Blog: The IP Law Blog

A business’s intellectual property may be its most valuable asset. Whether it is biotechnology, trade names, business methods, or computer software, intellectual property should be protected to the greatest extent possible in order to maximize the value of the business. This article summarizes the types of intellectual property protection that are available.

What Is Intellectual Property Protection?

There are four types of intellectual property protection: patent, copyright, trademark, and trade secrets.

Patents protect inventions. A patent is a grant by the United States Government to the inventor of the rights to exclude others from making, using, or selling the invention in the United States, or importing the invention into the United States. There are three kinds of patents: utility, design, and plant. A utility patent protects five classes of inventions: a process or method, a machine, an article of manufacture, a composition of matter (including chemical compositions, genes, and genetically engineered bacteria, plants, and animals), and an improvement of an invention in one of the other four classes. Subject matter that is not patentable includes pure mathematical algorithms that do not have steps, printed matter, natural compounds, and scientific principles. In order to be patentable, the invention must be useful, new (novel), and nonobvious.

A design patent protects new, original, ornamental designs for articles of manufacture. The patent protects only the appearance of the article, not any aspect of functionality.

Plant patents protect distinct, new varieties of a asexually reproducing plants (i.e. plants that can be reproduced without seeds, such as by budding or grafting), including certain types of roses, nuts, and fruit trees.

Copyrights protect original works of authorship fixed in a tangible medium. Original works of authorship include books, musical compositions, multimedia works, dramatic productions, motion pictures, and computer programs and databases. Functional works such as ideas, procedures, processes, and methods are not protectable by copyright. A copyright entitles its owner to the exclusive rights to reproduce the work, prepare derivative works, distribute copies of the work, and perform and display the work publicly.

Trademarks and service marks protect words, symbols, phrases, and logos used to indicate the source of goods or services. The strongest marks are those that are coined (made up words) or arbitrary (words that do not have any connection to the product or service). Suggestive marks, which suggest a characteristic of the product or service, are less strong than coined or arbitrary marks. Descriptive marks, which describe the product or service, are not protectable unless they have achieved secondary meaning (a strong association with the source of the product or service). Generic marks are not protectable at all because they are simply words that have become used to identify the product itself.

Trade dress protection is similar to trademark protection and protects the overall look of a product, as long as it is inherently distinctive and nonfunctional.

Trade secret law protects information such as formulas, compilations, programs, devices, or methods, which derives independent economic value from not being generally known to others and is the subject of reasonable efforts to maintain its secrecy.

Which Type of Protection Is Best?

A business may obtain all four types of intellectual property protection. For example, the product itself may be patentable, the name or brand may be a trademark, the literature or other written materials may be copyrightable, and the details of the manufacturing process for the product may be maintained as a trade secret.

In some cases, however, a decision must be made between the types of protection that will be used. One cannot obtain both patent and trade secret protection for the same thing. In order to obtain a patent, the invention must be disclosed to the public, while trade secret protection can be obtained only if the invention is kept secret. Patent and trade secret law offer different kinds of protection. A patent protects against the independent creation or reverse engineering of the device, while trade secret law does not protect against these acts. Patent and trade secret law have different requirements. An invention must be useful, novel, and nonobvious to be patentable, while there are no such requirements for trade secret protection.

In general, if both patent and trade secret protection are available, one should seek a patent if the invention is easily reverse-engineered or if it is disclosed when it is used (e.g. Amazon.com’s 1-Click method of accepting purchase orders over the Internet). If the invention is not easily reverse-engineered and not disclosed when it is used (e.g. the formula for Coca-Cola™), trade secret protection may be the better choice.

How Long Does the Protection Last?

A utility patent is valid for 20 years from the filing date of the patent application. A copyright lasts for the life of its author plus either 70 or 95 years, depending on the date of creation, unless it is a work-for-hire, which lasts for the shorter of either 95 years from the first publication or 120 years from creation. A trademark does not expire, as long as it is used. Trade secret protection lasts as long as the information is maintained as secret.

How Does One Obtain Protection?

