For those who are unfamiliar with the iPhone ecosystem, jailbreaking is iPhone user parlance for modifying the smartphone’s firmware so that it operates with applications (or “apps”) which are not sold through the Apple iTunes App Store. Jailbreaking opens up the ecosystem by enabling iPhone owners to run any apps they wish. Apple, citing reputational and user experience concerns, such as avoiding security breaches and malfunctions, as well as the need to protect app sellers on the App Store from unauthorized distribution of their works, has opposed jailbreaking and lobbied vigorously to maintain a closed ecosystem.

Of course, Apple has a vested interest in keeping the App Store the exclusive source of iPhone apps, as it frequently takes a cut of sales. Furthermore, according to the Electronic Frontier Foundation (EFF), which led the battle to legalize jailbreaking, Apple is somewhat puritanical about what apps may be featured on the App Store. In 2009, for example, Apple initially barred a Nine Inch Nails-themed app from the band’s front man Trent Reznor, as well as “Me So Holy,” an irreverent app that pastes a snapshot of the user’s face over the faces of hallowed religious figures.

The copyright issues involved in the rulemaking, while complex, are worth considering, since they raise cutting-edge issue of digital fair use that will become ever more germane as smartphones (and iPads) become our can’t-live-without, all-purpose personal computing, communication and multimedia devices.

Thou Shalt Not Circumvent, Except….

The so-called “anti-circumvention” provision of the Digital Millennium Copyright Act (DMCA), 17 U.S.C. §1201(a)(1), prohibits the circumvention of technological measures (also known as digital rights management or DRM) that “effectively control[] access” to copyrighted works. In this case, jailbreaking often requires the bypassing of software locks controlling access to the copyrighted iPhone firmware, the bootloader and operating system. Therefore, until now jailbreakers ran the risk of being sued for unlawful circumvention.

However, under the DMCA, the Library of Congress and the Copyright Office may hold rulemakings to create three-year exemptions permitting the circumvention of technological measures controlling access to certain classes of copyrighted works if users are likely to be adversely affected in their ability to make non-infringing uses of those works due to the circumvention prohibition. EFF sought such an exemption, as well as an exemption for DVD “ripping” and a renewal of the 2006 exemption allowing smartphone users to unlock their devices to work with a variety of wireless networks (Apple strikes again).

EFF ended up winning all three exemptions, with some limitations. While it made a number of arguments in favor of the right to jailbreak, the one that clearly resonated the most with the Register of Copyrights was that the modification of the firmware code (technically, the creation of a derivative work, one of the exclusive rights reserved to the copyright holder) to permit interoperability with unapproved apps is a fair use and, therefore, non-infringing.

Fair Use and the Quest for Interoperability

In evaluating the statutory factors of fair use analysis to reach this conclusion, the Register of Copyrights emphasized that the firmware modification is a private and non-commercial use (specifically, use on the very wireless handset owned by the user and for exactly the purpose the code was created, to operate applications) that does not injure Apple’s copyright interests as the owner of the code (though it does impinge on Apple’s interests as “a manufacturer and distributor of a device”). The ruling also noted that the DMCA embodies a statutory policy favoring uses that make software programs interoperable.

Looking at the nature of the work claimed to infringed, the Register of Copyrights observed that the firmware (basically, an operating system) was of a functional (as opposed to a creative) nature and was intended to enable the running of applications. With regard to the “amount and substantiality of the portion used in relation to the copyrighted work as a whole,” while reuse of the most of the original firmware is necessary to run apps, the Register of Copyrights did not give this factor much weight, since the modified code typically represents 50 bytes or less out of approximately 8 million bytes. Most tellingly, with regard to the final fair use factor, the effect of the use on the market for or value of the copyrighted work, jailbreaking does not involve or threaten the commercial exploitation of the firmware, which has no independent economic value apart from the iPhone. Once again Apple fell back on a reputational argument that allowing an exemption would jeopardize the integrity of its ecosystem. But, as the Register of Copyrights noted, this is not a concern that fair use analysis is meant to address.

The cell doors of iPhones and iPads have now been sprung open. However, as a cautionary note, app users should be aware that certain software upgrades provided by Apple will disable jailbroken phones, and failure to install these upgrades may void the user warranty. Still, there’s no question that horizons have widened for app users and developers alike, particularly in the iPad gold rush now currently underway.

Yes, you heard that correctly. In the last few months, the federal government has brought indictments against several individuals under a 1986 anti-hacking statute, the Computer Fraud and Abuse Act (the “CFAA”), for engaging in otherwise legal online behavior that nevertheless violated website terms of use. The CFAA (18 U.S.C. §1030) imposes criminal and civil sanctions for access to a protected computer without authorization or exceeding the scope of authorization. The theory used by government prosecutors and private litigants is that the do’s and don’ts spelled out in website terms of use define the scope and limitations of permitted access. Any behavior contrary to such terms, then, renders the site access illegal. In the most common application of this theory, an action is brought against a data aggregator or other person for using bots (automated software programs) to access a public website whose terms of use prohibit access through “automated means.”

Cops Armed with Website Terms

Even apart from the argument that the CFAA was never intended to prevent non-invasive access to public websites, the EFF highlights another problem with this theory: it delegates to private website owners the ability to define what is and is not criminal behavior. As a Internet lawyer who has both written and reviewed many website terms of use and privacy policies over the years, I can appreciate the EFF’s concern that they are rife with arbitrary and one-sided clauses.

In United States v. Lowson, federal prosecutors brought an action in New Jersey against the operators of Wiseguys Tickets, Inc., which used bots to buy concert tickets on the Ticketmaster.com website for resale, contrary to the site terms of use which prohibited access by automated means. Although scalping is not illegal in New Jersey, the government justified its action by a supposed need to protect consumer access to tickets. The EFF has filed an amicus curiae (friend of the court) brief on behalf of the defendants in this case.

In United States v. Drew, the feds indicted a woman who created a false profile on MySpace and used it to communicate with a teenager, who later committed suicide. The EFF similarly filed an amicus brief for the defense, and the indictment was ultimately dismissed.

Facebook is using a similar theory in a civil suit against a company called Power Ventures. Power Ventures provides an add-on that enables Facebook users to aggregate their data over several social media sites. Facebook is alleging that Power Ventures violated California criminal law because the add-on utilizes a bot (in violation of the Facebook terms of use) to retrieve user data. (Never mind, as the EFF has wryly observed, that the bot is being deployed at the user’s initiative to obtain his or her own data.)

Confusion in the Law

I’ve been following these cybertrespass case for years, and on a number of occasions I’ve counseled data aggregators using bots and other aggregation tools to harvest factual and similar uncopyrightable data from publicly accessible websites. It’s an exceedingly common practice, part of the landscape of the Internet that we are coming to take for granted. Unfortunately, the law hasn’t kept pace with technological evolution and business practices. The authorities are conflicted, and while some cases set a high standard for proving damage or loss in common-law computer trespass and CFAA actions based on violation of website terms (for example, a substantial slowdown of the web server or exclusion of other users due to tens of thousands of pings from bots over a short period of time), other courts have left the door wide open for suits.

