The IT / Digital Legal Companion: A Comprehensive Business Guide to Software, IT, Internet, Media and IP Law

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The IT / Digital Legal Companion: A Comprehensive Business Guide to Software, Internet and IP Law

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THE AUTHORS AND PUBLISHER MAKE NO EXPRESS OR IMPLIED WARRANTY OF ANY KIND and assume no responsibility for errors or omissions. No liability is assumed for incidental or consequential damages in connection with or arising out of the use of the information or digital fi les contained or supplied with or for use with this book. Changes occur in legal matters and in the interpretation of law. Some legal matters are subject to opinion and judgment rather than defi nite rules. If you require legal, accounting, or other expert assistance, you should consult a professional advisor.

Knowledge is power.

—Sir Francis Bacon, philosopher

Knowledge shared is power multiplied.

—Robert Noyce, co-inventor of the semiconductor, co-founder of Intel

Acknowledgment by Gene Landy

This work is founded on the insights and experience of many.

Most important is the contribution of Amy Mastrobattista, who edited the text, contributed forms, and provided many suggestions for improvements. You can find Amy’s touch throughout the book.

I also gratefully acknowledge the help of persons who contributed ideas and insight or kindly reviewed the text, including:

Mike Dornbrook, Executive Vice President, Harmonix Music Systems, Inc.

Peter Duflo, President and CEO, Strategic Ventures, LLC

Andrew Feinberg, General Counsel, Brightcove, Inc.

Jim Geisman, CEO, Marketshare, Inc.

George Grey, CEO & Founder, Mobicious Inc.

Beth A. Marcus, Ph.D., CEO and Director, Zeemote, Inc.

David Marglin, San Francisco attorney; formerly General Counsel, Gracenote, Inc.

Charles Nesson, Professor, Harvard Law School and Founder and Co-Director of the Berkman Center for Internet & Society

Jeffrey Steefel, Franchise Executive Producer, The Lord of the Rings Online, Turbine, Inc.

G. Venkatesh, Chief Technology Officer, Sasken Communication Technologies Ltd.

Aaron von Staats, Senior Vice President and General Counsel, Parametric Technology Corporation

Anyone who wants to reaffirm their belief in the essential goodness of human nature should write a book. Of course, any inadequacy in this work is solely my own responsibility.

I am indebted to Chris Williams and Amy Pedersen and all the other good people at Elsevier who helped with this book.

I am also grateful to my assistant Cindy Scolamiero and the others at my law firm that suffered through proofing of the text.

In addition to these individuals, I thank the countless innovators and risk takers in digital technology companies around the world. Their creativity and effort advances and continually renews the world that this book describes.

Finally, I owe the greatest debt to my wife Sylvia who put up with me while I worked on this book.

A Note from the Authors

We would like to hear from you about the ways in which this book has helped you and about ways that it could be improved.

We are always interested in new technologies, innovative legal techniques, new legal issues, and new problems to solve. If you have a need for business law services that require a sophisticated understanding of digital technology business and legal issues, please let us know.

Feel free to write us at our firm:

Gene K. Landy

Chair, Technology Business Group

e-mail: gkl@riw.com

or

Amy J. Mastrobattista e-mail: ajm@riw.com

Ruberto, Israel & Weiner, P.C.

100 North Washington Street

Boston

Massachusetts 02114

USA

www.riw.com

About the Authors

Gene K. Landy is a shareholder of Ruberto, Israel & Weiner, P.C., Boston, Massachusetts, USA and Chair of the firm’s Technology Business Group. His practice has a concentration on technology companies and digital technology transactions. He is a graduate of the Massachusetts Institute of Technology (SB 1969) and Harvard Law School (JD 1975 cum laude).

Mr. Landy handles domestic and international transactions for high technology businesses, from start-ups to publicly traded companies. He represents companies in software, integrated circuits, telecommunications technology, IT hardware, Internet applications, e-commerce, computer games, and other technology fields.

His work includes licensing, intellectual property, technology transfer, business sales and acquisitions, and investments. He has served non-US technology firms that operate in the United States, including companies in India, Australia, Ireland, England, Switzerland, and Scotland. Mr. Landy also works with investors in technology opportunities.

In addition to this book, Mr. Landy is the author of an earlier lay person’s guide to software law entitled The Software Developer’s and Marketer’s Legal Companion, published by Addison-Wesley in 1993, as well as a number of articles in the field of information technology law published in law journals and other publications.

Mr. Landy frequently lectures on legal topics and has spoken at e-Commerce Expo, Lotusphere, the Computer Games Developer Conference, and other industry trade shows, as well as the Massachusetts Technology Leadership Council, Massachusetts Continuing Legal Education, and the International Federation of Computer Law Associations. He has spoken at the invitation of the Comsware Communications Technology Conference in Bangalore, India and the Irish Software Association in Dublin, Ireland. He has been named a Massachusetts Super Lawyer in 2004 to 2007.

Amy J. Mastrobattista is a shareholder at Ruberto, Israel & Weiner, P.C. and a member of the Corporate Department and Technology Business Group. She is a graduate of Smith College (A.B. 1988 magna cum laude and Phi Beta Kappa) and New York University School of Law (JD 1991).

Ms. Mastrobattista has extensive experience structuring financings, including seed rounds, angel investments, and venture capital transactions. She has represented both emerging companies and investors. She is also very active in technology licensing for companies small and large.

Ms. Mastrobattista has successfully structured and negotiated the purchase and sale of numerous businesses. She was recognized as one of Boston’s Top 10 Lawyers in Women’s Business Boston reader’s poll, January 2006.

About the Authors’ Law Firm

SERVICES OF THE TECHNOLOGY BUSINESS GROUP

Focus on Technology and Business

Ruberto, Israel & Weiner is a Boston-based business law firm. Our Technology Business Group is focused on information technology, digital products and services, and high technology manufacturing.

