Remember those New Year’s resolutions? We know, it happens to us every year as well. All those push-ups we promised ourselves—seems like such a long, long time ago now. There’s always next year. But just to make you feel better, we’ve got a ready-made broken resolution solution for you, and it’s much easier to catch up on than anything having to do with Physical Fitness. Do yourself a big, huge, legal favor this year and read our series on Internet Law. Seriously, don’t get caught messing with the top four major intellectual property laws in the United States; it’s so much easier to inform yourself than to defend yourself (or pay someone else to defend you).

Mark Radcliffe and Dianne Brinson are the authors of The Internet Law and Business Handbook. (The book is currently out of print and undergoing revision, but you can reserve a copy of the next edition by sending an email to mradcliffe@sonic.net.) We’ve commissioned them to supply a series of articles to cover most of what you need to know about the legal issues you’ll encounter doing business on the Net. Among the detours into Internet Law they describe, you’ll find the answers to these (and other) burning questions:

• Does copyright protection apply to the work of Celestial Beings?
• How about my work? Beauty and artistic merit aside, does it qualify?
• How do I obtain a copyright?
• How original does “original thought” actually have to be?
• Trademark, copyright – what’s the difference, anyway?
• How secretive is a Trade Secret, and what have I got to do to keep mine securely under wraps?

Mark and Dianne cover a lot of ground here, so we’ll provide you with a quick summary. Sit up and pay attention, now. Internet users in the United States need to be aware of four major intellectual property laws:

• Copyright law
• Patent law
• Trademark law
• Trade secret law

If you’re to avoid ending up on the wrong side of the law, you’ve got to be able to define which category your work falls under, and you’ve got to know how to make the system work for you. Our first article in the series covered copyright law, defining the types of work that are covered, and the standards to which those works must adhere. The authors have come up with some great examples to brighten up the legalese, and they outline the procedures that must be followed in order to protect your own work.

Last month’s article on patent, trademark and trade secret law examined the basics of United States patent law as defined under the Patent Act. What’s covered? What are the standards? How do you protect your work? Read the article for answers to these questions, and you’ll discover the value of novelty, usefulness and (we love this term) non-obviousness, too. If you think you know it all already, go ahead and skip straight to the latest Security Issues, but we remind you that you ignore Internet Law at your peril.

This month’s article on ownership of copyrights is the last in the three-part series. Our legal experts will explain the Copyright Act, as well as touching on ownership regulations for patents, trademarks and trade secrets. If you acquire, make use of, or develop content for the Web, you really do need to understand this stuff. Some of the examples given hit closer to home than is comfortable; as in the story about the Marketing Director who was really pretty darn sure she had the permission she needed to use those photos on her company’s site, or the curious story of the Web Developer and the Shopping Cart.

We want the best for you, we really do. And we sincerely hope that all your Physical Fitness dreams come true—as a matter of fact, we recommend that you get up from your desk and stretch right now.

Better? Good.

Now all you need to do is read the article that follows and you’ll have kept at least one of your New Year’s resolutions. You’ll be thoroughly informed about issues of Internet Law, and that really is, well, big. You can always get back on that diet when you’re finished reading!

Ownership of Copyrights

This article covers the Copyright Act’s ownership rules, and, in less detail, the ownership rules for patents, trademarks, and trade secrets. Ownership rules discussed here apply only in the United States. Other countries have their own rules of intellectual property ownership.

The intellectual property ownership rules discussed in this article are default rules that apply if the parties—employer and employee, employer and independent contractor, Web developer and client—do not reach their own agreement, in writing, on ownership.

Introduction

You need to understand copyright’s ownership rules if you acquire, use, or develop Web content. Here’s why:

The types of material used for Web site content—music; graphics; text; and video, film, and television show clips—are protected by copyright, as are Web site designs and software. If you want to use copyrighted material belonging to a third party on your Web site, generally you need the permission of the copyright owner. Only the permission of the true owner will protect you from an infringement suit. Getting permission from someone who mistakenly believes he or she is the copyright owner will not protect you.

Example: Web Marketing Director saw some photographs she liked on Z Company’s Web site. Director contacted Z Company’s president and got permission to use the photographs on the Web site owned by Director’s company. The photographs were created for Z Company by a freelance photographer. If the copyrights in the photographs are owned by the photographer (likely) and Z Company does not have the right to sublicense the use of the photographs, Z Company cannot authorize Director to use the photographs. Only the photographer can. Getting permission to use the photographs from Z Company will not protect Director if the photographer sues Director for copyright infringement.

If you create Web content or commission freelancers (graphic designers, writers, or photographers, for example) to create Web content, you should give careful consideration to the question who will own the copyright in that content. The exclusive rights of copyright discussed in Internet Law Part I: Copyright Law belong to the copyright owner.

Example: Web Entrepreneur commissioned Graphic Designer to create graphics for a Web site. If Web Entrepreneur owns the copyright in the graphics, then Entrepreneur has the exclusive right to reproduce and modify the graphics for use on another Web site. If Graphic Designer owns the copyright, Entrepreneur needs Graphic Designer’s permission to reproduce and modify the graphics for use on another Web site.

If you are involved in Web site development, either as a developer or a client, you should give careful consideration to the question of who will own the copyright in Web site designs and program code, for the reason just discussed.

Example: Web Developer created a Web site for Client. The Web site includes a shopping cart program. Whether Web Developer can use the shopping cart program in projects for other clients depends on who owns the copyright in the program.

INITIAL OWNERSHIP

Ownership of copyright initially belongs to the author or authors of the work. 17 USC § 201(a).

Example: Sarah, a photographer, took a photograph of the Lincoln Memorial. Sarah is the author of the photograph and the initial owner of the copyright in the photograph.

The “author” is generally the individual who created the work, but there is an exception for “works made for hire.” This exception is discussed in the next section.

THE WORK MADE FOR HIRE RULE

The “author” of a work made for hire is the employer or hiring party for whom the work was prepared. This default ownership rule is known as the work made for hire rule. Unless the parties have agreed otherwise in a signed written document, the employer or hiring party owns the copyright of a work made for hire. 17 USC § 201(b).

There are actually two branches to the work made for hire rule: one covering works made by employees, and one covering specially commissioned works. 17 USC § 101. We discuss these in this section.

Works Made by Employees

A work created by an employee within the scope of his or her employment is a work made for hire. The employer for whom the work is made is the author of the work for copyright purposes and is the owner of the work’s copyright (unless the employee and employer have agreed otherwise).

Example: As part of his job, John, an employee of Big Company’s training division, created original interactive training materials on e-commerce for Big’s marketing staff. Even though John created the training materials, Big is the author for copyright purposes. Big owns the copyright in the training materials (unless John and Big have agreed in a signed contract that John owns the copyright).

The work made for hire rule does not give employers ownership of works made by employees outside the scope of their employment.

Example: Darryl, an engineer at Productions, Inc., does nature scene watercolors in his free time. The work made for hire rule does not apply to Darryl’s watercolors. If Productions wants ownership of the copyrights in the watercolors, it must get an assignment (discussed in “Assignments,” below) from Darryl.

Specially Commissioned Works

The second category of works made for hire is limited to nine types of specially ordered or commissioned works. These are works commissioned for use as:

• A contribution to a collective work.
• Part of a motion picture or other audiovisual work.
• A translation.
• A supplementary work.
• A compilation.
• An instructional text.
• A test or answer material for a test.
• An atlas.
• A sound recording.

For these types of works, if the hiring party and independent contractor creating the work agree in writing, before the contractor begins the project, to designate the work as a work made for hire, the work is a work made for hire. If the parties do not have an agreement to treat the independent contractor’s work as a work made for hire, it’s not a work made for hire.

Example: Game Company hired Don, a software developer, to design the software for Game Company’s new online game (an audiovisual work). Game Company and Don did not agree in writing to consider the software a work made for hire, so the software is not a work made for hire. Don owns the copyright in the software.

Even if the hiring party and independent contractor agree in writing to consider the independent contractor’s work a work made for hire, the work is not a work made for hire unless it falls into one of the nine special categories listed in the first paragraph of this subsection.

Example: Sarah commissioned John, a freelance painter, to do an oil painting of Sarah’s home. Although Sarah and John agreed in writing that the painting would be considered a work made for hire, the written agreement does not make the painting a work made for hire because the painting is not in one of the nine categories of works that can be specially commissioned works made for hire. If Sarah wants to own the copyright, she needs an assignment (discussed in “Assignments,” below) from John.

The rules governing ownership of copyrights in works created before January 1, 1978 (the effective date of the Copyright Act of 1976), were different from the rules described in this article. The 1909 Copyright Act did not distinguish between employees and independent contractors (works created by both independent contractors and employees were automatically owned by the employer or hiring party unless the parties agreed otherwise). In the case Community for Creative Nonviolence v. Reid, 490 US 730 (1989), the U.S. Supreme Court made it clear that the current Copyright Act does distinguish between employees and independent contractors.

The issue in Reid was who owned the copyright in a sculpture created by the artist Reid for the Community for Creative Nonviolence (CCNV). The Court concluded that the work made for hire rule did not apply for two reasons: Reid was not an employee of CCNV, and the sculpture was not one of the types of works that could be designated a work made for hire by written agreement of the parties.

Foreign Copyright Law

The work made for hire rule discussed in this article applies to copyrights in the United States. Other countries have different rules on copyright ownership. Although many countries have rules similar to the first branch of the Copyright Act’s rule (works made by employees), the second branch (specially commissioned works) of the U.S. rule does not exist in most countries.

To obtain international copyright ownership for works that fall within the second branch of the Copyright Act’s work made for hire rule, parties that commission works should obtain assignments of copyrights (see “Assignments,” below) from independent contractors.

JOINT AUTHORSHIP AND OWNERSHIP

According to the Copyright Act, the authors of a joint work jointly own the copyright in the work they create. 17 USC § 201(a). A joint work is defined in Section 101 of the Copyright Act as “a work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole.”

Example: Ann and Bruce worked together to create an e-commerce site, with Ann developing the software and user interface and Bruce developing the content. The work is a joint work, and Ann and Bruce jointly own the copyright.

