A Mythical License to Blog

My friends at Philly Startup Leaders were burning up cyberspace last week with passionate posts to the listserv about an item that recently got picked up by blogs and conservative newspapers around the nation, as well as by the Philadelphia Inquirer. It seems that the city has contacted a number of Philly-based bloggers who reported marginal advertising income from their blogs on their federal income tax returns (we’re talking under $100 per year, folks, not the Huffington Post) to demand that they buy business privilege licenses and pay business (gross receipts and net income) taxes.

The licenses, which grant you the privilege to operate a business in the city and pay business privilege taxes (BPT), cost $300 (for a lifetime license) or $50/year. Since you need a city account number to pay BPT, and you can’t get one without a business privilege license, the city hits you twice, and you’re essentially buying the right to pay BPT (unlike in other cities which generously comp you the right to pay business taxes). Furthermore, as Councilman Bill Green acknowledged in a post to the PSL listserv, Philadelphia frequently doesn’t inform you of the $50/year option.

This was the most revealing part of Green’s post, most of which was a canned plug for a tax reform proposal put forward by him and Councilwoman Maria Quinones Sanchez, which they claim will favor Philly-based businesses over those headquartered outside the city by raising the threshold for payment of BPT, eliminating the net income portion of the tax and raising the level of the gross receipts component. (Mayor Nutter is studying the proposal.)

For me, the PSL discussion highlighted several core issues. First, let me be clear: legally, there is no new “blogger tax” or “blogger license.” You do NOT need a license to write a blog in Philadelphia, only to earn money from one. Our cash-strapped city simply applied existing business regulations in a ham-fisted manner, giving itself (as it often does) a very public black eye. (The same goes for Philadelphia’s Eliot Ness-style war on cupcake trucks.) Until PSL took up the issue, nobody seems to have thought much about whether bloggers are businesses or creative hobbyists, and what differentiates the two. (According to Councilman Green, the city is considering adopting an IRS-style test.)

Shaking down bloggers, confiscating cupcake trucks, and grabbing revenue from wherever it can are prime examples of the functioning of our Uncreative Economy, a closed world of special-interest groups, bureaucrats, politicos and tired and dwindling old industries. Is it any wonder that we are widely perceived as boorish and uncreative, not to mention hostile to business and entrepreneurship? Are you surprised that the intellectual capital nurtured at Penn, Drexel and Temple flees to New York, Austin, Boston and Silicon Valley and that the hallmark of a homegrown company’s success is leaving Philadelphia?

Unserious Entrepreneurs and Why It’s Better to Have Money Than to Not

A few of my fellow PSLers made two other points which I want to address. First, entrepreneurs derive real quality-of-life and economic benefits from having easy access to the thrumming social, cultural, intellectual and aesthetic infrastructure that is Philadelphia. Short commutes, the ability to ride the No. 48 bus to work (as I do every day), Buddakan being immediately downstairs from my office in Constitution Plaza, access to the creative and entrepreneurial ferment of Wharton, proximity to New York and D.C. without the astronomically high rents — aren’t these things worth $300 or $50/year?

Of course they are. But we’re already paying business taxes, among the highest in the nation, for these benefits. Hitting up entrepreneurs – or worse, hobbyists trying to eke out a few extra shekels in the midst of the worst downturn since the 1930’s — for an additional fee for the privilege of paying business taxes is clueless and disdainful.

Some PSLers also contended that $300 is not a lot of money, and that anyone unwilling to shell out such a nominal sum isn’t really serious about entrepreneurship and shouldn’t be in business in the first place. This is dead wrong, in my view. For one thing, it puts the aficionado who writes an opera blog out of sheer love for the art form and uses Google AdSense for aperitif money in the same category as Comcast or a rapid-growth tech startup that has just closed $20 million in venture financing.

