SAP ordered to pay largest fine on record for software piracy

A federal jury in California has ruled that software giant, SAP, has to pay $1.3 billion in damages for illegally downloading customer support documents and software belonging to its rival, Oracle. The scheme apparently involved setting up fake customer accounts to access instruction manuals and software information.

The case began in 2007, when Oracle filed a suit against TomorrowNow (TN) alleging the it had made thousands of illegal downloads over a three year period. Oracle claimed that SAP, which acquired TN in 2004, did so in full knowledge of the ongoing piracy. SAP admitted liability, however contested Oracle’s claim that the damages amounted to $1.65 billion. The recent decision turned on the question of how to evaluate the worth of the intellectual property TN illegally downloaded.

Under US copyright law, money can be recovered for statutory damages or for actual damages caused by the infringement, along with any additional profit amassed by the infringer through its wrongdoing. Actual damages can be assessed by considering the “fair market value” of the plaintiff’s work. This approach requires a jury to assess “what a willing buyer would have been reasonably required to pay to a willing seller for the plaintiffs’ work,” Frank Music Corp v Metro-Goldwyn-Mayer Inc (1985). An alternative method to prove actual damages is to indirectly prove the plaintiff’s lost profits.

Using the loss of profit method, SAP argued that Oracle had lost 358 customers as a result of the piracy, and evaluated actual damages at around $40 million. Unsurprisingly, Oracle opted for the “fair market value” option, reaching a figure over 40 times larger. After an 11 day trial, the jury panel decided on an award representing the fair market value of the licence that SAP should have agreed with Oracle.

For further reading:

Bloomberg

by Katey Dixon

Google eyed by European Parliament Report on misleading and aggressive advertising

The European Parliament has approved a report recommending that the European Commission introduces new legislation to combat misleading and aggressive advertising. Although the Unfair Commercial Practices Directive already regulates this area, the Juvin Report highlights the danger of the growth of new, more pervasive forms of advertising being used on the internet.

Though there is no explicit mention of Google Inc, it is obvious that the proposals target some of the services offered by the internet giant. With a clear reference to Google’s AdWords service, the Report calls on the Commission to condemn the practice of allowing companies to bid for keywords associated with brand names in search engines. When an internet user enters a purchased keyword into a search engine, that company’s advertisement is displayed alongside the ‘natural’ search results. Since 2000, when AdWords was first released, Google has faced countless lawsuits in the US and across the EU over its service. Despite claims that selling brand names as keywords encourages acts of parasitism and counterfeiting, the European Court of Justice has upheld the practice as lawful so long as the associated ads do not mislead the user as to the identity of the advertiser. The Report proposes that keywords associated with registered trademarks should only be available if the owner of the trademark authorises such use of the brand in question.

Targeted advertising is also flagged up as an unfair advertising practice. With significant implications for Google’s Gmail service, the Report recommends the complete prohibition of third parties reading private emails for advertising purposes. It is suggested that such practices are intrusive and constitute an attack on the privacy of individual consumers. Besides Google, websites such as Trip Advisor could also come under fire if the proposals are taken up. The Report warns of the danger of ‘hidden advertising’ which takes place in forums where consumers post comments to one another about various goods or services. It recommends the creation of forum moderators, and suggests running a campaign to alert consumers about this form of advertising.

The Report is scheduled for a full vote in December.

Further reading

Read the Juvin Report

Internal Market and Consumer Protection Committee press release

By Katey Dixon

Nominet orders ‘ihateryanair.co.uk’ to be handed over to the airline

Internet registry, Nominet has held that the privately owned website, ‘Ihateryanair.co.uk’ takes unfair advantage of the airline’s trademark, and should therefore be handed over to them. The website was set up in 2007 by Robert Tyler- a dissatisfied Ryanair customer. Its primary purpose was to create a forum for people to share their negative experiences of flying with the no-frills airline.

Ryanair complained to Nominet that Tyler’s use of their Community trademark in his website’s domain name constituted ‘abusive registration’. Although the judgment found in favour of Ryanair, expert Jane Seager clearly emphasised the importance of the continued existence of criticism websites, such as Tyler’s, in a democratic society. Nominet’s finding was not determined by Tyler’s use of a trademarked word for his domain name, but rather turned on the fact that he had received an income from the commercial links included on the site. Although the amount was insubstantial (£322), and despite the fact that making a profit was evidently not Tyler’s primary intention behind the site, Nominet concluded that using the trademark almost certainly increased the level of traffic to the website, and therefore constituted abusive registration. It was irrelevant that the domain name in its entirety made it clear that the website was not affiliated with the airline.

Nominet controls domain names with the co.uk ending. Its Dispute Resolution Service assesses registered websites in light of its policy of use, rather than undertaking an examination into legal issues. Wings clipped, but undeterred, Tyler has moved his website into the .org domain.

By Katey Dixon

Further Reading:

http://www.nic.uk/disputes/drs/decisions/decisionssearch/?searchText=i+hate+ryanair&x=0&y=0
http://www.guardian.co.uk/business/2010/oct/12/i-hate-ryanair-website-closed

UK to be tried by European Court for Failing to Implement Data Protection Rules

The European Commission has commenced ‘infringement proceedings’ against the UK government, alleging it has breached EU data protection laws. The decision follows a year-long investigation into whether UK law provides sufficient safeguards against the interception and surveillance of internet traffic.

Concerns were initially raised when the EC received complaints from citizens about a British telecom firm’s use of behavioural advertising. In 2006-2007, BT tested behavioural advertising technology on its broadband users, without the consent of the customers involved in the trial. The advertising system, known as Webwise, was invented by Phorm – a US-based company which specialises in advertising software. Once an ISP has signed up to the service, Webwise is able to ‘trawl’ sites visited by its users in order to build up a profile of the users’ interests and habits. The information can be exploited by advertisers who are then able to target customers on the sites they visit thereafter. What sets Phorm’s technology apart from other behavioural advertising systems, is that it works in conjunction with ISPs, rather than simply relying on data shared between associated websites. Although BT later rejected the technology, and no other UK ISPs are known to have used it since, the UK government failed to give a satisfactory verdict on the legality of the BT trials. It did, however, conclude that the technology itself is legal so long as users have actively given their consent, and web-sites can easily opt out of the system.

Having considered the situation in the UK, the Commission concluded that data protection in the UK is not sufficiently robust to fulfil its obligations under the e-Privacy Directive 2002/58/EC and the Data Protection Directive 95/46/EC. The Commission identified three areas of potential infringement:

(1) The UK has failed to establish an independent national authority to supervise the interception of internet communications.

(2) Current UK law authorises the interception of communications, not only where the persons involved have given their consent, but also where the person intercepting has “reasonable grounds” for believing that consent has been given.

(3) Current UK law only provides sanctions where unlawful interception is “intentional”.

If the Court finds in favour of the Commission, the UK will be obliged to implement the measures necessary to comply with the judgment. If the UK subsequently fails to take the steps required, a financial sanction will be imposed by the Court.


For further reading:

Europa

BBC

The Guardian


By Katey Dixon

ACS Law, Party Babes and the Information Commissioner: Here’s What’s Happening

ACS Law is a London based law firm specializing in file-sharing infringement cases. The firm’s practice includes acting for copyright holders, whom the firm advises on legal action against individuals allegedly guilty of unlicensed file sharing.

ACS Claim Process

Typically, the story begins with an individual receiving a letter from ACS Law alleging that a file (usually pornographic, the cases we have seen refer to “Party Babes”) belonging to ACS’ client has been illegally downloaded. ACS’ letter states that ACS has used a court order to oblige the relevant ISP to reveal the IP address to which the file was downloaded. The letter then identifies the individual as the owner of the IP address, claims that the owner has infringed ACS Law’s client’s copyright and points out the legal consequences. Letters that we have seen and advised upon contain a settlement offer, whereby in return for a sum (typically around £495) ACS’ client will drop the claim.

ACS has allegedly sent claim letters to thousands of people. Concerns have been raised that many individuals may be mistakenly accused, particularly given the fact that ACS’ case typically relies on identifying an individual via an IP address. An IP address may be used by someone other than the individual to whom the IP address relates, either by someone using the individual’s computer, or by third party access to the IP address via an unsecured wifi connection or a virus. Websites have been set up to offer assistance to genuinely innocent individuals, such as http://beingthreatened.yolasite.com/.

