Interfaces ("APIs") Are Subject To Copyright. No, They're Not! Are Too! Courts Continue To Muddy Up The Water.

There are a mere 37 pieces of computer code that are the subject of this face off between the tech titans, Oracle and Google.  We have followed this case since its inception and you can review the history here, here and here.

In the latest installment, Oracle appealed a lower court ruling that held that application programming interfaces ("APIs") were not subject to copyright.  We thought that the issue might be settled.  Not so fast, my friend.  A three judge panel in the Federal Court of Appeals for the Norther District of California has reversed and held that such APIs are indeed subject to copyright protection and the only question is whether Google's use is allowed under the "fair use" exception.  The panel remanded the case to the lower court for a determination of the possibility of such fair use.

After reading the very detailed opinion, the main facts to be gleaned are there was 7,000 lines of code involved, there were 37 different interfaces and the opinion is 69 pages in length.  There is much good discussion regarding the application of copyright law to interfaces and the fair use doctrine.  You should read it.  The law the court cites is extensive but some quibble with the application of such law.  Given past performance, the odds are even that the result will change on appeal.

Following The "Silk Road". Where Exactly Was That Supposed To Go?

Originally, the Silk Road was a series of routes over which commerce traveled in Asia beginning over 2,000 years ago.  Silk, gold, technology, religion and diseases (e.g. bubonic plague) were carried and exchanged over the Silk Road.

Fast forward to the present day and the Silk Road was, until recently, a website accessible only in the deep web and only by TOR (The Onion Router), a network and browser designed to preserve your anonymity on the web.  Silk Road was the brainchild of fellow Austinite and former neighbor Ross Ulbricht.  Ross was a 2002 graduate of West Lake High, a school that I pass every day coming to work.  His Facebook page is still up and he seems like a pretty cool guy.  We even have a mutual Facebook friend.

However, when I visited Silk Road before the feds closed it in September and arrested Ross on Oct. 2nd of this year, I found that you could purchase most any kind of drug I had ever heard of and many that I hadn't.  Since I have a background in Pharmacy, that's a wide range of stuff.  Cocaine, Ecstasy, black tar heroin and 'shrooms were in abundance.  Apparently, you could also arrange for murder by hire and Ross is accused of that in regard to one of his clients on Silk Road supposedly threatening to expose everybody unless certain conditions were met.

The medium of exchange on Silk Road was Bitcoin, our favorite virtual currency.  When Ross was arrested, the FBI seized over $3,000,000 in Bitcoins belonging to Silk Road customers.  They were also trying to get an estimated 600,000 Bitcoins from Ross' personal Bitcoin wallet.  That's about five percent of all the Bitcoins presently in existence.

All in all, a very sordid story, including the allegation that Ross went by the pseudonym of the "Dread Pirate Roberts", which comes from my favorite movie "The Princess Bride".

So how does a 20s something, suburban, white bread guy go from wake boarding on Lake Austin to being one of the biggest drug dealers (or at least the facilitator) in the world ?

Apparently Ross is brilliant (degree in physics at the Univ. of Texas, graduate work at Penn State), a libertarian fan of Ron Paul and idealistic and naive.  On his Facebook page he wrote an essay on "Thoughts On Freedom".  On his LinkedIn page, he described an idealized version of Silk Road, when he wrote:   "Now, my goals have shifted. I want to use economic theory as a means to abolish the use of coercion and agression amongst mankind. Just as slavery has been abolished most everywhere, I believe violence, coercion and all forms of force by one person over another can come to an end. The most widespread and systemic use of force is amongst institutions and governments, so this is my current point of effort. The best way to change a government is to change the minds of the governed, however. To that end, I am creating an economic simulation to give people a first-hand experience of what it would be like to live in a world without the systemic use of force."

He apparently viewed Silk Road as beneficial because it was a place where people could obtain illegal drugs without the concomitant hazard of having to deal directly with a drug dealer.  Regardless of your view on drugs and their use, it would seem to be preferable if people didn't have to risk their life to obtain them.

In the end, despite his brilliance and perhaps because of his naivete, he got sloppy and used his real name and address in obtaining fake passports and made other mistakes that enabled his arrest.  This could have been a family member of any of us (assuming any of us has anybody that smart in our gene pool) and we would have been simultaneously amazed at  his drive, ambition and success and aghast at what he has wrought.

The Blog Gods Give Us The Winklevoss Twins Again.

We have devoted an inordinate amount of time and blog space to the exploits of the Winklevoss twins.  I won't take the time to do internal links to our posts but just type in Winklevoss in the search function on the side if you are interested.  However, when our creative (cue air quotes) juices run a little viscous, we can always do a Winklevoss post and for that, we thank the blog gods.

As you will recall, they are the guys that were unsuccessful in taking over Facebook, unsuccessful in suing their own lawyers when they failed and unsuccessful in overturning their unfavorable ruling in the Facebook lawsuits, even after several attempts.

Now they have been scooped again, in that someone else has beat them to the market with a Bitcoin investment vehicle.  They had made a filing to sell interests in a trust but because of the nature of their proposed investors, it has been slower going.  Hence, late to market.  However, in light of the Silk Road debacle (more to come on that soon) and its effect on Bitcoins, maybe that's not a bad thing for them.

So, in spite of the fact that they are excessively attractive, smart, educated, athletic, white, privileged and pampered, they have not reached their full potential.  Here's hoping they keep trying for the sake of the blog gods and us.

Zappos Gets Zapped. Browsewrap Agreements Are Collateral Damage.

You know Zappos.  That's where you ordered those 5 inch stiletto clear heeled stripper shoes.  And some of you women bought from there too.  Zappos is a part of Amazon and a year or so ago, Zappos suffered a really bad security breach.  Exposed something like 24 million customers' information.  Well, as almost always happens when something like this occurs, our legal comrades descended in droves and many lawsuits ensued (I guess that's a pun).  These were consolidated in a court in Nevada and procedural motions were filed. 

Zappos claimed that class actions were not justified because Zappos' terms of use agreement specified that all claims by customers had to be settled by arbitration.  The result would have been that each individual customer would be required to have his or her claim settled by a separate arbitration and presumably actually appear at the arbitration rather than be represented in a class.  So, instead of one lawsuit with 24 million plaintiffs in a class, it would have required 24 million individual arbitrations with one claimant in each.  This would have been good for the tourism industry in Nevada but not good for the individual claimants (or their class representing attorneys).

Zappos' terms of use agreement stated that by using the web site, the users consented to the terms of the user agreement, which contained the aforementioned arbitration requirement.  While a link to the terms of use was included on each page, it was in the same font and same color as the rest of the page and nothing compelled the user to look at the terms of use nor take any action that indicated assent to the terms of use.  In addition, Zappos reserved the right to amend the terms of use at any time.

Zappos' terms of use agreement has been referred to as a "browse wrap" agreement or a "click through" agreement.  We discussed the differences in a "clickwrap" agreement (which requires some evidence of assent, such as clicking a box) and a browse wrap agreement in a prior post.  We indicated that some courts have upheld these agreements and that the trend might be toward their acceptability but this court says "Not so fast".  The Nevada court held that a requirement to arbitrate is strictly a contractual matter and therefore, to compel the plaintiffs to arbitrate would require a binding agreement between Zappos and the plaintiff.  The court failed to find such a creature in this situation.  They found: "...we cannot conclude that Plaintiffs ever viewed, let alone manifested assent to, the Terms of Use.  The Terms of Use is inconspicuous, buried in the middle to bottom of every Zappos.com webpage among many other links, and the website never directs a user to the Terms of Use.  No reasonable user would have reason to click on the Terms of Use...".  The court also found that because Zappos reserved the right to unilaterally change the Terms of Use, the contract Zappos sought to enforce was "illusory" and therefore unenforceable.

It is possible that if the issue was not the requirement for 24 million folks to arbitrate in Nevada and something less impactful, like whether you could return your stripper heels, the result might have been different.  However, the fact remains that this case makes the enforcement of such browse wrap agreements tenuous and therefore, we should all review our policy regarding how we get people to agree to our terms of use.  It could become very important.

Massachusetts Imposes Sales and Use Tax On Computer and Software Services. Check Your Agreements With Your Massachusetts Customers.

Recently, Massachusetts amended its sales and use tax laws to include a tax on services relating to computer and software services.  In an act entitled "An Act Relative to Transportation Finance" (you might understand why it could be missed if all you were looking at was the title), effective July 31, 2013, a 6.25% sales and use tax is imposed on "computer system design services and the modification, integration, enhancement, installation or configuration of standardized software".

Computer system design services is defined as "the planning, consulting or designing of computer systems that integrate computer hardware, software or communication technologies and are provided by a vendor or a third party" and is imposed on any company "sourcing" such services in Massachusetts.  There are a hierarchical set of rules for determining where the sourcing occurs for tax purposes so some opportunity exists for reducing the tax by planning where the actual services take place.  There remains several undefined areas such as where the services would take place in a hosting environment, cloud computing or whether it applies to such services as staff augmentation.

However, it is plain that the tax applies to taxable services supplied under contracts that are in existence before the act became effective as long as the services are performed and billed for after  July 31, 2013. 

Therefore, if you have such contracts for the delivery of such services to an entity with a connection to Massachusetts, you should review your agreements and see if you need to begin collecting and remitting this tax.  Also, you should have your agreements reviewed to see if the tax impact can be reduced by thoughtful construction.

Updates and Breaking News on Gene Patents, PHI in the Cloud, Class Actions on ClickWraps and SEC Disclosures On Cybersecurity.

Some recent developments in the great, wide world of technology include:

(i)  The Supremes, in a unanimous decision (what?) ruled that naturally occurring genes could not be the subject of patent protection.  However, if you can create a gene artificially, you might still qualify.  Therefore, the creative force described in the Hebrew bible, missed his or her chance when on the sixth day, he or she created all those man genes.  Further, the one year bar and the first to file things have cluttered up the claim.  Also, since man was supposedly created in the image of the creator, there's that pesky prior art issue.  See Assn. for Molecular Pathology v. Myriad Genetics, Inc

(ii)  The recently released rules under HIPAA provide that entities that store protected health information ("PHI") for a covered entity are business associates even if the storage provider does not routinely access the information.  [See 45 CFR Parts 160 and 164 IV(3)]On the other hand, a data transmission organization (such as the U.S. Postal Service or internet service providers) that serve as a mere conduit are not business associates even if they do access the information occasionally in order to provide the service.  So, cloud providers of storage of PHI must sign a business associate agreement.  It is not clear how long one must hold on to a piece of information to be a storer as opposed to a transferor or if encrypting the information in storage without the key would serve to exclude the storage provider from the definition of a business associate.

(iii)  In a recent decision by the Seventh Circuit in Harris v. comScore, Inc., the court allowed the certification of a class to stand.  The class was composed of entities that had downloaded comScore's software that gathered information on the user's activities and sent the information back to comScore's servers.  One of the basic allegations of the plaintiff class was that comScore's clickwrap license was ineffective.  We have discussed this before in this post.  The court did not make factual finding as to any issues and this is only a class certification hearing and comScore may have legitimate individual defenses to many of the allegations.  However, comScore will have to deal with this in the context of a class action.

(iv)  The Securities and Exchange Commission has regulations in place regarding a publicly traded company's obligation to disclose its controls for cybersecurity and is now considering increasing the stringency of those rules.  A recent study by Willis Fortune 500 finds that a substantial percentage of  reporting companies fails (in Willis' opinion) to adequately disclose such company's exposure to cybersecurity issues and the impact on the company if an event occurs.  Look for this to increase in importance as the supposed cybersecurity wars increase in intensity.

What Are Patent Trolls and Why Is President Obama Saying All Those Terrible Things About Them?

Patent: an intellectual property right granted by the Government of the United States of America to an inventor “to exclude others from making, using, offering for sale, or selling the invention throughout the United States or importing the invention into the United States” for a limited time in exchange for public disclosure of the invention when the patent is granted.  USPTO Website

Troll: a dwarf or giant in Scandinavian folklore inhabiting caves or hills.  Merriam-Webster Dictionary

Patent Troll: (Patent Assertion Entities, also known as PAEs) or "companies that don’t actually produce anything themselves and essentially leverage and hijack somebody else’s idea and see if they can extort some money out of them".  President Obama

Patent trolls accounted for more than half of the patent suits filed this year.  The President issued executive orders today that, inter alia, asks Congress to pass laws to: (i) require disclosure of the real party in interest (not just the Patent Assertion Entity that merely holds patents, but doesn't practice any of them); (ii) remove consumers that are using the affected products in the manner intended from the effects of the lawsuits; and (iii) provide for the awarding of attorneys fees and costs to defendants in "abusive" lawsuits.

Now, given the speed in which Congress acts (Hey, the House has already repealed Obamacare 37 times), it is likely that this will not have any near term effect.  Some large patent holders, that are not PAEs, have expressed concern that laws such as those suggested by the President could have unintended consequences and make it harder for non-trolls to protect their patents.

Given that it is possible that facts will surface that indicate that the IRS has engaged in the targeting of trolls, that trolls could have prevented the tragedy at Benghazi or that trolls were the AP sources that the Justice Department was looking for, this could get folded into the other "scandals" and fail to get any legislative traction.  Or, it could just not get any legislative traction, like almost everything else.  It's now up to Congress.

FTC Concludes Investigation Into Google's Search Practices, Finds Nothing Much Wrong There. Hey, Google It If You Don't Believe It!

The Federal Trade Commission has been investigating Google's practices in regard to patent licensing, search results and other matters for about two years.  The FTC sought to determine if Google's practices in these regards were anti-competitive.  The FTC ended their investigation the first week of this year and entered into an agreement with Google in exchange for the FTC agreeing not to pursue the matter further.

Part of the analysis by the FTC was a investigation into whether Google manipulated its search algorithms such that websites that competed with Google's "vertical" results (i.e. sponsored Google sites) were moved down in the search results with concomitant  damages to the click through rate to such competing sites.  The FTC found that even though "...some of Google’s rivals may have lost sales due to an improvement (sic) in Google’s product...(t)he totality of the evidence indicates that, in the main, Google adopted the design changes that the Commission investigated to improve the quality of its search results, and that any negative impact on actual or potential competitors was incidental to that purpose."  The Commission went on to say "...these changes to Google’s search algorithm could reasonably be viewed as improving the overall quality of Google’s search results because the first search page now presented the user with a greater diversity of websites."

Needless to say, not all were enamored with the FTC's actions.  Microsoft, having been kicked around by the FTC for years, bemoaned the actions as "weak"Others found it to be totally justified.

Whatever your view, this is a win for Google and clears up their docket to proceed with their pursuit of world domination.  Not that there's anything wrong with that.

Are Confidentiality Provisions and I.P. Assignment Clauses In Employee Agreements To Be Treated Like Non-Compete Provisions? South Carolina Supreme Court Says No.

Almost every technology company of any variety has a couple of standard provisions in the documents that their employees sign as part of the employment on-boarding process.  Those are, of course, provisions that require the employee not to divulge certain information that they learn as a result of their employment and that provide that any intellectual property developed by the employee during the employment (and often for a period thereafter) and based on information provided by the employer, belongs to the employer.  Some agreements also contain non-compete provisions, which purport to prohibit the employee from engaging in certain kinds of employment activity after the present gig ends.

Mr. Morin went to work for Milliken & Company in South Carolina as a research physicist and worked for Milliken for nine years developing fibers.  Apparently, Mr. Morin began to make plans for his own company prior to leaving the employee of Milliken and filed for a patent on a new fiber within a few months after resigning from Milliken.  Milliken thought such behavior was untoward and filed a suit against Mr. Morin for breach of the confidentiality provisions and the breach of invention assignment provisions in his employee contract, among other things.

The appeal of this case recently found its way to the Supreme Court of South Carolina.  One of Mr. Morin's principal arguments was that the confidentiality provisions and the assignment of inventions provision were restraints of trade and as such, should be reviewed under the same standard as a non-compete provision, i.e. not favored by the courts and construed against the employer unless certain very stringent requirement were met.

The South Carolina Supreme Court disagreed with Mr. Morin and found that such provisions (confidentiality and invention assignment) were not restraints of trade and as such, were to be reviewed under the reasonableness standard, i.e. to be enforced as an ordinary contract provision unless the provisions exceeded what was necessary to protect the legitimate interests of the employer.  The court held: "We therefore hold confidentiality and invention assignment clauses are not in restraint of trade and should not be strictly construed in favor of the employee."

This confirms what most of us in this industry believed to be the law and should make it easier for well crafted provisions of this nature to be enforced in the future.

UPDATE: Ownership of Company's Twitter Account: Company vs. Employee

Almost a year ago, we mentioned the unusual case of PhoneDog v. Kravitz, where a former employee was sued by his former employer for $340,000, which amounted to $2.50 per Twitter follower that the employee took when he left the company.

We indicated that this was a gray area and developing.  So, how did PhoneDog v. Kravitz enlighten us on the rules for this situation?  Exactly none.  Mashable reports that the parties have settled after months of mediation.  Settlement terms are confidential but apparently Mr. Kravitz retained the Twitter followers and there was no indication of money changing hands.

