Blog » IP Licensing Law » Prinz Law Office

If your company is like most U.S. businesses, it has been severely impacted by the ongoing coronavirus crisis and the stay-at-home orders that have been mandated across the country. Legislation was recently passed by Congress and signed into law that may make available disaster relief to your company: the Coronavirus Aid, Relief, and Economic Security Act (the “CARES” Act).

The CARES Act established a new business loan program, the Paycheck Protection Loan Program (“PPP”), which will enable a U.S. company qualifying as a small business to receive a loan in the amount of 2.5 times the company’s monthly payroll costs. As part of the PPP, companies may be eligible for loan forgiveness on any loan proceeds applied during the eight-week period immediately following receipt of the loan towards payroll, rent, utilities, and interest on mortgage and debt obligations incurred prior to February 15, 2020, provided that all employees are kept on the payroll for the eight week period and the documentation verifying the use is submitted to the lender. Any loan proceeds that are not forgiven will have a maturity of 2 years and an interest rate of 1%. The program is described in more detail on this weblink. The interim regulations describing how the program will work are linked here and the FAQ addressing questions and answers is linked here.

To participate in this loan program, your company should submit an application through your primary bank. Alternatively, many online and non-bank business lenders are also participating in the loan program, so working through such a lender may be an available option.

In addition, your company may be eligible for an economic injury disaster loan advance of up to $10,000. Originally these advances were supposed to be available within 3 days of submitting an application; however, this now been revised to remove a deadline. Advances should be requested directly through the SBA website at this link. The loan advance will not have to be repaid but the amount may be deducted from a subsequently obtained PPP loan.

It is anticipated that the funds allocated to this program are going to run out before all the applications are processed, so companies are being encouraged to submit applications as soon as possible. It is unfortunately not clear how long businesses will have to wait to receive the aid. To date, the Silicon Valley IP Licensing Law Blog is only aware of one approved business and has heard of no business actually receiving any aid through these programs.

Silicon Valley IP Licensing Law Blog Attorney Kristie Prinz to Present Webinar on “Best Practices for Negotiating SaaS Contracts & Managing SaaS Customer Relationships”

The Prinz Law Office Announces Opening of San Francisco Office

Silicon Valley IP Licensing Law Blog’s Kristie Prinz to Speak on “Best Practices for Drafting Master Service Agreements & Managing the Service Relationship”

Silicon Valley IP Licensing Law Blog’s Kristie Prinz to Speak on “Best Practices for Drafting SaaS Contracts & Managing SaaS Customer Relationships”

New Expansion of CFIUS Powers Concerns Silicon Valley Dealmakers

The recent expansion of powers of the Committee of Foreign Investment in the United States (also known as “CFIUS”) by the passage of The Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”) has many Silicon Valley dealmakers concerned about the challenges CFIUS may pose going forward for business transactions in the technology industry. As you may know, the legislation significantly expands the powers of CFIUS to conduct national security reviews of pending business deals and imposes penalties on businesses for compliance failures, which will clearly complicate the ability of U.S. businesses in Silicon Valley to close transactions involving foreign investment. For more information on the key of FIRRMA and the national security review process which will be in place going forward, check out the U.S. Treasury website established to educate the public on the issue.

What types of business transactions are going to be affected by the new rules? Now, not only will CFIUS have the power to review proposed mergers, acquisitions, or takeovers that could result in foreign control of a U.S. business, but CFIUS will also be able to conduct national security reviews of the following deals:

A purchase, lease, or concession by or to a foreign person of real estate located in proximity to significant government facilities.
“Other Investments” by a foreign person in any unaffiliated U.S. business that owns, operates, manufactures, supplies, or services critical infrastructure; produces, designs, tests manufactures, fabricates, or develops one or more critical technologies; or maintains or collects sensitive personal data of U.S. citizens that may be exploited in a manner that threatens national security.
Any change in rights that results in foreign control of a U.S. business or an “other investment” as defined above.
Any transaction, transfer, agreement, or arrange, the structure of which is intended to evade the review of the committee.

As you might expect, the second point is what is perhaps most concerning to many in Silicon Valley. Of particular concern, is how two terms are being defined: “Other Investments” and “critical technologies.” FIRMMA defines “Other Investments” as “any investment, direct or indirect, by a foreign person in a U.S. business” that affords the foreign person

access to any material nonpublic technical information in possession of the United States business
membership or observer rights on the board of directors or equivalent governing body of the U.S. business, or the right to nominate an individual to a position on the board of directors or equivalent voting body, or any involvement other than the voting shares in the substantive decision making of the U.S. business;
the use, development, acquisition, safekeeping, or release of sensitive personal data of U.S. citizens maintained or collected by the U.S. business;
the use, development, acquisition, or release of critical technologies;
the management, operation, manufacture, or supply of critical infrastructure.

FIRRMA defines “critical technologies” to include:

Defense articles or defense services;
Items included on the Commerce Control List and controlled pursuant to multilateral regimes, including for reasons relating to national security, chemical and biological weapons proliferation, nuclear proliferation, or missile technology, or for reasons relating to regional stability or surreptitious listening;
Specially designed and prepared nuclear equipment, parts and components, materials, software, and technology covered by part 810 of title 10, Code of Federal Regulations (relating to assistance of foreign atomic energy activities);
Nuclear facilities, equipment, and material equipment, and material covered by part 110 of title 10, Code of Federal Regulations (relating to export and import of nuclear equipment and material);
Select agents and toxins covered by part 331 of title 7, Code of Federal Regulations, part 121 of title 9 of such Code, or part 73 of title 42 of such code; and
Emerging and foundational technologies controlled pursuant to section 1758 of the Export Control Reform Act of 2018.

While the full impact of the law is still to be determined, the interim rules already establish that transactions are going to be subject to review in a variety of industries represented by Silicon Valley, including but not limited to:

computer storage device manufacturing;
electronic computer manufacturing;
optical instrument and lens manufacturing;
primary battery manufacturing
wireless communications equipment manufacturing
research and development in nanotechnology
research and development in biotechnology;
semiconductor and related device manufacturing;
semiconductor machinery manufacturing;
storage battery manufacturing; and
telephone apparatus manufacturing.

As our affiliate blog, The Silicon Valley Software Law Blog, also noted in a recent post, the software industry is also potentially going to be impacted.

While the implications of this new expansion of national security review powers are still unknown, the concern is clearly that many technology business deals are going to be subject to more federal compliance obligations going forward when the deals involve any foreign investment, that these compliance obligations could potentially slow down or even derail the closing of deals, and that the compliance obligations may subject Silicon Valley companies to significant fines up to the amount of the deal if they fail to meet these new obligations. The concern for licensing deals and IP transactions generally is that CFIUS is going to impose new barriers to closing these types of deals.

The Silicon Valley IP Licensing Law Blog will continue to follow the developments regarding this law and how it is applied and interpreted to Silicon Valley companies going forward.

Silicon Valley IP Licensing Law Blog’s Kristie Prinz to Speak on “Negotiating SaaS Agreements” for Clear Law Institute

Silicon Valley IP Licensing Law Blog Sponsor Announces New “Subscription Model” Option for Legal Clients

Silicon Valley IP Licensing Law Blog’s Kristie Prinz to Present Webinar on “Negotiating SaaS Agreements: Drafting Key Contract Provisions, Protecting Customer and Vendor Interests”

Supreme Court Decision Sides with Silicon Valley over Legality of Inter Partes Review (“IPR”)

Silicon Valley is applauding a Supreme Court ruling announced early today which held 7-2 that inter parte reviews (“IPRs”) do not violate the US Constitution and that the Patent Trial and Appeal Board has the authority to invalidate patents. A copy of the decision is linked here.

The “inter partes review” process was enacted in 2011 by the Leahy-Smith America Invents Act, 35 U.S.C. Section 100, which was widely referred to as “Patent Reform”. Pursuant to the process, the United States Patent and Trademark Office (“USPTO”) was authorized to reconsider and cancel issued patent claims.

As Reuters reports, inter partes review was intended to “handle the perceived high number of flimsy patents issued by the patent office in prior years.” Since 2011, Reuters reports that the Patent Trial and Appeal Board has “cancelled all or part of a patent in eighty percent (80%) of its final decisions.” For this reason, IPR has become a favorite tool of Silicon Valley technology companies in the fight against patent trolls, as IPR can resolve patent infringement disputes without the expense of a trial.

At issue in the present case was whether actions to revoke a patent must be tried in an Article III court before a jury.

The case arose out of a patent infringement suit over an oil industry patent. Petitioner Oil States Energy, Services, LLC, was the holder of a patent relating to technology for protecting wellhead equipment used in hydraulic fracturing and sued Greene’s Energy Group, LLC for patent infringement. In response to the suit, Green’s Energy challenged the validity of the patent in District Court and petitioned the USPTO for inter partes review. The District Court issued a decision favoring Oil States while the USPTO issued a decision that Oil States’ claims were unpatentable. Oil States appealed and challenged the constitutionality of inter partes review on the basis that actions to revoke a patent must be tried in an Article III court before a jury. The Federal Circuit affirmed the USPTO’s decision.

In the today’s ruling, the Court held that the determination to grant a patent is a matter involving public rights that “need not be adjudicated in [an] Article III court” and that inter partes review “involves the same basic matter as the grant of a patent” and therefore similarly “falls on the public-rights side of the line.” According to the Court, the fact that inter partes review occurs after the patent has issued “does not make a difference.”

Justice Thomas delivered the opinion and was joined by Justices Kennedy, Ginsburg, Breyer, Alito, Sotomayor and Kagan. Justices Gorsuch and Roberts dissented.

For more in-depth commentary on this decision, check out the post by The Scotus Blog on the ruling.

As a Silicon Valley technology lawyer who practices in the patent licensing space, I cannot help but be pleased with this decision. Not only is it good news from a business perspective for Silicon Valley technology companies, who will be able to continue to rely on the IPR process to challenge weak patents as a defensive measure to patent enforcement efforts by patent trolls, but it is good news from an IP perspective as it retains a process in place for the USPTO to revisit the patents it has issued. While I have never been involved with patent prosecution, I do handle trademark registrations, which are also issued by the USPTO, and in the years I have been filing trademarks, I have seen numerous trademarks that, in my opinion, should never have been granted under the standards that the USPTO normally exercises today. My expectation as a practitioner is that if I am seeing these issues on the trademark side, the same issues have to be arising on the patent side, which is what I hear from practitioners. I think Congress was right to enact legislation to enable this type of review to be performed outside the courtroom, and I applaud the Supreme Court’s decision today that this type of review is constitutional.

News Update on Recent Webcast by Kristie Prinz: “Drafting Software Agreements for ASP & SaaS Hosting”

Silicon Valley IP Licensing Law Blog’s Kristie Prinz to Speak on “Negotiating SaaS Agreements: Drafting Key Contract Provisions, Protecting Customer and Vendor Interests”

Software Licenses: How Do You Recognize a Poorly Written Contract?

Silicon Valley IP Licensing Law Blog’s Kristie Prinz to Speak on “Negotiating SaaS Agreements: Drafting Key Contract Provisions, Protecting Customer and Vendor Interests”

Silicon Valley IP Licensing Law Blog’s Kristie Prinz to Present Webinar on “Drafting Software Hosting Agreements: Service Availability, Performance, Data Security, and Other Key Provisions”

Silicon Valley IP Licensing Law Blog’s Kristie Prinz to Speak on “Negotiating Software As a Service Contracts”

Software Contracts Lawyer Kristie Prinz to Speak at Webinar on “Drafting SaaS Contracts” Sponsored by The Prinz Law Office

Software Lawyer Kristie Prinz to be featured speaker for “Negotiating Software as a Service Contracts” Webinar Hosted by Clear Law Institute

Silicon Valley IP Licensing Law Blog Author Kristie Prinz to Present Webinar on “Negotiating SaaS Agreements: Drafting Key Contract Provisions, Protecting Customer and Vendor Interests”

Controversial Ninth Circuit Ruling May Limit the Availability of the DMCA Safe Harbor for Websites Relying on Moderators

A controversial ruling by the Ninth Circuit Court of Appeals was issued last week, which has the potential to discourage websites from relying on moderators for user-generated content going forward.

In the case of Mavrix Photographs LLC v. LiveJournal, Inc., No. 14-56596 (9th Cir. filed April 7, 2017), the Court ruled that agency law applied to the analysis of whether website content was posted at the direction of users, and that the DMCA safe harbor under Section 512(c) would only apply if the website could prove that it lacked both actual and “red-flag” knowledge of the infringements. The Court defined “red-flag” knowledge as being whether a reasonable person would objectively know of the infringements, and said that if the DMCA safe harbor did in fact apply, the website would have to show that it did not financially benefit for the infringements that it had the right to control. The Court remanded the case back to the lower court to make findings consistent with its ruling.

The Ninth Circuit’s ruling is controversial because the Court deemed that the availability of the DMCA safe harbor could be affected merely by the use of moderators on the platform. (See this blogpost by the Electronic Frontier Foundation “EFF”). The EFF argued that the test the Court established would put the analysis in front of a jury making a website’s reliance on the safe harbor significantly more expensive.

Also, the ruling is controversial due to its interpretation of precedent. According to one commentator, Annemarie Bridy at The Center for Internet and Society at Stanford Law School, the Court confused two separate sections of the DMCA: the part applying to network providers and the part applying to online service providers, which resulted in a misapplication of the Court’s own precedent.

The overall consensus opinion appears to be that this ruling will encourage online websites going forward to do less moderation of user-generated content, since the act of moderating the content could cause an online website to lose its safe harbor protections. According to a commentary published by Fenwick & West, this ruling also changes the best practice advice in the context of litigation so that an online website may be best advised not to invoke the safe harbor at all. Techdirt argues that this ruling is going to “backfire” on Hollywood, which generally is pro-moderation but takes a stance against the safe harbors, since the undermining of the safe harbor ironically is anticipated to discourage moderation altogether.

The bottom line is that this ruling seems to change the existing analysis for the availability of the DCMA safe harbor, and this change to existing precedent is noteworthy for any online platform which permits the posting of user content that could be infringing.

SaaS Contracts: Is Your SaaS Contract Extending Your Sales Cycle?

Passage of Defend Trade Secrets Act Provides Silicon Valley Companies New Trade Secret Enforcement Tools

When Congress passed the Defend Trade Secrets Act last week, legislators significantly expanded the tools available to Silicon Valley companies for addressing acts of trade secret misappropriation. Previously, trade secrets law had been largely a matter of state law, and U.S. companies seeking to file a claim for trade secrets misappropriation had been limited to initiating a claim under the Uniform Trade Secrets Act, a uniform law adopted in all but two states. With the passage of the new federal law, U. S. companies will not have the right to file trade secret misappropriation claims under federal law in federal court, provided that the trade secret was related to a product or service used in or intended for use in interstate or foreign commerce. A copy of the text of the new law is available at the following link: https://www.congress.gov/bill/114th-congress/senate-bill/1890/text.

Obviously, the enactment of a federal trade secrets law alongside existing federal copyright, trademark and patent laws is a significant development that stands to broadly impact all Silicon valley companies. However, what will the specific impact of the law be, beyond just the fact that companies will now be able to file trade secret cases in federal court?

According to The National Law Review, a key impact that will arise as a result of the enactment of the new law is that that litigants will now have more certainty as to the potential outcome of a case brought under the federal law, whereas previously litigants had to deal with the uncertainty of potentially divergent rulings pursuant to fifty (50) state jurisdictions. The National Law Review also identified another benefit: the definition of what constitutes a trade secret under the federal law may be broader than the definition adopted by the Uniform Trade Secrets Act, so the federal law may provide protection to a wider range of information.

In addition, a new feature of the federal law enables courts to issue orders for the seize of property in extraordinary circumstances “to prevent the propagation or dissemination of the trade secret that is the subject of the action.” According to The National Law Review, this new tool goes beyond what state trade secret laws provided previously. The law provides that the test to grant such an order will be as follows:

(I) an order issued pursuant to Rule 65 of the Federal Rules of Civil Procedure or another form of equitable relief would be inadequate. . . . because the party to which the order would be issued would evade, avoid, or otherwise not comply with such an order;

(II) an immediate and irreparable injury will occur if such seizure is not ordered;

(III) the harm to the applicant of denying the application outweighs the harm to the legitimate interests of the person against whom seizure would be ordered of granting the application and substantially outweighs the harm to any third parties who may be harmed by such seizure;

(IV) the applicant is likely to succeed in showing that–

(aa) the information is a trade secret; and

(bb) the person against whom seizure would be ordered–

(AA) misappropriated the trade secret of the applicant by improper means; or

(BB) conspired to use improper means to misappropriate the trade secret of the applicant;

(V) the person against whom seizure would be ordered has actual possession of —

(aa) the trade secret; and

(bb) any property to be seize;

(VI) the application describes with reasonable particularity the matter to be seized and, to the extent reasonable under the circumstances, identifies the location where the matter is to be seized;

(VII) the person against whom seizure would be ordered, or persons acting in concert with such person, would destroy, move, hide, or otherwise make such matter inaccessible to the court, if the applicant were to proceed on notice to such person; and

(VIII) the applicant has not publicized the requested seizure.

Also unique to the federal law is a provision which protects whistleblowers and provides immunity from criminal or civil liability for confidential disclosure of a trade secret to the government or in a court filing if made “solely for the purpose of reporting or investigating a suspected violation of the law” or if “made in a complaint or other document filed in a lawsuit other other proceeding, if such filing is made under seal.” The federal law also specifically provides that an employee who files a lawsuit claiming retaliation by his or her employer for reporting a suspected violation of law may disclose the trade secret to his or her attorney and use the trade secret information in the court proceeding, providing the disclosure is made under seal and is not otherwise disclosed except pursuant to court order.

Employers should take note that they are now required to provide notice of this immunity in any contract or agreement with an employee that governs the use of a trade secret or other confidential information. Failure to comply with this requirement will preclude an employer from being awarded exemplary damages or attorneys fees against an employee to whom notice was not provided. Thus, employers should review employee agreements and make appropriate changes to address this new notice requirement.

The Defend Trade Secrets Act does not preempt state trade secret laws, so plaintiffs now have the choice of whether to pursue relief under a state or federal law. So, a key change arising from the passage of the legislation is that plaintiffs now have options.

How significant is this legislation? According to Professor Eric Goldman of Santa Clara University in his column for Forbes, it is the “single most important intellectual property development since Congress enacted the America Invents Act in 2011.” I suspect that many patent attorneys might disagree with his assertion, as there is a prevailing view among most Silicon Valley patent attorneys I know that the Supreme Court’s Alice Decision should be afforded that distinction. However, I would concur with Professor Goldman that this is at least the most significant intellectual property legislation enacted by Congress since the American Invents Act.

Certainly, Silicon Valley companies should be pleased that Congress has seen fit to enhance the previously existing tools in their arsenal to protect their sensitive corporate trade secrets from misappropriation. Trade secret misappropriation has always been perhaps the single biggest legal concern of all Silicon Valley companies, given the innovation coming out of Silicon Valley at any given time and the “migration” of employees from one Silicon Valley company to the next. The enactment of a federal law to address these concerns makes a powerful statement about the protection of trade secrets that was never before achieved to quite the same degree. That change alone is of huge significance to Silicon Valley.

Silicon Valley IP Licensing Law Blog Author Kristie Prinz to Speak at Upcoming Webinar on “Negotiating Software as a Service Contracts”

The Prinz Law Office Launches New Copyright Law Meetup Group

Supreme Court Rules Patent Invalidity is Not a Defense to Induced Patent Infringement Claim in Commil USA Case Against Cisco Systems

The U.S. Supreme Court has issued an opinion today in the case of Commil USA v. Cisco Systems finding that patent invalidity is no defense to a claim of induced infringement.

In making its determination, the Court determined that infringement and invalidity appeared in two distinct parts of the Patent Act: the right to be free from infringement appeared in Part III of the Patent Act which addresses “Patents and Protection of Patent Rights” and what constitutes a valid patent appears in Part II of the Patent Act which addresses “Patentability of Inventions and Grants of Patents.” The Court also noted that noninfringement and invalidity are two separate defenses that can be raised independently of one another or together.

Also relevant to the Court’s decision was its determination that allowing the defense of patent invalidity would undermine the longstanding presumption that patents are “presumed valid,” since a defendant would be able to win an induced infringement case simply by proving that he or she held a reasonable belief that patent at issue was invalid.

The Court also cited “practical reasons not to create a defense based on a good-faith belief in invalidity,” noting that a defendant who believed that a patent that a patent holder was attempting to enforce against him was invalid was not left without recourse, and had the option of filing a declaratory judgment, seeking inter partes review of the patent at the Patent Trial and Appeal Board, seeking ex parte reexamination of the patent by the Patent and Trademark Office (the “PTO”), and even of raising the affirmative defense of patent invalidity. The majority deemed it relevant that a defendant would not be found liable for infringing an invalid patent.

Although acknowledging the truths that “an invalid patent cannot be infringed” and that “someone cannot be induced to infringe an invalid patent”, the majority still opined that the distinction is that “invalidity is not a defense to infringement; it is a defense to liability.”

In his dissenting opinion, Justice Scalia rejected the rationale of the majority, asserting that “Only valid patents confer this right to exclusivity. . . . It follows, as night the day, only valid patents can be infringed. To talk of infringing an invalid patent is to talk nonsense.”

Justice Scalia also dismissed the arguments of the majority as “unpersuasive.” Regarding the majority’s argument that the Patent Act treats infringement and validity as distinct issues, Justice Scalia asserted that this was “true” but “irrelevant.” Justice Scalia similarly dismissed the argument that the statutory presumption of validity would be diminished by finding a good faith belief in invalidity to be a defense to induced infringement, distinguishing avoidance of liability for a third party’s infringement of a valid patent from presumed validity of a valid patent. As to the Court’s assertion that “invalidity is not a defense to infringement, it is a defense to liability,” Justice Scalia opined that the statement itself is “an assertion, not an argument” and asked “How is it possible to interfere with rights that do not exist?” Finally, as to what Justice Scalia regards as the majority’s “weakest” argument–the practicality argument–Justice Scalia dismissed this majority argument on the strict interpretation grounds, asserting that the Court’s job is “to interpret the Patent Act” and to decide what it provides, obviously implying that this this is not what the majority did in this particular case.

What does this holding mean for Silicon Valley companies?

Well, I would argue that the ruling may have the effect of motivating more companies to challenge the validity of patents they believe to be invalid at an earlier stage than they’ve previously done, if there is any possibility that they could be deemed to be infringing. Also, the decision may prompt more companies to develop around weak but potentially problematic patents, where the companies might have not found a workaround previously. Finally, the ruling may have the effect of simply making the possibility of licensing a weak patent more attractive than it has been to date in cases where a company believes that a patent that it will potentially infringe is invalid.