Concerns have grown into outcry on numerous sites and forums, with ACS Law apparently being scrutinized by the Solicitors Regulation Authority. Concerns turned into a full blown attack on ACS Law when hackers obtained details from ACS’ website of over 5,300 individuals the firm was pursuing for unlicensed filesharing.

Data Breach

The disclosure of the details of the individuals’ data, if it contained personal data, would potentially be a breach by ACS of UK data protection legislation: the Seventh Principle of the Data Protection Act 1998 requires that “appropriate technical and organizational measures shall be taken against unauthorized or unlawful processing of personal data”.

The UK’s data protection watchdog, the Information Commissioner, has already expressed his concern about the situation (see interview here), and will want to establish whether ACS had put in place appropriate measures to prevent such disclosure. The Information Commissioner has the power to fine any organisation who breaches the data protection laws up to £500,000. The gravity of this situation, including in particular details of pornography allegedly downloaded by the individuals whose data has been disclosed, means that the ICO will take a particular interest in this case.

Defence

Ultimately, ACS may rely on an argument that the law firm had done everything appropriate and that even the best IT defence can’t protect against a determined hacker. This would be ironic, since many of the denials received by ACS from alleged file infringers rely on exactly the same defence.

By Rory Campbell

Germany's Facebook Ban

Last week a draft bill was backed by the German government limiting the use of Facebook by employers when hiring new staff. The proposed legislation will still allow employers to consult other social websites that make job information and networking public, such as LinkedIn or Xing. However, if an employer was to “befriend” an employee or hack into their account to access private data, with the intention to use the information against them, the employer could expect a fine of up to €300,000.

This development comes off the back of a number of workplace scandals that have recently surfaced. Deutsche Telekom (telecommunications company), Deutsche Bahn (national railway) and Lidl (retailer) are amongst the highest profile employers involved. The bill still faces a final debate and vote in parliament but is speculated to become law as early as this year.

One issue envisaged with the new proposed law is the difficulty in enforcing it. For example, it will be difficult for any employee to prove that personal information from their page on any private social network has made its way into hiring files.

The bill marks the increasing growth of German government control of data privacy. The same bill plans to restrict the use of video recording employees in places where they are not made aware of such use, despite arguments from opponents claiming that the proposal will affect anti-theft measures and employee corruption.

Separately, the German Data Protection Authority is investigating Google Street View for issues of privacy and allegations of collecting unencrypted wifi data. Google have said that this was a mistake and have stopped this process. Google have also introduced tools for German residents to opt out of their property being displayed on the street image software. Meanwhile, German authorities are also testing Apple on their data collection policies for devices like the iPhone.

The proposed bill for Germany seems to be welcomed amongst politicians. Up until now there has been no such legislation regulating social networking websites in this way. It is hoped that it will provide future guidance for courts in the growing number of cases involving networks such as Facebook. It is unknown at this stage whether the UK is soon to follow in Germany's legislative steps.


This blog was largely contributed by Nicola Mallon, whose copyright and moral rights in the blog are asserted. Many thanks to Nicola from everybody at Forde Campbell.

Places You Can’t Escape Facebook

At Facebook HQ on 18th August, CEO Mark Zuckerberg launched the highly anticipated new app, ‘Places’.

Following the lead of rival applications, Foursquare and Gowalla, the social networking site now offers its own geolocation service. The application allows users to ‘check in’ to various locations, in order to let their friends know where they are in real-time. It is also possible to tag friends who have been spotted in the same location. Places updates will be broadcast on friends’ News Feeds, on the user’s Wall, and in the ‘activity stream’ for that location.

Michael Sharon, the product manager for Places states that the goal of the app is to take the virtual relationships created through Facebook into the physical world. However, the commercial advantages for local businesses are also clear. Real-time geolocation data would enable shops, restaurants, bars and clubs to send vouchers, prizes, or promotion deals to entice customers who are nearby.

With over 500 million users on the site, the application is certain to send Facebook deeper into the quagmire of privacy debates. Rainey Reitman, spokeswoman for the non-profit consumer advocacy organisation, Privacy Rights Clearinghouse warned, “Location data is tied to people’s safety – if people know where you are, they know where you’re not.” Under the privacy settings, it is possible to control whether others can see your location by unchecking the “include me in ‘People Here Now’ after I check in” option, and disabling the “Friends can check me into places” function. Under the default setting, check ins will automatically be published.

The app is currently only available for smartphones in the US, but plans are already underway to include other countries in the upcoming months.

Further reading:
http://www.facebook.com/places/
http://www.guardian.co.uk/technology/2010/aug/19/facebook-places-location-tool-unveiled

ASA throws CAP at asterisked profanities

The Advertising Standards Agency (ASA) last week ruled that an expletive in an advert could still be considered offensive even if it was partly obscured by asterisks. The judgment came in response to two complaints made over The Fuel Agency Ltd’s direct mailing campaign. The marketing agency sent out 1000 valentine’s cards reading “I F**CKING LOVE YOU” on the front. Inside the card was the phrase “…You might f**king love us”. The Fuel Agency Ltd argued that it was commonly accepted that an expletive masked by asterisks does not cause offence.


Dismissing this viewpoint, the ASA Council adjudicating considered that it breached the decency clause in the Committee of Advertising Practice (CAP) Code. Clause 5.1 states that “Marketing communications should contain nothing that is likely to cause serious or widespread offence.” It stipulates that “Compliance with the Code will be judged on the context, medium, audience, product and prevailing standards of decency.” The Council held that although the swear words were partially obscured, the meaning was still clear. It considered persuasive the fact that the ad was positioned on the front cover of untargeted direct mail, and noted that use of the expletives was gratuitous as it was unrelated to the product being advertised.


The consequence of the Council’s finding means that the offending ad must not appear again in its current form. The Fuel Agency Ltd is also under caution to ensure that future ads do not cause serious or widespread offence.

Further Reading
http://asa.org.uk/Complaints-and-ASA-action/Adjudications/2010/8/The-Fuel-Agency-Ltd/TF_ADJ_48884.aspx

Asda “living dangerously” with in-store optician ads

Using an advertising campaign that intentionally mimics a competitor, and invites customers to draw a comparison between the two services may approximate “living dangerously”, but does not in itself amount to trademark infringement. In what was a disappointing outcome for Specsavers, the High Court was only willing to accept one of the three claims against the supermarket chain, Asda.

As the logo for its in-store optician, Asda chose two oval shapes indicative of a pair of spectacles. The Specsavers’ logo uses the same idea. However, whereas the ovals are positioned side-by-side in Asda’s logo, in Specsavers’ the ovals overlap in the middle. Underlining the mimicry, Asda adopted the pale green hue favoured by Specsavers as the colour for its logo. Despite these similarities the court was unwilling to accept Specsavers’ argument that the logo amounted to an infringement causing confusion.

Factors persuading the court in Asda’s favour included the fact that, since Specsavers had not registered their mark in a specific colour, the colour of the mark in question was an irrelevant issue. It was also noted that although the ovals were similar and formed an important part of the logo, this was not the dominant aspect. The court held that the wording “ASDA optician”, written inside the ovals, formed the active part, and thereby introduced a significant difference from the claimant’s brand. This meant that a ‘reasonably circumspect consumer’ would not be confused by the two logos. The evidence that Asda was intentionally “living dangerously” did not alter this conclusion.

Where Specsavers did succeed was in its claim that the strapline - “be a real spec saver at Asda” - took unfair advantage of the distinctive nature of their trademark. The court held that, wishing to establish a reputation for value, Asda had used a strapline which clearly called to mind “Specsavers” in order to gain an unfair advantage. The court dismissed Specsavers’ third claim that Asda was guilty of passing off. Since none of the marks gave rise to confusion, the element of misrepresentation that lies at the very heart of any such claim was missing.

