community Standards.

I. General

A. Only authorized representatives may administer a Page for a brand, entity (place or organization), or public figure.

B. Any user may create a Page to express support for or interest in a brand, entity (place or organization), or public figure, provided that it is not likely to be confused with an official Page or violate someone’s rights.

C. Content posted to a Page is public and viewable by everyone who can see the Page.

D. You are required to restrict access to Pages (through our gating functionality) as necessary to comply with applicable laws and Facebook policies, including our Advertising Guidelines and Community Standards.

E. You may not establish terms for your Page that conflict with our Statement of Rights and Responsibilities, Data Use Policy or these terms.

II. Page Management

A. Page Names and Facebook Web Addresses

Page names and Facebook Web Addresses must accurately reflect Page content. We may remove administrative rights or require you to change the Page name and Facebook Web Address for any Page that fails to meet this requirement.

Page names must:

i. not consist solely of generic terms (e.g., “beer” or “pizza”);

ii. use proper, grammatically correct capitalization and may not include all capitals, except for acronyms;

iii. not include character symbols, such as excessive punctuation and trademark designations; and

iv. not include superfluous descriptions or unnecessary qualifiers.

B. Name Changes and Migrations We will only process name changes and migrations that do not result in a misleading or unintended connection. For example, we will allow local to global migrations, such as “Facebook France” to “Facebook”, but will not allow global to local migrations, or location to location migrations, such as “Facebook France” to “Facebook Russia”. Additionally, you may not request a name change or migration that would result in re- categorizing a product Page to a brand Page, a generic or opinion Page to a brand Page, or a Group to a Page. All migrations are at our discretion and are final.

C. Collection of Data

If you collect content and information directly from users, you will make it clear that you (and not Facebook) are collecting it, and you will provide notice about and obtain user consent for your use of the content and information that you collect. Regardless of how you obtain content and information from users, you are responsible for securing all necessary permissions to reuse their content and information.

You will not collect users’ content or information, or otherwise access Facebook, using automated means (such as harvesting bots, robots, spiders, or scrapers) without our permission.

Any data you obtain from us must comply with Section II of our Facebook Platform Policies.

III. Page Features

A. Advertising on Pages

Ads and commercial content (including Page post content) are subject to the Advertising Guidelines.

Third-party advertisements on Pages are prohibited.

B. Cover

All covers are public. This means that anyone who visits your Page will be able to see your cover. Covers can’t be deceptive, misleading, or infringe on anyone else’s copyright. You may not encourage people to upload your cover to their personal timelines.

Covers may not include:

i. images with more than 20% text;

ii. price or purchase information, such as “40% off” or “Download it on socialmusic.com”;

iii. contact information such as a website address, email, mailing address, or information that should go in your Page’s “About” section;

iv. references to Facebook features or actions, such as “Like” or “Share” or an arrow pointing from the cover photo to any of these features; or

v. calls to action, such as “Get it now” or “Tell your friends.”

C. Applications on Pages

Apps on your Page must comply with the Facebook Platform Policies.

D. Offers

Facebook may not be a suitable place for every type of offer, and you are solely responsible for determining if Facebook is the appropriate forum for your offer. If you create an offer using Facebook’s offer creation tool, the following policies apply:

i. You may only run an offer if you are the merchant for or the manufacturer of the product or service you are promoting.

ii. You are responsible for ensuring that your offer complies with these terms and all applicable laws, rules and regulations. Offers are subject to many regulations (such as alcohol discounts and offers marketed to minors) and if you are not certain that your offer complies with applicable law, consult with an expert.

iii. If there are any restrictions on your offer (such as expiration date or limitations on redemption), you must disclose those restrictions to users in the terms and conditions section of the offer.

iv. You are solely responsible for improper redemption, fraud or other issues that arise from the distribution and/or redemption of your offer.

v. If your offer may be redeemed at a merchant not operated by you, it is your sole responsibility to communicate with the participating merchant.

vi. You must not use Facebook’s offer creator to offer the equivalent of a gift card, gift certificate or stored value card.

E. Promotions

If you use Facebook to communicate about or administer a promotion (such as a contest or sweepstakes), you are responsible for the lawful operation of that promotion, including the official rules, offer terms and eligibility requirements (e.g., age and residency restrictions), and compliance with regulations governing the promotion and all prizes offered in connection with the promotion (e.g., registration and obtaining necessary regulatory approvals). Please note that compliance with these guidelines does not constitute the lawfulness of a promotion. Promotions are subject to many regulations and if you are not certain that your promotion complies with applicable law, please consult with an expert.

i. Promotions on Facebook must be administered within Apps on Facebook.com, either on a Canvas Page or a Page App.

ii. Promotions on Facebook must include the following:

a. A complete release of Facebook by each entrant or participant.

b. Acknowledgment that the promotion is in no way sponsored, endorsed or administered by, or associated with, Facebook.

c. Disclosure that the participant is providing information to [disclose recipient(s) of information] and not to Facebook. iii. You must not condition registration or entry upon the user taking any action using any Facebook features or functionality other than liking a Page, checking in to a Place, or connecting to your app. For example, you must not condition registration or entry upon the user liking a Wall post, or commenting or uploading a photo on a Wall. iv. You must not use Facebook features or functionality as a promotion’s registration or entry mechanism. For example, the act of liking a Page or checking in to a Place cannot automatically register or enter a promotion participant. v. You must not use Facebook features or functionality, such as the Like button, as a voting mechanism for a promotion. vi. You must not notify winners through Facebook, such as through Facebook messages, chat, or posts on profiles (timelines) or Pages. vii. Definitions:

a. By “administration” we mean the operation of any element of the promotion, such as collecting entries, conducting a drawing, judging entries, or notifying winners.

b. By “communication” we mean promoting, advertising or referencing a promotion in any way on Facebook, e.g., in ads, on a Page, or in a Wall post.