Secondly, $300 is a lot of scratch even for a genuinely forward-looking startup. My clients fund their initial roll-outs from work income, severance and/or savings. In the evolving media space which is my professional ether, what puddles of funding exist must go toward development of the alpha and beta sites, branding, incorporation costs — and legal fees. Speaking of incorporation costs, I recently set a client up with a cheap Delaware registered agent ($99/year) rather than the standard national corporate service companies, who typically charge $275-$325 per year. The difference, $200 per year give or take, was significant to him.

This particular client told me he was sleeping on a friend’s floor to save money while the company was being set up. He is an extremely intelligent and focused entrepreneur with a nimble mind. You will not hear me call him a dilettante for wanting to save $200. That’s three or four hours of developer time, or an Amtrak ticket to attend an angel meeting.

Gargling Creative Capital

It is a privilege to build a business in Philadelphia. That’s why my office window looks out on the site of Ben Franklin’s house and I have woven (or my designer has) the street grid of Center City into my firm logo. A privilege, however, is not the same as a necessity. Nor is managing decline the same as leading. If the city doesn’t stop gargling its creative capital, those talented men and women will grab the first cupcake truck out of here.

Talking about shades of gray seems sophisticated and business-savvy, but one must also recognize that black and white still exist. Businesses will do things incredibly boneheaded and leave a paper trail. Take, for example, Gucci America, Inc. v. Frontline Processing Corp., Civ. No. 09-6925 (S.D.N.Y. June 23, 2010), in which a New York federal district court denied a motion to dismiss contributory trademark infringement claims against companies involved in procuring and providing credit card processing services for a website on which counterfeit Gucci handbags were sold. This is an important decision, since e-commerce could not survive without payment processing services, and new Internet and mobile payment services are a huge growth field.

The Gucci case is really the flip side of Tiffany (NJ) Inc. v. eBay, Inc., 600 F.3d 93 (2d Cir. 2010), which I blogged about back in April. There, the U.S. Court of Appeals for the Second Circuit held that eBay was not contributorily liable for trademark infringement associated with the sale of counterfeit Tiffany jewelry on the site, because eBay was not aware of the specific instances of infringement that it was accused of enabling (only the existence of counterfeiting in a generalized sense) and also because eBay used diligent measures to protect against infringement and respond to complaints from trademark owners.

Put simply, eBay did not have the right type of knowledge, and it did everything right to avoid enabling trademark infringement. The defendants in the Gucci case did everything wrong. In fact, if you make a strategic business decision to adopt an illegal business model, actively promoting trademark infringement, and you are consumed by worries that your outside counsel lacks sufficient funds to buy that yacht he always wanted, these guys provide some useful tips. [NOTE: This post summarizes the court's discussion and analysis of the facts alleged by Gucci, which the court had to assume as true to determine whether Gucci could state a legal claim. However, at the request of one of the defendants who apparently reads my blog, let me reiterate that the factual allegations are not necessarily true and must be proven at trial.]

Without further ado, let’s turn to the question at hand: How can you contribute to trademark infringement with your online services?

The Legal Standard

When setting out to violate a law, it’s good to know the controlling legal standard so that you don’t inadvertently end up in compliance. In the Tiffany v. eBay decision, the Second Circuit stated the test for contributory trademark infringement as follows: a service provider can be liable for contributory trademark infringement if it (1) intentionally induces someone else to commit trademark infringement, or (2) continues to supply services to someone it knows or has reason to know is engaging in trademark infringement. The supply of services, as opposed to goods, that aid in the infringement creates additional subtleties. Accordingly, to weed out ancillary service providers, the federal district court in the Gucci case tweaked the test to impose contributory liability for the supply of online services where the provider knowingly supplied services to websites and had sufficient control over infringing activity to merit liability. In other words, some control over the instrumentality of the infringement is key.

What are some examples of things you can do to induce trademark infringement?