Further reading:
Specsavers International Healthcare Ltd v Asda Stores Ltd [2010] EWHC 2035 (Ch)
http://your.asda.com/2010/8/2/judge-rules-you-can-get-spec-savings-at-asda

Budvar triumph in Budweiser’s Battle for Europe

Last week the European Court of Justice found in favour of Budĕjovický Budvar, against Anheuser-Busch in what has amounted to a 14-year-long trademark battle between the two breweries. The present dispute began in 1996 when the US-based brewer, Anheuser-Busch (now owned by Belgium’s InBev) applied to the Office of Harmonization for the Internal Market to register ‘BUDWEISER’ as a Community trademark for beer. The Czech brewery opposed the registration on the basis that it had the right to use the same trademark in Austria, Benelux, France, Germany and Italy.

The judgment marks the latest in a series of successes for the Czech brewery which has fought its American rivals globally in a branding war that has lasted for over a century. The German immigrant, Adolphous Busch, first used the brand name to promote beer in North America in 1875. However, when he applied for US registration in the early 1900s, Budvar tried to sue them on the grounds that they had been using the name since 1895. An agreement was eventually arrived at, whereby each brewery’s market was limited to either the Americas or Europe. However, with the subsequent expansion of the companies’ markets, this was to be a short-term truce.

In this latest dispute, Europe’s highest Court found that since Budvar was able to prove genuine use of the earlier international word mark ‘Budweiser’, Anheuser-Busch is prevented from registering the trademark across the whole of the EU. Although it cannot get a blanket trademark, it may retain the right to use the trademark in individual EU markets. However, Budvar has won the exclusive right to use the Budweiser name in Austria and Germany. This situation of exclusivity differs from that in the UK, in which both companies have been allowed to use the same trademark under the doctrine of “honest concurrent use”.

Further reading:

Case C 214/09 P, JUDGMENT OF THE COURT (Fourth Chamber), Anheuser-Busch v OHIM 29 July 2010
http://www.eubusiness.com/news-eu/us-czech-court.5rz
http://www.brandchannel.com/features_effect.asp?pf_id=191
http://www.budweiserbudvar.co.uk/budweiser
Budejovicky Budvar NP v Anheuser-Busch Inc [2009] EWCA Civ 1022 (CA)

“small, squat, smiley-faced, bowler hatted blimp” protected by the courts

On 28th May 2010, the High Court held that Qualtex Ltd, which threatened to manufacture and sell vacuum cleaners replicating Numatic International Ltd’s successful ‘Henry’ model, was guilty of the tort of passing off. The dispute arose in 2008, when Qualtex informed Numatic of its intentions to manufacture and sell replicas of the bowler-hatted, tub-style vacuum. Qualtex based its decision on the understanding that all relevant intellectual property rights (in the form of registered and unregistered design rights) associated with the model had expired.


The tort of passing off exists to prevent an individual from misrepresenting his goods or services as belonging to, or being associated with another person. A successful claim requires the plaintiff to establish that goodwill has attached to his product; that the defendant has lead the public to believe that his products belong to the plaintiff through misrepresentation; and that he has or is likely to suffer damage as a result of the misrepresentation. What makes this case remarkable is that the court was asked to consider whether sufficient reputation and goodwill existed in the shape or get-up of the product to warrant protection, even after registered design rights have expired.


Citing a newspaper article, which describes the Henry as a “small, squat, smiley-faced, bowler hated blimp on casters” and noting market research commissioned by Numatic, Mr Justice Floyd found that “[t]he public have been educated to recognise the overall shape combined with the black bowler hat as indicia of a genuine Henry.” This being the case, Qualtex’s defence that it had not intended to use the distinctive Henry “face” on the replica, and that it would use a different brand name to alert the public to the fact that the product was not a genuine Henry, were not held to be persuasive by the Court.


Further reading:

Numatic International ltd v Qualtex UK Ltd [2010] EWHC 1237 (Ch)
http://plc.practicallaw.com/3-502-8832
http://www.lawdit.co.uk/reading_room/room/view_article.asp?name=../articles/7216-Henry-has-his-day-in-court.htm

Nintendo DS ‘game copier’ chips fall foul of copyright law

The High Court in London has held that devices allowing users to run pirated games on Nintendo DS consoles are illegal in Britain. The storage devices, which slot into a Nintendo DS like a game card, contain either a built-in memory, or a slot for a micro-SD flash card. Using circuitry, software and data, the devices are able to circumvent the copy-right protection measures installed onto Nintendo consoles.

Games which have been illegally downloaded from the internet may then be stored on the memory card and played on the DS.

Finding against the defendants, Playable Ltd - a company which imports and sells the devices - and its sole director and share holder, Mr Wai Dat Chan, the Court held that they were guilty of circumventing copyright protection technology under s.296ZD of the Copyright, Designs and Patents Act. The Court was unwilling to accept the defence that the devices can also be used for lawful activities, such as playing home-made games. Even if this were the primary use, in order to enable such games to be played on the console, the device would still have to circumvent the effective technological measures (ETM) used by Nintendo.

The Judgment highlighted that HMRC and Trading Standards had seized over 165,000 game copiers intended for use by Playable Ltd. With devices available for as little as £10, and since each device is capable of storing multiple games (which would otherwise retail individually for as much as £20-£30 on release), the Court noted the “substantial” economic effect that the trading of these devices would have on Nintendo.



Sources:

http://www.guardian.co.uk/technology/gamesblog/2010/jul/28/games-controversy
http://www.bbc.co.uk/news/technology-10790835
Nintendo Co Ltd v Playables Ltd [2010] EWHC 1932 (Ch)

Google’s AdWords faces further scrutiny in the Paris Court of Appeal

Both LVMH Moet Hennessy Louis Vuitton and the internet search giant Google claimed victory last week in the latest of a series of challenges to Google’s AdWords business. On Tuesday 13 July the French Supreme Court (Cour de Cassation) referred a ruling in favour of the French luxury goods company back to the Court of Appeal.

The dispute involves Google’s paid referencing service, ‘AdWords’, which allows advertisers to bid for keywords- many of which are protected trademarks- used in Google’s search engine. When an internet user enters a keyword, advertisements known as “sponsored links” are shown in the top of the screen. Consequently, a search on a trademarked word could bring up a competitor’s product or - in theory – even direct the consumer to counterfeit products.

The Cour de Cassation’s judgment affirmed an earlier ruling by the European Court of Justice, which held that the practice of selling keywords associated with registered trademarks does not infringe trademark rights per se. Despite using its official blog to herald that ruling as a triumph for the free flow of information over the shackles of an overly coercive IP regime, the court made it clear that such advertising could constitute an infringement where it “does not enable an average internet user... to ascertain whether the goods or services referred to therein originate from the proprietor of the trade mark... or on the contrary, originate from a third party.” LVMH said that the Supreme Court’s recent decision “will enable the Paris Court of Appeals to rule on Google’s civil liability when using trademarks without the trademark owner's authorization." No date has been set for the forthcoming hearing.


Sources

http://googleblog.blogspot.com/2010/03/european-court-of-justice-rules-in.html

http://www.mediaweek.co.uk/news/1015878/Google-AdWords-held-liable-sale-trademarks/

http://sanfrancisco.bizjournals.com/sanfrancisco/stories/2010/07/12/daily10.html

ISPs take on the Digital Economy Act

BT and TalkTalk bosses call for judicial review of Digital Economy Act in High Court.

BT and TalkTalk, two of the leading UK Internet Service Providers (ISPs) stated that they will be “seeking clarity" from the High Court on the legality of the Digital Economy Bill’s provisions before spending tens of millions on implementing the system.

The current code of practice set out in the Digital Economy Act only applies to the larger ISPs, i.e. those with more than 400,000 subscribers, putting larger ISP’s at a disadvantage according to Andrew Heaney, the Executive Director at TalkTalk. Mr. Heaney stated

“It means we could have huge swathes of customers moving to smaller ISPs to avoid detection”.

TalkTalk chairman Charles Dunstone says

"The Digital Economy Act's measures will cost the UK hundreds of millions and many people believe they are unfair, unwarranted and won't work," "It’s no surprise that in Nick Clegg’s call for laws to repeal, this Act is top of the public’s ‘wish list’."