Guidelines for Contests on Twitter

Businesses, organizations, and even some creative individuals have hosted contests and sweepstakes through their Twitter profile. Contests and sweepstakes on Twitter may offer prizes for tweeting a particular update, for following a particular user, or for posting updates with a specific hashtag. If you’ve been thinking about hosting a contest using your Twitter profile, here are some simple guidelines to follow to ensure your contest doesn't ask anyone to violate any of Twitter's rules or guidelines:

Discourage posting the same Tweet repeatedly

Posting duplicate, or near duplicate, updates or links is a violation of the Twitter Rules and jeopardizes search quality. Please don’t set rules to encourage lots of duplicate updates (like saying, “whoever retweets this the most wins”). Your contest or sweepstakes could cause users to be automatically filtered out of Twitter search. Plus, instead of their followers seeing your cool contest or sweepstakes, their followers might start getting annoyed by your contest. You might want to set a clear contest rule stating that multiple entries in a single day will not be accepted.

Ask users to include an @reply to you in their update so you can see all the entries

When it comes to picking a winner, you’ll want to see all the contestants. If the updates include @username mention to you, you’ll be able to see all the updates in your Mentions timeline (see here for more information on replies and mentions). Just doing a public search may not show every single update, and some contestants may be filtered from search for quality.

Encourage the use of topics relevant to the contest

You might decide to have users include relevant hashtag topics along with the updates (like #contest or #yourcompanyname). Keep in mind that hashtag topics need to be relevant to the update; encouraging users to add your hashtag to totally unrelated updates might cause them to violate the Twitter Rules.

Follow The Twitter Rules

While these guidelines should help keep your contest entrants in good standing, please make sure you also review both the Twitter Rules and our search best practices before starting your contest. If you’re a business on Twitter, you might also want to check out the Twitter 101 for Business guide for more information and tips.

Applicable Laws and Regulations

In addition, before starting any contests or sweepstakes please ensure that they comply with all applicable laws and regulations. Compliance with such laws and regulations is your responsibility; please consult with an attorney if you have questions about legal compliance.

The Twitter Rules

Our goal is to provide a service that allows you to discover and receive content from sources that interest you as well as to share your content with others. We respect the ownership of the content that users share and each user is responsible for the content he or she provides. Because of these principles, we do not actively monitor user’s content and will not censor user content, except in limited circumstances described below.

Content Boundaries and Use of Twitter

In order to provide the Twitter service and the ability to communicate and stay connected with others, there are some limitations on the type of content that can be published with Twitter. These limitations comply with legal requirements and make Twitter a better experience for all. We may need to change these rules from time to time and reserve the right to do so. Please check back here to see the latest.

• Impersonation : You may not impersonate others through the Twitter service in a manner that does or is intended to mislead, confuse, or deceive others • Trademark : We reserve the right to reclaim user names on behalf of businesses or individuals that hold legal claim or trademark on those user names. Accounts using business names and/or logos to mislead others will be permanently suspended. • Privacy : You may not publish or post other people’s private and confidential information, such as credit card numbers, street address or Social Security/National Identity numbers, without their express authorization and permission. • Violence and Threats : You may not publish or post direct, specific threats of violence against others. • Copyright : We will respond to clear and complete notices of alleged copyright infringement. Our copyright procedures are set forth in the Terms of Service. • Unlawful Use : You may not use our service for any unlawful purposes or in furtherance of illegal activities. International users agree to comply with all local laws regarding online conduct and acceptable content. • Misuse of Twitter Badges : You may not use a Verified Account badge or Promoted Products badge unless it is provided by Twitter. Accounts using these badges as part of profile photos, header photos, background images, or in a way that falsely implies affiliation with Twitter will be suspended.

Spam and Abuse

Twitter strives to protect its users from spam and abuse. Technical abuse and user abuse is not tolerated on Twitter.com, and will result in permanent suspension. Any accounts engaging in the activities specified below are subject to permanent suspension.

• Serial Accounts : You may not create serial accounts for disruptive or abusive purposes, or with overlapping use cases. Mass account creation may result in suspension of all related accounts. Please note that any violation of the Twitter Rules is cause for permanent suspension of all accounts. • Username Squatting : You may not engage in username squatting. Accounts that are inactive for more than 6 months may also be removed without further notice. Some of the factors that we take into account when determining what conduct is considered to be username squatting are: • the number of accounts created • creating accounts for the purpose of preventing others from using those account names • creating accounts for the purpose of selling those accounts • using feeds of third-party content to update and maintain accounts under the names of those third parties • Invitation spam : You may not use Twitter.com’s address book contact import to send repeat, mass invitations. • Selling user names : You may not buy or sell Twitter usernames. • Malware/Phishing : You may not publish or link to malicious content intended to damage or disrupt another user’s browser or computer or to compromise a user’s privacy. • Spam : You may not use the Twitter service for the purpose of spamming anyone. What constitutes “spamming” will evolve as we respond to new tricks and tactics by spammers. Some of the factors that we take into account when determining what conduct is considered to be spamming are: • If you have followed a large amount of users in a short amount of time; • If you have followed and unfollowed people in a short time period, particularly by automated means (aggressive follower churn); • If you repeatedly follow and unfollow people, whether to build followers or to garner more attention for your profile; • If you have a small number of followers compared to the amount of people you are following; • If your updates consist mainly of links, and not personal updates; • If you post misleading links; • If a large number of people are blocking you; • The number of spam complaints that have been filed against you; • If you post duplicate content over multiple accounts or multiple duplicate updates on one account; • If you post multiple unrelated updates to a topic using #; • If you post multiple unrelated updates to a trending or popular topic; • If you send large numbers of duplicate @replies or mentions; • If you send large numbers of unsolicited @replies or mentions in an attempt to spam a service or link; • If you add a large number of unrelated users to lists in an attempt to spam a service or link; • If you repeatedly post other users’ Tweets as your own; • If you have attempted to “sell” followers, particularly through tactics considered aggressive following or follower churn; • Creating or purchasing accounts in order to gain followers; • Using or promoting third-party sites that claim to get you more followers (such as follower trains, sites promising “more followers fast,” or any other site that offers to automatically add followers to your account);

