Legal and business advice for online publishers and bloggers

Over the months that I’ve been writing about legal issues for OJR, the consistent issue that has emerged is that online publishers need good legal representation. But that imperative has been matched by an equally vexing question: how does a small publisher get the right legal advice at an affordable price? Fortunately, there’s a host of good resources available, and some fairly clear guidelines on when legal advice is needed. Here’s what I learned from talking to the experts and scouring the Web.

Consider your legal exposure when choosing a structure for your business. Mark Anderson, an intellectual property attorney at Masur & Associates, says that, “Especially in terms of copyright infringement claims, damages can be very high, and if you’re not insulated by a corporate entity… then, your personal assets are potentially at stake. If somebody sues you for something that you wrote on your website, they’d be suing you personally, then you could lose your house; you could lose your car. But if you’ve got a business set up, that’s separate from you, it’s the business that would be sued, and the most you could lose from that is what you put into the business.”

According to Anderson, many small publishers find that a limited liability company, or LLC, provides the right combination of tax and legal advantages. Because an LLC is a corporation, its assets and liabilities are separate from those of its principals. However, some corporate structures have a disadvantage, because both the corporation and the individuals deriving income from them pay taxes. Owners of LLCs, along with S Corporations, can avoid this double taxation when their revenues are small, but they can change the way they are taxed if they start to make more money. LLCs have other additional advantages – for example, the ownership rules are more flexible.

An ethics policy or code of conduct may help protect you from libel or defamation charges. Ethics codes have their own virtues, and they don’t protect a publisher from legal action by themselves, but they can help to set the tone for an online community and clarify the publishers’ intent.

The debate over codes of conduct has become more intense because of the recent controversy surrounding threatening comments and pictures posted about prominent technology blogger Kathy Sierra. Sierra told readers that safety concerns led her to cancel speaking engagements and hide out in her home, awaiting the results of a police investigation. What followed was a vigorous, ongoing debate including efforts to create a bloggers’ code of conduct. [Full disclosure: I am a contributing editor for BlogHer one of the groups that figures prominently in both the Sierra controversy and the debate over blogging guidelines. BlogHer’s community guidelines inspired a proposed code of conduct proposed by well-known web writer Tim O’Reilly. Both codes pledge that online publishers will ban “unacceptable content” — content that might be libelous, abusive, or that might infringe on a copyright or trademark.

Anderson says it’s “tough to say” how a bloggers’ code of conduct might affect a legal proceeding. “There are certain protections under the law for journalists, and now it’s getting tougher and tougher to define who, exactly is a journalist. Potentially, adhering to one of these codes might be a factor that weighs in favor of somebody being treated as a journalist under certain laws.”

Small publishers doing journalism have to think carefully about the risks they are willing to take, especially since the legal definition of a journalist is subject to debate. Of course, freelancers and small publishers who commit acts of journalism have to understand that courts may not be willing, for example, to extend state shield laws protections to them. It’s also important to understand that federal prosecutors have broad subpoena powers when it comes to forcing the disclosure of information they deem important for a criminal investigation.

Nothing better illustrates the risks small publishers take than the case of videoblogger Josh Wolf, who was released from federal prison in early April after serving 8 months for refusing to turn over video outtakes from a July 2005 demonstration to a grand jury. Wolf claimed that, as a journalist, he was entitled to withhold the information under California’s shield law. However, the court rejected his claim because Wolf was not employed by a news organization at the time that he shot the video.

Be clear about your purpose. It’s because of Wolf and other citizen-journalists that Christine Tatum, president of the Society of Professional Journalists, thinks that the definition of a journalist should be expanded beyond those who are paid to report the news. “We want to define journalists as people who are gathering information with the purposes of distributing it,” Tatum says. “Rather than question for me being, ‘was that person a journalist?’ the question for me is, ‘was that person practicing journalism?'”