As the EFF has observed, the defendants in these cybertrespass cases (scalpers, an unfriendly adult tormenting a teenager online, a etc.) are not terribly sympathetic. In the first rash of civil cases in the early 2000’s, the defendant was generally a competitor of the plaintiff which used to bots to copy factual data (such as movie times) from the plaintiff’s site. On some level this may seem unfair, since a website operator makes an investment in time and resources to assemble and publish the information in the first place. On the other hand, where the copyright law does not grant protection in publicly available content, the purpose of the law is circumvented by engineering some other legal cause of action effectively to prevent the copying and republishing of this content. (Copyright protects creative expression, and raw factual data by itself lacks even the minimal creative quotient needed for copyright. The fact that it may be difficult to assemble is legally irrelevant.)

Finding a Balance

The bringing of criminal prosecutions for violating public website terms of use takes the confusion in the law to a frightening new level. Even if courts ultimately dismiss the indictments (as happened in the Drew case), the threat of prosecution can be expected to deter competition and chill the beneficial use of data aggregation tools to enable the free access and management of data on the Internet, including users’ own data. Furthermore, as the EFF has noted, innocent parties who do not read or do not understand the terms of use of the sites they are accessing may be caught in the cybertrespass dragnet.

While the use of bots to access and harvest data from protected areas of sites (such as third parties’ personal profiles designated as private and shielded by privacy settings) should be actionable and treated as a criminal offense under the CFAA, website operators should not look to the government to police users on the public areas of their sites. Rather, let them be responsible for enforcing their own terms of use under breach of contract law and provide evidence of actual, quantifiable damages from user access they don’t like.

Still, if a major part of your business is a website or software application (including iPhone and Facebook apps), it’s well worth the time and (minimal) expense to put in place at least a simple contract with your developers. This contract should get signed BEFORE the developer begins any substantial work on the project

What you get with a solid developer contract

Why do you need a properly written contract with your developer?

1. Confidentiality. Ideas have legs — muscular marathon runner’s legs — and you don’t want your developer to walk the idea for your new website or app across the street. It’s difficult to protect still-inchoate ideas and requirements (as opposed to completed designs, specifications or prototypes) under intellectual property law, since bare ideas in the process of formulation are not copyrightable or patentable. Moreover, the allowance rate for business method patents is extremely low (presently under 10%), and the cost of prosecuting patents is typically tens of thousands of dollars, so you should not count on being able to patent your website, program or app even at a more advanced stage of development. What this means is that, besides avoiding disclosures except where strictly necessary, contract protection (i.e., a non-disclosure or “NDA” clause) is your best bet to protect your idea as it is being developed.

2. Intellectual Property Ownership. Even if a bare idea is probably unprotectable, at some point the development of your idea is going to lead to the creation of protectable intellectual property. In the context of web or software development, this could be some or all of the following: (1) code, web design, graphics, images, text and other creative content (all of which can be copyrighted), (2) logos, slogans, catchy domain names and similar branding features (which can be trademarked), (3) look and feel (which is potentially protectable as trade dress), and (4) in rare cases, patentable inventions (if your site, program or app does something new, useful and non-obvious in light of the current state of the art).

It is a widely held but mistaken belief that if you pay a contractor to do something for you, you automatically own all IP rights in the work product because it is a “work made for hire.” (In fact, even attorneys often make this mistake, as I was reminded when I was a reviewing an IP asset purchase agreement drafted by opposing counsel the other day.) “Work made for hire” is a copyright concept only; furthermore, with outside contractors, it applies only to select types of specially commissioned works like atlases, parts of motion pictures or other audiovisual works, tests and instructional texts, which are generally irrelevant to the context we are discussing — and even then, a written agreement stating that the works are “made for hire” is still required!

In plain English, what all this boils down to is: you don’t own it (even if you paid for it) unless there is a contract that says you do. To be legally effective, the contract must also assign all relevant copyrights, patent rights and other IP to your startup. Without such a contract, you only get a license (i.e., a narrow right to use), the developer still owns any copyrights and patents, and it is free to use or commercialize this IP elsewhere. Potential investors and acquirors looking at your startup will want to see that you have IP ownership buttoned down. If you don’t own your product, watch out.

3. Getting What You’re Paying For. In development parlance, this refers to scope and specifications: you are paying X for the developer to build you Y, with Y being fleshed out in as much detail as possible in the contract. The importance of getting this nailed down is best illustrated by a common horror story: Client goes to Developer and asks Developer to build a site with A, B and C features and functionality. Developer says sure, no sweat; it’ll cost you $5,000, half up front and half on completion.

Developer labors for a month before realizing that he seriously underbid the project, which is far more complicated than he had considered. So he stops work and informs Client: sorry, I can’t possibly make a profit on this deal, but because I’m a warm-hearted stand-up guy, I’ll agree to just keep the $2,500 you’ve already paid, even though I’ve done $6,000 of work. For this largesse I welcome any comparisons to Gandhi you care to make. Client, who is out $2,500 and doesn’t have a website, is not inclined to award any Nobel Peace Prizes.

Developers may cry foul at this narrative. The common argument I hear from developers is that clients think developing a website is like rehabbing a bathroom, i.e., the client knows what it wants and parameters of the project are fixed at the outset, so there is no scope creep. In contrast, the argument continues, development clients actually DON’T know what they want. Their requirements are constantly in flux, and they require endless rounds of revisions.

Fair enough. But this doesn’t undermine the case for a contract. Quite the opposite, it means a contract is urgently needed by both parties to manage expectations. The contracting process is an opportunity for both sides to crystallize and refine those expectations before money is spent — what will the basic functionality/features be? what platform will the site run on? how many rounds of revisions are included? what will additional revisions cost? And so on.

The idea is that scope is reduced to writing as much as possible at the discussion stage instead of during the thick of development (and ideally a process is defined to handle any requested changes in scope). If it is impossible or impractical to draft detailed functional specifications at this stage, they can be a deliverable to be approved by the client later. (For complex or expensive sites or programs, the parties may end up splitting the risk by handling functional specification development and actual coding as two separate projects, each covered by its own scope definition and cost parameters, with the client having the option whether or not to proceed to stage 2.)

4. Getting It When You Need It. Launch is everything to startups. If a site or program isn’t ready or isn’t debugged by the time desired, this creates all sorts of risks — risk of the competition getting a jump on you, risk of seed capital running out, cash flow risk if an expected stream of revenue is postponed, reputational risk if you’ve heavily promoted the launch and then have nothing (or nothing respectable) to launch. A well-drafted development contract, therefore, should include key deliverable milestones along with delivery dates, and payments should be tied to successful achievement of these milestones in order to incentivize developer performance. A meaningful portion of the development fee (a third or more) should be payable only after final delivery and successful completion of user acceptance testing.