• If you create false or misleading Points of Interest; • If you create Points of Interest to namesquat or spam. • Pornography : You may not use obscene or pornographic images in either your profile photo, header photo, or user background.

Your account may be suspended for Terms of Service violations if any of the above is true. Please see our help pages on Following Best Practices and Automation Rules and Best Practices for a more detailed discussion of how the Rules apply to those particular account behaviors. Accounts created to replace suspended accounts will be permanently suspended.

Accounts engaging in any of these behaviors may be investigated for abuse. Accounts under investigation may be removed from Search for quality. Twitter reserves the right to immediately terminate your account without further notice in the event that, in its judgment, you violate these Rules or the Terms of Service.

Twitter Search Rules and Restrictions

This article details the rules for using Twitter search, and explains reasons why content may not show up in Twitter search.

Why doesn’t all content show up in Twitter search?

In order to keep your search results relevant, Twitter filters search results for quality Tweets and accounts. Material that jeopardizes search quality or creates a bad search experience for other users may be automatically removed from Twitter Search. Read more about this here.

General rules for using Twitter search:

The Twitter Rules explain what behaviors are permitted on Twitter. In addition to these rules, we’ve included some tips below to keep your content relevant (and your Tweets in Twitter search).

Please DO NOT:

• Repeatedly post duplicate or near-duplicate content (links or Tweets). • Abuse trending topics or hashtags (topic words with a # sign). • Send automated Tweets or replies. • Use bots or applications to post similar messages based on keywords. • Post similar messages over multiple accounts. • Aggressively follow and un-follow people.

Twitter may automatically remove accounts engaging in these behaviors from search (or even suspend in some cases) in order to ensure the best experience for everyone.

Search results filtering in third-party applications:

Accounts may be filtered from search for posting similar messages over several accounts. Your account may be filtered from search if you are logged into a third-party application that is updating to lots of accounts with similar or duplicate content.

Rules for participating in contests on Twitter:

Businesses sometimes host contests and offer prizes to retweet an update, following a particular user, or posting Tweets with a specific hashtag topic or @reply. If you’re running a contest, check out this page on Twitter’s Best Practices for Contests.

If you repeatedly post near-duplicate updates or duplicate links in order to enter contests, you may be filtered from search. Please keep in mind that you are responsible for the updates that you post to your Twitter account. What to do if you are missing from Search:

Please see our Missing from Twitter Search help page for more information.

If you are being filtered from search, rest assured that your followers will still receive your updates, and if you post an @reply to a specific user, these will be delivered to that user.

These Terms of Use are effective on January 19, 2013. To access our previous Terms of Use, please click here.

By accessing or using the Instagram website, the Instagram service, or any applications (including mobile applications) made available by Instagram (together, the "Service"), however accessed, you agree to be bound by these terms of use ("Terms of Use"). The Service is owned or controlled by Instagram, LLC ("Instagram"). These Terms of Use affect your legal rights and obligations. If you do not agree to be bound by all of these Terms of Use, do not access or use the Service.

There may be times when we offer a special feature that has its own terms and conditions that apply in addition to these Terms of Use. In those cases, the terms specific to the special feature control to the extent there is a conflict with these Terms of Use.

ARBITRATION NOTICE: EXCEPT IF YOU OPT-OUT AND EXCEPT FOR CERTAIN TYPES OF DISPUTES DESCRIBED IN THE ARBITRATION SECTION BELOW, YOU AGREE THAT DISPUTES BETWEEN YOU AND INSTAGRAM WILL BE RESOLVED BY BINDING, INDIVIDUAL ARBITRATION AND YOU WAIVE YOUR RIGHT TO PARTICIPATE IN A CLASS ACTION LAWSUIT OR CLASS-WIDE ARBITRATION.

Basic Terms

1. You must be at least 13 years old to use the Service. 2. You may not post violent, nude, partially nude, discriminatory, unlawful, infringing, hateful, pornographic or sexually suggestive photos or other content via the Service. 3. You are responsible for any activity that occurs through your account and you agree you will not sell, transfer, license or assign your account, followers, username, or any account rights. With the exception of people or businesses that are expressly authorized to create accounts on behalf of their employers or clients, Instagram prohibits the creation of and you agree that you will not create an account for anyone other than yourself. You also represent that all information you provide or provided to Instagram upon registration and at all other times will be true, accurate, current and complete and you agree to update your information as necessary to maintain its truth and accuracy. 4. You agree that you will not solicit, collect or use the login credentials of other Instagram users. 5. You are responsible for keeping your password secret and secure. 6. You must not defame, stalk, bully, abuse, harass, threaten, impersonate or intimidate people or entities and you must not post private or confidential information via the Service, including, without limitation, your or any other person's credit card information, social security or alternate national identity numbers, non-public phone numbers or non-public email addresses.