A patent is obtained by filing, with the United States Patent and Trademark Office (“PTO”), a patent application containing claims (which set forth the scope and limits of the invention). The PTO conducts a search of the prior art, including U. S. and foreign patents and other publications, and issues a written opinion on whether the invention is patentable. The claims may be allowed or rejected. The applicant then has the opportunity to respond to the PTO and to explain why the claims should be allowed. After this process, called patent prosecution, the PTO either issues a patent or rejects the application. The process usually takes two to three years or so, depending on the type of invention and amount of prior art.

A copyright is obtained by filing an application with the United States Copyright Office. There is no examination process; it is simply a registration process.

A federal trademark is obtained by filing an application with the PTO. The PTO conducts an examination of other marks in use and determines whether there are similar marks and whether a likelihood of confusion could occur. If the PTO approves the mark, it is then registered. There is also protection for trademarks available under state law.

Trade secrets are governed by state law, in particular the Uniform Trade Secrets Act, which 43 states, including California, and the District of Columbia have adopted. There is no registration or examination procedure; a trade secret exists if the requirements set forth above are met.

What Advice Should a Client Be Given?

Clients should be advised to identify their intellectual property. This can be done through a formal audit by an intellectual property lawyer or informally by the company’s management. Once the intellectual property has been identified, the client should verify that it owns the intellectual property and, if not, take steps to secure ownership from employees or independent contractors. Then, an analysis should be made of the value of the intellectual property and a determination made of which items need to be protected and how they should be protected. If it is not economically feasible to protect all of the company’s intellectual property, management should prioritize the intellectual property and begin the effort necessary to obtain protection.

By Andrea Anapolsky

Once perceived as just a means for personal expression, blogs have grown into a mainstream form of communication used by business entities, the media, political campaigners and individuals alike. Just last month, Yahoo!® News reported that approximately 40 million blogs have been created, with more than 75,000 blogs added every day. The act of blogging, however, is not exempt from traditional defamation claims, and like any other form of communication, can be both false and defamatory and cause damage to one’s reputation. However, due to the complexity and nature of the Internet, the courts are still feeling their way through two central issues: first, whether to characterize the content publicized in a blog as opinion or fact, and second, who may be held liable for publicizing defamatory statements on a blog. This article briefly reviews trends in case law regarding defamation claims against bloggers, with a specific focus on whether operators and/or owners of network providers who publish or edit and then republish allegedly defamatory statements may be held liable for defamation.

Claims against the Blogger

There is considerable case law addressing whether the creator of the blog’s content, the “blogger” may be held liable for defamation. In 2005, one state court emphasized the significance of the context of the speech at issue and concluded that an unsatisfied customer’s online allegations that the Plaintiff website was “blatantly dishonest” and “crooked” were not defamatory because the customer’s opinion accompanied a series of facts on which the opinion was based. Penn Warranty Corp. v. DiGiovanni, N.Y.S.2d, 2005 WL 2741947 (N.Y. Sup. Ct. 2005). The court reasoned that the web site “presents to others as a personal statement by its maker” and that “when viewed in its full context,” the statements reflect only “personal opinion.” Ibid. In another 2005 case, a state court made a similar impression and characterized the allegedly false and defamatory postings dedicated to the political issues of a Delaware town as a “vehicle for expression of opinions…and not as a source of facts or data upon which a reasonable person would rely.” John Doe I v. Cahill, 884 A.2d 451, 466 (Del. 2005). Perhaps these recent cases reveal a trend by the courts to consider blogs statements of opinion, rather than of fact, and therefore outside the scope of a defamation claim. Ultimately, however, like traditional defamation cases, courts are rendering decisions on a fact-specific, case-by-case basis, and are yet to provide a clear rule.

Claims against the Message Board Operator/Owner of the Network

Due to the complexity and explosive growth of the blogosphere itself, courts are now beginning to address whether the operators/owners of the message board or network could be held liable for posting allegedly defamatory claims by third parties. The leading case on this issue is Zeran v. American Online, Inc., in which the Fourth Circuit provided immunity under section 230(c) of the Communications Decency Act of 1996 (“Section 230(c)”) to AOL for messages posted to a forum board. Zeran v. American Online, Inc. 129 F.3d 327 (4th Cir. 1997). Section 230(c) provides, in relevant part, that “[n]o provider or user of an interactive computer service shall be treated as the publisher or speaker of any information provided by another information content provider.” In turn, an “information content provide” is any person or entity that is responsible, in whole or in part, for the creation or development of information provided through the Internet or any other interactive computer service.” 47 U.S.C. §230(f). To date, there are no reported court decisions addressing the issue of whether Section 230 immunity applies to bloggers.