Inducing Trademark Infringement: Hold Yourself Out as a Friend to Infringers

Durango was the procurement company that put the counterfeiters into touch with Frontline and Woodforest, the two defendants that provided the credit card processing capability. Durango also facilitated the application process. Nathan Counley, Durango’s sales representative, actually helped the counterfeiters complete their applications and identified himself as a sales agent for Frontline and Woodforest on the applications.

I’ll let Judge Harold Baer (no relation to me) describe in his own words how Durango advertised its procurement services:

“Durango’s website reaches out to ‘high risk merchant accounts,’ including those who sell ‘replica products.’ The website further boasts that 95% of merchant accounts are approved and that Durango ’specialize[s] in hard to acquire accounts.’ …. Similar to the companies that promise the extension of credit or loans to those who are rejected by traditional lending institutions for having bad credit, Gucci’s complaint suggests that Durango bills itself as a company that sets up a certain quality of business with credit card processing services that accept these ‘high risk’ clients.”

(Gucci alleged that “replica” products are commonly understood to mean counterfeit products, but c’mon … is the explanation really necessary?)

The court found that Durango was “communicating an inducing message” to its users, which was enough for liability. On the other hand, while Woodforest and Frontline both charged higher fees for processing high-risk merchants, and Frontline specifically reviewed and approved the counterfeiters’ webpage acknowledgment that the handbags being sold under the Gucci trademark were replicas, such activities did not rise to the level of inducement. That doesn’t mean they were smart, however, which brings us to the second prong of the contributory trademark infringement standard.

Controlling Third-Party Infringement (to Make Sure It Happens)

What are some examples of things you can do to exercise control over acts of trademark infringement? (The court held that the payment services companies, Frontline and Woodforest, were liable under this theory; although Durango was on the hook for inducement, as a mere procurer of payment processing services it exercised little or no control over the actual website sales process.)

(1) You can let a guy who is on notice that potential customers for essential services may be infringers call himself your sales agent — even though he doesn’t work for you! His knowledge, however, will be imputed to you under the law of agency. In the Gucci case, Gucci alleged that Counley (Durango’s sales rep) was the counterfeiters’ connection, matching replica merchants with processors. Not a good state of affairs if you’re relying on a “wow, I’m shocked and appalled” type of defense.

(2) You can review the counterfeiters’ website disclaimer requiring users to acknowledge that they are receiving replica products and advise where it should be placed on the site. Some in-house lawyer or other compliance professional at Frontline actually did this! Free legal advice may be good for stroking a business partner, but in this down economy, if corporate counsel wants to do pro bono work, I’d recommend homeless advocacy instead.

(3) When investigating purchase items that generate chargebacks, you can take note that the price is weirdly cheap for a Gucci handbag, talk to customers who complain that they received fake Gucci bags — and then sit on your keister!

(4) You can review a potential customer’s website that claims to sell “replica” products, print out pages for your file — and then sit on the above-referenced keister! (As a former bank counsel, I can tell you that regulators love to see a well-ordered due diligence file. Maybe not in this case, though.)

I could go on, but you get the picture. The counterfeiters in the Gucci case did everything possible to proclaim the nature of their business except sign their credit card processing applications “N. Fringers.” In the offices of Frontline and Woodforest, there were apparently a lot of crickets chirping and keisters being sat upon. Of course, this is to snidely accord them the benefit of the doubt; the court saw their blindness as willful, and, therefore, the same as positive knowledge. In fact, Frontline and Woodforest charged higher processing fees for high-chargeback merchants and allowed themselves to be held out as processors of last resort for this online subspecies.

Once you take the steps listed above and establish your knowledge of specific cases of trademark infringement, the only remaining question is whether your service contribution is significant enough to give you the ability to control it. If the service you’re providing is the ability to accept credit and debit cards, then you’re in luck — your goose is cooked. As anyone who has ever used Amazon knows, you cannot have an e-commerce site without credit card processing.