5. Legal Stuff. This is the part that startups really hate, but it can be critical if a dispute arises (as it frequently does). Say a Philly client hires a developer in California to build a site for $10,000. The parties sign a contract, and the developer takes the client’s up-front payment of $5,000. The developer then absolutely does nothing and greets the client’s increasingly anguished entreaties with an upraised middle finger.

It doesn’t take a tech lawyer like me to tell you the developer breached the contract. But how does the client left in the lurch get a remedy? The contract says nothing about where disputes will be litigated (venue) or which state’s law will apply to the interpretation and enforcement of the contract (choice of law). The answer is that the client hires a California litigator at $500/hr to fight over these issues, as well as over the underlying breach-of-contract issue, and after spending $100,000+ in legal fees (and traveling to California to testify), after three to five years the client may get its $5,000 back or perhaps a court order forcing the developer to finish the site.

Obviously this is a losing economic proposition for any client, and it would be insane to sue, despite the legal merits of the case. On the other hand, let’s say the contract had provided that the law of enforcement would be Pennsylvania’s, that any litigation must take place in Philadelphia, and that the party prevailing in any litigation would be entitled to be reimbursed for its legal fees, in addition to any recoverable damages. The costs and risks of enforcement are now working in the client’s favor; it can now bring the suit in Philly, representing itself pro se if necessary, and force the wrongful party (the developer) to pay both sides’ litigation costs, which is a big stick indeed. Of course, there may still be reasons why litigation is not advisable (for example, the client would still need to get a California court to enforce the Philly court’s judgment, and the developer may not have sufficient assets to pay the client’s legal fees and damages, which defeats the whole purpose). However, the client’s ability to raise at least a credible threat of litigation, together with the possibility of much higher costs for the developer, thoroughly changes the dynamics of the dispute and gives the client greater leverage.

Avoiding the 15-Page Monstrosity

If you think that adequately addressing these considerations requires a 15-page contract which would take months to negotiate and consume thousands of dollars in legal fees, you’d be wrong. All of this can be easily hammered out in relatively simple language taking up a couple of pages. Legal fees should be minimal if you’re dealing with an attorney who knows technology and is used to working with startups (otherwise, you may very well get the 15-page monstrosity).

Your startup doesn’t need a perfect agreement with every conceivable bell and whistle; the perfect should never become the enemy of the good. But the basic issues I have described need to be covered. It’s no exaggeration to say that the costs of not obtaining basic protection, in terms of both money paid out to developers and lost future opportunities for your startup, are likely to vastly exceed the legal fees.

And, developers — this is for your own good too. Think about helping your clients by creating a simple contract template with some moderated version of these basic protections for the client built in, along with protections against scope creep and whatever payment terms you need for your business. Contrary to popular belief, contracts aren’t just (or even primarily) for hypothetical future litigation — if drafted well, they are litigation-preventers and value-enhancers, allowing projects to glide to completion along a pathway of smoothly aligned expectations.

Personally, I enjoy Twitter (can’t deny it, since you’ll see my tweets all over www.baerbizlaw.com!). I understand its value as a promotional tool for entrepreneurs, and, as a technology and social media lawyer, I relish the legal mind-benders it raises. Still, I can’t say that millions of tweets like “Lying on the couch!” or “I’m sipping a capuccino!” make me shiver with voyeuristic delight or enrich the world.

Speaking of legal mind-benders, consider Horizon Group Management v. Bonnen, a Cook County, Illinois circuit court case in which a property management company brought a defamation suit against a former tenant who tweeted, “Who said sleeping in a moldy apartment was bad for you? Horizon realty thinks it’s okay.” The case is interesting because it involves not only the content of Ms. Bonnen’s tweet (defamation and libel require factual content, specifically the publication of a false statement of fact; pure opinions are not defamatory), but also how it should be interpreted in the Twitter context.

Ms. Bonnen was represented by attorneys at The John Marshall Law School Center for Information Technology and Privacy Law. In their motion to dismiss, counsel for the defense cited a 2009 study in which more than 40 percent of tweets were deemed “pointless babble.” (ONLY 40 percent?) “When one considers Ms. Bonnen’s allegedly defamatory tweet in the social context and setting in which the statement was published,” they argued, “its nature as rhetorical hyperbole is readily apparent.” Or, to put the argument more bluntly, given the widely acknowledged stupidity of Twitter and the verbal diarrhea of many of its adherents, no one should reasonably have read a factual dimension into Ms. Bonnen’s moldy tweet.

Circuit Judge Diane Larsen granted Ms. Bonnen’s motion to dismiss without issuing a written opinion, although she did note in court that the complaint was too vague. The result, therefore, turned on the judge’s view that the complaint was not well constructed enough to satisfy the Illinois defamation standard.

Although I admit I was not in the courtroom, I find the outcome a bit surprising because the tweet does seem to state, or at least clearly imply, that Ms. Bonnen was or is a tenant in an apartment managed by Horizon and that she experienced mold in that apartment. The “social context” of the tweet may be a legitimate focus of inquiry at trial, but essentially holding tweets to be opinion, i.e., not “serious”, at the motion to dismiss stage is a bit hasty.

More broadly, I disagree with the notion that tweets are qualitatively different from other communications from a legal standpoint. You can communicate facts and harm reputations in a 140-character microblog post, just as you can through more traditional media. The medium shouldn’t matter. In its response to the motion to dismiss, the property management company pointed out that, indeed, many tweets are serious — for example, the U.S. Centers for Disease Control and Prevention use Twitter to publish information.

At a national intellectual property law seminar I attended last year, a roomful of IP lawyers representing big law firms, media companies and, of course, Baer Business Law largely agreed that tweets could even be copyrightable, if they contain a “modicum of creativity,” the copyright protection standard stated by the Supreme Court in the Feist case (which held that alphabetical telephone listings are not copyrightable). Twitter may very well be novel, if not epochal, as a unifier of the human family. Having said that, treat with extreme skepticism any claim that tweets are legally different from anything else you write.

Most website comments annotated with Sidewiki that I saw in a quick, wildly unrepresentative and unscientific survey I conducted are precisely that — commentary, either praising or respectfully responding to the content on the site. However, it is easy to imagine Sidewiki being used for competitive, abusive or deceptive purposes. For example, a competitor could trash a site’s products and services or post links to its own site in an effort to divert traffic. Or (as happened recently with Apple and other high-profile sites), a nattering nabob of negativism could simply post pejorative comments without any type of economic agenda whatsoever. All of this raises a host of intellectual property and brand abuse issues for site owners.