This issue is further complicated by the fact that a blogger can be characterized as both a content provider or publisher and a user of computer interactive services. A blogger is a user of an interactive service network when she or he creates a blog online, but a blogger could also be a provider of an interactive service network if she or he allows third parties to add comments to their blog or a publisher if she or he actively edits the contents on his or her blog.

This confusion as to how to characterize a blogger begs the question: under what circumstances will Section 230 immunity apply? The Ninth Circuit started to answer this question by concluding that Section 230 immunity applies if the blogger proves that the information is still “provided” to them even thought they are selecting information for their blog. (Batzel v. Smith, 333 F.3d 1018 (9th Cir. 2003)) In Baztel v. Smith, a third party sent an allegedly defamatory email to the manager of the listserve, without knowing that the manager would publish that email. The court created a reasonable person standard and held that Section 230(c) immunes a service provider or a user when “…a third person or entity that created or developed the information in question furnished it to the provider or user under circumstances in which a reasonable person in the position of the service provider or user would conclude that the information was provided for publication on the Internet or other ‘interactive computer service.” Id. at 1034 (emphasis added)

While Batzel provided a standard by which to evaluate when Section 230 may apply, the court did not address what would happen if the blogger actively edited a third party’s work and then republished it on their blog. In this case, would the blogger be considered the speaker and thus liable for any defamatory speech? Moreover, would actively editing a blog and then republishing it further incriminate the owner of a network by tending to show that the network provider edited the material because they knew the material was defamatory or had reason to be suspicious that some or all of the material was defamatory?

The courts are yet to answer these questions, however, as blogs and other online communication forums continue to vehemently develop, defamation claims are inevitably going to increase. And until the courts catch-up to technology, legal guidance on the issues concerning how to characterize a blogger and when Section 230 immunity applies remains muddy and uncharted.

Real estate lawyers take head. Waiting in the tall grass of your client’s real estate development project may be a thorny copyright issue that could cost your client all of the profit it earned on the project, and would probably buy you a serious malpractice claim.

In the course of developing a real estate project, whether it is a residential community or a commercial project, a central component of the project is the architectural plan. Unless the developer (and the developer’s counsel) are aware of how the Copyright laws affects what the developer can (and more importantly, can’t) do with the plan, the developer may find itself on the receiving end of a Copyright infringement lawsuit. Why? Because an architectural plan, as well as other architectural works, are protected under Copyright laws, and these laws govern who owns the plans and what can and can’t be done with the plan.

Scope of Protection Granted Architectural Works

In 1990, Congress enacted the Architectural Works Copyright Protection Act (the “Act”). The Act increased the scope of protection architectural works are entitled to under United States Copyright laws. The Act was passed in efforts to make United States Copyright laws more compatible with the Berne Convention For The Protection of Literary And Artistic Works.

According to a report prepared by the then Register of Copyrights, pre Act copyright laws provided adequate protection for architectural blueprints, plans, drawings and models. However, the adequacy of protection under Berne Convention standards for the constructed design of architectural structures was in doubt. Although the Act, when it was in Bill form, was intended to address this perceived gap, the legislative history provides us with insight into the intended scope of protection accorded to architectural works, including blueprints and plans.

The Act amended the definition section of the Copyright Act (17 USC 101) by adding the following definition of “architectural works:”

An ”architectural work” is the design of a building as embodied in any tangible medium of expression, including a building, architectural plans, or drawings. The work includes the overall form as well as the arrangement and composition of spaces and elements in the design, but does not include individual standard features.

The House Report on the Copyright Amendments Act of 1990 (which includes the Act) (the “Report”) provides a section by section analysis and discussion of the Act. In discussing the definition of architectural works, the Report identifies the elements of a protected architectural work. The Report states that “protection does not extend to individual standard features, such as common windows, doors and other stable building components.” The Report makes clear, however, that the provision is not intended to “exclude from copyright protection any individual feature that reflects the architect’s creativity.”