Where does this leave us?  Back at square one but with some lessons learned.  For example, if ownership and control of Twitter accounts is important to your business, state in the employment contract or the employee manual that such accounts belong to the company.  Eliminate any drama by addressing the issue head on.  #commonsense

Lewis Vuitton Loses One, Louis Vuitton Wins One.

We all know that Louis Vuitton is very aggressive in protecting their intellectual property.  We noted that they were successful in obtaining a large judgment from the operators of a San Antonio flea market for contributory infringement.

They have continued their protective efforts unabated and two recent decisions provided them with mixed (although perhaps justified) results.

First the victory.  Louis Vuitton had filed a case against in Federal District Court in Nevada against 182 websites and 1,000 "John Does" for infringement of Vuitton's rights by manufacture, advertising and sale of Vuitton knock offs.  The Court granted Vuitton a temporary restraining order against a number of the defendants, finding a strong likelihood of success at trial by Vuitton and that immediate and irreparable harm would accrue to Vuitton without the TRO.  Louis Vuitton Malletier, S.A. v. 1854louisvuitton.com, et al., 2012 WL 2576216, (D.Nev., July 3, 2012)

Now the loss.  In Louis Vuitton Malletier S.A. v. Warner Brothers Entertainment Inc., 2012 WL 2248593 (S.D.N.Y. 2012) a New York court ruled that Vuitton's reach had exceeded its grasp when it sued Warner Bros. for referring to a knock off in The Hangover II, even though Zack Galifianakis referred to it as a "Lewis" Vuitton and it was on the screen for less than 30 seconds.  The Court found that the use in this case was protected by the first amendment and was unlikely to cause any confusion.

By the way, "malletier" is french for luggage maker.  I had no idea.

New Top Level Domain Names. Coming Soon To A Browser Near You.

We have discussed before the new ICANN Top Level Domain scheme, whereby the initial regimen of .com, .net, .edu, etc. could be supplemented by any word to which an approved registrar gets the rights.  We joked that we were going to apply for the .law domain.  We came up a little short on our aluminum can drive to get the $185,000 necessary for the application but obviously someone is reading our blog because ICANN released a list of the applications today and six entities have applied for the .law domain name.  If that wasn't enough, there were two applications for .lawyer, two for .legal, one for .esq, one for .attorney and one for .abogado.

A review of the proposed strings probably provides a commentary on contemporary society, but you can make that evaluation.  The following are some of the applications and the number of applicants for such strings:

  1. 13 applications for .app
  2. 1 application for .bible, but none for .koran, although there is 1 for .catholic and 1 for .islam
  3. The applications are as divided as the country with 1 application for .democrat and 1 for .republican
  4. In the organized entity arena, there were 10 applications for .inc, 9 for .llc, 4 for .llp, 4 for .gmhd and 7 for .ltd
  5. There were 6 applications for .tech, 7 for .web and 7 for .cloud
  6. On the family front there were 3 applications for .mom and only 1 for .dad.  That sounds about right.
  7. For all the adults, there was 1 application for .porn (there already is a .xxx domain), 2 for .sex and 1 for .sexy
  8. There was 1 application for .gay and no applications for .straight
  9. There were numerous applications by corporations for the corporate extension, like .canon, .dell, .firestone and .csc
  10. And in the "I've got $185,000, I don't need right now" category, there was 1 application for .wtf and 1 for .unicorn.

There now follows a 60 day comment period and a 7 month window for filing an objection to any application.  Anyone want to oppose .cialis?  You can only do that after 4 hours.

Lessons Learned From The Trade Secret Trenches. Our Article Makes It To "Coatings World".

We teamed with our good friend to write an article relating to the requirements of maintaining trade secret status on your company jewels. 

Then, Coatings World, "The Resource For the Global Coatings Industry" was kind enough to print it. 

You can see it in their most recent edition here. 

Check it out to see what kind of dance steps you need to employ to avail yourself of such protection.

Oracle v. Google. Did Anybody Win?

Avid followers of this blog will clearly remember our discussion of the initial filing of the lawsuit involving the clash of the Larrys (i.e. Ellison [Oracle] and Page [Google]).  For a quick refresher, Oracle claimed that Google infringed on Oracle's Java related intellectual property (which Oracle obtained by buying Sun) by, among other things, violating some patents and copying application program interfaces ("API") in the development of the Android operating system.  There has been some question as to whether APIs are subject to protection by copyright but Oracle claims that the ones in Java are sufficiently complex  that they should be protected.  A recent case in Europe has held the other way.

The jury in this case held that Google did violate Oracle's copyrights but could not reach a decision as to whether the use was "fair use", a defense under the copyright act.  Therefore, this is not very conclusive.  The case is divided into three phases and this was the end of the first phase.  The case went directly into the patent phase of the case and the subsequent phase will be the damages phase.  So, a lot of work to do until this is finally decided but it is evident that this will have far reaching effects however it comes out.

Ouch. That's Gonna Sting And Leave A Mark. A LLC Gets Its Veil Pierced.

A New York Federal Court recently found reason to "pierce the veil" of a Delaware Limited Liability Company.  As we all know from Business Law 101, corporations and limited liability companies are formed to shield the assets of their owners from the liabilities of the entity.  When a court finds adequate reason, it can remove the liability protection of such entities and such an action is called "piercing the veil".

In this case, Soroof Trading Development Company signed a distribution agreement with GE Fuel Cells LLC.  This agreement gave Soroff exclusive rights to distribute fuel cells in Saudi Arabia.  The members of the LLC were GE Microgen, Inc. and Plug Power, Inc.  As luck would have it, the LLC failed to deliver the fuel cells for Soroff to distribute.  Soroff was peeved.  Lawsuits ensued.

The LLC was dissolved in 2006 and a certificate of cancellation was filed with the Delaware Secretary of State.  The LLC also (look, this is my shocked face) had no assets at the time it was dissolved.  The individual members were not parties to the distribution agreement so one way to get to them (and their assets) was to attempt to pierce the veil.

Factors that courts consider when deciding to allow such piercing include whether the entity (either corporation or LLC) acted as an alter ego for the shareholder(s) or members.  If it is virtually impossible to distinguish between the operation of the entity and the business of the members, a court will find liability under the alter ego theory.

In this case, the LLC had no assets at the time of dissolution, it had no employees and the individuals working at G E Fuel Cells were employees of the members or GE, it had no office space because it used the space leased by Plug Power and it did not have any signage reflecting its presence.  The Court found this sufficient to grant a partial summary judgment piercing the veil.

Now, this opinion has some hair on it (as we say on the farm) because the court failed to cite any unfairness or inequity, which is generally required to grant a piercing.  It also failed to annul the cancellation of the LLC, which leaves the LLC non-existent and under Delaware law, not susceptible to suit.  If the LLC is not susceptible to suit, there is no liability to flow through to the members.

Maybe this will sorted out on the next appeal.

However, lessons to be learned here are to heed the advice we give to each LLC that we form as to the steps to be taken to minimize the likelihood that this might happen to you.

Update: Website Operator Still Has "Complete Immunity" Even When They Are "Appalling"

In another of a series of victories for website operators, a Florida appellate court has found that a website operator enjoys (that truly is the right word) "complete immunity" for anything posted on their website. 

You will remember that we reported on a similar case involving PissedOff.com,

The defendants in the instant  matter operated a similar enterprise called "The Ripoff Report", which similarly encouraged people to post disparaging remarks about people and businesses.  In this situation, a graduate of an addiction treatment facility alleged that the owner was a felon, the facility was dangerous and they disbursed illegal medications.  The proprietor of the site consistently refused to take down the offending post and even when the poster was the subject of an injunction which forbade her to leave the complaint on the site and the poster begged the site to take it down, the website operators refused.

In spite of all this, the court found that Section 420 (how appropriate for today, pot joke to follow) of the Communications Decency Act ..."creates a federal immunity to any cause of action that would make service providers liable for information originating with a third-party user of the service."

This is true even though the court  thoroughly disapproved of the website's business practices (they offered reputation cleanup services for a large fee, much akin to PissedOff.com).

So, you have to do more than just be "appalling" to remove yourself from the CDA's umbrella of protection.

Update: You Can Now Look At Facebook At Work Without Committing A Crime.

About a year ago, we posted on a case that held that misappropriation of computerized informationin violation of a company's computer use policy could be a crime.  The defendant had received stolen confidential information from former coworkers.  The court held that this exceeded the employer's written use policy as as such violated the Computer Fraud and Abuse Act, which criminalizes "exceed(ing) authorized access" and using this to further fraud.

On April 10, 2012, the Ninth Circuit, sitting en banc, reversed, holding that because the pilfering co-workers did have authority to access the information they stole, this did not violate the CFAA.  The Court reasoned that the intention of the legislation was to prohibit hacking and not the kind of day to day activities that most slacker employees engage in (i.e. exceeding their company's policy) by surfing the web.

This doesn't get Mr. Nosal and his friends out of the woods, however, as the government is still able to pursue counts of mail fraud and theft of trade secrets.

Congress Agrees On Acronyms for JOBS and CROWDFUND. Astonishment Is Rampant.

Given the present state of partisan hostilities in Washington these days, it is big news when the Senate and Congress can agree on anything.  However, that is exactly what they did on March 27, when Congress agreed with a Senate amendment to an act that established once and for all, the acronyms JOBS and CROWDFUND.  Oh yeah, they also passed an act to go along with the acronyms, which is the most astonishing of all and which is designed to stimulate the market for initial public offerings ("IPOs") and, inter alia, contains provisions allowing for "crowdsourcing" or "crowdfunding".  President Obama has expressed his support for this bill and is likely to sign it in the near future.

The "JumpStart Our Business Startups" Act or the JOBS Act changed in a very significant manner, the rules relating to funding for small business startups.  It even changed the definition of a small business to an "emerging growth company" that had less than $1,000,000,000 (yes, that's a billion) of revenue in the last 12 months.  According to some sources, this would have covered more than 91% of the IPOs in 2011.  The JOBS Act eased many of the rules for IPOs and instructed the Securities and Exchange Commission to revise and adopt other rules pertaining to these types of equities, including determining whether it makes sense to allow trading in one cent increments.

The most notable effort in acronyming, however, goes to the drafters in coming up with the "Capital Raising Online While Deterring Fraud and Unethical Non-Disclosure Act of 2012".  Rolls off the tongue, right?  Or you can just call it the "CROWDFUND" Act.  This allows the collection of investments from large numbers of people in small amounts through brokers or registered websites.  It restricts the amount that can be raised to $1,000,000 annually and restricts the amount that can be raised from any one individual to the greater of $2,000 or 5 percent of their net worth or annual income if less than $100,000 or the lesser of 10% or $100,000 if annual income or net worth is greater than $100,000. 

The JOBS act also exempts most of the crowdfunding activities from state securities act registration requirements but still provides oversight by such state commissions for fraud and misrepresentation.

The Act provides for much registration and restrictions on advertising and generally has most securities lawyers in a state of moderate arousal.  A thorough summary of the act has been done by the firm of Andrews Kurth and can be found here.

Time will tell if this has the desired effect on increasing capital markets for "small" companies.  Some of the provisions may actually encourage the delay of IPOs but it is an ambitious effort if for nothing else than the advancement of acronym art.

Better To Be Pissed Off Than ... Well, You Know.

PissedConsumer.com is a website that encourages consumers to complain about companies and products.  When a complaint is lodged, PissedConsumer creates subdomains and metatags using the name of the product or company complained about in the name, e.g. productname.com/titleofpostedcomplaint.html.  PissedConsumer then uses a third party to post advertisements on the complaint pages for competitors of the product or company complained about.  Opinion Corp. is the company that owns and manages PissedConsumer.com.  As an additional service, Opinion Corp. offers to help remedy the negative impact of the complaints in a number of ways and for a substantial amount of money.

Ascentive, LLC (software company) and Classic Brands, LLC (mattress manufacturers) were the victims of negative comments on PissedConsumer.com and separately brought suit against Opinion Corp. and some of its officers individually.  Their suits were consolidated for the purpose of this action.

The plaintiffs (Ascentive and Classic Brands) alleged a number of causes of action, including a request for a preliminary injunction to disable the offending pages, counts under the Lanham Act and counts under the Racketeer Influenced and Corrupt Organizations Act ("RICO"). 

The counts under the Lanham Act centered around the plaintiffs' claims that the use of their trademarks in the subdomains and in metatags constituted trademark infringement, unfair competition and false designation of origin.

For the RICO allegations, they allege that the defendant's "Reputation Management Services", which allow companies (for a large fee) to respond to the reviews and alter the format in which the reviews appear were tantamount to bribery and extortion prohibited by the RICO Act.

The Court applied the preliminary injunction standard, which requires that such an injunction issue only if the plaintiffs have demonstrated a likelihood of success on the merits.

Applying this standard to the facts, this Court found that there was no likelihood of confusion as any reasonable user would understand that this was a gripe site and not a competing site and that the use of plaintiffs' marks as described did not result in such confusion.  In addition, the defendant plead that they were insulated from liability under Section 230 of the Communications Decency Act because they were an "interactive computer service" and therefore not liable for the defamatory comments of their users.  The Court agreed.

Consequently, the Court found that the plaintiffs had not demonstrated a likelihood of success and denied the motion for preliminary injunction even though the Court expressed some uneasiness about the defendant's business practices and ethics, e.g. eliciting (some say creating) complaints, advertising such complaints, engaging in search engine optimization to cause the complaints to appear higher in the search rankings and then charging fees to cure the situation they had created.  "Ethical obligations that exist but cannot be enforced are ghosts that are seen in the law but that are elusive to the grasp."  Lyrical, but little consolation to the plaintiffs.

Technology Contract Drafting Alert: When Do "Lost Profits" Go From Being Consequential Damages To Being General Damages?

Let me stipulate on at the outset that this is not very sexy.  Most normal people don't care about the arcane distinction that we try to make in this post.  However, most attorneys (by definition, not normal people) that write a lot of contracts and technology providers that sign a lot of contracts could find the distinction valuable.

The following is a common provision in the boilerplate of technology (and indeed, most) contracts:

"Neither party will be liable hereunder for penalties or for special, indirect, consequential or incidental losses or damages, such as damages for lost profits, lost or damaged data, failure to achieve cost savings, loss of use of facility or equipment, or the failure or increased expense of operations, regardless of whether any such losses or damages are characterized as arising from breach of contract, breach of warranty, tort, strict liability or otherwise, even if a party is advised of the possibility of such losses or damages, or if such losses or damages are foreseeable.

This provision flows from years of manipulation of contract language, which began with the case that all attorneys must read in the first few weeks of their Contracts course in law school: the famed Hadley v. Baxendale, 9 Exch. 341, 9 Ex. 341, 156 Eng. Rep. 145 - Court of Appeals, 1854. In that case the defendant failed to deliver a broken crank shaft to the repairman on time, so the repair man was late in getting the new crank shaft to the plaintiff and consequently, the plaintiff couldn't get his flour mill on line and sued for loss of profits for the down time. The 1854 court held that this type of damage was not readily foreseeable, was consequential (i.e. not a direct result of the breach) and therefore, speculative and non-recoverable in this instance.

So, are all lost profits non-recoverable? No, particularly when they are part of the thing the plaintiff had bargained for in the contract. Case in point is the 2007 case of Tractebel Energy Marketing v. AEP Power. As part of a highly complicated case with many issues, Tractebel sought to avoid paying AEP for the profits that it would have made had Tractebel fulfilled its commitment under a contract to purchase a minimum amount of power from AEP. The Court described consequential damages thusly:

"Lost profits are consequential damages when, as a result of the breach, the non-breaching party suffers loss of profits on collateral business arrangements. In the typical case, the ability of the non-breaching party to operate his business, and thereby generate profits on collateral transactions, is contingent on the performance of the primary contract. When the breaching party does not perform, the non-breaching party's business is in some way hindered, and the profits from potential collateral exchanges are 'lost'."

The Court then distinguished the lost profits in the Tractebel case by saying:

"By contrast, when the non-breaching party seeks only to recover money that the breaching party agreed to pay under the contract, the damages sought are general damages. *** But, in this case, the lost profits are the direct and probable consequence of the breach.The profits are precisely what the non-breaching party bargained for, and only an award of damages equal to lost profits will put the non-breaching party in the same position he would have occupied had the contract been performed. ***

AEP seeks only what it bargained for—the amount it would have profited on the payments TEMI promised to make for the remaining years of the contract. This is most certainly a claim for general damages."

Therefore, lost profits in this instance are general damages and recoverable. We have often thought that the general contract language excluding recovery for lost profits could potentially put the vendor in danger of having a defaulting purchaser say that they couldn't recover the entire contract price because part of it would obviously be profits that they lost. That probably wouldn't happen under the ruling in the Tractebel case but leaving that to the whim of the court is not good practice. For that reason, we try to add "amounts payable under this Agreement" to the usual litany (indemnity, breach of confidentiality, etc.) of things that are excepted from the limitation of liability to make it abundantly clear that these are recoverable.