Of course, if Ann and Bruce worked as employees of an employer rather than as individuals, their employer would be the copyright owner, as discussed in “The Work Made for Hire Rule,” above.

You do not become the author of a joint work merely by contributing ideas or supervision to a work. You do so by contributing material that meets the standards for copyright protection (see “Standards,” in Internet Law Part I: Copyright Law).

Example: Susan suggested that John write a book on how to beat the stock market, and John did so. Susan is not a joint author of John’s book.

Joint Authorship or Not?

Corky Ballas, a competitive dancer, asked a music producer to create a compact disk of music appropriate for dance competitions. Ballas made suggestions about concepts and suggested songs for the recording. When Ballas and the producer parted company, Ballas claimed to be a joint author of the completed CD. The court held that the producer was the sole author, because Ballas had contributed only uncopyrightable ideas and concepts to the project. Ballas v. Tedesco and Ballroom Blitz Music Inc., 41 FSupp2d 531 (DNJ 1999).

When the copyright in a work is jointly owned, according to U.S. law, each joint owner can use or license the work (authorize others to use it) without the consent of the other owner, provided that the use does not destroy the value of the work and the parties do not have an agreement requiring the consent of each owner for use or licensing. A joint owner who licenses a work must share any royalties he or she receives with the other owners.

Many foreign countries (Germany and France, for example) require that all joint owners consent to the grant of a license. Generally, joint ownership is not recommended because of the complications it adds to licensing worldwide rights. In addition, it is unclear what effect the filing of bankruptcy by one joint owner would have on co-owners.

COMMUNITY PROPERTY

In nine states (Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin), any property acquired during a marriage is jointly owned by the husband and wife. Whether a copyright in a work created by one spouse during marriage is community property is unclear. In Marriage of Worth, a California state court held that the copyrights in several books created by a man during his marriage were jointly owned by the man and his wife. 195 Ca3d 768 (1987). The court’s reasoning—that the copyrights were community property because they were the result of one spouse’s expenditure of time, effort, and skill during the marriage—could apply to patents, trademarks, and trade secrets as well. However, a federal court in Louisiana recently held that copyrights created by one spouse during a marriage are not community property because treating copyrights as community property would risk damaging the Copyright Act’s goals of predictability and certainty as to copyright ownership and national uniformity. Rodrigue v. Rodrigue, 55 FSupp2d 534 (ED La 1999).

ASSIGNMENTS

A transfer of the ownership of a copyright is known as an assignment. When a copyright is assigned, the assignee (individual or company to whom it is assigned) becomes the owner of the exclusive rights of copyright in the protected work. (These rights are discussed in “The Exclusive Rights,” in Internet Law Part I: Copyright Law.)

Example: Tom, an individual working on his own, created Web development tool software and then assigned the copyright in the software to Software Publisher. After the assignment, Software Publisher has the exclusive right to reproduce and publicly distribute the software. If Tom starts selling the software, he will be infringing the Software Publisher’s rights as copyright owner.

The ownership of copyright may be transferred in whole or in part. 17 USC § 201(d). Examples of partial transfers are an assignment of the copyright for a term of ten years (time limitation) and an assignment limited to California (geographic limitation). In addition, the individual exclusive rights (reproduction, modification, and so forth) can be transferred.

Assignments are common in many industries—for example, music composers often assign copyrights in their compositions to music publishers.

An assignment is not valid unless it is in writing and is signed by the owner of the rights conveyed or the owner’s authorized agent. 17 USC § 204(a).

Is an Email a Signed Writing?

So far, only one court has ruled on the question of whether an email satisfies the Copyright Act’s “signed writing” requirement. That court held that the email at issue in that case was not “signed.” Ballas v. Tedesco and Ballroom Blitz Music Inc., 41 FSupp2d 531 (DNJ 1999). Until this issue is clarified—either through amendment to the Copyright Act or through a general federal electronic records law—don’t rely on emails to satisfy the “signed writing” requirement. (A federal electronic records law is likely to be passed by late 2000.)

An assignment can be recorded in the Copyright Office to give others “constructive notice” of the assignment. Constructive notice is a legal term that means you are presumed to know a fact (because it is a matter of public record) even if you have no actual knowledge of the fact.

Recording an assignment in the Copyright Office to give constructive notice protects the assignee from future conflicting transfers. An assignment that is recorded properly within one month after its signing prevails over a later assignment. If the assignment is signed outside the U.S., the assignee has two months to record it. 17 USC § 205(d).

Example: Songwriter assigned the copyright in her song to Music Publishing Company in Boston on August 1, 1993. On August 15, 1993, Songwriter assigned the copyright in the same song to World Enterprises. So long as Music Publishing recorded its assignment properly in the Copyright Office by September 1, Music Publishing owns the copyright because its assignment prevails over Songwriter’s later assignment to World Enterprises.

A properly recorded assignment even prevails over an earlier assignment that was not recorded if the later assignment meets two criteria:

• The later assignment was taken in good faith and without notice of the earlier assignment.
• The assignee paid money or something of value for the assignment or made a promise to pay royalties.

Example: Author assigned the copyright in his novel to Publishing, Inc. on November 1, 1993. Publishing, Inc. did not record the assignment. On January 15, 1994, Author assigned the copyright in the same novel to Media, Inc. for $10,000. Media, Inc. recorded its assignment in the Copyright Office. So long as Media, Inc. acted in good faith and did not know or have reason to know about Author’s 1993 assignment to Publishing, Inc., Media, Inc. owns the copyright. The assignment to Media, Inc. prevails over Author’s earlier assignment to Publishing, Inc.

LICENSES

A license is a copyright owner’s grant of permission to use a copyrighted work in a way that would otherwise be copyright infringement. A copyright owner who grants a license is known as a licensor. A party receiving a license is known as a licensee.

Implied in every license is a promise by the licensor to refrain from suing the licensee for infringement based on activities within the scope of the license.

A copyright license can be exclusive or nonexclusive. An exclusive license is a license that cannot overlap another grant of rights.

Example: Author granted Publisher the exclusive right to sell Author’s novel in the United States. She granted Movie Developer the exclusive right to create and distribute a movie version of the novel. Both Publisher and Developer have exclusive licenses. There is no overlap between the two licenses.

Under copyright law, an exclusive license is considered a “transfer of copyright ownership.” 17 USC § 101. An exclusive license, like an assignment, is not valid unless it is in writing and signed by the owner of the rights conveyed. A nonexclusive license is valid even if it is not in writing.

No Writing, No Case

During the Cannes Film Festival, New World Entertainment orally agreed to grant Television Espanola the exclusive right to broadcast the television show Spiderman in Spain. Written documents were to be prepared by Television Espanola later. When Television Espanola delivered the documents to New World for signing, New World refused to sign, because by then it had granted the broadcast rights for Spain to another party. Television Espanola sued New World for breach of contract. Television Espanola lost the case because oral exclusive copyright licenses are unenforceable. Radio Television Espanola S.A. v. New World Entertainment, Ltd., 183 F3d 922 (9th Cir 1999).

An exclusive license, like an assignment, can be recorded in the Copyright Office to give constructive notice. Recording the exclusive license protects the license against unrecorded earlier transfers of copyright ownership and against later transfers. (See “Assignments,” above.)

TERMINATION RIGHT

The author of a work other than a work made for hire has the right to terminate any license or assignment granted on or after January 1, 1978 during a five-year period that starts thirty-five years after the grant was made. If the grant involves the right to distribute the work to the public, the termination period begins thirty-five years after distribution begins or forty years after the grant was made, whichever is earlier. 17 USC § 203.

For works published before January 1, 1978, a different rule applies to pre-1978 licenses and assignments: The five-year termination period begins fifty-six years after the work was published. 17 USC § 304(c). For older works in their renewal term in 1998 for which the termination right had expired before 1998, there is an additional five-year termination period beginning at the end of seventy-five years from the date the copyright was originally secured. 17 USC § 304(d).

The termination right cannot be waived in advance. If the author dies before the termination period begins, the termination right can be exercised by the author’s widow or widower, children, and grandchildren. If none of these people are alive at the time the termination right can be exercised, the right can be exercised by the author’s executor, administrator, personal representative, or trustee.

OWNING A COPY OF A WORK

Copyright law distinguishes the ownership of a copy of a protected work (a print of a photograph, a compact disc, a book, a diskette) from ownership of the intangible copyright rights. The transfer of a copy of a work does not transfer any rights in the copyright. Thus, purchasing a book (a copy of a literary work, in copyright terminology) does not give you permission to make copies of the book and sell those copies.

There are several exceptions to the principle that the transfer of a copy of a work does not transfer copyright rights. We’ll discuss the most important ones in the rest of this section.

Displaying a Copy

The owner of a lawfully made copy of a work has the right to display the copy publicly, “either directly or by the projection of no more than one image at a time, to viewers present at the place where the copy is located.” 17 USC § 109(c).

Making a Backup Copy

It is not infringement for the owner of a copy of a computer program to make another copy of the program if doing so is necessary to use the program or for archival purposes. 17 USC § 117(a).

“First Sale” Doctrine

The owner of a lawfully made copy of a work has the right to resell or otherwise dispose of possession of that copy. This exception to the distribution right is known as the “first sale doctrine.” 17 USC § 109(a).

Example: Don bought a copy of Publisher’s new book on Web design. Don can resell his copy of the book. The first sale doctrine gives him that right.

Sale or License?

The first sale doctrine is only triggered by a sale of a copy of a work, not by a license. Software and database products, whether delivered online or in tangible form, are generally licensed rather than sold. Licenses allow software suppliers to tailor products to specific markets. A multiuser site license, for example, provides different use rights and carries a different price from a single-user license. Software and database suppliers also use licenses to obtain protection for factual information and prohibit reverse engineering.

For mass-marketed software and databases delivered in tangible form (diskette or CD-ROM), licenses generally take the form of “shrink wrap” agreements contained on or in the product packaging. Some people maintain that shrink wrap agreements do not create binding contracts because they are “contracts of adhesion” (contracts based on “offers” that give the consumer no meaningful choice). They believe that the typical transaction wherein a consumer acquires a copy of mass-market software or database material is a sale, triggering the first sale doctrine.

