The IT / Digital Legal Companion: A Comprehensive Business Guide to Software, IT, Internet, Media and IP Law
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About this ebook
Chapters deal with topics such as copyrights on the Internet, for software protection and around the world; trademarks and domain names; patents and digital technology companies; trade secrets and non-disclosure agreements; confidentiality, rights transfer, and non-competition agreements for employees; introduction to digital product and service contracts; a pragmatic guide to open source; IT services - development, outsourcing, and consulting; beta test agreements; commercial end-user agreements; terms of use for web sites and online applications; privacy and use of personal data; digital technology standards - opportunities, risks, and strategies; content for digital media; and deals in the web and mobile value chains.
This book is intended for executives, entrepreneurs, finance and business development officers; technology and engineering officers; marketers, licensing professionals, and technology professionals; in-house counsel; and anyone else that deals with software or digital technology in business.
Comprehensive Business and Legal Guidance including
* Securing Intellectual Property for Digital Business
* Digital Contract Fundamentals
* Open Source Rules and Strategies
* Development, Consulting and Outsourcing
* Software as a Service
* Business Software Licensing, Partnering, and Distribution
* Web and Internet Agreements
* Privacy on the Internet
* Digital Multimedia Content Clearance and Distribution
* IT Standards
* Video Game Development and Content Deals
* International Distribution
* User-Created Content, Mash-Ups, MMOGs, and Web Widgets
* And Much More
Key Features:
* Up-to-the-Moment Legal Guide
* In Plain English
* Includes 38 Contract and Web Forms in the Book
Gene K. Landy
Gene K. Landy is a shareholder of Ruberto, Israel & Weiner, P.C., Boston, MA, where he is the head of the firm's Technology Group. His practice covers domestic and international transactions for high technology businesses, from start-ups to publicly traded companies. His work includes licensing, intellectual property, technology transfer, business sales and acquisitions and investments. He is a graduate of Massachusetts Institute of Technology (MIT) and Harvard Law School.
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The IT / Digital Legal Companion - Gene K. Landy
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The IT / Digital Legal Companion: A Comprehensive Business Guide to Software, Internet and IP Law
Printed in the United States of America. Except as permitted under the Copyright Act of 1976, no part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written permission of the publisher, with the exception that the program listings may be entered, stored, and executed in a computer system, but they may not be reproduced for publication.
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The IT/Digital Legal Companion and its content, including these forms, are for educational purposes only and is provided with the understanding that the authors and the publisher are not engaged in rendering legal, accounting, investment, or any other professional services.
THE AUTHORS AND PUBLISHER MAKE NO EXPRESS OR IMPLIED WARRANTY OF ANY KIND and assume no responsibility for errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of the use of the information or digital fi les contained or supplied with or for use with this book. Changes occur in legal matters and in the interpretation of law. Some legal matters are subject to opinion and judgment rather than defi nite rules. If you require legal, accounting, or other expert assistance, you should consult a professional advisor.
Knowledge is power.
—Sir Francis Bacon, philosopher
Knowledge shared is power multiplied.
—Robert Noyce, co-inventor of the semiconductor, co-founder of Intel
Acknowledgment by Gene Landy
This work is founded on the insights and experience of many.
Most important is the contribution of Amy Mastrobattista, who edited the text, contributed forms, and provided many suggestions for improvements. You can find Amy’s touch throughout the book.
I also gratefully acknowledge the help of persons who contributed ideas and insight or kindly reviewed the text, including:
Mike Dornbrook, Executive Vice President, Harmonix Music Systems, Inc.
Peter Duflo, President and CEO, Strategic Ventures, LLC
Andrew Feinberg, General Counsel, Brightcove, Inc.
Jim Geisman, CEO, Marketshare, Inc.
George Grey, CEO & Founder, Mobicious Inc.
Beth A. Marcus, Ph.D., CEO and Director, Zeemote, Inc.
David Marglin, San Francisco attorney; formerly General Counsel, Gracenote, Inc.
Charles Nesson, Professor, Harvard Law School and Founder and Co-Director of the Berkman Center for Internet & Society
Jeffrey Steefel, Franchise Executive Producer, The Lord of the Rings Online, Turbine, Inc.
G. Venkatesh, Chief Technology Officer, Sasken Communication Technologies Ltd.
Aaron von Staats, Senior Vice President and General Counsel, Parametric Technology Corporation
Anyone who wants to reaffirm their belief in the essential goodness of human nature should write a book. Of course, any inadequacy in this work is solely my own responsibility.
I am indebted to Chris Williams and Amy Pedersen and all the other good people at Elsevier who helped with this book.
I am also grateful to my assistant Cindy Scolamiero and the others at my law firm that suffered through proofing of the text.
In addition to these individuals, I thank the countless innovators and risk takers in digital technology companies around the world. Their creativity and effort advances and continually renews the world that this book describes.
Finally, I owe the greatest debt to my wife Sylvia who put up with me while I worked on this book.
A Note from the Authors
We would like to hear from you about the ways in which this book has helped you and about ways that it could be improved.
We are always interested in new technologies, innovative legal techniques, new legal issues, and new problems to solve. If you have a need for business law services that require a sophisticated understanding of digital technology business and legal issues, please let us know.
Feel free to write us at our firm:
Gene K. Landy
Chair, Technology Business Group
e-mail: gkl@riw.com
or
Amy J. Mastrobattista e-mail: ajm@riw.com
Ruberto, Israel & Weiner, P.C.
100 North Washington Street
Boston
Massachusetts 02114
USA
www.riw.com
About the Authors
Gene K. Landy is a shareholder of Ruberto, Israel & Weiner, P.C., Boston, Massachusetts, USA and Chair of the firm’s Technology Business Group. His practice has a concentration on technology companies and digital technology transactions. He is a graduate of the Massachusetts Institute of Technology (SB 1969) and Harvard Law School (JD 1975 cum laude).
Mr. Landy handles domestic and international transactions for high technology businesses, from start-ups to publicly traded companies. He represents companies in software, integrated circuits, telecommunications technology, IT hardware, Internet applications, e-commerce, computer games, and other technology fields.