OK, we'll try to make the next post sexier.

 

Who Owns Your Social Media Account? You Or Your Employer?

Here's the situation:  You establish a Twitter, Facebook, LinkedIn, etc. account while you are employed and use the account to tweet, post, blog, etc. about your employer.  Then your employer falls out of love with you and you are no longer employed.  Who owns your followers on Twitter or your Facebook or LinkedIn account?  That's a really good question and one that the courts are dealing with right now.

Rich Sanchez was an anchor on CNN and has a Twitter account with the handle: "richsanchezcnn".  Rich was rendered unemployed because of some ill advised statements he made.  So, does CNN own the account or was Rich popular with the Twitter followers because of his good looks and sex appeal or because he was on CNN?  Should he have to change his handle?  This was settled out of sight, so we don't know what happened there.

On another front, a company called PhoneDog LLC filed a suit against former employee Noah Kravitz.  Noah tweeted while an employee of PhoneDog under the name "PhoneDog_Noah" but then changed it to "noahkravitz" after the break up.  PhoneDog alleges that Noah's 17,000 followers are worth $2.50 per month for 8 months and are asking for a $340,000 judgment against our friend Noah.  PhoneDog has, for the moment, survived a motion for summary judgment with the judge finding enough question of fact about "trade secrets" in the account to let the case go on for a little longer.

Then there's the strange case of Dr. Linda Eagle, who was one of the original founders of Sawabeh Information Services.  As is the case sometimes, all the founders were fired and Sawabeh alleges that it owns Dr. Eagle's LinkedIn account and that she has somehow "misappropriated" her own  account.  As you know, most LinkedIn accounts (as was Dr. Eagle's) are in the employee's name alone and refers to the company in the employment history and in the connections established.

We have explored the issues of who owns clients of an LLC and whether a toxic ex-spouse might have some rights in a patent in a community property state, but this is an area of the law that is developing.

In most instances, this is probably not a huge issue but employers who want to have control over these accounts (and the wisdom of this should be evaluated thoroughly), should provide guidelines in the social media section of their employment rules.  If stated clearly, there seems to be no reason why the employer would not be entitled to control and ownership of such accounts if they fall into the parameters set out in such policy.  Otherwise, it's pretty gray.

Weekend Smorgasbord: Faceporn and Copyright Porn.

Here is a couple of technology law related things that happened this week and they are only marginally connected.

1.  Facebook sued a site called Faceporn in a federal court in California.  They are aggressive about this.  See here and here.  Faceporn is in Norway but uses a .com website.  They also have 250 users in California and 1000 users in the U.S.  Faceporm failed to file an answer and Facebook moved for default judgment.  The Court denied the motion, finding that it did not have personal jurisdiction over Faceporn in that personal jurisdiction requires more than "simply registering someone else's trademark as a domain name and posting a web site on the internet".  Hence, no default judgment.

2.  In a recent  case in Massachusetts involving the claim of copyright infringement for an adult film, the judge wondered aloud in a Footnote 2 whether there was actually any copyright protection available for a pornographic product.  A couple of cases had refused to provide such protection (beginning in the early days of Broadway, see Martinetti v. Maquire, 1867) but basically on the grounds that scant dialog and nude women were not a dramatic composition and therefore not entitled to copyright protection.  A 1979 case allowed for such protection because found that the concept of decency and pornography is constantly changing and "denying copyright protection to works adjudged obscene by the standards of one era would frequently result in lack of copyright protection (and thus lack of financial incentive to create) for works that later generations might consider to be not only non-obscene but even of great literary merit".  It seems incongruous that porn is not entitled to any copyright protection but cases as late as 1998 found that hard core porn that was "bereft of any plot and with very little dialog" was not entitled to injunctive relief against copyright infringement.

So, lack of personal jurisdiction just because you have a .com domain and a question raised about copyright protection for pornography.  How do these affect technology and law?  Well, the internet issue for personal jurisdiction will continue to develop over the years, copyright issues for any medium is a hot item in technology protection and any mention of porn lights up the search engines and gets us more readers.  Reasons enough?

Scam Alert! Especially For Attorneys.

Suppose you are hard at work doing your lawyer stuff one day and you get this e-mail:

"Greetings Counsel:

I need your legal assistance. I provided a friend of mine Mr Philip Anderson a business loan in the amount of $350,000. He needed this loan to complete an ongoing project he was handling in 2009. Mr Anderson is well based in your city and the loan was for 24 months and interest rate of 7.85%. The capital and interest were supposed to be paid on April 15th, 2011 but Mr Anderson has only paid $50,000.

Please let me know if this falls within the scope of your practice so that I can provide you with the loan documents and any further information you need to know.

Thanks,

John .F.Chao"

You think "Whoopee! New business. Just what I need."  At least that's what I thought today, when I got this very e-mail.

You should wait a minute.  It's a scam.  See here for a description.  Apparently, this has been circulating for some time.

Here's how it works, courtesy of AvoidAClaim Blog:

"In this type of scam a lawyer is contacted to help an overseas lender collect on a business debt from a purported borrower in the lawyer’s jurisdiction. The fraudster will provide documentation about the loan. A retainer agreement will be signed, but the fraudster will delay in paying the retainer fee. Instead, the lawyer will be asked to deduct any fees from the debt payment.

When the lawyer has sent a demand letter (or sometimes, before any letter has been sent) a cheque will arrive. The lawyer will be asked to deposit the cheque in the trust account and wire the balance (after fees are deducted) to an overseas account. Of course, the cheque is fraudulent and the lawyer will be left with a shortfall in the trust account."

And then, sure enough, something that sounded too good to be true, was.

StartUp America Launches In Austin

StartUp America is an initiative started in the White House in early 2011 to provide for the creation of resources around the country to facilitate in the creation and fostering of small companies.  The Austin version of that launched yesterday as the seventh one of this variety in the U.S.  Its website is here and it promises to provide much good information and valuable resources.

Give it a look.

In Cyberspace, No One Can Hear You Scream, But They Can Get Your Identity.

The Securities and Exchange Commission thought that a particular individual was engaged in a
"pump and dump" scheme, which is where bloggers, commentators, anonymous "experts" or others tout a small cap stock on line in forums, chat rooms, etc. and often with false or deceptive material and then when the price gets a bump as a result, the persons doing the touting sell the stock for a profit.

The SEC wanted the identity of the person behind jeffreyhooke@gmail.com and subpoenaed Google to get the information.  Google notified the person and the person (using the clever pseudonym "John Doe") moved to quash the subpoena.  The lower court denied the motion to quash and Mr. Doe appealed. 

The Court found that Mr. Doe had made a prima facie showing that his First Amendment right of free speech was implicated and therefore, the burden shifts to the government to show: (i) the information sought was rationally related to a compelling governmental interest and (ii) the disclosure requirements are the least restrictive means of obtaining the desired information.  The Court found that the government's interest in disclosure (being ancillary to a fraud investigation) trumped Mr. Doe's private interest in anonymity and that the information requested was the least restrictive means available.

Mr. Doe argued that the standard in Anonymous Online Speakers should be applied here instead of the Brock standard.  The Court held that in Anonymous Online Speakers, there was no government interest at issue (i.e. it was between private parties) as there was in Brock and therefore the Brock standard should be applied, i.e. the government did not have to present evidence sufficient to overcome a summary judgment.

The Court overruled the motion to quash and John Doe is anonymous no more.

 

Move Over Stuxnet, Here Comes DuQu - Son of Stuxnet, Stuxnet 2.0 or Demon Spawn?

The latest addition to the family of badass malware is DuQu.  DuQu was born sometime in the near recent past but only became obvious to the world on September 1, 2011 when the Laboratory of Cryptography and System Security (CrySyS) notified the world of its birth. 

If the proud parents were to issue a birth announcement it would read something like:

"The Stuxnet family is proud to announce its latest variant, DuQu, named after its propensity to create files with DQ as a prefix.  Born: Sometime lately.  Weight: Heavy.  Breadth: Remains to be seen.  The bouncing baby malware shares a good portion of its mother's (Stuxnet) source code.  Its father is undetermined but likely is a good looking roving nation state with sabotage or corporate espionage on its mind, like Mossad or the CIA, who are also related to Stuxnet, so birth anomalies are possible.  DuQu shares its likely father's fondness for stealth and trickery."

Most experts like Symantec would agree with the announcement's statement on DuQu's lineage but Dell's SecureWorks doesn't necessarily buy it.

Stuxnet has been used to infect the Iranian nuclear program by causing the centrifuges used to purify uranium to exceed their design for spinning speed and destroy themselves.  DuQu seems to extract information and send it to an unknown site.  Although not proven, this blog along with others have surmised that the sophistication of Stuxnet, the targets and the amount of programming resources required point to the involvement of a group of people more technically advanced and well funded than the average virus creator.  We also chronicled Stuxnet's move from being merely menacing to becoming a military weapon.

Anti virus groups are moving to address the issues, Microsoft says it will address the zero day defect that DuQu exploits when it gets around to it but proposes an emergency fix and the "whitelisting" folks like CoreTrace say that they've been ahead of this all along.

As this new arrival grows and spreads, the real purpose and the damage it may do can be assessed but if malware continues to be more sophisticated than some of the applications we regularly use, problems will abound.

It Meant What It Says and It Said What It Meant, A Contract Must Be Enforced 100%. The "Plain Meaning Rule" in Contract Construction.

With apologies to Horton and Dr. Seuss, we embark on a discussion of how attorneys must be extremely careful to articulate all the aspects of a deal in an agreement and not depend on a court to bail them out by adding other elements even if the parties thought they had agreed on these elements but failed to include them in the agreement.

A recent case in New Jersey shines a bright light on this situation.  In Microbilt Corporation v. L2C, Inc., Superior Court of New Jersey, No. A-3141-09T3, Decided August 23, 2011 the Court examined and applied the common law rule of contract construction referred to a the "plain meaning rule" or the "parole evidence rule".  In this case, Microbilt contracted with L2C for L2C to:  "...perform credit evaluations on suitable applicants, reach conclusions about the credit-worthiness of those applicants and quickly (as defined herein) return those conclusions to [MicroBilt]..."  The contract defined "conclusions" as "...a score, attributes or a combination of the two...".

L2C began to perform but Microbilt asserted that L2C must also provide Microbilt the underlying data used to calculate the credit scores.  L2C disagreed but agreed to contact the provider of the underlying data, a company called eFunds Corporation.   But lo and behold, eFunds and Microbilt had some history.  It seems that, in the near recent past, Microbilt had sued eFunds for breaching a contract to provide Microbilt some data (sound familiar?) and eFunds had counterclaimed asserting the Microbilt had breached the agreement by disseminating the data in violation of the agreement.  This conflict was ongoing.  So, in the spirit of spurned lovers everywhere, eFunds told L2C not to even think about giving the underlying data to Microbilt.

L2C told Microbilt about eFunds' reticence and Microbilt sued L2C for breach of contract alleging that "the [contract was] breached because L2C knew it needed to supply the supporting data".  The present situation was based on a motion by L2C to dismiss for failure to state a cause of action.  The Court said that such motions were evaluated on the same criteria as a motion for summary judgment.  The Court reasoned that:

1.  "The interpretation of a contract is ordinarily a legal question for the court and may be decided on summary judgment unless there is uncertainty, ambiguity or the need for parole evidence in aid of interpretation"..

2.  "When the terms of a contract are clear, it is the function of a court to enforce it as written and not to make a better contract for either of the parties."

3.  "Absent ambiguity, the intention of the parties is to be ascertained by the language of the contract." and

4.  "If the language is plain and capable of legal construction, the language alone must determine the agreement's force and effect."

The Court found that there was no ambiguity in that L2C had agreed only to provide a conclusion and that a conclusion was a score, an attribute or a combination of the two and did not involve the underlying data.  Microbilt conceded that the language was not ambiguous but said that "...the parties also understood that the underlying data was to be provided as well...".  Court said, that may be so but it doesn't matter.  If the language is unambiguous, parole evidence (i.e. evidence outside the language of the contract)  may not be introduced or considered by the court.  Hence, the dismissal of Microbilt's complaint for failure to state a cause of action was upheld.

The rule applied here is a common law rule of statutory construction and is followed by Texas courts.  See Baldwin v. New, 736 S.W.2d 148 (1987).

So, word to the wise.  If you agree to it, write it down. Don't be left waiting on an egg to hatch.

UPDATE: Supreme Court Allows Autodesk "License" Decision To Stand.

You will recall that we reported on a case styled Vernor v. Autodesk, which held that because of some "magic words", the distribution of used software was subject to a license and was not a sale and consequently, could be prevented by Autodesk.

Mr. Vernor (actually one or more of the multitude of entities that filed amicus briefs in the lower court, see here) sought an appeal to the U.S. Supreme Court but the Supremes denied cert on Oct. 3.  This means that the ruling stands in the Ninth Circuit (Washington, Oregon, California, Arizona, Nevada, Idaho and Montana) and if the proper words are used, the "first sale" doctrine doesn't apply.

Because this makes the operation of e-Bay and others more difficult, look for further developments.

Winklevoss Twins Not Particularly Enamored With Legal System, Lawyers nor Results.

We have chronicled the saga of the Winklevoss twins in these pages before (see here, here, here and here) and frankly, we're a little embarrassed we have spent so much time on this.  As you will remember, the twins succeeded beyond most mere mortals wildest expectations when they settled their claim against mighty Mark for a portion of Facebook now estimated to be worth more than 9 figures.  That definitely made them a member of the one percent.  They then decided that they had been scammed and tried a number of times to set the settlement aside.  As indicated in the posts described above, they have been singularly unsuccessful in that endeavor.

They engaged the firm of Quinn Emanuel to pursue the initial law suit against Facebook.  The arrangement with Quinn Emanuel provided for a contingency fee based on the amount ultimately recovered through suit or settlement.  They signed an engagement letter that they had reviewed by independent counsel.  After the settlement with Facebook, the twins decided not to pay Quinn Emanuel the $13 million in legal fees that Quinn Emanuel claimed under the engagement letter.  Quinn Emanuel instituted arbitration in accordance with the engagement letter.  The twins sought a court order enjoining the arbitration proceeding.  That was denied.  An arbitration panel awarded Quinn Emanuel the $13 million dollars.  The twins appealed again to the New York Supreme Court seeking to set aside the award because of the law firm's alleged malpractice.  Denied again.

The Winklevoss twins entered into a settlement that made them even wealthier than they already were.  They then decided that they didn't like what they had agreed to and have set out to avoid anything relating to that settlement.  They are zero for career in that category.  I wonder if the law firm representing them in the matter against Quinn Emanuel asked for up front payment.  They would be guilty of malpractice on their own behalf if they didn't.

This Week In Intellectual Property Lessons: Butters' "What What", Iron Mike's Tattoo and Ali's Catch Phrase.

What do South Park's Butters parody of "What What (In The Butt)", Mike Tyson's facial tattoo and Muhammad Ali's catch phrase have in common?  They all serve to illustrate some aspect of intellectual property law.

As you know, South Park is a cartoon featuring a group of foul mouthed kids and in which, no subject is taboo or sacred.  A rapper named Samwell did a video that went viral called "What What (In The Butt)". (Warning: Not exactly safe for work) The central group of foul mouthed kids in South Park convinced  Butters to do a version of that video to see if it would also go viral.  It did.  Samwell sued, alleging copyright infringement.  The court in Brownmark Films, LLC, v. Comedy Partners, 2011 U.S. Dist. LEXIS 72684 (E.D. Wis. July 6, 2011)  using a method deemed "irregular" (court's own words), considered an affirmative defense as a basis for a motion to dismiss for failure to state a cause of action.  Usually, affirmative defenses are considered only after the plaintiff have proved they have a viable case.  The court then found that "The South Park “take” on the WWITB video is truly transformative, in that it takes the original work and uses parts of the video to not only poke fun at the original, but also to comment on a bizarre social trend, solidifying the work as a classic parody."  The court also found that that "...South Park’s parody of the WWITB video falls squarely within the fair use protections afforded by the Copyright Act."  Therefore, fair use and a dismissal with prejudice.

We've all seen the offensive and extremely funny movies, Hangover and Hangover II.  Mike Tyson, former heavy weight champion of the world and famous pigeon lover was in both.  The tattoo on his face was featured prominently and in Hangover II, one of the actors ends up with an almost identical tattoo and this is shone on some of the advertisements for the movies.  The tattoo design was originated by a tattoo artist in Missouri and the artist retained all rights in the design.  He brought suit for damages for copyright infringement and for an injunction to stop the release of the film.  In a preliminary hearing, the judge found that the artist had a likelihood of success in the trial and stated that a copyright could exist in the medium of expression here (Mike Tyson's face).  The judge declined to issue an injunction against the release of the film by finding that damages would be sufficient remedy.  This ruling induced the parties to settle and while the settlement is confidential it is likely that as part of the settlement,  the movie company will alter the advertisements to obscure the similarities in the tattoos.