Digital Economy Act vs EU Law


BT and TalkTalk’s main argument lies with the European e-commerce directive, which states that ISPs are “mere conduits” of content and shouldn’t be held responsible for the traffic on their networks. The two companies will seek clarification if this European law conflicts with the newly introduced Act. In a statement to the BBC, the Coalition Government said

"We believe measures are consistent with EU legislation and that there are enough safeguards in place to protect the rights of consumers and ISPs and will continue to work on implementing them."

Privacy Rights Infringed?


Mr. Heaney (TalkTalk) also expressed concerns over users privacy rights claiming that the act may also be in contravention of the privacy and electronic communications directive. Charles Dunstone, TalkTalk Chariman, told the Times

'The Digital Economy Act's measures will cost the UK hundreds of millions, and many believe they are unfair, unwarranted and won't work'

he said.

"That’s why we need a judicial review by the High Court as quickly as possible before lots of money is spent on implementation."

ISPs vs the Creative Industries


The Digital Economy Bill has already been subjected to much criticism after being “rushed through” parliament earlier on in the year. Among its most controversial measures were proposals to disconnect persistent illegal file-sharers from the web and give copyright holders the power to block access to websites hosting illegal content. The BPI, which represents the UK's recorded music industry, has campaigned hard for the Digital Economy Act to act against file sharers. The Coalition Government have stated

"The Digital Economy Act sets out to protect our creative economy from the continued threat of online copyright infringement, which industry estimates costs the creative industries, including creators, £400m per year,".

Mr Heaney says

"It is outrageous that they are coming begging at our door but are not helping themselves,".

Ofcom have said that plans to disconnect users would not be implemented until 2011 at the earliest.

More Reading:

BBC News
The Times
The Guardian


Watch this space for updates.

Is it possible to trademark a smell?

Following the ECJ's ruling in the 2001 Ralf Sieckmann case, courts have continued to support the view that it is not possible to register smells or sounds as trademarks. A smell cannot be adequately graphically represented by a verbal description because it is too imprecise. Manufactured smells (which would include scents and perfumes) can give rise to intellectual property rights which will generally attach to the information describing the ingredients of / or formulae for the smells or to the processes of production (or both). This type of information has traditionally been protected by treating it as a trade secret.

By way of analogy, take for example the ingredients for Coca-Cola®. This information has always been guarded by the company as a trade secret and its disclosure to employees or third parties has always been under the form of non-disclosure agreements. Trade secrets are generally enforced by contract.

The advantage of holding a trade secret is that the intellectual property rights can exist indefinitely so long as you manage to keep it a secret. The trick is to make sure that you have sufficient contracts in place (whether with your employees or contract manufacturers or other third parties) to allow you to disclose freely the ingredients and means of production of your scents on a need to know basis. Any misuse or unauthorized disclosure of a trade secret by a contracted party would generally amount to a breach of contract and an actionable claim in the courts, giving the holder the right to an injunctive remedy (where available) and possible recovery of damages.


If you would like more information on this article or require assistance in the preparation of non-disclosure or employer/employee covenant terms to safe-guard this type of intellectual property, please contact Forde Campbell LLP.

British Government to Publish Details of I.T. Contracts starting July 2010

Cameron's bid to increase spending transparancy in Government has begun. July 2010 will see the introduction of online publications detailing all new central government ICT contracts together with all new central government tender documents for contracts over £10,000.

Later on in the year, new items of central government spending over £25,000 will also be made available online with UK international development spending over £25,000 and all new central government contracts to be published in full from January 2011.

Cameron has asked departments to take "immediate action" to ensure that the deadlines are met and that the information is usable by people regardless of computer specification.

Dear Secretary of State

Greater transparency across Government is at the heart of our shared commitment to enable the public to hold politicians and public bodies to account; to reduce the deficit and deliver better value for money in public spending; and to realise significant economic benefits by enabling businesses and non-profit organisations to build innovative applications and websites using public data.

The Government must set new standards for transparency, and our Coalition Programme for government sets out a number of specific commitments. The Government’s initial transparency commitments are set out below, alongside deadlines for publication. Limited exemptions on national security and personal privacy grounds will be permitted.

Central government spending transparency

• Historic COINS spending data to be published online in June 2010.
• All new central government ICT contracts to be published online from July 2010.
• All new central government tender documents for contracts over £10,000 to be published on a single website from September 2010, with this information to be made available to the public free of charge.
• New items of central government spending over £25,000 to be published online from November 2010.
• All new central government contracts to be published in full from January 2011.
• All UK international development spending over £25,000 to be published online from January 2011.

Local government spending transparency

• New items of local government spending over £500 to be published on a council-by-council basis from January 2011.
• New local government contracts and tender documents for expenditure over £500 to be published in full from January 2011.

Other key government datasets

• Crime data to be published at a level that allows the public to see what is happening on their streets from January 2011.
• Names, grades, job titles and annual pay rates for most Senior Civil Servants with salaries above £150,000 to be published in June 2010.
• Names, grades, job titles and annual pay rates for most Senior Civil Servants and NDPB officials with salaries higher than the lowest permissible in Pay Band 1 of the Senior Civil Service pay scale to be published from September 2010.
• Organograms for central government departments and agencies that include all staff positions to be published in a common format from October 2010.

Given the importance of this agenda, the Deputy Prime Minister and I would be grateful if departments would take immediate action to meet this timetable for data transparency, and to ensure that any data published is made available in an open format so that it can be re-used by third parties. From July 2010, government departments and agencies should ensure that any information published includes the underlying data in an open standardised format.

Of course, the release of the datasets specified in the Coalition Programme is just the beginning of the transparency process. In advance of introducing any necessary legislation to effect our Right to Data proposals, public requests to departments for the release of government datasets should be handled in line with the principles underpinning those proposals: a presumption in favour of transparency, with all published data licensed for free reuse.

To oversee the implementation of our transparency commitments, a Public Sector Transparency Board will be established in the Cabinet Office, which will be chaired by the Minister for the Cabinet Office Francis Maude. Board representation will include a mix of external experts and data users, and public sector data specialists; members will include Tom Steinberg, one of the UK’s leading experts on data transparency. The Board will provide support to departments as they deliver on the Government’s transparency commitments set out in this letter. The Board will also be responsible for setting open data standards across the public sector, publishing further datasets on the basis of public demand, and – in conjunction with the Ministry of Justice – will further develop the Right to Data and advise on its implementation.

I look forward to welcoming rapid progress on this agenda in the coming weeks.

I am copying this letter to Sir Gus O'Donnell.

Source

OFCOM Publishes Consultation Paper on Dealing with Online Copyright Infringement

by Rory Campbell

The Digital Economy Act 2010 gave Ofcom the responsibility of managing the controversial process of tackling copyright infringement via the internet.


The Act envisaged Ofcom having power to require ISPs to send warnings to subscribers infringing copyright. Failure to comply with a specific number of warnings would result in the identity of an infringing user being made available to copyright owners, who would then be able to take legal action against the infringing user.


The Act required Ofcom to draw up and enforce a code of practice describing how the system would operate, with the code being published by 8th January 2011. Ofcom published a draft code as a consultation on 1st June 2010, inviting responses by 30th July 2010. A copy of the code can be found here.


The consultation proposals include the following:

• Ofcom proposes that the code only covers larger ISPs, which Ofcom defines as fixed ISPs with more than 400,000 subscribers. This would include BT, Talk Talk, Virgin Media, Sky, Orange, O2 and Post Office. Small and medium sized ISPs would escape the remit of the code unless Ofcom receives evidence that subscribers to any such ISP are persistently infringing copyright.

• Ofcom acknowledges that it needs to create a proper system to check that any allegation against an alleged infringer is based on “credible evidence, gathered in a robust manner”. Any person accused of infringement will be able to appeal to an independent body, and Ofcom’s consultation proposes that any such person should be granted anonymity.

• The consultation proposes that once an ISP receives a copyright infringement report from a copyright owner, the ISP notifies the alleged infringer. The alleged infringer is given an easy to understand explanation of the allegations, and of the steps the subscriber can take to challenge the allegation – and to protect their network from being hijacked for the purposes of infringement.

• If an alleged infringer receives three notifications, their identity may be included in a copyright infringement list requested by the copyright owner. The copyright owner can then commence legal action against the alleged infringer.