We understand the interaction of intellectual property and technology in a global marketplace

We have sector-specific knowledge. We understand technologies, business practices, intellectual property assets, and transactions

We can execute sophisticated and complex technology sector deals

Technology Sectors that We Serve

Our firm has clients in many technology product and service fields. They include both US-based and non-US businesses. RIW represents emerging technology companies as well as established players expanding into new technologies. Specific industry segments served include:

Software including business products, infrastructure, financial software, Internet, open source and communications products

Consumer products, social applications, Web sites, and content, including Web and mobile media and games

IT services and consulting

Web businesses and software-as-a-service (SaaS)

Communications technology

Silicon products, including semiconductors, ASICs and MEMS

High tech materials and manufacturing companies

Business Services for Technology Companies

Our services for technology companies include:

Company Formation

Incorporation, tax strategy, capital structure, shareholder agreements

Formation and operation of US-based subsidiaries of non-US companies

Financing Transactions

Seed capital, angel and venture financing, commercial loans, private placements, and securities offerings

Employment

Employment law generally, employee agreements, option plans and other equity compensation plans

Trademarks and Copyrights

US and worldwide trademark registration

Management of global trademark portfolios

Copyright registration

Technology M&A and Strategic Licensing Transactions

RIW handles technology merger and acquisition transactions. We also can carry out strategic licensing deals, including acquiring or granting key licenses for product line expansion, patent portfolios, or enabling technologies.

Strategic Guidance

We provide advice and guidance on legal aspects of:

Technology and intellectual property strategies

Distribution strategies

Branding strategies

Information Technology Transactions

We handle domestic and international transactions for technology businesses ranging from start-ups to publicly-traded companies that are essential for technology companies, such as:

Licensing and technology transfer

Customer, reseller, VAR and OEM agreements

Development agreements

Technology acquisitions and transfers

Outsourcing agreements

Internet and mobile distribution deals

Web agreements and online documentation

Patent, copyright and trademark licensing

Open source licensing

International distribution arrangements

Strategic alliances and joint ventures

Multimedia, entertainment and game deals

Content acquisition and licensing

Litigation

We provide civil litigation services, including trade secret matters, copyright and trademark infringement, contract disputes, and non-competition and confidentiality agreements

Global Affiliations

Through our network of affiliations across the globe, we partner with other law firms as needed for global distribution agreements, trademarks, partnerships and other international matters.

Contact

Contact us to discuss your technology business needs and strategies. Please feel free to contact Gene Landy, Technology Business Group Chair, .gkl@riw.com

Ruberto, Israel & Weiner, P.C. 100 North Washington Street, Boston, MA

02114 USA

(617) 742-4200 Phone / (617) 742-2355 Fax

www.riw.com

Form Downloading Instructions

About the Forms in The IT/Digital Legal Companion

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Use of Forms

Please note that the forms are subject to copyright and are provided for your own personal or business use. You should not use them for distribution or sale.

Table of Contents

Cover

Title Page

Copyright

Dedication

Acknowledgment by Gene Landy

A Note from the Authors

About the Authors

About the Authors’ Law Firm

Form Downloading Instructions

Chapter 1: Introduction: Using this Book to Build Value

Your Need to Know Digital Business Law

Who is this Book For?

Organization of this Book

Approach of this Book

Understanding and Using Intellectual Property

Doing Deals

Understanding and Dealing with Legal Risk Factors

Global Perspective

Focusing on Your End Game From the Beginning

How to Use this Book

Using the Legal Forms

Limits to the Contents of this Book

Legal Counsel

Chapter 2: Digital Copyright Basics

Some History

Copyright Counts!

In this Chapter

The Nature of A Copyright

Public Domain

Infringement

Derivative Works

Works Made for Hire

Fair Use

The First Sale Rule

Thin Copyright Protection for Computer Databases

Copy Protection Technology and Anticircumvention Law

Registering your Copyright

Advantages of Copyright Registration

Criminal Copyright Violations

More on Copyright Law

Conclusion

Chapter 3: Copyrights on the Internet, for Software Protection and Around the World

In this Chapter

Topic One: Copyright and the Internet

Topic Two: Copyright and Software Protection

Topic Three: International Copyright Protection

Chapter 4: Trademarks and Domain Names

In this Chapter

Trademark Registration Process

Do-It-Yourself Registration of us Trademarks

Essential Actions to Protect your Trademarks

Taking Trademarks Global

Exploiting Trademarks in Distribution, Licensing, and other Deals

Domain Names

Trademark Infringement Litigation

Conclusion

Chapter 5: Patents and Digital Technology Companies

In this Chapter

The Power and Use of Patents

Nature of United States Patents

Software Patents and Business Method Patents

The Patent Application Process

Inventing and Patent Strategically

Getting Serious about Patents

Your Strategy for Use of Patents

Patents in Business Deals

Patent Licensing Agreements

How Patents Can be used Against your Business

If You Receive A Cease-And-Desist Letter from A Patent Holder

Chapter 6: Trade Secrets and Non-Disclosure Agreements

In this Chapter

Basis of Trade Secret Law

Care and Protection of Trade Secrets

Non-Disclosure Agreements and Confidential Disclosure

Violations of Trade Secret Law

Dealing with Violations of Trade Secrets

Use of Counsel in Managing Trade Secrets

Chapter 7: Confi dentiality, Rights Transfer, and Non-Competition Agreements for Employees