That view of journalists was part of the reason SPJ donated $31,000 to Wolf’s legal defense and helped him obtain the services of top-notch legal counsel. But Tatum acknowledges that the law has not embraced that definition, and neither do many bloggers. Noting that many bloggers say they aren’t journalists but want the legal protections afforded to journalists, she said, “I encourage people to really take a long and hard look at what is it you are, really?”

Take advantage of the growing number of educational resources and training opportunities made available by advocacy groups and professional organizations. Small business attorney Nina Kaufman notes that the Electronic Frontiers Foundation has a plethora of free resources, including legal guides for bloggers. The Media Bloggers Association is just one of several organizations that offers training in journalistic practices and legal issues. They have also taken the lead in advocating for press credentials for its members, most notably in the recent trial of Lewis “Scooter” Libby.

The MBA’s success echoes Anderson’s argument that, “the more professionally you run your blog site, the more you act like a traditional journalist, the more you are going to be treated as a real journalist. That would include adhering to a code of ethics.”

Be smart about copyrights. Anderson quips, “For starters, don’t use anything that belongs to any one else.” Seriously, Anderson urges publishers to educate themselves about fair use guidelines, which permit the use of small portions of copyrighted material for comment, criticism, parody or educational purposes. It’s a serious matter: Anderson warns that copyright judgments come with statutory damages that can be as high as $150,000 per violation. For that reason, Anderson urges publishers to think carefully before choosing to defy a request to remove material that someone claims is infringing on a copyright or trademark.

EFF maintains that major copyright holders such as entertainment companies often make abusive use of copyright laws — combating that abuse is one of their major areas of advocacy.

But online publishers are also copyright holders, and sometimes they, too, have to take action to protect themselves. Blogger Elise Bauer warns that there are some people who use RSS feeds to aggregate others’ content without their permission, forming their own revenue-generating website. Bauer urges using the Digital Millennium Copyright Act against them, either by filing a complaint with Google for content scrapers who use its AdSense program, or by complaining directly to the DMCA office itself.

When in doubt, ask a lawyer Anderson said the published guides and training workshops are great for general knowledge, but it’s best to consult an attorney for really specific questions. And EFF spokeswoman Rebecca Jesschke says that their attorneys have found that some media lawyers are willing to consult with small publishers for a reduced fee, assuming that the matter in question isn’t too involved.

Bottom line: choosing to publish online is an enormous responsibility, and it carries risks. But a professional attitude, self-education and a few proactive steps can go a long way.

Consider liability insurance Anderson says media liability insurance can offer “peace of mind” for online publishers. One leading provider, Media/Professional/Insurance, says the right policy offers much more. M/PI is one of two companies specializing in policies tailored for cyberspace-based businesses.

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In addition: The SPJ, EFF and MBA are just a few of the professional organizations and advocacy groups that offer legal advice and support. Others include:

The 'Libby Effect': Can you still keep your sources secret?

At this writing, the jury has yet to hand down a verdict in the trial of former White House aide Lewis “Scooter” Libby on charges of perjury and obstruction of justice. [Update: Guilty on four of five counts — Ed.] Whatever the verdict, one thing is clear, according Amy Ginensky, a partner at the Philadelphia law firm of Pepper, Hamilton, LLP who has tried many First Amendment cases: the Libby trial is “a subject that all of us who have any thing to do with the media need to do a lot of thinking about.”

Certainly, a lot of people are thinking about it, as evidenced, for example, by the discussion generated by Scooter Libby segment of the PBS Frontline series, News War.

OJR sat down with Ginensky to find out why she says that the Libby trial, “has changed journalism as we know it.”

OJR: You’ve said that “After this trial, even if privilege can be protected in federal and state courts, many may not perceive it.” What did you mean by that?

Ginensky: We all grew up in the “Deep Throat” era and thought that everything is protected and confidential. What we’re going to see, and I’ve already seen it myself, is lawyers – both on the civil and criminal side — thinking, ‘Oh reporters have to testify – that’s what the Libby case is all about. And it’s obvious that while there may be certain instances in certain courts where reporters have to testify, but in many states there are strong protections… shield law or common law protections. In federal courts there are still some protections, and some federal courts have been stronger than the DC court was.