His work includes licensing, intellectual property, technology transfer, business sales and acquisitions, and investments. He has served non-US technology firms that operate in the United States, including companies in India, Australia, Ireland, England, Switzerland, and Scotland. Mr. Landy also works with investors in technology opportunities.
In addition to this book, Mr. Landy is the author of an earlier lay person’s guide to software law entitled The Software Developer’s and Marketer’s Legal Companion, published by Addison-Wesley in 1993, as well as a number of articles in the field of information technology law published in law journals and other publications.
Mr. Landy frequently lectures on legal topics and has spoken at e-Commerce Expo, Lotusphere, the Computer Games Developer Conference, and other industry trade shows, as well as the Massachusetts Technology Leadership Council, Massachusetts Continuing Legal Education, and the International Federation of Computer Law Associations. He has spoken at the invitation of the Comsware Communications Technology Conference in Bangalore, India and the Irish Software Association in Dublin, Ireland. He has been named a Massachusetts Super Lawyer in 2004 to 2007.
Amy J. Mastrobattista is a shareholder at Ruberto, Israel & Weiner, P.C. and a member of the Corporate Department and Technology Business Group. She is a graduate of Smith College (A.B. 1988 magna cum laude and Phi Beta Kappa) and New York University School of Law (JD 1991).
Ms. Mastrobattista has extensive experience structuring financings, including seed rounds,
angel investments, and venture capital transactions. She has represented both emerging companies and investors. She is also very active in technology licensing for companies small and large.
Ms. Mastrobattista has successfully structured and negotiated the purchase and sale of numerous businesses. She was recognized as one of Boston’s Top 10 Lawyers in Women’s Business Boston reader’s poll, January 2006.
About the Authors’ Law Firm
SERVICES OF THE TECHNOLOGY BUSINESS GROUP
Focus on Technology and Business
Ruberto, Israel & Weiner is a Boston-based business law firm. Our Technology Business Group is focused on information technology, digital products and services, and high technology manufacturing.
We understand the interaction of intellectual property and technology in a global marketplace
We have sector-specific knowledge. We understand technologies, business practices, intellectual property assets, and transactions
We can execute sophisticated and complex technology sector deals
Technology Sectors that We Serve
Our firm has clients in many technology product and service fields. They include both US-based and non-US businesses. RIW represents emerging technology companies as well as established players expanding into new technologies. Specific industry segments served include:
Software including business products, infrastructure, financial software, Internet, open source and communications products
Consumer products, social applications, Web sites, and content, including Web and mobile media and games
IT services and consulting
Web businesses and software-as-a-service (SaaS)
Communications technology
Silicon products, including semiconductors, ASICs and MEMS
High tech materials and manufacturing companies
Business Services for Technology Companies
Our services for technology companies include:
Company Formation
Incorporation, tax strategy, capital structure, shareholder agreements
Formation and operation of US-based subsidiaries of non-US companies
Financing Transactions
Seed capital, angel and venture financing, commercial loans, private placements, and securities offerings
Employment
Employment law generally, employee agreements, option plans and other equity compensation plans
Trademarks and Copyrights
US and worldwide trademark registration
Management of global trademark portfolios
Copyright registration
Technology M&A and Strategic Licensing Transactions
RIW handles technology merger and acquisition transactions. We also can carry out strategic licensing deals, including acquiring or granting key licenses for product line expansion, patent portfolios, or enabling technologies.
Strategic Guidance
We provide advice and guidance on legal aspects of:
Technology and intellectual property strategies
Distribution strategies
Branding strategies
Information Technology Transactions
We handle domestic and international transactions for technology businesses ranging from start-ups to publicly-traded companies that are essential for technology companies, such as:
Licensing and technology transfer
Customer, reseller, VAR and OEM agreements
Development agreements
Technology acquisitions and transfers
Outsourcing agreements
Internet and mobile distribution deals
Web agreements and online documentation
Patent, copyright and trademark licensing
Open source licensing
International distribution arrangements
Strategic alliances and joint ventures
Multimedia, entertainment and game deals
Content acquisition and licensing
Litigation
We provide civil litigation services, including trade secret matters, copyright and trademark infringement, contract disputes, and non-competition and confidentiality agreements
Global Affiliations
Through our network of affiliations across the globe, we partner with other law firms as needed for global distribution agreements, trademarks, partnerships and other international matters.
Contact
Contact us to discuss your technology business needs and strategies. Please feel free to contact Gene Landy, Technology Business Group Chair, .gkl@riw.com
Ruberto, Israel & Weiner, P.C. 100 North Washington Street, Boston, MA
02114 USA
(617) 742-4200 Phone / (617) 742-2355 Fax
www.riw.com
Form Downloading Instructions
About the Forms in The IT/Digital Legal Companion
There are 38 contract and web forms in the Appendix at the end of this book. The purchaser of this book can download the forms from a special web page at no additional charge. The forms are available in PDF and Microsoft Word format. You can also download a zip file on the web side that includes all of the forms in both formats.
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Use of Forms
Please note that the forms are subject to copyright and are provided for your own personal or business use. You should not use them for distribution or sale.
Table of Contents
Cover
Title Page
Copyright
Dedication
Acknowledgment by Gene Landy
A Note from the Authors
About the Authors
About the Authors’ Law Firm
Form Downloading Instructions
Chapter 1: Introduction: Using this Book to Build Value
Your Need to Know Digital Business Law
Who is this Book For?
Organization of this Book
Approach of this Book
Understanding and Using Intellectual Property
Doing Deals
Understanding and Dealing with Legal Risk Factors
Global Perspective
Focusing on Your End Game From the Beginning
How to Use this Book
Using the Legal Forms
Limits to the Contents of this Book
Legal Counsel
Chapter 2: Digital Copyright Basics
Some History
Copyright Counts!