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7. You may not use the Service for any illegal or unauthorized purpose. You agree to comply with all laws, rules and regulations (for example, federal, state, local and provincial) applicable to your use of the Service and your Content (defined below), including but not limited to, copyright laws. 8. You are solely responsible for your conduct and any data, text, files, information, usernames, images, graphics, photos, profiles, audio and video clips, sounds, musical works, works of authorship, applications, links and other content or materials (collectively, "Content") that you submit, post or display on or via the Service. 9. You must not change, modify, adapt or alter the Service or change, modify or alter another website so as to falsely imply that it is associated with the Service or Instagram. 10. You must not access Instagram's private API by means other than those permitted by Instagram. Use of Instagram's API is subject to a separate set of terms available here: http://instagram.com/about/legal/terms/api/ ("API Terms"). 11. You must not create or submit unwanted email, comments, likes or other forms of commercial or harassing communications (a/k/a "spam") to any Instagram users. 12. You must not use domain names or web URLs in your username without prior written consent from Instagram. 13. You must not interfere or disrupt the Service or servers or networks connected to the Service, including by transmitting any worms, viruses, spyware, malware or any other code of a destructive or disruptive nature. You may not inject content or code or otherwise alter or interfere with the way any Instagram page is rendered or displayed in a user's browser or device. 14. You must comply with Instagram's Community Guidelines, available here: http://help.instagram.com/customer/portal/articles/262387-community-guidelines. 15. You must not create accounts with the Service through unauthorized means, including but not limited to, by using an automated device, script, bot, spider, crawler or scraper. 16. You must not attempt to restrict another user from using or enjoying the Service and you must not encourage or facilitate violations of these Terms of Use or any other Instagram terms. 17. Violation of these Terms of Use may, in Instagram's sole discretion, result in termination of your Instagram account. You understand and agree that Instagram cannot and will not be responsible for the Content posted on the Service and you use the Service at your own risk. If you violate the letter or spirit of these Terms of Use, or otherwise create risk or possible legal exposure for Instagram, we can stop providing all or part of the Service to you.

General Conditions

1. We reserve the right to modify or terminate the Service or your access to the Service for any reason, without notice, at any time, and without liability to you. You can deactivate your Instagram account by logging into the Service and completing the form available here: https://instagram.com/accounts/remove/request/. If we terminate your access to the Service or you use the form detailed above to deactivate your account, your photos, comments, likes, friendships, and all other data will no longer be accessible through your account (e.g., users will not be able to navigate to your username and view your photos), but those materials and

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data may persist and appear within the Service (e.g., if your Content has been reshared by others). 2. Upon termination, all licenses and other rights granted to you in these Terms of Use will immediately cease. 3. We reserve the right, in our sole discretion, to change these Terms of Use ("Updated Terms") from time to time. Unless we make a change for legal or administrative reasons, we will provide reasonable advance notice before the Updated Terms become effective. You agree that we may notify you of the Updated Terms by posting them on the Service, and that your use of the Service after the effective date of the Updated Terms (or engaging in such other conduct as we may reasonably specify) constitutes your agreement to the Updated Terms. Therefore, you should review these Terms of Use and any Updated Terms before using the Service. The Updated Terms will be effective as of the time of posting, or such later date as may be specified in the Updated Terms, and will apply to your use of the Service from that point forward. These Terms of Use will govern any disputes arising before the effective date of the Updated Terms. 4. We reserve the right to refuse access to the Service to anyone for any reason at any time. 5. We reserve the right to force forfeiture of any username for any reason. 6. We may, but have no obligation to, remove, edit, block, and/or monitor Content or accounts containing Content that we determine in our sole discretion violates these Terms of Use. 7. You are solely responsible for your interaction with other users of the Service, whether online or offline. You agree that Instagram is not responsible or liable for the conduct of any user. Instagram reserves the right, but has no obligation, to monitor or become involved in disputes between you and other users. Exercise common sense and your best judgment when interacting with others, including when you submit or post Content or any personal or other information. 8. There may be links from the Service, or from communications you receive from the Service, to third-party web sites or features. There may also be links to third-party web sites or features in images or comments within the Service. The Service also includes third-party content that we do not control, maintain or endorse. Functionality on the Service may also permit interactions between the Service and a third-party web site or feature, including applications that connect the Service or your profile on the Service with a third-party web site or feature. For example, the Service may include a feature that enables you to share Content from the Service or your Content with a third party, which may be publicly posted on that third party's service or application. Using this functionality typically requires you to login to your account on the third- party service and you do so at your own risk. Instagram does not control any of these third- party web services or any of their content. You expressly acknowledge and agree that Instagram is in no way responsible or liable for any such third-party services or features. YOUR CORRESPONDENCE AND BUSINESS DEALINGS WITH THIRD PARTIES FOUND THROUGH THE SERVICE ARE SOLELY BETWEEN YOU AND THE THIRD PARTY. You may choose, at your sole and absolute discretion and risk, to use applications that connect the Service or your profile on the Service with a third-party service (each, an "Application") and such Application may interact with, connect to or gather and/or pull information from and to your Service profile. By using such Applications, you acknowledge and agree to the following:

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(i) if you use an Application to share information, you are consenting to information about your profile on the Service being shared; (ii) your use of an Application may cause personally identifying information to be publicly disclosed and/or associated with you, even if Instagram has not itself provided such information; and (iii) your use of an Application is at your own option and risk, and you will hold the Instagram Parties (defined below) harmless for activity related to the Application. 9. You agree that you are responsible for all data charges you incur through use of the Service. 10. We prohibit crawling, scraping, caching or otherwise accessing any content on the Service via automated means, including but not limited to, user profiles and photos (except as may be the result of standard search engine protocols or technologies used by a search engine with Instagram's express consent).