Ofcom is clearly aware of the high temperature of the debate over the fairness of the Digital Economy Act: and it creates a future breathing space for itself by pointing out that enforcement under the Act needs to be one component in a broader approach to digital copyright infringement: “we note that [enforcement measures under the Act] were always expected to be complemented by a wider set of activity…including consumer education, the promotion of lawful alternative services and targeted legal action against serious offenders” (Ofcom consultation paragraph 1.9).


If you want legal advice on how the Digital Economy Act may affect you or your business, feel free to contact us at rory@fordelaw.com or on 028 44 33 00 23.

Forde Campbell LLP is a Northern Irish commercial law firm specializing in Media, IP and IT.

Guide to Licensing - Part II

WHO ARE YOU LICENSING TO?

A final key issue for a licensor to consider before entering into any licensing arrangement is the deal as envisaged by the licensee. Is the licensee intending to use the product for its own use, or is it on-licensing the product to end-users?
For example, the licensee may be acting as a value added reseller of the licensor’s product: taking the licensor’s technology, adding functionality or some form of application, and reselling the enhanced product to end-users.
The risk for the licensor is that while it may be happy to allow the licensee to on-licence in this way, the licensor’s contract is with the licensee and not with the end-users. The licensor cannot therefore contractually control the way in which the end-user uses the enhanced product: for example, in the case of software on-licensed to an end-user, the original licensor has no direct contractual ability to prevent the end-user from modifying or attempting to decompile the software’s code.

Licensors can deal with this problem in two ways. Firstly, the licensor can impose an obligation on the licensee to include in the licensee’s agreements with end-users restrictions on the end-user’s use of the licensor’s technology. Alternatively, the licensor can use its licence agreement with the licensee to oblige the licensee to require end-users to enter into direct agreements with the licensor in the form of an end-user licence agreement.

KEY LICENSE TERMS

This section lists commercial provisions which commonly feature in licence agreements. Depending on the particular licensing transaction, some of the terms may or may not be relevant: for example, a SaaS (software as a service) licence will not contain provisions relating to the delivery or installation of the software forming the basis of the SaaS service. Additionally, it is important to remember that the description of the provisions is structured from the licensor’s point of view: the recommendations are made to protect the licensor, and should not be followed by any organisation acting as licensee.


PRODUCT PERFORMANCE TERMS

· delivery/installation: although not applicable to all licences, many agreements will have provisions specifying how the licensor’s product will be delivered to the licensee and/or installed. The scope of the arrangements vary from deal to deal: in the case of a simple transaction, delivery may simply be specified to occur on a particular date; in the case of a heavy-weight IT implementation, there will be a formal implementation plan with specific milestones to be achieved by the licensor.

The licensor should take care in relation to the following areas:
· timing: although the licensor may be happy to comply with specified delivery dates, it should take care to avoid any commitment that “time is of the essence” in relation to delivery. This imposes an extremely strict obligation on the licensor to meet the agreed delivery dates: failure by the licensor to do so will usually constitute a breach of contract sufficient to allow the licensee to terminate the license agreement.

· Transfer of risk/title: licensors should take particular care to ensure there’s no wording in agreement referring to the transfer of title to any product being transferred from licensor to licensee. This would mean that ownership of the product passes from the licensor to the licensee: this would turn the licensing arrangement into a sale.

Wording dealing with the transfer of risk, however, can be found in licence agreements, particularly where licensed technology is contained in hardware. A transfer of risk transfers responsibility for protecting and insuring the product: it is in the licensor’s interests to ensure that transfer of risk occurs no later than the point of delivery.

· delay payments: in a complex installation, and particularly in relation to the public sector, the licensee may require compensation payments from the licensee if the licensee fails to achieve milestone stages on time. Ideally, these should be resisted: the licensor could as an alternative suggest that the sums payable to it for installation be linked to fulfilment of milestones, in order to induce it to fulfil milestones on time.

Care needs to be taken here as to how a licensor can demonstrate that a milestone is fulfilled: this should not be left to the sole opinion of the licensee. In any case, any delay payment structure should relieve the licensor from making compensation in specified situations, such as where installation was prevented by acts beyond the licensor’s reasonable control, or by any action or inactivity of the licensee.
· acceptance tests: again, these may not apply to all licence agreements, but are commonly required by licencees requiring larger than average software installations. The ideal position for the licensor is that the product is deemed accepted on delivery: however, the licensee may require some ability to test the product before confirming that it is accepted.

If the licensor is prepared to accept some degree of acceptance testing, it should take particular care in relation to the following:

· what are the tests? The licensor should at all times seek to control the extent of the tests: under no circumstances should the licensor accept any test standard allowing the licensee free range to decide whether the product does what the licensee wants it to. If possible, acceptance tests should be formulated by the licensor to ensure that fulfilment of the tests is within the capability of the product
· who decides if the tests are passed? The licensor should avoid allowing the licensee to determine this in its complete discretion: ideally, the requirement should be that the tests are passed when the licensor demonstrates material fulfilment of the acceptance tests.

In any case, the licensor should seek extra protection by specifying that acceptance is deemed to have occurred where no contrary notification has been made by the licensee within a specified time period, or where the licensee has remained silent on the tests but has put the product into every day use.

· What happens if the tests aren’t passed? A contract drafted aggressively in the licensee’s favour may specify that failure to pass acceptance tests allows the licensee to terminate and reclaim all fees paid by it. This should be avoided: the licensor should argue to keep any payments made so far, and should be allowed at least a couple more attempts to remedy any problems and re-test the product before termination occurs.

· warranties: the warranties available in a licence agreement are normally limited:

· product performance: the licensor usually has to give some warranty that the product will perform in a certain way for a certain length of time after delivery or, if required, satisfaction of acceptance tests. The test is typically that the product will perform in accordance with the product’s specification, which will be included in the licence agreement (see below).
While committing to this as a principle, the licensor can take a number of steps to diminish the burden of this commitment. Firstly, the standard of performance: the licensor should as a starting point argue that the equipment should only perform “materially” in accordance with the specification. Secondly, the length of the warranty period should be restricted as far as possible, for example to three months.

Next, if the licensor gives this warranty it should argue that this is its sole commitment to the performance of the product, and should include into the agreement an exclusion of all other warranties, whether express or implied at statute or at common law. Finally, the licensee should seek to control what happens if the licensee can show that the performance warranty is breached in the warranty period: instead of allowing the licensee to reclaim fees it has paid, the licensor should commit to replacing or repairing the equipment within a reasonable time.

· right to grant licence: the licensor will normally warrant that it has the right to grant the licence. This impacts directly on the “back-to-back” issue raised in the earlier section, Where does your IP come from? The wording of the warranty will normally require the Licensor to promise that it has secured all necessary consents to licence its product. If the product contains IP obtained by the licensor from a third party, and the licensor doesn’t have the right to on-license that IP to the licensee, the licensor will be in breach of this warranty.

Here, too, the licensor can control the scope of damage caused by this warranty being breached. Instead of allowing the licensee to claim back costs it has suffered as a result of the warranty breach, the licensor can try to negotiate provisions stating that the licensee’s sole remedy is for the licensor to replace the product with IP which won’t breach the warranty, or to obtain the necessary permissions from the owner of infringing IP to avoid breach of the warranty in the future.

· service level agreements: a licence drafted in the licensor’s favour will provide that at the end of the performance warranty period, the licensor is no longer responsible for the product’s performance. Any problems with performance will thereafter be dealt with by maintenance services provided by the licensor, for which the licensee will pay.

If maintenance services are required, their extent will typically be described in a schedule to the contract: the licensee may well seek to impose some performance standard, including by requiring certain service levels to be stated. An example of this would be time periods for response by the licensor to the licensee’s notification of a problem.

The licensor may be happy for minimum service levels to be specified, if it is confident of reaching them. Alternatively, the licensor may seek to dilute the service levels, for example by stating that they are only target service levels.
· product specification: licensees will want to ensure that a clear and precise specification is included in the licence. This enables the licensee to tie down the licensor to delivering a product which achieves a specified performance standard.