Alternate payment systems like PayPal are growing in popularity, and by some accounts, are likely to explode in the next couple of years, but credit (and debit) cards are still king. The counterfeiters in the Gucci case sold over $500,000 of counterfeit bags using Frontline and Woodforest’s credit card processing services. Pull the plug on these services, and you pull the plug on the trademark infringement, or most of it. Credit card processing was an “essential factor” (in the court’s words) to the acts of trademark infringement alleged by Gucci, i.e., the sale of counterfeit handbags.

The defendants in the Gucci case did just about everything they could to contribute to massive trademark infringement. However, in the age of cloud computing and outsourced web and IT applications, the case has broader significance for online service providers and payment services. If you’re providing the lifeblood of a website, be careful about what you may be enabling.

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.

I consider this a significant, if qualified, victory for online marketplaces and forums as well as consumers. Significant, because a contrary result would have imposed potentially crippling liability on these venues and forced them to adopt ever more draconian measures to filter user content and terminate users based on educated guesses and unproven allegations. Qualified, because the irony of this case is that eBay actually used a broad range of costly preventive and remedial measures to protect Tiffany’s trademarks and prevent sales of counterfeit Tiffany products. These measures included: canceling sales and reimbursing buyers of counterfeit products, deploying a “fraud engine” to filter out illegal Tiffany listings, responding within 12-24 hours to Tiffany’s take-down requests submitted through eBay’s highly respected Verified Rights Owner (VeRO) Program, terminating repeat offenders and sellers of multiple counterfeit Tiffany products, and manually reviewing certain Tiffany listings. In fact, during the relevant period covered by Tiffany’s complaint, eBay had over 200 employees dedicated exclusively to combatting trademark infringement.

Both the district court and the appellate court were clearly impressed by the seriousness with which eBay took infringement and counterfeiting. Obviously, this was not a case of a website looking the other way. But eBay sets a very, very high standard for other online marketplaces.

Despite all these protections, a “significant portion” of Tiffany jewelry listed on eBay was counterfeit, a fact of which eBay was aware. After determining that eBay’s use of sponsored-link advertisements on Google and Yahoo! touting the presence of Tiffany products on eBay was not direct trademark infringement (because the use of Tiffany’s mark was necessary to describe Tiffany products and did not falsely imply any affiliation with or endorsement by Tiffany), the court turned to the bigger issuer: to what extent was eBay responsible for the infringement of its sellers? The court applied the Supreme Court’s rule in Inwood Laboratories, Inc. v. Ives Laboratories, Inc., 456 U.S. 844 (1982) to hold that a service provider can be liable for contributory trademark infringement if it (1) intentionally induces someone else to commit trademark infringement, or (2) continues to supply services to someone it knows or has reason to know is engaging in trademark infringement.

Of course, no one claimed that eBay was intentionally getting its sellers to infringe Tiffany’s marks. However, Tiffany alleged that eBay’s knowledge of the existence of continued widespread counterfeiting and infringement, despite all of its protective measures, was enough to impose liability for contributory infringement. The court disagreed — generalized knowledge of infringement cannot be used to penalize a service provider for continuing to provide service to a particular individual where the provider doesn’t have real information to suggest that that individual may be using the service to infringe someone else’s trademark. In other words, suspecting that a person might conceivably be an infringer doesn’t make you, the service provider, an enabler in a legal sense. At the same time, the court noted that websites can’t choose to remain willfully blind when there is evidence to suggest that particular users are infringers. However, the response doesn’t have to be perfect, and eBay had clearly done at least as much as the law expects to detect and punish infringers.

Tiffany did score a lesser point when the appellate court remanded its false advertising claim under the Lanham Act for reconsideration by the lower court. It held that while eBay’s advertisements indicating that consumers could find Tiffany jewelry on eBay were not literally false, they could be considered misleading in view of eBay’s awareness that many Tiffany-branded products sold on eBay were counterfeit. Still, the elimination of the trademark claims significantly reduced eBay’s potential legal exposure.