Some courts agree with this analysis. The Court of Appeals for the Fifth Circuit held that an end-user software license prohibiting reverse engineering was a contract of adhesion. Vault Corp. v. Quaid Software Ltd., 847 F2d 255 (5th Cir 1988). The Court of Appeals for the Third Circuit also held shrink wrap licenses invalid. Step-Saver Data Systems, Inc. v. Wyse Technology, 939 F2d 91 (3d Cir 1991). However, more recently, the Seventh Circuit Court of Appeals held that shrink wrap licenses are enforceable unless their terms are objectionable on grounds applicable to contracts in general. ProCD, Inc. v. Zeidenberg, 86 F3d 1447 (7th Cir 1996). The court noted that even though the consumer in this case could not review the license terms before concluding the transaction, ProCD’s license gave the consumer the right to reject the product if the consumer found the license terms unsatisfactory.

Sale or License Transaction?

Sometimes the documents used in a transaction use “sale” terminology and “license” terminology, making it unclear whether the transaction is a sale triggering the first sale doctrine or not. In Adobe Systems Inc. v. One Stop Micro Inc., 84 FSupp2d 1086 (ND Cal 2000), Adobe sued a company that had acquired copies of “education versions” (stripped-down, less expensive versions) of Adobe products, removed the “education version” labels, and sold the products to consumers. The defendant claimed that it had a right to distribute the software because it had purchased the copies from educational resellers who had purchased the copies. The reseller agreement used the word “purchase.” Other language in the reseller agreement indicated that Adobe was only granting licenses to educational resellers. The court found that the reseller agreement was a license, so the first sale doctrine was not triggered between Adobe and the educational resellers. The court held that the defendant infringed Adobe’s copyrights by distributing the products without a license.

PATENTS, TRADEMARKS, AND TRADE SECRETS

Patent law does not have a work made for hire rule. Patentable inventions created by employees within the scope of their employment are owned by the employee. However, the employee may have a legal obligation to transfer ownership to the employer under the patent law’s “hired to invent” doctrine. This doctrine provides that when an employee is hired to perform research or solve a specific problem, the employer is entitled to get an assignment of a patent received by the employee on the results of the research. Generally, as a condition of employment, employers require employees to agree to assign their interests in patentable inventions to the employer. The Patent Act implicitly recognizes the validity of such agreements, providing that a patent may be granted to the assignee of the inventor.

A trademark is owned by the first party to use it in connection with goods or services or the first to apply to federally register it. A trademark can be owned by an individual, company, or any other legal entity.

An employer or hiring party generally owns trade secrets developed by employees and by independent contractors who are hired to invent.

Ownership of patents, trade secrets, and trademarks, like the ownership of copyrights, can be assigned. As with copyrights, owners of these types of intellectual property frequently grant licenses authorizing others to do things that would otherwise violate the owner’s exclusive rights.

Broken those New Year’s resolutions yet? Well, we didn’t really care about them anyway. Except for the one we assigned you last month (hint: it’s much easier to keep than anything having to do with Physical Fitness). Do yourself a big, huge, legal favor this year and read our three-part series on Internet Law. Seriously, don’t get caught messing with the top four major intellectual property laws in the United States; it’s so much easier to inform yourself than to defend yourself (or pay someone else to defend you).

Mark Radcliffe and Dianne Brinson are the authors of The Internet Law and Business Handbook. (The book is currently out of print and undergoing revision, but you can reserve a copy of the next edition by sending an email to mradcliffe@sonic.net.) We’ve commissioned them to supply a series of articles to cover most of what you need to know about the legal issues you’ll encounter doing business on the Net. Among the detours into Internet Law they describe, you’ll find the answers to these (and other) burning questions:

• Does copyright protection apply to the work of celestial beings?
• How about my work? Beauty and artistic merit aside, does it qualify?
• How do I obtain a copyright?
• How original does “original thought” actually have to be?
• Trademark, copyright – what’s the difference, anyway?
• How secretive is a Trade Secret, and what have I got to do to keep mine securely under wraps?

Mark and Dianne are covering a lot of ground, so here’s a quick summary. Sit up and pay attention, now. Internet users in the United States need to be aware of four major intellectual property laws:

• Copyright law
• Patent law
• Trademark law
• Trade secret law

If you’re to avoid ending up on the wrong side of the law, you’ve got to be able to define which category your work falls under, and you’ve got to know how to make the system work for you. Last month’s article covered copyright law, defining the types of work that are covered, and the standards to which those works must adhere. The authors provide some great examples to brighten up the legalese, and they outline the procedures that must be followed in order to protect your own work.

This month’s article on patent law, trademark law and trade secret law examines the basics of United States patent law as defined under the Patent Act. What’s covered? What are the standards? How do you protect your work? You’ll find answers to these questions, as well as discovering the value of novelty, usefulness and (we love this term) non-obviousness. If you think you know it all already, go ahead and skip straight to the latest Security Issues, but we remind you that you ignore Internet Law at your peril.

Consider this: think you can patent an abstract idea? How about the discovery of a scientific principle, or a natural phenomenon? Easy, you say – of course you can’t patent, say, the discovery of the electricity contained in the lightning bolt that went right through you at the gas pump the other day, shocking you into a brilliant abstract idea for how to build a better mousetrap. Well, no. But you can patent the mousetrap. What’s more, if you don’t patent the mousetrap, the Emergency Room intern who was party to your crazed babbling while you were being treated for lightning-caused injuries might; and sure enough – before you know it you’ll be washed up; toiling away in obscurity and regaling your cynical grandchildren with tales of how you almost made a fortune.

To think you could have had all that money, if only you’d read this article.

Next month we’ll cover copyright ownership. Our legal experts will explain the Copyright Act, as well as touching on ownership regulations for patents, trademarks and trade secrets. If you acquire, make use of, or develop content for the Web, you really do need to understand this stuff. Some of the examples given hit closer to home than is comfortable; as in the story about the Marketing Director who was really pretty darn sure she had the permission she needed to use those photos on her company’s site, or the curious story of the Web Developer and the Shopping Cart.

As part of our continuing effort to help you keep at least one promise to yourself in 2009, we provide you with this next installment on Internet Law. If you develop or deal in Web content, it’s much more important to the community that you inform yourself about these legal issues, than it is that you have washboard abs, or that you quit drinking all that Sangria. Avail yourself of Mark & Dianne’s legal know-how! We really don’t want to have to say we told you so…

Patent Law

Introduction

Patent law in the United States is based on a federal statute, the Patent Act. States are prohibited from granting protection similar to that provided by the Patent Act.

Types of Works Protected

Patent law protects inventions (utility patents) and ornamental designs for articles of manufacture (design patents).

Inventions protected by utility patents include any new and useful process, machine, manufacture, or composition of matter. Inventions can be electrical, mechanical, biotechnology or chemical in nature. Examples of inventions protected by utility patents are a microwave oven, genetically engineered bacteria for cleaning up oil spills, a computerized method of running cash management accounts, and a method for curing rubber.

Internet-related inventions protected by utility patents include communications protocols, data compression techniques, interfaces, networking methods, encryption techniques, interfaces, online payment systems, and information processing and retrieval technologies. In the area of e-commerce, patentable inventions and processes include electronic postage, electronic cash, and e-commerce business methods (discussed below).

Examples of manufactured articles protected by design patents are a design for the sole of running shoes, a design for sterling silver tableware, and a design for a water fountain.

Standards

There are strict requirements for granting utility patents and design patents. We’ll discuss the requirements in this section.

Design Patents

To qualify for a design patent, a design must be new, original, and ornamental. Design patents are generally not suitable for protecting elements of Internet-related software processes. Design patents are considered rather narrow intellectual property protection because they are limited to the ornamental appearance of an article. Owners of design patents rarely sue to enforce their patents against infringers.

Utility Patents

To qualify for a utility patent, an invention must be new, useful, and “nonobvious.”

To meet the novelty requirement, the invention must not have been known or used by others in this country before the applicant invented it, and it also must not have been patented or described in a printed publication in the U.S. or a foreign country more than one year before the application date. The philosophy behind the novelty requirement is that a patent is issued in exchange for the inventor’s disclosure to the public of the details of his invention. If the inventor’s work is not novel, the inventor is not adding to the public knowledge, so the inventor should not be granted a patent.

Meeting the useful requirement is easy for most inventions. An invention is useful if it can be applied to some beneficial use in society.

To meet the nonobvious requirement, the invention must be sufficiently different from existing technology and knowledge so that, at the time the invention was made, the invention as a whole would not have been obvious to a person having ordinary skill in that field. This requirement makes sure patents are only granted for real advances, not for mere technical tinkering or modifications of existing inventions by skilled technicians.

First to Invent or First to File?

Who gets the patent if two inventors, working independently of each other, achieve patentable results around the same time? In the United States, the patent goes to the first person who invented the claimed subject matter (even if the first to invent was not the first to file a patent application). Only the U.S. has a first-to-invent system. In other countries, the first person who files a patent application gets the patent, even if he or she is not the first to invent the claimed subject matter.

It is difficult to obtain a utility patent. Even if the invention or process meets the requirements of novelty, utility, and nonobviousness, a patent will not be granted if the invention was patented or described in a printed publication in the U.S. or a foreign country more than one year before the application date, or if the invention was in public use or on sale in the U.S. for more than one year before the application date. This rule is known as the “statutory bar.” If you think your technology might be patentable, you should contact a patent attorney before you display or distribute your invention. The one-year grace period following disclosure of the invention is available only in the U.S. In most other countries, the patent application must be filed prior to any public disclosure of the invention.

“Printed Publications” on the Internet

In applying the statutory bar rule, material is considered a “printed publication” if it has been sufficiently accessible to that portion of the public interested in the particular field. Presumably, material made available on the Internet could count as a “printed publication.” Contact a patent attorney before publishing information about potentially patentable material on the Web.