In light of the very procedural “in the weeds” nature of the ruling, though, its most significant impact may be simply on how patent infringement litigation defense is conducted going forward, as the corporate calculations on how to deal with weak third party patents that could be enforced against them may not really change that much as a result of this ruling from what they were previously. Companies have long had to decide how to proceed with product development when a weak third party patent is identified that they potentially could be deemed to infringe, and the calculations of whether or not the patent invalidity defense will be available in light of an induced infringement claim may not have a significant impact on a company’s overall decisionmaking processes.

Taking Time to “Date” Before Pursuing an IP Acquisition “Marriage”

Lately many of my technology clients have been negotiating deals involving the purchase or sale intellectual property, so this Forbes story on choosing the right acquisition partner caught my attention. The author carried an interesting analogy about dating through the piece, and listed a number of considerations that a business should have before pursuing either side of an acquisition. I am in complete agreement with the author that parties should be cautious in pursuing these kinds of transactions before they decide to seriously engage in talks to close an IP deal. It has been my experience that parties are always extremely eager to close a deal while it is still “hot,” and they aren’t necessarily prepared for the issues that arise in the negotiation itself–and even less prepared for what comes afterwards.

Taking the marriage analogy one step further, one issue I have seen come up multiple times is simply the issue of cold feet. When you talk to the proposed partner, how committed does that party really seem to be about doing the deal? In the software internet technology space, it’s not unusual to see deals on the table with a company that is still being managed entirely by the original founder, where that founder has spent years of his life developing and growing precisely what the prospective partner is looking to acquire. While this founder may want at some level to “cash out,” is he or she really ready to give up control over what he or she has built? If the prospective partner starts calling the negotiations off, making take it or leave it demands, and engaging in other behavior suggesting that he or she might not be easy to close a deal with, you may very well have a situation where the party on the other side of the table is simply experiencing cold feet. Contrary to what many clients think, we attorneys cannot force anyone to close a transaction, or to be cooperative after the deal is closed. If your prospective partner is not ready to take the next step, it may be time to move on to the next candidate.

Another issue to consider is the quality of the intellectual property that is under consideration for purchase and the quality of the extent that the seller was truly prepared to do the deal. Is the seller truly prepared to do the transaction? It’s not unusual for clients to tell me as IP transactions counsel that they want to “keep it simple” and do minimal due diligence, but it’s not unusual at all to find if appropriate due diligence is conducted that the intellectual property at the heart of the deal being considered has not been properly protected–or even acquired. The copyrights may very well still be owned by the original developer rather than the company you are buying them from, the trademarks may never have been registered or a search even conducted, the patents may not have been filed by competent patent counsel, and the past agreements relating to the IP may have been drafted and negotiated by someone with minimal IP transactions legal expertise. So, it’s important to fully consider whether or not the IP is truly ready to be acquired, or if the seller needs to have some time to do some clean-up with the help of one or more IP lawyers? Is the buyer okay with purchasing assets that require significant clean-up and may have enforcement issues? Or is the buyer looking for a partner whose assets are in perfect shape?

Another issue: the financial considerations that go along with walking down the aisle, so to speak. You may have agreed to the price of the wedding, but are you really and truly in agreement on when and how the price will be paid? More often than not, serious disagreement arises over the structuring of whatever consideration has been agreed on. Sometimes this is because the prospective “suitor” really doesn’t have the cash necessary to pay the consideration agreed on, sometimes this is because the acquirer has particular tax requirements for the deal, and sometimes this is because the acquirer wants to procure certain services or other performance out of the founder before paying the bulk of the consideration. In a recent deal, there was even an issue with the non-cash consideration actually being transferable as agreed upon. Obviously, for both parties to walk away happy, they need to be walking away with what they are expecting to get out of the deal.

In my Silicon Valley industry niche, there is generally an expectation that the key IP developers are going to continue on with the acquirer after the big wedding date. In my experience, while the parties are almost always adamant before the deal closes that this type of ongoing relationship will go smoothly, it rarely does. In fact, in many cases the ink on the paper barely dries before the fighting and legal threats start. These problems are often foreseeable. If your visions for the business diverge and are in no way compatible, or if you have a strong aversion to one another or problems communicating before the deal closes, is it really going to work so smoothly after the money has been exchanged? Or are bigger headaches, stress, and tension in the partners’ future? Partners are rarely honest about their plans and expectations in the negotiation stage, which doesn’t do much to head off problems after the deal is closed.

The bottom line is that before you rush into closing an IP deal with a potential partner, it does make sense to conduct your due diligence on the partner just like you would do before rushing into making any other major life decision, so that you can make sure that it is really going to be the right fit, and to seriously consider the red flags that your IP deal counsel communicates to you before the deal is closed. I have seen my share of clients who regretted the “marriage” almost immediately after they walked down the aisle, which is never a good point from which to start a new “life” with a partner. The dating and marriage analogy are absolutely good frameworks by which to consider the compatibility of any two parties for moving forward.

Should You Follow the Advice of this Start-up if Approached with a Demand Letter by a So-Called ‘Patent Troll’?

Tech Crunch published an interesting commentary today written by Chris Hulls, Chief Executive Officer of Life360, in which Mr. Hulls shares his story of taking on a patent troll and urges other start-ups to do the same.

For those of you who are unfamiliar with the Life360 patent case, Ars Technica recently published an article on the case, which provided some additional background on Life360’s patent infringement fight against Advanced Ground Information Systems (“AGIS”). Apparently Life360 received a demand letter after closing a third round of funding for $50 million demanding that Life360 license the AGIS patents, and issued a rather colorful response to the demand letter, which fast-tracked the matter into court.

Mr. Hulls’ commentary is striking on a variety of levels. His story itself is unusual, as it is not everyday that you hear of start-ups making the gutsy move to fight a patent infringement case. Of course, even rarer is the occasion when a start-up makes such a decision and achieves a good outcome as a result of the fight. But beyond the facts themselves, Mr. Hull’s colorful language and editorializing of the case after the fact is noteworthy.

The advice itself that Mr. Hulls offers to start-ups can be summarized in three points: (a) publicly call out the “troll or predatory law firm”; (b) pool resources with other start-ups as a defensive strategy; and (c) commit to the fight without backing down.

While I think this particular story, as well as the takeaway advice provided by Mr. Hulls, merits discussion, and certainly should be viewed by patent holders who might fall in the category of constituting a ‘patent troll’ with concern, I would urge start-ups in Silicon Valley and elsewhere to be cautious in following in Mr. Hulls’ footsteps and adopting his advice in its entirety.

First of all, I will state the obvious: if you take on a fight like this, you need to have the money to finance it. While as a start-up, you may find it challenging to pay your attorney bill in normal circumstances, but if you decide to take on any litigation rather than resolving it via settlement, you will most likely incur far more significant legal bills than you will ever incur for any other type of legal matter. In the discussion after the Hulls’ editorial, Chris Hulls conceded that his legal bill in this matter exceeded $1 million. Many, if not most, start-ups simply do not have the resources to be able to finance $1 million or more in legal fees. Of course, even when they do, the investors may not be happy about their burning so much cash–and human resources–on a patent infringement battle that could have been settled.

Second of all, start-ups need to independently evaluate the facts and the legal risks of their particular dispute independently from what happened in Mr. Hulls’ case. Not every start-up who takes on this type of patent infringement battle will see a favorable outcome to their case, and start-ups should not automatically assume that they will get the same result if they take the same approach. Seek the counsel of an attorney you trust to advise you on the merits of your particular case, and make an educated decision as to how to proceed only after considering the advice you receive from your trusted counsel.

Third, I would urge start-ups to be cautious about launching a public campaign against a law firm or other third party, as you could easily create new legal problems for your company and yourself by what you say and do in that campaign. If you are going to take on any third party in the media as a start-up, you want to make sure that you are seeking both legal and public relations advice in conjunction with your strategy. You definitely are not going to win any friends by taking a campaign against a third party public, so it would be wise to think through your strategy with advisors who are in a position to guide you away from making major missteps in how you approach the campaign.

Having said all this, I agree that the pooling of resources can at times can be a very effective defensive strategy. Information is power, which is why larger companies have been known to pool resources with other companies in particular situations. There is no reason why start-ups should not take the same approach when appropriate. Of course, if your start-up shares information against its own interests, that could backfire, so some caution should be taken before adverse information is shared with any third party, even a fellow start-up. Also, being prepared to take a strong legal position when the facts are in your favor or the negotiation power is in your hands should be applauded, as start-ups traditionally have a hard time drawing lines in the sand not only against legal bullies but also just in deal negotiation generally.

So, my advice to start-ups reading about this case: be cautious in following in Mr. Hulls and Life360’s example. This case proves that the little guy can win a patent fight; however, this is a unique story with a highly unusual outcome, and start-ups would likely be wise to view this story in just that light.

Copyright reform is on the table again in Congress. A bill to amend the Copyright Act has just been introduced: the Songwriter Equity Act of 2015. The text of the bill is available at the attached link.

Surprisingly, the bill was introduced by Rep. Doug Collins from the 9th District of Georgia. While the Atlanta area is the home to a number of rap musicians, as an attorney who once practiced in Georgia before relocating to the Silicon Valley, I can say with some authority that Georgia is generally not a state in which you would expect to see copyright-focused legislation to protect songwriters introduced. However, what is perhaps far less surprising is that there is significant bipartisan support for the bill in the neighboring state of Tennessee, which of course is the home to the country music industry as well as a fairly significant part of the lesser known Christian music industry. The Tennessean reports that Senators Lamar Alexander and Bob Corker and Representatives Jim Cooper and Marsha Blackburn, both from the Nashville area but from opposite sides of the aisle, are all supporting the bill. Additionally, according to The Tennessean, the bill has the support of music industry associations such as ASCAP, BMI, and the National Music Publishers Association.

So, if you are wondering what argument bill supporters are making for copyright reform in this case, the argument is that the compensation paid to songwriters and music publishers for digital royalty payments as set by the copyright royalty board is too low and that they should be paid fair market value for the music they write. The argument is that performance artists are getting paid significantly higher royalties, but that the copyright royalty board is not currently permitted to take into account privately negotiated royalty deals for performance of the music when it sets royalty rates for digital distribution of the music, so the law needs to be changed to enable the copyright royalty board to set royalty rates based on what the music is actually worth in the marketplace.

While the principles behind the bill seem reasonable enough, the argument against bill is that reforming copyright law to address this issue will drive up the costs of doing business for online radio companies. The Tennessean addresses this issue in its recent article on the bill. But in my opinion, this argument is weak: if copyright law as written is establishing an artificially low cap on royalty rates that is not in line with the market value of the music, then the artificially low cap should be removed to allow the market to determine the rates. While Rep. Collins has argued in a recent interview with Billboard.com that this is a fairness issue, I would argue that it is really more of a free market issue, where one particular segment of our intellectual property system is not being permitted to commercialize its intellectual property rights to the same extent that other intellectual property holders are being able to do so.

Obviously, this issue is not getting much attention in the Silicon Valley, since our tech-focused community does not generally follow music industry issues, but with copyright reform on the table in the current Congress, perhaps Silicon Valley should be asking itself what other reforms should be introduced. I can certainly identify a few areas where the copyright system in existence seems out of sync with the realities of the market. What do you think? Is a broader overhaul of the U.S. copyright system needed?

Lessons from the Copyright Infringement Verdict Against Robin Thicke and Pharrell Williams

A verdict was reached earlier this week in the copyright infringement case between Robin Thicke and Pharrell Williams and the children of Marvin Gaye, finding that the 2013 song “Blurred Lines” infringed on the copyright in Marvin Gaye’s 1977 song “Got to Give it Up.” Tech Times reported that Gaye’s children have been awarded $4 million in actual damages and $3.4 million in profits, and also provided links to postings of both songs on YouTube.com. According to The New York Times, the decision is one of the largest damage awards in a music copyright case, recalling the 1994 jury verdict for $5.4 million against Michael Bolton and Sony for infringing a 1960s song by the Isley Brothers.

If you have followed the commentary this week in the news on this case, much has been made of the detrimental precedent that this ruling is anticipated to set for the music industry. The fear articulated is that this will discourage artists in the future from creating music that recalls earlier musical eras. Joe Caramanica editorialized for The New York Times that the jury instructions in this case ordering the jury to base its decision on the copyrighted sheet music ” reflects how inadequate copyright law is when it comes to contemporary songwriting and production practices.” Hardeep Phull opined for The New York Post that “So it’s decided. Marvin Gaye owns a certain type of “feel” and argued that” [the] vast majority of pop music is based on the same chords, played much the same way, and at a similar speed.” The online publication Quartz warned that “the true cost” will be when an “unknown musical genius tries to create a new song that evokes a particular era, and is sued into oblivion” due to the fact that the new song “kind of sounds the same” as a song that was previously written.

The commentary following this ruling is not unlike the commentary voiced after rulings in copyright infringement cases where technology rather than music was at the heart of the debate, and commentators have warned about how a particular decision would hurt innovation and stifle creativity. The only distinction here is that we are dealing with music and not technology.

I would argue, however, there is a lesson to be learned in this case: when you are “lifting” the creative works of others, you should take the time and make the effort to procure a copyright license authorizing the planned use rather than attempting to circumvent the unlicensed use. L.A Now reported that ‘Blurred Lines’ generated $5.6 million for Thicke, $5.2 million for Williams, and $5-6 million for the record company. It seems to me that all three parties made quite enough off of the song in question to have been able to afford to pay copyright royalties on the infringing lines taken from the Marvin Gaye song. So, the question I have: why not negotiate the license? If they were truly ‘evoking an era’, doesn’t that mean that they had some idea in advance of the music which had inspired them?

Now, if you were to assert that the copyright office database is not as search-friendly as the USPTO databases are, then I would have to agree with you that there are definitely short-comings with the Copyright Office that make searching for prior registered works more challenging than you would ideally like it to be. The copyright search functionality currently available is minimal at best. However, I think that artists who are “inspired” by a particular genre or era of music should know enough about the genre or era that they are evoking to be able to identify potential infringement issues that need to be further researched, and that they–like all creators of creative works–should be held accountable when they use third party creative works without permission. The bottom line is that works appropriated from other works are merely derivative works of the original creative work, and only the author of the original creative work has the right to authorize the creation of the derivative

But even if the Marvin Gaye song was never the original work from which the new song derived, it seems to me that the smart play here would have been to immediately negotiate a backdated copyright license or settlement once Williams and Thicke were notified of the potential infringement. While a license or settlement would have cut into their profit margins, it is unlikely that it would have been for such a high amount as the damage award, and that the attorneys fees incurred would have been much lower. So, why make the decision not to pursue this strategy?

It seems clear to me that the take-away lesson from this case is that when creative works are similar enough to existing works to potentially be deemed to be infringing, creators should pursue copyright license agreements with the owners of the original works. The procurement of a copyright license can save creators a lot of headaches–and potentially money–down the road. I would argue that the cost should be viewed–not as an unnecessary expense to be avoided–but as a form of insurance against potential legal claims from the original work holder. Commercialization of older works through licensing can easily be a win-win for all sides of a negotiation. The fact that this matter was played out in a courtroom rather than over a negotiating table was a real oversight by Williams and Thicke.

Pitfalls in Negotiating and Drafting Exclusive Licensing Deals: Lessons from Macy’s Dispute with JcPenney’s Over its Martha Stewart Product Line

When a new client contacts me for assistance in negotiating a licensing deal, the client almost always informs me that the deal is going to be an exclusive licensing arrangement. However, when I engage the client further to tell me more about the proposed exclusivity deal, in most cases the proposed terms on the table are extremely murky and so convoluted that the exclusivity being extended is entirely subject to interpretation and often looks more like a nonexclusive relationship than the exclusive relationship that is supposedly intended.

A Forbes report on the latest developments in Macy’s ongoing case against JcPenney’s is a good reminder of why parties should exercise caution in entering into murky exclusive licensing contracts. In that case, Martha Stewart had entered into an exclusive licensing agreement in 2006 with Macy’s and then entered into a second exclusive licensing agreement in 2011 with JcPenney’s that attempted to work around the prior agreement with Macy’s. As might be expected. a dispute ensued and ended up in litigation, which continues four years later.

In general, I always encourage clients not to jump head-first into exclusive licensing deals because they will inevitably tie their hands with respect to limiting their ability to capitalize on future licensing opportunities, as clearly happened with Martha Stewart in its contract with Macy’s. However, clients tend to disregard this advice when they have a potential licensing deal on the table and proceed anyway, typically opting to limit the scope of exclusivity to the extent possible. Thus, I tend to see creative drafting proposed in such agreements with terms that are only understood by the two parties in discussions and not by anyone who is not directly involved in the negotiations. Obviously the danger in such arrangements is that the other side may conveniently decide at some point to “forget” the agreed upon interpretation and no one else will apply the same interpretation to the language previously agreed upon by the parties.

So, what are some lessons to take away from this dispute about licensing negotiations?

First of all, if you are looking to maximize the commercial licensing value of intellectual property that you own, stick to nonexclusive license negotiations and refrain from entertaining exclusive licensing offers. Exclusive licensing offers should have a higher price tag attached to them, but just because a potential licensee is pressuring you to make your licensing offer “exclusive” does not mean that you have to cave in to its demands.

Second of all, if you agree to offer an exclusive license, refrain from offering a worldwide license and limit the scope of the license by clearly defined geographic territories such as states or regions. Worldwide territories obviously leave open very little room for negotiation with third parties for other licensing rights. Besides, it may make more sense to test out the commercial success of a limited territory first with the licensee before expanding the licensee’s territory further.

Third of all, if you try to carve down the scope of exclusivity by something other than a geographic territory, define the scope by a clearly defined “field of use” such as an industry or specialty field. If whatever field you limit exclusivity to is not defined so clearly that any third party could pick up the contract and understand what is intended, then your field is not sufficiently clear. A well-drafted field of use clause will only have one easily understood interpretation and will not require further explanation by either you or the licensee to be understood.

Fourth, build in parameters to the license so that if the licensee is not meeting your revenue requirements, you can either terminate the agreement, or eliminate the exclusivity. If you are not making the money you expected to off the business arrangement, why be stuck in a long-term, unprofitable relationship? You are more likely to make bad decisions that get you into trouble if you are stuck in bad relationship that you cannot get out of than you would be if you had a limited arrangement that proved not to work out, since you will then have the ability to walk away from the unprofitable deal.

Fifth, consider limiting the period of exclusivity so that you can re-evaluate the scope of the relationship from time to time, and move on from a relationship that is not generating the revenues you were anticipating. If you have a fixed time when you can terminate an unprofitable relationship, this will allow you to jump ship and make you less inclined to try to circumvent an existing unprofitable licensing agreement.

Sixth, do not hesitate to buy a third party out of an agreement that is not working for you so that you can move on to an arrangement that is. When you enter into a bad deal, sometimes asking for a “divorce” is the best option. Indeed, putting some money on the table to buy your way out of the arrangement may make more sense than attempting to circumvent the existing deal, creating bad feelings with the existing licensee, and ultimately stumbling into an expensive litigation. If the relationship is not profitable for you, it is unlikely to be profitable for the licensee either, and a mutual agreement to part ways with a buy out attached may make more sense than continuing on in a relationship that is no longer beneficial for either party.

All in all, I think that the Macy’s dispute provides a good example of why intellectual property owners should proceed with caution when presented with exclusive licensing opportunities. While exclusive offers can be very tempting, the party receiving exclusivity generally has to pay dearly for that right and is going to be commercially inclined to defend its rights to preserve the exclusivity. The inclination to propose creative wording to carve out the scope of exclusivity is likely a good sign that you have reservations about the relationship that should probably prompt you to step back and reconsider whether a nonexclusive relationship is a better fit for your commercial needs than the exclusive relationship that has been proposed.

Practical Tips on Choosing your Start-Up’s Name

Given my Silicon Valley location, I often am consulted by entrepreneurs and start-ups who have just started a business and are seeking advice on how to protect their trademarks. However, more often than not, I quickly determine that the name that the entrepreneur or start-up has selected is a poor mark and my advice ends up being to think about changing the trademark immediately before the company gets further established and changing the mark becomes more difficult.

Why is it that this issue comes up so often? In all likelihood, it arises on a recurring basis because entrepreneurs starting a new business are so focused on other aspects of starting their company when they launch that they don’t give the choice of name the attention it merits.

To be honest, I am guilty of this as well. When I started my law firm after the collapse of my prior firm, I barely gave the issue of naming my law firm any consideration. As a result, I did what many lawyers do and just began using my last name as the name of the firm. More than a decade later, I am still in private practice and continue to build my Silicon Valley firm, have become somewhat marketing-savvy, and I frequently find myself wishing I could rebrand. However, in today’s world, the practical consequences of rebranding an established business are huge, since such a name change will affect your web presence, and in the case of a small firm that relies on its web presence to generate business, rebranding is a huge business risk that could have a tremendous upside or a huge downside. Also, there is the expense you will deal with in such a case of reprinting marketing materials, which can be very costly, depending on the extent of marketing materials, which have been printed for you. In my case, I made a significant investment early on in marketing materials which I might have reconsidered in retrospect. So, to date, I’ve done nothing but I continue having recurring thoughts of wishing I could easily facilitate a smart rebranding move. If only I could have been as business-savvy when I started my law firm as I now am more than a decade later. . . . but, as the familiar saying goes, hindsight is 20/20.

However, some entrepreneurs and start-ups end up selecting such a bad name initially that they have no choice but to rebrand, simply because at some point they retain a trademark attorney and realize that the mark they selected could be determined to be infringing another mark, or else because the owner of other mark holder sends them a cease and desist letter and actually threatens them with a lawsuit, and they realize that the most cost-effective and prudent manner of handling the situation is to simply rebrand and stop using the disputed trademark. While these entrepreneurs and start-ups have a different reason to rebrand, they often find themselves in the very same dilemma I find myself in: they realize that they will be essentially starting over with a clean slate on the web and they will lose whatever marketing foothold they’ve previously achieved on the Internet by erasing their existing web presence, which can often be very detrimental to an established business.

A perhaps even more common scenario for entrepreneurs and start-ups to find themselves in is to realize–not that they are using an infringing mark but that they are using a completely unprotectable mark. Generally, the entrepreneurs and start-ups in this situation will discover that their mark is descriptive or has some other deficiency which will render in unprotectable with the USPTO.

So, what can a savvy entrepreneur or start-up do to proactively avoid finding themselves in a trademark dilemma down the road?

First and foremost, when you choose a name for a new business you need to determine if there is any possible way that the name you have chosen could be deemed to infringe on another company’s business. While having a trademark attorney run some searches for you is ideal, you don’t need a trademark lawyer to make this determination. You can visit the USPTO.gov website yourself and search for your proposed business name and any possible variations of your business name to see what comes up. If your name is so unique that your search generates no similar names, then you can move on to searching any possible variations or other spellings of your name to see if anything comes up. If something does come up in the search then you want to look for names that are similar to yours that are in the same industry as you will be or offer products and services similar to yours. If you find any similar marks, then you may want to give some consideration to changing your name. Obviously unique names are generally a safer choice than a common name.