Rights

1. Instagram does not claim ownership of any Content that you post on or through the Service. Instead, you hereby grant to Instagram a non-exclusive, fully paid and royalty-free, transferable, sub-licensable, worldwide license to use the Content that you post on or through the Service, subject to the Service's Privacy Policy, available here http://instagram.com/legal/privacy/, including but not limited to sections 3 ("Sharing of Your Information"), 4 ("How We Store Your Information"), and 5 ("Your Choices About Your Information"). You can choose who can view your Content and activities, including your photos, as described in the Privacy Policy. 2. Some of the Service is supported by advertising revenue and may display advertisements and promotions, and you hereby agree that Instagram may place such advertising and promotions on the Service or on, about, or in conjunction with your Content. The manner, mode and extent of such advertising and promotions are subject to change without specific notice to you. 3. You acknowledge that we may not always identify paid services, sponsored content, or commercial communications as such. 4. You represent and warrant that: (i) you own the Content posted by you on or through the Service or otherwise have the right to grant the rights and licenses set forth in these Terms of Use; (ii) the posting and use of your Content on or through the Service does not violate, misappropriate or infringe on the rights of any third party, including, without limitation, privacy rights, publicity rights, copyrights, trademark and/or other intellectual property rights; (iii) you agree to pay for all royalties, fees, and any other monies owed by reason of Content you post on or through the Service; and (iv) you have the legal right and capacity to enter into these Terms of Use in your jurisdiction. 5. The Service contains content owned or licensed by Instagram ("Instagram Content"). Instagram Content is protected by copyright, trademark, patent, trade secret and other laws, and, as between you and Instagram, Instagram owns and retains all rights in the Instagram Content and the Service. You will not remove, alter or conceal any copyright, trademark, service mark or other proprietary rights notices incorporated in or accompanying the Instagram Content and you will not reproduce, modify, adapt, prepare derivative works based on, perform, display, publish, distribute, transmit, broadcast, sell, license or otherwise exploit the Instagram Content.

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6. The Instagram name and logo are trademarks of Instagram, and may not be copied, imitated or used, in whole or in part, without the prior written permission of Instagram, except in accordance with our brand guidelines, available here: http://help.instagram.com/customer/portal/articles/182487. In addition, all page headers, custom graphics, button icons and scripts are service marks, trademarks and/or trade dress of Instagram, and may not be copied, imitated or used, in whole or in part, without prior written permission from Instagram. 7. Although it is Instagram's intention for the Service to be available as much as possible, there will be occasions when the Service may be interrupted, including, without limitation, for scheduled maintenance or upgrades, for emergency repairs, or due to failure of telecommunications links and/or equipment. Also, Instagram reserves the right to remove any Content from the Service for any reason, without prior notice. Content removed from the Service may continue to be stored by Instagram, including, without limitation, in order to comply with certain legal obligations, but may not be retrievable without a valid court order. Consequently, Instagram encourages you to maintain your own backup of your Content. In other words, Instagram is not a backup service and you agree that you will not rely on the Service for the purposes of Content backup or storage. Instagram will not be liable to you for any modification, suspension, or discontinuation of the Services, or the loss of any Content. You also acknowledge that the Internet may be subject to breaches of security and that the submission of Content or other information may not be secure. 8. You agree that Instagram is not responsible for, and does not endorse, Content posted within the Service. Instagram does not have any obligation to prescreen, monitor, edit, or remove any Content. If your Content violates these Terms of Use, you may bear legal responsibility for that Content. 9. Except as otherwise described in the Service's Privacy Policy, available at http://instagram.com/legal/privacy/, as between you and Instagram, any Content will be non- confidential and non-proprietary and we will not be liable for any use or disclosure of Content. You acknowledge and agree that your relationship with Instagram is not a confidential, fiduciary, or other type of special relationship, and that your decision to submit any Content does not place Instagram in a position that is any different from the position held by members of the general public, including with regard to your Content. None of your Content will be subject to any obligation of confidence on the part of Instagram, and Instagram will not be liable for any use or disclosure of any Content you provide. 10. It is Instagram's policy not to accept or consider content, information, ideas, suggestions or other materials other than those we have specifically requested and to which certain specific terms, conditions and requirements may apply. This is to avoid any misunderstandings if your ideas are similar to those we have developed or are developing independently. Accordingly, Instagram does not accept unsolicited materials or ideas, and takes no responsibility for any materials or ideas so transmitted. If, despite our policy, you choose to send us content, information, ideas, suggestions, or other materials, you further agree that Instagram is free to use any such content, information, ideas, suggestions or other materials, for any purposes whatsoever, including, without limitation, developing and marketing products and services, without any liability or payment of any kind to you.

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Reporting Copyright and Other IP Violations

1. We respect other people's rights, and expect you to do the same. 2. We provide you with tools to help you protect your intellectual property rights. To learn more about how to report claims of intellectual property infringement, visit: http://help.instagram.com/customer/portal/articles/270501 3. If you repeatedly infringe other people's intellectual property rights, we will disable your account when appropriate.