Abstract ideas and mental conceptions are not patentable. Discoveries of scientific principles, laws of nature, and natural phenomena are not patentable (although applications of such discoveries are). Mathematical algorithms that have not been reduced to some type of practical application have been held to be unpatentable. However, a claim to a system or method that recites a mathematical algorithm and produces “a useful, concrete and tangible result” may be patentable. State Street Bank & Trust Co. v. Signature Financial Group, 149 F3d 1368 (Fed Cir 1998), cert. denied, 525 US 1093 (1999). The software process involved in the State Street Bank case was used by a computer system to recompute the share prices of a pool of mutual funds after each day’s trading activities ended, taking into account the day’s gains and losses and expenses attributable to each mutual fund. The final share prices were the “useful, concrete and tangible result.”

Until recently, methods of transacting business were thought not to be patentable. However, in the State Street Bank case, the court made it clear that systems or methods which implement business methods are patentable if they meet the requirements of novelty, usefulness, and nonobviousness.

You’ve probably read about new patents being issued for Internet-related methods of doing business. Here are a few:

• CyberGold’s patent for a method that rewards customers who receive online ads
• Netcentives’ patent for rewarding online purchasers with airline frequent-flyer miles
• Priceline.com’s patent for reverse auctions
• Open Market’s patents related to secure online credit-card payments
• Amazon.com’s patents on “one-click” technology and affiliate programs

Some people think that business methods should not be patentable. In State Street Bank, the Court of Appeals for the Federal Circuit, which reviews all patent appeals, held that processes which are otherwise patentable subject matter are not rendered unpatentable because they involve business methods. The Supreme Court, by denying certiorari, declined to review the position taken by the Court of Appeals. Unless Congress amends the Patent Act, processes involving business methods are patentable. However, they must meet the stringent requirements for patent protection discussed earlier in this section. The Patent and Trademark Office is now subjecting business methods patents to a second-level review.

Procedure for Getting Protection

Patent protection is obtained by demonstrating in an application filed with the U.S. Patent and Trademark Office, www.uspto.gov, that the invention meets the stringent standards for grant of a patent. The patent application process is an expensive, time-consuming process (it generally takes at least two years). Although you can file a patent application yourself, the application process is complex. You should consider using an experienced patent attorney or patent agent (a non-lawyer who has passed the special patent bar exam given by the U.S. Patent and Trademark Office).

If you want to be able to claim “patent pending” status without undertaking the expense and paperwork involved in a regular patent application, consider filing a “provisional patent application” (PPA). A PPA remains in effect for one year. The PPA filing date can be used to prove that the invention described in the PPA document predates other inventions in the field.

Exclusive Rights

A patent owner has the right to exclude others from making, using, selling, offering to sell, or importing the patented invention or design in the United States during the term of the patent. Anyone who makes, uses, sells, offers to sell, or imports a patented invention or design within the United States during the term of the patent without permission from the patent owner is an infringer—even if he or she did not copy the patented invention or design or even know about it.

Example: Developer’s staff members, working on their own, developed software for manipulating images in multimedia works. Although Developer’s staff didn’t know it, Inventor has a patent on that method of image manipulation. Developer’s use of the software infringes Inventor’s patent.

Duration

Under current law (effective June 8, 1995), utility patents are granted for a period of twenty years from the date the patent application was filed but in many countries you need to pay “maintenance fees” to keep the patent in force.

Example: Amazon.com, Inc. was issued a patent on its affiliates program on February 22, 2000. The patent application was filed on June 27, 1997. The patent will expire in June 2017.

Under prior law, patent protection lasted seventeen years from the date the patent was issued. Under the current law, if a patent application is pending for longer than three years, the patent’s term can be extended to give the applicant seventeen years to enjoy the patent.

Example: Inventor filed a patent application on June 15, 1997. She was granted a patent on December 15, 2000. Her term can be extended so that her patent will not expire until December 2017.

The extension is available only if the delay is not the fault of the applicant.

For utility patents in existence prior to June 8, 1995, the patent term is the greater of seventeen years from the date of issue (the term under prior law) or twenty years from the application filing date. Design patents are granted for a period of fourteen years.

The patent application must contain a written description of the invention and how to make and use the invention in such complete terms as to enable others to make and use it. Once a patent is issued, this information—known as the disclosure—becomes available to the public, as do the patent’s “claims” (patentee’s defined legal rights). Once the patent on an invention or design has expired, anyone is free to make, use, or sell the invention or design.

The Patent and Trademark Office maintains a free online searchable database of U.S. patents issued since January 1, 1976 at www.uspto.gov. Google has compiled a free searchable database of US patents issued between 1790 and 2006 available at www.google.com/patents. Commercial services such as Micropatent (www.micropatent.com) include pre-1971 patents in their databases. Patents may also be searched at Patent and Trademark Depository Libraries located throughout the U.S. Information on the libraries is available at www.uspto.gov.

Sample Specification and Claim Language

The specifications section of Amazon.com’s affiliates program starts with this description: “The present invention provides a software system and method for enabling an Internet sales entity . . . to efficiently market and sell goods in cooperation with Web sites or other network sites of respective business partners, referred to herein as ‘associates’.” The first claim starts this way: “A method of selling items with the assistance of associates, the method comprising: providing a Web site system that includes a browsable catalog of items and provides services for allowing customers to electronically purchase the items . . .” This patent is Patent 6,029,141, “Internet-based customer referral system.”

While most countries publish patent applications, Congress has only recently changed the U.S. Patent Act to allow the Patent and Trademark Office to publish patent applications. Effective November 29, 2000, the Patent and Trademark Office will publish patent applications eighteen months after they are filed, unless the applicant certifies that foreign patent protection is not being sought in a country that requires publication of applications eighteen months after filing. The publication provision does not apply to applications for design patents.

Limitations on Exclusive Rights

There are two major limitations on the patent owner’s exclusive rights. They are discussed in this section.

Functionally Equivalent Products

A patent owner can exclude others from making, using, or selling products or using processes that do substantially the same work as the patented invention in substantially the same manner. However, a patent does not protect the patent owner from competition from functionally equivalent products or processes that work in different ways.

Example: Microco owns a patent covering a laser printer. While Microco can prevent others from making, using, or selling laser printers that work in substantially the same manner as Microco’s printer, it cannot prevent others from making, using, or selling laser printers that operate in a different manner.

Invalidation

The validity of an issued patent is subject to challenge in an infringement proceeding or a re-examination proceeding. Defendants in infringement suits usually raise the defense of patent invalidity, asserting that the invention covered by the patent was not novel or nonobvious. It is not unusual for a patent infringement suit to result in a determination that the U.S. Patent and Trademark Office made a mistake in granting the patent.

Patent Validity

Patent invalidity is certain to be an issue in infringement suits to enforce e-commerce business methods patents. For example, when Amazon.com sued Barnesandnoble.com for infringing Amazon’s “One-Click Shopping” patent, Barnesandnoble.com’s defenses included patent invalidity. Barnesandnoble.com maintained that One-Click Shopping was not novel or nonobvious—and that the patent examiner who granted the patent to Amazon.com would have realized that had the examiner had all the relevant “prior art” available to him when he reviewed Amazon’s patent application.

Avoiding Infringement

New Internet-related and e-commerce patents are being granted in record numbers. If you learn of a patent and are concerned that your operations may infringe it, get advice from a patent attorney.

Consulting a patent attorney is particularly important if your potentially infringing operations are still in the planning stages. Based on the legal advice you receive, you may decide to modify your operations to avoid infringement—or you may decide to get a license from the patent owner. Avoid investing more money or time in your plans until you get legal advice.

If you learn that a patent has recently been granted on a method of doing business you are already using, you may have an “early inventor” defense (also known as a “first inventor” defense). The early inventor defense was added to the Patent Act in late 1999, after the State Street Bank case (discussed earlier in this section) was decided. Prior to that decision, business methods were thought not to be patentable. Now thousands of business methods patent applications are being filed. The early inventor defense, applicable only to business methods patents, is a complete defense to infringement for those who meet two requirements:

• Commercially used the subject matter covered in the patent prior to the patentee’s patent application date.
• Acting in good faith, “reduced the subject matter to practice” (executed the invention) at least one year before the patentee’s application filing date.

“Submarine patents” have long been a concern in fast-moving fields. A submarine patent is one that remains secret until it is issued, by which time competitors and other companies have made substantial investments to use the technology covered by the new patent. There is nothing you can do to eliminate the risk of submarine patents. However, the fact that many patent applications will now be published eighteen months after they are filed helps to reduce the risk.

If you are concerned that someone else is going to apply for a patent on a business method they and you are already using on the Internet, take comfort in the statutory bar mentioned earlier in this section. No patent can be granted on an invention that was in public use or on sale in the U.S. for more than one year prior to the patent application date.

Trademark Law

Introduction

Trademarks and service marks are words, names, symbols, or devices used by manufacturers of goods and providers of services to identify their goods and services, and to distinguish their goods and services from goods manufactured and sold by others.

Example: The trademark FrontPage is used by Microsoft Corporation to identify the company’s Web development software and to distinguish its software from other vendors’ Web development software.

For ease of expression, we will use “trademark” in this article to refer to both trademarks (used on goods) and service marks (used for services).

For trademarks used in commerce, federal trademark protection is available under the federal trademark statute, the Lanham Act. Many states have trademark registration statutes that resemble the Lanham Act, and all states protect unregistered trademarks under the common law (nonstatutory law) of trademarks.

Types of Works Protected

Examples of words used as trademarks are Kodak for cameras and Burger King for restaurant services. Examples of slogans used as trademarks are Fly the Friendly Skies of United for airline services and Get a Piece of the Rock for insurance services. Examples of characters used as trademarks are Pillsbury’s Dough Boy for baked goods and Aunt Jemima for breakfast foods.

Sounds can be used as trademarks, such as the jingle used by National Public Radio. Product shapes and configurations—for example, the distinctively shaped bottle used for Coca-Cola—can also serve as trademarks.

Standards

Trademark protection is available for words, names, symbols, or devices that are capable of distinguishing the owner’s goods or services from the goods or services of others. A trademark that merely describes a class of goods rather than distinguishing the trademark owner’s goods from goods provided by others is not protectible.

Example: The word “corn flakes” is not protectible as a trademark for cereal because that term describes a type of cereal that is sold by a number of cereal manufacturers rather than distinguishing one cereal manufacturer’s goods.