In this Chapter
The Nature of A Copyright
Public Domain
Infringement
Derivative Works
Works Made for Hire
Fair Use
The First Sale Rule
Thin Copyright Protection for Computer Databases
Copy Protection Technology and Anticircumvention Law
Registering your Copyright
Advantages of Copyright Registration
Criminal Copyright Violations
More on Copyright Law
Conclusion
Chapter 3: Copyrights on the Internet, for Software Protection and Around the World
In this Chapter
Topic One: Copyright and the Internet
Topic Two: Copyright and Software Protection
Topic Three: International Copyright Protection
Chapter 4: Trademarks and Domain Names
In this Chapter
Trademark Registration Process
Do-It-Yourself Registration of us Trademarks
Essential Actions to Protect your Trademarks
Taking Trademarks Global
Exploiting Trademarks in Distribution, Licensing, and other Deals
Domain Names
Trademark Infringement Litigation
Conclusion
Chapter 5: Patents and Digital Technology Companies
In this Chapter
The Power and Use of Patents
Nature of United States Patents
Software Patents and Business Method Patents
The Patent Application Process
Inventing and Patent Strategically
Getting Serious about Patents
Your Strategy for Use of Patents
Patents in Business Deals
Patent Licensing Agreements
How Patents Can be used Against your Business
If You Receive A Cease-And-Desist Letter from A Patent Holder
Chapter 6: Trade Secrets and Non-Disclosure Agreements
In this Chapter
Basis of Trade Secret Law
Care and Protection of Trade Secrets
Non-Disclosure Agreements and Confidential Disclosure
Violations of Trade Secret Law
Dealing with Violations of Trade Secrets
Use of Counsel in Managing Trade Secrets
Chapter 7: Confi dentiality, Rights Transfer, and Non-Competition Agreements for Employees
In this Chapter
The Contents of Employee Agreements
Noncompetition and Nonsolicitation Provisions
Chapter 8: Introduction to Digital Product and Service Contracts
In this Chapter
First Topic: Contract Concepts
Conceptualizing the Contract
Second Topic: Contract Provisions
Third Topic: Contract Negotiations
The Role of Legal Counsel
Chapter 9: A Pragmatic Guide to Open Source
Introduction
In this Chapter
The Popularity of Open Source Software
Open Source Licenses
Conclusion
Chapter 10: IT Services—Development, Outsourcing, and Consulting
In this Chapter
The it Consulting Business Model
Development Deals
Process Overview
The Agreement
Structure of A Development Agreement
Development Planning
Conclusion
Chapter 11: Beta Test Agreements
In this Chapter
Variation in Beta Test Agreements
Marketing Uses of Beta Tests
Following Up on A Beta Test
Beta Test Plans
Two Forms of Beta Test Agreement
Chapter 12: Commercial End-User Agreements
In this Chapter
Business Setting for Software End-User Agreements
Bargaining Between Vendor and Customer
Common Issues in Negotiating End-User Agreements
Source Code Escrow Agreements
Note on Commercial Licensing Software to the Government
Accounting for License Revenue
Software Licensing and Sales Tax
Conclusion
Chapter 13: Software as a Service (SaaS)
In this Chapter
Saas Business Varieties
What Customers Like about Saas
Customer Concerns with the Saas Model
Advantages and Issues for Saas Vendors
Mixing Traditional Software Licensing and Saas
Saas and Security
More Mandates
Foreign Data Privacy Laws
Hot, Cold, and Warm Disaster Recovery Sites
Saas Agreements
Pricing in Saas Agreements
Saas Agreement Form
Chapter 14: Commercial Distribution—Part I
General Principles, Deal Types, Reseller Deals, and Legal Rules
Software Partnering and Channels
Reseller Agreements
Some Legal Issues in Distribution
Form Agreements in this Book
Chapter 15: Commercial Distribution—Part II
Embedded, Component, and other Distribution Deal Variations
In this Chapter
Form Agreements
Chapter 16: Clickwraps and Browsewraps
Uses of Electronic Contracting
Categories of Mass-Market Forms Contracts
Product Clickwrap Agreements
Chapter 17: Terms of Use for Web Sites and Online Applications
In this Chapter
About Web Terms of Use
Chapter 18: Privacy and Use of Personal Data
Use of the Internet to Obtain Personal Data
Overview of Us Law on Personal Data
Data Security Breach Notification Laws
Anti-Spyware Laws
Anti-Spam Provisions of Us Federal Law
Other Regulation of Personal Data Regulation
Privacy and the International Data Economy
Chapter 19: Digital Technology Standards—Opportunities, Risks, and Strategies
In this Chapter
Digital Technology Standards and the Modern World
Sources of Standards
Participating in A Consortium—Business Issues
Tension Between Patents and Standards
Staying Out of Trouble with Standards
Patent Pools
Forming your Own Consortium
Conclusion
Chapter 20: Content for Digital Media
In this Chapter
Forms for Content
Some Background: Content and Intellectual Property
Topic One: Practical Guidance in Clearing Content
Topic Two: User-Supplied Content
Topic Three: Just Taking
Content
Conclusion
Chapter 21: Deals in the Web and Mobile Value Chains
In this Chapter
The Web and Mobile Communications Environment
Topic II: Digital Content Deals
Topic III: Hosting and other Services
About Widgets
Conclusion
Chapter 22: Video Games! Developing Games and Doing Deals
In this Chapter
The Game Industry
Publishing Agreements
Massively Multiplayer Online Games
Chapter 23: Going Global—Doing Business in World Markets
Background: Globalization of Information Technology
The Opportunity
In this Chapter
Getting into Global Markets
Foreign Distribution
Dispute Resolution Procedures
International Intellectual Property Protection
Dealing with Software Piracy
International Anti-Israel Boycott
Conclusion
Chapter 24: United States Export Controls
In this Chapter
Why Export Controls Matter
Multiple Regulators
Embargoed Nations and Denied Persons
The Regulation of Technology Exports by BIS
Conclusion
Chapter 25: Proactive Management of Your Legal Affairs
The Need for Control of Legal Affairs
Intellectual Property Protection Procedures
Information Protection and Control
Managing the Documentation of your Business
Periodic Legal Audits and Strategic Reviews
Conclusion
About These Forms
DMCA Web Site Copyright Policy
Royalty-Free Trademark License Agreement
Royalty Bearing Trademark License Agreement
Patent License Agreement
Mutual Non-Disclosure Agreement
Evaluation Agreement (Pro-Recipient)
Employee Agreement
Software Development Agreement
Software Consulting Agreement (Favors Consultant)
Software Consulting Agreement (Favors Customer)
Web Site Development Agreement
Web Hosting Agreement
Beta Test Agreement – Consumer Application
Beta Test Agreement – Business Application
Evaluation License Agreement
Commercial End User License Agreement
Source Code Escrow Agreement
SaaS Customer Agreement
Reseller Agreement
OEM Software Agreement
Software Bundling and Distribution Agreement
Retail Software Distribution Agreement
Sales Representative Agreement
EULA – Consumer Product
Clickwrap EULA — Commercial Product
Web Site Terms of Use
Content Guidelines
Weblog Rules
Privacy Policy
Release for Video, Images and Music
Right of Personality Release and Permission
Location Release
Mobile Content License Agreement
Media Publishing and Services Agreement
Affi liate Media Services Agreement
Video Game Publishing Agreement
International Distribution Agreement
Term Sheet (Non-Binding) for an International Joint Venture
INDEX
Introduction: Using this Book to Build Value
YOUR NEED TO KNOW DIGITAL BUSINESS LAW
To compete effectively in any digital business in a changing world, you need to understand how to use the law to advantage.