In this Chapter

The Contents of Employee Agreements

Noncompetition and Nonsolicitation Provisions

Chapter 8: Introduction to Digital Product and Service Contracts

In this Chapter

First Topic: Contract Concepts

Conceptualizing the Contract

Second Topic: Contract Provisions

Third Topic: Contract Negotiations

The Role of Legal Counsel

Chapter 9: A Pragmatic Guide to Open Source

Introduction

In this Chapter

The Popularity of Open Source Software

Open Source Licenses

Conclusion

Chapter 10: IT Services—Development, Outsourcing, and Consulting

In this Chapter

The it Consulting Business Model

Development Deals

Process Overview

The Agreement

Structure of A Development Agreement

Development Planning

Conclusion

Chapter 11: Beta Test Agreements

In this Chapter

Variation in Beta Test Agreements

Marketing Uses of Beta Tests

Following Up on A Beta Test

Beta Test Plans

Two Forms of Beta Test Agreement

Chapter 12: Commercial End-User Agreements

In this Chapter

Business Setting for Software End-User Agreements

Bargaining Between Vendor and Customer

Common Issues in Negotiating End-User Agreements

Source Code Escrow Agreements

Note on Commercial Licensing Software to the Government

Accounting for License Revenue

Software Licensing and Sales Tax

Conclusion

Chapter 13: Software as a Service (SaaS)

In this Chapter

Saas Business Varieties

What Customers Like about Saas

Customer Concerns with the Saas Model

Advantages and Issues for Saas Vendors

Mixing Traditional Software Licensing and Saas

Saas and Security

More Mandates

Foreign Data Privacy Laws

Hot, Cold, and Warm Disaster Recovery Sites

Saas Agreements

Pricing in Saas Agreements

Saas Agreement Form

Chapter 14: Commercial Distribution—Part I

General Principles, Deal Types, Reseller Deals, and Legal Rules

Software Partnering and Channels

Reseller Agreements

Some Legal Issues in Distribution

Form Agreements in this Book

Chapter 15: Commercial Distribution—Part II

Embedded, Component, and other Distribution Deal Variations

In this Chapter

Form Agreements

Chapter 16: Clickwraps and Browsewraps

Uses of Electronic Contracting

Categories of Mass-Market Forms Contracts

Product Clickwrap Agreements

Chapter 17: Terms of Use for Web Sites and Online Applications

In this Chapter

About Web Terms of Use

Chapter 18: Privacy and Use of Personal Data

Use of the Internet to Obtain Personal Data

Overview of Us Law on Personal Data

Data Security Breach Notification Laws

Anti-Spyware Laws

Anti-Spam Provisions of Us Federal Law

Other Regulation of Personal Data Regulation

Privacy and the International Data Economy

Chapter 19: Digital Technology Standards—Opportunities, Risks, and Strategies

In this Chapter

Digital Technology Standards and the Modern World

Sources of Standards

Participating in A Consortium—Business Issues

Tension Between Patents and Standards

Staying Out of Trouble with Standards

Patent Pools

Forming your Own Consortium

Conclusion

Chapter 20: Content for Digital Media

In this Chapter

Forms for Content

Some Background: Content and Intellectual Property

Topic One: Practical Guidance in Clearing Content

Topic Two: User-Supplied Content

Topic Three: Just Taking Content

Conclusion

Chapter 21: Deals in the Web and Mobile Value Chains

In this Chapter

The Web and Mobile Communications Environment

Topic II: Digital Content Deals

Topic III: Hosting and other Services

About Widgets

Conclusion

Chapter 22: Video Games! Developing Games and Doing Deals

In this Chapter

The Game Industry

Publishing Agreements

Massively Multiplayer Online Games

Chapter 23: Going Global—Doing Business in World Markets

Background: Globalization of Information Technology

The Opportunity

In this Chapter

Getting into Global Markets

Foreign Distribution

Dispute Resolution Procedures

International Intellectual Property Protection

Dealing with Software Piracy

International Anti-Israel Boycott

Conclusion

Chapter 24: United States Export Controls

In this Chapter

Why Export Controls Matter

Multiple Regulators

Embargoed Nations and Denied Persons

The Regulation of Technology Exports by BIS

Conclusion

Chapter 25: Proactive Management of Your Legal Affairs

The Need for Control of Legal Affairs

Intellectual Property Protection Procedures

Information Protection and Control

Managing the Documentation of your Business

Periodic Legal Audits and Strategic Reviews

Conclusion

About These Forms

DMCA Web Site Copyright Policy

Royalty-Free Trademark License Agreement

Royalty Bearing Trademark License Agreement

Patent License Agreement

Mutual Non-Disclosure Agreement

Evaluation Agreement (Pro-Recipient)

Employee Agreement

Software Development Agreement

Software Consulting Agreement (Favors Consultant)

Software Consulting Agreement (Favors Customer)

Web Site Development Agreement

Web Hosting Agreement

Beta Test Agreement – Consumer Application

Beta Test Agreement – Business Application

Evaluation License Agreement

Commercial End User License Agreement

Source Code Escrow Agreement

SaaS Customer Agreement

Reseller Agreement

OEM Software Agreement

Software Bundling and Distribution Agreement

Retail Software Distribution Agreement

Sales Representative Agreement

EULA – Consumer Product

Clickwrap EULA — Commercial Product

Web Site Terms of Use

Content Guidelines

Weblog Rules

Privacy Policy

Release for Video, Images and Music

Right of Personality Release and Permission

Location Release

Mobile Content License Agreement

Media Publishing and Services Agreement

Affi liate Media Services Agreement

Video Game Publishing Agreement

International Distribution Agreement

Term Sheet (Non-Binding) for an International Joint Venture

INDEX

Introduction: Using this Book to Build Value

YOUR NEED TO KNOW DIGITAL BUSINESS LAW

To compete effectively in any digital business in a changing world, you need to understand how to use the law to advantage.

This book will empower you to:

Understand the interaction of law, business, and technology.

Exploit emerging technologies and intellectual property (IP) assets.

Negotiate better deals.

Build and reinforce positive relationships with other companies.

Leverage digital media.

Perceive and manage risk.

Benefit from Internet and mobile networks.

Act more decisively and confidently in legal matters.

WHO IS THIS BOOK FOR?

This book is written for anyone in the world of digital technology business, including:

Business owners, executives, and decision-makers.