Muhammad Ali famously coined the phrase "Float like a butterfly, sting like a bee."  The smart people advising him got a trademark on the phrase.  Kobo, Inc. has been using the phrase as a part of its advertising for its electronic reader and using it prominently in several print advertisements.  Ali's licensing company has filed suit, alleging that this improperly suggests that Ali endorses the product and since he apparently has not been paid to do so, it is apparent that he doesn't endorse it.  This suit has been recently filed and its progress will be interesting.  Maybe not as interesting as the "Thrilla in Manila" or the "Rumble In the Jungle" but nonetheless interesting to us IP nerds.

 

New Patent Legislation Signed by President Obama - All Patent Problems Immediately Cured.

Snarky titles aside, President Obama today signed into law the America Invents Act.  This bill passed the Senate by a vote of 95 to 5, so given the political climate in Washington today, you almost have to assume that it doesn't do much, but that might be unfair.  Some of its features include:

  • Changes the definitive date from the first to invent to the first to file.  This is designed to eliminate controversy and the necessity of a court to review a lot of evidence to determine who has prior rights.  It also puts the U.S. into conformance with most of the rest of the world on this issue.  It also creates a race to the USPTO and may favor large companies with money and staff over inventors with less resources.
  • Allowing the USPTO to set its fees and keep most of the fees itself in contrast to having them siphoned off to fund other agencies as in the past.  This supposedly will help clear up a backlog of approximately 1 million applications.
  • Giving rights to third parties to challenge a patent within 9 months after its issuance.  It also limits patent rights for tax systems and financial products or systems.

Large companies like IBM touted the legislation but others weren't so impressed.

A full text of the bill can be found here.  Problems solved.

Update: The Acquisition That Keeps On Giving. SAP Agrees To Pay Criminal Fine of $20 million For TomorrowNow's Transgressions.

 In 2005, SAP acquired TomorrowNow, a company designed to provide third party maintenance for Oracle software.  Unfortunately, TomorrowNow chose to reduce its operating costs by pirating a bunch of Oracle software and then using it in its business.  

Oracle found that to be somewhat offensive and sued TomorrowNow and SAP and originally obtained a judgment against them for $1.3 billion dollars.  We recently noted that a judge had reduced this amount to a mere $272 million.

During the civil trial, federal prosecutors listened and then filed criminal charges against TomorrowNow.  TomorrowNow is basically defunct and has fewer than ten employees and no individuals were named in the indictment.  This was done as part of a plea bargain and SAP worked out a deal where they would pay a $20 million dollar fine for TomorrowNow, even though SAP was not named in the indictment either.  One would have to assume that some individual actually performed the criminal act of stealing the software, although in this case, it appears that Mitt Romney is correct in that: "Corporations are people, my friend."  At least for plea bargains.

Court Reduces Oracle's Judgment Against SAP From $1.3 Billion (With a B) to $272 Million (With a M).

Once upon a time, SAP purchased a company called TomorrowNow.  TomorrowNow apparently downloaded Oracle software thousands of time in an effort to get the software cheaply (free) and obtain some of Oracle's customers.  Oracle sued and SAP did not contest the fact of the downloads but alleged that the damages to Oracle should be equal to the profits that Oracle would have realized from the pirated software.  The Court allowed the jury to find damages based on a "hypothetical license" that would have existed between Oracle and SAP if Oracle allowed SAP to use the software in question.  This allowed the jury to find damages in the amount of $1.3 billion, the largest copyright infringement verdict in history.  However, today, in the U.S. District Court for the Northern District of California, the judge found that there was no evidence that Oracle would have ever granted such a license and that damages must be based on evidence and not speculation or guesswork.  The judge then said that the judgment could be reduced to $272 million and if the parties could agree on that, then it would be settled.  If they do not agree, then a new trial will be ordered.

It's an interesting world when a $272 million dollar verdict is considered a victory for the defense.

Austin Start Up Week - Sept. 6-10. Good Times and Learning Together: What A Concept!

The first Austin Start Up Week will be held September 6 through 10.  The website and more information may be found here.  The organizers have as their stated goals: "...learn, mix and mingle with your peers, meet some new people and make awesome things happen". 

Included in the agenda are kayak rides, pub crawls, Office Space quote-a-longs ("So I was sitting in my cubicle today, and I realized, ever since I started working, every single day of my life has been worse than the day before it. So that means that every single day that you see me, that's on the worst day of my life") and some educational stuff also.

This sounds like a whole lot more fun than working (even if you have a job), so you should check it out.  We hope to see you there.

Ninth Circuit Withdraws Opinion On Betty Boop. Logo Licensors Breath Easier For A While.

We have previously discussed an opinion issued by the Ninth Circuit, which found that the "Betty Boop" character was a "functional aesthetic component" of a product upon which it was printed and therefore, like embossed designs on toilet paper and red soled shoes, was not subject to trademark protection.  We found the ruling and the method of getting to the ruling to be unusual and proposed that the Court could have reached the same result by addressing other issues actually before the Court and not caused heart attacks in the offices of companies that license logos.

We were not the only ones that found the ruling to be troubling and last week the three judge panel in the Ninth Circuit took the unusual approach of withdrawing the original opinion and superseding it with a new opinion.  The new opinion makes no mention of whether the panel thought they erred in the original opinion nor of any of the firestorm of criticism that the opinion evoked.  They merely took our suggestion (I'm pretty sure this blog was the driving force in causing this to happen) and found chain of ownership issues and other issues sufficient to allow them to remand for further hearings.

So, for the present, it is as though the original opinion never existed.  The Betty Boop trademark issue is not solved for the litigants but logo licensors are temporarily happier.

Update: Louboutin's Red Sole Ruled "Functional" So Use As A Trademark Is Suspect.

Recently we reported that the shoe of choice for fashionistas, Louboutin, had filed an infringement action against a competitor because the competitor was selling shoes with red soles. Louboutin had obtained a trademark for such red soles.  In an opinion denying Louboutin's request for a  preliminary injunction, the Court held that no injunction would issue because it was unlikely that Louboutin would be successful in the trial on its merits because the red soles were "functional".  The Court found this in part because Christian Louboutin, himself, testified (perhaps unwisely) that the red soles provided "energy", and were "engaging" and "sexy".  This, the Court found, was not designed to identify the shoes but provided "function" and therefore was not subject to trademark.  So, red soles, along with designs on toilet paper and Betty Boop are functional.

The Court also based its decision upon the thought that chaos would result if a single color was granted as a trademark in the fashion industry.  Since Louboutin's registered trademark is for a "red' sole, the Court wondered just how red would red have to be to be infringing and would other designers race to trademark all the other colors.

Louboutin's trademark is therefore likely to be cancelled, depending on Louboutin's next legal move.  I think you might be seeing some red soled Low Bootawns in Walmart soon.

Zediva's Cord Is Too Long. Court Considerably Shortens It.

You know our friends at Zediva, the entrepreneurs that used DVD players in a data center and DVDs they had bought to rent the DVDs and the players to individuals and stream movies over the internet to subscribers.  We chronicled their launch and subsequent encounter with the legal system here and here.  Zediva had thought their arrangement would be legally equivalent to renting a DVD and player to an individual in their home, a situation that is legally acceptable.  They reasoned that the only difference was a little longer cord, i.e. the distance through the cloud from Santa Ana, California to the respective user.

The Federal District Court, Central Division, of California recently disagreed.  In a decision that has been roundly criticized by some and lauded by others (no surprise there), the Court granted a preliminary injunction, which effectively shut down the Zediva enterprise.  Their website now shows the following:

The Court reasoned that the Zediva service constituted a public performance and that the method of providing the movies constituted a transmission, both violations of the exclusive rights of a copyright holder.  Consequently, the Court found that the plaintiff had shown a likelihood of success on the merits, a requisite of the granting of an injunction.  Another requisite is the showing of irreparable injury.  The Court solved this by reasoning that the provision of the movies by the unlicensed provider deprived plaintiff of its ability to control the use and transmission of their copyrighted works and deprived the plaintiff of revenue (the crux of the matter).  The Court also decided in a rather conclusory manner that the balance of hardships weighs sharply in favor of the plaintiffs and the public interest is best served by the issuance of the injunction.

The Court seemed to think that some kind of physical act on the part of the user, such as recording on a DVR or physically inserting the DVD in a player owned by the user on the user's premises, was required to remove the transaction from the "public performance" and transmission arenas.  Zediva maintained that this was a distinction without a difference.

This area of the law continues to evolve, although more slowly than the technology driving it.  Although it looks like it probably will not happen, it would be helpful if Zediva were to proceed to trial on this so that we could get a more complete consideration of all the issues and some judicial instruction in this cloudy area (pun intended).

Design On Toilet Paper Found To Be Functional and Trademark Gets Wiped Out and More Bad Puns.

In the technical arena, we routinely deal with trademarks and their validity.  A basic tenet of trademark law is that if the thing that is being trademarked is "functional", i.e. useful for the product to function, it can not be the subject of a trademark.  We recently wrote about a case with which we disagreed that found that the image of Betty Boop on a purse was functional and therefore could be used on the purse without infringing.

Another case involving functionality in a trademark setting was recently decided by the Seventh Circuit and this case involved toilet paper.  The initial line in Georgia-Pacific Consumer Products LP v. Kimberly-Clark Corporation et al (Seventh Circuit Court of Appeals, No. 10-3519, Decided July 28, 2011) states: "Toilet paper. This case is about toilet paper. Are there many other things most people use every day but think very little about? We doubt it."

The case is a decision on a summary judgment motion filed by Kimberly-Clark that, inter alia, alleged that the "Quilted Diamond Design" on Georgia-Pacific's Quilted Northern was functional and therefore, Georgia-Pacific couldn't enforce an infringement action against Kimberly-Clark using a similar design on their Cottonelle product, even though the quilted design was the subject of a registered trademark.

The decision rested in large part on the fact that Georgia-Pacific had several utility patents on the design and the Court found that this was "strong evidence" that the design was functional, particularly if the "central advance" claimed in the utility patent matches the "essential feature" of the trademark.

The Court also engaged in what passes for ribald humor in an opinion.  In addition to their explosive first line described above, the puns flowed freely in the opinion: e.g. "Georgia-Pacific unrolled this suit against Kimberly-Clark", "...despite the fact that the judge dutifully plied her opinion, we now wipe the slate clean...", "[this] claim...does not hold water" and the "...judge was spot-on".  Riotous humor for a judicial opinion.

In the end [see what I did with that?] the Court held that "...if a design is functional the owner cannot trademark the design and block innovation. Georgia-Pacific, whether intentionally or not, patented their Quilted Diamond Design and claimed it to be functional. They must now live with that choice and can benefit only under the protection of a patent, not that of a trademark."

So the Court got to the bottom of the matter, flushed Georgia-Pacific's trademark claim and dispensed a double roll of justice.  

Please, may I be excused for this?

Negotiation 101 - Part 3. Always Be Prepared To Walk Away.

In this series of negotiating tips, this one may be the most obvious.  

A very basic fact in deal-doing is that, if you are unprepared to completely walk away from the deal at any time, you face a distinct disadvantage.  We discussed the desirability of establishing a BATNA in the last post: the Best Alternative To a Negotiated Agreement.  If you don't have a BATNA, i.e. if you have to have the deal, you are left with a Scarlett O'Hara solution: Depending on the kindness of strangers. The other side will know if you are desperate and your effectiveness in negotiating will be impacted negatively.  The knowledge that you are in a financial bind and the deal will bail you out or it's the last week of the quarter and you need the deal to make your numbers are all information the other party is likely to have. 

Sometimes the best deals are the ones that you don't make.  This could be due to the possibility that the relationship that you are signing up for will turn out to be problematic over the long haul.  If you are unsure about whether the deal is a good one and the other party is a real problem to deal with in the negotiations, then it is pretty certain that their style will be the same through out the term of the deal. 

Sometimes you have to look outside your own goals and needs to determine whether you can walk away.  This is the case in the debt limit negotiations that are going on as I write this.  The majority of people involved on both sides seemed to share the view that the U.S. should not be allowed to reach its debt limit.  Therefore, failure to reach a negotiated agreement could redound to the detriment of an entire financial system.  So, the pressure was great to reach a compromise, even if it didn't feel good to either side.  Time will tell whether either side got what the public really needed out of this deal.

Time for another war story from an old guy.  During one deal for some real estate and mineral interests, I represented a buyer who planned to buy up coal residue, refine it into large briquette-like lumps and ship it abroad for home heating purposes.  We had arrived earlier at a price for these interests and I arrived at the closing with a cashier's check for the amount.  At the closing, the seller reneged on its earlier price and stated that they knew they had agreed on a price, but now the price had gone up (this was in spite of a signed agreement).  Although the seller probably didn't know it, the raised price was well within the price that my client had said they were willing to pay.  However, I proceeded to pound the table, call off the closing and storm out.  A couple of days later, the sellers capitulated to the price they had agreed to before (yes, obviously a very principled bunch).  We closed, my client failed to start the mining recover process on time and forfeited all they had paid up to that point and then proceeded to stiff me on my fees.  This was one that I should have walked away from and never gone back.

Winklevosses Lose Again. Massachusetts Court Dismisses New Lawsuit Against Facebook.

We have covered the Winklevoss twins versus Zuckerberg/Facebook legal struggle on way too many occasions (see here, here, here and here).  We rejoiced when we found out that the Winklevosses would not go away as we felt it would make for easy blog posting.  Well, this is one.  About a month after the Winklevosses decided not to take their appeal to the U.S. Supreme Court and instead pursued a suit in District Court in Massachusetts, that court has dismissed their claim on the grounds that other courts had already considered and rejected their substantive claims (res judicata).  The twins' attorney will file a motion for post judgment relief and we can only hope that this continues until we need another easy post.

 

Negotiations 101: Part 2 - Don't Get Personal And Don't Take Things Personally.

The next  point in our on-going trip through negotiations land may sound pretty basic and not particularly profound and if that's what you think, you're right. 

An admonition not to take anything in a negotiation personally and not get personal could sound unnecessary, however, I have seen plenty of negotiations that otherwise had a good chance to result in a mutually beneficial deal go off the tracks solely because of a violation of this tenet.  Remember, most of these suggestions are directed toward the reaching of agreement on a business transaction with several moving parts and which should not have much emotion involved.  Unlike a discussion about the settlement of a lawsuit, which often has much emotion involved because of the adversarial nature of the beast, a business transaction works better when approached rationally.

However, some approach negotiations as a zero-sum game and as a contest and measure success not by the attainment of a mutually beneficial goal but by the amount of scorched earth left behind them.  While such an approach (and result) may bring some short term benefit, it has been my view (both as the scorcher and the scorchee) that this gives one of the parties an incentive to find ways during the relationship to claw back real or perceived slights and generally poisons the situation such that a long term deal is difficult.  The same is true for ad hominem attacks. 

Permit an old man a war story. I had negotiated a long term deal with termination rights for the other side but with a eight figure termination fee, which was designed to pay for the unamortized costs still in the deal.  The other side was acquired and the acquiror seriously wanted to terminate and not pay the termination fee.  We agreed to discuss some renegotiation but the first two days of the meetings were highlighted by a multi-volume PowerPoint presentation attempting to tell us how much we had breached the agreement, how bad we were as a vendor and generally, how bad we were as people.  Now, I have to say I took some of that personally and that made me harder to deal with.  We negotiated off and on for over 6 months, in three states and two countries and the deal never got any better for us.  We failed to reach a renegotiation, the blustering about breach was just that and nothing came of that and several years later, the other side terminated pursuant to the agreement and paid the large termination fee.  I say that only to illustrate that I violated this principle in that deal but the other side did to a much greater extent.  And we neither one got a longer term relationship, which would probably have been much more beneficial to each.

Hallelujah! We Spoke Too Soon. Winklevosses Strike Back. More Easy Blog Posts Ahead.

Yesterday we announced prematurely the cessation of combat operations in the Winklevoss v. Zuckerberg saga/soap opera/high grossing movie plot.  It seems that even though the twins had decided to forgo their appeal to the U.S. Supreme Court, they are pressing the attack in an existing suit in Boston.  Thank you, whatever deity is responsible for providing material for blog posts.  Our faith in you is renewed.

 

Our Long National Nightmare Is Over. Facebook/Winklevoss Lawsuit Comes To An End.

This blog has been in sort of a TMZish mode regarding the unfolding drama of the Winklevoss twins vs. Zuckerberg.  See here, here and here.  Apparently the era of easy blog posts is coming to an end as the twins have announced through a filing that they will not pursue an appeal to the U.S. Supreme Court.

 

Negotiations 101: A Dozen Things You Need To Understand To Be An Effective Negotiator

Every business person has been subjected to some type of negotiation advice.  Many of us, like me,  have taken negotiation courses.  Some of us, like me, have learned negotiation lessons the hard way. 