This book will empower you to:
Understand the interaction of law, business, and technology.
Exploit emerging technologies and intellectual property (IP) assets.
Negotiate better deals.
Build and reinforce positive relationships with other companies.
Leverage digital media.
Perceive and manage risk.
Benefit from Internet and mobile networks.
Act more decisively and confidently in legal matters.
WHO IS THIS BOOK FOR?
This book is written for anyone in the world of digital technology business, including:
Business owners, executives, and decision-makers.
Entrepreneurs.
Business development executives
Sales and product line managers.
Technology developers, consultants, and advisors.
Chief information officers who make important software and IT decisions.
In-house lawyers, contracting officers, and paralegals.
Anyone managing and protecting software or digital technology IP.
ORGANIZATION OF THIS BOOK
This book consists of 25 chapters. The subject matter includes:
Chapters 2-7: Intellectual Property in Digital Business—Copyrights, trademarks, domain names, patents, trade secrets, and nondisclosure agreements, explained with a focus on digital business, digital media, the Internet, and mobile networks.
Chapter 8: Digital Contract Fundamentals—The key principles and strategies in digital licensing and contracting.
Chapter 9: Open Source—A practical guide to open source licensing, including open source business models.
Chapter 10: Development and Consulting—A how-to guide for the deal-making process (including RFPs and agreements) for digital technology services, consulting, Web development, and outsourced development.
Chapters 11-15: Business IT and Software, including Licensing and Distribution—Beta test agreements, commercial end-user license agreements, distribution and reseller deals, partnering agreements, component distribution, OEM deals, and software-as-a-service agreements.
Chapters 16-17: Web and Internet Agreements—The law and practice of business and consumer clickwrap and browsewrap agreements, Web site terms of use, Weblog terms, and Web site rules of conduct.
Chapter 18: Privacy—The rules on privacy and acceptable use of personal data in the digital world, including privacy law, privacy policies, child protection issues, and trans-national issues.
Chapter 19: Standards—Legal strategies, opportunities, and risks in the system for setting new technical standards for software, digital products, and communications. How you can use this process to get ahead of the curve.
Chapter 20: Clearance of Content—An overview of getting licenses and clearance for use of media assets for Web and mobile consumer applications and games, including text, graphics, music, and video. Also the legal rules about user-contributed content, mashups, and spidering the Web.
Chapter 21: Web and Mobile Deals—Guidance for deals in technology licensing, providing services, and media distribution for the Internet and mobile networks.
Chapter 22: Video Game Deals—Doing deals in the video game sector, including IP, clearance issues, and publishing agreements. The chapter includes discussion of console, PC, mobile, and online games, including multi-player games.
Chapters 23 and 24: International Distribution—IP and deal issues for digital business in going global, distributing in world markets, international partnering and joint venturing, localization, setting up operations abroad, and protecting your rights in other nations, together with an overview of the US export controls.
Chapter 25: Legal Affairs Management—Practical measures to manage your legal affairs in order to execute legal strategies effectively and build value in your business.
Forms Appendix—38 sample forms agreements for deals and transactions addressed in this book.
APPROACH OF THIS BOOK
The book is based on three concepts:
First is that all legal issues are business issues—they have meaning only in their business context.
Second is that essential legal principles can be made comprehensible when explained in straightforward English.
Third is that once you understand basic concepts of IP and contracts, you will be ready to put to good use the more advanced deals and strategies discussed in this book.
UNDERSTANDING AND USING INTELLECTUAL PROPERTY
Digital technology companies gain power from their intellectual property space
—the zone where their IP helps them be dominant, overcoming competition, gaining customers, and pricing at a premium.
This book introduces you to the IP rights that underlie all digital technology. This book will help your business to secure and expand its IP assets. It will help you fully understand what rights you have, can acquire, and can license, assign, or enforce.
The discussion in this book about IP includes digital technology and digital content issues of a networked world. For example, the discussion of copyrights includes anti-circumvention and peer-to-peer file sharing; the explanation of trademarks includes the trademarks on the Internet and domain names; and the discussion of patents includes a review of software and business method patents. There is also a discussion of IP in digital media. You can factor this information into your company’s IP strategy.
DOING DEALS
This book can help your company make better deals. Software and digital technology contracts span a huge range. They include consumer online or mobile transactions that are over in an instant and multiyear global relationships involving hundreds of millions of dollars of commerce. Agreements allocate valuable intellectual property. Contracts allow sharing of opportunities and transfer of risk. They are the means to getting paid.
Nothing combines, replicates, interfaces, embeds, or distributes like software and digital data. Technology deals can provide leverage and extend the distribution reach of small and large companies. Most digital technology companies license technology in from suppliers as well as licensing it out to customers and distributors, so every company needs to know how to function on both sides of the license equation. This book covers a variety of up-to-date contract types that are the tools of the trade for digital business.
There is no such thing as a perfect contract, but there are good deals and bad ones. This book explains the goals and key provisions of digital technology and content deals, as well as common traps and critical issues.