Licensors therefore have to be very careful in how the specification is described. In many cases, the less specific commitment in terms of functionality, the lower the performance standard the licensor will have to attain. However, in certain situations it is absolutely in the licensor’s interest to be as specific as possible: an example from the biotech industry would be the licensing of a process as a trade secret, where it is in the licensor’s interest to describe the process as clearly as possible in order to delineate precisely the extent of the trade secret.
Finally, it may well be sensible to build an element of flexibility into the specification: licensing objectives change, and products are continually modified and enhanced.

IP OWNERSHIP PROTECTION TERMS

· scope of licence: this is a crucial clause in any licence. The licensor will want to control what the licensee can do with the product. The extent of this control varies according to the deal: a licensor distributing software to users around the world will have less restrictions than a licensor allowing a very limited number of licensees to exploit the licensor’s technology. Main examples of controls are as follows:

· exclusivity: licensing a product on an exclusive basis means the licensee is the only person able to use the product. In certain situations, including an exclusive license of copyright, this can prevent the licensor itself from using the product.

An absolute exclusive licence is therefore relatively rare, and is usually found in media circles: for example where a broadcaster is commissioning a television programme or a film, and requires an exclusive licence for a period of time to allow it the sole right to exploit the product.

More usually, exclusive licences are granted on a territorial basis, and/or for a particular business demographic: for example, licensing to the automotive industry in the island of Ireland. This allows the licensor to licence separately to the automotive industry outside Ireland, and/or to non-automotive industries in or outside Ireland.

The commercial rationale behind giving exclusive licences, whether territorially or demographically defined, is that the licensee should pay a premium for receiving the commercial advantage of being the sole licensee of a particular product within a regional/demographic market.

The size of the premium will depend on the size of the commercial advantage, but a licensor should always consider the ability of the licensee fully to exploit the licensed product within its market. Does it have the ability to use the product in the best way to meet the licensor’s aspirations for the relevant market, which could be pure revenue receipts or raising the profile of the licensee’s brand? Is there a risk that by granting the licensee some form of exclusivity, the licensor is limiting its own prospects by missing out on alternative, perhaps superior, partners within the excluded market?

Finally, in any commercial area where the licensor wishes to be able to sell to the licensee’s competitors, the licensor needs to check that the licence is expressed to be on a non-exclusive basis.

· non-transferability: the licence should make it clear that it is non-transferable, so that the licensee cannot transfer its benefit under the licence to another party with whom the licensor would have no contract and who the licensor would not be able to control. The licence should also restrict the licensee from sub-licensing, unless the licensor has agreed that the licensee can do this (in which case, the licensor should be imposing obligations on end-users: see EULAs below)

· restrictions on scope of use: the licensor will wish to place a number of restrictions on the licensee’s use of the licensed product. This may include a limit on the number of users of the product (above which limit the licensee must pay an additional licence fee), or a restriction on the use of the product for any other purpose than the licensee’s stated business use.

Additionally, different licences would place specific restraints on the licensee from doing anything with the licensed product which could give the licensee a proprietary interest in it, or understanding of how the product operated. For example, a software licence should always prevent the licensee from modifying or decompiling the product, in particular way as would give the licensee access from the object code to reach the source code.

In summary, the scope of the licence needs to be particularly carefully considered and drafted. The licensor needs to balance the creation of a licence which the licensee will accept with the certainty that the scope of the licence does not rob the product of its IP protection, nor restrain the licensor’s commercial activities in its desired markets.
· confidentiality: confidentiality clauses in licence agreements are usually included as a “boilerplate” term expected of any contract documenting a business arrangement. Usually, the clause obliges each party (licensor and licensee) to protect the other party’s confidential information.

The licensor needs to take care here: the protection may be useful to preserve any of the licensor’s confidential information (such as pricing information, business methods, even the licensor’s performance under the licensing contract). In particular, in a trade secret licensing agreement, care needs to be taken to ensure that the full extent of the trade secret is classed as confidential. However, care needs to be taken in defining what the licensee’s confidential information is: in particular, will it include data processed by the licensee as part of its business, for instance customer data? For example, a SaaS system licensor whose system inadvertently disclosed customer information could in this situation find itself in breach of confidentiality requirements.

In certain situations, however, the confidentiality wording is mandatory to protect the licensor’s IP: for example, licensing of any process as a trade secret. In situations where the licensor wishes to ensure the licensee’s confidentiality, the licensor should also consider an explicit indemnity from the licensee to compensate it financially for any loss suffered as a result of a confidentiality breach. Additionally, the licence should allow the licensor to take pre-emptive steps to prevent a breach where it believes this likely, for example by obtaining an injunction.

· escrow: in certain licensing situations, particularly in IT transactions, the licensee may call for products to be placed in escrow. An escrow agreement is a tri-partite arrangement under which the licensor agrees to deposit a copy of the product with an escrow agent. The escrow agent undertakes to the licensee that it will deliver a copy of the product to the licensee in certain events, including in particular the insolvency of the licensor.

Escrow agreements are of particular use where a licensee believes itself dependent on the licensor’s product, and fears that its ability to use the product will be materially affected by the licensor’s insolvency. In a software licensing situation, the source code of the software would be held in escrow and released to allow the licensee to develop the code itself or get outside assistance to do so.
If licensors find themselves forced to accept escrow agreements, the terms of the escrow agreement should be carefully examined: in particular, the terms stating when the product held in escrow is released to the licensee. One thing for the licensor to be wary of is any commitment that its product is released upon its insolvency: there are several stages of insolvency, and the licensor should avoid escrow being triggered at too early a stage of the insolvency process.

· ownership of IPRs: another particularly important clause in any licence agreement. This clause should make it clear that the licensor retains ownership of all IPRs licenced by it under the agreement. The licensee should acknowledge that it gains no interest in these rights, and cannot deal with them (for example, by leasing, sub-licensing, charging by way of security) in any way other than specifically and explicitly permitted by the licensor. It is imperative that the licensor asserts its ownership in this way to ensure that it retains control if its IP.

· EULAs: end-user provisions are appropriate where the licensee has the licensor’s permission to on-license the product to its own customers. The licensor’s concerns here are explained in greater detail in the preceding section, Who are you licensing to?

LIMITATION OF LIABILITY TERMS

· liability for breach of performance warranty: the manner in which the licensor should limits its liability for failure of the product to work properly is described more fully at Warranties above. The licensor should resist as far as possible any attempt by the licensee to seek an indemnity from the licensor. This would allow the licensee a contractual right to claim compensation of loss it can prove it suffered as a result of the product’s failure to perform. Indemnification is a contractual obligation on the licensor: if the licensee can establish loss, the licensor has to pay up.

The licensor should argue that, instead of having the advantage of a contractual right to compensation, the licensee should only get compensation if the courts think fit: i.e., the licensee has to demonstrate the worth of its claim by first proving it in the courts.

If the licensee successfully negotiates an indemnity, the licensor should insist that the indemnity is subject to a financial cap: see general limitation below.

· liability for breach of intellectual property rights warranty: again, the recommended limitation of liability is detailed at Warranties above. Here, too, the licensee may well seek a specific indemnity to compensate it for loss occasioned by a third party claim that the licensee’s use of the product infringes the third party’s IPRs. The request for this indemnity should be dealt with as per the previous bullet point. Additionally, the conduct of any such third party claim should be transferred into the control of the licensor, so that the licensor can be confident that the licensee will not admit to breach of the third party’s IPRs, or offer any settlement amount, without the licensor’s approval.

· general limitation: it is a commercially accepted principle that a licensor may attempt to limit various grounds on which it may be liable to the licensee. This principle is based on the concept that the value of the licensed product in the licensee’s business, and the potential damage which the licensee may suffer if the product fails, may far exceed the price paid by the licensee to the licensor.
Losses fall into different types:

· death or personal injury caused by the licensor’s negligence: a licensor cannot exclude its liability for this sort of loss

· damage to tangible property: because of the relatively wide availability of insurance on reasonable terms against liability for damage to tangible property, it is not unusual for there to be a specific limit for property damage which is capped at a higher amount than the limit for financial losses

· financial loss: the remaining category of loss is largely financial. A licensor should seek to limit the scope of loss in two ways. Firstly, by negotiating a financial cap, reasonably proportionate to the amount received by the licensor by way of payment: secondly, to exclude liability for a range of losses which are not direct consequences of the licensor’s act and which are too indirect reasonably to be compensated.