So, I think lawyers’ instincts are going to be to serve a subpoena whenever they think journalists have information about anything – any information, whether or not it’s been published, whether or not it’s confidential, or whatever, they’re going to try to get reporters to testify.

Then I think you’re going to face the fact that sources have seen this group of reporters walk into the Libby trial and testify and be the number one and two and three witnesses against Scooter Libby. That is a position that I think reporters have always tried to avoid, to be a witness against people who are talking to you.

In the Justice Department, I think there has been a great reluctance to serve subpoenas on reporters – I think that’s changing. But… the fact that people think that the protections have been undone [doesn’t mean] that they have been undone.

We need to fight against that to the extent possible.

OJR: One of the extraordinary things about this case is that you have the White House and the prosecutor using the unprecedented tactic of getting sources to sign confidentiality waivers.

Ginensky: It is unprecedented. But what I have argued before is that the privilege is not the source’s; the privilege is the reporter’s. It doesn’t matter if my source is willing to speak, if I’m a reporter. It’s whether or not I will waive the privilege.

And I, as a journalist, have good reasons not to want to waive the privilege in addition to the source’s reasons, because it will chill the next source. I have won on that argument in both Federal and state courts before. Obviously this argument must have been made and did not work in [the Libby] case. If sources believe that their employers can get these waivers out of them, then they’re probably not going to be whistleblowers.

It seems to me that in the face of an attack like this, what we ought to do is to stand up and try to protect [reporters’ privilege] as much as possible, rather than lay down.

OJR: You say that there ought to be a conversation in every newsroom about the rules for granting confidentiality to a source. It’s been suggested that the practice of granting confidentiality has changed over the years from being an incentive that reporters sometimes use to coax reluctant interview subjects to being a privilege that sources expect and use to put out information for their own purposes.

Ginensky: I always understood, both from the dealings with journalists, and also from arguments that I’ve made in court, that it’s…used almost as a matter of last resort. We try to get people on the record, and not just take information off the record, because there are recognized dangers with this type of information.

And then, you may find yourself in a situation like Judith Miller, where you haven’t even published [your information] and you’re faced with having to try to protect somebody who you’ve really never tried to get on the record, and you put yourself, I think, in a bad situation.

OJR: This all comes about when the traditional interpretation of the Branzburg case is being challenged.

Ginensky: We’ve argued for years that the Branzburg case does not mean that there is no protection. But more and more courts – federal courts have found to the contrary. All the efforts to get federal shield laws are really important.

OJR: You’ve also suggested that reporters need to think about their methods and frequency of note-taking.

Ginensky: I think that each journalist needs to think about when they’re taking notes. There are journalists who always take notes – whether it’s on the record or off the record, and then they make a note afterward whether the conversation is on the record. And then they keep the notes, pretty much forever, and then they’ll be like Judy Miller – they’ll find them under desks, in shopping bags.

And that’s not a place you really want to be, because then you’ll have those notes being used to go against the memory of your source… Most sources are not likely to have that accurate a recollection, not because of anything nefarious, but because people just don’t recall the details of conversations. And given any time passage, most of us can’t recall. And so we have the journalists’ notes being used to impeach our source, and that’s a really terrible picture to put out there, and a really terrible position to put your source in.

So I think that people need to think initially, “Am I going to make notes for this conversation with this confidential source where there’s a likelihood I might end up in a battle about my notes?” Maybe you don’t make notes at all. Once you get a subpoena, you can’t get rid of your notes – that’s the destruction of evidence. So you have to think about it, I think, right from the beginning.

OJR: Many journalists hold on to their notes both in case there are questions, and because they might want to re-use the research for another project.