UNDERSTANDING AND DEALING WITH LEGAL RISK FACTORS
The information here can help you manage risk. Digital businesses have been sued by competitors, employees, contractors, licensors, licensees, and IP owners. Legal mistakes can result in bad relationships, wasted opportunities, lost IP, unprofitable deals, litigation, and lost business value.
No one can guarantee your business a risk-free existence, but the discussion here will help you recognize legal contingencies, make intelligent risk management decisions, and conduct smarter negotiations to reduce risk. We also discuss legal safe harbors
that can protect against liabilities.
GLOBAL PERSPECTIVE
Digital technology is global. You may need to provide technology products or services locally or in Russia. Your technology may come from Silicon Valley or from India and China. While the majority of the content in this book is about US law, there is substantial discussion on dealings in non-US markets and on international aspects of IP, privacy, contracting, export controls, and other topics.
FOCUSING ON YOUR END GAME FROM THE BEGINNING
Understanding your legal environment can help you build value in your business.
From the founding of each digital technology company and during every working day, you should be thinking about securing the assets and building the relationships that will be of value at the end—that sale of business exit deal where you will reap the many millions of dollars of value that you have created. When the buyer’s lawyers begin to review your company’s files in the investigative process known as due diligence,
good legal planning will pay off.
During the Internet boom of late 90s, my law firm saw a $400 million proposed sale of start-up Internet software company stopped dead because of a very bad distribution deal the start-up had signed. The company had granted a small distributor in a key market a very broad, very long lasting exclusive license to its technology. The would-be acquirer saw this flawed distribution deal as a fundamental obstacle to its own use of the technology.
Each legal move that your company makes—each distribution deal, each strategic partnership, each investment in a technology, each trademark or patent filing, each license granted—can make your company more or less valuable. This book will help you use the law to maximize the value of your business.
HOW TO USE THIS BOOK
Readers will make different decisions on which content in this book they need to read.
This book is written to be used in two ways. First, it is a plain-language primer on digital technology law, designed to give you a basic understanding of law that affects your business. Second, the book is designed as a reference book for practical guidance—a resource to pick up when you face legal problems or important negotiations.
Each chapter begins with basic concepts and proceeds to discussions in more detail. You can decide which content in each chapter suits your needs. In addition the early chapters on IP and contract basics serve as a foundation for the deal discussions that follow.
There are many connections between these chapters. You will find frequent cross-references in the text. Some will bring you back to basics and some will bring you forward to new topics.
USING THE LEGAL FORMS
This book includes an Appendix of legal form agreements. As you will see, each of the forms in the Appendix has an introduction that provides information about the contents and use of the form. Many of the forms also have annotations with further explanatory material.
These forms are largely based on deals that we have seen or forms that we have used at our law firm. They should be used as checklists of issues and examples for what may work. They are forms, but not templates. We do not believe it is meaningful to consider contracting (except for the simplest forms) as fill in the blank.
The reality is that most types of agreements have endless variations, and forms used in most deals require adjustments. Changes in one part of a deal inevitably affect provisions and force changes elsewhere, so that adjusting forms requires legal insight, drafting skill, and the ability to spot issues that comes with experience. You can use these forms to guide your thinking and to understand issues, learn typical contract wording, and for a contractual starting place. However, they are not magic and not a substitute for legal help in significant deals.
The forms are also available online at a special web site. You can download them in both Word and PDF format. You can find instructions on downloading the forms at the beginning of this book and also in the introduction to the Appendix.
LIMITS TO THE CONTENTS OF THIS BOOK
While this book is intended to be your need-to-know legal companion, there are some limits to its contents.
While there is a lot of substance and detail in this book, it does not deal with legal issues at the most technical level. This is a layperson’s guide, not a lawyer’s treatise. Inevitably there are going to be questions on which you will have to consult legal counsel.
This book focuses on the legal aspects of digital business that are distinctly associated with digital business and are central to its technology, business, and IP strategies and tactics. While we believe these are the core issues, there are more general legal aspects of doing business that we left outside the scope of this book. The business subjects that this book does not cover are company formation, taxation, equity investment deals (by angel
investors, venture capital firms, or others), employment law matters (except for employee agreements and IP aspects which are covered), and the buying and selling of digital technology companies. For these matters, you should consult your attorney and your accountant. We also have not included (except in passing) discussion of the criminal law aspects of the regulation of technology.
While this book mentions statutes and some key decisions by the courts, it does not contain legal citations of the sort that lawyers use. There are two reasons for this. First, they are meaningless for most readers. Second, anyone who wants to find the original materials can easily do so using the information in this book and a Web search engine.
LEGAL COUNSEL
This book is not a substitute for hiring legal counsel. Each digital technology business needs to use legal services. Good legal counsel can add value to your business. Even companies that have in-house counsel need the services of outside law firms from time to time.
How should you select counsel to best serve your business? In the final analysis, you are looking for more than just a person to carry out tasks. Your lawyer, like your accounts, should be a trusted partner and should be someone that you can rely upon.
The important criteria are apparent: knowledge, skills, and experience. You want counsel that has experienced the challenges your business will face, that follows digital technology law issues, and understands your business and your technologies. Digital business exists at the intersection of technology, law, and markets. Your counsel should have knowledge of IP law as well as the other legal, business, and financial issues that affect your technology businesses. Your lawyer should speak your language and provide practical guidance and solutions.
Digital Copyright Basics
It’s not manufacturers trying to rip anybody off or anything like that. There’s nobody getting rich writing software that I know of. There are people who would like to stay in business and earn a salary writing packages for these low-cost computers.
—Microsoft CEO, Bill Gates, then 25 years old, in a 1980 interview with 80 Microcomputing, a computer hobbyist magazine
SOME HISTORY
Back in 1980, Bill Gates was upset. Microsoft was a tiny company serving an infant personal computer market and selling copies of BASIC, a programming language. Most personal computer users were hobbyists who felt free to make copies of Microsoft’s commercial software programs and give them to friends for free. Gates told anyone that would listen that it was important that PC software companies get paid for copies!
In those days, it was unclear whether copyright law, the body of law that governs making and selling copies of books, movies, and music, could be used to protect software too. Gates (as well as everyone else that wanted to make money from software for PCs) was hoping that Congress would pass a proposed change in US federal law to make it clear that copyright law covers software.