Google posts an inconspicuous content policy which prohibits “unlawful” activities using Sidewiki as well as copyright infringement and “unwanted promotional or commercial content” (whatever that means). The Google Webmaster also allows a site owner to claim the topmost spot in the Sidewiki annotations, and Google provides a generic form for parties to complain about objectionable use of its products and services. Still, there is no clear way for a site owner to compel Google to cede back control of its real estate (if indeed the site as displayed through a browser enabled with the Google toolbar can even be likened to real estate).

Sidewiki is obviously too new a service for there to be any law on its use and abuse. Once again, a leap in new media technology has outpaced judges and legislators. Still, since I can’t resist plunging into uncharted waters, I offer a few preliminary thoughts below on intellectual property (IP) and other legal issues that both site owners and Sidewiki commenters should consider.

1. Copyright Infringement. It’s possible that some level of annotation, if substantial and creative enough, could result in the creation of an unauthorized derivative work (modification) of the website or specific website pages. (Web copy is protectable by copyright.) If so, this would be copyright infringement, since the ability to create derivative works is one of the exclusive rights of a copyright holder. A similar argument has been used, with occasional success, against some types of website framing.

Of course, commentary, particularly for non-commercial purposes, is one of the touchstones of fair use, so an infringement case would probably not succeed (either because of the lack of genuine modification or a fair use defense) against most run-of-the-mill commenters. Still, site owners concerned about voluminous Sidewiki comments may want to consider registering their copyrights in their site content, if they have not already done so, since registration is necessary to file suit under the U.S. Copyright Act and to avail oneself of the full panoply of legal remedies (including statutory damages) provided in the Act.

Another copyright issue that site owners should be aware of is the possibility that content posted via Sidewiki may itself infringe a third party’s copyright, in which case the site owner may find itself receiving Digital Millennium Copyright Act take-down notices. However, as mentioned above, the site owner has no real ability to take down objectionable Sidewiki annotations and can only contact Google. In this situation, all the site owner can do is file a complaint with Google and advise the copyright owner to do the same.

2. Trademark Infringement/Dilution and Unfair Competition. It’s possible to construct a creative argument that annotating a site with Sidewiki involves using the site owner’s trademarks (certainly its URL and arguably also other trademarks appearing on the annotated pages, as well as any trademarks used in the comments themselves). If this use is in commerce, i.e., in connection with an offering of goods or services for sale, and is likely to confuse or deceive consumers as to who is providing what goods or services, or suggests some level of sponsorship, affiliation, endorsement, etc., there may be trademark infringement and unfair competition under the federal Lanham Act as well as under applicable state laws.

Showing a likelihood of confusion (the touchstone of a Lanham Act infringement and unfair competition case) will likely to be difficult with Sidewiki. The site owner would have the strongest case where the Sidewiki commenter is a competitor, does not make its separate identity clear, and tries to capitalize somehow on the site owner’s brand in order to divert traffic to its own site. However, where the content or context of the comment make it clear that the commenter is unassociated with the site owner and the commenter does not use the site owner’s trademarks in its annotations or otherwise try to pass itself off as the site owner, making the case will be next to impossible.

Even in the “strongest case” scenario, the site owner will have to tackle the issues of whether the commenter has made commercial use of its marks (this point will be easier to argue if the marks actually appear in the comments themselves) and whether “initial interest confusion” is sufficient confusion for Lanham Act purposes. To explain the latter issue, once an Internet user goes to a competitor’s site via a link provided by the competitor in its comment, they will know, before making any purchase, that they are not dealing with the trademark owner. Having said that, some persons “initially confused” and diverted in this manner may not return to the original site. The legal question is whether this type of confusion is enough to support an infringement or unfair competition claim.

The “initial interest confusion” issue, as well as what constitutes use of a mark in commerce, were both litigated over the past decade in cases examining the use of trademarks as Google search terms and the embedding of trademarks as metatags. Unfortunately, there are no settled answers, although courts in the federal Ninth Circuit (the West Coast states, plus Alaska and Hawaii) are more sympathetic to arguments based on initial interest confusion. Whether you are a site owner or a commenter, therefore, knowing the law in your federal circuit is important.

Finally, where abusive, competitive or otherwise objectionable Sidewiki comments are posted on a site for an extremely well-known brand (such as Apple, Pepsi or Cadillac), the site ower may be able to claim trademark dilution in violation of the Trademark Act. Trademark dilution requires the use in commerce of a famous trademark or a near-identical mark in a manner that is likely to blur or tarnish the mark, whether or not there is any similarity between the goods or services or any likelihood of confusion. It therefore sidesteps the whole confusion issue discussed in the infringement and unfair competition scenario.

However, dilution does require use of the famous mark together with an offering of goods or services, so although a Sidewiki commenter’s choice of where to place their annotations (on the trademark owner’s site) may count against them somewhat, a dilution claim is an unlikely remedy against authentic commentary, critical or otherwise, that is not connected with the promotion of another product, service or website.

3. FTC Endorsement Guidelines. On October 5, the Federal Trade Commission (FTC) issued its final revised Guides Concerning the Use of Endorsements and Testimonials in Advertising, the first rewrite of the Guides since 1980. Under the revised rules, which went into effect on December 1, 2009, companies that make payments or give free products to bloggers and other online commenters in order to generate positive buzz or favorable reviews for their products will now have to monitor closely the statements and claims made about the products and ensure that these relationships, if material, are clearly and conspicuously disclosed. Otherwise, they will face liability for unfair or deceptive advertising practices under Section 5 of the FTC Act, even if they do not control what the bloggers say (or, indeed, whether they say anything).

The bloggers themselves will face similar liability for false or misleading statements and non-disclosure of material connections. Furthermore, according the Guides, a company employee who posts messages on an online message board promoting the company’s product (a common practice) must clearly and conspicuously disclose his or her relationship to the company. Violations are punishable by civil penalties of up to $11,000 per violation. For a more detailed discussion of the FTC Endorsement Guidelines, please see my prior blog post.

What this means is that whether you are (1) a Sidewiki commenter being incentivized to post favorably on a website or trash a competitor’s site, or (2) a site owner or an employee or agent of a site owner posting favorable comments in response to negative Sidewiki remarks posted by someone else, you MUST disclose these connections. Knowing when to disclose is critical because, in the absence of any clear ability to force Google to remove objectionable comments, claiming the top spot on Sidewiki and posting responses to negative comments are indispensable elements of a Sidewiki brand management strategy. (New York’s attorney-general has also brought administrative proceedings against companies which tried to drum up favorable buzz by having their employees make anonymous posts in Internet chatrooms and public forums.)

If you have reason to believe that objectionable comments posted on your site via Sidewiki are being sponsored somehow by an undisclosed competitor or other third party, you should consider playing the UDAP (unfair or deceptive advertising practices) card by threatening to report the matter to the FTC and/or your state AG.