Second of all, when you choose a name for a new business you need to avoid descriptive names. By descriptive I mean names that are based in any way on what your business will be doing. The USPTO will generally not grant a trademark on a descriptive name. There is a natural tendency for many entrepreneurs or start-ups to adopt clever, descriptive names, but those names will generally not be protected as trademarks by the USPTO. While being descriptive is not the only reason a trademark can be refused, it is probably the most common reason for refusal after being confusingly similar to another mark.

Third, as soon as you have the resources to do it, you should probably file an intent to use application with the USPTO to reserve your name. If you can file before you actually launch, this is ideal, since you will then know if your mark can be granted before you actually start using the mark in interstate commerce. Intent to use applications are usually fairly easy to file, but you will need to set aside enough funds to cover the USPTO filing fee and any legal expenses you incur.

The USPTO has published some information intended for public viewing about choosing a strong mark, which may be helpful to you in selecting your name at the following website: http://www.uspto.gov/trademarks-getting-started/trademark-basics.

All in all, I would encourage anyone starting a business to give serious thought to the choice of name very early in the process of launching a business and not postpone all such name related issues to a later date, as the investment of time and money early on can save you from having to throw out thousands of dollars in marketing materials or re-establish an established web presence down the road. It is far easier to choose the right name when you launch than it is to rebrand years later, which will inevitably be a risky proposition, even if handled in an optimal marketing fashion.

Recent Interview of Kristie Prinz for World Trademark Review

Challenges of Negotiating a Licensing Deal with a Start-Up

I recently gave a webinar on Negotiating License Agreements with Start-Ups, and wanted to follow up on that program with some comments for Silicon Valley IP Licensing Law Blog readers on some of the challenges that companies may face when negotiating an IP licensing deal with a start-up.

In the years that I have worked as a tech transactions attorney in Silicon Valley, I have represented a large number of start-ups in negotiating deals with large companies, and I have found that there is a tendency of large companies to approach deals with start-ups with the expectation that the deal is going to be really easy to close due to the perceived imbalance of negotiating power between the two companies. While there is no question that this imbalance of power clearly exists in this type of negotiation, companies who approach these types of deals with the expectation that the negotiation is going to be a cakewalk may be setting themselves up for failure. The very act of entering into a negotiation with a start-up brings to the table a set of unique complications that must be dealt with by the company on the other side of the table.

One of the first issues that a company negotiating with a start-up must contend with is the fact that the start-up on the other side of the table is likely to have a very low tolerance for negotiation. While large companies enter into negotiations as a normal course of business, start-ups often have absolutely no experience with negotiation, which may even rise to the level of outright aversion to negotiation. In some cases this is because they are relying on friends and family with law degrees to advise them who have absolutely no experience in deal negotiation themselves. In other cases, they may have skilled counsel that they rely on but just are unwilling to allocate the necessary financial resources to procure the assistance. It may also be simply due to a lack of comfort with the negotiating process generally.

A second issue that a company negotiating with a start-up will have to overcome is the inexperience factor, which can have a huge impact on the negotiation process. In my role as IP transactions counsel, I often find that an important aspect of my job in working with a start-up involves educating the business on the business model and even the standard terms that would be found in the type of transaction they are negotiating. More often than not, I find that start-up clients have never been involved in a negotiation of the type of deal they are engaged in and that they have never even seen a well-written contract for such a transaction. The lack of familiarity with deal terms may prompt start-ups to negotiate deal terms that are not even appropriate for the type of deal they are doing, and to even remove deal terms from drafts that are essential to the type of transaction they are negotiating. For example, I ran into a situation recently where a client removed a license grant clause from a draft being negotiated in a licensing deal on the grounds that the other side would never agree to it. The inexperience factor often results in start-ups being unable to make decisions in a negotiating context, or reversing their position on critical negotiating points mid-way during the negotiation. It also is not unusual for them to be unsure about where they want to involve outside counsel in the negotiation, including him or her in non-essential conference calls with the other side and excluding outside counsel altogether on calls at key points in the negotiation.

A third issue that a company negotiating with a start-up will often have to address is its confusion over how to manage the negotiation process. It has been my experience that a start-up may put all its energy and focus in lining up the prospective deal partner to do the deal but then find itself unclear on how to proceed and get the deal closed. This uncertainty can put the party on the other side of the negotiating table in a bind, prompting the more sophisticated larger company to take charge of driving the negotiation if it serious about pursuing the deal. However, taking over the deal management role for a start-up you are negotiating with will not necessarily move the deal forward either, since critical negotiation steps may be trampled over in the interest of deal management, and the larger company may put a standard template on the table that has no semblance to the deal that the start-up was proposing to the larger company. To make matters worse, the start-up may then be advised by friends, family, or trusted advisors with no deal negotiating experience that they should just sign whatever the larger company puts in front of them, which often leaves the start-up even more confused and the deal at a complete stand-still.

Of course, there are a number of other issues that may come up in the start-up licensing deal negotiation, but the bottom-line is that they are far from “easy” deals to close and they inevitably present their own unique challenges. Does that mean that as a larger company you should shy away from these types of deals? Absolutely not. Most of the innovation in this country–and even the world–is coming out of start-ups who are uniquely able to nurture and develop new technologies and business models. The level of innovation that I see among the entrepreneurs I have the privilege of working with consistently amazes and inspires me. So, as a large company, it makes a tremendous amount of sense to look to start-ups for innovation and corporate growth. Having said this, in pursuing deals with start-ups, successful companies should approach negotiations with their eyes wide-open about some of the challenges they are likely to face in moving forward with the deals. Appreciating the considerations of the start-up can go a long way to getting your deals closed with early stage companies.

Successfully Managing Intellectual Property Disputes as an Early-Stage Start-up

TechCrunch posted an article this afternoon written by attorney David Soofian, which caught my attention, addressing the issue of what to do as a young start-up if you are sued for patent infringement. In particular, the article addressed the challenges posed by so-called patent trolls, who use “weak patents to go after young tech startups” seeking licensing deals.

In the article, Soofian recommended that start-ups consider two key strategies to addressing patent suits.

First of all, if the patent at issue is on software, Soofian urged start-ups to challenge the eligibility of the patent, looking to recent court decisions in Ultramercial v. Hulu and Alice v. CLS Bank International for guidance.

Second of all, Soofian advised start-ups to pursue an Inter Partes Review at the Patent Office and to challenge the patent on grounds that it is not innovative and that it is obvious. Soofian explains that while this type of review was not traditionally available until a significant amount of expense had already been incurred in litigation proceedings, recent legislation has now made the proceeding more readily available to a start-up company with limited resources. Soofian identifies a number of advantages to pursuing this type of proceeding as a start-up over federal court proceedings such as the speed of the proceeding, the limited discovery required in such a proceeding, the fact that the burden of proof is lower, and most importantly, the fact that the court proceeding is stayed while the review occurs.

While Soofian’s article suggests that start-ups need not throw in the towel on their business efforts when they find themselves faced with the prospect of patent infringement litigation looming over them, as a transactional attorney who advises entrepreneurs and start-ups, I would caution businesses who receive demand letters–whether patent or otherwise–not to respond to those letters in a way that invites litigation. The mistake I often see many young start-ups and entrepreneurs make is that they either ignore demand letters altogether or they respond without the assistance of legal counsel and do it in such a way that is unhelpful to their position. In most cases, what is really in the best interests of the start-up is to make the claim go away as quickly as possible–not instigating a fight with the claimant.

As Soofian acknowledges in his article, most infringement demand letters are sent with the objective of procuring a license fee from the recipient, and in many cases, it is going to be far cheaper for the entrepreneur or start-up to settle the claim, whether legitimate or not, than to run up legal fees in litigation. While there is no question that so-called patent trolls and other bad actors may take advantage of this reality, the savvy demand letter recipient will conduct his or her due diligence of the available options and respond accordingly with the information in hand.

The bottom line: Soofian’s article should give hope to start-ups facing patent infringement disputes that will not necessarily run out of money and have to shut down simply because they have found themselves in a legal dispute. However, the savvy start-up will still deal with an intellectual property dispute in a timely fashion when it arises and try to resolve the problem long before it gets to the point of a filed complaint.

Trademark Commissioner Resigns over Allegations of Nepotism Law Violations

Trademark Commissioner Deborah Cohn was reported by The Washington Times to have announced her resignation today after allegations were reportedly made against her that she had violated nepotism laws. A Federal Times article from July provides some additional background on the reported scandal.

This particular Washington scandal has received virtually no coverage outside of the Beltway, so it was a little surprising to receive notices today that the Trademark Commissioner had resigned over a nepotism scandal.

If you are unfamiliar with the departing Trademark Commissioner, IP Watchdog published an interview of Commissioner Cohn in February, 2012, in which she indicated that her career with the Patent and Trademark Office began in 1983 as a trademark examiner, so she will have been with the agency for some 31 years when she steps down. (The second part of the interview is attached here). Commissioner Cohn was apparently not an appointee from the private sector but rather a career Patent and Trademark Office employee.

It is unfortunate to see yet another federal government agency affected by scandal, particularly the Patent and Trademark Office. With so many Washington scandals in the news right now, is it any wonder that many Americans have such a negative perception of the federal government? With all the tax dollars and fees that we Americans are sending to our government each year, wouldn’t it be nice if we could run our federal government a little more transparently and feel like so much of the money that we are sending them out of our pockets was not being misused? Washington D.C. sometimes seems a world away from Silicon Valley, and frequent scandals only increase that perception.

But the underlying story here is still just how very hard it is to land employment for many Americans–even lawyers. For those of us working, we sometimes forget. Perhaps this story would never have developed but for that reality. Who among us hasn’t been asked to do a favor for someone struggling to find work–or even perhaps asked for a favor ourselves?

All in all, this is not the kind of news you want to see come out of the Patent and Trademark Office. Or Washington.

Getty Images Copyright Dispute Against Microsoft to Challenge Legality of Recently Released Widget

Getty Images made news in the copyright world this week by filing a complaint against Microsoft Corporation in the Southern District of New York for “infringing and facilitating the massive infringement of [its] copyrights” through its release of the new Bing Image Widget service. To review the full complaint, click here.

The case is significant because Getty Images, one of the premier content companies in the nation, has directly challenged Microsoft, which runs one of a handful of web browser companies, over tools that it is making available to web developers to embed images in websites. In taking on one of the key players in the technology world, Getty Images obviously stands not only to potentially enjoin Microsoft from continuing to make this technology available but also to potentially create precedent that it no doubt hopes will discourage the continued development and adoption of similar digital technologies.

As anyone who works in the digital media and content industry today knows, embedding and framing third party content has increasingly become a very widely adopted practice on the Internet, and in many cases the content being embedded and framed has not been procured through any sort of license from the third party–it has simply been “captured” through a developer tool. I definitely have been receiving an increased number of client inquiries regarding various adaptions of this practice and where the lines are on permissible and impermissible uses of these technologies. Evidently, Getty Images is also watching how the industry is evolving and believes that it makes sense from a business standpoint to invest the legal resources into procuring further clarification on where the lines are as well.

While it’s too early to predict what will ultimately happen with this case, any precedent that comes out of the case could have an impact on how the digital media industry goes forward. So, it will definitely be a dispute to watch in the coming weeks.

Twitpic’s Abrupt Announcement to Shut Down over Trademark Dispute: Convenient Excuse or Full Story?

Twitpic announced in a blog posting today that it will be shutting down on Sept. 25th over a trademark dispute with Twitter regarding the use of the name “twitpic.” Various media outlets have also covered the announcement such as Wall Street Journal and Time.

The reporting on this story has thus far not raised many questions over the rationale provided, but as an IP lawyer, it’s hard to believe that this was the real reason to close down the business. Twitpic has apparently existed for a number of years: it is hard to believe that the company would not have been advised years ago that it was never going to secure a trademark on the name “Twitpic” and that it would not have been warned that a trademark dispute with Twitter was in its future if it went forward with this particular trademark without working out a prior agreement with Twitter. Yet, according to the Wall Street Journal, the company had attempted to register this trademark three times. Really?

A quick search of the most recent trademark registration filing for “Twitpic” reveals that the examiner issued an office action on October 23, 2013, refusing the trademark registration for “likelihood of confusion.” In response, Twitpic filed a response to the office action, arguing that the trademark should be granted due to the execution of a coexistence agreement with Telly, Inc., which was executed by the parties April 22, 2014. The examiner then approved the registration for publication. At that point, Twitter filed the foreseeable opposition to the registration being granted.

Interestingly enough, the USPTO database reveals that in the prior two filings, the application never made it past the office action stage and thus never went to publication.

But it is hard to believe that the company never anticipated that Twitter would oppose the granting of the trademark if an application ever made it to the publication stage. Moreover, even if a trademark application had never been filed, it was almost inevitable that “Twitpic” would have to change its name sooner or later if the company survived long enough to generate revenue and get on Twitter’s radar screen.

So, one can’t help but wonder if the real story behind all the media buzz was more about money and less about Twitter itself. Could it be that the start-up had yet to come up with a successful revenue model and has thus just run out of money and was looking for a convenient excuse to close down? Neither the media reporting nor Twitpic itself has released any information about any trademark infringement litigation being initiated against the company. Thus, in all likelihood, simply dropping the trademark application and changing its name would have been sufficient to resolve its current legal issues with Twitter. I would imagine any outstanding issues with Twitter could then have been easily settled. But obviously, settling the issues with Twitter would not have resolved any underlying financial problems that existed with the company. Those would have remained. And perhaps the company would have been a little harder to find rebranded under a different name that was not so closely tied to Twitter. However, I would assume its customer base would still have been intact.

The bottom line: I think there is reason to suspect that the public explanation being reported on by the media is a convenient excuse for closing down rather than the full story. What do you think?

Landmark Copyright Verdict Against Media Companies Serves as Cautionary Tale to All

In case you missed the headlines late last year, freelance photographer Daniel Morel was awarded a $1.2 million damage verdict against Agence France-Presse (“AFP”) and Getty Images after it was found that they willfully infringed Mr. Morel’s photos of the 2010 earthquake in Haiti. The verdict caught my attention given the fact so many clients have received demand letters from Getty in recent years alleging copyright infringement of a Getty photo.

The case is noteworthy primarily because the maximum statutory penalty available under the Copyright Act was awarded by the jury. Also noteworthy were the facts of the case, which involved an initial Twitter posting of the photos and subsequent commercial media distribution of the same photos. See a report by Law 360 of the verdict here; and a report by Reuters of the verdict here. To see Daniel Morel’s website, where a transcript from the trial is posted, click here.

Several news outlets reportedly settled with the photographer for undisclosed amounts, but AFP and Getty went to the jury with the damages question, which in hindsight was probably not the best tactical move, given the outcome.

As you might expect, AFP and Getty have already filed an appeal in the case, arguing that the verdict “constitutes a miscarriage of justice.” See the appeal filing here.

It is hard not to see the irony in the circumstances of a company, who in my opinion, is an aggressive enforcer of copyrights in photos, now finding itself on the wrong side of a verdict against a photographer also enforcing his copyrights in photos. Moreover, it is ironic to see Getty raising outrage over the calculation of damages made by the jury, given the fact I often hear the same outrage voiced over the damage calculation Getty uses in its demand letters.

Clearly, this case serves as a cautionary tale to all who have ever taken photos off social media or the Internet and distributed them to third parties, or been tempted to do so. Also, it serves as a good reminder to respect the rights of photographers in their photos, as they perform a valuable service in getting the news and images out to the world in a crisis, and they deserve to be able to make a living for their work. Apparently even big media companies need to be reminded of this from time to time. I think the jury verdict in this case probably gave them quite the wake up-call.

Supreme Court Rules that Patent Owner Bears Burden of Proving Infringement in Licensing Dispute

The U.S. Supreme Court recently issued a decision in the licensing dispute case of Medtronic Inc. v. Mirowski Family Ventures, LLC, where the Court held that the patent owner had the burden of proving infringement when the licensee files a declaratory judgment action in a patent licensing dispute.

What are the facts in this case?

Medtronic was a sublicensee of a patent license between Mirowski and Eli Lilly. The original sublicense agreement provided that, upon receipt of a notice from Mirowski that a new Medtronic product infringed a Mirowski patent, Medtronic would have the choice of either accepting Mirowski’s claims and curing the nonpayment of royalties or challenging Mirowski’s claims by filing a declaratory judgment action while still paying the disputed royalties. A subsequent agreement amended this procedure, enabling Medtronic to accumulate disputed royalties in an escrow account in the event that it decided to challenge Mirowski’s claims and file a declaratory judgment action.

In 2007, Mirowski notified Medtronic that seven of its products violated two of its patents. Medtronic disputed the claims and filed for declaratory judgment in the Federal District Court in Delaware while continuing to pay the disputed royalties in an escrow account in accordance with the terms of the sublicense agreement.

The District Court found that Mirowski had not proved infringement but had the burden of proof to prove infringement. The case was appealed to the Court of Appeals for the Federal Circuit, which concluded that a different rule applied, and that the party seeking the declaratory judgment of noninfringement bore the burden of persuasion.

The Supreme Court held that the same rule applied whether the patent owner filed an infringement suit against the sublicensee or the sublicensee seeks a declaratory judgment after being accused of patent infringement by the patent owner: the patent owner must prove that the infringement exists.

From my perspective, the Supreme Court reached the right conclusion: the declaratory judgment procedure and escrow option was put in place to allow the sublicensee to challenge the patent owner’s claims while continuing to otherwise meet the terms of the license. The fact that the sublicensee disputed the patent owner’s claims should not have shifted the burden to the sublicensee to prove that it had not infringed–it is logical to expect that the patent owner should have to prove its claims of infringement.

What is the significance of this case? The Supreme Court has now resolved the uncertainty that existed over who bears the burden of proof in a declaratory judgment action in a patent licensing dispute. The elimination of uncertainty on this issue may prompt more patent licensees and sublicensees to take the step of challenging licensors’ interpretation of their patent licenses in lieu of paying the royalties demanded of them. In light of this development, licensors who become aware of royalty dispute with a patent licensee or sublicensee should consider the merits of taking a more proactive approach to seeking a commercial resolution of such a dispute with their licensee before the licensee decides to escalate the issue to filing for declaratory judgment. Moreover, this decision may impact the negotiating dynamic in situations where a patent owners seek to enforce its patent rights on a less than enthusiastic licensee, since a heavy-handed negotiating approach by the patent owner may be more likely now to prompt the licensee to file for declaratory judgment after the ink dries on a newly executed license agreement. Patent owners engaging in such licensing negotiations should perhaps give more consideration to reaching an agreement with the reluctant licensee that is not so one-sided that the licensee will feel compelled to challenge the agreement after its execution.

Steering Clear of Marketing Traps Around Milestone Events

If you are in the marketing/advertising business, your success depends largely on coming up with innovative new ways to promote a customer’s product or event offering. Thus, when a milestone event arises in the sports, music, or film worlds, you may be inspired to try to capitalize on those events by tying your marketing efforts to the milestone event.

There is only one problem: the names and marks associated with those milestone events are likely protected trademarks. Thus, if you launch a marketing campaign without first procuring the necessary license from the trademark owner to use the trademarks, you will likely be the recipient of a stern cease and desist letter. . . .or worse.

What kinds of marks am I talking about? Marks surrounding awards events and sport events are just some of the major events that come to mind that likely have a number of registered trademarks protecting the use of the names. I recall, for example, not too long ago that a client came to me with a cease and desist letter regarding the alleged use of the word “Grammy” in conjunction with a publicized party. According to attorney Gonzalo Mon who recently wrote an article on this issue, he has clients contemplating the use of ring-based marks and reference-based marks to the Olympics right now, any of which could be problematic if the client is not an official sponsor of such event specifically authorized to use the marks in question. While I know from my own practice that marketing professionals have a tendency to grab and use third party marks without giving much consideration to whether or not they have the right to do so, and they often fly under the radar screen in engaging in such actions, it is not an advisable practice and it may catch a third party’s attention, particularly where the third party is charging a premium rate for the use of that mark.

So, as we come up on milestone events, if you are inspired with a great marketing or advertising idea, you should always assume that the marks surrounding such an event are going to be protected and engage in some research before making use of a event-related mark or mark that might be confusingly similar to an event-related mark. How do you confirm that this is the case? Well, a simple search of the USPTO database for the name of the event in question would be a good starting point for your research. While you can absolutely run a question like this by a trademark attorney, searching the USPTO database does not require legal credentials, and I encourage all my clients to learn how to run searches themselves, as it is an easy skill to learn as a non-lawyer. Typing in the word “Olympics” for example, brings up a long list of marks, and should alert you fairly quickly to the fact that there are in fact registered trademarks surrounding the event in question that you need to be aware of. The same type of search should work for other events.

Of course, even if there are no federal trademarks in place surrounding a particular event mark, there still may be common law rights in a trademark that you might be infringing on if you use the mark without first obtaining a license, so just because your search of the database is clear, does not mean that you are free to use a particular mark. Also, you should remember that the database only searches U.S. trademarks, so there are trademarks all around the world that potentially could be a problem if the mark in question may have a worldwide platform.

The bottom line is that you should be cautious in marketing around events to ensure that you stay clear of legal problems in conjunction with those events. The success you achieve with such a marketing campaign could easily backfire and result in legal woes that far outweigh any benefits you received from your marketing efforts.

Supreme Court to Hear Streaming TV Over the Internet Case

Like many cable and satellite TV consumers these days, I have been closely following the new options on the market for streaming TV service and hoping that the day will soon come when I can significantly reduce my monthly subscription costs without cutting off my access to live TV. With the cost of living and working in Silicon Valley running so high already, expensive TV service is one of those expenses I just can’t help but resent each month, especially in light of the fact I have so little time to spend watching television programming anyway. So, when I happened to come across the start-up Aereo, their business model caught my attention, as you could access a number of channels with their service for a very low monthly price. I remember thinking to myself that it was only a matter of time before there would be litigation challenging the Aereo model. I did not have to wait long before that in fact happened. As you might expect, a group of broadcasters quickly filed for injunctions. They lost in cases filed against Aereo in New York and Boston, as well as in an appeal to the Second Circuit. However, they had more success in an injunction filed against an Aereo competitor, FilmOn, in the D.C. Circuit. Due to the split circuit decisions, the dispute has already made its way to the Supreme Court and will be heard later this year.

At issue is the question of whether or not Aereo’s service publicly performs copyrighted television programs Petitioners argue that the Aereo model “would seem to be an obvious copyright violation–an entire business model premised on a massive for-profit unauthorized exploitation of copyrights where competitors’ prices are undercut because they seek authorization and pay fees” and that “Aereo offers precisely the kind of service Congress sought to prohibit when it revised the Copyright Act to define public performance to include retransmissions of over-the-air broadcasts to the public.” The other side of the argument, which the Second Circuit Court of Appeals found compelling, is the argument that the Aereo model does not infringe Petitioners’ public performance right since the transmission under the Aereo model is to a single subscriber and therefore is not a public performance. In reaching this decision, the Second Circuit looked to prior precedent interpreting the public performance right and the transmit clause of the Copyright Act in Cartoon Network LP, LLLP v. CSC Holdings, Inc., 5369F.3d 121 (2d Cir. 2008), stating that in that case the same Court had found that “in determining whether a transmission is to the public, it is important to discern who is capable of receiving the performance being transmitted” and held that a transmission of a recorded program to an individual subscriber was not a public performance.