A trademark that resembles a trademark already in use in the U.S. so closely that it is likely to cause confusion or mistake is not protectible. Geographically descriptive marks—”Idaho” for potatoes grown in Idaho—are not protectible trademarks for products that originate in the geographical area (all Idaho potato growers should be able to use “Idaho” in connection with selling their potatoes). Geographically misdescriptive marks that are deceptive are not protectible.

Example: Hiromichi Wada, the owner of a Michigan leather goods shop, attempted to federally register the name New York Ways Gallery for leather goods. The Patent and Trademark Office refused to register the name because it thought the public would assume Wada’s goods were from New York. The Court of Appeals for the Federal Circuit upheld the Patent and Trademark Office’s decision. In re Hiromichi Wada, 194 F3d 1297 (Fed Cir 1999).

Procedure for Getting Protection

The most effective trademark protection is obtained by filing a trademark registration application in the Patent and Trademark Office, www.uspto.gov. Federal law also protects unregistered trademarks, but such protection is limited to the geographic area in which the mark is actually being used.

Federal Protection

Federal registration is limited to trademarks used in interstate commerce (or intended for use in interstate commerce). Before November 1989, a trademark application could be filed only after the trademark’s owner had actually used the trademark in commerce. Under current law, a person who has a “bona fide” intention to use a trademark in commerce may apply to register the trademark.

For federally registered marks, the use of notice of federal registration is optional. A federal registrant may give notice that his or her trademark is registered by displaying with the trademark the words “Registered in U.S. Patent and Trademark Office” or the symbol ®.

State Protection

State trademark protection under common law is obtained simply by adopting a trademark and using it in connection with goods or services. This protection is limited to the geographic area in which the trademark is actually being used.

State statutory protection is obtained by filing an application with the state trademark office. Those relying on state trademark law for protection cannot use the federal trademark registration symbol, but they can use the symbol ™ (or, for a service mark, ℠).

Domain Names as Trademarks

The mere registration of a domain name does not convey trademark rights. However, if you use your domain name to identify your goods or services—using it in ads for your e-commerce site, for example—it acquires trademark protection.

Exclusive Rights

Trademark law in general, whether federal or state, protects a trademark owner’s commercial identity (goodwill, reputation, and investment in advertising) by giving the trademark owner the exclusive right to use the trademark on the type of goods or services for which the owner is using the trademark. Any person who uses a trademark in connection with goods or services in a way that is likely to cause confusion is an infringer. Trademark owners can obtain injunctions against the confusing use of their trademarks by others, and they can collect damages for infringement.

Example: Distributed Learning Company is selling a line of interactive training products under the trademark Personal Tutor. If Giant Multimedia Company starts selling interactive training products under the name Personal Tutor, purchasers may think that Giant’s products come from the same source as Distributed Learning’s products. Giant is infringing Distributed Learning’s trademark.

One of the most important benefits of federal registration of a trademark is the nationwide nature of the rights obtained. For the registrant, federal registration in effect reserves the right to start using the mark in new areas of the U.S.

Example: In March 1999, Small Multimedia Company, a California corporation, obtained a federal trademark registration on the trademark Abra for computer games. Small Multimedia did not begin using the trademark on computer games in New York until 2000. In September 1999, Giant Company started using Abra on computer games in New York. Because Small Multimedia’s federal registration gives it a right to use Abra throughout the United States that is superior to Giant’s right to use Abra, Small Multimedia can stop Giant from using Abra on computer games in New York—even though Giant started using Abra in New York before Small Multimedia did.

A trademark owner’s rights under state trademark law (and the rights of an unregistered trademark owner under federal law) are generally limited to the geographical area in which the owner has used the trademark.

Example: (For this example, we changed just one fact from the previous example.) Small Multimedia Company did not get a federal trademark registration. Now Giant’s right to use Abra on computer games in New York is superior to Small Multimedia’s right to use Abra on computer games in New York, because Giant was the first to actually use the trademark on computer games in New York.

Internet Use

In the last example, what if Small Multimedia Company, the first company to use Abra on computer games, sold its games on a Web site? People anywhere in the world could view the Web site. Does that mean that Small Multimedia was using Abra throughout the world? We don’t know the answer. It is unclear how the above rule would apply when a trademark is protected only under state or common law and is used on the Internet.

Duration

A certificate of federal trademark registration remains in effect for ten years, provided that an affidavit of continued use is filed in the sixth year. A federal registration may be renewed for any number of successive ten-year terms so long as the mark is still in use in commerce. The duration of state registrations varies from state to state. Common law rights endure so long as use of the trademark continues.

Limitations of Exclusive Rights

Trademark law does not give protection against use of the trademark that is unlikely to cause confusion, mistake, or deception among consumers, but dilution laws may provide such broader protection.

Example: Western Software has a federal registration for the use of Flap on Web development tool software. If Giant Company starts using Flap on its desktop publishing software, Giant may be infringing Western Software’s trademarks because consumers may think the desktop publishing software and the Web development tool software come from the same source. If Giant starts using Flap on fire extinguishers, though, Giant is probably not infringing Western Software’s trademark. Consumers are unlikely to think that the Flap software and the Flap fire extinguishers come from the same source.

Avoiding Infringement

For tips on how to avoid trademark infringement in naming your products and services, tips on how to avoid trademark infringement when choosing domain names, and rules for using trademarks owned by others, see The Internet Law and Business Handbook. (This book is currently out of print and undergoing revision, but you can reserve a copy of the next edition by sending an email to mradcliffe@sonic.net.)

Trade Secret Law

Introduction

A trade secret is information of any type that is valuable to its owner, not generally known, and kept secret by the owner. Even negative information such as research options that have been explored and found to be worthless can be trade secrets.

Trade secrets are protected only under state law. The Uniform Trade Secrets Act, in effect in a number of states, defines trade secrets as “information, including a formula, pattern, compilation, program, device, method, technique, or process that derives independent economic value from not being generally known and not being readily ascertainable and is subject to reasonable efforts to maintain secrecy.”

Types of Works Protected

The following types of technical and business information are examples of material that can be protected by trade secret law:

• Customer lists
• Designs
• Instructional methods
• Manufacturing processes
• Document-tracking processes
• Formulas for producing products

Inventions and processes that are not patentable can be protected under trade secret law. Patent applicants generally rely on trade secret law to protect their inventions while the patent applications are pending.

Standards

Six factors are generally used to determine whether material is a trade secret:

• The extent to which the information is known outside the claimant’s business.
• The extent to which the information is known by the claimant’s employees.
• The extent of measures taken by the claimant to guard the secrecy of the information.
• The value of the information to the claimant and the claimant’s competitors.
• The amount of effort or money expended by the claimant in developing the information.
• The ease with which the information could be acquired by others.

Information has value if it gives rise to actual or potential commercial advantage for the owner of the information. Although a trade secret need not be unique in the patent law sense, information that is generally known is not protected under trade secret law.

Procedure for Getting Protection

Trade secret protection attaches automatically when information of value to the owner is kept secret by the owner.

Exclusive Rights

A trade secret owner has the right to keep others from misappropriating and using the trade secret. Sometimes the misappropriation is a result of industrial espionage. Many trade secret case defendants are people who have taken their former employers’ trade secrets for use in new businesses, or new employers of such people.

Trade secret protection endures so long as the requirements for protection—generally, value to the owner and secrecy—continue to be met. The protection is lost if the owner fails to take reasonable steps to keep the information secret.

Example: After Sam discovered a new method for manipulating images in multimedia works, he demonstrated his new method to a number of other developers at a multimedia conference without requiring the developers to sign nondisclosure agreements. Sam lost his trade secret protection for the image manipulation method because he failed to keep his method secret.

Limitations on Exclusive Rights

Trade secret owners have recourse only against misappropriation. Discovery of protected information through independent research or reverse engineering (taking a product apart to see how it works) is not misappropriation. However, many software license agreements prohibit reverse engineering.

Federal Criminal Trade Secret Law

The Economic Espionage Act of 1996 (EEA) makes stealing or knowingly buying trade secrets a criminal offense punishable by a fine of up to $250,000, imprisonment of up to fifteen years, or both. The EEA provides higher penalties for stealing or knowingly buying trade secrets for the benefit of a foreign government or agent.

Avoiding Infringement

To avoid infringing trade secrets, you should avoid using valuable confidential business and technical information you acquired while working for a former employer. When you hire someone to perform exactly the same duties he or she used to perform for another company, you run the risk of being sued for trade secret infringement. An individual is allowed to carry general knowledge or skill from one job to the next. Drawing the line between general knowledge or skill and protected trade secrets belonging to the former employer can be difficult. Consider consulting an experienced attorney if you need to make this distinction.

Customer Contacts List

Haber worked in sales at North Atlantic Instruments. He left North Atlantic and joined Apex Signal Corporation, where he immediately began calling the customer contacts he had developed and used while working at North Atlantic. North Atlantic sued for trade secret misappropriations and won. The customer contact list was held to be a trade secret belonging to North Atlantic because North Atlantic had taken appropriate steps to keep the information secret. North Atlantic Instruments v. Haber, 188 F3d 38 (2d Cir 1999).

International Protection

To obtain patent, trademark and trade secret protection in another country, you must comply with that country’s requirements for obtaining protection. For these intellectual property rights, there are no international conventions that provide automatic protection for U.S. rights owners. However, the World Intellectual Property Organization has proposed a Patent Law Treaty which will, if adopted, simplify the filing of multi-country patent applications.

Some inventors file patent applications in other countries simultaneously with the U.S. filing. The Paris Convention and the Patent Cooperation Treaty allow an inventor who files a patent application in the U.S. to delay filing in member countries based on the earlier U.S. application date. The European Patent Convention offers a way to file a single patent application for a patent which will be valid in 17 European countries. The European Community Trademark system provides a centralized procedure for obtaining trademark rights in European Community countries. The Madrid Protocol permits United States trademark owners to obtain trademark rights in a number of countries by filing a single application.