So, what does all this mean for you, dear web businesses? As under the Digital Millennium Copyright Act (DMCA), you are partially protected from infringement liability flowing from the misdeeds of your site users. But the protection is porous — if you are aware (or are in possession of information to tip you off) that particular site users are using your site or web service to infringe trademarks, you can’t blithely continue to provide service and keep out of their business. You are NOT expected to have the knowledge of a trademark attorney and be able to judge authoritatively whether every use of a third-party trademark is infringing or not; there is room for error and miscalculation. Mere suspicion won’t make you contributorily liable. But you should investigate and respond expeditiously to any complaints by trademark owners. Even better, if your site invites abundant third-party content, you should include in your website terms of use or as a separate intellectual property policy a notice and take-down procedure (like eBay does with its VeRO policy) for rights holders to follow if they wish to submit complaints of infringement. Finally, if you are aware that certain trademarks are particularly susceptible to infringement on your site, and if economically feasible, you might consider adopting (again, as eBay did) a filtering mechanism to block or segregate for prior review postings that use the problematic trademarks.

For a slightly differently take on a ticked-off Tiffany, please check out a recent blog post on the Electronic Frontier Foundation’s (EFF) site. (The EFF, by the way, filed an amicus brief in the case on behalf of eBay.) The EFF, like me, sees the decision as a qualified victory for web businesses and consumers. Its main concern is that trademark law as yet does not provide a “put-back” procedure, as the DMCA does for content that is taken down by a web service provider in connection with a contested copyright infringement allegation.

Guys — on a related note, if you’re thinking of buying Tiffany jewelry for that special somebody in your life, please don’t buy it on eBay. If you’re in or near Center City, Philadelphia, go to the Tiffany store on Walnut Street between Broad and 15th. Or use their catalog or website. Otherwise, you may need a different type of lawyer.

Two items emerged almost immediately from the roundtables and the FTC’s related comments: (1) the FTC does not believe industry self-regulation in behavioral advertising is working, and (2) the category of “personally identifiable information” (PII) that has been used in privacy law up to this point to denote sensitive information warranting legal and regulatory protection is effectively obsolete.

RIP, PII

To the latter point, studies have shown that non-personalized information like IP addresses or even browser and operating system specifications can be combined with other information gathered from online browsing to build detailed personal profiles and even identify individuals with a reasonable degree of certainty. The FTC’s 2009 behavioral guidelines anticipated a breakdown of the existing personal/non-personal information dichotomy by expanding the category of information covered by the guidelines to include information that can be used to identify a specific computer or device (not just a particular human being). According to the FTC, such data include clickstream data that can be combined with a consumer’s website registration information; individual pieces of anonymous data combined into a detailed profile that is identifiable with a particular person; and behavioral profiles that are not associated with a particular consumer, but are stored and used to deliver personalized advertising and content to a particular device.

In addition, the guidelines identified a special category of personal information, such as health information, financial information, precise geographic location information or information about children, that is so sensitive it warrants heightened privacy protection (for example, requiring consumers to opt in before such data can be collected for behavioral advertising, rather than providing the standard opt-out).

More Powers for the FTC?

Greater privacy regulation in online behavioral advertising seems to be a given, therefore. Some sites like Yahoo! have felt it prudent to get ahead of the curve by expanding their privacy disclosure preemptively (for example, Yahoo!’s Ad Interest Manager allows you to see information about your browsing activities that Yahoo! collects for targeted advertising purposes and set your preferences accordingly). The big question, though, is how sweeping the new rules will be. One problem with a non-incremental approach is that the FTC is currently limited in its rule-making authority when it is using its power to combat unfair or deceptive practices under Section 5 of the FTC Act. This is the main authority the FTC has used for a decade to make its views known with respect to online privacy (Congress has granted it broader powers to regulate in specific areas, such as under the Children’s Online Privacy Protection Act and the CAN-SPAM Act).