Entrepreneurs.

Business development executives

Sales and product line managers.

Technology developers, consultants, and advisors.

Chief information officers who make important software and IT decisions.

In-house lawyers, contracting officers, and paralegals.

Anyone managing and protecting software or digital technology IP.

ORGANIZATION OF THIS BOOK

This book consists of 25 chapters. The subject matter includes:

Chapters 2-7: Intellectual Property in Digital Business—Copyrights, trademarks, domain names, patents, trade secrets, and nondisclosure agreements, explained with a focus on digital business, digital media, the Internet, and mobile networks.

Chapter 8: Digital Contract Fundamentals—The key principles and strategies in digital licensing and contracting.

Chapter 9: Open Source—A practical guide to open source licensing, including open source business models.

Chapter 10: Development and Consulting—A how-to guide for the deal-making process (including RFPs and agreements) for digital technology services, consulting, Web development, and outsourced development.

Chapters 11-15: Business IT and Software, including Licensing and Distribution—Beta test agreements, commercial end-user license agreements, distribution and reseller deals, partnering agreements, component distribution, OEM deals, and software-as-a-service agreements.

Chapters 16-17: Web and Internet Agreements—The law and practice of business and consumer clickwrap and browsewrap agreements, Web site terms of use, Weblog terms, and Web site rules of conduct.

Chapter 18: Privacy—The rules on privacy and acceptable use of personal data in the digital world, including privacy law, privacy policies, child protection issues, and trans-national issues.

Chapter 19: Standards—Legal strategies, opportunities, and risks in the system for setting new technical standards for software, digital products, and communications. How you can use this process to get ahead of the curve.

Chapter 20: Clearance of Content—An overview of getting licenses and clearance for use of media assets for Web and mobile consumer applications and games, including text, graphics, music, and video. Also the legal rules about user-contributed content, mashups, and spidering the Web.

Chapter 21: Web and Mobile Deals—Guidance for deals in technology licensing, providing services, and media distribution for the Internet and mobile networks.

Chapter 22: Video Game Deals—Doing deals in the video game sector, including IP, clearance issues, and publishing agreements. The chapter includes discussion of console, PC, mobile, and online games, including multi-player games.

Chapters 23 and 24: International Distribution—IP and deal issues for digital business in going global, distributing in world markets, international partnering and joint venturing, localization, setting up operations abroad, and protecting your rights in other nations, together with an overview of the US export controls.

Chapter 25: Legal Affairs Management—Practical measures to manage your legal affairs in order to execute legal strategies effectively and build value in your business.

Forms Appendix—38 sample forms agreements for deals and transactions addressed in this book.

APPROACH OF THIS BOOK

The book is based on three concepts:

First is that all legal issues are business issues—they have meaning only in their business context.

Second is that essential legal principles can be made comprehensible when explained in straightforward English.

Third is that once you understand basic concepts of IP and contracts, you will be ready to put to good use the more advanced deals and strategies discussed in this book.

UNDERSTANDING AND USING INTELLECTUAL PROPERTY

Digital technology companies gain power from their intellectual property space—the zone where their IP helps them be dominant, overcoming competition, gaining customers, and pricing at a premium.

This book introduces you to the IP rights that underlie all digital technology. This book will help your business to secure and expand its IP assets. It will help you fully understand what rights you have, can acquire, and can license, assign, or enforce.

The discussion in this book about IP includes digital technology and digital content issues of a networked world. For example, the discussion of copyrights includes anti-circumvention and peer-to-peer file sharing; the explanation of trademarks includes the trademarks on the Internet and domain names; and the discussion of patents includes a review of software and business method patents. There is also a discussion of IP in digital media. You can factor this information into your company’s IP strategy.

DOING DEALS

This book can help your company make better deals. Software and digital technology contracts span a huge range. They include consumer online or mobile transactions that are over in an instant and multiyear global relationships involving hundreds of millions of dollars of commerce. Agreements allocate valuable intellectual property. Contracts allow sharing of opportunities and transfer of risk. They are the means to getting paid.

Nothing combines, replicates, interfaces, embeds, or distributes like software and digital data. Technology deals can provide leverage and extend the distribution reach of small and large companies. Most digital technology companies license technology in from suppliers as well as licensing it out to customers and distributors, so every company needs to know how to function on both sides of the license equation. This book covers a variety of up-to-date contract types that are the tools of the trade for digital business.

There is no such thing as a perfect contract, but there are good deals and bad ones. This book explains the goals and key provisions of digital technology and content deals, as well as common traps and critical issues.

UNDERSTANDING AND DEALING WITH LEGAL RISK FACTORS

The information here can help you manage risk. Digital businesses have been sued by competitors, employees, contractors, licensors, licensees, and IP owners. Legal mistakes can result in bad relationships, wasted opportunities, lost IP, unprofitable deals, litigation, and lost business value.

No one can guarantee your business a risk-free existence, but the discussion here will help you recognize legal contingencies, make intelligent risk management decisions, and conduct smarter negotiations to reduce risk. We also discuss legal safe harbors that can protect against liabilities.

GLOBAL PERSPECTIVE

Digital technology is global. You may need to provide technology products or services locally or in Russia. Your technology may come from Silicon Valley or from India and China. While the majority of the content in this book is about US law, there is substantial discussion on dealings in non-US markets and on international aspects of IP, privacy, contracting, export controls, and other topics.

FOCUSING ON YOUR END GAME FROM THE BEGINNING

Understanding your legal environment can help you build value in your business.

From the founding of each digital technology company and during every working day, you should be thinking about securing the assets and building the relationships that will be of value at the end—that sale of business exit deal where you will reap the many millions of dollars of value that you have created. When the buyer’s lawyers begin to review your company’s files in the investigative process known as due diligence, good legal planning will pay off.