I am going to list twelve general principles of negotiation practice in this post and expand on each of them in subsequent posts.  In this, I will not take the approach of suggesting that you keep the room freezing, that you make your opponent face bright windows or that you raise your chair slightly higher than the other participants.  These, like many of such ilk, are bush league suggestions and really don't address real negotiation issues.

So, with that premise, here are twelve things you absolutely need to understand to be an effective negotiator:

  1. Approach each negotiation as a mutual problem solving exercise.
  2. Know the deal you want and how much leeway you have within acceptable parameters.
  3. Never get personal or take anything personally.
  4. Be prepared to walk away at any time.  It's never too late.
  5. Try to avoid getting "double negotiated".
  6. Don't hurry or be rushed and try to avoid having to comply with the other party's "rules".
  7. Trade groups of issues for groups of issues.  Try not to come down to one sticking point.
  8. Try to look at the issues from the viewpoint of the other party but don't make unwarranted assumptions.
  9. Anticipate objections in advance and determine your response.
  10. Use lawyers judiciously.  I know this is strange for an attorney to say and lawyers have their place in negotiations but be sure what that place is.
  11. Be flexible and creative.  This is good advice for everything.
  12. Negotiation need not be a zero-sum game.  Even if you can, sometimes it's not best in the long run to take advantage of a superior negotiating position.

Now, these are not necessarily in order of importance, they overlap in many aspects and the list is not exhaustive.  However, in the next few posts, we will explore each of these in greater detail and along the way, I'll tell a few war stories.  I would also appreciate hearing some of your pointers and stories of successful and not-so-successful negotiations.  I am still learning.

Forget About Stomping On Public Unions, Wisconsin Is Now Stomping On Automatic Renewals In Contracts.

I'm pretty sure that activists didn't occupy the State Capitol building in response to this bill, but it could have some ramifications for companies that enlist language that purports to let contracts automatically renew, unless one of the parties takes some affirmative action.

There is a pretty common provision in a lot of contracts, including those that provide for technology consulting and services that goes something like this:

"This Agreement has a one year initial term, beginning on the Effective Date ("Initial Term"). The Agreement will automatically renew on each anniversary of the Effective Date for subsequent one year terms (each a "Renewal Term") unless either party gives written notice to the other at least thirty (30) days prior to the expiration of the Initial Term or the Renewal Term that the Agreement will terminate at the end of the present term."

Nothing sinister here.  It is designed to take some administrative work out of renewals and vendors like them because of the inertia that induces customers to not think about nor terminate an agreement.

The Wisconsin legislature, having solved all of the harder problems, turned its attention to agreements like this in the present session.

They have decreed that after May 1, 2011, agreements between businesses to lease equipment or provide business services (supposedly technology services would qualify) can not have an enforceable automatic renewal clause unless adequate notice was given and the customer's initials appeared in a certain place on the contract. 

There are several exceptions to this of course.  Lobbyists are good at their jobs.  However, anybody that does business in Wisconsin and leases equipment or provides services should look at this statute and determine if they would profit from adjusting their forms.  There is also a provision that provides for a right of private action for failure to comply.  The amount of recovery provided for in an individual contract is relatively minor and repair is simple but one could envision class actions under this statute that would be a real nuisance.

And just when you thought it was safe to go back into Wisconsin.

Cookies, COPPA and Contracts

Alliteration abounds.  Reports today concern the EU Directive on the use of cookies, a settlement with a Disney subsidiary for violation of COPPA (Children's Online Privacy Act of 1998) and why paying attention to the construction and organization in the drafting of a contract can be extremely important.

1.  The European Union has issued a directive that will go into effect on May 26 of this year that basically reverses the way cookies are handled.  In the past the regulations required that the user be advised of the way that cookies are used and be given the opportunity to opt out of receiving them.  The new regulations requires the same advising but requires "consent" before cookies can be placed.  This is the so-called "opt in" provision.  The regulations recognize that enforcement of this will be a phased in approach with the most intrusive cookies getting the most attention.  The Information Commissioner's Office has issued advice about how to deal with this.  If your website attracts significant traffic in the European Union, you would be well advised to read the ICO's advice and plan accordingly.

2. COPPA has requirements about what information can be collected from children online and what use can be made of such information.  The Federal Trade Commission accused Playdom, an online game provider, of violating COPPA by collecting information from children without parental consent and by violating its own stated privacy policy.  Playdom is a subsidiary of the Disney company.  The FTC filed a complaint against Playdom that resulted in a consent decree, which among other things, required a $3,000,000 civil penalty.   This is the largest penalty yet assessed for such a violation.

3.  The placement (or misplacement) of a single word recently made a $1,000,000 difference in a Maryland case.  In Weichert Co. of Maryland, Inc. v. Faust, an ex-employee of a real estate firm was sued for violation her obligation of  loyalty and the non-solicitation clause of her employment agreement.  The Court found that she violated the obligation of loyalty but not the non-solicitation clause.  Her contract had an attorneys' fee provision where the prevailing party is entitled to its fees.  The real estate firm prevailed on the breach of the duty of loyalty but the employee prevailed on the issue about non-solicitation.  The attorneys' fee provision was included in the non-solicitation clause and gave fees to the party that prevailed "hereunder".  Since the "hereunder' was in the particular clause, the Court reasoned that it applied only to that clause and not the contract or the relationship as a whole.  Hence, the employee was entitled to her attorneys' fee, which were approximately $1,000,000, even though she had "prevailed" on only half of the issues.  In the lessons learned department for us attorneys, if you intend to make a provision apply to the contract as a whole and not just a specific clause, move the provision into a section of its own or make it very clear that it is applicable to the whole contract.

Ninth Circuit Denies Winklevoss v. Facebook Motion For Rehearing. Winklevosses Change Status To: "It's Complicated".

You will remember that the Winklevoss twins had tried to get their settlement with Facebook overturned.  The Ninth Circuit had decided that the settlement should stand and that litigation should end at some point.  The Winklevosses did not take the hint and asked for a rehearing en banc (i.e. that all the judges of the Ninth Circuit hear it as a panel rather than the three judge panel that originally sat on the case).  That motion was denied without comment.  The only option left for the twins is to appeal to the U.S. Supreme Court.  In order to decide to grant certiorari (i.e. the decision to put the case on the Supreme Court docket), the Supremes will have to believe there is some constitutional issue to be decided.  That will not be easy in this case as the issues deal primarily with contract law and the allegations of fraud.

We had mentioned before that we hope the Ninth Circuit granted a rehearing for no other reason than it gave us fodder for further posts.  We now wish the same for the Supreme Court.

Whole Bunch of Folks Gang Up On Apple To Try To Make "App Store" Available To Everybody.

We had written a couple of times (here and here) about the on-going battle among Apple, Microsoft and Amazon about the use of the term "App Store" as a trademark. 

Now, Microsoft, Nokia, Sony, HTC and Amazon have all registered opposition to Apple's exclusive use of such term in Europe.  Most of these companies announced yesterday that they have filed or will file opposition to Apple with the Office of Harmonization in the Internal Market, the body responsible for trademarks in the European Union.

Apple has already obtained a mark for App Store with the OHIM but this new gang of opponents are seeking to have this reversed on the grounds that such term is generic and has been used by everybody for a long time.

If Apple is able to hold on to the right of exclusive use of this mark, it would be huge.  The price of poker just went up.

Updates And Comments: Posting On Facebook At Work Is Criminal?, Past Notice Doesn't Create Obligation To Police Site, Use of Competitor's Trademark As Keyword Is Infringement But No Damages, and Red Soles In The Sunset.

A few comments and updates:

1.  The Ninth Circuit recently held in U.S. v Nosal (9th Circuit No. 10-10038) that exceeding your employer's computer use restrictions could be criminal under the Computer Fraud and Abuse Act, 18 U.S.C. 1030 et seq.  Sec. 1030 (a) (4) states: "Whoever... knowingly and with intent to defraud, accesses a protected computer without authorization, or exceeds authorized access, and by means of such conduct furthers the intended fraud and obtains anything of value.." violates this statute.  The Defendant had authority to access the computer in question but exceeded his employer's written use policy and obtained some confidential information.  The Court reasoned that this satisfied the statutory requirement of "exceeds authorized access" and if coupled with furthering fraud and obtaining something of value that was sufficient to avoid dismissal.  Was the headline about accessing Facebook at work being criminal hyperbole?  Yeah, a little, but it caused you to look, didn't it?  A lesson to be learned from this is that a well crafted computer use policy will be another tool for employers to use to protect their trade secrets.  Employees' rights groups are not thrilled.

2.  We noted recently that continuing to provide certain services after actual knowledge of infringing activity could lead to liability for contributory infringement but that prior received notices were not necessarily actual knowledge. This principle was confirmed in Wolk v. Kodak Imaging Network Inc., Southern District of New York, March 17, 2011.  The Court in Wolk held that previous takedown notices from the same artist did not give rise to actual or apparent knowledge nor the obligation to police the site for infringement.

3.  Suits relating to use of competitor's trademarks as search terms continue to show up.  We had discussed a couple here and here.  In InternetShopsInc.com v. Six C Consulting, Inc. the defendants conceded liability but the Court failed to award any damages because they could not find a single sale that resulted from the infringement.  The Court did enjoin the defendant from using the trademark as a search term going forward.

4.  Louboutin is a luxury shoe retailer who started marketing shoes with red soles in 1992.  Yves Saint Laurent recently marketed shoes with the same color uppers and soles. One of these was red and therefore had a red sole.  Others were blue and green with correspondingly colored soles. Louboutin has filed an infringement action relating to the red soled variety in the Southern District of New York.  A pivotal issue in this case will be whether consumers will be confused.  Would you be confused if you were going to pay more than $1,000 for a pair of shoes?  I mean confused as to the identity, not the wisdom of paying that much for shoes.

Quick! Licensors Re-evaluate Your Non-Assignment Clauses.

"Neither this Agreement nor any of the rights, interest or obligations under this Agreement shall be assigned, in whole or in part, by operation of law or otherwise by any of the parties without the prior written consent of the other parties..."

This provision or something very similar appears in approximately 100% of license agreements, whether patent, software or something else.  It is ubiquitous, well written, rarely discussed and settled, or so you thought.

The Chancery Court of Delaware (them again) recently gave reason to reconsider this provision.  In Meso Scale Diagnostics, LLC v. Roche Diagnostics GMBH, C.A. No. 5589-VCP, Decided April 8, 2011, the Court considered the application of this clause in the context of a reverse triangle merger.  For those of you scoring at home, a reverse triangle merger occurs when a wholly owned subsidiary of a parent merges with an unaffiliated entity, with the unaffiliated entity being the survivor.  The result is the unaffiliated entity becomes a wholly owned subsidiary of the parent without the necessity of the parent directly purchasing the stock of such unaffiliated entity.

In the instant case, Roche had licensed some technology from Meso and there had been prior controversies and law suits relating to the scope of use that Roche had under the license agreements.  Roche had lost some of these battles and had responded by repeatedly acquiring companies that had the technology.  One of the companies that had license rights was acquired by Roche by the above described reverse triangle merger method.  The result was that such licensee became the wholly owned subsidiary of Roche.  The licensors complained that this violated the language and intent of the non-assignment clause as set out above.  Roche countered that there was no assignment of any kind and that only the ownership of the licensee changed.  Roche filed a motion to dismiss for failure to state a cause of action based partially on their assertion that no assignment had taken place.

The Delaware court said that it wasn't as simple as that.  The Court reasoned that even though the non-assignment language did not expressly address a change of control or ownership of the licensee, that did not necessarily mean that it falls outside of the ambit of the non-assignment language.  The Court basically said that it felt strongly both ways and both parties had taken reasonable positions and had cited cases supporting their positions, although none were Delaware cases dealing with reverse triangle mergers.  The Court also stated that since Delaware had not directly ruled on this issue,therefore, at this early stage of the proceedings, it could not dismiss as a matter of law.

Again, it is important to note that this was in response to a motion to dismiss and the standards are different than in a final adjudication.  The Court has not ruled that a reverse triangle merger runs afoul of a non-assignment clause that prohibits assignments occurring "...by operation of law".

The Court's reasoning and some of its dicta indicates that it could ultimately find that a merger, however constituted, is tantamount to an assignment if certain elements are present.  How that shakes out remains to be seen.

However, if such an outcome bothers you (whether you are a licensor, licensee, assignor, assignee or something else), you should strongly consider the construction of the language.

A licensor seeking to prevent such an assignment would opt to include specific language about any kind of merger or change of control constituting an assignment that is prohibited.  Others (licensees, etc.), seeking more freedom in assignment, should be leery of such language. Companies considering acquisition and doing due diligence should consider whether their proposed transaction would bring any of these issues into play.  Let your lawyer know what your plans and purposes are so they can address those issues.

Five Things That Web Hosters and SEO Providers Should Avoid Like The Plague (Other Than Cliches).

Companies hosting web sites and providing search engine optimization (SEO) services generally enjoy safe harbor protection from copyright infringement under the Digital Millennium Copyright Act and protection from liability for information provided by third parties under Section 230 of the Communications Decency Act, but does that protection extend to protection from contributory trademark infringement liability?  Courts increasingly have answered that question in the negative.

Let's examine one such instance.  Christopher Prince operated several websites, one of which was called "copycatclubs.com".  Through these websites (all of which resolved to a single online store), Mr. Prince sold golf equipment, accessories and apparel.  The online store was described as a "wholesaler" that was a "...one stop shop for the best copied and original golf equipment on the internet".  A shopper working for Roger Cleveland Golf Company, Inc. (Cleveland) ordered several clubs described as "Cleveland" clubs from the online store.  The shopper received the order and the clubs were branded as "Cleveland" clubs.  Cleveland determined that the clubs were counterfeit and brought suit against Mr. Prince and some of his affiliates.  During discovery, it was determined that Mr. Prince employed Bright Builders, Inc., a web site designer and SEO consultant to create and support the web sites and the business model.  Cleveland amended its complaint to include Bright Builders as a defendant and allege that Bright Builders had contributorily infringed Cleveland's trademarks.

Bright Builders moved for summary judgment with a one and one-half page motion with no supporting citations or reference to the record as is required by court rules.  The gist of Bright Builders' defense was that it was merely a "web hosting entity" and was not "...aware that Mr. Prince was engaged in illegal activities...".  Cleveland strongly disputed this and cited evidence in the record that Bright Builders created the website, assured Prince that he would make at least $300 a month from the online store, took $10,000 to provide coaching and mentoring services, provided a Project Advisor and had discussions with Prince about developing copycatclubs.com.  In fact, the Court said that the name (copycatclubs) should have alerted Bright Builders to possible infringement (even though copying is not necessarily illegal).  Bright Builders did not bother to reply to Cleveland's response.

Perhaps due in no small part to the nonchalant manner in which Bright Builders approached the lawsuit and the pleadings, the Court found that there was a genuine issue of material fact as to whether Bright Builders participated in Prince's business to such an extent that Bright Builders could be held liable for trademark infringement and denied the motion for summary judgment.  This was in December of 2010 and the case proceeded to trial.  On March 10, 2011 the jury found infringement by both Prince and Bright Builders and returned a much larger verdict against Bright Builders (the secondary infringer) than it did against Prince (the actual infringer).

So, here we are again in the Lessons Learned Department.  What steps should website developers and SEO consultants take (or not take) to minimize their exposure to a verdict for secondary liability?

Consider these principles:

1.  If the developer exerts sufficient control over the website and knows or had reason to know of infringement, the developer must not fail to take appropriate actions.  The developer does not have to reasonably anticipate that infringement will occur and generalized knowledge is not sufficient to impute knowledge of any and all instances of infringing activity.

2.  Demand letters and other notices from potential plaintiffs are not sufficient to establish a duty to act but when the developer has knowledge of specific infringing activities, it must not fail to take action to eliminate the infringing activities or it must cease to provide services to the infringer.

3.  The website hoster should have programs designed to detect possibilities of infringement and not fail to take defined steps to eliminate it when specifically found.

4.  Do not be "willfully blind" to infringement.  This means refusing to investigate when you fear the results of the investigation.  White heart and empty head is no defense.  Principles 1 through 4 above are discussed in great length and detail in Tiffany et al v. EBAY, Inc. 576 F. Supp. 463 (2008).

5.  You must not fail to do a better job of documenting your activities and responding to court pleadings than Bright Builders did.  While this might not be the developer's responsibility, the developer should be sure that it engages legal counsel knowledgeable in the area and that takes the potential liability seriously.

Therefore, the next time you are engaged to develop a website to sell Gucci bags and Louboutin shoes, do your due diligence to see if they are the real thing or you may end up taking a bigger hit than the actual culprit.  That's not optimization of any kind.

Delaware Court Plows New Ground In The Field of Tortious Interference With A Contract Right.

Delaware courts have long been known for rendering cutting edge opinions, particularly in the area of corporate law.  The Superior Court of Delaware has now given approval for the expansion of the tort of tortious interference with a contract right.

