"In contrast to previous economic eras,
intellectual property will be the primary source
of new wealth in the 21st century."
- Gregory A Piccionelli, 1989
 
AREAS OF PRACTICE
• Internet Matters
• Music & Other Entertainment Matters
• Intellectual Property Rights Enforcement
• Crowdfunding Matters
• Freedom of Expression Matters

Getting The Biggest Bang For Your Legal Buck (Part 1)

MARCH 2009

In the early 1990s the Soviet Union dissolved and the Cold War ended. In response to the collapse of Soviet communism, the United States was able to dramatically reduce military spending for the first time in decades. President Clinton referred to these savings as a “peace dividend”. Now that the Administration of George Bush and its religiously motivated anti-porn policies have joined the Soviet Union in the ash heap of history, many in the adult industry are looking for an analogous “peace dividend” hoping that the Obama administration will simply allow the adult entertainment industry to prosper in peace.

While I cannot tell you with certainty that the Obama administration will not bring any new federal obscenity prosecutions, I do not think that such cases or the enforcement of the federal record keeping and labeling laws (18 U.S.C. § 2257) are likely. The only possible exceptions I see would be the relatively unlikely initiation of one or a few new cases for which the Department of Justice has already expended substantial resources during the previous administration.

 

Additionally, given that recent changes to the 2257 regulations now allow adult entertainment enterprises to outsource record keeping to a third parties, a typical company might soon be able to realize tangible record keeping cost savings if specialized low cost record keeping companies enter the business as expected.

 

The relative removal of the threat of federal obscenity and 2257 prosecutions, and the diminution of record keeping costs, admittedly might not be a peace dividend on par with winning the Cold War. But for many adult entertainment businesses it is a welcome change of circumstances that might well be substantial enough to justify a serious reconsideration of how to best get the biggest bang for the bucks budgeted for legal expenses in what we all hope will be a new era of diminished federal anti-porn hostility.

 

Personally, I do believe that adult businesses have good reason to both celebrate and exploit the fact that the federal prosecutorial environment has likely changed for the better. Because of this, in the remainder of this article, and in several others that will be published throughout the year as a part of this series, we will be examining how the legal landscape is rapidly changing for adult entertainment companies and how they might best and most efficiently use their legal resources to address the new legal challenges and exploit the new economic opportunities of the post-Bush era.

 

Now I know that given the tough economic times, it may seem reasonable for some to suggest that if it’s true that the Obama Administration is not going to prosecute adult entertainment businesses, why not save money by just firing the lawyers entirely. While I am sure that suggestion is seriously appealing to some, particularly those who have been over-billed, over-frightened and underserved by their lawyers in the past, it really is not a good strategy for a number of reasons.

 

First, regarding the diminution of the threat of criminal prosecution, Obama’s election does very little to change the possibility of state obscenity prosecutions of adult entertainment companies. Also, the federal obscenity and 2257 laws, like all federal criminal laws, have fairly long statutes of limitation in which the government can file its case. Because of this, an obscenity or record keeping violation committed in the first months of the Obama administration could, for example, still be prosecuted five years down the road in the next presidential term. While, probably not a problem if Obama is reelected, consider the possibility that he is not and that he’s replaced by a cultural conservative like Mitt Romney or, heaven help us, Sarah Palin. Given their history of fierce opposition to pornography, a Department of Justice under Romney or Palin could make the Bush DOJ look like the AVN Awards Show by comparison.

 

Additionally, as more and more foreign countries crack down on adult content distributed via the Web, the risk of detention and foreign prosecutions is becoming a real concern for those in the business who travel to Asia and the Middle East.

 

Finally, while not criminal matters, during Obama’s term I expect to see a resurgence of Federal Trade Commission (“FTC”) actions against online adult companies regarding their use of false or deceptive trade practices. Our firm successfully handled many of the FTC actions filed against online adult companies during the Clinton years. And while not criminal in nature, I can unreservedly tell you that FTC actions have the potential to break the back of virtually any adult company because they carry the potential for the governmental imposition of virtually unlimited fines and forfeitures.

 

But more importantly perhaps, is the fact that in addition to preventing or addressing what are hopefully rare governmental actions against an adult entertainment company, a good lawyer can also provide invaluable day to day assistance to help an adult business more effectively negotiate deals, exploit its intellectual property and help keep the enterprise out of vexatious litigation.