However, a clause in Congress Barney Frank’s (D-Mass.) financial reform bill H.R. 4173, otherwise known as the Wall Street Reform and Consumer Protection Act of 2009, would greatly expand the FTC’s power to regulate and litigate, and not just against financial services companies. Specifically, the bill would allow the FTC to implement consumer protection regulations generally through the Administrative Procedures Act (APA) rule-making process, rather than through the more rigorous current process, which takes much longer and requires greater public participation and comment. The FTC would also be able to file suit directly instead of having to act through the Department of Justice. (NOTE: this is the second time in a week I have blogged about a little-known clause in Congressional financial reform legislation that drastically expands regulatory involvement in areas that have nothing to do with the 2008 financial collapse.) FTC Chairman Jon Leibowitz argued for such powers in Senate testimony on the pending legislation, promising to use them sparely. It remains to be seen whether Congressman Frank’s creation of an “FTC on steroids” (as some libertarian/anarchist tech bloggers have called it) will appear in the final act after reconciliation with Senator Chris Dodd’s (D-Conn.) bill.

So, what’s next for online privacy? More disclosure and more consumer choice, probably, as well as the possible creation of a sliding scale of privacy protection based on categories of totally de-identified data, data that can (either alone or in combination with other data available through the Internet) be associated with a unique individual, and sensitive personal data warranting strong safeguards. Online advertisers and ad networks: be aware that the FTC is watching you. Of course, I am watching them, and you can find new developments on this blog as soon as they occur.

This visit we talked about Colorado, object of the paeans of the late John Denver and also the latest battleground over the Internet sales tax or affiliate tax (also known as the “Amazon tax” because of the online retailer’s starring role in the drama). As everyone knows, the states are parched for revenue in the Great Recession, and the idea of solving fiscal problems by reducing spending is anathema. Moreover, in-state brick-and-mortar retailers have been smarting for years over the competitive advantage enjoyed by many online businesses like Amazon that do not charge sales tax. However, as the Supreme Court has held, states can’t simply require out-of-state retailers with no physical presence (or “nexus”) in the state to charge sales tax on purchases by state residents, since this violates the constitutional prohibition on burdening interstate commerce.

What a few states have done, following New York’s lead in 2008, is pass laws taking the position that the use of in-state affiliates — websites featuring links to refer Internet traffic to the out-of-state retailer’s site — amounts to having an independent sales force in the taxing state and provides the nexus needed for the state to constitutionally exercise its taxing power over interstate commerce. (Indeed, the New York statute used affiliate nexus to require the collection of tax on ALL online sales to New York residents, not just on those sales referred by in-state affiliates.) Online businesses, affiliates and their lobbyists in the Performance Marketing Association (PMA) countered that affiliate marketing should not be likened to engaging a force of door-to-door salesmen, but is actually nothing more than the rental of advertising space.

Great album, but if you order it online in Colorado you may get a tax notice.

Amazon, to shield itself from sales tax nexus, has been terminating its affiliate relationships in the taxing states. While some affiliates are large, sophisticated businesses (sometimes with their own networks of sub-affiliate publishers), many are home businesses operated by bloggers and small website owners who have managed to monetize their site traffic to the tune of a few hundred dollars per month or more. Amazon’s understandable but still draconian response to the affiliate tax laws threatens an important source of income for these creative and enterprising individuals in difficult times.

Aggressive lobbying by the PMA and others has stalled or killed affiliate tax initiatives in other states, with California’s Governor Schwarzenegger vetoing the legislature’s bill last year. As of the date of this post, Rhode Island has reported collecting no revenue from its affiliate tax. With tax-and-spend fatigue growing on both the national and state levels, there is increasing recognition that the affiliate tax is punishing in-state web entrepreneurs while hardly filling state coffers.