In Allen Family Foods, Inc. v. Capital Carbonic Corporation, C.A. No. N10C-10-313 JRS CCLD, decided March 31, 2011, the Superior Court of Delaware, for the first time in Delaware, recognized an action arising under Section 766A of the Restatement (Second) of Torts.  Section 766A states in pertinent part: “One who intentionally and improperly interferes with the performance of a contract (except a contract to marry) between another and a third person, by preventing the other from performing the contract or causing his performance to be more expensive or burdensome, is subject to liability to the other for the pecuniary loss resulting to him.”

Heretofore, only the other parts of Section 766 of the Restatement had been a basis for actions.  Those were the portions that stated that an intentional and improper interference with a third party, which caused such third party to breach an agreement, was a basis for an action. 

In the instant case, Allen Family Foods had a requirements contract with Capital Carbonic Corporation that stated that Capital Carbonic would supply Allen with all the dry ice Allen needed.  Supposedly, Allen thought the agreement with Capital Carbonic had expired and entered into a new agreement with Praxair for the same thing.  Capital Carbonic's attorneys sent a hotly worded letter to Praxair accusing Praxair of tortiously interfering with the contract between Capital Carbonic and Allen.  As a result of the letter, Allen ceased doing business with Praxair and re-upped its agreement with Capital Carbonic.  Allen then sued Capital Carbonic for tortious interference with its agreement with Praxair.  There was no indication in the opinion about how bad customer service got after the filing of the lawsuit.

Capital Carbonic responded that a cause of action did not exist when the alleged interference was just with the plaintiff and it merely caused the performance of an agreement with a third party to be more expensive or more burdensome.  Capital Carbonic pointed to a federal court case that stated that such court believed that an action under Section 766A would be rejected by a Delaware court because of its "...inherently speculative..." nature.

The Delaware court acknowledged that Delaware already recognized claims under "...Section 766 (tortious interference with a third party’s performance of a contract) and Section 766B (tortious interference with prospective contractual relations)".  The Court went on to say that not all 766A claims would be totally speculative and that courts dealt with speculative claims all the time anyway.  The Court reasoned that it made no sense to allow third parties to interfere in this manner without sanction, while recognizing that they could not interfere with other parts of the transaction. "The Court can think of no rational basis to encourage behavior which would be tantamount to targeted tortious interference."

Having found that a cause of action could rise under Section 766A, the Court then found that the plaintiff had not properly pled such an action and dismissed that portion of the claim.

So, look for this to be a new arrow in the quiver for plaintiffs to plead in contract interference cases.  To observe how courts across the nation deal with this and measure the damages that might accrue will be very interesting.  Stay tuned.

Who Owns The Clients Of A Professional LLC? Hint: It's Probably Not The LLC.

While not strictly technology related, this matter has some interest among professionals and could certainly have some impact on consulting firms in the technology arena.

Doctors, lawyers, accountants and others form limited liability companies (LLCs) under various state laws to conduct their practices.  In New Jersey, the Superior Court was called upon to determine whether the clients of a LLC belong to the LLC or to the individual members.  Gaines v. Luongo,  Superior Court of New Jersey, Docket No. A-3600-09T3, Unpublished Opinion, March 25, 2011.   

An accounting firm was organized as an LLC and one member was given a 70% ownership but the two members equally shared income and losses.  Shortly after the formation of the LLC, the fun went out of the relationship and the minority member sued under the oppressed minority shareholder rules of the New Jersey corporate code.  Part of the complaint alleged that the value of the clients of the firm should be considered when determining the pay out under the dissolution.  The Court held that the the "...Partnership's clients were never carried on [the] books as an asset; no value was ever assigned to them on the Company's balance sheets; and they were free to stay in business with either partner or neither."  Therefore, the value of the goodwill ascribed to each client belonged to the individual members and would not be considered in the dissolution.

So, unless otherwise stated in the Operating Agreement or otherwise on the books of the LLC, a client's value is not the property of the LLC.

Who Owns The Patent? Your Assignee or Your Assignee and Your Toxic Ex-Spouse?

We hold these truths to be self evident: (i) Patent rights originally vest in the inventor even if the patent was conceived in the course of employment; (ii) Most companies get assignments from their employees as to patent rights; (iii) All property obtained during marriage is presumptively community property in community property states (e.g. California and Texas); (iv) divorces can be nasty.

So, what happens if an inventor works for a company, creates a patentable invention while married, signs the standard assignment of intellectual property and the spouse does not sign the assignment.  Is that an effective assignment?

Or, what happens if an inventor develops a patentable invention, gets a divorce in which the ownership of such patent is not mentioned, then assigns the patent, the assignee then brings suit on the patent and the defendant moves to dismiss the complaint because the ex-spouse is a necessary party and was not named in the suit?

Who gives a damn?  Well, the U.S. Court of Appeals for the Federal Circuit has to decide this issue in Enovsys LLC v. Nextel et al.  In this case Nextel was sued for infringement of some GPS patents that Enovsys obtained from an inventor after his divorce.  The inventor and the spouse got a "quickie" divorce in California in which they marked a box on the divorce form that said they did not possess any community property.  The Court of Appeals thought that this was enough to vest all ownership in Enovsys and preserve their standing to sue.

Although the Court skirted the issue (no sexism implied) in this case, the issue remains as to the status of patents obtained during marriage and the proper way to assign them.  California and Texas are community property states and both states recognize that property obtained during a marriage is presumptively community property.  The Court of Appeals in Enovsys confirmed that federal patent law does not preempt state law in regard to property ownership.  The Texas Court of Appeals has said (in dicta) that "It is unquestionable that, had these patents been taken out during the marriage, the patents and the income they generated would be community property. In this, we would join other jurisdictions in which the courts treat the income from intellectual property created during marriage as marital or community property."  Alzenz v. Alsenz 101 S.W.3d 648 (2003)

Then, is it possible that a spouse or ex-spouse in a community property state has an interest in your patent portfolio?  Must you get the spouse to sign the assignment of intellectual property rights that resides in your standard forms that companies get all employees to sign?  Must you update that if an unmarried inventor gets married?  Seems like a lot of trouble, doesn't it?  Good practice may indicate that you do so, but the dearth of cases that revolve on this issue would seem to indicate that maybe the chances are so slim that it's not worth the trouble. 

What do you think?

Yes, Virginia, A Compilation of Publicly Known Processes Can Still Be A Trade Secret

Trade secret law is not nearly as topical and sexy as some of the social media controversies we have been talking about lately, unless you are the one depending on trade secret protection. 

First, a primer: If something has independent value, is not generally known or readily ascertainable by proper means and has been subject to reasonable efforts to maintain its secrecy, it can qualify as a trade secret under Virginia (and most other states) law.  Software, in particular, is generally protected by a combination of copyright, trade secret and sometimes, patent law.  That's the reason that software vendors have to have non-disclosure agreements before they can allow you to review their software and the reason that most software licenses restrict the people and entities to whom you (as licensee) can provide information regarding the software.  That's part of the reasonable efforts to maintain the secrecy element in trade secret law.

The Fourth Circuit recently took up another of the elements, i.e. whether a compilation of publicly known processes combined in a way that is not publicly known or readily ascertainable can qualify for trade secret protection.  In Decision Insights, Inc. v. Sentia Group, Inc., the Court said that matter was already decided in Servo Corporation of America v. General Electric Corp. 393 F.2d 551 (1968) where it was held a trade secret "might consist of several discrete elements, any one of which could have been discovered by study of material available to the public".  In the Decision Insights case, there was testimony that although the contested part of the software was comprised largely of publicly known algorithms, the compilation and some of the methods used to cause the compilation to interact were not publicly known.  The Fourth Circuit thought that this testimony was sufficient to overcome a motion for summary judgment and reversed and remanded for further consideration of this issue and the other issues applicable in a trade secret case.

It is important to note that the Court did not say that the compilation in question was a trade secret but merely that such a compilation could be held to be if all the elements are present. 

This should eliminate (at least in Virginia) contentions that all parts of a formula or process have to be completely secret and unknown in order to qualify as a trade secret.

Winklevosses Ignore Part of Ruling That Says: "...litigation must come to an end..." and Ask For En Banc Rehearing.

Last week we talked about the Ninth Circuit refusing to set aside the Winklevoss/Zuckerberg/Facebook/ConnectU settlement agreement.  Yesterday, the famous twins decided to ignore the part of the opinion that said that now is the time for the litigation to come to an end and filed a Petition For Rehearing En Banc.  This means that they are asking all the judges of the Ninth Circuit to rehear the case rather than the panel that originally heard it. 

From the language of the Petition, the twins seem to take umbrage at some of the snarkier language in the original opinion.  They find issue with: "bested by a competitor", "backing out", "quite favorable", "enough" and allege that "sophistication is no defense".

We can only hope that a rehearing will be granted, if for no other reason than it will give us fodder for several more posts.  Stay tuned.

 

Amazon.com Seeks To Form "App Store". Apple says: "Not So Fast!"

You will remember that Apple has applied to the USPTO for registration of the mark "APP STORE".  Dedicated readers of this blog were informed in January that Microsoft was opposing the issuance of such mark for Apple.

Amazon.com is now allegedly using the term "APP STORE" to solicit software developers for future software development and distribution.  Apple is having none of that and has filed suit in the Northern District of California alleging that such use by Amazon.com constitutes trademark infringement and several other heinous sins.  The suit asks for injunctive relief, damages, a constructive trust and attorneys' fees.

It is evident that "APP STORE" has become part of the popular lexicon and if one party is entitled to use it to the exclusion of others, it is a very valuable property.  The holy trinity (Apple, Microsoft and Amazon.com) will continue to duke it out over this issue and the birds will just get angrier.

The Social Network II - The Facebook Legal Saga Continues.

We've all seen the movie.  Mark Zuckerberg versus the Winklevoss twins.  Uber-nerd versus uber-jocks.  Outsider versus the privileged and connected.  In the balance rests the right to violate the privacy of virtually everybody in the "civilized" world.

The movie shows some of the discovery proceedings in the lawsuit filed by the Winklevosses in Massachusetts alleging that Zuckerberg stole the Facebook idea.  Zuckerberg filed a countersuit in California (typical Facebook ploy, see here) against the twins and ConnectU, alleging that ConnectU had hacked into Facebook and stolen information and attempted to steal Facebook users by spamming them.  The California dismissed the action against the Winkelvosses, finding that there was no personal jurisdiction over them. The Court then ordered the parties to mediate to attempt to find a settlement to all their issues.

Then things start to get stranger.  With billions of dollars at stake, the parties mediate for one day, reach a settlement and document it with a one and a third pages of hand written notes with the title: "Term Sheet and Settlement Agreement".  This Agreement envisions the transfer of ConnectU to Facebook in exchange for cash and an interest in Facebook.  Facebook lawyers then present 130 pages of documents to flesh out the Agreement (merely 100 times the volume of the Agreement).  The deal then comes off the tracks for a number of reasons including the Winklevosses asserting that the value of the Facebook stock is less that they were lead to believe.  Facebook files a motion to enforce the Agreement.  The twins alleged that the Agreement is not enforceable because it lacks material terms and was procured by fraud.  The Court finds the Agreement enforceable and the Winklevosses appeal.

Then Ninth Circuit, in a decision released yesterday, upheld the enforcement of the Settlement Agreement.  The Winklevosses had alleged that the Agreement violated Rule 10b-5 of the Securities Act and as such was void.  The Ninth Circuit rejected this argument and found: "The Winklevosses are sophisticated parties who were locked in a contentious struggle over ownership rights in one of the world's fastest-growing companies. They engaged in discovery, which gave them access to a good deal of information about their opponents. They brought half-a-dozen lawyers to the mediation. Howard Winklevoss—father of Cameron and Tyler, former accounting professor at Wharton School of Business and an expert in valuation—also participated."

The Court also held: "The Winklevosses are not the first parties bested by a competitor who then seek to gain through litigation what they were unable to achieve in the marketplace. And the courts might have obliged, had the Winklevosses not settled their dispute and signed a release of all claims against Facebook. With the help of a team of lawyers and a financial advisor, they made a deal that appears quite favorable in light of recent market activity. See Geoffrey A. Fowler & Liz Rappaport, Facebook Deal Raises $1 Billion, Wall St. J., Jan. 22, 2011, at B4 (reporting that investors valued Facebook at $50 billion —3.33 times the value the Winklevosses claim they thought Facebook's shares were worth at the mediation). For whatever reason, they now want to back out. Like the district court, we see no basis for allowing them to do so. At some point, litigation must come to an end. That point has now been reached." (Emphasis added)

So, the poor Winklevoss twins are stuck with a deal that is only worth millions and not billions.  In the lessons learned department, we are struck by the fact that you probably couldn't turn around in the mediation room without tripping on a lawyer or a financial advisor and yet, they ended up with slightly over a page long, hand written document.  That either means you don't need lawyers at all or you really need them to do their job. 

Maybe we'll find the answer in the next sequel, "Social Network III, The Legal Grievance Phase".

 

Update On the Epsilon E-Mail Hack.

Last week we discussed the very large, very disruptive loss by Epsilon of a number of e-mail addresses and the identities of the companies with whom the e-mail owners did business. 

InfoWorld Tech Watch reports that it appears that the hack relied on the gullibility of Epsilon employees.  So, there was no midnight rappelling from the ceiling through banks of laser beam alarms like you see in the movies, but merely a "social engineering" attack using e-mails targeting Epsilon employees that contained some personal information about the employee and made them think it was from a personal acquaintance. 

The messages included links (bad idea to click links in a message) that took them to a site that downloaded one malware program that disabled the antivirus software, one that logged keystrokes and one that gave hackers remote access to the infected machines.  It also turns out that Epsilon was warned about such attacks several months ago.

In the "lessons learned" department or more appropriately, the "lessons we should already have known" department, it would be prudent for a company with large amounts of customer data (everybody on line?) to train their employees not to respond to personal e-mails at work, recognize the tell tale signs of a social engineering attack and not to click on links in a message the origin of which you do not know.

This is not hard to teach but apparently compliance is difficult.  This lesson will get expensive for Epsilon.

Software Vendor's Worst Nightmare: Your Licensee Acquires Your Main Competitor.

You are a software licensor and you own a lot of valuable intellectual property tied up in the code and the trade secrets of your software.  You license that software to an entity and then that entity buys your main competitor.  You just know that all your valuable intellectual property is getting swapped around with your competitor.  Pop quiz, hotshot.  What do you do?  What do you do? (Yep.  Speed reference again.)

Well, if you are Edifecs, Inc. and your licensee Tibco Software, Inc. buys Foresight Corporation, you bring a suit and allege breach of contract and misappropriation of trade secrets.  Unfortunately, for Edifecs, a California court dismissed a substantial portion of their complaint and held that, under California law, allegations that failure to segregate employees and relevant documents after the Foresight acquisition did not state a claim for misappropriation of trade secrets, breach of contract or a breach of the implied covenant of good faith and fair dealing.  The Court also reiterated that California has rejected the inevitable disclosure doctrine.  That doctrine, adopted in a few states, allows a claim to proceed without evidence of actual disclosure if the circumstances are such that the court thinks that a disclosure is inevitable. Edifecs Inc. v. Tibco Software Inc., Case No. C10-330-RSM, United States District Court, Western District of Washington.  Order On Defendant's Motion to Dismiss Amended Complaint, March 23, 2011

Note that this is not a final ruling on the merits but it is does say that merely stating in California that wrongful disclosure is likely to occur will not substitute for pleading and proving that disclosure actually occurred.  Also note that a well drafted confidentiality provision would prohibit disclosure to the competitor, even if that competitor is a subsidiary of the licensee.

Other ways to prevent this result are to include a provision in your license agreement that the license terminates if the licensee acquires or is acquired by a competitor or to include a "paint your people purple" provision.  Alliteration aside, this is a provision that states that in addition to the normal confidentiality provisions, the license agreement prevents any person who worked on or had access to your confidential information from being assigned to any position that makes it likely that they would use absorbed information.  These are not usual provisions in a license agreement but could make sense in an environment where an acquisition of this nature is contemplated.

Well, That Didn't Take Long. Movie Studios Sue Zediva.

It seems like only last week (actually, it was) when we first talked about the Zediva launch, which allowed you to view streamed videos from the cloud via a DVD that you rent played on a DVD player that you rent.  Of course, you never see or possess either, given that they reside somewhere in a Zediva leased data center.

Wasting no time, several movie studios have sued Zediva.  The complaint can be found here.  The Motion Picture Association of America detailed their members' position in a press release.

As expected, the plaintiffs allege copyright infringement, specifically, the exclusive right of the copyright holder to publicly perform their movies.

Interesting times, these.

Massive E-Mail Hack. Phishing Season To Begin Early This Year.

On April Fools' Day, Epsilon (one of the largest on-line marketing firms) announced through a terse press release that their "...clients' customer data were exposed by an unauthorized entry..." but that the information obtained had been limited to names and e-mail addresses.  Unfortunately, it was not an April Fools joke.