Broken those New Year’s resolutions yet? Well, we’ve got a new one for you, and it’s much easier to keep than anything having to do with Physical Fitness. Do yourself a big, huge, legal favor this year and read our three part series on Internet Law. Seriously, don’t get caught messing with the top four major intellectual property laws in the United States; it’s so much easier to inform yourself than to defend yourself (or pay someone else to defend you).  

Mark Radcliffe and Dianne Brinson are the authors of The Internet Law and Business Handbook. (The book is currently out of print and undergoing revision, but you can reserve a copy of the next edition by sending an email to mradcliffe@sonic.net.) We’ve commissioned them to supply three articles, covering most of what you need to know about the legal issues you’ll encounter doing business on the Net. Among the detours into Internet Law they describe, you’ll find the answers to these (and other) burning questions:

• Does copyright protection apply to the work of celestial beings?
• How about my work? Beauty and artistic merit aside, does it qualify?
• How do I obtain a copyright?
• How original does “original thought” actually have to be?
• Trademark, copyright – what’s the difference, anyway?
• How secretive is a Trade Secret, and what have I got to do to keep mine securely under wraps?

Mark and Dianne are going to cover a lot of ground with this series, so we’ll provide you with a quick summary. Sit up and pay attention, now. Internet users in the United States need to be aware of four major intellectual property laws:

• Copyright law
• Patent law
• Trademark law
• Trade secret law

If you’re to avoid ending up on the wrong side of the law, you’ve got to be able to define which category your work falls under, and you’ve got to know how to make the system work for you. This month’s article on copyright law defines the types of work that are covered, and the standards to which those works must adhere. The authors have come up with some great examples to brighten up the legalese, and they outline the procedures that must be followed in order to protect your own work.

In next month’s article on patent, trademark and trade secret law we’ll examine the basics of United States patent law as defined under the Patent Act. In March, you can read the final article in the series, which concerns ownership of copyrights. Our legal experts will explain the Copyright Act, as well as touching on ownership regulations for patents, trademarks and trade secrets.

If you acquire, make use of, or develop content for the Web, you really do need to understand this stuff. Some of the examples given hit closer to home than is comfortable; as in the story about the Marketing Director who was really pretty darn sure she had the permission she needed to use those photos on her company’s site, or the curious story of the Web Developer and the Shopping Cart.

You can do all the push-ups and avoid all the french fries you want to this year, but if you develop or deal in Web content, it’s much more important to the community that you inform yourself about these legal issues, than it is that you have washboard abs. Avail yourself of Mark & Dianne’s legal know-how! We really don’t want to have to say we told you so…

Copyright Law

INTRODUCTION

Copyright law in the United States is based on the Copyright Act of 1976, a federal statute that went into effect on January 1, 1978.  We’ll refer to this statute throughout the book as the Copyright Act.  The Copyright Act (Title 17 of the United States Code) is available online in Adobe Acrobat PDF format at http://www.loc.gov/copyright/title17. The United States Copyright Office, part of the Library of Congress, handles copyright registrations (discussed later in this section) and provides information on copyright law on its Web site, www.loc.gov.

States cannot enact their own laws to protect the same rights as the rights provided by the Copyright Act. 17 USC § 301. For example, a state cannot pass a law to extend copyright protection on works in the state beyond the term of protection given by the Copyright Act.  State “copyright” laws exist, but they are limited to works that cannot be protected under federal copyright law.   (Requirements for federal protection are discussed in the “Standards” section below.)

Copyright law is important for Internet users for three reasons:

• Much of the material that is on the Internet is protected by copyright, making copyright law a concern for those wishing to use material they find on the Internet.
• The types of pre-existing material used for Web site content — text, graphics, photographs, and  music — are copyrightable, and much of this material is protected by copyright.   Web site owners and developers and Web product designers and publishers must avoid infringing copyrights owned by others.
• Copyright protection is available for Web sites and new Web content.

TYPES OF WORKS PROTECTED BY COPYRIGHT

Copyright law protects “works of authorship.” 17 USC § 102(a). The Copyright Act states that works of authorship include the following types of works:

• Literary works.  Novels, fictional characters, nonfiction prose, poetry, newspaper articles and newspapers, magazine articles and magazines, computer software, software documentation and manuals, training manuals, manuals, catalogs, brochures, ads (text), and compilations such as business directories.
• Musical works.  Songs, advertising jingles, and instrumentals.
• Dramatic works.  Plays, operas, and skits.
• Pantomimes and choreographic works.  Ballets, modern dance, jazz dance, and mime works.
• Pictorial, graphic, and sculptural works.  Photographs, posters, maps, paintings, drawings, graphic art, display ads, cartoon strips and cartoon characters, stuffed animals, statues, paintings, and works of fine art.
• Motion pictures and other audiovisual works.  Movies, documentaries, travelogues, training films and videos, television shows, television ads, and interactive multimedia works.
• Sound recordings.  Recordings of music, sounds, or words.
• Architectural works.  Building designs, whether in the form of architectural plans, drawings, or the constructed building itself.

STANDARDS

To receive copyright protection, a work must be “original” and must be “fixed” in a tangible medium of expression. 17 USC § 102(a). Certain types of works are not copyrightable.

Originality

The originality requirement is not stringent:  A work is original in the copyright sense if it owes its origin to the author and was not copied from some preexisting work.  A work can be original without being novel or unique.

Example: John’s book, Designing Web Sites, is original in the copyright sense so long as John did not create his book by copying existing material-even if it’s the millionth book to be written on the subject.

Only minimal creativity is required to meet the originality requirement.  No artistic merit or beauty is required.

Prior Widespread Use

While most works make the grade on the originality requirement — because they possess some creative spark, no matter how obvious — a phrase or slogan that has been in widespread use may lack the originality necessary for copyrightability.  A federal appeals court held that a music publishing company could not claim copyright in the phrase, “You’ve got to stand for something, or you’ll fall for anything,” because the phrase lacked originality.  Acuff-Rose Music Inc. v. Jostens Inc., 155  F3d 140 (2d Cir 1998).  Short phrases rarely meet the originality requirement and are usually not copyrightable.  However, they may qualify for trademark protection.

A work can incorporate preexisting material and still be original.  When preexisting material is incorporated into a new work, the copyright on the new work covers only the original material contributed by the author.

Example: Web Developer used preexisting photographs and graphics (with the permission of the copyright owners) in a Web design project.  The Web site as a whole owes its origin to Developer, but the photographs and graphics do not.  Web Developer’s copyright on the Web site does not cover the photographs, just the material created by Developer.

Facts owe their origin to no one and so are not original.  In the United States, a compilation of facts (a work formed by collecting and assembling data) is protected by copyright only to the extent of the author’s originality in the selection, coordination, and arrangement of the facts.

Example: Ralph created a neighborhood phone directory for his neighborhood by going door-to-door and acquiring his neighbors’ names and phone numbers.  The directory’s facts (names and phone numbers) are not original.  Ralph’s selection of facts was not original (he “selected” every household in the neighborhood).  His coordination and arrangement of facts (alphabetical order by last name) is routine rather than original.  The directory is not protected by copyright.

Selection and Arrangement

In the case Urantia Foundation v. Maaherra, the court had to decide whether a book believed by both parties to be the words of celestial beings was copyrightable.  The foundation claimed copyright ownership.  The defendant, who had distributed a computer disk version of the book without the permission of the foundation, maintained that the book was not copyrightable because no human creativity was involved in creating the book.  The court held that even if the book’s content originated with a celestial being, there had been sufficient human selection and arrangement of material to satisfy copyright law’s “originality” requirement. 114  F3d 955  (9th Cir 1997).

Fixation

According to Section 101 of the Copyright Act, a work is “fixed” when it is made “sufficiently permanent or stable to permit it to be perceived, reproduced, or otherwise communicated for a period of more than transitory duration.”  It makes no difference what the form, manner, or medium is.  An author can “fix” words, for example, by writing them down, typing them on an old-fashioned typewriter, dictating them into a tape recorder, or entering them into a computer.  A live television broadcast is “fixed” if it is recorded simultaneously with the transmission.

Uncopyrightable Works

Works prepared by federal government officers and employees as part of their official duties are not protected by copyright. 17 USC § 105. Consequently, federal statutes (the Copyright Act, for example) and regulations are not protected by copyright.  This rule does not apply to works created by state government officers and employees.

Titles of works are not copyrightable.  However, titles may be protectible under trademark law.

The design of a useful article is protected by copyright only if, and to the extent that, the design “incorporates pictorial, graphic, or sculptural features that can be identified separately from, and are capable of existing independently of, the utilitarian aspects of the article.” 17 USC § 101 (definition of “pictorial, graphic, and sculptural works”).  For example, while a standard belt buckle design is not protected, a three-dimensional belt-buckle design with a dolphin shape qualifies for limited protection.

Uncopyrightable works and works for which copyright protection has ended are referred to as “public domain” works.

PROCEDURE FOR GETTING PROTECTION

Copyright protection arises automatically when an original work of authorship is fixed in a tangible medium of expression. 17 USC § 102.  Registration with the Copyright Office is optional (but you have to register before you file an infringement suit, if you are a United States citizen or corporation).

The use of copyright notice is optional for works distributed after March 1, 1989.  Copyright notice can take any of these three forms:

• © followed by a date and name.
• “Copyright”  followed by a date and name.
• “Copr.” followed by a date and name.

THE EXCLUSIVE RIGHTS

According to section 106 of the Copyright Act, a copyright owner has five exclusive rights in the copyrighted work:

• Reproduction Right. The reproduction right is the right to copy, duplicate, transcribe, or imitate the work in fixed form.   Scanning a copyrighted work for use on a Web site is an exercise of the copyright owner’s reproduction right.
• Modification Right. The modification right (also known as the derivative works right) is the right to modify the work to create a new work.  A new work that is based on a preexisting work is known as a “derivative work.”  Altering a photograph is an exercise of the modification right, as is creating an interactive version of a novel or creating a sequel to a computer game or motion picture.
• Distribution Right. The distribution right is the right to distribute copies of the work to the public by sale, rental, lease, or lending.
• Public Performance Right. The public performance right is the right to recite, play, dance, act, or show the work at a public place or to transmit it to the public. In the case of a motion picture or other audiovisual work, showing the work’s images in sequence is considered “performance.”  Showing scenes from a copyrighted motion picture in sequence on the Web is an exercise of the public performance right, as is the use of a copyrighted musical composition on the Web.
• Public Display Right. The public display right is the right to show a copy of the work directly or by means of a film, slide, or television image at a public place or to transmit it to the public.  In the case of a motion picture or other audiovisual work, showing the work’s images out of sequence is considered “display.”  Posting copyrighted material on the Web is an exercise of the public display right.