Disclaimer of Warranties

THE SERVICE, INCLUDING, WITHOUT LIMITATION, INSTAGRAM CONTENT, IS PROVIDED ON AN "AS IS", "AS AVAILABLE" AND "WITH ALL FAULTS" BASIS. TO THE FULLEST EXTENT PERMISSIBLE BY LAW, NEITHER INSTAGRAM NOR ITS PARENT COMPANY NOR ANY OF THEIR EMPLOYEES, MANAGERS, OFFICERS OR AGENTS (COLLECTIVELY, THE "INSTAGRAM PARTIES") MAKE ANY REPRESENTATIONS OR WARRANTIES OR ENDORSEMENTS OF ANY KIND WHATSOEVER, EXPRESS OR IMPLIED, AS TO: (A) THE SERVICE; (B) THE INSTAGRAM CONTENT; (C) USER CONTENT; OR (D) SECURITY ASSOCIATED WITH THE TRANSMISSION OF INFORMATION TO INSTAGRAM OR VIA THE SERVICE. IN ADDITION, THE INSTAGRAM PARTIES HEREBY DISCLAIM ALL WARRANTIES, EXPRESS OR IMPLIED, INCLUDING, BUT NOT LIMITED TO, THE WARRANTIES OF MERCHANTABILITY, FITNESS FOR A PARTICULAR PURPOSE, NON-INFRINGEMENT, TITLE, CUSTOM, TRADE, QUIET ENJOYMENT, SYSTEM INTEGRATION AND FREEDOM FROM COMPUTER VIRUS.

THE INSTAGRAM PARTIES DO NOT REPRESENT OR WARRANT THAT THE SERVICE WILL BE ERROR-FREE OR UNINTERRUPTED; THAT DEFECTS WILL BE CORRECTED; OR THAT THE SERVICE OR THE SERVER THAT MAKES THE SERVICE AVAILABLE IS FREE FROM ANY HARMFUL COMPONENTS, INCLUDING, WITHOUT LIMITATION, VIRUSES. THE INSTAGRAM PARTIES DO NOT MAKE ANY REPRESENTATIONS OR WARRANTIES THAT THE INFORMATION (INCLUDING ANY INSTRUCTIONS) ON THE SERVICE IS ACCURATE, COMPLETE, OR USEFUL. YOU ACKNOWLEDGE THAT YOUR USE OF THE SERVICE IS AT YOUR SOLE RISK. THE INSTAGRAM PARTIES DO NOT WARRANT THAT YOUR USE OF THE SERVICE IS LAWFUL IN ANY PARTICULAR JURISDICTION, AND THE INSTAGRAM PARTIES SPECIFICALLY DISCLAIM SUCH WARRANTIES. SOME JURISDICTIONS LIMIT OR DO NOT ALLOW THE DISCLAIMER OF IMPLIED OR OTHER WARRANTIES SO THE ABOVE DISCLAIMER MAY NOT APPLY TO YOU TO THE EXTENT SUCH JURISDICTION'S LAW IS APPLICABLE TO YOU AND THESE TERMS OF USE.

BY ACCESSING OR USING THE SERVICE YOU REPRESENT AND WARRANT THAT YOUR ACTIVITIES ARE LAWFUL IN EVERY JURISDICTION WHERE YOU ACCESS OR USE THE SERVICE.

THE INSTAGRAM PARTIES DO NOT ENDORSE CONTENT AND SPECIFICALLY DISCLAIM ANY RESPONSIBILITY OR LIABILITY TO ANY PERSON OR ENTITY FOR ANY LOSS, DAMAGE (WHETHER ACTUAL, CONSEQUENTIAL, PUNITIVE OR OTHERWISE), INJURY,

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CLAIM, LIABILITY OR OTHER CAUSE OF ANY KIND OR CHARACTER BASED UPON OR RESULTING FROM ANY CONTENT.

Limitation of Liability; Waiver

UNDER NO CIRCUMSTANCES WILL THE INSTAGRAM PARTIES BE LIABLE TO YOU FOR ANY LOSS OR DAMAGES OF ANY KIND (INCLUDING, WITHOUT LIMITATION, FOR ANY DIRECT, INDIRECT, ECONOMIC, EXEMPLARY, SPECIAL, PUNITIVE, INCIDENTAL OR CONSEQUENTIAL LOSSES OR DAMAGES) THAT ARE DIRECTLY OR INDIRECTLY RELATED TO: (A) THE SERVICE; (B) THE INSTAGRAM CONTENT; (C) USER CONTENT; (D) YOUR USE OF, INABILITY TO USE, OR THE PERFORMANCE OF THE SERVICE; (E) ANY ACTION TAKEN IN CONNECTION WITH AN INVESTIGATION BY THE INSTAGRAM PARTIES OR LAW ENFORCEMENT AUTHORITIES REGARDING YOUR OR ANY OTHER PARTY'S USE OF THE SERVICE; (F) ANY ACTION TAKEN IN CONNECTION WITH COPYRIGHT OR OTHER INTELLECTUAL PROPERTY OWNERS; (G) ANY ERRORS OR OMISSIONS IN THE SERVICE'S OPERATION; OR (H) ANY DAMAGE TO ANY USER'S COMPUTER, MOBILE DEVICE, OR OTHER EQUIPMENT OR TECHNOLOGY INCLUDING, WITHOUT LIMITATION, DAMAGE FROM ANY SECURITY BREACH OR FROM ANY VIRUS, BUGS, TAMPERING, FRAUD, ERROR, OMISSION, INTERRUPTION, DEFECT, DELAY IN OPERATION OR TRANSMISSION, COMPUTER LINE OR NETWORK FAILURE OR ANY OTHER TECHNICAL OR OTHER MALFUNCTION, INCLUDING, WITHOUT LIMITATION, DAMAGES FOR LOST PROFITS, LOSS OF GOODWILL, LOSS OF DATA, WORK STOPPAGE, ACCURACY OF RESULTS, OR COMPUTER FAILURE OR MALFUNCTION, EVEN IF FORESEEABLE OR EVEN IF THE INSTAGRAM PARTIES HAVE BEEN ADVISED OF OR SHOULD HAVE KNOWN OF THE POSSIBILITY OF SUCH DAMAGES, WHETHER IN AN ACTION OF CONTRACT, NEGLIGENCE, STRICT LIABILITY OR TORT (INCLUDING, WITHOUT LIMITATION, WHETHER CAUSED IN WHOLE OR IN PART BY NEGLIGENCE, ACTS OF GOD, TELECOMMUNICATIONS FAILURE, OR THEFT OR DESTRUCTION OF THE SERVICE). IN NO EVENT WILL THE INSTAGRAM PARTIES BE LIABLE TO YOU OR ANYONE ELSE FOR LOSS, DAMAGE OR INJURY, INCLUDING, WITHOUT LIMITATION, DEATH OR PERSONAL INJURY. SOME STATES DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO YOU. IN NO EVENT WILL THE INSTAGRAM PARTIES TOTAL LIABILITY TO YOU FOR ALL DAMAGES, LOSSES OR CAUSES OR ACTION EXCEED ONE HUNDRED UNITED STATES DOLLARS ($100.00).