Some of Epsilon's customers include Citigroup, JP Morgan Chase, Brookstone, Kroger, College Board, Walgreens, TiVo, Capital One, HSN Inc., Visa, Kraft, LL Bean, Best Buy and Verizon.

So, what you need to look out for and alert your clients about is the possibility of increased "phishing" attacks.  We have all had e-mails purporting to be from some bank or other entity and requesting us to go to some website (configured to look like the real entity's website) and enter information and  possibly pick up spyware or viruses.  Since most phishing attacks are just random broadcasts, the fact that these intruders have specific names, e-mail addresses and links to specific entities with whom the targets do business leads to a more pointed attack, which is referred to as "spear phishing".  Because of the more targeted approach, the success rate is likely to be higher.

How do you protect yourself?  PC World has some good advice.  As the PC World articles states, the best way to avoid this is never to go to a website from an unknown e-mail link and don't provide any sensitive information such as password, PIN, etc.  Common sense instructions but please tell your grandma about this.

New .XXX Top Level Domain Approved. The Steps You Need To Take Now To Insure That You Don't See a [yourname].XXX Domain In The Future!

You may have read recently that ICANN (Internet Corporation For Assigned Names and Numbers) has approved the new top level domain (TLD) of .XXX.  Obviously, this is intended for the adult entertainment industry and TLDs with that extension will begin to be issued in the near future.  However, aside from any passing prurient interest you may have in mentioning this factoid in social chatter, does this affect you in any way?

It does if you would not want to Google your name, trademark or tradename in the future and find that name with a .XXX extension.  So, if  you are concerned that this might happen either because someone might want to take advantage of the popularity of your name or you have a really sick friend that might want to hold this over you as a pathetic practical joke, here is what you need to do now.

ICM Registry has obtained the rights to act as the registrar for the .XXX domain.  They have set up a procedure to address your concerns about having your name or tradename associated with a .XXX domain.  The procedure is referred to as Sunrise A, B and C and offers you two avenues to avoid the result we describe above.  Obviously, one avenue would be to apply for all the domain names you want to protect with the .XXX extension and then just not use them for anything.  However, you would still show up in a search on WHOIS as the owner.  This is the Sunrise A procedure.  The preferred route would be Sunrise B, which allows domain holders and trademark holders to apply to block use of those names with the offending extension.  This is the explanation from the ICM website:

"Sunrise B is for rights owners from outside the [adult entertainment industry]. Names secured through Sunrise B will not result in the registration of a conventional, resolving domain name at the .xxx registry. Instead, these names will be reserved and blocked from live use. The applied for string will resolve to a standard plain page indicating only that the string is reserved from use through ICM’s rights protection program."

Since time could be of the essence, head over to this site or have someone do it for you and open an account and apply to reserve the appropriate names.  At some point in the process (after the original submission), you may be asked to prove you have the rights to the names so be prepared to do that. 

Now, don't you feel better?

Zediva Tries To Beat Netflix To The DVDs By Invoking Same Doctrine That Will Make It More Expensive For Netflix.

The many avid readers of this blog will no doubt remember our in depth discussion of the "first sale" doctrine as it relates to the inability of Netflix to rely on such doctrine for the streaming of videos, since there is no "sale" involved.  We surmised that this would increase costs because Netflix would have to license the videos from the copyright holders rather than just buy the DVD and rent it out.

Now, another service is trying to side step the issue and offer streaming DVD videos in a time frame well in advance of when Netflix can offer the video.  Zediva went from beta to production last week and is offering streaming videos as soon as the DVD is available for purchase.  Zediva's legal reasoning on this (we believe) is that they are buying the DVDs and physically taking delivery of the DVDs and actually playing them on a DVD player somewhere in their data center.  The particular DVD and the player on which it is playing are leased to the subscriber for four hours, during which no other subscriber can access either that DVD or that player.  The technology employed by Zediva allows that DVD and player to stream the video over the internet to the subscriber's device.  So, according to Zediva, it is like renting the DVD and player and the player just has a really long cord (with the cord serving as a metaphor for the cloud).  Surely, says Zediva, that must be allowed under the "first sale" doctrine.   If DVD copyright holders take umbrage at this arrangement, they might say that the "first sale" doctrine requires physical transfer of the medium and "Don't call me Shirley".  (gratuitous Leslie Nielsen homage)

The roll out of this bears watching.  Zediva's website today says it is down while they get more capacity.  Recently, another company thought they fit into an exception of the Copyright Act. ivi TV was retransmitting television broadcasts and claimed they were a virtual "cable company" and therefore entitled to transact their business under Sec. 111 of the Copyright Act, although they didn't get retransmission consent nor qualify as a cable company under the Communications Act.  The US Court for the Southern District of New York granted a preliminary injunction that ceased their operation until further adjudication.

As new technology challenges the present state of the law, we close this post as we almost always do.  Stay tuned.

LinkedIn Reaches 100 Million Users. First Million Get Thanked Personally.

Sometimes referred to as the Facebook for the business set, LinkedIn provides a multitude of information and contacts to its members.  Last week, LinkedIn notched its 100 millionth user.  According to the metrics on my LinkedIn page, I'm connected to about 4 percent of them.  That's a lot.  I hope they don't all decide to come over to the house at once.

In a nice touch, the founder of LinkedIn sent a personal letter of thanks to the first 1 million adopters, specifically citing their order of signing up.  I didn't get a letter as I missed being in the first million by a mere 16,915,876.  If you are looking for your letter, you can determine if you are going to get one by looking at your full profile URL.  Your order in the LinkedIn hierarchy is listed after the "id=__" in the URL.

I'm probably not going to get a letter from Mark Zuckerberg either.

Syracuse Goes For the Orange and Google Scan Settlement Gets Stopped.

Syracuse University once were known as the "Orangemen".  This arose from a hoax in the student newspaper about the fictional remains of an Indian chief being found during the excavation of a university building.  Because of the racist stereotype, Orangemen was eventually changed to "Orange" and the mascot now is a rotund citrus fruit known as Otto.  Now, Syracuse has moved to trademark the "Orange" .  After all, the Fifth Circuit has held that a color scheme can be part of a identifying mark if likely to cause confusion.  Other universities that embrace orange as a team color and use the term orange as part of their identifying marks and slogans have objected, including Tennessee and Auburn but surprisingly not Texas.  Maybe burnt orange is sufficiently different so as to not cause confusion.  After all, school buses, road cones, citrus fruit and pumpkins are different colors, right?

In Google's quest to rule the world, it entered into agreements with several large libraries to scan books, include "snippets" of such books in a database and allow searches of such scans.  In 2005, Google predictably was sued for copyright infringement and just as predictably raised fair use as a principal defense.  The suit was in the nature of a class action and Google had entered into a settlement of this case, which would have allowed Google to continue the scanning with the payment of certain fees.  The settlement was subject to approval by the courts but the District Court Southern District of New York said "not so fast" and rejected the settlement.  The reasons stated by the Court include that the settlement "...would grant Google significant rights to exploit entire books, without permission of the copyright owners. Indeed, the [settlement agreement] would give Google a significant advantage over competitors, rewarding it for engaging in wholesale copying of copyrighted works without permission, while releasing claims well beyond those presented in the case."

Back to the drawing board.

Company Buys Competitor's Trademark as Google AdWord. Another Scuffle Ensues.

We recently reported on a case where competing law firms were involved in a tussle over the use by one of the law firms of the other law firm's name as a Google AdWord.  The California court in that case found trademark infringement.

Now, another case from the Ninth Circuit comes along where one software company bought the name of the other company's product as a Google AdWord.  Advanced System Concepts licensed a product under the registered trademark "ActiveBatch".  Network Automation (whose own product is called "AutoMate")  bought ActiveBatch as a Google AdWord (doesn't anyone own a space bar?).  Advanced System Concepts brought suit against Network Automation and was granted a preliminary injunction prohibiting the use of ActiveBatch in this way by Network Automation.  Network Automation appealed to the Ninth Circuit.

The District Court applied the Sleekcraft test first espoused in AMF Inc. v. Sleekcraft Boats,
599 F.2d 341 (9th Cir. 1979), which set out eight factors in determining infringement.  The District Court held that the three most important factors in the Sleekcraft test in cases relating to the internet were: (1) the similarity of the marks; (2) the relatedness of the goods; and (3) the marketing channel used.

The Ninth Circuit held: "Mindful that the sine qua non of trademark infringement is consumer confusion, and that the Sleekcraft factors are but a nonexhaustive list of factors relevant to determining the likelihood of consumer confusion, we conclude that Systems’ showing of a likelihood of confusion was insufficient to support injunctive relief."  (Emphasis added)

The Court then went on to say:

"Given the nature of the alleged infringement here, the most relevant factors to the analysis of the likelihood of confusion are: (1) the strength of the mark; (2) the evidence of actual confusion; (3) the  type of goods and degree of care likely to be exercised by the purchaser; and (4) the labeling and appearance of the advertisements and the surrounding context on the screen displaying the results page.
The district court did not weigh the Sleekcraft factors flexibly to match the specific facts of this case. It relied on the Internet “troika,” which is highly illuminating in the context of domain names, but which fails to discern whether there is a likelihood of confusion in a keywords case. Because the linchpin of trademark infringement is consumer confusion, the district court abused its discretion in issuing the injunction."

It's important to note that the Court did not say that there was no infringement here, merely that the factors to be considered were not limited to those in the Sleekcraft case and they had to be applied in a flexible manner and therefore, the Ninth Circuit remanded for further consideration in line with these factors.

In my conversations with communications and advertising people, it is apparent that purchasing competitor's trademarks and names as SEO enhancers is a common and accepted practice.  Therefore, this emerging area of the law will be developing for several years.  So, as usual, stay tuned.

Stanfield Hiserodt To Present Discussion On Cloud Computing At RISE Tomorrow.

We will be leading a discussion on "Ten Things You Should Know About Cloud Computing Agreements" at Austin RISE Week 2011 tomorrow at 4:00 pm at the PeopleFund offices at 207 Chalmers Avenue in Austin.  If you need something to do during that awkward time between afternoon coffee break and happy hour, come on out and share it with us.

Your Government And Courts At Work.

A few things for your consideration:

1.  The White House's proposed budget includes the authority for the USPTO to charge a surcharge on patent applications.  The proposed budget would provide $2.7 billion for fiscal 2012 with one of the stated objectives to reduce the backlog of 720,000+ applications.

2.  By Executive Order 13565 of February 8, 2011, the White House established two I.P. committees.  One is the Senior Intellectual Property Enforcement Advisory Committee, which will facilitate the formation and implementation of each Joint Strategic Plan, which will be be developed by the other committee established, the Intellectual Property Enforcement Advisory Committee.  As is evidenced by their names (i.e. Senior and not Senior) the Senior Advisory Committee will be comprised of cabinet level members or their designees and the Enforcement Advisory Committee will be comprised of representatives from the USPTO, DOJ, Department of Commerce and others.

3.  Health and Human Services through its Office for Civil Rights has assessed its first ever civil penalty for violation of HIPAA.  The penalty was $4.3 million against Cignet Health of Prince George’s County, Md.  Cignet failed or refused to provide health records to at least 41 patients and then apparently stonewalled the patients and requests from the Office for Civil Rights to the extent that the Office for Civil Rights obtained a default judgment against them.  Cignet also apparently was uncooperative in the investigation into this affair.  The penalty was $1.3 million for failure to provide access to the records and $3.0 million for being uncooperative.

4.  Microsoft was successful in getting a patent infringement suit originally filed in the Eastern District of Texas transferred to the Western District of Washington on the grounds of forum non conveniens.  For some strange reason, there are a lot of patent infringement suits and class actions filed in the Eastern District of Texas.  The plaintiff here, Allvoice, was an U.K. company with an office in the Eastern District of Texas but with no employees there or anywhere in the U.S.  Calls there were transferred to their office in the U..K.  Allvoice was incorporated in Texas but had done so 16 days before the suit was filed.  Forum shop much?  The Circuit Court of Appeals issued a writ of mandamus compelling transfer to Microsoft's home court even though Microsoft had also petitioned to move the case the Southern District of Texas.

 

U.S. Wants Governments To Be Able To Veto Proposed Generic Top Level Domain Names. Other Countries Not So Much.

You may remember that we recently described the new procedure for obtaining generic top level domain names.  ICANN (The Internet Corporation for Assigned Names and Numbers) has proposed a new procedure to allow additional entities to act as domain registrars.  Included in this was the opportunity to propose an infinite variety of domain extensions and not be limited to the ones heretofore approved (and originally suggested) by ICANN. 

Now, the U.S. government has proposed that each member of the Governmental Advisory Committee (GAC) to ICANN have the right to object to any proposed extension and if a "consensus" of the GAC members is obtained, then ICANN will not approve the domain extension and will refund the fees paid by the applicant.  This supposedly is designed to limit the award of "objectionable" domain names such as .gay or .xxx or anything else that any GAC member's citizens feel runs counter to some aspect of their society or religion.  So, in addition to .gay, a really depressed nation might object to .cheery, .jolly or .festive.  And, in addition to .xxx, a nation might find .xoxox objectionable if they hate football coaches, tic-tac-toe players or post script huggers and kissers.

The U.S. proposal has not been warmly received by the other GAC members and in a response supported by a majority of the other GAC members, the GAC has recommended that the GAC's role be limited to advisory only and if ICANN goes against a GAC recommendation, ICANN's only requirement is to explain its position.

It is plain that this will not be the last we hear of this matter and much more discussion will be had when the actual applications come rolling in.

Metadata "presumptively producible" in FOIA Requests.

Metadata is data about data.  Software programs such as Excel, Word, e-mail clients and others routinely produce such metadata. 

In the instant case, National Day Laborers Organizing Network ("NDL") lodged a Freedom Of Information Act ("FOIA") request with four government agencies including Integration and Customs Enforcement ("ICE").  The agencies generally resisted the requests, citing expense and burden and did not comply with a discovery agreement among the parties.  NDL then brought a action to compel discovery.  While awaiting a hearing on the matter, NDL sent ICE a proposal for the form of the production.  The proposal was based on the formats routinely requested by the SEC and the DOJ.  ICE then responded with a response that NDL complained was produced in an unsearchable format, was stripped of all metadata and paper and electronic documents were merged together in one PDF file.

The Court then held that while no federal court has yet ruled that metadata is part of a public record several state courts (i.e. New York, Washington, Arizona) have uniformly so held.  After discussing the relationship between civil discovery rules and FOIA requests, the Court then said: "...certain metadata is an integral or intrinsic part of an electronic record.  As a result, such metadata is 'readily reproducible' in the FOIA context.  The only remaining issue is which of the many types of metadata are an intrinsic part of an electronic record.  Unfortunately, there is no ready answer to this question.  The answer depends, in part, on the type of electronic record at issue (i.e. text record, e-mail, or spreadsheet) and on how the agency maintains its records.  ... The best way I can answer the question is that metadata maintained by the agency as a part of the electronic record is presumptively producible under FOIA, unless the agency demonstrates that such metadata is not 'readily producible'."  [Emphasis added by the Court]  National Day Laborer Organizing Network, et al v. United States Immigration and Customer Enforcement Agency, et al, No. 10 Civ. 3488 (SAS), US District Court, S.D. New York, February 7, 2011

The Court took the opportunity to chastise the attorneys in the case about failing to cooperate, stating: "While certainly not rising to the level of a breach of an ethical obligation, such conduct certainly shows that all lawyers...need to make greater efforts to comply with the expectations that courts now demand of counsel with respect to expensive and time-consuming document production."

This decision is sure to have ramifications in all areas of discovery.  Look for future cases to flesh out the requirements.  It would behoove all document custodians to review this case in view of their policies of retention and destruction and take actions that will reduce the burden that will accompany the next discovery request.

Law Firm Buys Another Law Firm's Name as GoogleAd Word. Scuffle Ensues.

Binder & Binder is a national law firm devoted almost exclusively to the representation of persons seeking Social Security benefits.  Disability Group, Inc. is a competing law firm involved in the pursuit of the same clients.  In 2006, Disability Group purchased the words "Binder and Binder" as a Google AdWord.  As a result, some Google searches for the law firm Binder and Binder resulted in having Disability Group appear high in the sponsored search rankings.  Binder and Binder had registered trademarks for the use of their name.  Binder and Binder brought suit against Disability Group alleging: (i) infringement of a registered trademark; (ii) false advertising; and (iii) unfair competition.

On January 25, 2011, the U.S. District Court for the Central District of California (Case No. 07-2760-GHK), found that the actions of Disability Group did in fact constitute trademark infringement.

The Court found that: (i) there was no dispute that the defendants used plaintiff's mark in their GoogleAd campaign; (ii) that plaintiffs were, in fact, the owners of the mark despite some reorganization from partnership to LLP and several assignments of the mark; (iii) according to the Sleekcraft test, there was a strong likelihood of confusion and also found actual confusion;  and (iv) plaintiffs had not given consent to such use of their mark.

Using testimony about plaintiffs average profit on a case and the number of clicks on defendant's site and some other algorithms, the Court assessed damages for lost profits in the amount of $146,117.60. 

