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.

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.

You’ve probably sensed the hunger for an answer if you’ve read this blog at all over the past year. (And if you haven’t, we forgive you.) Everyone, including all nine Supreme Court justices, agreed that Bernard Bilski and Rand Warsaw’s patent application for a method of hedging weather-related risk in energy trading was properly denied by the Patent Office. That much was clear from the November 2009 oral arguments before the Court, in which the querulous justices peppered Bilski’s counsel with business method patent hypotheticals (speed dating, an 80%-effective method of keeping students awake during an antitrust class, a method of maximizing wealth by buying low and selling high, and horse whispering). The hypotheticals were only slightly more absurd than the reality with which businesses have been living since the Federal Circuit suggested in its 1998 ruling in State Street Bank v. Signature Financial Group that methods of conducting business could be patentable if they produced a “useful, concrete and tangible result.”

The Bilski/Warsaw “invention” did not pass the smell test. The question was why? Inquiring technologists and IP lawyers wanted to know.

Abstract Ideas

In the end, the Court splintered. All the justices agreed that Bilski’s patent application taught an abstract idea or principle, and as such, according to well-established precedent, was not eligible for patenting as a “process” under 35 U.S.C. §101. Abstract ideas or principles, laws or phenomena of nature (even if just discovered) and mental processes are not patent-eligible subject matter because they are seen as the basic tools of scientific and technological work, and courts are careful not to permit any single person or entity to preempt their use. (However, as the Court’s opinion noted, the application of such concepts to a known structure or process can be patentable if it is novel, useful, non-obvious when viewed against the prior art and supported by a full and particular description in the patent application.)

All of the justices also agreed that the Federal Circuit had overstepped its bounds by holding that the machine-or-transformation test, which grounded the patentability of processes in their connection to a particular machine or physical transformation) was the sole test for determining whether a process met the threshold requirement for patentability. However, in a true mindbender, they also all agreed that the machine-or-transformation is still relevant, as an “useful and important” clue or investigative tool (in the Court’s opinion) or as a “critical” tool (in Justice John Paul Stevens’ concurring opinion). Of course, the justices could not agree on exactly how the machine-or-transformation test was still important, useful, critical, awesome, etc. In the Court’s opinion, the justices drew a dichotomy between Industrial Age inventions and Information Age inventions and suggested that the machine-or-transformation test might be the proper standard for evaluating processes in the first category, but from my perspective, trying to puzzle out whether a client’s invention is more like a steam engine or a search engine doesn’t seem like a particularly helpful — or intellectually satisfying — inquiry. Ultimately, the Court did not articulate a standard, beyond trotting out the abstract idea trope as a lowest-common-denominator limiting principle.

What About Business Methods?

So where does that leave us? In limbo, dear techies. The lower courts will have to go back to the drawing board to devise new standards for evaluating software and Internet patents. The Bilski opinion — or more accurately, opinions (for there were several concurrences) — do provide a few tea leaves to read. Business method patents survive, but by the skin of their teeth. The Court’s opinion leaves open the possibility that some business methods may be patentable, although the majority is skeptical that they warrant “broad patentability”, and in his concurring opinion Justice John Paul Stevens (joined by Justices Sonia Sotomayor, Stephen Breyer, and Ruth Bader Ginsburg) argued strenuously that business methods should never be patentable.

The relevant part of the Court’s opinion (authored by Justice Anthony Kennedy and joined in by Chief Justice John Roberts as well as Justices Samuel Alito and Clarence Thomas) had this to say with regard to business method patents:

“Interpreting §101 to exclude all business methods simply because business method patents were rarely issued until modern times revives many of the previously discussed difficulties…. At the same time, some business method patents raise special problems in terms of vagueness and suspect validity…. The Information Age empowers people with new capacities to perform statistical analyses and mathematical calculations with a speed and sophistication that enable the design of protocols for more efficient performance of a vast number of business tasks. If a high enough bar is not set when considering patent applications of this sort, patent examiners and courts could be flooded with claims that would put a chill on creative endeavor and dynamic change.

In searching for a limiting principle, this Court’s precedents on the unpatentability of abstract ideas provide useful tools…. Indeed, if the Court of Appeals were to succeed in defining a narrower category or class of patent applications that claim to instruct how business should be conducted, and then rule that the category is unpatentable because, for instance, it represents an attempt to patent abstract ideas, this conclusion might well be in accord with controlling precedent…. But beyond this or some other limitation consistent with the statutory text, the Patent Act leaves open the possibility that there are at least some processes that can be fairly described as business methods that are within patentable subject matter under §101.”