Which brings me to Colorado. Colorado represents a twist on the affiliate tax paradigm. The PMA successfully lobbied to remove explicit affiliate provisions from the bill. As approved by the Governor and effective as of March 1, House Bill 10-1193 says nothing about affiliates or collecting taxes on sales referred by affiliates.

What it does is impose stringent tax notice and reporting obligations on retailers doing business in Colorado (a category which is broadly defined to include anyone “soliciting [transactions in tangible property], either by direct representatives, indirect representatives, manufacturers’ agents, or by distribution of catalogues or other advertising, or by use of any communication media, … or by any other means whatsoever”) that do not collect Colorado sales tax. These retailers are required to (1) notify annually by first-class mail all Colorado purchasers that sales or use tax is due for which they are required to file a return with the state, and provide these purchasers with detailed information itemizing taxable and exempt purchases, purchase dates, amount of each purchase, etc., and (2) file an annual statement for each purchaser with the Colorado Department of Revenue showing the total amount paid for Colorado purchases during the preceding calendar year. Failure to provide the required notices and reporting can subject an online retailer to penalties of up to $10 per violation (which could get expensive if a retailer has hundreds of thousands of customers in Colorado).

In response to passage of House Bill 1193, Amazon promptly terminated all of its Colorado affiliates. The reason was not immediately clear, since the bill’s requirements are not targeted to affiliate marketing and on its face applies to Amazon’s direct sales. In addition to punishing Colorado, I suspect Amazon also wanted to preserve its ability to argue that the bill unreasonably burdens interstate commerce and cannot be constitutionally applied to Amazon without an affiliate network to provide a ghost of an in-state footprint. (Recall that the New York Supreme Court didn’t buy the argument that affiliates are advertisers rather than an independent sales force, which is sufficient to create sales tax nexus.)

While Amazon’s actions may strike us as a bit churlish and heavy-handed, the plain fact of the matter is that laws like this are not revenue generators and impose unnecessary costs on businesses — devastating costs, in fact, when you see things from the affiliates’ point of view. While Baer Business Law welcomes the opportunity to assist marketers and publishers in the affiliate space on affiliate tax compliance matters, it is my firm belief that a crazy quiltwork of divergent laws benefits no one but lawyers. Rather, there should be a uniform Internet sales and use tax law, implemented either by act of Congress or by multistate participation in a streamlined sales initiative.

The impetus toward affilliate taxation has slowed somewhat, but as long as state legislatures continue to defer the day when they learn to operate like a business, they must continue to stretch their manicured fingers toward virgin sources of revenue. Of course, a public suffering from tax-and-spend fatigue may send a different message in November.

NOTE: The views expressed in this post are solely those of the author.

A Special Trademark Issues (STI) review team was created by ICANN in October 2009 to provide further recommendations on some of the proposed Rights Protection Measures (RPM’s), such as the creation of a global trademark clearinghouse to serve as a repository of data about asserted trademark rights and to validate these rights in domain name disputes. Another proposed RPM is the creation of a Uniform Rapid Service (URS) as a faster, cheaper alternative to the current Uniform Dispute Resolution Policy (UDRP) in shutting down blatant cybersquatters and typosquatters. On December 17, 2009, the STI issued a report adding some more flesh to these proposals. You can find it here.

The STI report gives some tantalizing hints concerning the shape the new URS will likely take. Unlike with the UDRP, the remedy for the successful complainant would not be transfer of the domain name, but rather a hold, so that it doesn’t resolve to the original IP address. The elements of a URS complaint would be the same as for a UDRP complaint: bad-faith registration and use of a domain name that is confusingly similar to a trademark, where the domain name registrant has no legitimate interest in the domain name. However, the standard of proof would be higher: clear and convincing evidence that there is no genuine issue of material fact requiring further consideration.

If upon initial examination a URS complaint appeared to contain the basic requirements, an initial freeze would be placed on the domain name to prevent its transfer or changing of the WHOIS record. A full hold — disconnection with the IP address — would be imposed on final determination. However, the registrant would have the right to appeal to another examining body which would review the complaint and facts anew.