I don’t have much of a track record in predicting how the Supreme Court will rule on a particular case, but as a technology attorney, I am more persuaded by the Aereo argument than the broadcasters’ position. I think that given all the other relevant copyright decisions in this space over the years, there is reason to anticipate that the Supreme Court should decide in Aereo’s favor. Whether they will or not, however, is another question entirely.

Obviously, the Aereo model has the major networks concerned. It has been reported that CBS and Fox are already threatening to turn their broadcast channels into cable channels, asserting that they cannot afford to provide the type of content that they are currently providing from an advertiser-supported-only business model. Professional sports leagues such as the National Football League and Major League Baseball have been reported to have also threatened to move their high-profile broadcasts such as the Super Bowl and World Series to cable, and certain cable and satellite TV companies are already exploring building services to compete with Aereo.

With all the ways to view and consume content now on the market, it was almost inevitable that we would be seeing streaming TV companies emerge on the market and that there would be litigation in an attempt to put any of the more successful models out of business. I personally have been eager to see some changes in the marketplace on how I can access live TV programming, and I’ve been frustrated at the snail’s pace that such change has seemed to occur, as so many other new technologies flooded the marketplace. Without question, a decision in this case has the potential to disrupt and transform the broadcasting landscape as it now exists. Whether or not any such disruption will be beneficial to consumers remains to be seen. As an interested consumer, I am hopeful that any change in the television marketplace that arises because of Aereo will be for the better.

To view the Petition for Writ of Certiorari filed with the Supreme Court, click here. To view the Second Circuit Decision, click here.

As an attorney who largely represents small businesses and entrepreneurs, I have often found myself in the tough position of explaining to someone with limited resources just how difficult it was going to be to go after an infringer. Either it is simply too cost-prohibitive to go after an infringer, or the client has the resources to pursue litigation, but the damage amount makes litigation difficult to justify.

Apparently the issue is getting some new consideration by Congress and the Copyright Office, as the Copyright Office has been asked by Congress to conduct a study to:

(1) assess the extent to which authors and other copyright owners are effectively prevented from seeking relief from infringements due to constraints in the current system; and

2) furnish specific recommendations, as appropriate, for changes in administrative, regulatory and statutory authority that will improve the adjudication of small copyright claims and thereby enable all copyright owners to more fully realize the promise of exclusive rights enshrined in our Constitution.

If you are a small business or an individual who has been faced with a small copyright claim matter and has any feedback on obstacles that you encountered in dealing with the matter, or if you have any thoughts on how the current system might be changed to better address copyright small claims matters, then the Copyright Office wants to hear from you. You should submit your comments to the Copyright Office by October 19th at the submission link.

I personally would like to see changes made to better address small copyright claims matters, because I think that most copyright infringement at this point in time goes unaddressed because so little can be done about it. I feel confident that many of you feel the same. If you have any thoughts to share on this issue, please take the time to write the Copyright Office and share those thoughts, and make certain you do it in time to meet the deadline.

Google Reaches Settlement with Book Publishers in Copyright Infringement Case

Google Announces Controversial Decision to Factor Receipt of DMCA Notices into Ranking of Websites

Google has just made a controversial announcement that it will now be factoring the number of “valid” DMCA notices that it receives on a particular website into how it ranks that website in its search results.

The Wall Street Journal reported:

Google’s move comes as Google itself is attempting to become a major seller and distributor of professional video and music content through a variety of services, from its YouTube video site to the Google Play online-media store to its pay-TV service in Kansas City, which required deals with cable-channel networks. It is pursuing such initiatives partly in a bid to compete with Apple Inc. and Amazon Inc. among other tech companies that distribute media.

As you might expect, the announcement has been met with controversy. Some observers are accusing Google of censorship, and others are accusing Google of caving into pressure exerted by the powerful recording industry and motion picture industry lobbies.

Those accusations are not exactly baseless, given the fact that Google itself reports that a high percentage of the removal requests each month are received from the recording industry and various media corporations, and certainly those groups are looking for removal results. Moreover, it is clear with Google’s purchase of YouTube and its development of Google Play that Google is looking to build a better media platform, and obviously the company is likely to meet less resistance in this space if it is seen as working with these companies rather than against them. Anyone who follows copyright legal developments knows that these lobbies are powerful and aggressive in going after alleged infringers, regardless of their size or financial resources, and it doesn’t require much of a leap to imagine how those same lobbies could utilize those resources to cause the “censorship” of such companies on the Internet.

I would argue, however, that Google’s new policy may be beneficial to many companies in Silicon Valley who simply do not have the resources to pursue infringers in a court of law but want to do something about the fact that their copyright is being infringed. I’ve represented many companies in recent years who have fallen into this category, and they are always very frustrated when I explain to them the limitations of a DMCA notice. They always want to more but just can’t afford it, and they usually hang up in disbelief that the U.S. system doesn’t better protect copyright owners.

Now, I’ll be able to suggest to those clients that they file a DMCA notice directly with Google before they throw in the towel on taking action against the infringer. Since what irritates such clients the most is having those infringers competing with them on the Internet, I think most clients will be very pleased with having a new tool in their arsenal against infringers.

So, all in all, while I agree with the concerns voiced by Internet observers and agree that the potential exists for abuse, I am on the whole pleased with this new Google policy development.

PayPal Launches New Internet Controversy over Decision to Censor Erotica Content Sold through Platform

PayPal has set off a new controversy on the Internet by advising e-book sellers that they must remove all erotica content off their websites or PayPal will stop doing business with them. In particular, PayPal is apparently concerned with content dealing with erotica fiction containing rape, incest, and bestiality, reported Technolog on MSNBC’s website.

According to a report by Tech Crunch, e-book publisher Smashwords received a notice from PayPal on Feb. 18th giving the publisher only a few days to achieve compliance with the “ultimatum.” In response to the Paypal demands, Smashwords has posted this press release on its website advising authors, publishers, and literary agents of the new Smashwords position.

Zdnet is reporting that AllRomance, Excessica and Bookstrand received similar notices.

As you might expect, the uproar over the Internet is on the fact that a payment processor is trying to “censor” obscene content sold over the Internet by third parties. The concern is over the slippery slope of censorship and how dangerous this is for society as a whole.

On the other hand, PayPal is definitely not the only payment processing option available over the Internet, so these e-book publishers do have other options besides working with Paypal. Moreover, PayPal is a privately owned company, and despite recent acts by the President and Congress to force particular behavior on privately owned companies, as far as I know, there are still laws in this country recognizing the right of privately owned companies to make their own decisions about how to run their businesses, including what customers to work with and what terms and conditions to operate under. We may be on a slippery slope of private companies losing their autonomy to make their own business decisions, but at the moment, we still live in a country where private companies have some autonomy to make their own individual decisions.

Furthermore, we still have obscenity laws in this country, which are local in nature. Can’t an international company like PayPal take the position that running payments to purchase obscenity would be a violation of the laws somewhere in this country?

According to many of dissenter voices over the Internet, the answer is a clear “no.” Constitutional rights to free speech are at risk when censorship is involved, say these dissenters.

In considering this issue, I must say that I am a strong proponent of free speech; however, at the same time, I personally see no value in this type of content, other than to law enforcement who might want to know who is reading it. I would contrast this type of content with pure adult pornography in the sense that it is actually depicting criminal activity against a non-consenting third party or a third party who is not capable of consenting, whereas pornography does not by its very nature depict something that is of a criminal nature. That puts this type of content, in my opinion, in a different category from mere obscene content.

I would also argue that companies like PayPal have the right to make business decisions based on their own conscience and morals, provided that those decisions do not violate any laws themselves. I worry about the direction our society is going in, if private companies are no longer the afforded the opportunity to make business decisions for themselves and the public good starts dictating private business behavior motivated by morality and conscience. Isn’t that how our society and other societies have gotten themselves in trouble in the past?

It will be interesting to see how this controversy develops. The Silicon Valley IP Licensing Law Blog will continue to follow the story and keep you posted on any new developments.

Apple Trademark Dispute with Proview Becomes a Global Fight

Apple’s trademark dispute with Proview is now being fought on two fronts: at the local level in China and here in Silicon Valley.

The Wall Street Journal is reporting that Proview has filed a lawsuit in Santa Clara County Superior Court claiming that Apple committed fraud when it used a company called IP Application Development Ltd., to purchase the iPad trademark from Proview on Dec. 23, 2009. According to The Wall Street Journal, there are emails in which a representative of IP Application Development told Proview “that it wanted to acquire the iPad name because it was an abbreviation of its company’s title, and that its future products wouldn’t compete with Proview’s products.”

Reuters is reporting that the strategy of filing now in the U.S. increases the likelihood that the dispute will disrupt Apple’s supply of iPads to China, and puts additional pressure on Apple to settle the matter quickly.

At the same time, Proview also likely needs this dispute resolved quickly, given its current financial situation. According to Reuters, Proview will be de-listed by the Hong Kong stock exchange this summer unless it comes up with a viable plan to deal with its debt. Going after Apple would appear to be its strategy for dealing with its current debt load.

As an outsider looking in on this dispute, it seems highly likely to me that a settlement in this matter will be reached at some point this year, since Apple stands to lose a significant amount of money in sales if its supply chain is disrupted and Proview is reported to be desperate for cash. The primary impediment to settlement is likely to be emerely the amount of money on the table, since Proview requires a certain amount of money as a business necessity to get out of its current financial problems and a settlement for less than that amount will not resolve its problems. Of course, if Proview is in such dire straits, Apple may be able to just drag out the dispute until Proview runs out of money; however, whether or not that makes sense as a legal strategy depends on how much money Apple is losing by not resolving the dispute. Thus, as with most things in business, reaching an agreement is all about the bottom-line.

What can be taken away from these recent developments in this dispute? Well, this story is full of lessons for Silicon Valley businesses, some of which I’ve raised in my prior blog posting regarding this matter. I think you can add to the list, though, tying up loose ends with your business before they cost you money. In my practice, I regularly work with start-ups who often neglect a long list of legal matters in their early years in order to keep expenses at a minimum, and they often what I would call “loose ends” that I identify for them as matters that might need to be “tied up” in order to avoid a dispute down the road. This is a good example of what can happen when a “loose end” for a business is left unaddressed–the other side can get into financial trouble and then the “loose end” may become a big headache for your business. When you identify loose ends, the temptation is always to let them slide because they aren’t a problem for you at the moment, but you have to weigh that preference against the cost that the price of tying up the loose end goes up down the road. It is unclear at the moment on the outside as to what extent this dispute developed out of a “loose end” or what the exact facts are in this dispute, but in my role in advising clients, many disputes often do evolve this way and this is certainly an example of what can happen when the stakes go up for the other side.

SOPA Blackout Protesters Succeed in Tabling SOPA and PIPA Bills; Focus Shifts to OPEN Act

To follow up on my blog posting about the SOPA blackout, the SOPA blackout protesters achieved their desired result: SOPA and its companion bill PIPA were tabled after its co-sponsors withdrew their support of the bills, as the L.A. Times reported.

The focus of Congress will now shift to consideration of the Online Protection and Enforcement of the Digital Trade Act (the “OPEN Act”), H.R. 3782, which was introduced by Rep. Darrell Issa (R-California) on the day that the SOPA blackout was held. In a blog posting to the Silicon Valley Software Law Blog I explored whether the OPEN Act was a more viable alternative, writing as follows:

Obviously, the OPEN Act provides a far less drachonian approach to dealing with infringing foreign websites than what was contemplated by SOPA, which would have allowed full websites to be completely “erased” from the Internet. Instead, the OPEN Act’s approach goes to the heart of the problem: cutting off the ability of infringers to make a profit off of their infringement. So, in that respect, the OPEN Act is definitely improvement over SOPA. Also, there is an argument that the ITC is a more appropriate body to hear these kinds of disputes, since the agency already has been tasked with the job of addressing unfair import disputes, where intellectual property violations are involved. Furthermore, this bill focuses on the problem of infringement by foreign websites, so it targets the real source of concern over infringement as opposed to usurping existing methods of dealing with domestic infringers. . . . All in all. . . I think the OPEN Act is a much more palatable proposal for dealing with infringers, and that this bill is a far better working document than what we had on the table with SOPA and PIPA. At the same time, I think that the whole concept of adopting new legislation to deal with online infringers is still a work in progress warranting further consideration before any new legislation is adopted.

A working text of the OPEN Act has been posted for comment, and I would encourage all members of the Silicon Valley IP community to check out the website and provide your feedback to the proposed legislation. Unlike SOPA and PIPA, this particular piece of legislation is receiving support from some prominent online companies such as Google, Facebook, LinkedIn, and Twitter. As you might expect, it is not receiving the same kind of fanfare from the entertainment world.

The Silicon Valley IP Licensing Blog will continue following this story as it develops and keep you updated on any news.

Lessons for Silicon Valley Companies in Apple Trademark Dispute

In case you have not been following the story, Apple has found itself in the middle of a trademark dispute in China over the use of its mark “iPad,” as MSNBC reported on its website yesterday.

You might wonder how in the world this happened, given Apple’s large, IP savvy legal department and the fact that China was such a large potential market. Apple surely started focusing on the protection of its worldwide rights in the “iPad” mark the moment it conceived the concept and the name itself.

Well, according to MSNBC’s report, a Chinese company reserved the mark originally back in 2000 and in 2009, Apple purchased the company’s worldwide rights in the mark from the company’s Taiwanese subsidiary. However, the Chinese company maintains that it still owns the rights in the mark in the Chinese mainland, and that the subsidiary never had those rights to license. Unfortunately for Apple, the Chinese company is now having financial problems, and so, the Chinese company is diligently pursuing this issue, no doubt in order to procure a large settlement from Apple that can keep the company in business.

The facts of this particular legal dispute provide a variety of lessons to Silicon Valley companies.

First and foremost, if you come up with novel business product that you plan on marketing worldwide, you need to devote resources before you launch to protecting your mark in all of your key markets and you need to work with qualified local counsel in each country to ensure that your mark is actually protected in each of those key markets. Then, when you have to enter into agreements with with foreign companies, make sure that both your local and your U.S. counsel are experts in the relevant areas of law, so that they can confirm that the English and foreign language versions of your agreements give you the correct rights that you need to proceed. When I negotiate agreements with China, for example, the agreements typically have one line in Chinese and another line in English, so it is important to confirm that both sentences read as intended.

Second, when you enter into agreements regarding IP, do due diligence on the IP in advance to confirm ownership rights in the IP and also procure warranties and indemnifications regarding the ownership of the IP from any third party who is transferring rights in IP to you, so that you don’t find out down the road that you didn’t actually get what you paid for and have to absorb the losses directly yourself, when those losses are inevitably going to be far more expensive.

Finally, if you are launching a product for the worldwide market, make certain that the marks you want to build your brand around are protectable on a worldwide basis. So many clients that I work with do it backwards and select a name and develop their brand before they even stop to consider whether they can even protect the brand they are developing. Far too often I see companies have to start over 2 to 3 years into their business with rebranding everything because they discover that a third party is already using their mark. Even if they are successful in avoiding a lawsuit for trademark infringement, they run the risk of losing all of their Internet history for their old brand and having to spend thousands and thousands of dollars recreating all of their branded materials such as their website, business cards, landing pages, brochures, stationery and everything else. It can be a very costly mistake, even when the companies escape the worst case scenario of litigation.

The bottom line is that trademark protection planning needs to start on the day that you conceptualize a brand, and when you are trying to protect the brand off-shore, you need to make sure you are coordinating your U.S. and foreign representation to ensure that you are definitely protecting your brand in both locations.

Silicon Valley Prepares for SOPA Blackout Day Observation

The Silicon Valley cyberspace community is currently preparing for tomorrow’s observation of SOPA Blackout Day. Organizers are requesting that participants make their websites go black for at least 12 hours tomorrow in observation of the blackout.

As I reported on the Silicon Valley Software Law Blog, Mozilla, Reddit, Word Press, Boing Boing and the English language version of Wikipedia have confirmed that they will participate in the blackout.

In addition, Politico is now reporting that Google will be joining in tomorrow’s protest, but will not be participating in the Internet blackout. Instead, Google will reportedly be posting a link on its homepage explaining its opposition to the Stop Online Piracy Act and the Protect IP Act.

The nonprofit organization Fight for the Future has posted a comprehensive list of the participants who have currently committed to tomorrow’s online strike.

In case you have not been following the SOPA controversy, the purpose for tomorrow’s blackout is to express online opposition to the proposed SOPA legislation. I discussed the controversy in the Silicon Valley Software Law Blog as follows:

[T]he Stop Online Privacy bill was introduced in late October, 2011 by the Republican Congressman Lamar Smith of Texas, which would allow the Attorney General of the United States to seek a court order against internet service providers to cause them to make a website disappear from the Internet. . . . The bill was designed to allow U.S. companies to shut down offshore infringers, and as you might expect is being championed by the Motion Picture Association of America and the Recording Industry Association of America, which of course, are highly invested in stopping the loss of profits to online privacy.

While few in the Internet world would disagree that online privacy is bad, the controversy over SOPA is over the concern that large companies are going to be able to censor or blacklist smaller Internet players and simply be able to “erase” their very existence from the Internet. Net Coalition.com has assembled a list of parties who oppose SOPA. The list includes companies, prominent individuals and educators, public interest groups, industry associations, websites and online services, cybersecurity and engineering groups, and international human rights advocates.

In case you are wondering what my position is on the issue, I am absolutely against infringement but am very concerned about the potential impact of this bill. As I wrote in the Silicon Valley Software Law Blog:

Like most attorneys who represent clients in the Internet space, I have found myself on both sides of this issue. It is not unusual to have a client come to me with a complaint about a third party infringing my client’s copyright on the Internet, and to find myself in the frustrating position of having to advise my client of the limited options available for dealing with the infringement. It is particularly frustrating when I am talking to a client who has limited resources and cannot afford the investment of resources that is going to be required to really go after the infringer.

In fact, even I have run into situations where my copyrighted works were being infringed on the Internet and I had to make a decision about how to best deal with the infringement.

At the same time, however, I am very concerned by the fact that Congress wants to further legislate in this area. I agree with many of my fellow Internet law experts that we should oppose in general the encroachment of government regulation of the Internet, and this bill appears to be very serious encroachment. Moreover, I am concerned about how a bill like this would be used. It is almost certain that the small content publisher on the Internet would be at a serious disadvantage in defending itself against SOPA-based actions. Large companies with large teams of lawyers would be in a position to effectively censor smaller entities on the Internet, since the accused would not be financially able to defend themselves. It is highly likely that a bill like this which would allow parties to “erase” websites from the Internet would be misused for the economic benefit of one party over another.

Of course, there is another issue. Given the fact that the very nature of Cyberspace is borderless, should a U.S. attorney general really be able to police websites offshore? If so, shouldn’t the equivalent officials for other governments be able to do the same thing? What kind of standard are we setting for the rest of the world to follow? I’m not sure we want certain countries’ political leaders to start erasing American websites from the Internet.

The bottom line is that the implications of this bill go beyond the intent of just getting offshore infringers that cannot be shut down off the Internet. The effects of this bill could be very far-reaching, and take us a step closer to the day when virtually every activity on the Internet is subject to government oversight and regulation-not only by the U.S. but also other governments around the world.

For any companies interested in supporting tomorrow’s protest by participating in the blackout, you still have time to get involved. Wired.com has republished Google’s recommendations for how to participate in the blackout in a “web-friendly” way. Fight for the Future has also published instructions on its website on how to get involved.

What does Patent Reform mean for Silicon Valley Entrepreneurs?

The recent passage of the long-awaited Patent Reform bill was heralded by many around the country as great accomplishment; however, the bill was not without controversy, particularly in the Silicon Valley, where many who work with start-ups and tech companies expressed concern about the new legislation.

In my recent blog posting on the California Biotech Law Blog, I raised concerns about whether or not this bill was really good for the biotech industry. As you might expect, my concerns about the bill go beyond its effect on the biotech community–my concerns are relevant to the Silicon Valley start-up community as well.

It has yet to be seen as to whether or not the legislation will really improve the operations of the USPTO as promised, but the passage of this legislation has an immediate effect on inventors and start-ups, who now have to race to gather the capital necessary to file a patent on their invention, so that they can ensure that they are the first to file a patent on the invention. Like many who work with start-ups, I worry that this hurdle will now discourage innovation, particularly in these challenging economic times, since investors and loans are so difficult to come by. Why make the effort to invent at all if it is going to be such a challenge to protect your invention?

In truth, despite my concerns about this new legislation, I have faith that Silicon Valley entrepreneurs will overcome this hurdle as they do so many others. The Silicon Valley is a resilient place where people are used to overcoming challenges and setbacks. However, I remain puzzled as to why Congress chose to finally pass this bill, which had been introduced and debated by many prior Congresses. Why impose this new hurdle on inventors at this point in history during this economic crisis? Shouldn’t our policy be to encourage innovation at every opportunity so that we can get new businesses going that create new jobs? Placing new hurdles on cash-strapped inventors and start-ups in this economy just seems to defy common sense.

To see the full text of the American Invents Act of 2011, click here.

Amazon, Google, Wall Street Journal Move to Modify Applications on Apple App Store

The Prinz Law Office Launches the Silicon Valley Software Law Blog

How Does an Entrepreneur Protect His or Her Ideas for Launching a New Start-Up?

When an entrepreneur calls me with questions about launching a new start-up, he or she is inevitably concerned about a single issue: protecting his or her ideas.

Most are a little disappointed to learn that ideas alone are not something that you can protect with an IP filing.

So, if ideas alone are not protectable, how exactly does an entrepreneur protect an idea long enough to get it off the ground?

My first piece of advice to entrepreneurs who call me with this issue is that they need to procure a well-written nondisclosure agreement, and use it with any friends, family, or business contacts that they share their idea with. Of course, I always caution them that the best form of protection is not to share confidential information in the first place, and if they do have to share confidential information, to keep the sharing to an absolute minimum. But certainly, to the extent they need to discuss their ideas with anyone else, the discussion needs to be covered by a nondisclosure agreement.

My second piece of advice is to make certain that anyone they hire to develop anything at all for them related to their idea needs to assign all their rights in whatever is developed to him/her or his/her company. The mistake I see entrepreneurs make over and over again is that they think payment amounts to a transfer of ownership rights. This is far from the case. If you pay for development and there is no assignment of rights to you, then the contractor will own the rights in what was developed.

My third piece of advice: if your idea constitutes an invention, you need to hire a patent attorney right away and get a provisional patent filed on your invention. Please note: THIS STEP WILL BECOME INCREASINGLY CRITICAL IF PATENT REFORM IS PASSED, SINCE THE NEW PATENT BILL WOULD MAKE THE U.S. A FIRST TO FILE SYSTEM, and you will lose your rights to the invention if someone else files the patent first.