 

Consequently, to obtain the full spectrum of benefits that working with a good attorney can provide to an adult entertainment company, substantial care should be taken in the evaluation and selection of the right law firm for your business. To help our readers in this regard, one of the future articles in this series will address the issues involved in finding and working with good adult entertainment counsel.

 

Post Bush Era Challenges and Opportunities for Adult Entertainment Businesses

 

Before an adult entertainment company can efficiently use its legal budget resources to effectively exploit the opportunities and meet the legal challenges of the Post-Bush era, a basic understanding about how the legal landscape is changing for typical adult entertainment businesses is helpful. As a brief introduction to some topics that will be discussed in later installments of this “Getting the Biggest Bang For Your Legal Buck” series, the following are a few of my observations regarding the industry’s current legal state of affairs and the direction that I think we are likely to see it go.

 

 

1. Obscenity and 2257 Prosecutions. As indicated above, I believe that the threat of federal obscenity or 2257 prosecutions has been seriously eroded with the election of President Obama. Moreover, over the next few years as adult content becomes more and more prevalent in virtually every community in the United States, and the constitutional attacks on the 2257 regulations by the Free Speech Coalition and others come to their conclusion, we may actually see the beginning of the end for both of these outmoded means of regulating constitutionally protected erotic materials. Anecdotally, there may already be at least one tangible result of what is perceived by some as a sea change in the regulatory environment. Specifically, over the last six months I have begun to observe that an increasing amount of investment capital seems to be flowing into adult businesses from non-adult industry sources than I have previously seen.

 

But while obscenity and 2257 prosecutions may be “on the ropes” they are by no means knocked out. And remember the issue of exposure to prosecution by a future anti-porn administration for violations occurring years previously will continue to exist into the foreseeable future. But assuming that an adult entertainment company takes steps to comply with existing laws, thanks to recent changes in the 2257 regulations, like the authorization to outsource record keeping, it may be time to consider shifting a company’s legal resources and focus to more effectively exploit new opportunities. For example non-adult industry investment and joint ventures with non-adult companies are two areas that are rapidly becoming a part of the new evolving landscape of the greater adult industry.

 

2. Federal Trade Commission Actions. It is likely that the Obama administration will, like the Clinton administration, favor civil actions brought by the FTC over federal criminal prosecutions as the principal means of regulating the adult entertainment industry. The FTC is charged with the task of enforcing both the FTC Act, which prohibits false and deceptive trade practices, and the CAN SPAM Act, which prohibits illegal bulk email transmissions. For the industry, this means that adult businesses, particularly those with an online component, should expeditiously review their business practices with an attorney experienced in FTC matters to determine their state of compliance with these laws. Among the current business practices employed by the industry that I think are the most likely to attract the FTC’s attention are misuse of cross sales and the deceptive use of auto-generated “flirt” emails and text messages that purport to be from real persons desiring to communicate with the recipient through an adult dating service. I will discuss FTC regulations applicable to adult businesses in greater detail a future article in this series.

 

3. Branding and Effective Exploitation of Trademarks and other Intellectual Property. As the threat of criminal prosecution of mainstream adult businesses wanes under the Obama administration, perhaps no area of the law is more important than intellectual property law. As one of the industry’s first “IP” attorneys, I can tell you that one of the biggest industry casualties that resulted from the prosecution fears engendered by Bush’s anti-porn policies has been the industry’s generalized neglect of its intellectual property rights. The adult entertainment industry, like its mainstream counterpart is nothing if not a producer of intellectual property. Because of this, the effective protection and exploitation of copyrights, trademark rights, patent rights and rights associated with the use of name and likeness are all critically important to a company’s bottom line. Nevertheless, because of the industry’s general failure to focus on legal issues pertaining to the protection and exploitation of intellectual property, especially in the area of copyrights, it now finds itself at the mercy of the rampant piracy that threatens the viability of the entire content producing sector of the industry.

 

Content piracy has now gone all but unchecked for so long that it is likely that the industry has now moved beyond its previous recordings-based business model to a new brand-centric model that uses content as loss leader material to market less piratable goods and services like adult toys, live video chat and adult dating. Because of this, the critically important intellectual property area for adult companies will be the legal stuff that brands are made of: trademarks.