INFRINGEMENT

Anyone who violates any of the exclusive rights of a copyright owner is an infringer.

Example: John scanned Photographer’s copyrighted photograph, altered the image by using digital editing software, and used the altered version of the photograph on  an e-commerce site.  If John used the photograph without Photographer’s permission, John infringed Photographer’s copyright by violating the reproduction right, the modification right, and the public display right.

A copyright owner can recover actual or, in some cases, statutory damages from an infringer.  The federal district courts have the power to issue injunctions (orders) to prevent or restrain copyright infringement and to order the impoundment and destruction of infringing copies.

There are two essential elements to an infringement case:  (a) that the defendant copied from the plaintiff’s copyrighted work; and (b) that the copyright was improper appropriation.  Copying generally is established by showing that the defendant had access to the plaintiff’s work and that the defendant’s work is substantially similar to the plaintiff’s work.

Most copyright infringement cases are civil cases.  However, copyright infringement also can be a criminal offense.   According to Section 506 of the Copyright Act, two types of willful copyright infringement are criminal offenses:

• Willful infringement for purposes of commercial advantage or private financial gain.
• Willful infringement by reproducing or distributing copies or phonorecords of copyrighted works having a total retail value of more than $1000 in a 180-day period.

Barter Boards

David LaMacchia, an MIT student, invited users to post commercial software on his bulletin board for exchange with other users.  LaMacchia made no money from the exchanges.  He was arrested, but the court dismissed the suit because the criminal copyright law in effect at the time of the prosecution applied only to willful infringement for commercial motive or private gain.   Congress then amended the law, adding the second violation category discussed in the paragraph immediately above.  Prosecutors can use the provision to shut down barter boards through which pirated copies of software and computer games are traded.

DURATION OF THE RIGHTS

The duration of copyright law is very complicated because it depends on when the work was created, when the work was “published” (distribution of copies to the general public), the author of the work and, in some cases, the type of work. However, works created under the Copyright Act of 1976, the copyright term for works created by individuals is the life of the author plus seventy years. 17 USC § 302(a).

The copyright term for “works made for hire” is ninety-five years from the date of first “publication” or 120 years from the date of creation, whichever expires first. 17 USC § 302(c).  Works made for hire are works created by employees for employers and certain types of specially commissioned works.

LIMITATIONS ON THE EXCLUSIVE RIGHTS

The copyright owner’s exclusive rights are subject to a number of exceptions and limitations that give others the right to make limited use of a copyrighted work.  Major exceptions and limitations are outlined in this section.

Ideas

Copyright protects only against the unauthorized taking of a protected work’s “expression.”  It does not extend to the work’s ideas, procedures, processes, systems, methods of operation, concepts, principles, or discoveries.

Facts

A work’s facts are not protected by copyright, even if the author spent large amounts of time, effort, and money discovering those facts. In the United States, copyright protects originality, not effort or “sweat of the brow.”

Extracting Facts from a Web Site

In Ticketmaster Corp. v. Tickets.com, Inc., the court held that extracting facts from a Web site is not copyright infringement.  “This falls in the same category of taking historical facts from a work of reference and printing them in a different expression,” the court stated.   54 USPQ2d 1344  (CD Cal 2000).  The court also held that using facts from a Web site is neither an unfair business practice nor unjust enrichment.

Independent Creation

A copyright owner has no recourse against another person who, working independently, creates an exact duplicate of the copyrighted work.  The independent creation of a similar work or even an exact duplicate does not violate any of the copyright owner’s exclusive rights.

Fair Use

The “fair use” of a copyrighted work, including use for purposes such as criticism, comment, news reporting, teaching, scholarship, or research, is not an infringement of copyright.  Copyright owners are, by law, deemed to consent to fair use of their works by others.

The Copyright Act does not define fair use.  Instead, whether a use is fair use is determined by balancing these factors:

• The purpose and character of the use.
• The nature of the copyrighted work.
• The amount and substantiality of the portion used in relation to the copyrighted work as a whole.
• The effect of the use on the potential market for, or value of, the copyrighted work.

INTERNATIONAL PROTECTION

U.S. authors automatically receive copyright protection in all countries that are parties to the Berne Convention for the Protection of Literary and Artistic Works, or parties to the Universal Copyright Convention (UCC).  Most countries belong to at least one of these conventions.  Members of the two international copyright conventions have agreed to give nationals of member countries the same level of copyright protection they give their own nationals.

Example: Publisher has discovered that bootleg copies of one of its software are being sold in England.  Because the United Kingdom is a member of the Berne Convention and the UCC, Publisher’s work is automatically protected by copyright in England.  When Publisher files a copyright infringement action in England against the bootlegger, Publisher will be given the same rights that an English copyright owner would be given.

The copyright laws (and other intellectual property laws) of a number of countries are posted at www.wipo.int/clea.

Works of foreign authors who are nationals of Berne or UCC-member countries automatically receive copyright protection in the U.S., as do works first published in a Berne Convention or UCC country.  Unpublished works are subject to copyright protection in the U.S. without regard to the nationality or domicile of the author.

2007 was the one of the most active years for legal developments in the history of free and open source (“FOSS”), and 2008 saw a continuation of important legal developments for FOSS. So without further adieu, here’s our list of the top ten FOSS legal developments in 2008.

1. First Major Appellate Decision For a FOSS License. Last year, the District Court in San Francisco in Jacobsen v. Katzner decided the first case under US law interpreting an open source license. That decision had the potential to significantly undercut the ability of FOSS licensors to enforce their license. However in August, the Court of Appeals for the Federal Circuit (“CAFC”) overturned the District Court decision and strongly supported the right of FOSS licensors to obtain copyright remedies for breach of FOSS licenses: such remedies include injunctive relief (an order by the court to the licensee to obey the license) and statutory damages of up to $150,000 for each infringed work. (Read more about the victory for open source in the Jacobsen Decision.)

2. Final End Of the SCO Attack On Linux. Although SCO’s lawsuits against IBM and others were largely resolved by the decision last year against SCO in its litigation with Novell over ownership of the copyrights to UNIX, several important issues remained. This year the court confirmed its ruling against SCO and awarded Novell $2,547,817 from the amount paid to SCO by Sun. The decision is interesting because the court came to different conclusions about whether licenses to SVRX software in SCO’s agreements with Sun and Microsoft were “incidental.” This term was important because SCO did not owe royalties to Novell if the license of the SVRX software (the royalties from which would have to be paid to Novell) was “incidental” to the licensing of Unixware. This case demonstrates the importance of careful drafting in intellectual property licenses.

3. First Settlement of Patent Infringement Litigation For an Open Source Community. Red Hat’s settlement of the Firestar litigation demonstrated the need to carefully consider the nature of open source communities on the settlement of patent litigation. Unlike traditional patent settlements, Red Hat ensured that the settlement covered other members of the community including upstream licensors of products incorporated in the Red Hat product and downstream licensees. The settlement of patent litigation for open source products needs to deal with the complexity of many open source products and communities. This reality makes settlement of patent litigation much more complicated for open source products than for traditional software. (Read more about the patent litigation settlement agreement between Red Hat and Firestar.)

4. Major Litigation on GPL. In December, the Software Freedom Law Center (SFLC) filed suit against Cisco Systems, Inc. alleging that Cisco had violated the GPLv2 and LGPLv2 in its distribution of certain software whose copyright is owned by the Free Software Foundation (FSF), including GNU C Library, GNU Coreutils, GNU Readline, GNU Parted, GNU Wget, GNU Compiler Collection, GNU Binutils, and GNU Debugger. The complaint asserts that Cisco distributed the programs without providing complete and corresponding source code as required by the GPLv2 and LGPLv2. FSF requested that an injunction be issued against Cisco and that damages and litigation costs be awarded to the FSF. The SFLC states that they filed the lawsuit reluctantly and had negotiated with Cisco for two years on the issues. The suit raises the question of whether the SFLC is becoming more willing to file suits to enforce the GPL. For example, the SFLC has been vigorously enforcing the rights under the GPLv2 for Busybox.

5. Enforcement of GPL For Busybox Continues. The Software Freedom Law Center has continued to enforce the GPLv2 on behalf of the owners of the copyright in Busybox software. Although most of these cases apparently are settled without litigation, SLFC filed suit three suits this year: Bell Products, Super Micro Computer, Inc. and Extreme Networks, Inc.

6. Open Source Litigation From Other Countries. Although litigation about open source licenses has generally been confined to Germany and the United States, one case that settled this year about the enforceability of the GPL was in Isreal. The plaintiff, Maryanovsky, claimed that the IchessU software violated the terms of the GPL because IchessU software did not include credit for him and was released under a proprietary end-user license agreement. He also suggested that an audio-visual module developed by IchessU was a derivative work, since it could not compile without his code. The case was filed in 2006, but was settled confidentially this year.

7. SFLC Guide to Legal Issues and GPL Compliance. The increasing ubiquity of open source software as well as the litigation to enforce the GPL and other open source licenses has made understanding the obligations imposed by the GPL very important for a wide range of companies. The SFLC has been the leader in developing and enforcing the GPL. They shared their views of the legal issues in open source and the obligations imposed by the GPL in two publications: A Legal Issues Primer for Open Source and Free Software Projects and A Practical Guide for GPL Compliance. The Primer and Guide are quite useful. Although licensing attorneys may not agree with all of their conclusions (the nature of the law and the lack of court decisions make this statement true about most open source license issues), the Primer and the Guide should be read by any lawyer working with open source legal issues.