My fourth piece of advice: if you have created or developed or recorded in any way your ideas and you are not concerned about having them published at the Libary of Congress, then you will want to register a copyright to cover what you created/developed/or recorded, so that there is a record of ownership.

My fifth piece of advice: If you come up with a great name for your company or product, immediately do a thorough search of the name on the USPTO website and the web to see if anyone else is using that name, and if so, confirm whether or not they are using it to describe similar services or a similar product that could be confused with your business, product, or service. A common mistake that I run into with my practice is that entrepreneurs get their heart set on a particular name, and then find out months or years later that they are infringing on another company’s trademark and realize that they have to change the name(s) they have chosen. Not only is this a huge waste of money, but it’s also a huge waste of time, since you will have spent an extended period advertising a mark that you have to drop. It is much easier to simply confirm that you are not infringing from the start.

At some point, you will of course want to protect the mark you come up with, but I don’t recommend doing it immediately since there’s a minimal amount of risk that another entrepreneur in your same space will come up with the same mark at the same time you do. It is far more likely that you will select someone else’s mark than that you will lose your mark if you wait to file it until you can afford to do so.

Finally, my sixth piece of advice: you should not let people use your ideas except pursuant to a well-written agreement, even if the third party is simply “testing” or “evaluating” your product. Entrepreneurs tend to be educated on the need for filing patents, copyrights, and trademarks, and are generally willing to spend money on those filings; however, they often forget that the agreements are perhaps the most important piece of the puzzle to IP protection and either try to draft their own agreements based on contracts they find or in many cases, they simply forget to enter into an agreement altogether. It is a really bad idea to permit third parties to use your IP without having a well-written agreement to govern the relationship, particularly if you want to retain the value of your IP, even if the other side simply wants to evaluate the product or services It will pay to take the time to do things the right way–even if you have to spend a little more money up-front to get the work done.

In summary, an entrepreneur can protect his or her ideas–but just not directly as a particular IP filing. Thus, to protect the idea an entrepreneur has to examine the individual elements of the idea to determine how to protect each element. By utilizing a combination of nondisclosure agreements, copyright and trademark registrations, patent filings, and agreements, the entrepreneur can protect his or her ideas long enough to get them to market and start making money.

Hiring a Third Party to Create for You? Don’t Forget the Copyright Assignment

In this day and age, it is very easy to find someone to create almost anything for you or your business at the mere click of the mouse; however, what most people forget when they make that easy hiring decision: paying for the work does not mean that you OWN what was created–it merely means that you have the right to USE what was created.

In other words, if someone hands you work that he or she created and no copyright assignment is made, then you typically are just going to receive a nonexclusive license to use the work created. However, if the license is not written, then the extent of your rights is technically unclear and not actually defined. Thus, your license could be terminated at any time.

So, what does this mean? It means that if you decide to repurpose the work that was created and use it in an alternative way, i.e. other than what was contemplated by the contractor, then you may be committing copyright infringement. Similarly, if you decide to create a derivative work of the original work which was created, well then you may be commiting copyright infringement as well, since only the owner of the IP in a work can authorize the creation of derivative works.

In the current economy, I see this issue come up quite often in terms of payment disputes. The buyer of the work decides not to pay the invoice for the work that was created but wants to continue using the work. Obviously, if you only have a license to use work and you breach that license by not paying for the work, then you are technically infringing the copyright of the creator if you continue to use the work after the dispute arises.

Thus, the best practice when you are hiring someone to create something for you–whether it is artwork, text, videos, designs, software code, music, or any other type of creative work–is to make certain you get a copyright assignment from that person BEFORE you pay him or her any money for his or her work. And, if you have a payment dispute with the person you hire, you need to resolve that dispute and you should stop using the work until a resolution has been reached which involves an assignment of copyright. And, of course, it’s always best to discuss your expectations with this person when you hire him or her rather than after he or she has already finished the project, as he or she is always going to be more willing to enter into a copyright assignment before starting the job rather than after the work has been concluded.

Trying to Save Money with Do-It-Yourself Trademark Filings? How to Avoid Creating a More Expensive Headache for Yourself

I have been working with a number of start-ups in this recession tried to save money by filing their own trademarks, and ultimately ended up creating a more expensive headache for themselves because of mistakes they made in the application.

If your start-up is one of those businesses that is trying to cut corners in this recession, I would of course recommend that you at least pay the money to have an attorney review what you are filing before you file it.

However, if you are too cash-strapped to pay more than the USPTO filing fees, then I have a few tips for you:

(1) If you are filing an application on a name rather than a logo, pay the extra money to have a designer stylize your name rather than filing the words of the name in black type. Many of the problems I see with do-it-yourself applications arise where entrepreneurs just file the application on words rather than the stylized words. In my experience, the stylized words are more likely to receive a trademark than the words alone.
(2) Do a search on the USPTO website for the words in the name individually and, where there is more than one word in your mark, do searches of the words in various combinations, and just pick the key words in the name and search those. If your mark is already in use, look at what it is in use for and decide how close the current use is to your use. If the uses are similar, it may be best to pick another mark. You should also do a search of any images in your mark on the USPTO website to see if there are any similar marks currently in use.
(3) Do not make up from “scratch” your description of the services that your mark will describe. Instead, find the Trademark Acceptable Identification of Goods and Services Manual on the USPTO website, and try to find an approved USPTO description that refers to your services. You will have to pay a filing fee with the USPTO for each class that you select, so I generally recommend that entrepreneurs pick initially the class that most closely describes the goods or services that the mark covers and then list as many of the approved descriptions in that class that describe your goods or services as possible. Then, after you have compiled a list of the approved descriptions, you should put them into a paragraph format that reads well.
(4) Put together an example of the mark’s use in commerce to submit as your “specimen” to the USPTO, and make certain that the example that you submit refers to the services listed in the description you just wrote. If you don’t have an example yet to submit, then you may need to file an “intent to use” form, which will cost you an extra $100 ultimately, but will give you some extra time to create your example.
(5) If the USPTO writes you about your mark after it is filed, find the name of the attorney who is writing you and pick up the phone and call him or her rather than filing responses that may not address the questions or concerns of the attorney. If, after calling the attorney at the USPTO, you still do not understand what you need to do to get your application through the USPTO, then at that point, you should solicit the assistance of an attorney. The USPTO gives you six months to respond to USPTO correspondence, so take the time to pull together the money to obtain further assistance; however, you should not wait to the very last minute to obtain further assistance.

The bottom line: trying to save money by doing your own trademark filing can backfire and result in your spending even more money to clean up what you did yourself, so it’s always best to at least have an attorney look over your application before you file it. However, if are too broke to do even that, following these steps should minimize your risk of wasting your filing fees or ultimately creating a more expensive headache for yourself.

New Start-Ups Should Consider Collaboration Agreement as Alternative to Equity Agreement

Given my Silicon Valley location, I often receive calls from start-ups who want to “give equity” to a developer that they’ve just started working with. When I receive these calls, I inevitably have a talk with the client or prospective client urging them to consider an alternative: entering into a collaboration agreement with the developer rather than actually giving the developer equity.

You might ask: why do I discourage start-ups for granting equity to a developer? Well, nine times out of ten the start-up has never worked with the developer before when they call me. They are generally proposing equity because they do not have the money to pay for the developer’s services, and the developer usually wants a large percentage of the company. Also, I know from experience that most clients terminate their relationships with their first developer within the first year of starting their business, so the odds are high those same clients will be coming to me within a year asking how they should go about kicking the developer out of their company.

Going into business with anyone is a huge commitment, and it despite the fact entrepreneurs are accustomed to granting equity in lieu of paying cash for services, doing it immediately with someone you have never worked with is a tremendous risk.

So, what do I recommend instead?

I recommend that start-ups in the position of requiring development work and not having the cash to do it should consider drafting a collaboration agreement.

Why use a collaboration agreement structure instead? Well, you can still share the profits arising from the development work with the developer; however, you can do it in such a way that if the relationship does not work out on a long-term basis, you can get out of it by ceasing use of the work that was developed. In the alternative, if the developer proves to be an integral member of your team, you can always provide equity down the road after the developer has proven his or her worth to the business.

In case you are not familiar with the collaboration model, this model is one that is routinely used in the Silicon Valley to describe an arrangement between two individuals or companies who have decided to pursue some sort of business opportunity together but have elected not to set up a separate business entity or to provide equity in an existing company to do it. The agreement provides a framework by which the parties can work together, defining how expenses will be shared, how profits will be shared, and what services each party will perform within the framework. It also defines how disputes between the parties will be resolved, in order to prevent a breakdown of the collaboration when there is disagreement.

All in all, I think it is the perfect model for many cash-strapped entrepreneurs to consider when they want to hire a particular developer but lack the cash to pay the developer for the services. It certainly is much less risky than taking a leap of faith and granting a large amount of equity in a company to a developer they have never worked with, and it really accomplishes the same purpose if the relationship works out, which is to share the profits made from using the work that is developed.

Silicon Valley IP Licensing Law Blog Author Kristie Prinz Profiled in TheSciTechLawyer

Silicon Valley IP Licensing Law Blog Author Kristie Prinz Discusses Intellectual Property Licensing with IP Society’s Patrick Reilly

Technology Transfer Tactics Interviews Kristie Prinz on Tech Transfer Commercialization Dilemma

Seventh Circuit Court of Appeals Issues Ruling Which Affirms Rights in an Exclusive License to Joint Intellectual Property

I just spent about five hours on the phone with multiple clients over the last few weeks explaining to them the ins and outs of exclusively licensing joint intellectual property, so I was pleased to see the decision of the Seventh Circuit Court of Appeals in the Wisconsin Alumni Research Foundation v. Xenon Pharmaceuticals, Appeal No. 08-1351 (7th Cir. 2010), which affirmed the licensor’s rights in an exclusive license to joint intellectual property.

In this case, as in my various clients’ cases, the parties had entered into a collaboration in which they agreed to jointly pursue research. The agreement provided Xenon an exclusive option to license any resulting technology, which again is often typical in collaboration agreements, particularly with universities. The parties filed a joint patent application deriving from the provisional application that the Wisconsin Alumni Research Foundation (“WARF”) filed before the collaboration began. Xenon exercised its option to exclusively license the technology, which gave Xenon the exclusive right to make, use and sell patented products under the joint patent application within the field of human healthcare. In exchange, Xenon agreed to pay the Foundation a percentage of any product sales, royalties or sublicense fees it received.

Xenon then went on to sign a license agreement with NovartisPharma AG (“Novartis”), which gave Novartis a license to the technology covered by the same joint patent application it had exclusive licensed from WARF. WARF demanded sublicensing royalty fees under the terms of the exclusive license, which Xenon refused, claiming it had the right to license its interest in the joint patent application. WARF sued Xenon, claiming that it had breached the terms of the exclusive license. The district court judge held in favor of WARF, ruling that Xenon breached the exclusive license agreement by granting a sublicense to Novartis without notifying WARF or conforming the sublicense to the terms of the exclusive license agreement. The judge held that Xenon owed WARF license fees, and that given Xenon’s breach, WARF had the right to terminate the exclusive license.

At the same time the district court judge ruled in Xenon’s favor on several issues:

He dismissed as moot the Foundation’s claim that Xenon breached its duty of good faith by failing to abide by the terms of the license agreement.
He held that the Foundation had not given Xenon proper notice or opportunity to cure before invoking its right to terminate the exclusive license agreement.
It denied the Foundation’s claims to a compound that had been discovered by a University researcher who had entered into a consulting agreement with Xenon.

In a subsequent ruling, the court vacated its earlier decision regarding the WARF’s right to terminate the license agreement. The case went to a jury on the damages issue and the jury awarded $1 million, which was later reduced by the court to $300,000.00.

So, that’s the background. The Seventh Circuit ruled exactly as I would have expected, and agreed that Xenon breached its exclusive license by granting a sublicense on the joint patent without paying WARF’s sublicense fees. The Seventh Circuit also agreed that the breach triggered WARF’s right to terminate the agreement. The Seventh Circuit also found that WARF owned the compound in dispute as well.

What did the Seventh Circuit find compelling here?

First, the terms of the exclusive license on the joint patent contemplated sublicenses and said that they were permitted upon the payment of a royalty sublicense fee but specifically prohibited assignments without consent. So, even though Xenon before the agreement had the right to commercialize the patent independently of WARF, it gave up that right when it entered into the exclusive license. The Novartis license provided that Xenon would grant Novartis an exclusive license to all Xenon technology in the field of human and animal healthcare, which effectively was a sublicense to Xenon’s exclusive rights in the joint patent.

Second, the terms of the license require that Xenon was to pay WARF

(1) a royalty for direct sales by Xenon, which would be earned on the date that the product was sold, the date the invoice was sent on the sale of the product, or the date the product was transferred to a third party for promotional reasons, whichever came first; and

(2) “a percentage of any license fees, milestones, and royalty payments received by Xenon as consideration for the sublicense granted. . . .the percentage shall remain fixed at a rate of ten percent (10%) for years (1) and two (2) of this Agreement and seven and one-half percent (7.5%) thereafter until this agreement was terminated.”

In the second possibility, Xenon tried to argue that because the clause began with “for all Products sold by Xenon sublicensees” that it didn’t owe Novartis any money until such time that Novartis brought products to market at sold them. However, the court dismissed that interpretation, saying that in both the direct sales and sublicensing possibilities, the paragraphs began with “for all products sold” and that this phrase was just intended to distinguish direct commercialization from when a sublicensee commercialized the technology, and in the latter case, any compensation received triggered a payment obligation on Xenon’s part to WARF.

Third, on the damages issue, the Seventh Circuit found that the evidence was sufficient to sustain a damages award and that the issue of damages was not beyond the understanding of a lay juror and did not require the use of expert testimony.

Fourth, the Seventh Circuit dismissed the argument that because the agreement had a 90 day notice and opportunity to cure a material breach clause, that WARF’s decision to file suit during that 90 day period meant that it could not terminate the agreement for material breach until the court found Xenon in breach. The Seventh Circuit found that the ability to terminate the license was completely separate from the right to sue for breach of the contract, and that WARF had the right to sue after giving notice and had the right to terminate for breach after the 90 day period had lapsed.

Fifth, on the compound issue, the researcher assigned his rights to the compounds to the Foundation, and the fact that his work was conducted in part under the sponsorship did not change the ownership of the rights in the compounds.

All in all, this decision is a clear affirmation of the licensor’s rights in an exclusive license to jointly owned intellectual property. Parties looking to collaborate on the development of intellectual property and who have questions about how this all works from a practical perspective should look to this case as a reference.

At the same time, I think this case provides some good lessons to potential collaborators. You need to be very precise about what remains joint intellectual property and what will potentially be exclusively licensed intellectual property. If you do not intend to exclusively license all of the joint intellectual property, the agreement needs to be clear on this and it needs to be clear on what rights the parties jointly retain after the exclusive license is entered into.

You also need to be clear on what triggers payments to the licensor–in this case, the dispute was in part over a clause “on all sales of products”. The compensation language was obviously imprecise enough to provide fodder for a dispute. The parties clearly could have made a better choice on words.

As I have stressed to my clients, it is very important to think through all of the issues in a collaboration before you just draft and sign the agreement. This case is a good example of why that is so important.

FTC’s Suit Against Intel: What Will Be the Impact on the Silicon Valley?

The Federal Trade Commission (“FTC”) just filed suit against Intel this week, on the grounds that Intel’s “anti-competitive tactics have stifled innovation and harmed consumers.”

The FTC’s press release on the suit states as follows:

“The FTC’s administrative complaint charges that Intel carried out its anti-competitive campaign using threats and rewards aimed at the world’s largest computer manufacturers, including Dell, Hewlett-Packard, and IBM, to coerce them not to buy rival computer CPU chips. Intel also used this practice, known as exclusive or restrictive dealing, to prevent computer makers from marketing any machines with non-Intel computer chips.

In addition, allegedly, Intel secretly redesigned key software, known as a compiler, in a way that deliberately stunted the performance of competitors’ CPU chips. Intel told its customers and the public that software performed better on Intel CPUs than on competitor’s CPUs, but the company deceived them by failing to disclose that these differences were due largely or entirely to Intel’s compiler design. . . .

[Intel has now embarked] on a similar anti-competitive strategy, which aims to preserve its CPU monopoly by smothering potential competition from GPU chips such as those made by Nvidia, the FTC Complaint charges. As part of this latest campaign, Intel missed and deceived potential customers in order to protect its monopoly. The complain alleges that there also is a dangerous probability that Intel’s unfair methods of competition could allow it to extend its monopoly into the GPU chip markets.

According to the FTC’s complaint, Intel’s anti-competitive tactics violate Section 5 of the FTC Act, which is broader than the antitrust laws and prohibits unfair methods of competition, and deceptive acts and practices in commerce. . . . The complaint also alleges that Intel engaged in illegal monopolization, attempted monopolization and monopoly maintenance, also in violation of Section 5 of the FTC Act. “

So, what is this suit all about?

Based on some of the commentary, it appears that the crux of the argument is as follows: Intel pressured computer companies into exclusive deals and manipulated data to make its chips appear better than its rivals. As a result, Intel kept the prices higher than they would have otherwise been if the rivals had been able to compete in the space.

I am not an antitrust expert, so it’s unclear to me at the moment how strong the FTC’s case is against Intel, but I think the more interesting question is what the FTC’s action means to the Silicon Valley.

A Marketwatch story today looked at the issue, and quoted several Silicon Valley commentators who had concerns about the potential impact of FTC action on innovation in the Silicon Valley.

I think the article raises some interesting points, but I wonder if the concerns about the impact of this one case aren’t a little exaggerated. It is hard to accept that any one suit could have such a detrimental impact on Silicon Valley innovation. After all, we have a tremendous amount of talent in the high tech industry here, and no single case can just turn that talent off.

On the other hand, certainly, everyone in the Valley will be watching to see whether or not the FTC prevails and what the consequences are for Intel, in order to gauge what this one action means for how Silicon Valley companies can operate in the future. Obviously, there were likely patents on all this technology, which would give Intel as the patent owner the right to license out its technology. The question will be how the two bodies of law intersect here: patent, which gives monopolies, and antitrust, which tries to prevent monopolies.

As for Intel itself, this case adds one more antitrust suit to its plate, in addition to the antitrust legal troubles it already had in Europe, Korea, and in New York State, by its attorney general. I am sure this is not what Intel needed in a bad economy which has hit both the Silicon Valley and the technology industry in general hard.

We will keep you posted at the Silicon Valley IP Licensing Law Blog on the developments in this case as they arise.

Kristie Prinz Interview with Patrick Reilly on Technology Licensing

Series on ALI Software Contract Principles: Clarify Rules on Implied and Express Warranties in Software Contracts

We continue today with our series on the new American Law Institute Principles of the Law of Software Contracts with a discussion of what software companies need to know about the Principles’ treatment of warranties.

Again, for any of you who have not read our earlier postings on this subject, the importance of the Principles is that they may be used by courts to interpret and rule on disputes regarding software contracts in the future. Thus, software companies may want to take the time now to review their form agreements in anticipation of the possibility that the Principles may be used to interpret those agreements down the road.

So, what do you as a software company need to know about the Principles’ treatment of warranties?

Well, for the non-lawyers reading this blogposting: contracts can have express warranties, which are warranties that have to be spelled out very conspicuously in a contract to apply, and implied warranties, which are warranties which are read into an agreement. So, in talking about this subject, we are addressing what the new Principles say about the language that has to be in an express warranty to be valid, as well as what implied warranties will be read into a software contract, regardless whether the contract specifically talks about those warranties or not. We are also addressing what the Principles say about a party’s ability to disclaim certain warranties.

On the issue of express warranties, the Principles adopt the standard Uniform Commerical Code (“UCC”) view of express warranty, but interestingly enough do not require use of the words “warrant” or “guarantee” to constitute an express warranty. Also, the Principles clarify that distributors or dealers cannot be liable for breach of a software developer’s warranty, provided that they merely “transfer” the warranty provided by the developer but do not “adopt” that warranty themselves. The Principles provide that disclaimers of express warranties are unenforceable only if a reasonable party would not expect the exclusion or modification.While the position on disclaimers is a little unexpected, the Principle’s position on express warranties is bascially in line with what we as attorneys would expect.

On the issue of implied warranties, the Principles largely take the UCC position, allowing for an implied warranty of merchantability and an implied warranty of fitness for a particular purpose, and allowing both warranties to be disclaimed. However, the Principles do take a few noteworthy positions on the issue of implied warranties. First of all, the Principles take the position that one warranty cannot be disclaimed: the warranty that the software contains no material hidden defects of which the party was aware at the time of transfer. Also, the Principles say that this warranty does not take the place of any action for misrepresentation or any remedies. Second, the Principles take the position, that no implied warranty regarding material hidden defects that will be read into an agreement, where the purchaser of the software has tested the software in advance as fully as desired or unreasonably has refused to test it, provided that the warranties are with respect to defects that a test should or would have revealed. The position advocated by the Principles suggests that, if software companies are not already offering free trials or evaluation licenses to potential customers, it may be in their best interest to start doing so, in order to ensure that an implied warranty regarding hidden defects is not read into their software contracts.

In addition to addressing express and implied warranties, the Principles also take the position that these warranties automatically extend to certain third party beneficiaries such as immediate family, household members, and guests, and any other person who uses the software in a manner contemplated or that should have been contemplated by the software company. However, the Principles clarify that any disclaimers that would be effective against the purchaser are also effective against third party beneficiaries, so the Principles do not require the inclusion of any express disclaimer against third party beneficiaries.

What should you take away from this posting? Well, the important take-away point is that the Principles read in an implied warranty that there are no material hidden defects that cannot be disclaimed, but that this burden on the part of a software company may be negated by ensuring that the purchaser thoroughly tests the software in advance. So, if you are software company and you are not already taking steps to ensure software purchasers test the product in advance, you may want to implement policies now to ensure that this happens in the future.

Related blog postings:

Facebook Licensing Controversy Prompts Public to take Closer Look at Social Networking Site Terms and Conditions

Facebook Reverses Decision and Announces Temporary Return to Prior Terms and Conditions

Facebook Reverses Decision and Announces Temporary Return to Prior Terms and Conditions

Following up on our blog posting yesterday regarding the recent controversy over a Facebook decision to amend its terms and conditions, Facebook has decided to reverse its previous decision and temporarily adopt its previous terms and conditions.

Facebook CEO Mark Zuckerberg announced the change of policy late last night, stating as follows:

Many of us at Facebook spent most of today discussing how best to move forward. One approach would have been to quickly amend the new terms with new language to clarify our positions further. Another approach was simply to revert to our old terms while we begin working on our next version. . . .

Going forward, we’ve decided to take a new approach towards developing our terms. We concluded that returning to our previous terms was the right thing for now. . . . Our terms aren’t just a document that protect our rights; it’s the governing document for how the service is used by everyone across the world. Given its importance, we need to make sure the terms reflect the principles and values of the people using the service.

