Bluetooth Sig Inc v. U.S.A

• Decision Date: 08 July 2010
• Docket Number: No. 08-35312.,08-35312.
• Citation: 611 F.3d 617
• Parties: BLUETOOTH SIG INC., Plaintiff-Appellant,v.UNITED STATES of America, Defendant-Appellee.
• Court: U.S. Court of Appeals — Ninth Circuit

611 F.3d 617

BLUETOOTH SIG INC., Plaintiff-Appellant,v.UNITED STATES of America, Defendant-Appellee.

No. 08-35312.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 9, 2009.

Filed July 8, 2010.

K. Lee Marshall, Bryan Cave LLP, Saint Louis, MO, argued the cause for plaintiff-appellant and filed the briefs. Mary Gassmann Reichert, Thomas C. Walsh, and B. Derek Rose, Bryan Cave LLP, Saint Louis, MO, were on the briefs.

Bridget M. Rowan, Tax Division, Dep't of Justice, Washington, DC, argued the cause for the defendant-appellee and filed the brief. Kenneth L. Greene, Tax Division, Dep't of Justice, Washington, DC, was on the brief.

Appeal from the United States District Court for the Western District of Washington, John C. Coughenour, District Judge, Presiding. D.C. No. 2:05-cv-1778-JCC.

Before ROBERT R. BEEZER, DIARMUID F. O'SCANNLAIN, and ANDREW J. KLEINFELD, Circuit Judges.

O'SCANNLAIN, Circuit Judge:

We must decide whether an association which owns and markets a wireless networking protocol and trademark is entitled to exemption from federal income tax as a business league.

I

A

Bluetooth is a technological specification that allows for two-way wireless data transmission using radio frequencies between multiple electronic devices over short distances (typically less than thirty feet). In less technical (and hence less precise) jargon, it provides a language for electronic devices to talk to one another. Originally, it was primarily used to connect mobile phones and wireless headsets. It is now also used for wireless communication between a great variety of products, including personal computers, printers, digital cameras, keyboards, home audio equipment, and medical devices.

Ericsson Technology Licensing AB began to develop Bluetooth. It worked with a few other major manufacturers (Toshiba, IBM, Intel, and Nokia) in refining the Bluetooth technology in an association called Bluetooth Special Interest Group. Ericsson initially owned the Bluetooth name and patents. Subsequently, the technology companies caused the Special Interest Group to be incorporated as Bluetooth SIG (“SIG”) on November 13, 2000 as a Delaware nonprofit corporation to own the name and patents. Its stated purpose: “development and regulation of technical standards for the compatibility and interoperability of wireless products within a wireless personal network.”

Ericsson sold all of its rights to the Bluetooth name and patents to SIG on February 20, 2001. According to the terms of the transfer, Ericsson was reimbursed for some of its legal expenses and received the right to “eighty percent (80%) of all Net e-Commerce Revenue ... up to a maximum aggregate of all such payments of thirty million United States dollars” as consideration. The organizers of SIG had some interest-it is not clear how much-in running an online store at which consumers could buy Bluetooth-compatible devices. For whatever reason, this did not come about, and thus there was no “e-Commerce Revenue.”

B

SIG's operations fall into four major categories: specification development, marketing, trademark enforcement, and certification/licensing.¹

First, SIG develops, refines, and adapts the Bluetooth specification. SIG acts as a forum through which different technology manufacturers collaborate in the development process. It does this through meetings, conferences, working groups, and by sharing research results. As a result, the Bluetooth specification is constantly evolving.

Second, SIG engages in marketing, public relations, and other promotional activities designed to “influence the acceptance, understanding, and use of Bluetooth enabled products.” It conducts market research, sponsors trade fairs, and publishes handouts and flyers for trade shows and other events. It also publishes newsletters for members in order to keep them informed of the organization's activities.

Third, SIG enforces its trademark both by ensuring that its members conform to the “Bluetooth Brand Book” and by detecting unauthorized use of the Bluetooth trademark. It employs trademark counsel to protect its mark both in the United States and around the globe. According to SIG's marketing manager, unauthorized users were encouraged to become part of SIG and have their products certified. It does not appear that any infringement suits have been filed. SIG works to have infringing products seized and destroyed if they pass through U.S. customs.