8. American Law Institute Publishes Draft of Principles of the Law of Software Contracts with Significant Problems for Open Source Software. The ALI is a very prestigious and influential non-profit institution whose purpose is “to promote the clarification and simplification of the law and its better adaptation to social needs.” The Principles state that the “best practices” in software licensing would be to include two new “non-disclaimable” warranties which would result in significant problems for the open source community. The warranties are the (1) warranty of non-infringement of intellectual property rights (such as patents or copyrights) if the contributor knew or should have known of the infringement and the contributor holds himself out by occupation as having knowledge or skill peculiar to the software and (2) warranty of no hidden material defects. Current law (and all OSI-approved licenses) permit the contributor (and any licensor) of open source software to completely disclaim all warranties—i.e., promises about performance or non infringement which could result in liability to a contributor or a licensor (so called AS IS provisions). If accepted by the courts, these recommendations would have a significantly negative effect on open source licensors. (Read more about how the ALI’s legal recommendations could create new liabilities for open source licensors.)

9. Publication of Version 1.3 of GNU Free Documentation License. The new version permits the use of the Free Documentation License (FDL) with the Creative Commons Attribution ShareAlike License (CCASL). The draft is an interim one and SFLC is working on FDL 2.0. However, the Wikimedia Foundation requested the FDL be made compatible with the CCASL. This change recognizes the need for the two major branches of “free” content licenses to be compatible just as the GPLv3 was modified to be compatible with the Apache license.

10. Project Governance Concerns Become More Important. The recent fork in the Twiki community (an open source wiki project) demonstrates the need for a community to think about how it will manage itself. As open source projects have greater economic value, the potential for the community to split over decisions regarding the direction of the project (in particular, commercialization) will increase. Communities need to develop processes to discuss these issues and come to a conclusion that is supported by the community. Although forks are always an option for open source projects, they generally create significant loss of momentum and can doom a project if it has competitors offering similar functionality. In the case of Twiki, the ownership of the Twiki trademark by Peter Theony, the project leader, was critical to the control of the project.

Let there be no doubt about it: the open source model is changing the way people develop, acquire, implement, and maintain software. In 2007, Gartner declared open source software “the biggest disruptor the software industry [Gartner] has ever seen and [Gartner] postulated it will eventually result in cheaper software and new business models.” They stated that open source products accounted for a 13 percent share of the $92.7 billion software market in 2006, but should account for 27 percent of the market in 2011 when revenue is expected to be $169.2 billion, according to Gartner research.

Today, all developers, entrepreneurs, and users of software need to understand open source, not least because, by dramatically speeding up development, improving quality, and reducing the cost of marketing and sales, it represents a paradigm shift in the development and distribution of software. The use of open source software is becoming ubiquitous: for example, the Apache web server is used by more than 60 percent of web servers and the Linux operating system is used on a wide variety of products ranging from digital televisions to computers.

Although the press has paid much attention to “pure” open source companies, such as JBoss or Monta Vista, many companies are adopting “hybrid” business models which include both open source and proprietary software. In 2007, major proprietary software companies announced the “open sourcing” of some of their products: Adobe “open sourced” its Flex tool for Flash programming and Yahoo “open sourced” its Flickr upload tool.  For software developers, open source software provides a significant opportunity to speed development and enhance functionality. Therefore, virtually all software companies that don’t closely manage their development and IT departments may have open source software in their products. The open source business model, even more that proprietary software business model, requires careful attention to legal issues because many such issues remain open.

Although some companies still openly express skepticism about the viability of the open source model, open source products are used by such major companies as IBM, HP, Dell, DaimlerChrysler, and E*TRADE. Furthermore, open source companies have become quite popular in the venture capital community. Major venture capital firms such as Kleiner Perkins, NEA, Draper Fisher & Jurvetson, and Walden International have invested in one or more open source companies. In 2005, venture capitalists invested over $120 million (some reports claim as much as $400 million) in open source companies. Although some investors have expressed concern about the availability of “exits” for open source companies, these concerns have been laid to rest in the last year including Yahoo’s acquisition of Zimbra, Oracle’s acquisition of Sleepycat, IBM’s acquisition of Gluecode, Citrix’s acquisition of Xensource, Red Hat’s acquisition of JBoss and Sun’s acquisition of MySQL. Sun Microsystems has shifted to an open source business model, making both its Solaris operating system and Java software available under open source licenses.

However, the uncontrolled use of open source software can lead to serious problems for companies. For example, IBM reduced the purchase price for Think Dynamics by 30 percent due to uncertainties arising from the use of open source. The use of open source software needs to be managed carefully. One reason for this is the many legal uncertainties that surround its use. None of the more than 50 licenses approved by the Open Source Initiative as being “open source” have been interpreted by United States courts; thus, many issues regarding use of open source remain uncertain. For example, the General Public License Version 2 (GPLv2), the most commonly used open source license, extends to all “derivative works” of the original program. A “derivative work” is a term with special meaning in copyright law, but its definition for software varies in different courts in the United States. The definition of derivative work becomes very important because the GPLv2 requires that if a company distributes GPLv2 licensed software, it must include the source code (as well as the object code) of all software, as well as the “derivative works” of such software. The Free Software Foundation has defined derivative works to include “dynamically linked” software. The GPLv2 further requires that all licensees be given the right to modify and redistribute such software without charge. Another major concern for many companies is that the GPLv2 terminates immediately upon any breach of its terms rather than the more common approach of providing a thirty day (or longer) period to “cure” any such breach. This immediate termination is particularly troubling because of the many uncertainties in the GPLv2. The new version, General Public License Version 3 (“GPLv3″), has corrected many of these problems, for example GPLv3 includes a “cure” period.

Another way to look at this issue is to note that profitable software development requires close management of open source software. For example, after Cisco bought Linksys for $500 million, the Free Software Foundation approached Cisco claiming that elements of Linksys products should be made available in source code form because open source code licensed under the GPLv2 was included in the product. Neither Cisco nor Linksys were aware of this at the time of acquisition. The Free Software Foundation, the developer and enforcer of the GPLv2, initially insisted that Cisco make the entire source code of the Linksys operating system available under the GPLv2. Such a result would have dramatically reduced the value of Linksys because the source code of the Linksys products would have been available at no charge to any licensee. However, Cisco and the Free Software Foundation came to an agreement that the open source software was limited to a single driver, and Cisco agreed to distribute that driver under the GPLv2. Recently, the Free Software Foundation has filed three lawsuits to enforce the GPLv2, including a suit against Verizon.

Both software developers and software users should avoid such problems by adopting an open source use policy. An open source use policy should address the following issues:

• Use of open source components in products for third parties

• Use of open source for internal purposes

• Approved usage models

• Implementation of policy by industry experts or outsourced teams

• Permitted/forbidden open source licenses

• Rules for contribution by employees to open source projects

• Use of commercial products (Black Duck/Palmida/HP FOSSology) to audit use of open source code

These policies may range from simple ones for startups to elaborate 60-page documents for large companies. A company’s open source policy is frequently implemented by committees which include technical, business development, and legal representatives who make the final determinations. One large company reviewed 1,500 potential uses of open source products in an 18-month period (they approved all but 10 uses).

As noted above, many companies who do not consider themselves “open source” are nevertheless incorporating elements of open source distribution and development into their core business model. The business model for software products can range from the traditional “services only” model, such as Collabnet, to “commercial” open source products such as SugarCRM. A common commercial open source model provides for distribution of the product under an open source license as well as distribution of a version under traditional commercial terms, including a performance warranty and infringement indemnity. The open source business model is very powerful because it enables a company to leverage its open source “community” of developers to review the source code and discover and correct bugs much more rapidly, in addition to the community contributing to new code which provides additional functionality. In addition, the open source model allows customers to “try before you buy,” which dramatically decreases the company’s costs for sales and sales personnel. Many open source companies have thousands or tens of thousands of downloads each month.

The relationship between a company and the open source community is unique to the business model, and it is essential. One radical difference between the open source business model and the proprietary business model is that the open source model requires that the software code be accessible to individual programmers: it should be “lightly” coupled or integrated so the members of the community can focus on a part of the product and not be forced to use large amounts of software with little value to them. Software programs that are tightly coupled or “non-modular” in design are not likely to be accepted by the open source community.

In addition, the open source community is very sensitive to companies that attempt to claim “open source” status without “giving back to the community.” A number of companies have claimed to be open source but they don’t make their source code available and/or don’t use an Open Source Initiative approved license: these companies have been uniformly unsuccessful in developing communities or have lost any community support. When a company loses a good relationship with the community, the result is sparse contribution by the community. Without community support, companies will lose the leverage that makes the open source business model so powerful.

In the worst case, failure to properly manage open source can result in the “forking” of code into two separate incompatible products. Forking is a problem particular to the open source business model. Forking is possible only because of the availability of source code, and it can destroy a product. As an illustration the content management project Mambo — founded by a commercial company, Miro — split into two groups, Mambo and Joomla, because Miro tried to exert too much control over the community.

The adoption of an open source business model also requires a different approach to an intellectual property strategy. Providing the software under an open source license means the trade secrets in the product will be lost and copyright will be much less important because of the scope of open source licenses. Thus, open source companies must depend much more on trademark and patent rights to maximize their value.

Even those software companies that do not incorporate components of open source into their business model need to understand these issues because both customers and potential acquirers are becoming much more sensitive to the use of open source software. Many large Silicon Valley companies have a specific provision in their development agreements which requires the description of, and advance approval of, all use of open source software. In fact, in one case, the provision relating to open source software has the title “Infectious Software.” Many sophisticated acquirers now have a separate “due diligence process” for open source software. The results of such due diligence regarding open source software can result in a reduction in purchase price or even termination of the transaction. Since acquisitions are very intense transactions, the worst result for a software company is to discover the use of open source software during the due diligence: when that happens, the solution or remediation must be found quickly, which limits options. The best approach is to adopt an appropriate open source use policy and to meticulously use commercial products to audit the implementation of the policy.

Companies that are users of software must also be careful about their use of open source software. The use can lead to problems if “blended” with proprietary software: as stated earlier, the breach of many open source licenses results in automatic termination without the ability to “cure” the breach. And many software “users” also distribute software to their customers, thus triggering the obligations regarding distribution under traditional open source licenses. Thus, many large software users also have open source use policies.

Open source provides many great opportunities, but it requires careful research, understanding and thoughtful management.