One final point: it is always in the licensor’s interest to limit its liability as far as possible. Generally, however, limitations of liability apply to both parties to a contract: the licensor needs to take care that by negotiating a low liability cap it has not inadvertently restricted its own ability to claim adequate sums from the licensee, for example where the licensee breaches its own obligations. At the most extreme, a licence negotiated aggressively in the licensor’s favour would only allow limitation of the licensor’s liability to the licensee, and not vice-versa: the success of such a limitation would depend, as ever, on the bargaining power of the parties.


PROTECTING THE DEAL TERMS

· payment: clear terms describing how the licensor will be paid are obviously crucial to a licence agreement. The timing of payments depend on the deal: in shorter transactions, the licensor may require payment up front: in longer transactions, the licensor may be happy to receive payment on a periodic basis. In transactions where the licensor has to incur significant initial costs itself to meet installation or implementation requirements, the licensor will typically ask for a large payment to cover its own costs up front, and then a subsequent periodic annual charge for licencing and perhaps maintenance. The successful licensor will negotiate the periodic payments as being annually in advance.

The licensor should also consider on what basis it wishes to be paid. Will it require a flat fee? Is the licence agreement sufficiently lengthy as to require price increase mechanisms to be included? If the licence is on an exclusive territorial or demographic basis, the licensor may want an increased reward in exchange for its grant of exclusivity: for example, it may require the licensee to buy a minimum amount of the licensed product, or commit to a minimum number of sales within a particular period. The licensor could require that these minimums increase as the contract continues.

Frequently, the licensor requires a percentage share of the revenues as its payment. The licensor must take particular care over how its share is calculated: what revenues is the share based on? Are taxes deducted first? Is any other amount, for example the licensee’s purchase or installation costs? Care in drafting the basis of revenue share calculation will protect the amount payable to the licensor.

· duration: the licensor will wish to ensure that the license runs for an appropriate length. This requires careful thought: too short, and the licensor might not receive sufficient payment to recompense its own investment in the license; too long, and the licensor may find itself trapped into an unprofitable transaction. The licensor should consider its own business model to see the minimum length it wants a contract to last in order to recover costs and hit its commercial targets: the licensor can also control risk here by ensuring that appropriate termination provisions are inserted into the licence.

· termination and its consequences: termination has two important purposes for the licensor:

· firstly, to ensure that it can terminate its relationship with the licensee in the event of the licensee’s material breach of the licence agreement, or the licensee’s insolvency. This can protect the licensor against any actual, or even anticipated, disclosure or unauthorised modification of the licensor’s IP: it can also, where drafted appropriately, allow the licensor to terminate the licence if the licensee continually fails to pay

· secondly, the licensor may require a termination “at will” provision. This is a break clause allowing either party to close down the contract by giving written notice. The licensor will, as noted at duration above, wish there to be a minimum period in which the licensee cannot terminate at will. For example, a licence agreement may specify that there is a licence period of five years, after which the agreement can be terminated by either party on three months’ written notice.

In an relationship where a licensor is receiving a revenue share payment, a licensor can use a termination at will provision effectively to hedge its bets: it may want a five year relationship, for example, but also want the ability to get out of the relationship after three years if the licensee is not succeeding in exploiting the licensed product. In such a situation, the licence would allow for a minimum five year lock-in term, but would allow either party to terminate at the end of year three if the revenue share received by the licensor at that point was less than an agreed amount.

The final point in relation to termination is that the licence should be very clear about the consequences of termination. Fundamentally, the licence to use the licenced property should be stated to cease. If the licensor requires any materials or product to be returned, this should be stated in the contract.

Where does your Intellectual Property come from?

A crucial issue to consider before an organisation licenses its IP is the need to check the organisation’s actual right to license the IP. Does the organisation actually own the IP? If the organisation’s product uses IP provided by a third party, has the third party entered into a licence agreement with the organisation?

Of vital importance, does that licence agreement allow the organisation to bundle the third party’s IP into the organisation’s own product and on-licence it?
The importance of this can hardly be overstated, and this is an issue frequently overlooked in any licensing transaction. The reason for its importance is two-fold:

• if the organisation (party A) licenses to a licensee (party B) IP which A itself obtained from a third party (party X), A needs to be certain that it is permitted to on-license in this way. If such on-licensing is prohibited under the terms of A’s agreement with X, or imposes terms on how X’s IP must be sub-licensed, A will be in breach of the agreement with X to the extent that it on-licenses X’s IP or fails to fulfil the conditions imposed by X on the on-licensing. In such a situation, X will be able to sue A for damages caused by the breach of contract.

• secondly, party B may negotiate terms with A which require A to warrant that it has all necessary consents to allow B to use the licensed IP, including X’s IP. B may also require a specific indemnity from A so that A agrees to compensate B for any losses suffered as a result of a legal claim that A has no right to license the IP it is providing to B.

In this situation, party A is in serious trouble if it does not have the necessary permissions from X to provide X’s IP to B. It will be in breach of warranty to B, and liable to the indemnity being triggered if B suffers a loss as a result of A’s failure to obtain the necessary permissions from X.

In this example, party A needs to take extreme care to “back-to-back” its obligations to party B with the benefits it receives from party X. A can only allow B the scope of use of X’s IP which the agreement with X allows it to on-license. Equally importantly, the extent to which A agrees to be liable to B needs to back-to-back with the extent of liability offered by X to A. For example, if X agrees to be liable up to a financial cap of £1 million for failure of its technology to work, A would be extremely unwise to offer a £5 million cap to B in relation to X’s technology. If X’s technology failed and B claimed losses of £4 million from A, A would only recoup £1 million from X.

A typical area where IP licensors overlook the terms on which they themselves have licensed IP is in the software licensing world, in particular in relation to Open Source software. This is software the source code of which is made available to the end user for free: it is therefore attractive to many developers.

Users of Open Source software frequently overlook the fact that while it may be provided for free, this does not mean that the Open Source organisations do not impose restrictions on the use of the software. For example, Open Source licences frequently require that the Open Source organisation is given some form of credit in any on-licensing by an Open Source user; alternatively, the Open Source user may be required to document any changes made to the base Open Source product. Occasionally, the libertarian ethos underpinning Open Source has encouraged users to believe that there are no restrictions on use. The trend of recent court cases, however, is to protect the interests of the Open Source organisations: in Jacobsen v Katzer (August 13th 2008, US Court of Appeals) a court not only upheld the credit and change documentation restrictions as enforceable, but added that the user’s failure to comply with them was not simply a breach of contract, but also a breach of copyright. This allowed the supplier the extra remedy of suing for copyright infringement. Licensors who use Open Source code should therefore take care that they comply with any restrictions relating to how the code should be used and on-licensed to the licensor’s licensees.

Guide to Licensing - Part 1

WHAT IS A LICENCE?

Licence comes from licens, the Latin for the verb "to be permitted". The concept of permission is central to licensing: the owner of a particular product is permitting someone else to use the product. The owner wants both to allow use of the product, but also to protect its ownership: the licence agreement allows fulfilment of both of these requirements.

A licence arrangement is a useful alternative to a sale or a purchase arrangement. In a sale, the seller transfers legal ownership of the sold article to the buyer: the deal is over at that point. In a licensing situation, the licensor retains ownership of the product and can derive a lasting range of benefits: a continued revenue stream, the ability to provide maintenance and support services to the licensee, the ability to share in any intellectual property rights (IPRs) generated by the licensee through use of the licensed product - these are all benefits which, if the licensee agrees, can arise from a licensing relationship.

Licensing can also be a strategic decision: for example, a company may be rich in intellectual property (IP), but may not have the resources to manufacture products based on the IP. Alternatively, the company may not have the ability to market its product. Finally, and frequently, a company may recognise that its product is best sold as a component of a bigger product created by another organisation: allowing the other organisation to manufacture and market saves the company significant costs, and may allow important access to a significant market share.

All of the commercial situations listed in the previous paragraph should be achieved through the use of a licence, in order to protect the licensor's ownership of IP in its product. The licence will contain an explicit assertion of the licensor's ownership of the IP, and will carefully define the scope of the licensee's right to use the product.