The plaintiffs also requested an award for corrective advertising.  The standard for this is to allow the plaintiff to recover the cost of advertising undertaken to restore the value that plaintiff's trademark has lost due to the infringement.  While the Court was of the opinion that defendant's actions would have given rise to this kind of damages, they declined to award any such damages because of the limited period of infringements (a few months) and the passage of substantial time since the infringement (2006).

The Court then found that the infringement was willful and under the treble damages provisions of the Lanham Act "enhanced" the damages to double the damages for lost profits.

The Court also found that attorney's fees and costs should be awarded to plaintiff because the infringement was "exceptional", i.e. willful, deliberate, knowing or malicious.  The Court declined to award punitive damages because punitives are not available under the Lanham Act and the Court found the double damages already awarded to be sufficient.

Defendants raised several defenses including one that said basically if the plaintiffs had just put the trademark notice (the R in the circle) on their name, Google would not have let the defendants do what they wanted to do and we wouldn't have had this problem.  Basically, "if you had told on me, mommy wouldn't have let me misbehave".  The Court didn't give this much weight.

So, when lawyers litigate with each other, the rest of the world just bemusedly views it as karmic justice but this case provides good instruction about the use of trademarks as search terms.  Other cases may not be this blatant, but look for other litigation on this emerging area of the law.

 

New Generic Top Level Domain Names Soon To Be Available. Do You Want To Be In The Domain Registry Business?

Top level domain names are the extensions that occur after the dot in URLs, such as the generic variety, e.g. .com, .edu, .org or the country code variety e.g. .AQ (Antartica), .CO (Columbia) or .VA (Vatican City).  There are presently 21 generic top level domains and approximately 250 country code top level domains.

ICANN (The Internet Corporation for Assigned Names and Numbers) is proposing to begin taking applications for a whole new series of generic top level domain names.  The new generic top level domain names will generally be limited only by the creativeness of the applicants and is, in fact, an application to become a registrar for the domain string for which you apply.  This opens up the possibility that a large corporation may become a registrar for entities within its corporate structure and a domain name like .walmart could be used to marshal all the company's domains under one domain name umbrella. 

Cities, states, areas, religions, professions or other organizations could conceivably obtain such generic top level domains.  However, the application process will be rigorous and the fees are designed to keep out the riff-raff.  Each application will have a fee of $185,000 of which $5,000 must be made as a down payment and the remainder must accompany the application.  There are some refund provisions where the applicants can get back from 20 to 70 percent but the price of cybersquatting will go up substantially under this procedure.  In addition, the applicant will be screened for prior acts of cybersquatting and will undergo extensive evaluation as to its operational, technical and financial capabilities.  There is also an ongoing quarterly fee and a per registration fee.

Trademark holders should monitor this procedure to make sure that their marks are not compromised by any applications.  The ICANN procedure provides for a trade mark clearinghouse and expedited dispute resolution.

So, plans are afoot in our firm to apply for the generic top level domain name: .law    When we obtain this and become the official registrar for this name, all the law firms will come groveling to our door and our goal of global domination will be complete.  Now, if we can just come up with $5,000.

Revenge of the Native Americans Continues. Sovereign Tribes Not Subject To Suit For Patent Infringement.

Specialty House of Creation ("SHC") is a company started in a chicken coop in 1971 by a 63 year old grandmother and a 26 year old entrepreneur (who both apparently loved dogs).  Their business grew over the years and one of their products is the "Slot-Card with Claw".  This device is designed to keep casino goers from losing their player cards by tethering the card to a belt loop, shirt pocket, body piercing or other stable foundation.  SHC has a patent on this device.

SHC provided a number of these Slot Cards to the Quapaw Tribe of Oklahoma for use in the tribe's casinos.  The Tribe allegedly obtained more of these tsotchkes from another company and referenced the SHC patent number in the request.

SHC sued the Quapaw Tribe in the Federal District Court for the Northern District of Oklahoma.  The Tribe moved for dismissal due to lack of subject matter jurisdiction.  The Court granted the motion and dismissed the suit.  The Court followed a line of cases that indicate that a tribe is a sovereign power and as such is immune from private law suits (including patent and copyright infringement) unless such sovereign immunity has been waived.  The Court did not find any such waiver and therefore dismissed the suit.

I think we can blame this too on George Bush.

Don't Talk To Your Attorney In A Loud Voice In Your Employer's Conference Room OR Use The Employer's E-Mail System Either.

A California Court has held that an employee's use of her employer's e-mail system to communicate with her attorney about a law suit against such employer waived attorney-client privilege and allowed discovery of such e-mails and the introduction of such at trial. Holmes vs. Petrovich Development Company LLC et al, Superior Court No. 05AS04356

The Court held that the employee was not entitled to the privilege because "(1) she had been told of the company’s policy that its computers were to be used only for company business and that employees were prohibited from using them to send or receive personal e-mail, (2) she had been warned that the company would monitor its computers for compliance with this company policy and thus might “inspect all files and messages . . . at any time,” and (3) she had been explicitly advised that employees using company computers to create or maintain personal information or messages “have no right of privacy with respect to that information or message.”

Then the Court said that using the e-mail system thusly was like taking the action described in the title of this post and neither would be accorded the privilege.

Lessons to be learned: Attorneys, tell your clients not to use the company e-mail especially if they are about a potential suit against the company.  It just makes the discovery process easier for the company.

USPTO Has Really Busy Year - Record Number of Patents Issued

According to IFI, the United States Patent and Trademark Office granted 219,614 patents in 2010.  This is 31% more than was granted in 2009 and 29% more than granted in the next busiest year (2007).  Granted applications took a big jump around 1998 when software patents began to be granted with more regularity (thanks, State Street Bank case).

Not everybody is happy about this, as some see this as merely an effort by the USPTO to reduce their backlog (now standing at 720,000+) and not as an increase in efficiency and quality.

In any event, a lot of patents were issued and the pace seems to be increasing.  Happy days are here again.

UMG v. Augusto - "First Sale" Doctrine In Relation To Promotional CDs

UMG sends unsolicited, promotional CDs to potential reviewers, music critics and radio programmers to try to promote the sale, play and mention of such CDs. UMG does not charge for the CDs but it does put notices on the CDs.
One such notice reads:
"This CD is the property of the record company and is licensed to the intended recipient for personal use only. Acceptance of this CD shall constitute an agreement to comply with the terms of the license. Resale or transfer of possession is not allowed and may be punishable under federal and state laws."
Another, more terse notice reads:
“Promotional Use Only—Not for Sale.”

Defendant, Augusto, bought some of these CDs from the recipients and attempted to sell them on eBay. UMG sought to stop this by claiming copyright infringement and claiming that the language above and the acceptance by the recipient constituted a license rather than a sale under the provisions of Vernor v. Autodesk, which we discussed in length here. Therefore, the recipients could not sell the CDs without violating the copyright holder’s right of exclusive distribution.

Mr. Augusto claimed that the unsolicited delivery of the CDs constituted a “sale” for the purposes of our old friend the “First Sale Doctrine”. See our earlier discussions of this doctrine here, here and here.

The Court agreed with Mr. Augusto and stated that the mere receipt of the CDs without some other kind of action did not constitute an assent to the terms of the “license” and therefore, it had to be a sale. In addition, the Court also relied on the “Unordered Merchandise Statute” 39 U.S.C. § 3009(a), (b) (2006), which states that unsolicited merchandise may be treated as a gift. Hence, First Sale Doctrine applies and subsequent sales can be made without claims by the copyright holder. The Court’s opinion can be found here.

Lessons to be learned here are that in order to come under the license standards set out in Vernor v. Autodesk, the right kind of language has to be present and some overt act of acceptance of such language has to be displayed.

You are now free to buy those promotional Lady Gaga CDs you’ve had your eye on.
 

Key Points In Negotiating a SaaS Agreement

From time to time, we like to post the thoughts of other clear thinkers in the IT industry.  Our friend, Derek Singleton, over at Software Advice, has written the following article and has graciously given us permission to repost it.  We have previously written a post on the same subject and cover similar issues.  You can see that article here.
 

9 Key Points to Negotiate in a SaaS Agreement

By: Derek Singleton

ERP Market Analyst at Software Advice

derek@softwareadvice.com


Derek recently graduated from Occidental College with a degree in political science. He writes about various topics related to ERP software and covers the manufacturing, distribution, and supply chain management software markets. In his spare time he enjoys training in boxing and martial arts.
 

Article:

So you’ve decided to go with Software-as-a-Service (SaaS). It’s easy to implement, easy to use and has a friendly subscription pricing model. You’re psyched.

Then comes the contract.

While SaaS has simplified enterprise software in many ways, you will still need to review, negotiate and execute a fairly complex contract when subscribing to an “enterprise-class” system. In this post, we will walk you through the nine most important things to consider when negotiating your SaaS agreement.

1. Pricing and Discounts
By pricing software as a utility service, SaaS vendors have simplified software licensing considerably. Most SaaS pricing is based on a subscription – monthly or annual payments for using the system during that period. The subscription pricing is typically based on one simple metric (e.g. users, records, projects) that roughly ties subscription fees to the value of the system. Finally, SaaS vendors tend to publish their pricing openly.

Even with this simplicity and transparency, there is still a need to be vigilant as a buyer. For one, don’t assume that straightforward published pricing means there isn’t room for some negotiation. Many SaaS vendors will discount up to 20% to win your business. The bigger the deal, the bigger the discount. Moreover, if the vendor’s pricing metric doesn’t fit with your business model, you might be able to negotiate custom pricing. Of course, you’ll have to make a cogent argument that the standard metric fails to balance price paid and value received.

2. Additional Costs
Another key component to pricing is ferreting out any extra costs early in the process. Published pricing may appear to be a good value, but extra fees can add up quickly. Common additional costs include extra users, customizations, integrations, third-party services, training and set-up fees. Work with your sales rep early in the process to understand what additional charges might apply to your account.

By far the best way to keep the additional costs down is to avoid customizations to functionality and integration with other systems. The inherent complexity in custom development and data integration makes these services expensive. We recommend that you start with the base system, make use of its core functionality and then assess how important the custom features or integrations are to your success. Start small, think big, grow quickly.

3. Term
If you are negotiating with a vendor over pricing discounts, subscription metrics and additional fees, expect to give something in return. Oftentimes, this means committing to an extended contract term. Vendors like longer terms because it provides more predictability in their revenue forecasting. Terms can be as short as 30 days or as long as five years. If the vendor wants a long-term subscription, we recommend that you start with the shortest – probably one or two years.

If you do agree to a longer term of three to five years, make sure you have an out clause. Typically this would provide a window of opportunity to break the contract during a specific time window. For example, it might allow you to walk after one month of using the system but before 90 days. Another example might be the ability to break the contract if certain levels of service are not provided consistently.

4. Service Level Agreements (SLAs)
Regardless of what you pay for the system, reliability is paramount. The SLA is the vendor’s commitment to keeping the system up and running. It is typically expressed as a percentage of “up time.” You will almost always see the SLA represented as 99.9% or thereabouts. However, there is wide variation in how that number is calculated. Many vendors will simply start with 100% and subtract time during which their internal systems reported an error. Most of these SLAs leave far too much wiggle room for vendors.

If this new SaaS system is mission critical, push the SLA issue to see who is really ready to stand behind their service. The SLA topic is far too detailed to delve into all the considerations here, so we’ll refer you to this great blog post on SLAs. However, we’ll suggest you focus most on the penalty for breaking the SLA when negotiating. Usually these penalties are paltry discounts paid out against future purchases. Just pushing for bigger penalties will provide great insight into the reliability of the system.

5. Renewals
Hopefully, you will want to renew your contract. However, given that the renewal process provides an important exit opportunity from a bad contract, as well as an opportunity to re-negotiate, make sure you are still in control when the renewal date comes around. Be on the lookout for something known as an “evergreen” renewal. An evergreen automatically renews your term, usually 30 days prior to expiration.

If you spot an evergreen renewal, ask to remove it. When a company refuses to remove the clause, this is a red flag. The vendor should have to continue to win your business. Not the other way around. Vendors who offer quality services can be confident that their customers will renew based on value, not because the customer forgot to cancel in time.

6. Scalable Pricing
As your business changes, you may want to expand your use of the system; or, unfortunately, you might need to scale back your use if business deteriorates. It seems likely that your vendor will be more than happy to grow your account, but what if you need to downgrade? In the current economy, this is all too common. Present this scenario to the salesperson and know your options.

In most cases, the vendor will not let you downgrade until the end of your term – another reason to keep the term relatively short. However, if you get in a pickle, you might be able to offer to extend the term of your contract in return for lowering the scale of your subscription.

7. Support
No matter how good the system is, you will need a little help somewhere along the way. Knowing what help is included in your support package is very important. A key point you will want to know is how you will receive support. Is it delivered via the web, by email, phone, or chat? Also ask about the hours of support availability. Is support available 24 / 7 or only during business hours?

Moreover, you should know the quality of support included in your package. A valuable metric for support quality is the response time guarantee. The best support organizations guarantee a thirty minute response time for emergencies and two hours in all other cases. Having a dedicated support staff (i.e. a “customer success manager”) is also very helpful. Flesh these points out in the contract. Just keep in mind that high levels of support might cost a little extra.

8. Backups and Recovery
You’ve trusted someone else with valuable business data; you don’t want them to lose it. Luckily, almost every SaaS vendor performs regular data backups. However, some providers backup more frequently than others. Most vendors will backup data either on a daily or weekly basis. If you input valuable data every day, then you will want to ensure the provider performs a backup each day. Others might back up throughout the day.

The way the backups are performed is also important. Some vendors maintain numerous backups, while others maintain only one and overwrite the previous backup. Creating separate entries allows you to rollback to a prior date if necessary. This takes up a lot of space so you will probably have to ask for it specifically. The final consideration with backups is whether the data is backed up in a separate data center. Keeping it at a separate center will add a buffer against data loss in the event of a data center disaster.

9. Data export
Finally, you will want to include a clause about data export. Two things are key here: you should always retain ownership of your data and you should know how to get it back. This will be most important in two scenarios: 1) if you want to migrate to a new system because you are unsatisfied; or, 2) the vendor goes out of business and you need access to your data even before you select a new system.

The method for getting your data back will vary, but common methods include a XML, CSV, and HTML. For the very technical, a SQL export may be better. That’s all well and good but what happens if the company fails? Most SaaS vendors have prepaid the data center hosting company to “keep the lights on” for a couple months in case they go out of business. This will keep the doors open long enough to get your data exported.

In the comments section below, please share your personal experiences with contract neogtiations. Also, feel free to add other considerations that you feel are important.

 

Not Content To Wait On COICA, HSA and ICE Seize Domain Names

This notice did not appear on our site (yet), thankfully, but about 70 sites were hit with this over the holiday weekend.

We recently posted on the pending legislation called COICA and noted that the forces that be were quickly drawing lines in the sand and standing rather firmly on their side of the line.  Interestingly, Homeland Security and Immigration and Immigration and Customs Enforcement supposedly obtained warrants and seized the domain names of these sites that they alleged are infringing, either by committing copyright infringement or selling counterfeit items.  As noted by this article in Techdirt, the seizure was only of the domain names and not of the equipment or other assets so some of the sites merely changed their high level domains (e.g. .com to .info), put out the word on Twitter and continued business.

Some people are worried by the apparent lack of due process in this matter and the potential for abuse.  Others are worried by the level of infringement and counterfeiting and the loss of revenue as a result.  This would call into question the need for COICA if HSA and ICE already possess these powers.  There should be a serious discussion of this whole process as the COICA legislation progresses.

Should Corporations Have a Right to Privacy?

Back in 2004 the FCC investigated the government billing practices of AT&T.  The investigation lead to a settlement in which AT&T paid $500,000.  Afterwards, a trade group representing some of the telecommunication giant's competitors wanted to find out exactly what the FCC discovered during its investigation, and so they filed a Freedom of Information Act request.  

Exemption 7(C) of FOIA  allows the government to withhold releasing information that would cause an unwarranted invasion of personal privacy.  AT&T, claiming a right of personal privacy, appealed within the FCC to prevent the release of the information.  The FCC disagreed and AT&T then appealed to the Third Circuit.  The Third Circuit reversed and sided with AT&T stating, "corporations, like human beings, face public embarrassment, harassment and stigma” by having their private information released.  Now the Supreme Court has decided to hear the case this term.

The "personhood" of corporations has always been a controversial concept under the law.  Last term, in the Citizens United case, the Supreme Court held that corporations have free speech rights under the First Amendment when it comes to political advocacy. 

 

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If corporations are found to have privacy rights similar to individuals it could have a profound effect on the public's knowledge of corporate behavior.  Many feel that the citizens' right to know about information affecting the public interest outweighs the privacy rights a corporation might have.  For example, some fear that corporate privacy claims could be used in cases involving safety records (think Toyota, BP), or certain policies of financial institutions (think Goldman Sachs).  Stay tuned.

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