During the Internet boom of late 90s, my law firm saw a $400 million proposed sale of start-up Internet software company stopped dead because of a very bad distribution deal the start-up had signed. The company had granted a small distributor in a key market a very broad, very long lasting exclusive license to its technology. The would-be acquirer saw this flawed distribution deal as a fundamental obstacle to its own use of the technology.

Each legal move that your company makes—each distribution deal, each strategic partnership, each investment in a technology, each trademark or patent filing, each license granted—can make your company more or less valuable. This book will help you use the law to maximize the value of your business.

HOW TO USE THIS BOOK

Readers will make different decisions on which content in this book they need to read.

This book is written to be used in two ways. First, it is a plain-language primer on digital technology law, designed to give you a basic understanding of law that affects your business. Second, the book is designed as a reference book for practical guidance—a resource to pick up when you face legal problems or important negotiations.

Each chapter begins with basic concepts and proceeds to discussions in more detail. You can decide which content in each chapter suits your needs. In addition the early chapters on IP and contract basics serve as a foundation for the deal discussions that follow.

There are many connections between these chapters. You will find frequent cross-references in the text. Some will bring you back to basics and some will bring you forward to new topics.

USING THE LEGAL FORMS

This book includes an Appendix of legal form agreements. As you will see, each of the forms in the Appendix has an introduction that provides information about the contents and use of the form. Many of the forms also have annotations with further explanatory material.

These forms are largely based on deals that we have seen or forms that we have used at our law firm. They should be used as checklists of issues and examples for what may work. They are forms, but not templates. We do not believe it is meaningful to consider contracting (except for the simplest forms) as fill in the blank.

The reality is that most types of agreements have endless variations, and forms used in most deals require adjustments. Changes in one part of a deal inevitably affect provisions and force changes elsewhere, so that adjusting forms requires legal insight, drafting skill, and the ability to spot issues that comes with experience. You can use these forms to guide your thinking and to understand issues, learn typical contract wording, and for a contractual starting place. However, they are not magic and not a substitute for legal help in significant deals.

The forms are also available online at a special web site. You can download them in both Word and PDF format. You can find instructions on downloading the forms at the beginning of this book and also in the introduction to the Appendix.

LIMITS TO THE CONTENTS OF THIS BOOK

While this book is intended to be your need-to-know legal companion, there are some limits to its contents.

While there is a lot of substance and detail in this book, it does not deal with legal issues at the most technical level. This is a layperson’s guide, not a lawyer’s treatise. Inevitably there are going to be questions on which you will have to consult legal counsel.

This book focuses on the legal aspects of digital business that are distinctly associated with digital business and are central to its technology, business, and IP strategies and tactics. While we believe these are the core issues, there are more general legal aspects of doing business that we left outside the scope of this book. The business subjects that this book does not cover are company formation, taxation, equity investment deals (by angel investors, venture capital firms, or others), employment law matters (except for employee agreements and IP aspects which are covered), and the buying and selling of digital technology companies. For these matters, you should consult your attorney and your accountant. We also have not included (except in passing) discussion of the criminal law aspects of the regulation of technology.

While this book mentions statutes and some key decisions by the courts, it does not contain legal citations of the sort that lawyers use. There are two reasons for this. First, they are meaningless for most readers. Second, anyone who wants to find the original materials can easily do so using the information in this book and a Web search engine.

LEGAL COUNSEL

This book is not a substitute for hiring legal counsel. Each digital technology business needs to use legal services. Good legal counsel can add value to your business. Even companies that have in-house counsel need the services of outside law firms from time to time.

How should you select counsel to best serve your business? In the final analysis, you are looking for more than just a person to carry out tasks. Your lawyer, like your accounts, should be a trusted partner and should be someone that you can rely upon.

The important criteria are apparent: knowledge, skills, and experience. You want counsel that has experienced the challenges your business will face, that follows digital technology law issues, and understands your business and your technologies. Digital business exists at the intersection of technology, law, and markets. Your counsel should have knowledge of IP law as well as the other legal, business, and financial issues that affect your technology businesses. Your lawyer should speak your language and provide practical guidance and solutions.

Digital Copyright Basics

It’s not manufacturers trying to rip anybody off or anything like that. There’s nobody getting rich writing software that I know of. There are people who would like to stay in business and earn a salary writing packages for these low-cost computers.

—Microsoft CEO, Bill Gates, then 25 years old, in a 1980 interview with 80 Microcomputing, a computer hobbyist magazine

SOME HISTORY

Back in 1980, Bill Gates was upset. Microsoft was a tiny company serving an infant personal computer market and selling copies of BASIC, a programming language. Most personal computer users were hobbyists who felt free to make copies of Microsoft’s commercial software programs and give them to friends for free. Gates told anyone that would listen that it was important that PC software companies get paid for copies!

In those days, it was unclear whether copyright law, the body of law that governs making and selling copies of books, movies, and music, could be used to protect software too. Gates (as well as everyone else that wanted to make money from software for PCs) was hoping that Congress would pass a proposed change in US federal law to make it clear that copyright law covers software.

Gates was facing a fundamental fact: digital products are incredibly cheap to copy. Copying is the key to turning digital products into wealth—but only if you can control copying. The law that provides legal control of digital copying is copyright law.

In 1980, not long after Gates gave that interview, Congress amended the Copyright Act to give express copyright protection to software. It is hard to overestimate the importance of this legal protection for digital industries.

COPYRIGHT COUNTS!

Why does copyright law matter to you? Copyright law grants the copyright holder exclusive rights that are at the heart of licensing and distribution deals. Copyright law is also an important legal weapon against unauthorized copying of software and digital content. When copyright law is violated, most often copyright holders use civil law—a lawsuit—to protect their copyrights; sometimes the authorities enforce criminal copyright provisions.

While copyright is your friend, there are copyright doctrines that surprise, and in some cases, bedevil digital product and content companies. To function effectively in any digital business, you need a grasp of the basics of copyright law.