 

Recently on an XBIZ Winter Conference panel about branding, my partner, and I am proud to say, famous, industry trademark attorney, Anna Vradenburgh, discussed how adult companies such as Digital Playground and LFP have been able to grow and prosper in these tough economic times through the effective use of licensing and other exploitation of their trademark brands. She also pointed out how virtually any adult company, whether through the trademarking of the title of a successful adult video series or the name of a contract star such as Jesse Jane®, a big part of the formula for success in the adult business is, and will increasingly be, effective branding and corresponding trademark protection and exploitation of that brand. The importance of branding for adult entertainment companies will also be the subject a future article in this series.

 

4. Contracts And The Art Of Deal Making. Artfully negotiated deals and well-drafted contracts are among the most efficient legal expenditures a company can make. Having negotiated and drafted literally hundreds of agreements, I can tell you that on numerous occasions it was the fact that my client had a good contract that allowed me to either prevent, face down, or prevail in, litigation. Since the subject of how a company can get the biggest bang for its legal buck is intrinsically tied to the issues of how to efficiently negotiate and paper its deals, we will return to this subject in an upcoming article.

 

5. Talent Issues, Sexual Harassment And The Wide Wide World Of Labor Law. Another likely benefit for the adult industry resulting from the end of the Bush era is the greater and more widespread acceptance of adult entertainment businesses as legitimate enterprises. But with increasing respectability there also comes a greater expectation of industry responsibility to act like “ordinary” businesses. One area in which the adult industry is already being called to task in this respect is the area of labor relations. From the increasing numbers of sexual harassment lawsuits filed against adult entertainment companies to the increased numbers of governmental actions against companies for failure to comply with worker safety laws pertaining to adult performers, challenging labor issues will be a part of the industry’s next era to be sure. This too will be a subject of a future column in this series.

 

6. Taxes and Bankruptcy. Despite what many people may think, adult businesses do fail. In fact, recently they have been failing in increasing numbers due to the triple whammy of a content glut, unchecked piracy and a cratering world economy. Add to this the fact that democratic administrations have traditionally been more aggressive in tax audits and collections than their republican counterparts and, well, spending a few shekels to get some good tax and/or bankruptcy advice should be a no-brainer. These subjects will also be addressed in an upcoming article in our Getting The Biggest Bang For Your Legal Buck series.

 

In sum, as hopefully every adult entertainment entrepreneur already knows, participating in the adult entertainment business will, for the foreseeable future, carry at least some risk of finding oneself on the wrong side of a complex government regulatory infrastructure erected (pun intended) by congress and state legislatures at the behest of the self-appointed morality police of the religious right. Because of this it would be foolish and irresponsible for me or any other adult entertainment attorney to suggest that because of Obama’s election adult entertainment businesses can simply ignore the stack of criminal laws put on the books to deter if not destroy commercial erotic expression. In fact, in a world where young teenage kids now create their own kiddy porn and share it amongst themselves and with the world via mobile phones, social networking sites, tube sites and torrents, one might argue that there is actually an increased risk that an adult entertainment entrepreneur could somehow get mixed up in such illegal activity.

 

But regardless of what twists and turns technology and our culture will bring to this wacky businesses, the one thing I can tell you is that the times they are ‘a changin’. The creation and consumption of porn has gone from shame in the closet to cool in the classroom. Go figure.

 

But because the industry is experiencing legal, technological, cultural and economic changes all at the same time, I think it is safe to say that a profound remaking of the business is currently underway. So much so that I am going to venture the prediction that future success in the adult entertainment business will not be so much a matter of selling copies of pornographic content as it will be the selling of the culture of pornography.

 

Regardless of how specifically the changes currently impacting the industry will ultimately work out, it is likely that the competition will be fierce, and victory will go to the swift, the creative, the cleaver and the efficient. Knowledge of the law and the right lawyer can be indispensable tools to help a company develop, magnify and exploit those talents and its other assets. In the coming months this column will endeavor to help you find and use those tools and get the biggest bang for your legal buck. Stay tuned.

 

Gregory A. Piccionelli, Esq. is an adult entertainment attorney. He can be reached at Piccionelli & Sarno at (310) 553-3375 or at greg@piccionellisarno.com.

 

 

 

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