Gates was facing a fundamental fact: digital products are incredibly cheap to copy. Copying is the key to turning digital products into wealth—but only if you can control copying. The law that provides legal control of digital copying is copyright law.
In 1980, not long after Gates gave that interview, Congress amended the Copyright Act to give express copyright protection to software. It is hard to overestimate the importance of this legal protection for digital industries.
COPYRIGHT COUNTS!
Why does copyright law matter to you? Copyright law grants the copyright holder exclusive rights that are at the heart of licensing and distribution deals. Copyright law is also an important legal weapon against unauthorized copying of software and digital content. When copyright law is violated, most often copyright holders use civil law—a lawsuit—to protect their copyrights; sometimes the authorities enforce criminal copyright provisions.
While copyright is your friend, there are copyright doctrines that surprise, and in some cases, bedevil digital product and content companies. To function effectively in any digital business, you need a grasp of the basics of copyright law.
IN THIS CHAPTER
This chapter is about the fundamentals of copyright law, including:
How you get copyright protection.
Legal rights a copyright gives you.
Legal provisions that restrict cracking
copy protections and access control.
An overview of copyright registration.
In the next chapter, we will examine some advanced copyright topics regarding the application of copyright law to the Internet and to software products, as well as international aspects of software law.
THE NATURE OF A COPYRIGHT
Fundamentally, a copyright is just what it sounds like: the legal right to control copying. Copyright law also governs distributing and selling copies, preparing works based on earlier works (known as derivatives
), and public display and public performance of works. Copyright protection in the United States is governed by the Copyright Act, a statute passed by Congress. (There is no state copyright law.) The purpose of copyright law is to encourage creation and expression. Copyright law does this by granting a legal monopoly on copying, distributing and performing works to the copyright holder. Nations around the world also have copyright statutes, and there are international copyright treaties.
What Is Covered by US Copyright Law?
Something that is protected by copyright is referred to as a work.
Modern copyright law began in 18th century England with books and expanded to other media of expression. Today, US copyright law covers the following works:
Literary works: novel, stories, articles, advertisement text, manuals, and so forth.
Computer programs.
Musical works and sound recordings.
Choreography.
Visual arts.
Motion picture and audiovisual works.
Architectural works.
Works in the form of digital goods are covered by copyright law. A motion picture, photograph, song, or novel can all be distributed and copied in digital form. Even choreography can be in the form of a digital file. There is therefore an extensive overlap between digital technology and all media under copyright law. The Internet, wireless networks, CDs, and DVDs have accelerated the trend for copyrighted goods to become digital.
Copyright law affects any business that communicates (which means all of them). Industries that are the most reliant on copyright law to protect their core products and services include the software industry, video game developers and publishers, Web-based businesses, the recording industry, the motion picture business, publishers, and broadcasters.
Any contract that deals with the creation or modification of software or any digital content must consider issues of rights under copyright law.
What Is a Computer Program under Copyright Law?
As noted above, computer programs
are protected under copyright law. What is meant by a program
under copyright law? In the Copyright Act, we find the following definition:
A computer program is a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.
Under copyright law, a program can be written in any computer language: C++, Java, SQL, COBOL, or anything else. A Web page written in HTML meets the definition. A program could be an operating system, Web server, video game, a word processor, a software component meant to be incorporated in a device, or anything else that runs on a computer or processor. It could be a few lines of code or millions of lines. A program under the Copyright Act may also be a combination of programs that work together.
The (Very Modest) Requirement of Originality
Under copyright law, you can only get a copyright on a work, including a computer program, that is original. However, the required level of originality required is very low, and meeting this requirement is easy. The legal test contains two elements: (1) a level of originality described by judges as very slight
or minimal
and (2) independent creation. This means that if you wrote a software program or created any other original work, even if quite pedestrian and ordinary, it will be original enough under this test. What falls outside of copyright is pure data or facts.
Copyright and Musical Works
Music recordings (including those in digital form) are subject to two different copyrights:
The Composition Copyright, which covers the words and musical notes.
The Sound Recording Copyright, which covers the recorded sounds—also known as the master recording copyright.
You will find much more about music copyrights and the application of copyright law to digital music (including special webcasting rules) in Chapter 20, which is about clearing digital content.
Exclusive Rights under Copyright Law
What rights does a copyright include? Here is a list of exclusive rights held by a copyright holder under US law:
Reproduction—The right to make copies.
Distribution—The right to sell or rent copies.
Public Performance—The right to perform, display, or play the copyrighted work in public. (There are some limitations on this exclusive right with regard to recorded music that we will review in Chapter 20.)
Derivatives—The right to create works based on a work.
Expressions vs. Ideas and Methods
A fundamental concept of copyright law is that it grants exclusive rights to the particular expression that constitutes the work—but not the ideas in the work.
The Copyright Act expressly provides that copyright protection does not extend to any idea, procedure, system, method of operation, concept, principle, or discovery underlying the program. A news story reported on CNN.com is protected by copyright, but the facts reported are not. An article describing a new theory in biophysics would be protected by copyright, but the theory itself would have no copyright protection.
How to Get a Copyright
To get a copyright is amazingly easy. All you have to do is get your work into some fixed form. Copyright applies, for example, to a sketch that you draw on a paper napkin and to every email you compose and send. For software or digital content, fixed form could mean a printout, storage on a hard drive, network storage, diskette, or ROM chip. The rule is that a copyright is secured automatically when the work is recorded in some reasonably persistent form for the first time.
Although the question is not completely settled, it is probable that works that exist only in RAM memory are sufficiently fixed
to be copyrighted, but in any case, as soon as they are saved, they are undoubtedly within the scope of the Copyright Act.
Copyright vs. Other Kinds of Intellectual Property (IP)
As you can see above, copyright law is for works in which there is some kind of original content. Copyright protection is very different from other types of IP protection. Here are some key differences.
Copyright vs. Patents
Let us say that you make an invention implemented by software—for example, a new way of encrypting data. Copyright will not stop other persons from making other programs that use the same invention. Inventions are covered, not by copyright law, but by patent law. A copyright on a software program that has patentable elements would only cover the code itself, not the inventions or any concepts or methods used in the invention. Software and patents, a topic of growing importance in the digital technology industry, are discussed in Chapter 5.