Ginensky: Right. And I’m somebody who defends a lot of libel lawsuits, and sometimes notes can be helpful. Most of the time, they could be helpful, but you’ve got to weigh the possibility of getting a libel lawsuit now against the possibility of a subpoena, and be thinking about these things ahead of time. You can never predict where your libel lawsuit is going to come from, nor predict where every subpoena is going to come from.

But in both instances, you can make some calculated decisions. I mean, I have been more surprised about libel lawsuits, but subpoenas – there are areas where people probably should think about whether they’re likely to get a subpoena. If you’re dealing with a whistleblower in a government agency, think about it ahead of time.

OJR: That gets pretty tricky when it comes to things like e-mail.

Ginensky: Yes, you have to worry about e-mails for your subpoenas; you also have to worry about your phone records, because there have been subpoenas to phone companies where you don’t even have control. Then, the fact that there is this phone record with you and this confidential source could reveal the confidential source. So you might want to think about some way to communicate other than the telephone. Hopefully, it won’t involve getting in the basement or parking garage like Deep Throat!

OJR: You’ve said the credentialing of bloggers to cover this trial is also significant.

Ginensky: The credentialing of bloggers is significant because it places them on a similar level as mainstream journalists. However, this event also raises some questions about the treatment of bloggers. For example, if they are treated as journalists, then will the standard of conduct practices that applies to journalists be applied to them as well in relation to liability issues? If you are considered a journalist, then you’re going to be held to a journalist’s standard of care in a libel lawsuit. I would suspect not all bloggers know much about the standard of care of how other journalists work. On the other hand, if they are considered journalists under shield laws, then, to the extent that they have confidential sources and the statutes that protect them, that’s a good thing.

OJR: Given what you’re saying, anyone who’s going to do journalism really has to have access to quality legal advice. When it comes to solo journalists, bloggers and small publishers, you’re not available.

Ginensky: Right, and I don’t have an answer for that. I would think for a lot of bloggers, it means getting insurance. I worry about risk, and I can’t say I have an answer for that. In terms of how they protect themselves, there should be a lot of reading and discussion. I would think that journalists who are in newsrooms. If they say to somebody, “I’ll protect you and give you confidentiality,” are they really willing to go to jail for that person? That’s a real problem, I would imagine.”

Whatever the verdict, we’ve all been sentenced to deal with a new with a new way of thinking about this, and the recognition that sources are going to think of it differently, and courts of going to think of it differently. In my view, we shouldn’t give up, but we should be proactive in the steps we take.

Tax answers for online publishers

There are many ways of making money as an online journalist – whether you’re producing content for someone else, blogging, or running an online news outfit in a virtual world. But where there’s money being made, there’s likely taxes to be paid. We turned to Daniel Kushner CPA, a partner with the Miami-based accounting firm, Gerson, Preston and Robinson, to find out whether there are tax issues especially relevant to online journalists.

OJR: Are bloggers legally required to report donations to a Paypal account, Amazon wishlist, or other similar fundraising vehicles?

Kushner: I imagine that what your talking about there is that someone has an online magazine in the public domain, and they ask that if people like it, maybe they’d like to contribute money to it to help sustain the publication.

OJR: Right.

Kushner: In that regard, the first issue is, is the person publishing that site doing it for profit motive? If there’s a profit motive, then yeah, of course, any money that they collect would be income.

Now, why do I say a profit motive? What do I mean by that? What I mean is that people sometimes make their hobbies their business. So there’s some tests for when a hobby becomes a business or when a business is really a hobby. If someone is doing this for profit, of course any money they collect – they’re a US person, of course it’s taxable, no matter where it’s contributed from. When I say US people, I don’t [just] mean individuals, I mean a US corporation, partnership, individual trust – whatever it is. A US entity is taxed on its worldwide income.

OJR: For an individual blogger, what is the test to distinguish between a hobby and a business?

Kushner: The way the tax rules are set up is that if your income exceeds your expenses, it’s generally considered a business. Here’s the problem — a lot of people will take their hobby and say it’s a business.