Our next version will be a substantial revision from where we are now. . . . Facebook users will have a lot of input in crafting these terms. . . .we’ve changed the terms back to what existed before the February 4th change, which was what most people asked us for and was the recommendation of the outside experts we consulted.

Clearly, the large public relations controversy forced Facebook to reconsider its decision to amend its terms and conditions. In the end, Facebook apparently felt that it had no choice but to listen to its customer base and respond to the controversy by returning to its prior terms and conditions.

As I indicated in my prior blog posting, this is a good example of a situation where a company has had to separate out its legal interests from its business interests. While overly broad licensing language such as what Facebook adopted may have been in its best legal interests, in that it offered the company the most protection with respect to user content, clearly the adoption of such language was not in its best business interest due to the public relations outcry it created. Although terms and conditions are typically drafted to allow the company to unilaterally modify them at any time, the fact that a company can unilaterally modify them does not mean that the company should always make such modifications. Clearly, the legal risks posed to the company by the old language were determined ultimately to be less than the business risks to the company from not putting a prompt end to the public relations controversy.

This incident should provide a good lesson to lawyers and businesses relying on legal advice: legal decisions–particularly when it comes to contracts–should not be made in a vacuum. The business consequences of legal decisions always need to be considered in parallel. It does not do much good to protect your company against all possible risks if your company is protected to such a degree that it is unable to operate.

Facebook Licensing Controversy Prompts Public to Take Closer Look at Social Networking Site Terms and Conditions

Following on the heels of a 2007 controversy over its privacy and advertising policies, Facebook has now set off a new controversy on the web with its decision to amend its terms and conditions, which deal with the licensing of content posted to its site.

The provision at the heart of this controversy states as follows:

You are solely responsible for the User Content that you Post on or through the Facebook Service. You hereby grant Facebook an irrevocable, perpetual, non-exclusive, transferable, fully paid, worldwide license (with the right to sublicense) to (a) use, copy, publish, stream, store, retain, publicly perform or display, transmit, scan, reformat, modify, edit, frame, translate, excerpt, adapt, create derivative works and distribute (through multiple tiers), any User Content you (i) Post on or in connection with the Facebook Service or the promotion thereof subject only to your privacy settings or (ii) enable a user to Post, including by offering a Share Link on your website and (b) to use your name, likeness and image for any purpose, including commercial or advertising, each of (a) and (b) on or in connection with the Facebook Service or the promotion thereof. You represent and warrant that you have all rights and permissions to grant the foregoing licenses.

In making this change, Facebook also deleted a key phrase, according to the Consumerist, which has been credited by some bloggers with breaking the story:

You may remove your User Content from the Site at any time. If you choose to remove your User Content, the license granted above will automatically expire, however you acknowledge that the Company may retain archived copies of your User Content.

What’s so controversial? Well, the new clause gives Facebook very broad rights to utilize for commercial or advertising purposes the content that you post on Facebook. Facebook now has the right to use your name, likeness, and image for any purpose, and to even create derivative works from that content. Moreover, Facebook now has those rights even after you remove the content from the site.

Needless to say, this change to its terms has caused another uproar on the Internet–perhaps more of one than Facebook was expecting, given the fact that it is very common in this day and age for terms and conditions to permit modifications without notice at any time. I’m sure Facebook anticipated that this revision to its terms and conditions would go largely unnoticed. Of course, that is not what has happened. Instead, Facebook has created yet another public relations nightmare.

Check out some of the commentary on the blogosphere over this issue:

Blogger Jonathan Blundell writes the following regarding the Facebook changes:

I’m not real happy with this at all. I’ve made 99% of my creative content available with a Creative Commons 3.0 license. That basically says that you’re free to use and share my content as long as you give me credit, don’t use it for commercial reasons (make money off of it) and you don’t change the licensing of it (i.e. Copyright the material).

But Facebook now claims they have ownership of everything I post on their site. That includes my recent cruise pictures, random videos of me and my friends eating sushi, pictures of my wedding and honeymoon as well as content we’ve created for the something beautiful podcast.

They claim they have the right to it all – and can do with it as they please. . . .

So, until they change their terms of service back to what they were, I won’t be posting any new content of my own to Facebook.

Blogger Simeon Simeonov writes of the issue:

What I find particularly offensive is that, from what I understand, users have no choice over the matter. Under the current terms of service, if I were to protest and close my account then they’ll own my archived data. But if I stay and close my account some years from now, well, they might own my data. Hmm……

This is an important step in the global battle for data ownership. If Facebook gets away with this, I expect to see these types of policies quickly spread through other services. I don’t expect this to happen, however. My prediction is that this will be another Facebook Beacon-type experience and another lesson to the company about the level of sensitivity and care with which a large online player must behave

Blogger Jim Goldstein writes of the Facebook action:

The February 2009 revision to the Facebook Terms of Use is the most egregious rights grab in the history of the Internet that I’ve seen.

The uproar has even poured over into the mainstream media:

Fox News is following the story and has posted the prior terms of service for Facebook as well as the response thus far from Facebook and various bloggers to the controversy.
The New York Times wrote of the controversy:

For Facebook, the ability to store users’ data and use their names and images for commercial purposes is important as it seeks to make more money from the virtual interactions of friends.

But balancing the desire for sharing with the need for control remains a challenge for Facebook as it turns five years old this month. . . . Amid the evolution, at least a few members are showing their uneasiness about the stance that Facebook is taking.

CNN and CNET News offered the following commentary:

Truth be told, most Facebook users won’t give a hoot, the same way that the flurry over the Beacon advertising program in late 2007 was fueled by a few vocal privacy advocates while the general population didn’t seem to care about it one way or the other but for advocates of copyright reform and privacy, not to mention photographers and writers who may want the photos they upload or “notes” they write on Facebook to eventually lead to some kind of profit, the news was alarming.

In looking at this controversy, the question comes to mind: is all of this outrage really warranted?

Blogger Jonathan Bailey of Plagiarism Today suggests that it may be a little overblown, stating:

The bottom line though is that Facebook is only doing what it feels it has to in order to protect its legal interest. Does it claim a wide range of rights? Yes. Does it offer a clear way to revoke them? No. If you trust Facebook, this isn’t an issue at all. If you don’t, then it’s probably time to begin thinking about an exit strategy.

Personally, I think the odds of Facebook doing anything too uncouth with a user’s content is slim to none. Facebook simply has too much to lose if users begin to get upset enough to leave.

However, this doesn’t mean that I’m going to start uploading my new novel or masterpiece paintings any time soon (not that either exist). Facebook, as with all such sites, should be reserved for works you don’t care too much about the rights in as you’re going to have to give up a lot just to get the work online through them, even under the best of circumstances. I urge caution when uploading to Facebook, but then again, I urge caution when uploading anywhere…

For my part, I have mixed feelings on the issue. Let’s face it: Facebook’s terms now are quite broad. If I were a lawyer representing Facebook or another social networking site, there is no question that I would prefer the new terms over the old terms. They would better protect my client from the risks of using user content elsewhere. My guess is that the language was drafted to protect against inadvertent use of user content, or perhaps against a past use of the content that was already taken within the company, outside of the prior terms and conditions. From my experience in representing clients, this is how most terms and conditions get modified–not because there are any plans in place to change the way the company does business.

On the other hand, as a businessperson, you have to take into account your customer base and its expectations, and clearly, these customers expected to maintain the rights to their own content. And there is no question that their expectations were reasonable. Why shouldn’t users maintain the right to their own content and be able to limit the use of their photos and images? Furthermore, the prior terms and conditions were very similar to the terms and conditions of its arguably closest competitor, MySpace, so there was some basis for those expectations. The MySpace terms and conditions provide as follows:

MySpace does not claim any ownership rights in the text, files, images, photos, video, sounds, musical works, works of authorship, applications, or any other materials (collectively, “Content”) that you post on or through the MySpace Services. After posting your Content to the MySpace Services, you continue to retain any such rights that you may have in your Content, subject to the limited license herein. By displaying or publishing (“posting”) any Content on or through the MySpace Services, you hereby grant to MySpace a limited license to use, modify, delete from, add to, publicly perform, publicly display, reproduce, and distribute such Content solely on or through the MySpace Services, including without limitation distributing part or all of the MySpace Website in any media formats and through any media channels, except Content marked “private” will not be distributed outside the MySpace Website. This limited license does not grant MySpace the right to sell or otherwise distribute your Content outside of the MySpace Services. After you remove your Content from the MySpace Website we will cease distribution as soon as practicable, and at such time when distribution ceases, the license will terminate. If after we have distributed your Content outside the MySpace Website you change the Content’s privacy setting to “private,” we will cease distribution of such “private” Content outside the MySpace Website as soon as practicable after you make the change.

The license you grant to MySpace is non-exclusive (meaning you are free to license your Content to anyone else in addition to MySpace), fully-paid and royalty-free (meaning that MySpace is not required to pay you for the use on the MySpace Services of the Content that you post), sublicensable (so that MySpace is able to use its affiliates, subcontractors and other partners such as Internet content delivery networks and wireless carriers to provide the MySpace Services), and worldwide (because the Internet and the MySpace Services are global in reach).

Clearly, the MySpace terms and conditions dealing with user content are closer to the prior Facebook terms, in that the scope of the license to user content is limited in nature, and it does not permit the content to be used elsewhere for commercial purposes. As a customer, I would be far more comfortable with the MySpace language than I would be with the new Facebook language.

Having said this, Facebook’s actions are not out in left field either–there are definitely other sites that are using similar language in their terms and conditions. In fact, two other popular social networking sites have adopted similar language: Linked In and YouTube. I don’t know about you, but I have yet to hear any uproar over these sites’ terms and conditions.

All in all, this controversy provides a good lesson to the public on Internet terms and conditions: they can be changed at any time for any reason. Indeed, that is the language in the fine print of most websites’ terms and conditions. Given this fact, you have to anticipate that your terms of use could be changed at any time to modify your rights as a user of the site, and plan accordingly.

On the other hand, this controversy provides a good reminder to businesses advertising on the web: anticipate how your customer base is going to respond to the modifications when you consider changing your terms and conditions. Just because you have the legal right to modify your terms and conditions, does not mean that you should do so. There are times when the consequences of making the change can be worse than the risks posed by leaving the terms and conditions “as is.”

Maintenance Agreements: How to Ensure Your Revenue Stream Continues Through the Recession

It’s inevitable: in a recession, most businesses are trying to cut costs wherever they can. Every business owner is seeing the effects of this all around them.

So, if you are a software company, how do you keep your maintenance agreements from being the target of one of these cuts?

The Software Licensing and Master Services Agreements Blog addressed this issue in a blog post this past week, summarizing an op-ed piece written by Chris Dowse and Ben Galison, which advises that software companies take the following steps in this economy: 1) create a positive customer experience; 2) understand customer usage; and 3) deliver business value, not technical service.

These are all good points. As a business owner who has considered whether or not to enter into these contracts for my business, I can tell you that when customer service is bad, it is hard to justify paying for a maintenance agreement, since you know that you will receive minimal support if and when you need it. In tough times like this, it may be tough to motivate your customer service people to deliver good service, but it is critical to maintaining a positive customer experience. If money is tight and your customer service people are not doing a great job, you can almost count on customers not renewing your maintenance agreements.

At the same time, the value that the maintenance relationship provides is also critical. For my own business, I have often weighed the potential value lost by canceling the maintenance contract versus just buying the updated product down the road, and in most cases, I have decided that it is best for my business to just hold off and buy the updated product down the road. In an economy like this, software companies should anticipate that their customers will be making the same calculation, and focus on delivering enough value through maintenance that the customer will determine that signing the maintenance contract is a better value than holding off to buy an updated version of the product down the road.

Beyond customer service and value, are there other considerations that may come into play in deciding whether or not to terminate a maintenance contract in the recession? Well, a big consideration is going to be financing the maintenance fee. If your business is requiring a large maintenance fee right now, in the middle of the recession, to continue maintenance, there is a good chance that the customer is not going to renew. While I don’t typically advocate for clients to agree to break down the fee into smaller payments, it may be necessary to make such a concession in this economy if you want to keep your customers. You should consider the option of allowing customers to pay in quarterly or even monthly installments. While being this flexible does open the door to the possibility that a customer may not be able to continue the contract due to low finances in the middle of the contract, it also increases the likelihood that they won’t allow the contract to expire immediately right now, cutting off the revenue stream.

Another option right now may be to offer a discounted price in exchange for the customer signing up for a longer term than just the usual one-year period. Customers may be able to better justify the expense if they receive a discount and can lock in a single price for the contract over a longer period than just a single year.

The bottom line is that difficult times require some creative solutions to maintain your customer base and your revenue stream. Staying in tune with what your clients want and need is the best way to maintain your revenue stream so that it will survive the recession.

Should You Look to Your Intellectual Property Portfolio to Get Through This Recession?

Most companies and individuals are looking to cut expenses right now, but have you considered looking to your intellectual property portfolio to generate additional capital?

According to a report by the Chicago Tribune, many companies and even individual inventors are doing just that right now: while the rest of the economy is sinking, business is booming for Ocean Tomo, which is perhaps best known for its intellectual property auctions.

The Chicago Tribune reported:

As firms streamline operations to save money amid the recession, a growing number are looking to generate cash by selling or licensing their dormant trademarks and patents. That’s creating new demand for Chicago-based Ocean Tomo’s intellectual property appraisals, auctions and other services. . . . Ocean Tomo, which had revenue of about $30 million in 2008, is expecting revenue growth of 25 percent this year.

Of course, you don’t have to sell your intellectual property to make money off of it. Licensing is also a very effective way to commercialize your intellectual property, and licensing has an added benefit over selling: you can license your intellectual property without losing control of it altogether.

So, if you don’t have a large patent portfolio, what types of intellectual property might be commercialized to create another stream of income?

Well, according to the Chicago Tribune, trademarks are very marketable in this economy. Also, creative works can also be very marketable, regardless of whether they are written publications, recorded speeches, designs, or other creative works.

The bottom line is that if you are looking to generate some additional capital right now, it might be time to carefully review your intellectual property in order to see what products might be commercialized. Whether you choose to sell or license it, your unused intellectual property may just be the stream of income you need to get through this recession.

Associated Press Alleging Artist Stephen Fairey Infringed President Obama Photograph

Did artist Stephen Fairey commit copyright infringement when he painted the image of President Obama and based that painting on a photo owned by the Associated Press?

The Associated Press has approached Mr. Fairey and is claiming that he has in fact infringed their copyrighted photo.

A photo of course is generally protected under Copyright Law; however, one question that I have here is how much creativity is actually in a head shot. Is it truly enough to even receive copyright protection? If so, what is it that is creative about this head shot to merit the protection? I’ve not reviewed the case law on the issue, but I think there is certainly some room to argue that there is not enough creativity in this particular photo to merit copyright protection.

This is in fact the argument rised by Georgetown University law professor Rebecca Tushnet, who indicated in a BBC interview that it could be argued that what Mr. Fairey copied was the basic fact of Mr Obama’s features, which do not have a copyright.

The problem, of course, with this argument, is that if a photo like this were not copyrightable, then you might have trouble arguing that news-type photos are ever copyrightable. All it takes is a very minimal amount of expression to constitute a copyrightable photo, and in all likelihood, this photo would meet that very basic standard.

Having said this, even if the photo were in fact copyrightable, a second hurdle exists to proving infringement: the fair use exception.

What is the fair use exception?

Section 107 of the Copyright Act states as follows:

[T]he fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include –

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work.

The fact that a work is unpublished shall not itself bar a finding of fair use if such finding is made upon consideration of all the above factors.

So, would the mass distribution of this photo constitute a fair use?

In my opinion, no. While there is an argument that this painting was not made for commercial purposes because it was used in a political campaign, I think that there was a commercial element to the distribution. Also, the entire photo was utilized and while you might be able to argue that the painting has made the photo more valuable, I am not convinced by the argument. The photo is just a head shot–far less interesting than the painting.

The Stanford University Fair Use project thinks differently and is involved in Mr. Fairey’s defense.

This should be an interesting case to watch. It is a good reminder to artists that they should work these issues out in advance of creating works based on photos. Moreover, it is always a good idea to verify that you have a license on a copyrighted work before you begin distribution of that work. Otherwise, you may very well end up in federal court trying to defend your actions after the fact.

More on Renegotiating Contracts in the Bad Economy

Is Your Business Infringing on the Intellectual Property in Other Companies’ Logos?

Increasingly, I have noticed a trend with websites: more and more, companies are displaying other companies’ logos on their websites. In fact, when my new website was in development, my developers proposed that I do the same.

However, if you are displaying other companies logos on your website, there is a high likelihood that you are infringing on the intellectual property in those companies’ logos. Do you have a signed trademark license with each company to use their logos on your website? If the answer is no, then you are probably infringing.

I understand that this type of infringement seems to be something that everyone is doing now, but not so long ago, “everyone” was downloading music for free too, and I’m sure almost everyone in the blogosphere knows at least one person who has been sued by the RIAA for copyright infringement due to the illegal downloading of music. Just because “everyone” is doing it, certainly does not make the action any more legal–just perhaps it means that many companies are not at the moment enforcing their rights in their logos. However, this could change.

Displaying another company’s logo without first licensing the right to use the logo, infringes the copyright in the logo’s design.

Section 102 of Title 17 of the U.S. Code (“Copyright Act”) states as follows:

a) Copyright protection subsists, in accordance with this title, in original works of authorship fixed in any tangible medium of expression, now known or later developed, from which they can be perceived, reproduced, or otherwise communicated, either directly or with the aid of a machine or device. Works of authorship include the following categories:

(1) literary works;

(2) musical works, including any accompanying words;

(3) dramatic works, including any accompanying music;

(4) pantomimes and choreographic works;

(5) pictorial, graphic, and sculptural works;

(6) motion pictures and other audiovisual works;

(7) sound recordings; and

(8) architectural works.

Thus, as a pictorial or graphic work, the logo is clearly protectable by U.S. Copyright Law, unless, of course, its use fits within the fair use exception.

Section 107 of the Copyright Act sets forth the fair use exception as follows:

[T]he fair use of a copyrighted work, including such use by reproduction in copies or phonorecords or by any other means specified by that section, for purposes such as criticism, comment, news reporting, teaching (including multiple copies for classroom use), scholarship, or research, is not an infringement of copyright. In determining whether the use made of a work in any particular case is a fair use the factors to be considered shall include –

(1) the purpose and character of the use, including whether such use is of a commercial nature or is for nonprofit educational purposes;

(2) the nature of the copyrighted work;

(3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and

(4) the effect of the use upon the potential market for or value of the copyrighted work. . . .

The problem with arguing that the use of another company’s logo on your website without permission is a “fair use” is that: (i) if you are a for-profit business, the use will be commercial and (ii) you will be using the entire logo (not a portion of the logo). In addition, you can certainly argue that use of another company’s logo can have a dilutive effect on the value of such other company’s logo and brand generally. See the definition in Wikipedia of “Trademark Dilution.” It simply is not clear that the fair use exception would extend to allow the use of other companies’ logos without permission on a website.

In addition, using another company’s logo without permission can in some instances also constitute trademark infringement. The test is whether the mark is being used with respect to products or services that are the same or similar to the products or services covered by the trademark registration, such that a “likelihood of confusion” exists. In most cases, providing a list of logos on your website for advertising purposes is not going to constitute trademark infringement, since the typical business using unauthorized logos is doing so to identify customers or clients of the company, or to list news organizations where their product has been featured. Such use does not generally rise to the level of trademark infringement.

If you have been using logos without authorization, you may wonder how to remedy the problem. Well, you simply need to contact each of the companies whose logos you want to use and ask for a copy of their license to use their logos on your website, which they should be very willing to provide to you. I recommend that you retain the services of a licensing lawyer to review the license and ensure that the agreement authorizes your current and intended use of the logo. You may or may not decide to ask that the agreement be backdated in order to authorize retroactively your prior use of the logo. While making such a request could open a can of worms by alerting the other party to the fact you have been infringing, it will also ensure that you will not have any future legal problems with that company down the road over your past authorized use. A judgment must just be made in each case as to how best to handle the situation with each company you have infringed.

While the process of cleaning up your company’s unauthorized use of trademarks on your website can be daunting, once this has been dealt with, you can breathe easily knowing that you have minimized your company’s liability in this area. A slow economy is the perfect time to take on such a project.

Bad Economy Presents Opportunity to Renegotiate Contracts

While the bad economy has stopped much of the deal activity going on in the business world, the poor economy presents one opportunity that you may have overlooked: the opportunity to renegotiate your contracts.

Why does a bad economy provide such a good opportunity for renegotiation? Well, the answer is fairly obvious: in a bad economy, parties are just more inclined to work with each other. Businesses cannot afford to lose contracts, whether as a result of breach or simply termination, so they are more likely to work out a satisfactory resolution with an opposing party who wants to amend an existing contract.

Why might you want to renegotiate a contract?

Well, if you have run out of money and are unable to make the payments required under the contract, you probably want to consider renegotiating. However, you may want to renegotiate even if you are having no difficulty in making the payments. First of all, your circumstances may have changed since the time you originally entered into the agreement, and the agreement in its current form just may not make sense to you any longer. Second of all, you may have entered into a bad agreement that you would like the opportunity to fix retroactively. Finally, you may just want to take the opportunity to negotiate a better deal since the time is right to do so.

In my opinion, businesses of all sizes should take the time in this slow economy to carefully review their contracts–particularly the most expensive ones–to determine whether or not it may make sense to raise the renegotiation issue with the opposing parties to those contracts. Then, assuming you decide that it makes sense to renegotiate one or more of your contracts, I recommend that you obtain some outside legal assistance to make certain your amendment(s) is/are drafted correctly, in order to avoid creating a legal mess of the original agreement(s). A transactional attorney should be able to draft an amendment for you in most cases without generating any significant legal fees for the work. Thus, in most cases, it should be cost-effective to pursue the renegotiation, even with the assistance of legal counsel.

Should Your Business Conduct an IP Licensing Audit?

Entrepreneur.com ran an article this month, which advised business owners to practice “preventive lawyering” or “litigation avoidance” by conducting audits in some key areas of the business such as contracts and intellectual property.

I agree with the advice in this article. Regardless of their size, businesses need to conduct a periodic review of their operations to see where they might be at risk for lawsuits, and they need to retain attorneys to assist with that review.

What would you be looking for in such a review?

From an IP licensing perspective, you would first and foremost be concerned about possible infringement of a third party’s intellectual property. Are you using a third party’s intellectual property, and if so, do you have a license in place that gives you the rights to utilize the third party intellectual property in the manner you are using it for? If you have licenses in place, are you performing according to the terms of those licenses, including paying the correct amount of royalties?

Beyond just looking for potential infringement, however, there are other issues that you will likely want to be look for in a review. First, you will want to confirm that all of your intellectual property has been identified and is adequately protected. Second, you will want to confirm that you actually own all of the intellectual property you think you do and that you have the documentation in place to establish your ownership. Third, you will want to confirm that no third parties are using your intellectual property, and that if they are, that they are using that intellectual property pursuant to a valid license agreement. Finally, you will want to confirm that your license agreements are well-written and that licensees are performing all of the terms as set forth in the agreements.