Copyright vs. Trade Secrets
Software may use secret methods of data storage, graphics display techniques, character recognition methods, encryption and compression techniques, speed optimization methods, and so forth. The law that may protect these secrets from unauthorized appropriation is state trade secret law, discussed in Chapter 6, not copyright law. However, copyright law may be relevant to reverse engineering, a topic discussed in Chapter 3.
Copyright vs. Trademark
The brands of your digital products (used on packaging, CD-ROM discs, Web sites, screen displays, and so forth) are covered by trademark law. If someone is using your brand (or a confusing similar brand) without your consent and causing market confusion, you can use trademark law in a court of law to stop that use or obtain money damages from the infringer.
Copyright does cover graphic art, so that someone else’s unauthorized use of your unique logo might be both copyright and trademark infringement. Trademarks are discussed in Chapter 4.
Duration of Copyright Protection
Copyrights last a very long time. In the United States and many other countries, for copyrights now being created:
For works created by individual authors, under US law, the copyright lasts for the life of the author plus 70 years. In the case of a joint work, that is a work prepared collectively by two or more authors, the term lasts for 70 years after the last surviving author’s death.
For works by employees of a company and other works made for hire (see discussion below of the work made for hire
concept), the duration of copyright will be 95 years from first publication or 120 years from creation, whichever is shorter.
Stanford law professor Lawrence Lessig once remarked: By the time Apple’s Macintosh operating system finally falls into the public domain, there will be no machine that could possibly run it.
For technology, the life of copyrights might as well be forever. As is discussed below, the duration of copyright often matters for content.
PUBLIC DOMAIN
Works that are not subject to copyright at all are in the public domain.
Anyone can copy, distribute, and make derivatives of works that are in the public domain freely and without permission. The public domain includes works on which the copyright has expired, US government works, and works dedicated by the copyright owner to the public domain.
The rules on copyright have changed several times and so there are some technicalities to the rules. Subject to some exceptions, the copyright on a published work will have expired if:
The work was created and first published before January 1, 1923, or, if published later, then.
Seventy years after the death of the author, or if work made for hire for a company, 95 years from publication.
There are other technical rules under which works published before 1989 may have lost copyright protection (such as the pre-1989 rule regarding omitted copyright notices discussed below or a pre-1964 rule that required copyrights to be renewed). There are also rules on the duration of copyrights on unpublished works. Other nations may have different rules. If you want to rely on the public domain status of a work, you may want to consult your attorney to be sure you are correct.
Whether a work is the public domain can have more than one answer, because there may be more than one applicable copyright. For example, a 19th century tune will be out of copyright, but not its 1975 sound recording. A 19th century novel will be out of copyright, but not a translation of the novel made in 1985.
Notice
You have seen copyright notices (also called copyright legends) on books and on digital products many times. A typical notice looks like this:
Copyright © 2008 Jack Smith, Inc.
All rights reserved
Is a notice legally required to secure copyright protection? Under the Copyright Act, the answer is No,
if the work was first published on or after March 1, 1989. (A work is published
when it is first put into general distribution or made available for public sale. Private showings to friends, investors, or publishers are not publication.) If the publication took place after that date, there is no legal requirement that you mark your product in any special way in order to preserve your copyright. You won’t loose the protection of copyright law by failing to use a notice. This is the rule not only in the United States, but also around the world.
Nevertheless, it is a good idea to always use a copyright notice on software, documentation, and digital content—even before publication. This is because the notice serves to put others on notice of your ownership claim. The copyright notice might deter unauthorized copying. It also helps you if you ever have to bring litigation against infringers because it makes it clear that unauthorized copying was done in the face of your claim of ownership. The date that you should put in the copyright notice is the first publication date of the work, and you should use the name of the copyright owner. You can find more details about proper copyright notice formats on the Web site of the US Copyright Office at www.copyright.gov.
For works published before March 1, 1989, putting that copyright notice on all versions of the work was essential. If you fear that you might have inadvertently lost a copyright for a work published before March 1, 1989 because of a failure to include a proper notice, you should consult legal counsel.
Copyright Registration
A frequently asked question is: Do I have to register my work with the US Copyright Office in order to get a US copyright? The answer, which surprises many, is No.
Copyright law protects works without registration. Your works are subject to copyright even if not registered.
Even though you won’t lose your copyright if you do not register, registration with the US Copyright Office is required in order to bring a lawsuit to enforce your copyright. You can also get better remedies in a copyright lawsuit (as explained below) if you register your copyright before the infringement began. As we will discuss later in this chapter, registration is easy and inexpensive, and many companies routinely register their US copyrights in software and other digital content.
INFRINGEMENT
Violation of the rights of a copyright holder is called infringement.
Copyright law gives the copyright owner a remedy in court when someone else infringes the copyright. However, there are some important defenses discussed below and in the following chapter. In some cases, which we will also discuss below, violation of copyright law is criminal.
There are several different kinds of infringement under US law:
Direct Infringement—consists of exercising one of the exclusive rights of copyright without consent of the party that owns or controls the copyright. Copying copyrighted software or digital files without permission (unless a defense applies) is direct infringement.
Contributory Infringement—applies when a party knowingly materially contributes to the directly infringing conduct of another. For example, helping another person make or sell infringing copies would be contributory infringement.
Vicarious Infringement—apples when a party (1) has the right and ability to supervise or control infringing activity; and (2) receives a direct financial benefit from that activity. The classic example of vicarious infringement is a flea market where infringing goods are sold by a person that rents a booth; the owner of the flea market may be liable for vicarious infringement.
Inducing Infringement—occurs when a party knowingly encourages or induces another party to engage in direct infringement. The US Supreme Court added this final category in its 2005 decision of MGM Studios, Inc. v. Grokster, Ltd. in the context of peer-to-peer file sharing. Grokster was liable because it made and distributed software that facilitated peer-to-peer filing sharing, and Grokster knew that illegal file sharing would be the software’s main use. The application and limits of this inducement
doctrine are still not clear. What is clear is that this is a very important extension of copyright law.