YOU AGREE THAT IN THE EVENT YOU INCUR ANY DAMAGES, LOSSES OR INJURIES THAT ARISE OUT OF INSTAGRAM'S ACTS OR OMISSIONS, THE DAMAGES, IF ANY, CAUSED TO YOU ARE NOT IRREPARABLE OR SUFFICIENT TO ENTITLE YOU TO AN INJUNCTION PREVENTING ANY EXPLOITATION OF ANY WEB SITE, SERVICE, PROPERTY, PRODUCT OR OTHER CONTENT OWNED OR CONTROLLED BY THE INSTAGRAM PARTIES, AND YOU WILL HAVE NO RIGHTS TO ENJOIN OR RESTRAIN THE DEVELOPMENT, PRODUCTION, DISTRIBUTION, ADVERTISING, EXHIBITION OR EXPLOITATION OF ANY WEB SITE, PROPERTY, PRODUCT, SERVICE, OR OTHER CONTENT OWNED OR CONTROLLED BY THE INSTAGRAM PARTIES.

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BY ACCESSING THE SERVICE, YOU UNDERSTAND THAT YOU MAY BE WAIVING RIGHTS WITH RESPECT TO CLAIMS THAT ARE AT THIS TIME UNKNOWN OR UNSUSPECTED, AND IN ACCORDANCE WITH SUCH WAIVER, YOU ACKNOWLEDGE THAT YOU HAVE READ AND UNDERSTAND, AND HEREBY EXPRESSLY WAIVE, THE BENEFITS OF SECTION 1542 OF THE CIVIL CODE OF CALIFORNIA, AND ANY SIMILAR LAW OF ANY STATE OR TERRITORY, WHICH PROVIDES AS FOLLOWS: "A GENERAL RELEASE DOES NOT EXTEND TO CLAIMS WHICH THE CREDITOR DOES NOT KNOW OR SUSPECT TO EXIST IN HIS FAVOR AT THE TIME OF EXECUTING THE RELEASE, WHICH IF KNOWN BY HIM MUST HAVE MATERIALLY AFFECTED HIS SETTLEMENT WITH THE DEBTOR."

INSTAGRAM IS NOT RESPONSIBLE FOR THE ACTIONS, CONTENT, INFORMATION, OR DATA OF THIRD PARTIES, AND YOU RELEASE US, OUR DIRECTORS, OFFICERS, EMPLOYEES, AND AGENTS FROM ANY CLAIMS AND DAMAGES, KNOWN AND UNKNOWN, ARISING OUT OF OR IN ANY WAY CONNECTED WITH ANY CLAIM YOU HAVE AGAINST ANY SUCH THIRD PARTIES.

Indemnification

You (and also any third party for whom you operate an account or activity on the Service) agree to defend (at Instagram's request), indemnify and hold the Instagram Parties harmless from and against any claims, liabilities, damages, losses, and expenses, including without limitation, reasonable attorney's fees and costs, arising out of or in any way connected with any of the following (including as a result of your direct activities on the Service or those conducted on your behalf): (i) your Content or your access to or use of the Service; (ii) your breach or alleged breach of these Terms of Use; (iii) your violation of any third-party right, including without limitation, any intellectual property right, publicity, confidentiality, property or privacy right; (iv) your violation of any laws, rules, regulations, codes, statutes, ordinances or orders of any governmental and quasi- governmental authorities, including, without limitation, all regulatory, administrative and legislative authorities; or (v) any misrepresentation made by you. You will cooperate as fully required by Instagram in the defense of any claim. Instagram reserves the right to assume the exclusive defense and control of any matter subject to indemnification by you, and you will not in any event settle any claim without the prior written consent of Instagram.