4. Terms of Use. Another option for site owners is to prohibit Sidewiki annotations, or perhaps certain categories of Sidewiki annotations (such as abusive or disparaging comments or comments that use your trademarks), in your website terms of use. Insofar as the terms of use create a binding, enforceable contract between the site owner and its users (which will generally be the case as long as they’re easily noticeable when accessing the site and don’t hold consumers to any unconscionable obligations), then making Sidewiki posts in violation of the terms of use will give the site owner a claim for breach of contract. You might also have a claim for trespass to computer chattels, since your site has been accessed for the purpose of etching on it in violation of your terms of use, although many courts will reject this claim in the absence of some excessive load on the site’s technical infrastructure that has the potential to exclude or disrupt other users.

There are two drawbacks to the terms of use approach. First, opposing this new social media technology may make you seem intolerant of free discourse and criticism (of course, the logical response here is “Do it on your own site!”). Secondly, for the reasons already mentioned, your ability to enforce the contract (other than through legal action) is limited, and appearing to tolerate numerous violations of your terms of use may hurt you in the cases you do want to prosecute. Since filing a complaint with Google for every single Sidewiki comment seems impractical and a waste of resources, it’s probably better to prohibit only those Sidewiki comments that are definably objectionable or use your intellectual property.

5. Other Legal Issues. A site owner might be able to proceed against particularly wrongful commenters (e.g., those who make false or deceptive claims or blatantly infringe the site owner’s intellectual property rights) for the state-law tort of tortious interference with prospective economic relations. Advertising-related causes of action under a state-law trade libel or unfair competition theory or the federal Lanham Act are also a possibility where the comments are false, deceptive or misleading (not to mention governmental action against UDAP, discussed in item #3 above). Site owners may be given some latitude by the courts in these cases due to the placement of the objectionable commentary; on a gut level, other things being equal, it would seem less wrongful on someone else’s website.

As the discussion above indicates, the legal landscape is hazy and will take time to resolve. Vigilance, therefore, is key. Website owners concerned about protecting their brands should claim the top spot for their sites on Sidewiki, monitor the other comments that are being posted, and make responses (with the disclosures required by the FTC) where appropriate. Site owners should also consider what type of approach to Sidewiki they wish to take in their terms of use. Finally, as with other forms of unwelcome commentary on the web, brand owners must weigh the benefits of cleansing their sites against the legal costs involved as well as the risk of enhancing the cachet of Sidewiki commenters they pursue.

Thank you, Google, for doing what you do so well — giving us intellectual property and new media lawyers tons to think and write about.

The Copyright Act, 17 U.S.C. Section 109(a), codifies the first-sale doctrine. What this means is that if you own a particular copy of copyrighted material, you have the right to sell or otherwise dispose of that copy, and the buyer then becomes the owner of the copy. Since copyright owners normally have the exclusive right to distribute their works, the first-sale doctrine is what allows the sale of used books, to give just one example. (The buyer of a new book has the right to resell it; otherwise, selling a used book would be copyright infringement, specifically a violation of the author or publisher’s distribution monopoly!).

Another provision of the Copyright Act, 17 U.S.C. Section 117(a)(1), permits the owner of a copy of a computer program to make a copy of the computer program if doing so is an essential step in the utilization of the program. This carve-out from a copyright owner’s exclusive right to reproduce copyrighted material is necessary because when a computer program is run by a machine, it is wholly or partially copied into memory.

In the Vernor case, Autodesk accused Vernor of direct copyright infringement for selling on eBay copies of Autodesk’s “AutoCAD” software (on CDs contained in “jewel cases” which were themselves enclosed in packaging) that he had bought from an architectural firm. He was also accused of contributory copyright infringement for essentially aiding and abetting what was alleged to be unlawful reproduction of the software by his buyer (for if owership of the copies of the AutoCAD software was not transferred to Vernor, then Vernor could not transfer it to his buyer, in which case the buyer could not legally run the software under 17 U.S.C. Section 117(a)(1), which applies only to an “owner” of a copy of a computer program). Still following this?

Vernor sued for a declaratory judgment that his activities were non-infringing, which depended on the court’s finding that the architectural firm had had the right to resell the copies to Vernor under the first-sale doctrine. But for the first-sale doctrine to apply, the transaction between Autodesk and the architectural firm had to involve the transfer of ownership in the software copies (i.e., there had to be a first “sale”), as opposed to a mere license to use the copies. Naturally, the applicable license agreement used license, not ownership, terminology, contained severe restrictions on use and transfer of the software, and stated that title to the software and the copies remained with Autodesk. Autodesk moved for summary judgment dismissing Vernor’s complaint; however, the court denied the motion on the basis of the first-sale doctrine in a decision reported at 555 F.Supp.2d (2008).

Autodesk then moved for summary judgment again after some discovery had been taken. The second time around, the court also denied Autodesk’s motion, finding that the facts had not materially changed, and granted judgment for Vernor, holding as a matter of law that the transfer of the software copies to the architectural firm was a transfer of ownership in the copies, not a mere license. Consequently, the first-sale doctrine applied, Vernor could legally resell the software copies, and his buyers could legally run the programs.

At the heart of the case was the court’s interpretation and characterization of Autodesk’s software license agreement, and its reasoning highlights some critical drafting issues. No one claimed that Autodesk ever transferred ownership of the software itself (i.e., the intellectual property). What was at issue was the rights in the copies. The license agreement stated explicitly that the copies were licensed (and Autodesk retained title to the copies), yet the court overlooked this, noting that how the contract labels a transaction is just one of many factors to be considered in characterizing the whole transaction.

Ultimately, the court was swayed by certain other facts: that the license agreement did not include any right for Autodesk ever to regain possession of the software copies, that there was no unconditional right for Autodesk to force the architectural firm to destroy the copies, and that the fees for the copies were assessed as a single up-front payment rather than being spread out over time. Tying all of this together, the license agreement basically allowed the architectural firm permanent and perpetual possession of the software copies (subject to the restrictions in the agreement) in exchange for a one-time payment at the time of the transaction. To the court, this resembled a sale more than a license:

“In this court’s view, retaining title in a copy is meaningless unless the copyright holder has some means to regain possession of the copy. [United States v. Wise, 550 F.2d 1180 (1977), the Ninth Circuit U.S. Court of Appeals precedent relied upon by the court (involving sales of motion picture reels)] requires the court to look at a transaction holistically, and the court finds no basis for the conclusion that an agreement to permit perpetual possession of property can be construed as reserving ownership.”

There is a clear drafting lesson here for software licensors who want to retain the legal ability to control the transfer of copies of their software: Make sure the license agreement, in addition to reserving ownership or title in the copies, does not allow perpetual possession of the copies, but limits possession to a definite license term, after which the licensee is unconditionally obligated to return or destroy the copies. Making license fees recurring, rather than one-time, also helps.