Practically speaking, the URS process would not work to resolve genuinely two-sided trademark disputes, i.e., situations where the claimed trademark is weak or descriptive or where the registrant is conducting a legitimate business under a mark adopted in good faith or where the degree of similarity between the domain name and the claimed trademark is less than overwhelming. The UDRP, the Anti-Cybersquatting Consumer Protection Act, and traditional trademark causes of actions for infringement, dilution and false designation of origin would still be available in these situations. However, when I handled trademark matters in-house for a large publicly traded company (whose unpopular line of business made it the target of much brand abuse), my experience was that even in those cases where we were dealing with a clear cybersquatter who didn’t respond at all to our UDRP complaint, we still ended up paying thousands of dollars in legal and arbitration forum fees to obtain a transfer of the domain name registration.

For those whack-a-mole cases, the URS as envisioned by ICANN’s STI (how’s that for alphabet soup?) would be a genuine boon.

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.

In my view, the disclosure requirements don’t apply to a typical sponsored ad run by an affiliate site because someone looking at the ad is likely to understand it as advertising for which the site is (presumably) being compensated. The disclosure requirements apply to an “endorsement,” which the new rules define as an advertising message that consumers will likely believe reflects the opinions, beliefs, findings or experience of a party OTHER THAN THE SPONSORING ADVERTISER, whether the endorser’s statements are the same as or different from the sponsoring advertiser’s. If a consumer perusing a site is likely to think it is the site owner or blogger speaking, not the seller of the product being written about, then there may be a disclosure obligation if the site owner or blogger is being comped or incentivized somehow for making the posts.

If disclosure is required, it must be “clear and conspicuous.” In FTC parlance, this requires, among other things, putting the disclosure somewhere near the post that constitutes the “endorsement” (i.e., the advertising). I would NOT bury it in the site T&C’s — the FTC has criticized this practice in other contexts (such as behavioral advertising) where it favors clear disclosures. So if there are multiple posts that constitute endorsements, you may need to include a short disclosure at the end of each post (unless you can associate a single disclosure with multiple posts in a way that makes it clear the disclosure relates to all of them).

Having said that, I also don’t think it is necessary to include a paragraph of legalese in each case. You might think about including a simple link entitled “Advertising Disclosure” after each post that causes a pop-up box to appear with a one-sentence disclosure (e.g., “The product reviewed here was provided by ____ free of charge.”). The bottom line is that I don’t believe the FTC is going to take a hard line on bloggers, particularly where there is some good-faith attempt to comply (as described above). The FTC itself has signaled that its primary target for enforcement will be advertisers, not bloggers. On the other hand, the product sellers may end up dictating what sort of disclosure they want, since they are also liable if bloggers don’t make the required disclosure.

Finally, with regard to affiliates who are also bloggers, a big question is what kind of incentive are they getting for writing favorable blog posts? Is it merely the affiliate advertising revenue (i.e., they want to say good things about the product they are running affiliate ads for) or are they getting something else too?

The latter case is easy — I would say include disclosure near the relevant blog posts, as discussed above. In the former case, one could make the argument that the presence of the ad means consumers are likely to suspect that the site owner has a compensated relationship with the product seller and therefore that the blog posts are sponsored advertising; ergo, no additional disclosure is needed. To be safe, I would probably still include some kind of short disclosure about the relationship, but the point is at least arguable. I think an ordinary blogger/affiliate running a site out of his house who isn’t realizing a significant amount of revenue and hasn’t previously been warned by the FTC is not facing a huge risk. (That said, if the FTC reads this blog or my article and comments on ReveNews, they may disagree with me!)

Now for my own disclosure: the foregoing is provided for informational purposes only and does not constitute legal advice on a specific matter. You should consult with an attorney (hopefully me!) before taking any definite action on this or any other legal matter.

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.