Then, assuming you do in fact have licenses in place, you may want to take the next step with your audit and actually conduct an audit of your collections of royalty payments. As I wrote in my California Biotech Law Blog, a significant amount of royalties are often left on the table uncollected due to ineffective licensing compliance programs. Thus, you may find it very financially worthwhile to conduct an audit of the licensing compliance program in order to confirm that your program is not leaving significant money on the table, too.

Of course, if your business already has a general counsel or an IP counsel in-house, the chances are good that your legal department already conducts such reviews on a routine basis–this job is a typical function of such legal departments. However, in the event that your business is not yet large enough to have its own legal department, then it makes sense to consider launching such a review and conducting those reviews on a regular basis–regardless of whether your business is a one-person sole proprietorship or a larger company having several hundred employees.

All in all, I definitely agree that a little “preventive lawyering” on IP licensing issues can save easily save you thousands and, in some cases, even millions of dollars. Clearly, it can prove to be an excellent investment in your business.

Given where we are on the patent reform debate, is it time to move patent reform off the table and work on copyright reform?

If you haven’t heard many calls for this lately, you are not alone, but according to Wired, Judge Miriam Hall Patel, who presided over the Napster case has had time to think about the issue and believes that it is time to do just that. However, unlike in the case of patent reform, she does not believe that legislation is the answer. Instead, she believes that we need to establish a new administrative body.

Patel’s specific recommendations included the following:

The new body needs to be a mix of public and private entities with all parties represented. It cannot be a purely governmental body because that is not likely to instill confidence in the public.

All copyrighted music would be part of this system and subject to a compulsory license, with possible opt-out provisions for certain rights holders.

Congress should abolish all current compulsory licenses and adopt a blanket licensing system. (Such a system may have allowed Napster to continue operating, assuming it could afford to pay labels under the compulsory licensing scheme.)

The body would administer all royalty payments and would replace all current systems for doing so.

An independent arm would arbitrate royalty disputes using music databases that allow arbitration to be done with speed and precision lacking in the current system.

Manufacturers and developers would need approval from this body before introducing an application or device capable of recording, distributing or copying music to consumers. The body would include technology experts to aid in making those decisions quickly — Patel described this as “sort of like the FDA, but much faster.”

Is the creation of a new administrative body the answer? It is an interesting proposal. I agree with Judge Patel–there is no question that the current system leaves much to be desired, but I am not sure myself as to what we should do to “improve” it.

Still, you have to admire her “out of the box” thinking. And she just may have something there: perhaps it would be better to move some of these royalty disputes into arbitration through a designated administrative body to hear them–wouldn’t that be preferable over Recording Industry Association of America (“RIAA”) lawsuits?

Should the Blogosphere Adopt the Creative Commons Licensing Model?

A posting by Kevin Smith on the Scholarly Communications @ Duke Blog explores the argument that the academic world should consider adopting the Creative Commons Licensing system for their academic works. The article got me to thinking: should the blogosphere consider adopting the same model?

Smith’s argument is that the problem with the current copyright system is that it does not necessarily protect attribution or moral rights that the writer has in the work that he or she created. Thus, if the ownership right is transferred to a publisher or just another entity, then that publisher or entity has the right to republish the work and could easily do so without making any attribution to the author.

Smith writes:

There was a story in the higher education press about six months ago about a professor who found that his short book, published several years before and since out of print, had been incorporated whole into a larger work from the same publisher that carried the name of a different author. Because the professor had transferred his copyright to the publisher, and the US has no moral right of attribution, he had no recourse to continue to get credit for his own scholarship. For an academic author this is a dreadful fate, since scholarly publication is done more for reputation and standing in the discipline than it is for money. . . .

So, what exactly is the Creative Commons License?

Well, the Creative Commons License is actually a series of six licenses:

1) The Attribution By License

2) The Attribution Share-Alike License

3) The Attribution No Derivatives License

4) The Attribution Non-Commercial License

5) Attribution Noncommerical Share-Alike License

6) Attribution Non-Commerical No Derivatives License

The Creative Commons Website provides a short overview of each licensing model as well as a series of videos explaining how they work. The inspiration for the Creative Commons License is, of course, the open source model in software. The Creative Commons Website explains as follows:

Too often the debate over creative control tends to the extremes. At one pole is a vision of total control – a world in which every last use of a work is regulated and in which “all rights reserved” (and then some) is the norm. At the other end is a vision of anarchy – a world in which creators enjoy a wide range of freedom but are left vulnerable to exploitation. Balance, compromise, and moderation – once the driving forces of a copyright system that valued innovation and protection equally – have become endangered species.

Creative Commons is working to revive them. We use private rights to create public goods: creative works set free for certain uses. Like the free software and open-source movements, our ends are cooperative and community-minded, but our means are voluntary and libertarian. We work to offer creators a best-of-both-worlds way to protect their works while encouraging certain uses of them – to declare “some rights reserved.”

Thus, a single goal unites Creative Commons’ current and future projects: to build a layer of reasonable, flexible copyright in the face of increasingly restrictive default rules.

Creative Commons’ first project, in December 2002, was the release of a set of copyright licenses free for public use. Taking inspiration in part from the Free Software Foundation’s GNU General Public License (GNU GPL), Creative Commons has developed a Web application that helps people dedicate their creative works to the public domain – or retain their copyright while licensing them as free for certain uses, on certain conditions. Unlike the GNU GPL, Creative Commons licenses are not designed for software, but rather for other kinds of creative works: websites, scholarship, music, film, photography, literature, courseware, etc. We hope to build upon and complement the work of others who have created public licenses for a variety of creative works. Our aim is not only to increase the sum of raw source material online, but also to make access to that material cheaper and easier. To this end, we have also developed metadata that can be used to associate creative works with their public domain or license status in a machine-readable way. We hope this will enable people to use our search application and other online applications to find, for example, photographs that are free to use provided that the original photographer is credited, or songs that may be copied, distributed, or sampled with no restrictions whatsoever. We hope that the ease of use fostered by machine- readable licenses will further reduce barriers to creativity.

Like most attorneys, I am always a little reluctant to step out of the normal legal regime that I am accustomed to, but I think that in light of the recent fair use controversy launched by the Associated Press on the blogosphere (see my June 20, 2008 posting), it may just be time for bloggers to consider stepping “outside the box” on copyright law. For those of you new to the blogosphere, this is because in our world, it is advantageous for us to be quoted as many times as possible. Indeed, unlike the traditional journalism model, we are not looking to collect a license fees from our web publications, but we are looking to give a voice to our views and share a perspective on the web, which many of us hope will assist in developing our reputation in our respective professions as well. I, for one, am pleased to see myself quoted elsewhere, regardless of the number of words that are quoted, provided that my quotations are properly attributed and not taken out of context.

Going back to Smith’s article: wouldn’t the same rationale that argues for the use of the Creative Commons license in academia apply to many of us in the blogosphere as well?

While I am not quite ready myself to strike all of the copyright notices off my blogs and other online publications, I think that there is something to be said for this argument. As traditional journalism continues to grapple with the fact that society is moving away from print publications to the web, the blogosphere is going to have to deal with the fact that traditional journalism is still trying to come to terms with how to be viable online, and this may result in additional challenges to fair use. If that is the case, we as bloggers may just have to take another look at the Creative Commons Model, and decide whether this alternative licensing model is how we should be distributing our work online.

Retired NFL Players Win Verdict Against Union For Failing to Include Them in Licensing Deals

A verdict was reached yesterday in an interesting case filed by retired NFL players against the players union for failing to include them in lucrative licensing deals involving video games and other sports products.

NFL Gridiron Gab reported on the verdict as follows:

NFL Players Association was ordered by a jury on Monday to pay $28.1 million in damages to retired players after finding that the union failed to properly market their images. The dollar amount includes $21 million in punitive damages, just short of the requested $21.9 million award that the players’ lawyer had submitted to the jury which reflected about 10% of the net worth of the union at the start of this year.

Interestingly enough, the NFL Players Association Official Website calls the verdict on the front page of its website a “complete miscarriage of justice” and further states:

[I]t is significant that the jury did not buy the retired players’ claim that they were entitled to an equal share of the active players’ group licensing money, which was the principal claim in the case. If the retired players had prevailed on that claim, their claimed damages would have been close to $90 million as opposed to the $7.1 million awarded.

A New York Times article from February, 2007 reported on the background to the case as follows:

Parrish and Adderley said they were suing in part to compel Players Inc. to provide full details of all agreements with and payments to the players. . . . According to a news release from Players Inc. last month, the organization, formed in 1994, handles $750 million in retail licensing business on behalf of all 1,800 current players as well as 3,500 retired players, generating more than $100 million in annual revenue. While no specifics were offered, it is common industry knowledge that the vast majority of the revenue derives from the use of the names and likenesses of active players.

I have not had the opportunity to review the court filings in this case, but this verdict caught my attention because the suit is over the failure to include certain individuals in a licensing deal, rather than a breach of the licensing deal itself.

Of course, the thought that comes to mind as an attorney is how in the world did retired players get themselves into the situation, where they are represented by an apparently unaccountable organization?

A quick search of the NFLPA in Wikipedia provided some additional history on the organization. While I am no expert on labor union law, the fact that the union was reconsituted in 1993 suggests to me that at very least the retired players had the opportunity to express their views on the arrangement.

I can understand the need for single representative doing the negotiating on behalf of a group of people, but shouldn’t there be some accountability in that representation? When you have to go to court to force the hands of the representative, then it seems to me that you have a problem with the representation itself. As a transactional attorney, I wonder if it isn’t time to go back to the drawing board on the relationship with the union.

All in all, I think a good argument could be made that this case is really an internal matter between the retired NFL players and the union that is supposed to be representing them. While it is an interesting issue, I can’t help but wonder if we should be using limited court resources to hear a case like this. Presumably, the parties will be continuing their relationship even now that the verdict has been rendered. Should the courts be getting involved in an ongoing relationship like this?

Regardless, I think this case is a good example of why you should be careful of allowing a third party to do your negotiating for you. While such third party representations can be advantageous, they can also be very problematic at times, and you ideally need to be in a position to be able to discern what the situation is before you end up locked into a bad deal.

Of course, for the retired players in this case, they ultimately came out reasonably well with a $28.1 million verdict in their favor. However, since this is apparently only a fraction of what they had hoped for, it still seems that they would have been better off if the dispute had been avoided altogether.

See related blogpostings:
Consortia Licensing: Is this an ideal way to license intellectual property?
Supreme Court to Consider Fantasy Baseball Case: Do Players’ Names and Statistics Constitute Major League Baseball Intellectual Property?

United States Patent and Trademark Office

U.S. Copyright Office

Licensing Executives Society, Silicon Valley Chapter

Trade Secrets Case Provides Important Lesson to Employers and Employees on the Significance of Employment Agreements

The case making headlines today regarding an ex-Intel Corporation employee accused of stealing trade secrets and giving them to his new employer, rival Advanced Micro Devices, provides some important lessons to employers and employees on the significance of employment agreements.

The Mercury News reported on the case against former engineer Biswamohan Pani as follows:

Federal prosecutors in Massachusetts alleged this week in a five-count indictment that Biswamohan Pani, 33, illegally downloaded more than a dozen confidential documents from Intel’s computer system during a four-day stretch in June. He had already resigned from Intel, but remained on the payroll and still had access to the company’s computers while he burned unused vacation days.

What Pani’s supervisors didn’t know then is that instead of taking the time to investigate a hedge fund job Pani claimed he was considering, he had actually started working for AMD and for a brief period was on both companies’ payrolls.

Prosecutors say AMD had no knowledge of Pani’s actions and did not benefit. But they say the information Pani downloaded was worth more than $1 billion in research and development costs, and included details about methods for designing microprocessors.

While it is unclear at this point as to whether or not the allegations could be proven in a court of law, the case highlights the important role that employment agreements and trade secret education can have on both employers and employers during an employee’s employment as well as in his/her subsequent career. As a technology transactions attorney, I cannot help but wonder what agreements this employee signed with Intel and what kind of education on trade secret issues he received while working at Intel. I also wonder what kinds of agreements, if any, he had signed with his new employer when he accepted his new position.

Unfortunately, it has been my experience that these types of agreements often do not receive the kind of attention they deserve, and that the education provided employees is frequently inadequate. While legal recourse certainly is available to employers after an issue arises, it is generally better for all involved if the problems never develop in the first place.

What can employers and employees do to protect themselves in advance from potential trade secret cases?

Well, during the period of employment, employers should obtain employment agreements with their employees, which in easy-to-read language set forth very clearly the employee’s obligations with respect to the employer’s intellectual property, including trade secrets and confidential information. Employers should provide such agreements to employees for review as soon as possible after the offer is accepted, so that the employee has the time to review and consider the agreements outside of the office, in order to ask questions as necessary, speak with an attorney about the agreements, and determine whether any of the language requires negotiation. After such employment agreement is agreed to, the employer should then devote resources to educate the employee on issues like trade secret and confidential information protection, as well as intellectual property protection, so that the employee fully understands what is expected of him or her. Then, when the employee leaves his or her employment, the employer should reiterate the terms of the previously signed agreements which survive his or her employment, and again remind the employee of what his/her obligations are to the soon-to-be former employer. Of course, one additional action an employer can take is to simply limit the employee’s access during the scope of employment to only that information that the employee “needs to know.” Based on the article, it seems likely that there would be no case now if Intel had only cut off the employee’s access to the trade secret information at an earlier date, so that the employee could not–whether well-intentioned or otherwise–download any files off the company’s system.

Similarly, the employee should maintain a file of all agreements signed at any point in time with an employer and retain a lawyer to review all documents before signing them. When he or she leaves a job for any reason, the employee needs to refresh his or her memory on what the terms and conditions are of any agreement which was signed with the employer prior to signing any new documents with any new employer. In addition, the employee needs to educate himself or herself regarding the basics of intellectual property and trade secret law, so that he or she has a good general understanding of his or her legal obligations and the issues that can arise in these areas of law. Finally, if the employee is asked to sign any termination or severance agreements, the employee should retain a lawyer to review the exact nature of the language in those agreements, in order to ensure that he or she is agreeing to language that he/she can actually agree to.

The bottom line is that both employers and employees alike should take employment agreements and education more seriously, in order to protect themselves against the threat of trade secret litigation. Although taking such steps will not prevent legal issues from arising in all cases, the odds of a problem arising is significantly lessened when both sides have taken steps to protect themselves in advance. This is particularly important in a down economy when companies are hurting, layoffs are increasing, and employees are just feeling less secure in their positions. For employers, exerting a little extra care in this area can reduce bad publicity, reduce the risk of losing protection on trade secrets, and prevent the diversion of resources away from growing and investing in the business toward investigations of personnel who are no longer working at the company. For employees, extra care in this area can provide peace of mind and the ability to pursue new career opportunities without having to worry about the threat of potential lawsuits from past employers.

Corporate Designs: Does Your Business Really Have the Rights to its Designs?

When I speak with the average small business owner about what I do for a living, 9 times out of 10 they advise me that they wish they could use me, but that there is business just does not have intellectual property to protect. However, in most cases, when someone tells me this, they are overlooking at least one important piece of their company’s intellectual property–its designs. Furthermore, in the majority of those cases, that is the one area of their business that is completely unprotected and vulnerable to a law suit.

Now, if you are one of those businesses, your next statement to me will likely be that there is no problem with the designs because you paid for them. A few of you would next go on to tell me that you registered your trademark, so there is no issue.

Unfortunately for most business owners, though, this is often just not true, and designs seem to be an area of particularly vulnerability, whether we are talking about corporate branding, website design, or the design of marketing materials.

Why is this? Well, it’s simply because most small businesses buy design work for their business, and few designers or purchasers of their services use attorneys to draft or review their contracts. Thus, more often than not, the designer is paid for his or her design work, and the purchaser of his or her services never actually receives in exchange the ownership or even a written license to the intellectual property rights in the work. The purchaser of the work often assumes they own the full rights to the designs, when in fact they often have at most a very narrow implied license to use the work in a particular manner–and in some cases, they may really be infringing on the designer’s copyright.

So, what happens? Well, increasingly attorneys like me are seeing disputes arise over who has the rights to the artwork, and these disputes are turning into copyright infringement cases. I am even seeing nonprofit organizations who are running into problems over this issue.

You might ask why there is such a problem in the area of design? Well, it is due to a fundamental lack of understanding over copyright law. U.S. Copyright law establishes that the creator of a copyrightable work owns the rights in that work when it is fixed in a tangible form of expression, unless the work at issue is a “work for hire.” However, to have a “work for hire,” the work had to have been (a) prepared by an employee in the scope of his or her employment or (b) the work has to have been commissioned for creation and the parties had to have agreed that the work was a “work for hire” in a written agreement. Thus, if you hire someone to create a design for you on a website, a marketing material, etc., and the designer was not your employee, you do not own the rights to what was created unless you have an appropriate agreement in place with the designer who created the work. Moreover, if the designer who created the work was not an employee of the business that you contracted with to design the work, you still may not own the rights even with the appropriate agreement in place with the business, if that business failed to have the appropriate agreement in place with its designer.

In the absence of ownership of the rights in the design, is there some other way to use the design work? Yes, in fact, the other option is entering into a license to use the work. While this would not give the purchaser the right to make changes to the design and would limit the ways in which the design could be utilized, a copyright license would enable the purchaser to secure in writing the ways in which the design could be utilized, provided that the license is entered into with the actual copyright owner.

In case this sounds a little confusing to you, this is exactly why businesses and designers alike should be consulting with an attorney prior to entering into any arrangement to provide design services. To date, however, this is still not the standard practice in the business world and the design industry.

So, the next time you start to apologize to an IP attorney for not being able to send him or her work, you might catch yourself and think about what you are saying. If you have a website that someone else created for you or if you even have your own business cards, there is a relatively good chance that you in fact could use the help of an IP attorney and just not realize it.

Cutting Legal Costs by Investing in Good Templates

In a recent blog post, AdamsDrafting suggested that the recession should prompt companies to look at overhauling their contract template process.

AdamsDrafting wrote

A recession should provide a greater incentive for a company to do something about the considerable amounts of time and money that it’s wasting due to its mediocre templates and primitive contract process.

I completely agree that it makes sense for companies regardless of their size to consider investing in better templates during a recession. I would argue that spending a little money to improve bad templates can save companies of all sizes big bucks in legal expenses.

You are probably thinking how does investing in templates save me in legal fees when I am going to have to hire a lawyer to do the work?

Well let me explain Having good carefully drafted templates saves you money at the negotiation drafting stage of a deal because you start from a sound legal framework that is based upon what you already know you need out of the deal. While some third parties will sign that template without trying to negotiate it and others will try to make several changes to the draft the fact remains that you will start the negotiation from a sound legal framework that reflects your company needs. If you are able to start a negotiation with a well drafted template your company will at most only require legal help to review the proposed changes the attorney will not need to review any other part of the document. Since most attorneys bill by the hour this can reduce your legal costs in the short term significantly and also allow you to rely on someone other than an attorney to handle your negotiations.

In addition to saving you money at the negotiation drafting stages of a deal having well drafted templates can save you money by ensuring that your company legal risks are minimized to the extent possible in every contract. How does this work? Well, you can standardize your company contractual language dealing with liabilities such as breach of contract indemnification limitation of liability, etc. in every contract and thereby lessen the risk that contracts get signed with language which does not adequately protect your company with respect to its liabilities.

In case you are thinking that your company is too small to worry about liabilities and that perhaps liabilities are not the key concern when you are trying to just survive in a bad economy I would argue that in a bad economy you do not want to conduct business regardless of the size of your company without thinking about liabilities.

Why is this?

Well, a bad economy is exactly the time when you are most likely to run into breached contracts as many companies will simply experience shortfalls in cash. The simple reality is that the companies with the best contracts are more likely to be paid under those contracts in a bad economy as companies short of cash will prioritize their payments and pay the bills which they feel they have to pay first. Well drafted contracts are more easily enforced against a breaching party so a party short on cash is probably going to meet its obligations under that contract first. Not getting paid under a contract is painful for a business at any size. Thus it would be prudent for companies of any size to pay particular attention to liability clauses in their contracts particularly during a bad economy.

Likewise a bad economy is exactly the time when your business could be most at risk for lawsuits. Cash flow could be tight in your business and you could fall behind in your bills simply because you yourself are not paid under other contracts. Similarly cash flow could be tight on the other side and the other side could be looking for ways to get out of contracts they deem expensive or to even sue another company just to bring in additional income to their business. Regardless of the size of your business a lawsuit will always be expensive in terms of legal expenses and to the extent you can minimize your risks in this area your business will be well served particularly during a bad economy when the last thing you will probably want to be doing is spending limited financial resources on legal expenses for a litigation.

All in all investing in good legal templates is an excellent move in good times and bad and can save companies a lot of money when it comes to legal costs. However in a bad economy investing in good templates can be particularly important because it reduces a company need for outside counsel and limits the likelihood that its contracts will go unpaid or end up in litigation. Spending a little cash on your company templates right now could prove to be a very beneficial investment for your company even before the recession ends and the economy picks back up. In fact depending on the nature of your business whether or not you choose to make the investment could end up being the deciding factor as to whether or not your company is still in business after the recession.

Open Source Licensing: Is it a Viable Business Model?

Open Source Software Licensing in its “pure” form is not a viable business model, reported CMS Wire on a study recently conducted by the 451 Group.

According to the CMS Wire report, the 451 Group study looked at the business strategies of some 114 open source vendors, and found as follows:

-The majority of open source vendors utilize some form of commercial licensing to distribute or generate revenue from open source software.
-Half the vendors assessed are using hybrid development models of free and commercially licensed software.
-Vendors using hybrid development and licensing models are balancing higher development and marketing costs with the ability to increase revenue.
-The license used for an open source project (reciprocal or permissive) has a strong influence on development, vendor licensing and revenue-generation strategies.

So what did the 451 Group conclude about the open source model?

According to CMS Wire, the 451 Group determined that “open source as a business model is nothing but an oversimplification” and that more than 80 different combinations of development models, vendor licensing strategies and revenue triggers are being by the vendors in the study. Also, the findings indicated that proprietary extensions are generating an increasing amount of revenue and “blurring the lines” between proprietary and open source software.

This article was interesting because it shed some light on the revenue models, which are successfully being used by open source software companies today. Based on this study, it appears that hybrid proprietary/open source models are increasingly the model of choice rather than relying on support services to generate income from “pure” open source software, which is in line with what I have been seeing in industry myself.

License Grant Language: How Should it be Drafted?

Ken Adams at Adams Drafting raised an interesting question about the proper drafting of a license grant in a software license. In particular, Adams questions the drafting of the following clause:

Acme hereby grants Widgetco a nonexclusive, perpetual, irrevocable, royalty-free, fully paid-up, worldwide license to the Software (that license, the “License”).