To be sure, the Vernor case is likely to be appealed to the Ninth Circuit, which may very well reverse or modify the district court’s analysis. The Wise case invoked by the court as controlling precedent was decided in 1977, a time when disco was king and business software was still in its infancy. Later Ninth Circuit cases, such as MAI Sys. Corp. v. Peak Computer, Inc., 991 F.2d 511 (9th Cir. 1993) and Wall Data Inc. v. Los Angeles County Sheriff’s Dep’t, 447 F.3d 669 (9th Cir. 2006), which examined the applicability of the first-sale doctrine to the transfer of software copies, gave far more deference to the characterization of the original transfer in the license agreement. The Vernor court found these decisions to be in irreconcilable conflict with Wise, and, therefore, using the rules of decision in the Ninth Circuit, ignored the later decisions (which it freely admitted would have required a judgment against Vernor, the software reseller) in favor of Wise.

The Ninth Circuit may soon, therefore, have a chance to clarify the legal metaphysics of what exactly distinguishes a sale from a license in a copy of software for purposes of the copyright law. For the time being, however, whether you’re a licensor or a licensee of software, it might be a good idea to take another look at that license agreement. If you need some help with this (or if you just would like to hear an exposition of the Wise ruling with “Disco Inferno” playing in the background), please get in touch with me.

Patenting Business Methods: The Floodgates Open – For a Time

Perhaps you’ve heard of In re Bilski, if not by name. At issue is the viability of business method patents, especially for processes that are implemented by computer or over electronic networks (namely the Internet). Most software and web patents are for business methods. After the U.S. Court of Appeals for the Federal Circuit confirmed in State Street Bank v. Signature Financial Group, 149 F.3d 1368 (1998) (involving a patent for a tax-avoidance method) that methods of doing business could be patent-eligible subject matter if they produced a “useful, concrete and tangible result,” a flood of business method patents were issued during the dot-com boom of the late 1990’s and early 2000’s. This period also saw a commensurate spike in cease-and-desist letters and “offers to license” from holders of business method patents, many of them “patent trolls” who had no interest in commercializing their inventions, but only in extracting license fees and infringement damages from companies with little inkling that apparently routine or ubiquitous methods and processes could be patented.

With incredulity and outrage mounting in the early years of the new century, the courts and the Patent Office began to eyeball business method patents more skeptically and moved to stem the tide. In 2001, the court hearing Amazon.com’s infringement suit against Barnesandnoble.com wound up invalidating Amazon’s “One Click” patent for a single user-action electronic fulfillment method on the ground that it was obvious in light of the prior art. The Patent Office has now instituted a procedure whereby patents for computer-implemented business methods are given an independent second review, resulting in far fewer business method patents being issued and a corresponding decrease in applications. Unlike copyrights and trademarks, a patent is extremely expensive to apply for, maintain and defend against invalidation, requiring tens of thousands of dollars in attorney and filing fees — and if litigation is involved, that amount is usually multiplied tenfold or twentyfold. A good friend of mine who is a patent attorney laments, “A lot of what I do is talk people out of applying for patents.” That may hurt the firm’s bottom line, but it is the right attitude from a client service standpoint, particularly now that the availability of business method patents may be severely curtailed.

Bilski: Patentability Requires a Machine or Transformation of an Article

Which brings us back to Bilski. In that case, the Patent Office refused to grant a patent for a method of hedging risk in commodities trading, not on obviousness grounds (which was the issue in the Amazon case), but rather because the application was not directed to patent-eligible subject matter. To be patentable under the statute (35 U.S.C. §101) an invention must be a “new and useful process, machine, manufacture, or composition of matter, or any new and useful improvement thereof.” Business method patents are “process” patents. The Federal Circuit, hearing the patent applicant’s appeal, agreed with the Patent Office that the application did not describe a patent-eligible “process”. In its en banc (full panel) opinion, reported at 545 F.3d 943 (2008), the court rewrote the legal standard for patentability of business methods, throwing the validity of more than a decade of business method patents into question.

Under the generally controlling legal test (referred to as the machine-or-transformation test), a process is only patentable if (1) it is tied to a particular machine or apparatus, or (2) it transforms a particular article into a different state or thing. (I call this the “generally controlling” test because the court speculated cryptically that some business methods could conceivably be patentable without satisfying the test, but did not care to elaborate.) The rationale for these limitations is that the patent statute was never intended to protect abstract principles, laws or phenomena of nature (even if just discovered) or mental processes, since, as the court put it, these are “the basic tools of scientific and technological work.” In the court’s view, requiring the limitation of process patent claims to a specific machine or the transformation of some specific matter safeguards against a patent owner pre-empting all uses of a fundamental principle that everyone ought to have resort to in the furtherance of progress.

The need to prevent any patent owner from pre-empting all uses of a principle leads to some further caveats. First, if a principle can only be implemented using a particular machine, limiting the patent claims to that machine will not turn the principle into a patent-eligible process. So, far example, in Gottschalk v. Benson, 409 U.S. 63 (1972), discussed extensively in Bilski, the Supreme Court held that a numerical algorithm for converting binary-coded decimal numerals into pure binary numerals was not a patentable process even when limited to a digital computer, since the algorithm will always be implemented on a computer. (This concept obviously has great significance for the validity of many software and Internet business method patents.) Secondly, limiting the patent claims to a single field of use also will not make a patent-eligible process. As the Bilski court noted, if the opposite were true, then one could patent the Pythagorean theorem as used in surveying. Finally, “insignificant” pre- or post-solution activity, such as data gathering or recording a result, which may involve some peripheral use of a machine or a transformation of matter, does render a principle patentable. Of course, what activity is “insignificant” is less than clear and will be the subject of much future patent litigation.

Applying the machine-or-transformation standard with these caveats, the Federal Court affirmed the Patent Office’s denial of the patent claims for the risk hedging method. It also eviscerated (without formally overruling) its ruling in State Street by holding that the “useful, concrete and tangible result” standard is no longer valid. At the same time, it rejected the proposition that business methods are never patent-eligible subject matter. Since the patent statute allows a patent to be issued for a “process,” a business method is patentable subject matter if it is tied to a particular machine or transforms an article into a different state or thing.

If the Supreme Court affirms the Federal Circuit’s reasoning, most business methods implemented through software or Internet will no longer be patentable. As discussed by the Federal Circuit in Bilski, the Supreme Court, in Diamond v. Diehr, 450 U.S. 175 (1981), held that a software algorithm can be used to control the execution of a physical process (curing rubber) which is patentable when considered in its totality, i.e., including the software component. Likewise, the court noted that manipulation of electronic signals or data can form a patent-eligible process (on the basis of a transformation of matter) if the signals or data are not abstract but represent tangible physical objects (e.g., X-ray data that is manipulated to produce images of bodily organs). However, the business method in Bilski involved, at most, the transformation of risks and liabilities, which as intellectual abstractions are not eligible “articles.”

Should I Patent?

What do all of these arcane patent rules mean for technology clients? One the one hand, investors see patents as valuable assets, and so they are – if they are actually issued and the claims are broad enough so that a competitor can’t easily maneuver itself outside their reach. A “patent pending” notice also lends gravitas to one’s website and marketing materials (you can use this notice just by filing a provisional patent application, by the way). However, rejected patents and narrow patents do very little good for anyone, except the lawyers, of course.