IN THIS CHAPTER

This chapter is about the fundamentals of copyright law, including:

How you get copyright protection.

Legal rights a copyright gives you.

Legal provisions that restrict cracking copy protections and access control.

An overview of copyright registration.

In the next chapter, we will examine some advanced copyright topics regarding the application of copyright law to the Internet and to software products, as well as international aspects of software law.

THE NATURE OF A COPYRIGHT

Fundamentally, a copyright is just what it sounds like: the legal right to control copying. Copyright law also governs distributing and selling copies, preparing works based on earlier works (known as derivatives), and public display and public performance of works. Copyright protection in the United States is governed by the Copyright Act, a statute passed by Congress. (There is no state copyright law.) The purpose of copyright law is to encourage creation and expression. Copyright law does this by granting a legal monopoly on copying, distributing and performing works to the copyright holder. Nations around the world also have copyright statutes, and there are international copyright treaties.

What Is Covered by US Copyright Law?

Something that is protected by copyright is referred to as a work. Modern copyright law began in 18th century England with books and expanded to other media of expression. Today, US copyright law covers the following works:

Literary works: novel, stories, articles, advertisement text, manuals, and so forth.

Computer programs.

Musical works and sound recordings.

Choreography.

Visual arts.

Motion picture and audiovisual works.

Architectural works.

Works in the form of digital goods are covered by copyright law. A motion picture, photograph, song, or novel can all be distributed and copied in digital form. Even choreography can be in the form of a digital file. There is therefore an extensive overlap between digital technology and all media under copyright law. The Internet, wireless networks, CDs, and DVDs have accelerated the trend for copyrighted goods to become digital.

Copyright law affects any business that communicates (which means all of them). Industries that are the most reliant on copyright law to protect their core products and services include the software industry, video game developers and publishers, Web-based businesses, the recording industry, the motion picture business, publishers, and broadcasters.

Any contract that deals with the creation or modification of software or any digital content must consider issues of rights under copyright law.

What Is a Computer Program under Copyright Law?

As noted above, computer programs are protected under copyright law. What is meant by a program under copyright law? In the Copyright Act, we find the following definition:

A computer program is a set of statements or instructions to be used directly or indirectly in a computer in order to bring about a certain result.

Under copyright law, a program can be written in any computer language: C++, Java, SQL, COBOL, or anything else. A Web page written in HTML meets the definition. A program could be an operating system, Web server, video game, a word processor, a software component meant to be incorporated in a device, or anything else that runs on a computer or processor. It could be a few lines of code or millions of lines. A program under the Copyright Act may also be a combination of programs that work together.

The (Very Modest) Requirement of Originality

Under copyright law, you can only get a copyright on a work, including a computer program, that is original. However, the required level of originality required is very low, and meeting this requirement is easy. The legal test contains two elements: (1) a level of originality described by judges as very slight or minimal and (2) independent creation. This means that if you wrote a software program or created any other original work, even if quite pedestrian and ordinary, it will be original enough under this test. What falls outside of copyright is pure data or facts.

Copyright and Musical Works

Music recordings (including those in digital form) are subject to two different copyrights:

The Composition Copyright, which covers the words and musical notes.

The Sound Recording Copyright, which covers the recorded sounds—also known as the master recording copyright.

You will find much more about music copyrights and the application of copyright law to digital music (including special webcasting rules) in Chapter 20, which is about clearing digital content.

Exclusive Rights under Copyright Law

What rights does a copyright include? Here is a list of exclusive rights held by a copyright holder under US law:

Reproduction—The right to make copies.

Distribution—The right to sell or rent copies.

Public Performance—The right to perform, display, or play the copyrighted work in public. (There are some limitations on this exclusive right with regard to recorded music that we will review in Chapter 20.)

Derivatives—The right to create works based on a work.

Expressions vs. Ideas and Methods

A fundamental concept of copyright law is that it grants exclusive rights to the particular expression that constitutes the work—but not the ideas in the work.

The Copyright Act expressly provides that copyright protection does not extend to any idea, procedure, system, method of operation, concept, principle, or discovery underlying the program. A news story reported on CNN.com is protected by copyright, but the facts reported are not. An article describing a new theory in biophysics would be protected by copyright, but the theory itself would have no copyright protection.

How to Get a Copyright

To get a copyright is amazingly easy. All you have to do is get your work into some fixed form. Copyright applies, for example, to a sketch that you draw on a paper napkin and to every email you compose and send. For software or digital content, fixed form could mean a printout, storage on a hard drive, network storage, diskette, or ROM chip. The rule is that a copyright is secured automatically when the work is recorded in some reasonably persistent form for the first time.

Although the question is not completely settled, it is probable that works that exist only in RAM memory are sufficiently fixed to be copyrighted, but in any case, as soon as they are saved, they are undoubtedly within the scope of the Copyright Act.

Copyright vs. Other Kinds of Intellectual Property (IP)

As you can see above, copyright law is for works in which there is some kind of original content. Copyright protection is very different from other types of IP protection. Here are some key differences.

Copyright vs. Patents

Let us say that you make an invention implemented by software—for example, a new way of encrypting data. Copyright will not stop other persons from making other programs that use the same invention. Inventions are covered, not by copyright law, but by patent law. A copyright on a software program that has patentable elements would only cover the code itself, not the inventions or any concepts or methods used in the invention. Software and patents, a topic of growing importance in the digital technology industry, are discussed in Chapter 5.

Copyright vs. Trade Secrets

Software may use secret methods of data storage, graphics display techniques, character recognition methods, encryption and compression techniques, speed optimization methods, and so forth. The law that may protect these secrets from unauthorized appropriation is state trade secret law, discussed in Chapter 6, not copyright law. However, copyright law may be relevant to reverse engineering, a topic discussed in Chapter 3.