Let’s say I have horses. I own horses, I breed them sometimes, I have a lot of horse expenses. Clearly I like to ride them a lot, but I say I’m in the horse business because I breed them, and whatever it is. I collect a little bit in fees, and I have huge expenses, huge losses in my horse business. It’s almost like a tax shelter, right? If I’m going to do the horses, whether I say I’m in business or not, why not take advantage of the tax deductions and say I’m in the business? So a lot of people will take their hobbies and actually say they’re businesses.

Well, in different types of activities… you have to show a profit in a certain number of years. You can’t show losses every year. Either two out of seven or three out of seven years, you have to have a profit. And there are a lot of other tests. If somebody says it’s a hobby and they’re profiting, the government is going to say it’s a business! The government gets the best of every rule. They have the ability because they have the hindsight. They know what has occurred, and they’ll make the determination based on what has occurred.

OJR: So that means you really have to keep accurate records.

Kushner: That’s the thing. If somebody has a hobby, and they really keep accurate records, and treat in a businesslike manner, the government may agree that it was an attempt at a business, even if you have losses. So, if you’re going to have a business and have losses, you’re going to have to keep really good records.

OJR: When should owners of blog sites file 1099 forms for contributing writers?

Kushner: The rules are the rules. Whenever you pay somebody more than $600 in a calendar year, you’re supposed to give them a 1099. In theory, what you should be doing is before you pay them the first time, you should request a certification of their [tax] ID number. There’s a form, W-9. Keep that on file, in case the payments go over $600.

OJR: In recent years, news organizations have been setting up shop in virtual worlds such as Second Life. Some of these news outlets sell advertising and other products on the web and in-world. They spend money creating offices in world and sometimes stage special events. There has been some discussion about whether assets created and sold in virtual worlds should be taxable. [One journalist, Julian Dibbell, chronicled his failed effort to get an answer to the question in this 2006 article for Legal Affairs magazine.] Given the interest in Congress in taxing revenues generated in virtual worlds, are there things that people who start businesses in those sites should be doing?

Kushner: We have a definition in the tax code of what gross income is. Any time gross income is realized, it’s taxable. Whether or not it’s a profit that you also pay tax on is a different issue, but anytime there’s gross income, it’s reportable gross income. So if somebody receives something of value, or they had an increase in their wealth as a result of a transaction, then it’s considered taxable income.

OJR: Dan Miller, a senior economist for the House joint economic committee, told Reuters last year. that, “you can have a virtual asset and virtual capital gains, but there’s no mechanism by which you’re taxed on this stuff.” Your thoughts?

Kushner: Certainly, if a US person has created virtual wealth which they can exchange for any product or service, or exchange it back into some currency, then it’s reportable income. Under our tax laws, I don’t care what [Miller] says, that happens to be the definition of income, and it’s reportable.

OJR: They have a virtual currency, called Lindens, that can be exchanged for US dollars.

Kushner: If you can convert it back to US dollars, or to Italian lira, or to any country’s currency, at any time, then, all they’ve done is created another medium of exchange. And to the extent that your increase in net worth exists as a result of your exchanges, you have income.

OJR: Is it taxable at the point when you convert it to dollars, or when you acquire it?

Kushner: It’s taxable when the transactions occur. It’s no different than if I convert my money into British pounds, and I put into a British stock brokerage account, and I trade stock in the United Kingdom, and I make money in that account, trading stock. Just because I’m trading it in sterling, doesn’t mean that I don’t have income.

Now, if you buy assets in those currencies, it’s when you sell the assets [that it’s taxable.] It’s what you realize in terms of US dollars Let’s say I buy an asset for £1 million, and the equivalent in US dollars is $750,000. Then I sell it at a £1 million. But when I sell it, the equivalent is $850,000 US because the exchange rate [fluctuates]. I’d have $100,000 of income, even though the sales price and the purchase price was the same.