I agree with Adams that this grant is not particularly well-drafted; however, I differ from him a bit on why I think it is not a well-drafted clause.

Regarding the strings of adjectives, this is just how licenses are drafted. A well-drafted license grant has to convey a series of information, and the best way to convey that information is through the “strings of adjectives” format, which is why IP attorneys have adopted that drafting method for license agreements.

Having said this, Adams is correct in stating that some of these adjectives are unnecessary. I would argue that the adjectives “perpetual,” “irrevocable,” and “fully paid-up” are completely unnecessary to include in the granting clause for the majority of license agreements. The term of the Agreement can and should be dealt with in the term section of the Agreement, and the fact that the royalty is or isn’t paid off can be dealt with in the payments section of the Agreement. The term “royalty free” is likely unnecessary as well, assuming that some form of payment is due under the agreement; however, if absolutely no payment is due under the license, it would be appropriate and expected to include the term “royalty free” in the license grant rather than spelling out this fact elsewhere in the Agreement.

So, what is actually necessary?

Well, the term “nonexclusive” is critical. Licenses are either exclusive or non-exclusive, and a well-drafted license will identify which type of license you are dealing with in the license grant clause. I disagree with Adams regarding his comments on this term; the distinction between an “exclusive” and a “nonexclusive” license is well-understood by IP professionals and does not require further explanation in the license grant.

In addition, the geographic scope of the license is critical and needs to be identified, if the territory of the license is not defined elsewhere in the Agreement. Typically, if the territory is worldwide, this would be identified in the license grant rather than in a separate clause of the agreement. If the territory is something less than worldwide, then it would be appropriate to just use the term “Territory” in the license grant and to define that term elsewhere in the Agreement.

What Adams fails to mention in his posting, however, is that the phrase “license to the Software” is poorly drafted because it does not define the scope of the license to the Software. The grant clause should define exactly what constitutes the scope of the license. Can the licensee grant sublicenses to the Software? Can the licensee distribute the Software? Can the licensee manufacture the Software? You get the picture. . . . The license grant needs to spell out what exactly constitutes a license to the Software. If it fails to do so, then it is poorly drafted.

In summary, I agree with some of the criticism raised by Adams regarding this license grant. It is wordier than necessary. At the same time, there are some critical elements of a license grant that are clearly missing from the clause, and these omissions are what concern me most about the specific clause identified by Adams in his posting.

Consortia Licensing: Is this an ideal way to license intellectual property?

The Licensing Handbook Blog ran an interesting posting today on consortia agreements. I am currently in the middle of a consortia negotiation, so the posting caught my attention.

The Licensing Handbook Blog posting responded to a posting by SpendMatters, which had stated that participating in purchasing consortia can be an excellent means of leveraging resources to negotiate better contracts. Jeffrey Gordon of The Licensing Handbook Blog disagreed, citing as a particular concern the challenge of negotiating a consortia agreement for software licenses:

Commodities are an excellent use for consortia buying. They’re ubiquitous (everyone needs toilet paper and almost everyone’s buying the cheapest they can find), relatively easy to source (and hard to screw up), and bulk quantities clearly reduce overall expense.

But what if your consortia wants to offer something else… say, intellectual property? Software, for example. Now I think there’s a problem. The member companies no longer have identical interests. Your organization wants Exchange email… mine wants Groupwise. You want an enterprise license … and I do, too, but my enterprise is 3x bigger than yours. Consortia buying stumbles in the face of diversity of interests. . . .

Gordon ultimately asserts that the key problem with consortia contracts is that you are “ultimately paying for someone to negotiate a deal that’s good for them, not me.”

Having represented clients in negotiations with both group purchasing organizations and consortia, I have mixed feelings myself on the benefits of licensing technology through one of these arrangements.

Can it be cumbersome to do these deals? Yes, absolutely. In my experience, doing a deal with one of these groups has never been a fast process. It has taken weeks and in some cases months longer to finalize the deal than negotiating a deal with each of those companies individually would likely have taken. The experience has required negotiations with multiple negotiators, each of whom was not always in sync with the other, and the individual members have not always been satisfied with the agreement they received at the end of the process. So, from the perspective of ease of negotiation, there is no question that negotiation with a group is far more time consuming than negotiating with an individual company or organization. Moreover, as with any time consuming legal process, the process is inevitably going to generate a large number of legal fees, unless you have an in-house counsel who can handle all of the work internally.

On the other hand, I think there can be an advantage to these deals for the licensor: a consortia or group purchasing deal can provide greater access to a wider community of licensee/buyers than what would have existed if the group had not been in place. A greater number of prospects will inevitably be educated on the intellectual property or product’s value, which will result ultimately in a wider number of licensee/buyers. In my experience, this has translated in higher revenues for the company licensing the intellectual property.

I think that there can be a similar advantage for the licensee: there generally is a cost benefit, since the legal fees, though higher than what might be typical for a one-on-one agreement– will be shared by the members of the group. There is also typically a matchmaking/education benefit, since the licensee will be matched with a licensor that might have been previously unknown to the licensee, and such licensee will become educated on the value of the intellectual property at issue.

So, I think that these deals absolutely can be a win-win for both sides, even when intellectual property is involved, since both the licensor and the members can benefit from the transaction.

As for the idea that either of the parties will come out of the negotiations with a better agreement in place: well, that is the one issue that I take issue with. I agree with The Licensing Handbook Blog on this point. I’m not sure that the over-negotiating that takes place in these deals is really in anyone’s best interest. Consider this example: one member company may have five minor issues with a particular transaction. Perhaps fifty or more issues in the contract get negotiated, but none of those issues included the member’s five minor concerns. Obviously, once the deal is finally reached, neither the consortia or the licensor are going to be willing to do much compromising. Thus, the member company ends up stuck with a deal that doesn’t address its five minor concerns, despite the fact that those five minor issues would have initially been very easy to negotiate with the licensor–perhaps much easier to negotiate than what was actually negotiated. The member company ends up unhappy with the deal, even after the many weeks and/or months of negotiation that took place, since none of its issues were ever addressed.

This is unfortunately can be and often is the reality whenever someone else is doing the negotiation on someone else’s behalf. The ultimate beneficiary of the agreement can end up unhappy with what has been negotiated.

In the end, despite the potential risks from a group licensing arrangement, I think that ultimately they can be beneficial to members and licensors alike. Let’s face it: the name of the game in business is to make money, and if this does the trick for the licensor and the members save a little money in the process, then everyone ultimately comes out ahead.

Yahoo Music to Shut Down Service, Issue Refunds to Customers

Yahoo Music has advised its customers that it will be shutting down its digital rights management (“DRM”) service on September 30, 2008, but will be issuing refunds to customers who request them, reported Techspot.

According to Techspot, Yahoo Music has decided to shut down its DRM licensing service in order to become part of Real Networks’ Rhapsody Service. Techspot reports that this move will not affect subscribers to its unlimited music service, whose accounts will simply be moved over to the new service, but it will affect subscribers on an individual tracks basis, whose music will only play on the original authorized computer (and not a new computer).

Yahoo’s move follows a similar move by Microsoft, which recently announced that it is shutting down its DRM music service after August 31st; however, Microsoft has announced that it will keep its DRM servers up and running until 2011.

The moves by both Yahoo and Microsoft to close down their DRM licensing services highlight a key problem posed by DRM licensing–the fact that you obtain very limited rights in the music you “purchase” from the services. Unlike with compact disc purchases, DRM licensing purchases are made pursuant to terms and conditions that can be changed at any time, the downloaded music often has compatability limitations, and the ability to continue listening to the music is somewhat dependent on the continued existence of the particular DRM server. While DRM licensing has certain advantages such as convenience and the ability to purchase rights to particular songs as opposed to a whole album of songs, there is no doubt that consumers obtain fewer rights with their purchases than they did with standard compact disc format. The Electronic Frontier Foundation has published a consumer guide on its website, which describes some of the DRM limitations in detail.

Will these recent problems with DRM licensing result in a resurgence of compact disc purchases? My guess is that this will probably not happen–the high cost of gas alone will probably push consumers to buy their music online rather than in stores. Besides, many of the consumers buying music today have grown up on downloadable music and perhaps do not even own a compact disc player.

What these incidents may do, however, is push more consumers toward iTunes, given the fact that its service is perhaps the least likely to get shut down in the near future. Apple has made a significant investment into its iphone and ipod technologies, and my suspicion is that the company has a solid enough following that iTunes is likely to remain alive and well long after its competitors’ services have become only a distant memory.

Blog Content Licensing: Is there a market for it?

PlagiarismToday raised an interesting question today when it asked if blog content licensing was dead.

I have given several presentations on blog law issues now, but I must say that I had never really given thought to the issue of whether or not there was really a market for blog content licensing–beyond, of course, thinking about the fair use debate which emerged as a result of the Associated Press’s attempt to license the use of its content. As I indicated in my blog posting on the issue, my concern was not so much the fact that Associated Press wanted to license its content, but the fact that Associated Press wanted to impose licenses on the blogosphere that appeared to be unenforceable under the law in light of the fair use doctrine.

Given the blogosphere’s reaction to the Associated Press incident, however, I think that PlagiarismToday’s question is very timely. While in theory there may be a market for blog content licensing, the reality may be very different. The reaction to the Associated Press action was relatively uniform in the blogosphere: most bloggers vowed simply not to quote the Associated Press again in their blogs, thereby avoiding having to pay a license fee. Thus, in trying to impose a content licensing regime on the blogosphere, the Associated Press essentially managed to withdraw itself from the blogosphere altogether.

Was this really the result that Associated Press was looking to achieve? In all likelihood, no. I would assume that by now the Associated Press–like most organizations–has at least some fundamental understanding of the value of the Internet by, and understands the value of having other websites link to its content. It seems unlikely that Associated Press would knowingly put its organization in unfavorable business position on the Internet at a time when media outlets increasingly are moving to the Internet.

In looking at the blogosphere’s reaction to the Associated Press incident, I think it is safe to say that the blogosphere itself is not going to be a very viable market for commercializing blog content. Having said this, is there another potential market in which blog content could be commericalized?

Well, one possibility comes to mind: the traditional media.

Is it not possible that Associated Press got it all wrong? Isn’t it possible that the real market for content licensing actually content that is licensed from the blogosphere to traditional media outlets such as Associated Press, rather than vice versa?

In my opinion, this is the direction that journalism is actually heading. I personally receive one or two calls per week from traditional media outlets regarding content I am blogging about. My understanding is that this is not that unusual, and that other established legal bloggers are having similar experiences. It is not much of a leap to think that this content could be licensed back to traditional media outlets for republication. In fact, there is evidence that this is already happening. I know that I have already been approached by traditional outlets about potentially republishing my content.

So, I would argue that blog content licensing is not really dead, but that the market is really with the traditional media outlets rather than in the blogosphere itself. Traditional media outlets have the advertising revenue that can be utilized in the payment of content licensing fees, and they increasingly are looking for content to be supplied by the blogosphere. Thus, they are the ideal market for commercializing blog content, as opposed individual bloggers themselves.

I would be interested in hearing any thoughts by readers on this issue: what do you think? Is this the direction that journalism is going? Is there really a market for blog content licensing, and if so, is it in the traditional media?

iTunes Music License: Is it Really Enforceable?

Is the iTunes Music License really enforceable? This is the question raised by F. Scott Kieff in a recent article for IP Law & Business.

According to Kieff, the issue is as follows: the iTunes contract for service allows the customer to copy a song for a small number of times–the license provides that users can burn an audio playlist for up to seven times. Kieff argues that this license provision conflicts with the doctrine of fair use as follows:

There are at least two key differences between fair use and the iTunes contract. First many commentators consider the fair use scope to be broader than the scope granted under the iTunes contract, covering a much broader amount of uses. Second, the borders of the fair use scope are fuzzy, coming from on of those “all things considered” multi-factor legal tests, while the scope defined in the iTunes contract is precise in limiting the amount of copyright to a specific number.

Kieff’s argument gets even more interesting: he argues that the iTunes contract may be completely void due to the doctrine of federal pre-emption. Kieff explains as follows:

[T]he doctrine of federal pre-emption, which stems from the Constitution’s Supremacy Clause, speaks very forcefully about the consequences of such a conflict between federal law, in this case copyright, and a state law, in this case enforcement of the iTunes agreement under California state law. Following established precendent, the state law may be unenforceable when it conflicts with the federal law. . . .the contract on which the iTunes business model largely depends may actually be void.

Kieff makes a fascinating argument in his article and highlights a problem that most practitioners dealing with copyright law have grappled with for years: the fact that U.S. copyright law was developed long before computers, software programs, or the Internet were ever contemplated. As a result, the theoretical and practical application of copyright law does diverge at times, as practitioners have developed workarounds to some of the holes that otherwise existed in the statutory law.

But does the fact that this dichotomy exists mean that a copyright license which is drafted to expressly allow for the creation of a set number of digital copies is void and unenforceable under the law? I would argue no: the copyright owner has the right to define the scope of its copyright license in the same way that a patent owner has the right to define the scope of its patent license. Indeed, if you look at the newly revised copyright office website, the Copyright Office has provided a question and answer page that addresses the issue of backup copies of digital files as follows:

Can I backup my computer software? Yes, under certain conditions as provided by section 117 of the Copyright Act. Although the precise term used under section 117 is “archival” copy, not “backup” copy, these terms today are used interchangeably. This privilege extends only to computer programs and not to other types of works.
Under section 117, you or someone you authorize may make a copy of an original computer program if:
the new copy is being made for archival (i.e., backup) purposes only; you are the legal owner of the copy; and any copy made for archival purposes is either destroyed, or transferred with the original copy, once the original copy is sold, given away, or otherwise transferred.
You are not permitted under section 117 to make a backup copy of other material on a computer’s hard drive, such as other copyrighted works that have been downloaded (e.g., music, films). It is also important to check the terms of sale or license agreement of the original copy of software in case any special conditions have been put in place by the copyright owner that might affect your ability or right under section 117 to make a backup copy. There is no other provision in the Copyright Act that specifically authorizes the making of backup copies of works other than computer programs even if those works are distributed as digital copies.

This excerpt from the Copyright Office’s website suggests that the Copyright Office believes that copyright law provides that you cannot make backup copies of downloaded music without the copyright owner’s permission, even though the backing up of copies of computer programs for archival purposes is expressly permitted by Section 117. If my interpretation of the Copyright Office’s text is correct, then a license would be required to make any number of copies of downloaded music.

So, the question becomes: does fair use extend to exempt the copying of downloaded music from constituting copyright infringement in some cases? I feel confident that the music industry would say “absolutely not.” But would its position be correct? I think that Kieff has a valid argument that fair use probably should extend to permit copyright in some instances where the elements of the fair use exemption are met.

In the end, however, I take issue with Kieff’s notion that a contract that specifically authorizes certain instances of copying would conflict with the fair use exemption as codified by federal law and therefore render the contract unenforceable due to the pre-emption doctrine. In my opinion, a copyright owner can and should define the scope of its license and expressly provide for certain instances of copying instead of leaving it to the licensee’s interpretation of fair use to decide whether or not such copying constitutes infringement. I would argue that a well-drafted agreement is one that expressly states the terms in very clear language and leaves little or nothing to the independent interpretation of the licensee.

Despite my position on the issue, there is no question that Kieff presents an interesting argument. I suspect that we will see his argument again in a litigation proceeding at some point in the future.

IP Licensing Lawyer Kristie Prinz Shares A Brief Guide to Intellectual Property

Internet Lawyer Kristie Prinz shares Recording “Employee Blogs and Websites: How to Protect Your Company from the Legal Risk of Workers Going Online”

Blogosphere Reacts to Associated Press Assault on Fair Use Doctrine

Should the Associated Press have the right to set its own standards as to how much quoting from an Associated Press article constitutes fair use and how much requires the payment of a royalty?

The Associated Press (“A.P.”) apparently thinks so, based on recent coverage of its plans to adopt blogging guidelines for quoting A.P. articles. Check out A.P.’s new royalty price list. Note that the royalty fee starts at quoting 5-25 words.

The New York Times reported on the controversy as follows:

Last week, The A.P. took an unusually strict position against quotation of its work, sending a letter to the Drudge Retort asking it to remove seven items that contained quotations from A.P. articles ranging from 39 to 79 words.

On Saturday, The A.P. retreated. Jim Kennedy, vice president and strategy director of The A.P., said in an interview that the news organization had decided that its letter to the Drudge Retort was “heavy-handed” and that The A.P. was going to rethink its policies toward bloggers.

The quick about-face came, he said, because a number of well-known bloggers started criticizing its policy, claiming it would undercut the active discussion of the news that rages on sites, big and small, across the Internet.

The A.P.’s announcement caused an uproar in the blogosphere, as The New York Times writer, Saul Hansell, reported in a follow-up article:

There was a lot of anger in the blogosphere last week over The Associated Press’s assertion that some blogs were infringing its copyright by publishing excerpts of its articles. . . . A number of bloggers I respect a great deal didn’t find the A.P.’s openness to their ideas to be enough and have declared war on it. As someone who is both a blogger and an employee of a mainstream news organization, I worry that this hotheaded response is part of what gives blogs a bad name.

There was no doubt that the reaction to the A.P.’s plans was overwhelmingly negative. Tech Crunch asserted that its new policy was that A.P. stories are banned. BuzzMachine had a similar reaction, essentially critiquing the A.P. as old journalism vs. the blogosphere’s manner of quoting as new journalism. Progress Bar predicted that the “backlash was going to be enormous.” Snowflakes in Hell asserted that the “mainstream media is declaring war on blogs.”

Given the strongly adverse reaction to the A.P.’s actions, it seems very likely that this issue is headed to the courts, unless the A.P. suddently has a change of heart. By attempting to impose a licensing fee over content uses in excess of four words, the A.P. is essentially trying to single-handedly throw out–or at the very least redefine–the doctrine of fair use. It is difficult to see how a quoting five words from an A.P. article would require the payment of a licensing fee. Under such a rationale, many of us in the blogosphere could be collecting some serious royalties ourselves–some of which would come from “old journalism” news organizations.

The New York Times addressed the legal side of this controversy as follows:

A crucial part of the legal question here, and probably the ethical one too, is whether by using its material, a Web site inhibits the A.P.’s ability to earn money from its work. Several lawyers suggested to me that the A.P. may have a hard time proving how a few paragraphs in a blog represents real harm. Most blogs aren’t reporting news in direct competition with the A.P.; they are commenting on the news or offering a place to discuss news. Some sites, and this gets a tad dicey, are mainly about presenting lists of links to articles that the blogger, or the members of a community, find interesting. . . . Still, if enough people click on links from these sites back to the sites of the A.P. clients who publish its articles, value is being created for the A.P., not destroyed.

The Citizen Media Law Project took this analysis one step further, stating as follows:

[I]t is very likely that the posts AP is complaining about on Drudge Retort are permissible fair uses under the Copyright Act. First, several posts appear to be offering commentary on recent news items. The use of another’s copyrighted work for the purpose of criticism, news reporting, or commentary, will generally weigh in favor of fair use.

Second, all of the posts use fewer than 80 words from the original AP articles. While there is no bright line that defines how much of a copyrighted work can be copied and still be considered fair use, courts will consider the amount and importance of the material copied in assessing what is permissible. I can’t tell how long the original AP articles were, but it’s likely that all of the articles were substantially longer than 80 words.

Third, it is hard to see how the posting of AP headlines and 80 word snippets could possibly impair the market for the original AP articles (when evaluating fair use claims, courts are most concerned with whether the copying will undercut the market for the original work). Instead, the posts AP is complaining about would seem to be doing just the opposite. Users of Drudge Retort, and sites like it, post these headlines and snippets for the very purpose of alerting others that some interesting piece of news exists. These snippets invariably include links to the original articles and serve to drive traffic to the site hosting the original AP story.

Mike Markson in his blog Marksonland made an interesting point that the real problem here from a business perspective is AP’s business model, as the AP is putting out great content and not seeing the financial benefit from it. Of course, this brings us back to the old journalism, new journalism dilemma.

We at the Silicon Valley IP Licensing Law Blog will keep you posted as this controversy further unfolds. My suspicion is that the controversy is far from being over.

In the meantime, I guess I am going to take the position of other bloggers in the blogosphere and stop quoting the A.P. until this issue is resolved. I’m not sure I’m ready to drop my blogging style entirely, since as a licensing attorney who does a significant amount of work with copyright law, I think that the A.P. is going out on a limb and trying to make new law. I suspect that the A.P. is going to get the opportunity it appears to be seeking to see if courts will side with its new view of the world with respect to copyright law. However, I think I will let someone else fight that battle.

And fellow members of the blogosphere: you will be relieved to know that my firm is not going to be launching a royalty collection site any time soon. Please feel free to continue quoting my blog postings to your heart’s content. Some of us actually understand the web and appreciate the coverage.

IP Licensing Lawyer Kristie Prinz shares Recording on Leveraging an IP Portfolio in the Development of Partnering Relationships

Supreme Court to Consider Fantasy Baseball Case: Do Players’ Names and Statistics Constitute Major League Baseball Intellectual Property?

The Supreme Court is considering whether to take a case which would address the issue of whether major league baseball players’ names and statistics constitute the intellectual property of Major League Baseball, requiring the payment of a royalty fee.

Fox News reported on the case as follows:

St. Louis-based company called CBC Distribution and Marketing Inc. says that companies shouldn’t have to pay licensing fees to use those figures – and they’ve already won their case in two lower courts, so MLB has filed an appeal to the nation’s highest court.

A decision from the Supreme Court could have a broad impact on the fantasy league industry, which generates more than $1.5 billion annually from millions of participants. . . .

Some large media companies, such as Yahoo and ESPN, already pay millions in licensing fees to use names and stats in their fantasy leagues, and they operate with MLB’s blessing.

But smaller companies are balking at paying such fees. CBC has argued that players’ names and stats are in the public domain, as they are easily found in newspapers and on TV.

The case raises some interesting questions: to what extent should the sports industry be able to claim that their players and their records constitute the industry or the team’s intellectual property? As an IP licensing attorney it is difficult to rationalize Major League Baseball’s position: is this not a an example of industry overreaching? While it makes sense that the sports world should be able to license trademarked items such as logo products as well as copyrighted items such as television and radio broadcasts, how do you extend those rights to the players themselves? From a public policy perspective, the potential applications of such a legal theory raise some clear concerns, particularly when you start looking outside the sports industry. I would hate to think that any of my former employers were claiming my name and “record” as their intellectual property.

Two lower courts have already rejected Major League Baseball’s position. According to Fox News, the 8th Circuit Court panel ruled in a 2-1 decision last October that CBC doesn’t have to pay the players, finding that fantasy leagues’ broad use of statistics is not the same as “faking an endorsement.” My expectation is that the Supreme Court will let those decisions stand and pass on this case; however, we will likely see early next week if the Court thinks that there is any merit to Major League Baseball’s position, and if this case should be further addressed. The Silicon Valley IP Licensing Law Blog will keep you posted on the developments.