Whatever the Supreme Court ruling in the Bilski case (and I expect an affirmation of the Federal Circuit’s approach at least in part), the change in the legal landscape will be largely limited to process patents and to business method patents in particular. Someone looking to obtain a patent in a composition of matter, a machine or a manufacturing process should not stop the patent train to await the Court’s ruling; while some general concepts in Bilski, namely the unpatentability of natural phenomena, mathematical formulas, etc., are applicable to all types of patents, as a practical matter, unless you’re trying to patent some naturally occurring compound, for example, the case doesn’t have much relevance if your invention is not a business method. On the other hand, I would strongly advise clients desiring protection in pure software or Internet processes to file a provisional patent application at most (which is cheap) but hold off any non-provisional patent application for a few more months. (You can file a patent application up to one year after the invention is first publicly sold or used or disclosed in non-confidential fashion.)

Consider Trade Secret Protection for Software and Other Business Methods

Moreover, unavailability of patent protection, or of broad patent protection, does not mean the total absence of intellectual property protection. Clients and counsel evaluating IP protection strategies for a new invention often overlook the need to balance the costs and benefits of patent protection against those of trade secret protection. (Software is also protectible by copyright.)

Patent protection is, by definition, a grant of exclusivity in a limited set of claims for a limited period of time (20 years) in exchange for disclosing a new, useful and non-obvious invention into the public domain. Patent applications become public after 18 months (whether or not a patent is actually issued) unless the applicant disclaims foreign patent protection. If no patent is issued or protection is granted in only a narrow set of claims, the applicant has obtained little or no competitive advantage for its money, and now the secret is out. On the other hand, by instituting procedures to treat a proprietary process or business method as a trade secret, such as internal access restrictions, limitation of external disclosures, use of confidentiality agreements, confidential or proprietary legends on material relating to the process or method, and logging who has contact with it, a company can preserve legal rights against usurpers for a theoretically indefinite period of time. Trade secret protection requires no legal fees and no filing fees. (Copyright protection requires nominal legal and filing fees.) If the Supreme Court embraces the Federal Circuit’s reasoning in Bilski, trade secret (and copyright) protection should supplant patent protection as the optimal strategy for many software and web clients.

As always, stay tuned. Oral arguments before the Supreme Court have been scheduled for November 9. You can expect to find updates on those arguments, as well as an analysis of the Supreme Court’s opinion and what it means for your business, on this blog as events unfold.

Some interesting tidbits from the seminar –

Can you have a copyright in a tweet? In theory, yes. While Twitter requires tweets to be 140 characters or less, there is no reason why a tweet can’t possess the minimal “modicum” of creativity needed to be copyrightable. After all, short poems and haikus are copyrightable. However, “I’m sitting on the couch” probably doesn’t qualify.

Does a copyright owner have an obligation to consider fair use before sending a Digital Millennium Copyright Act take-down notice? Yes, at least according to the federal district court in the famous “dancing baby case” of Lenz v. Universal Music Corp., 572 F.Supp.2d 1150 (N.D.Cal. 2008). A mom had posted a 29-second video on YouTube (you can see it here) showing her toddler bopping up and down with a Prince song playing in the background. The sound quality was awful, to put it charitably. However, Universal issued a DMCA take-down notice, YouTube complied, and then angry mom sued Universal for allegedly misrepresenting in its notice that it had a good-faith belief that the use of the material was unauthorized (a statutory requirement under the DMCA) and for a declaratory judgment that her use of the song was non-infringing. Angry mom won. Everyone at the seminar agreed this was pretty obviously a fair use (it’s non-commercial and the record company is not going to lose any royalties from Prince aficionados duping the song off the video rather than downloading it from iTunes or buying the album). So, all you copyright owners, think before you bring out that big DMCA hammer.

Transform, transform, transform. In the era of digital fair use, everything’s about “transformation,” which can often happen in a mashup or otherwise through the use of digital editing tools. The Copyright Act lists four factors to be taken into consideration when evaluating whether or not a use of copyrighted material is a fair use. One of these is the purpose and character of the use, including whether the use is of a commercial nature (fair use is often, although not exclusively, associated with non-commercial uses like education, criticism, news reporting, etc.) When assessing the purpose and character of a use and in which party’s favor this factor weighs, courts consider whether the use is “transformative” of the original material. This is nowhere in the Copyright Act, but it is all the rage in digital fair use cases.

Bottom line: while there is no simple calculus, if the use you are making of copyrighted material is not a traditional fair use, you can help yourself by making sure it significantly transforms the nature and/or purpose of the content somehow (as opposed to simply reproducing it or reproducing it with modifications). So, for example, when Ben Stein used a 15-second clip of John Lennon’s song “Imagine” in his film Expelled to critique the anti-religious message of the song and comment on the concept of a world without religion, the court in Lennon v. Premise Media Corp., 556 F.Supp.2d 310 (S.D.N.Y. 2008) found Messr. Stein’s use highly transformative.

What should you ask for in your widget development contract? SLA’s and source code escrow (if the developer is going to host the widget), insurance (general liability and E&O to establish that your developer is a real business; however, copyright and trademark infringement insurance may be too expensive), ownership of rights in the widget, acceptance criteria, delivery deadlines.

Embedding third-party content on your site. To reduce the risk of copyright infringement liability, stay away from uses that are clearly infringing, stick to official embed channels for videos from major rights-holders like TV networks, stick to the more popular amateur videos, and where appropriate include commentary, criticism and/or analysis, because that helps you a make a “transformative use” argument (see above).

Enjoy the weekend and stay dry.

Copyright: Not Everything is a Work Made for Hire

In general, the person who creates an original work of authorship (such as a photo, painting, movie, poem, book, software program, web page, musical composition or sound recording) owns the copyright unless he or she makes a written assignment of that copyright to someone else. There is a widely known exception for “works made for hire,” where the hiring party is considered the author of the work and, therefore, owns the copyright.

What is not so widely known is that simply paying someone to create a work does NOT mean it is a “work made for hire.” A work created by an employee within the scope of his or her employment (i.e., doing what he or she is paid to do) is automatically a “work made for hire,” and the employer owns the copyright. However, what if the author is an independent contractor rather than an employee, as is common in the software and web development industries? In this case, the work becomes a “work made for hire” ONLY if it is a very specific type of work (such as a part of a movie or other audiovisual work, a contribution to a collective work, a translation or an atlas) AND it has been specially commissioned and the parties agree in writing that it is a “work made for hire.”

This is a very limiting definition, which means that copyrightable works created by non-employees are generally not “works made for hire,” and a written assignment is necessary to transfer the copyright to the hiring party. In the absence of a written assignment, then, the contractor walks away with the copyright, and the hiring party gets only a license. So a decision to keep things informal means that you may end up paying a developer or programmer good money to create a website or code for you, only to watch helplessly as they commercialize the product themselves or develop the same whatsit for your competitor.