Copyright vs. Trademark

The brands of your digital products (used on packaging, CD-ROM discs, Web sites, screen displays, and so forth) are covered by trademark law. If someone is using your brand (or a confusing similar brand) without your consent and causing market confusion, you can use trademark law in a court of law to stop that use or obtain money damages from the infringer.

Copyright does cover graphic art, so that someone else’s unauthorized use of your unique logo might be both copyright and trademark infringement. Trademarks are discussed in Chapter 4.

Duration of Copyright Protection

Copyrights last a very long time. In the United States and many other countries, for copyrights now being created:

For works created by individual authors, under US law, the copyright lasts for the life of the author plus 70 years. In the case of a joint work, that is a work prepared collectively by two or more authors, the term lasts for 70 years after the last surviving author’s death.

For works by employees of a company and other works made for hire (see discussion below of the work made for hire concept), the duration of copyright will be 95 years from first publication or 120 years from creation, whichever is shorter.

Stanford law professor Lawrence Lessig once remarked: By the time Apple’s Macintosh operating system finally falls into the public domain, there will be no machine that could possibly run it. For technology, the life of copyrights might as well be forever. As is discussed below, the duration of copyright often matters for content.

PUBLIC DOMAIN

Works that are not subject to copyright at all are in the public domain. Anyone can copy, distribute, and make derivatives of works that are in the public domain freely and without permission. The public domain includes works on which the copyright has expired, US government works, and works dedicated by the copyright owner to the public domain.

The rules on copyright have changed several times and so there are some technicalities to the rules. Subject to some exceptions, the copyright on a published work will have expired if:

The work was created and first published before January 1, 1923, or, if published later, then.

Seventy years after the death of the author, or if work made for hire for a company, 95 years from publication.

There are other technical rules under which works published before 1989 may have lost copyright protection (such as the pre-1989 rule regarding omitted copyright notices discussed below or a pre-1964 rule that required copyrights to be renewed). There are also rules on the duration of copyrights on unpublished works. Other nations may have different rules. If you want to rely on the public domain status of a work, you may want to consult your attorney to be sure you are correct.

Whether a work is the public domain can have more than one answer, because there may be more than one applicable copyright. For example, a 19th century tune will be out of copyright, but not its 1975 sound recording. A 19th century novel will be out of copyright, but not a translation of the novel made in 1985.

Notice

You have seen copyright notices (also called copyright legends) on books and on digital products many times. A typical notice looks like this:

Copyright © 2008 Jack Smith, Inc.

All rights reserved

Is a notice legally required to secure copyright protection? Under the Copyright Act, the answer is No, if the work was first published on or after March 1, 1989. (A work is published when it is first put into general distribution or made available for public sale. Private showings to friends, investors, or publishers are not publication.) If the publication took place after that date, there is no legal requirement that you mark your product in any special way in order to preserve your copyright. You won’t loose the protection of copyright law by failing to use a notice. This is the rule not only in the United States, but also around the world.

Nevertheless, it is a good idea to always use a copyright notice on software, documentation, and digital content—even before publication. This is because the notice serves to put others on notice of your ownership claim. The copyright notice might deter unauthorized copying. It also helps you if you ever have to bring litigation against infringers because it makes it clear that unauthorized copying was done in the face of your claim of ownership. The date that you should put in the copyright notice is the first publication date of the work, and you should use the name of the copyright owner. You can find more details about proper copyright notice formats on the Web site of the US Copyright Office at www.copyright.gov.

For works published before March 1, 1989, putting that copyright notice on all versions of the work was essential. If you fear that you might have inadvertently lost a copyright for a work published before March 1, 1989 because of a failure to include a proper notice, you should consult legal counsel.

Copyright Registration

A frequently asked question is: Do I have to register my work with the US Copyright Office in order to get a US copyright? The answer, which surprises many, is No. Copyright law protects works without registration. Your works are subject to copyright even if not registered.

Even though you won’t lose your copyright if you do not register, registration with the US Copyright Office is required in order to bring a lawsuit to enforce your copyright. You can also get better remedies in a copyright lawsuit (as explained below) if you register your copyright before the infringement began. As we will discuss later in this chapter, registration is easy and inexpensive, and many companies routinely register their US copyrights in software and other digital content.

INFRINGEMENT

Violation of the rights of a copyright holder is called infringement. Copyright law gives the copyright owner a remedy in court when someone else infringes the copyright. However, there are some important defenses discussed below and in the following chapter. In some cases, which we will also discuss below, violation of copyright law is criminal.

There are several different kinds of infringement under US law:

Direct Infringement—consists of exercising one of the exclusive rights of copyright without consent of the party that owns or controls the copyright. Copying copyrighted software or digital files without permission (unless a defense applies) is direct infringement.

Contributory Infringement—applies when a party knowingly materially contributes to the directly infringing conduct of another. For example, helping another person make or sell infringing copies would be contributory infringement.

Vicarious Infringement—apples when a party (1) has the right and ability to supervise or control infringing activity; and (2) receives a direct financial benefit from that activity. The classic example of vicarious infringement is a flea market where infringing goods are sold by a person that rents a booth; the owner of the flea market may be liable for vicarious infringement.

Inducing Infringement—occurs when a party knowingly encourages or induces another party to engage in direct infringement. The US Supreme Court added this final category in its 2005 decision of MGM Studios, Inc. v. Grokster, Ltd. in the context of peer-to-peer file sharing. Grokster was liable because it made and distributed software that facilitated peer-to-peer filing sharing, and Grokster knew that illegal file sharing would be the software’s main use. The application and limits of this inducement doctrine are still not clear. What is clear is that this is a very important extension of copyright law.

DERIVATIVE WORKS

Suppose that you write a brilliant software game program based on the latest Stephen King’s novel and begin selling it. What will happen? Unless you have a license from the holder of the rights to create computer games from the novel, you will surely be sued. This is because your software is a derivative work.