As previously mentioned, four justices (include three who remain on the Court) have taken the position that business methods are not patentable under any circumstances. It is also worth noting that Justice Antonin Scalia did not join in the portion of the Court’s opinion (quoted above) upholding the theoretical patent-eligibility of business methods. Therefore, at least three, and perhaps four, sitting justices reject business method patents totally, with four others rejecting their “broad patentability” and recommending that a higher bar be set. Notably, too, all of the justices take a dim view of the State Street opinion, with the majority refusing to endorse its perceived blessing of business method patents and Justice Stevens’ concurrence calling it a “grave mistake.” Forget abortion, gun rights and church-state separation: given this volatile mix, Elena Kagan’s views on patent law may assume paramount importance.

What Do I Do Now?

So what should software and Internet clients take away from all of this? Don’t blow your legal dollars on patents if the essential value of your invention or product lies in its algorithm or the fact that it automates or expedites a general business process. Despite the Court’s rejection of the machine-or-transformation test as the exclusive standard for the patent eligibility of processes, the Patent Office will only be emboldened by Bilski to continue its aggressive stance against business methods and software and Internet patents whose claims are broad and general and have only an ethereal connection to hard technology.

In addition, established companies with ample litigation reserves that are approached by patent trolls wielding business method and general process patents should consider the value of an upraised middle finger. If one such company (possibly co-funded by other similarly situated targets) succeeds in getting the troll’s patent invalidated, the troll’s business is vaporized. Accordingly, trolls may choose their targets more carefully from now on, may be more hesitant to follow through on threatened infringement litigation, and may be willing to take a smaller license fee before moving on to the next target. However, because business method patents survive and Bilski provides no concrete guidance for what qualifies as a patent-eligible process, the troll threat is not eliminated.

Towards Patent Act 2.0

Was Bilski worth the wait? I’d have to say no. On the other hand, perhaps the justices can’t be blamed for agonizing over our intellectual property law’s failure to come to grips with non-traditional inventions and the marginalization of brick-and-mortar innovation ecosystems. It’s time, perhaps, for Congress to step in and give us a Patent Act for the post-industrial age.

* Bilski’s patent application for a method of hedging risk in commodities trading was properly rejected because the invention was nothing more than abstract principles and formulae, which are not subject matter eligible for patenting according to prior Supreme Court decisions.

* There is no reason to exclude categorically business methods from the scope of patent eligible subject matter. A business method can be a patentable “process” if it meets the other statutory requirements for patenting (novelty, usefulness, etc.).

Based on my reading of the November 2009 oral argument transcript and my conversations with patent experts, we predict that (1) the Patent Office’s rejection of Bilski’s application for a method of hedging risk in commodities trading will be upheld, (2) the Federal Circuit’s machine-or-transformation test will be invalidated as unduly limiting given the statutory language and history, BUT (3) we may see a new definition of patentable subject matter based upon some ethereal concept of “technology.”

The Supreme Court will next release decisions on Tuesday, June 1. Given the importance of this ruling to our software and Internet clients, we will post a link to the opinion and a brief summary on this blog as soon as it is issued, to be followed by a full analysis not long afterward.

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.

On a legal note, one of the tidbits that VC’s have for startups is … make sure you have the proper intellectual property assignments in place with founders, employees and consultants (for my PANMA and PSL friends, that means: DEVELOPERS) to transfer ownership of all intellectual property rights to the startup entity. VC’s look for this when they do their due diligence for funding transactions, and you can bet your startup keister on the fact that everything will be given an even more penetrating once-over at the time of an exit event like an acquisition or IPO. If these assignments are not in place, your startup could end up being an unintentional co-owner of its product with someone else, who may be able to sell or license it independently as they see fit. In fact, I blogged about the need to nail down ownership last May, so you know how near and dear this issue is to my heart.

Someone else co-owning your patents or copyrights is NOT good for your valuation! If you need an IP audit or want to get IP ownership buttoned up, please give me a call. I always have time for startups.

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.

Readers of this blog know that the Bilski case will set the new standard for patent eligibility of business methods. In 2008 the U.S. Court of Appeals for the Federal Circuit upheld the Patent Office in setting a strict machine-or-transformation test that essentially bars the patenting of business methods except where they are tied to or transform something physical. If the Supreme Court agrees, this could invalidate a lot of Internet and software patents.

In the oral arguments several justices — most notably the newest one, Sonia Sotomayor — seemed uncomfortable with the intellectual contortions of the machine-or-transformation test, yet agreed that on some level a patentable invention must involve “technology.” But what is “technology”? How do you define it? A software patent whose claims delve into the nuts-and-bolts of the effects the programming has on the host computer probably teaches “technology”, but is it possible to drill down any further?

Here’s hoping (if not expecting) that SCOTUS brings some real clarity so that going forward clients will know when they are up to their elbows in “technology.” In the meantime, check out my recent articles (actually one article that my editor broke into two pieces because it was so verbose!) on the oral arguments in the Bilski case here and here.

Seriously, protecting your idea in business discussions is critical, and it’s all about timing, covering your steps, and controlling the manner and scope of the disclosure. I’ve written a guide for entrepreneurs on how to approach these issues and some tools and tips to keep in mind. You can find it here. Of course, you should also consult a business and IP attorney.