Another potential pitfall is joint authorship. If more than one person plays a role in authoring a copyrightable work, and it is not a “work made for hire,” all of the authors will share the copyright, which means that each can commercialize the work without the others’ consent, but must share any licensing royalties with the other copyright owners. Typically this is not the result intended when a group of creative types get together to pool their intellectual resources in the service of a common business enterprise. It’s much better to handle the allocation of rights and any restrictions on exercising those rights via contract at the outset than have a disgruntled partner be able to undercut the enterprise by going out on his own.

Patent: An Inventor is an Individual, Not a Company

A patent is awarded to the individual inventor named in the patent application, unless that individual transfers the rights to an entity or other person through (you guessed it!) a written assignment. With patents, there is no “work made for hire” doctrine. An employee who invents something within the scope of his employment will own the patent unless he makes a written assignment to the employer. Under state law, an employee is contractually required to assign an invention to his employer if the employee was hired for the purpose of using his inventive ability to solve a specific problem or to design a specific procedure or device for the employer, but this is a narrow exception. In all other cases, where the employee devises the invention on the employer’s time and at its expense, using the employer’s materials and facilities, the employee will get the patent, and the employer gets only a “shop right” (a narrow, non-transferable license to use the invention).

Needless to say, without a written assignment, there is no protection for the hiring party where the inventor is an independent contractor rather than an employee. Again, the hiring party may end up paying for the invention, only to see its employee or contractor walk away with a multimillion-dollar patent.

Co-inventorship creates further complications. All individuals who contribute meaningfully to the conception and reduction to practice of the invention must be named in the patent application (or the patent may be invalidated) and, unless they assign their rights, will be co-owners of the resulting patent. If the rights in the patent are being transferred, then all of the inventors must sign written assignments. Otherwise, each co-inventor has the right to commercialize the invention without the approval of the others and without any obligation to share the proceeds (note the difference with joint authorship in copyright). This lack of control can severely undercut the monetizable value of a patent, since the patent cannot be sold in its entirety and no one can grant an exclusive license for a geographic region or market without the concurrence of all the owners.

For these reasons, the allocation of rights in an invention and any restrictions on exercising those rights should be handled by written contract before the serious work begins.

Confidentiality and Trade Secrets: If It’s Confidential, Then Act Like It!

If you discuss sensitive details of a project openly with someone else and allow that person free access to information and materials relating to the project, but do not require them to sign a non-disclosure agreement (or NDA), you should not be surprised if the project ends up walking out the door one day (perhaps accompanied by the patent and copyright!). Even more galling, you will get little sympathy from the robed sages in our halls of justice. To obtain legal trade secret protection for information or materials you consider proprietary, you must take reasonable measures to preserve their secrecy, including requiring users to sign NDA’s and notifying them (such as by stamps, legends, memos or e-mail headers) of their obligation to keep specific information or materials confidential. A little formality here goes a long way.

What Contracts Are Needed?

All of these IP issues are easily solvable by a little contracting at the inception of a project. If you want your company to own the IP rights in any developed work, your employees and contractors should be required to sign a simple confidentiality, work product and invention assignment agreement prior to beginnning work. Under this agreement, they would assign all intellectual property rights, including all copyrights and patent rights, in any works of authorship or inventions that they create, conceive, develop or reduce to practice in connection with their employment or engagement, and they would also agree to sign any ancillary documents (such as patent assignment forms to be filed with the U.S. Patent Office) which might be needed to further establish or enforce the company’s rights in the developed work. Furthermore, they would agree to keep confidential and not use or disclose (except as permitted by the company) any confidential or proprietary information of the company, including any IP developed in projects in which they are involved. Such agreements are standard operating procedure in most established businesses.

Where you are developing IP with partners, rather than employees or contractors, you may agree on a more intricate allocation of ownership rights, along with restrictions on the various parties’ ability to exercise those rights. For example, one party might own the patent, while another might be granted exclusive (even as against the patent owner) license rights for a certain period of time to market and sell products based on the invention in particular regions or markets. Or the parties might agree on co-ownership of the patent, but with restrictions on each party’s ability to license its rights to third parties. There are many possibilities. Here, too, it is best to address ownership and usage issues by contract at the formation of the relationship, when the IP has not been created yet, the parties’ interests are more closely aligned, and everyone is eager to proceed so that the money can start rolling in.

Whatever you do, NEVER bet your IP on a handshake.

Apple’s iPhone includes software locks to prevent applications (or “apps”) other than those sold through Apple’s App Store from running on the iPhone platform. Jailbreaking is the increasingly popular practice of bypassing the locks so that iPhone owners can run non-Apple-approved apps of their choosing. According to the Electronic Frontier Foundation (EFF), which is leading the battle to legalize jailbreaking, Apple has become somewhat puritanical about what apps may be featured on the App Store, barring, for example, a Nine Inch Nails-themed app from the band’s front man Trent Reznor, as well as “Me So Holy,” an irreverent app that pastes a snapshot of the user’s face over the faces of hallowed religious figures.

In any litigation to prevent jailbreaking, Apple is likely to invoke the so-called “anti-circumvention” provision of the DMCA, 17 U.S.C. Section 1201(a)(1). This clauses prohibits the circumvention of technological measures (also known as digital rights management or DRM) that “effectively control[] access” to copyrighted works. Apple’s position would be that the software locks bypassed by the jailbreakers are genuinely designed to protect Apple’s copyrighted code for the iPhone bootloader and operating system from unauthorized modification and copying. While this is far from clear, jailbreakers and their legal advocate the EFF have taken preemptive action to clear the way for the free exchange of iPhone apps outside of Apple’s control.

Under the DMCA, the Library of Congress and the Copyright Office may hold rulemakings to create three-year exemptions from the anti-circumvention provision of the DMCA for certain classes of works if it is determined that users are likely to be adversely affected in their ability to make non-infringing uses of those works due to the prohibition on circumvention of access controls. The EFF has specifically requested the creation of a formal exemption to permit jailbreaking and installation of non-App Store apps on the iPhone platform. The period for public comment ended February 2, and the Copyright Office held hearings on the proposed rulemaking at Stanford Law School on May 1 and in Washington, D.C. on May 6-8. The EFF is essentially arguing that Apple’s software locks are intended to protect a closed business model with respect to the distribution of apps, rather than any legitimate copyright interest. Apple has countered that the software locks protect its copyrighted firmware, with the goals of protecting the iPhone device from harm, excluding malware, protecting Apple’s and its authorized developers’ rights in their apps, and preventing the circulation of pirated apps. A final rule is expected in October 2009.

For more on the EFF’s involvement with the jailbreaking movement and its other digital crusades, check out their website at http://www.eff.org.