Arbitration

Except if you opt-out or for disputes relating to: (1) your or Instagram's intellectual property (such as trademarks, trade dress, domain names, trade secrets, copyrights and patents); (2) violations of the API Terms; or (3) violations of provisions 13 or 15 of the Basic Terms, above ("Excluded Disputes"), you agree that all disputes between you and Instagram (whether or not such dispute involves a third party) with regard to your relationship with Instagram, including without limitation disputes related to these Terms of Use, your use of the Service, and/or rights of privacy and/or publicity, will be resolved by binding, individual arbitration under the American Arbitration Association's rules for arbitration of consumer-related disputes and you and Instagram hereby expressly waive trial by jury. As an alternative, you may bring your claim in your local "small claims" court, if permitted by that small claims court's rules. You may bring claims only on your own behalf. Neither you nor Instagram will participate in a class action or class-wide arbitration for

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any claims covered by this agreement. You also agree not to participate in claims brought in a private attorney general or representative capacity, or consolidated claims involving another person's account, if Instagram is a party to the proceeding. This dispute resolution provision will be governed by the Federal Arbitration Act. In the event the American Arbitration Association is unwilling or unable to set a hearing date within one hundred and sixty (160) days of filing the case, then either Instagram or you can elect to have the arbitration administered instead by the Judicial Arbitration and Mediation Services. Judgment on the award rendered by the arbitrator may be entered in any court having competent jurisdiction. Any provision of applicable law notwithstanding, the arbitrator will not have authority to award damages, remedies or awards that conflict with these Terms of Use.

You may opt out of this agreement to arbitrate. If you do so, neither you nor Instagram can require the other to participate in an arbitration proceeding. To opt out, you must notify Instagram in writing within 30 days of the date that you first became subject to this arbitration provision. You must use this address to opt out:

Instagram, LLC ATTN: Arbitration Opt-out 1601 Willow Rd. Menlo Park, CA 94025

You must include your name and residence address, the email address you use for your Instagram account, and a clear statement that you want to opt out of this arbitration agreement.

If the prohibition against class actions and other claims brought on behalf of third parties contained above is found to be unenforceable, then all of the preceding language in this Arbitration section will be null and void. This arbitration agreement will survive the termination of your relationship with Instagram.

Time Limitation on Claims

You agree that any claim you may have arising out of or related to your relationship with Instagram must be filed within one year after such claim arose; otherwise, your claim is permanently barred.

Governing Law & Venue

These Terms of Use are governed by and construed in accordance with the laws of the State of California, without giving effect to any principles of conflicts of law AND WILL SPECIFICALLY NOT BE GOVERNED BY THE UNITED NATIONS CONVENTIONS ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS, IF OTHERWISE APPLICABLE. For any action at law or in equity relating to the arbitration provision of these Terms of Use, the Excluded Disputes or if you opt out of the agreement to arbitrate, you agree to resolve any dispute you have with Instagram exclusively in a state or federal court located in Santa Clara, California, and to submit to the personal jurisdiction of the courts located in Santa Clara County for the purpose of litigating all such disputes.

If any provision of these Terms of Use is held to be unlawful, void, or for any reason unenforceable during arbitration or by a court of competent jurisdiction, then that provision will be deemed severable from these Terms of Use and will not affect the validity and enforceability of any remaining provisions. Instagram's failure to insist upon or enforce strict performance of any

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provision of these Terms will not be construed as a waiver of any provision or right. No waiver of any of these Terms will be deemed a further or continuing waiver of such term or condition or any other term or condition. Instagram reserves the right to change this dispute resolution provision, but any such changes will not apply to disputes arising before the effective date of the amendment. This dispute resolution provision will survive the termination of any or all of your transactions with Instagram.

Entire Agreement

If you are using the Service on behalf of a legal entity, you represent that you are authorized to enter into an agreement on behalf of that legal entity. These Terms of Use constitute the entire agreement between you and Instagram and governs your use of the Service, superseding any prior agreements between you and Instagram. You will not assign the Terms of Use or assign any rights or delegate any obligations hereunder, in whole or in part, whether voluntarily or by operation of law, without the prior written consent of Instagram. Any purported assignment or delegation by you without the appropriate prior written consent of Instagram will be null and void. Instagram may assign these Terms of Use or any rights hereunder without your consent. If any provision of these Terms of Use is found by a court of competent jurisdiction to be invalid or otherwise unenforceable, the parties nevertheless agree that such portion will be deemed severable from these Terms of Use and will not affect the validity and enforceability of the remaining provisions, and the remaining provisions of the Terms of Use remain in full force and effect. Neither the course of conduct between the parties nor trade practice will act to modify the Terms of Use. These Terms of Use do not confer any third-party beneficiary rights.

Territorial Restrictions

The information provided within the Service is not intended for distribution to or use by any person or entity in any jurisdiction or country where such distribution or use would be contrary to law or regulation or which would subject Instagram to any registration requirement within such jurisdiction or country. We reserve the right to limit the availability of the Service or any portion of the Service, to any person, geographic area, or jurisdiction, at any time and in our sole discretion, and to limit the quantities of any content, program, product, service or other feature that Instagram provides.

Software related to or made available by the Service may be subject to United States export controls. Thus, no software from the Service may be downloaded, exported or re-exported: (a) into (or to a national or resident of) any country to which the United States has embargoed goods; or (b) to anyone on the U.S. Treasury Department's list of Specially Designated Nationals or the U.S. Commerce Department's Table of Deny Orders. By downloading any software related to the Service, you represent and warrant that you are not located in, under the control of, or a national or resident of, any such country or on any such list.

The effective date of these Terms of Use is January 19, 2013. These Terms of Use were written in English (US). To the extent any translated version of these Terms of Use conflicts with the English version, the English version controls.

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