Now, let’s say I make $1000 in a virtual transaction. If I use that $1000 to pay my office rent and telephone expense and my internet hosting costs – I’m using it for business expenses, I get to deduct those.

OJR: The tricky thing here, is that if you don’t convert your Linden dollars, what you’re buying and selling are virtual assets, which in the real world are just 1s and 0s.

Kushner: But it’s whatever the conversion rate is for those dollars after your own currency. So if it’s dollar for dollar, when you have a closed transaction, you have to measure the value of the transaction in US currency.

[As of Jan. 26, 2007, one US dollar was worth 267 Lindens, according to Reuters’ Second Life bureau.

OJR: You seem to have a very clear position, but it doesn’t seem to be something that is settled in the eyes of the IRS. So what should people who are active in places like Second Life be doing?

Kushner: We have to talk about the difference between US people and non-US people. The issues would most likely be – and I’m only guessing because I haven’t read much about this – transactions [by non-US people] that are occurring within the United States, and whether they should be taxed because they’re occurring in the United States. But they’re not getting taxed because the participants might be somebody sitting at a keyboard in another country.

OJR: It has to do with people in the United States, too.

Kushner: I think the difficulty there is that they probably have no way of tracing those transactions, and they’re probably trying to figure out how to set up some excise tax or something like that. That’s the only thing I can think of, because income tax rules are clear. You have income when you realize the accession to wealth. What that means is that if you sold something for more than you bought it for, no matter what the currency, no matter what the medium of exchange, you have income.

I think people have to aware that what they transact online with virtual dollars, they have to consider just as they would consider transacting business a real bank account. They have to account for the income, and account for the withdrawals for personal use

OJR: Do independent writers who are given equipment and software for review have to report it? (Last year, for example, Microsoft gave laptops with their new Vista operating system to several bloggers.)

Kushner: There are rules that cover that. They’re called the barter rules. If Microsoft sends a computer to somebody and says, “We’d like you write a review of this computer for us, and you can keep it for your trouble,” they’ve bartered that person’s services in exchange for providing them a piece of equipment. A person has income to the extent of the fair value of the piece of equipment that they’ve received.

OJR: Suppose they don’t put it that way. Suppose they say, “We hope you’ll consider writing a review?” But you don’t have to agree to do it.

Kushner: And if they don’t agree to do it, they can just keep the computer?

OJR: Right.

Kushner: And it’s unsolicited? That’s a good question. That depends on the existing relationship between the parties. There’s a couple of different things here.

Let’s pull apart the transaction where somebody gives you a book and says, “We’d like you to review the book.” What they could have done is say, “Here’s $25, go out and buy our book and please do a review for it.” You have $25 income that they’re paying you, then you have $25 expense for buying the book. You’re at zero for that.

A piece of equipment is a little bit different. On my books, when I receive this piece of equipment, I’m going to record “equipment: $500,” and I’m going to credit “income: $500.” Now, I can depreciate that equipment, I can expense that equipment under certain expensing elections. So, to a certain degree, I can come out at zero on that, as well.

The question is, do they have something they’re supposed to report? The answer to that is, “Yes.” They have bartering income.

They should probably be recording the value of that piece of equipment on one side [of the ledger] and either the expense of acquiring that equipment, to do the work that they had to do, value it a capital asset, probably. But somehow, it would become something that they ultimately would get a tax deduction for, in most circumstances.

OJR: I suppose your advice to any one who has questions would be to talk to their accountant.

Kushner: Yes. That’s absolutely necessary. We’ve had clients with Internet businesses, and let me tell you, some of them make substantial amounts of money, and the reason we to them as clients is because in their initial planning, they never thought they were going to make the money that they’re making. So their initial planning was off, in terms of the type of entity selected. There are consequences to entity selection in terms of self-employment taxes and things like that. So planning is key, especially if you are really doing it for profit and you have the potential to make a large profit.