In copyright law, a derivative work is a fundamental concept. It means a work based on another work. The legal rule on derivative works is quite clear and is just what you would expect: If you want to create, make copies of or sell a derivative work, you need the permission of the holder of the rights that your work is based on.

If you create a derivative work without permission, you infringe the copyright in the underlying work. Moreover, while you will have the copyright in your derivative work, your rights will cover only your own contribution and creation—and any acts to distribute the derivative work without permission from the owner of the underlying work will be acts of infringement.

Examples of derivative works are a translation, a sequel or an adaptation of a work for another medium—for example, a movie based on a novel. A derivative software program could be:

An update, new release, or new version of any existing computer program.

A localized version of a program with foreign language content.

A port of a program into a different software-operating system.

A program substantially derived from another computer program (or portions of the program)

A program based on another medium such as a novel, a movie, or a game that is copyrighted.

A novel, television show, or movie based on a digital product, such as a video game, would also be a derivative work. Processing works electronically also creates derivatives. For example, if you take a digital music file from a music CD and process it to create an MP3 file, you have created a derivative of the original file.

The concept of what is derivative is logically related to the concept of copyright infringement. In contracts we often define a derivative work as: A work sufficiently based on a copyrighted work such that copying it without permission would infringe the copyright of the prior work.

WORKS MADE FOR HIRE

A basic concept of the Copyright Act, and one that is much misunderstood, is work made for hire, often shortened to work for hire. The concept of work made for hire is important for two purposes:

It may control who is the author of a copyrighted work.

It may govern the duration of a copyright license or transfer (as discussed below).

If an employee of a company creates a work while on the job, the program is automatically work made for hire. This means that the employer company is legally the author of the program and owns the copyright. The concept follows federal employment law. If the person gets W-2 compensation, has FICA withholding, gets unemployment insurance and the like, he or she will be an employee. If the person gets a Form 1099 and is paid on a per-job basis, the person will be a contractor and not an employee under this doctrine.

This very important rule of US copyright law has the following effect:

If an employee develops a work, it will belong to the employer because the employer is considered the author.

If an independent contractor develops a work under contract with a customer, unless a contract says otherwise, the independent contractor will own the copyright. The customer will likely receive a nonexclusive license for the intended use of the software. This is a result that often comes as a shock and surprise to companies that have paid contractors to develop software without using a proper contract.

More on Work Made for Hire

There is another rather technical circumstance in which a program is work made for hire under the Copyright Act: A work also classifies as work made for hire if (1) there is a written contract, (2) the contract states that the work will be work made for hire, and (3) the work is part of a larger work, is a translation, is supplemental to another work, is part of a fact compilation, or is an instructional text. This concept is relevant when a company hires a person to provide copyrighted work product, including software code or other digital products.

Work Made for Hire Clauses in Contracts

In contracts for development of software or other digital products, you will often see work made for hire, clauses, which say, in essence: This work is to be a work made for hire of Customer, but if not work for hire, the work is hereby assigned to Customer.

The reason that these clauses have the but if not language is that work made for hire status is technical, as noted above. So lawyers want the assignment language as a back-up, in case the attempt to classify the work as work made for hire is ineffective.

These clauses are necessary to capture for the customer the copyright that otherwise would go to the independent contractor. This is one reason why a carefully written contract with every independent contractor is so important.

Note on the Right to Revoke Copyright Grants and Transfer after 35 Years

There is another legal impact of the work for hire classification; it affects a special rule under which authors may revoke copyright transfers or licenses. This rule in the Copyright Act applies if an author has licensed or transferred any rights to a copyright: The author (or his or her heirs) has the right to revoke the transfer or license 35 years after publication or 40 years after the transfer or license grant, whichever comes first, by serving written notice on the licensee or transferee within specified time limits.

The purpose of this rule is to protect the creators of works of literature and art that show their true value only many years after creation. It gives creators a second bite at the apple in transfer or licensing. However, if the work was work made for hire, this rule does not apply, and as a result the assignee or licensee of the work (often the publisher) keeps control of the work for the full life of the copyright.

If you sign an agreement with a developer in which the developer assigns your company the copyright to the resulting product, but it is not work made for hire, then the author (or his or her heirs) will have this right to revoke. On the other hand, if your written contract with the developer had a proper work made for hire clause (and the other qualifications for work made for hire apply), your company is deemed the author of the program, the copyright belongs to your company, and there is no right to revoke.

Because this rule requires the passage of such a long time, it might appear to have no practical relevance to digital products and digital technology. However, it might affect you if you have licensed content (say music, a film, or a short story) that was created years ago for new use in software or in a multimedia product.

California Law Issue Involving Work Made for Hire Clauses

There is a California state law aspect of the work made for hire that might affect you—and will probably be a surprise if you are not expecting it. Under the California Labor Code, if your company engages any individual as an independent contractor under a written contract to create any work made for hire, that individual is treated as your employee for the purposes of worker’s compensation insurance (which covers on the job injuries). This means that you will need to obtain in advance and pay for worker’s compensation insurance covering the contractor during the period of the assignment as if he or she were your employee.

What does this mean for you if your company retains independent contractors that reside in California but does not want to incur the cost of worker’s compensation insurance? You have two basic options:

Retain only corporations as independent contractors—rather than individuals. (As your lawyer will tell you, there are other legal benefits from this practice.)

Have your individual contractor assign the copyright (and all other rights) to your company and not have a work made for hire clause in the written contract.

If you have questions about the effect of this California law, you should consult a lawyer that practices in California.

Problems When Parties Fail to Specify Who Is to Own the Copyright

When a contractor or consultant provides software or other digital products under a contract, the parties all too often forget to specify who will own the copyright. The following example illustrates the problem.

Example: A large manufacturer, United Inc., wants a program to calculate and optimize its capital expenditures. United asks Smith, a programmer, to write the required program, and the contract says nothing about who will own what.