DERIVATIVE WORKS
Suppose that you write a brilliant software game program based on the latest Stephen King’s novel and begin selling it. What will happen? Unless you have a license from the holder of the rights to create computer games from the novel, you will surely be sued. This is because your software is a derivative work.
In copyright law, a derivative work is a fundamental concept. It means a work based on another work. The legal rule on derivative works is quite clear and is just what you would expect: If you want to create, make copies of or sell a derivative work, you need the permission of the holder of the rights that your work is based on.
If you create a derivative work without permission, you infringe the copyright in the underlying work. Moreover, while you will have the copyright in your derivative work, your rights will cover only your own contribution and creation—and any acts to distribute the derivative work without permission from the owner of the underlying work will be acts of infringement.
Examples of derivative works are a translation, a sequel or an adaptation of a work for another medium—for example, a movie based on a novel. A derivative software program could be:
An update, new release, or new version of any existing computer program.
A localized
version of a program with foreign language content.
A port
of a program into a different software-operating system.
A program substantially derived from another computer program (or portions of the program)
A program based on another medium such as a novel, a movie, or a game that is copyrighted.
A novel, television show, or movie based on a digital product, such as a video game, would also be a derivative work. Processing works electronically also creates derivatives. For example, if you take a digital music file from a music CD and process it to create an MP3 file, you have created a derivative of the original file.
The concept of what is derivative is logically related to the concept of copyright infringement. In contracts we often define a derivative work as: A work sufficiently based on a copyrighted work such that copying it without permission would infringe the copyright of the prior work.
WORKS MADE FOR HIRE
A basic concept of the Copyright Act, and one that is much misunderstood, is work made for hire,
often shortened to work for hire.
The concept of work made for hire
is important for two purposes:
It may control who is the author of a copyrighted work.
It may govern the duration of a copyright license or transfer (as discussed below).
If an employee of a company creates a work while on the job, the program is automatically work made for hire.
This means that the employer company is legally the author of the program and owns the copyright. The concept follows federal employment law. If the person gets W-2 compensation, has FICA withholding, gets unemployment insurance and the like, he or she will be an employee. If the person gets a Form 1099 and is paid on a per-job basis, the person will be a contractor and not an employee
under this doctrine.
This very important rule of US copyright law has the following effect:
If an employee develops a work, it will belong to the employer because the employer is considered the author.
If an independent contractor develops a work under contract with a customer, unless a contract says otherwise, the independent contractor will own the copyright. The customer will likely receive a nonexclusive license for the intended use of the software. This is a result that often comes as a shock and surprise to companies that have paid contractors to develop software without using a proper contract.
More on Work Made for Hire
There is another rather technical circumstance in which a program is work made for hire under the Copyright Act: A work also classifies as work made for hire if (1) there is a written contract, (2) the contract states that the work will be work made for hire, and (3) the work is part of a larger work, is a translation, is supplemental to another work, is part of a fact compilation, or is an instructional text. This concept is relevant when a company hires a person to provide copyrighted work product, including software code or other digital products.
Work Made for Hire Clauses in Contracts
In contracts for development of software or other digital products, you will often see work made for hire,
clauses, which say, in essence: This work is to be a work made for hire of Customer, but if not work for hire, the work is hereby assigned to Customer.
The reason that these clauses have the but if not
language is that work made for hire status is technical, as noted above. So lawyers want the assignment
language as a back-up, in case the attempt to classify the work as work made for hire
is ineffective.
These clauses are necessary to capture for the customer the copyright that otherwise would go to the independent contractor. This is one reason why a carefully written contract with every independent contractor is so important.
Note on the Right to Revoke Copyright Grants and Transfer after 35 Years
There is another legal impact of the work for hire classification; it affects a special rule under which authors may revoke copyright transfers or licenses. This rule in the Copyright Act applies if an author has licensed or transferred any rights to a copyright: The author (or his or her heirs) has the right to revoke the transfer or license 35 years after publication or 40 years after the transfer or license grant, whichever comes first, by serving written notice on the licensee or transferee within specified time limits.
The purpose of this rule is to protect the creators of works of literature and art that show their true value only many years after creation. It gives creators a second bite at the apple
in transfer or licensing. However, if the work was work made for hire, this rule does not apply, and as a result the assignee or licensee of the work (often the publisher) keeps control of the work for the full life of the copyright.
If you sign an agreement with a developer in which the developer assigns your company the copyright to the resulting product, but it is not work made for hire, then the author (or his or her heirs) will have this right to revoke. On the other hand, if your written contract with the developer had a proper work made for hire
clause (and the other qualifications for work made for hire apply), your company is deemed the author of the program, the copyright belongs to your company, and there is no right to revoke.
Because this rule requires the passage of such a long time, it might appear to have no practical relevance to digital products and digital technology. However, it might affect you if you have licensed content (say music, a film, or a short story) that was created years ago for new use in software or in a multimedia product.
California Law Issue Involving Work Made for Hire Clauses
There is a California state law aspect of the work made for hire that might affect you—and will probably be a surprise if you are not expecting it. Under the California Labor Code, if your company engages any individual as an independent contractor under a written contract to create any work made for hire,
that individual is treated as your employee for the purposes of worker’s compensation insurance (which covers on the job injuries). This means that you will need to obtain in advance and pay for worker’s compensation insurance covering the contractor during the period of the assignment as if he or she were your employee.
What does this mean for you if your company retains independent contractors that reside in California but does not want to incur the cost of worker’s compensation insurance? You have two basic options:
Retain only corporations as independent contractors—rather than individuals. (As your lawyer will tell you, there are other legal benefits from this practice.)
Have your individual contractor assign the copyright (and all other rights) to your company and not have a work made for hire clause in the written contract.
If you have questions about the effect of this California law, you should consult a lawyer that practices in California.
Problems When Parties Fail to Specify Who Is to Own the Copyright
When a contractor or consultant provides software or other digital products under a contract, the parties all too often forget to specify who will own the copyright. The following example illustrates the problem.
Example: A large manufacturer, United Inc., wants a program to calculate and optimize its capital expenditures. United asks Smith, a programmer, to write the required program, and the contract says nothing about who will own what.