Fourth, SIG operates a certification and listing program. The organization does not directly provide product testing services to its members. Until 2006, a member desiring certification needed to submit its product to a Bluetooth Qualification Testing Facility. The results of the testing would, in turn, be submitted to a Bluetooth Qualification Board for review. The boards and testing facilities were independent entities, but had to be approved by SIG and pay an annual fee. The fees charged by the testing facilities varied and were unregulated by SIG. Once the product was certified by a board, its manufacturer could use the Bluetooth trademark on the product by paying a listing fee. The product would also be listed as Bluetooth-compliant on the SIG website. This process needed to be repeated for each product that used the Bluetooth specification.²

C

As of October 2005, SIG had 4,148 members, all independent businesses. SIG has three membership classes: Adopters, Associates, and Promoters. Adopters pay no annual fee, but pay a listing fee of $10,000 per product.

Associates pay an annual fee of either $7,500 or $35,000 depending on the size of the manufacturer. They pay a reduced listing fee of $5,000 per product and have the right to participate in the continuing development of the Bluetooth specification. They receive certain marketing and promotional opportunities that may not be available to Adopters.³

Promoters pay no annual fee but enjoy the same benefits as Associates, plus a seat on the board of directors. Each of the original five companies involved with the technology has Promoter status. New applicants must be approved by the board of directors and pay a one-time fee in an amount set by the board. As of the date of the district court's ruling, only three additional members had been permitted to join the Promoter group.

D

Between its incorporation and the end of 2000, SIG realized $309,180 in income with $146,985 in expenses. At the end of 2001, it had about $4 million in assets against about $2 million in liabilities (mostly deferred revenue). Its 2001 annual income of about $5.3 million came from four sources: membership fees (about $2.8 million, or 52% of total income); “brand management” ⁴ (about $1.8 million, or 34%), license fees (about $50,000, or less than 0.1%), and conferences/events (about $700,000, or 13%). Expenses of about $4 million were broken down into “brand management” (about $700,000, or 18% of total expenses), “development and core services” (about $500,000, or 13%), sales and marketing (slightly less than $500,000, or 11%), and “general and administrative” expenses (about $2.3 million dollars, or 59%). Net income was thus about $1.3 million.

At the end of 2002, SIG's assets had grown to about $5.6 million, mostly in cash and investments. Liabilities were less than two million dollars, mostly in deferred revenue. Revenues of over $6.7 million were primarily derived from membership fees (about $3 million, or 44%) and product registration fees (about $2.7 million, or 40%). Events brought in almost a million dollars in revenues. Major expenses included events (which cost about $800,000), about $600,000 each for “development and core services” and marketing/promotion, plus around $800,000 for legal fees. The bulk of the remainder was apparently staff salaries (management services and wages/contracts services). Total expenses were almost five million dollars. Net assets increased by about $1.8 million in 2002.

E

In 2002, SIG applied for an exemption under I.R.C. § 501(c)(6), which exempts business leagues from taxation. In 2004, the IRS denied the application, stating:

Your primary purpose and activity is to promote a single brand of inter-connection technology, rather than the improvement of business conditions of one or more lines of business. In addition, one of your substantial activities consists of providing particular services to individual persons.

SIG responded by paying the assessed tax and penalties for 2000, 2001, and 2002 (about $900,000) and then filing administrative refund requests for those years. After waiting the required time period and receiving no response, it then sued in the Western District of Washington. The complaint sought a refund of income tax, penalties, additions, and interest paid for 2000-2002 under 28 U.S.C. § 1346(a) and I.R.C. § 7422.

The district court granted summary judgment for the United States. SIG timely appeals.

II

The district court reviewed the Commissioner's decision to deny § 501(c)(6) status de novo. Our review of the district court decision is also de novo, because the existence of a business league is a mixed question of law and fact. See Eng'rs Club of S.F. v. United States, 791 F.2d 686, 688-89 (9th Cir.1986).⁵

Section 501(c)(6) of the Internal Revenue Code exempts from income tax

[b]usiness leagues, chambers of commerce, realestate boards, boards of trade, or professional football leagues (whether or not administering a pension fund for football players), not organized for profit and no part of the net earnings of which inures to the benefit of any private shareholder or individual.

The operative Treasury regulation, which “merits serious deference,” see

National Muffler Dealers Ass'n v. United States, 440 U.S. 472, 484, 99 S.Ct. 1304, 59 L.Ed.2d 519 (1979), states that

[a] business league is an association of persons having some common business interest, the purpose of which is to promote such common interest and not to engage in a regular business of a kind ordinarily

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