Commercially, therefore, a licence is a contractual relationship which balances the licensor's ability to derive benefit through exploitation of its product with its ability to protect ownership of its IP.

IMPORTANCE OF PROTECTION

There is an almost infinite number of licensing arrangements: software licences, outsourcing arrangements, pharmaceutical or bio-tech licensing and distribution arrangements, end user licence agreements to name but a few. Licensing arrangements can differ widely on commercial terms. For example, a telecoms company licensing its product to the public will have a standard form agreement containing contractual protections for the licensor appropriate to an organisation contracting with customers numbering in hundreds of thousands. Different contractual terms will be contained in a license where an IP company contracts with a handful of organisations around the world, offering each organisation exclusivity within the organisation's particular territory.

Different types of contract differ radically in their terms: an SaaS company's license terms will vary significantly from a pharmaceutical company entering into an R&D development. This is hardly unexpected: the differing terms reflect the number of different commercial transactions that can be achieved through licensing.

But there are some contractual aspects which are common to every license. This goes back to the central purpose of any licence, being to protect. Each licence should always achieve the following three types of protection:

• Protection of ownership of IP: the licensor's IP is a significant asset of the company into which time, resources and cost have been invested. The key purpose of a licence is to preserve the licensor's ownership of its IP.

The contractual terms which are used to preserve this ownership are detailed at section C below. However, it may be fair for an IP owner to object that its IP is already protected by some aspect of intellectual property law: for example, the company's product may be an invention protected by a patent, or source code for software protected by copyright, or even a process protected as a trade secret. If the product is already protected in this way, why should it separately require protection through a licensing agreement?

This question seems even more relevant when the fact is taken into account that a license agreement can be said to diminish a product's existing protection, by allowing the licensee to use the product. In this sense, a license is an agreement to do something with someone else's property which, were it not for the license, could be legally prevented and/or could give rise to a legal cause of action (breach of copyright, breach of patent, breach of confidentiality). If a licence is diminishing pre-existing protection in this way, how can it itself be regarded as providing protection?

The issue here is that the product may well be protected by intellectual property law, but this protection will suffer as soon as the owner allows use of the product by another person. A properly drafted license, therefore, will allow this use, but only on terms which carefully define the scope of the use and protect the IP of the licensor.

For example, consider a situation where a company wishes to licence a secret process to another company. Such processes are typically protected as trade secrets. Trade secrets are an incredibly fragile form of intellectual property, since they can only be classified as a trade secret while they are an actual secret: as soon as the process is divulged to the public, it loses any right to be qualified as a trade secret. In this example, the licensor of the trade secret has successfully maintained the secrecy of the process, for instance by limiting physical access to the process operation area and limiting knowledge of the process to a small group of people, as well as imposing strict confidentiality obligations in employee contracts and on visitors to the licensor's premises. The licensor now wants to divulge the trade secret to the prospective licensee: how can he do this without compromising the essential secrecy of the process?

The answer is that the licence agreement will be used to maintain the secrecy of the process, by clearly identifying the extent of the trade secret and placing detailed confidentiality obligations on the licensee and its staff. This is an example of a fundamental quality of any licence, the protection of the licensor's intellectual property.

• Protection of reward. The fundamental aim of a licence may be to protect the licensor's IP ownership, but almost as important an objective of the licence is to secure the licensee the benefit expected as a reason for entering into the licence in the first place.

The benefit is usually financial: the licence will contractually oblige the licensee to make a payment to the licensor. However, in many situations the benefit may not be financial: the licence may occur as part of a collaboration agreement between two organisations sharing their IP to create some greater product; alternatively, the benefit may simply be exposure of the licensor's product to the licensee's client base to increase brand profile.

Whatever the nature of the benefit, the licensor's right to it should be clearly explained in the licence agreement: this then gives the licensor a contractual right to the particular benefit, and failure on the licensee's part to provide the benefit will entitle the licensor to sue for breach of contract.

• Protection against liability. The third protection offered by a licence is the scope for a licensor to limit its liability to the licensee, or the licensee's end-users, for certain types of breach committed by the licensor.

Why should a licensor be allowed to limit its liability for its product? Firstly, it is relatively commercially accepted that if a product fails to work, the licensor should not be responsible for repaying the initial sums paid by the licensee, plus the licensee's cost of replacing the product, plus the cost to the licensee of every possible consequence of the product's failure to work. These costs could amount to a financial sum which is disproportionate to the amount of payment originally received by the licensor. As a commercially standard principle, therefore, the licensor should be able to place a financial cap on its liability (although there are certain liabilities which may not be limited by law, such as liability for death or personal injury caused by the licensor's negligence).

Secondly, a less subtle reason for limiting the licensor's liability is that it is obviously in the licensor's interests to do so. This point increases in importance in a situation where a licensor has licensed a product to numerous licensees, and the product develops a generic flaw: if each licensee claimed successfully, the licensor would be facing a huge bill. The further the licensee can limit liability in each licence, the lower the size of overall cost. The licence can therefore provide protection to the licensee by controlling the scope of the licensor's liability.

IMPORTANT LICENSING ISSUES TO CONSIDER WHEN ARE YOU LICENSING?

It is important to remember that an organisation may be licensing even though it is not in the process of taking its product to market. Any arrangement where an organisation allows another organisation to use its IP will involve licensing. Examples include:

• R&D: contracting with another organisation to pool resources with the aim of developing an improved product, or a combination of each party's product, will necessarily involve licensing.

Consider the following situation, which is a typical R&D collaboration scenario. Two parties enter into a contract to further the development of a product incorporating IPRs owned by either party. One party may be developing and providing hardware, and will therefore own the IPRs subsisting in the hardware. The other may be providing technology to enable the operation of the hardware, and will own IPRs in that technology. The parties work together to develop and test the combined product. In order to achieve these objectives, a correctly drafted collaboration contract would contain the following licences:

• Each party would license to the other party the use of such pre-existing intellectual property rights in the licensor's product as the licensee needs to use in order for it to complete its share of the collaboration services. Pre-existing intellectual property rights means rights existing at the point that the collaboration agreement begins;

• The contract would also deal with new intellectual property rights generated by either party during the course of the collaboration services. Typically, the contract would state that each party owns intellectual property rights it generates during the contract, and would license the use of such intellectual property rights to the other party to the extent required by the other party to fulfil its collaboration services obligations; and

• Finally, the contract would typically assert each party's rights of ownership of its intellectual property rights, and impose contractual restrictions on the other party's use of such rights.

•During manufacture: IP companies frequently lack the resources to manufacture their product: alternatively, they may find it more cost effective to outsource the manufacture process.

Any contract resulting in the manufacture of a product will need to allow the manufacturer to use the IP comprising the product. In order to protect the IP, the IP owner will impose restrictions on the scope of the manufacturer's use of the IP: for example, limiting such use solely to the purpose of manufacturing the required product, and limiting permission to use the IP solely to the duration of the agreement. An example of this would be a manufacturing arrangement entered into by a pharmaceutical company wishing to produce a particular pharmaceutical product. The composition of the product is likely to be protected by patent: the actual process by which the product is made may well be a trade secret. The manufacturing agreement will have to be a carefully drafted licence to allow the manufacturer to make the product, and will have to licence the intellectual property as follows:

• The licence to use the patent requires particular attention. A major problem with patent licenses lies in the fact that a patent does not grant the patent owner the right to make anything: rather, it grants the owner the right to prevent anyone else from making, using or selling the invention. It follows that any attempt to phrase a licence in a way that explicitly permits the licensee to make, use or sell the patented invention is invalid. Worse, if the licensee has obtained an explicit warranty from the licensor that the licensor has the right to grant the license, the licensor will be in breach of this warranty and liable to the licensee.

Instead, a patent licence needs to grant the licensee protection from infringement lawsuits being brought by the licensor for the licensee's making, using or selling the patented invention.

• The process protected as a trade secret needs extreme protective measures, given the fact that a single unintentional disclosure of a trade secret can rob it of its secrecy and thereby forfeit its protection.

The manufacturing agreement will therefore impose extensive confidentiality obligations on the manufacturer in relation to the use of the process.

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