Commenting on the meaning of “arrangement and composition of spaces and elements in the design” the Report noted that this phrase recognizes that creativity in architecture frequently takes the form of selection, coordination or arrangement of unprotectable elements into an original, protectible whole, and that a architect may incorporate new, protectible elements into standard features that might not otherwise be protectable and create an original, protectible whole.

The Report sets out a two step analysis to be engaged in when determining the scope of protectability for an architectural work.

First, an architectural work should be examined to determine whether there are original design elements present, including overall shape and interior architecture. If such design elements are present, a second step is reached to examine whether the design elements are functionally required. If the design elements are not functionally required, the work is protectible without regard to physical or conceptual separability.

Protection would be denied for the functionally determined elements, but would be available for the nonfunctional elements. The Report states that courts must be free to decide the level and scope of protection, and evidence that there is more than one method of obtaining a given functional result may be considered in evaluating the scope of protection. The Report notes that the Act incorporates the general standards of originality applicable for all other copyrightable subject matter, and the determination of infringement is to be made according to the same standard applicable to all other forms of protected mater.

How Issues of Infringement Can Arise and How to Avoid Them

Poor planning and a lack of understanding can lead to a developer finding itself in hot water with regard to architectural plans. Just because a developer paid an architect to come up with drawings does not mean that the developer can do whatever it wants with the drawings. Granted, case law has held that in certain circumstances the developer may have an implied license to perform the acts that are the subject of the infringement suit. However, defending an infringement claim can be quite expensive. Preventing the situation from arising will be much easier on the pocketbook.

Anytime your client is working with an architect, make sure that there is an engagement letter in place and it is clear on exactly what can and can’t be done with plans or other drawings created by the architect. Also, make sure that the engagement letter is crystal clear on exactly who owns the plans. I have seen engagement letter from architects that state that the architect is the owner of the copyright in the plan and that any contributions by the developer to the plan is a work made for hire and made on the architect’s behalf. As long as the developer understands the implication of these provisions, major problems can be avoided. Representing developers, I would rather have my client own the rights to its contributions. I can just imagine the horror a developer would experience upon finding out that the architect he worked with in developing a completely unique floor plan is now selling the plans to all the other major builders in the area.

Developers can find themselves facing copyright infringement issues if they change architects mid project and continue to use the drawings created by the first architect. To preserve the right to do this, the developer should make sure that this right is specifically reserved in the engagement letter. Usually most reasonable architects will allow the developer this right in exchange for being indemnified against any claims related to work performed by the new architect.

Some engagement letters I have seen from architects allow a developer to freely reuse a plan or other drawing without having to pay a reuse fee as long as it is being used for the same development. If a developer wishes to reuse a drawing for multiple developments, the developer should bring that up as soon as possible and make sure that it finds its way into the engagement letter.

The real estate developer and his counsel should give serious consideration of how to incorporate the requirements of the Copyright laws into the company’s best practices. While hand shake deals are still commonplace in the real estate and construction industries, they just won’t cut as far as the Copyright laws are concerned.

The United States District Court of Colorado issued summary judgment in favor of several big-name producers and movie studios and against several “clean movie” companies in the business of creating sanitized versions of movies. (Clean Flicks of Colorado LLC, et al. v. Stephen Soderbergh, et al., Case No. 1:02-CV-01662, in the United States District Court of the District of Colorado.)

The litigation was initiated by several clean-movie companies, seeking declaratory relief that their process of editing objectionable content and reselling the edited copies fell within the “fair use” defense to copyright infringement. The defendant movie studios (“Studios”) filed a cross-complaint for infringement under both 17 U.S.C. section 106(1) for violating their right to reproduce the copyrighted works, as well as infringement under section 106(2) for violating their right to create derivative works.

The original plaintiffs resold sanitized digital versions of movies in hardcopy format. The sanitized versions were created by disabling the copy protection software on an original DVD, copying the content onto a hard drive, then removing the objectionable excerpts either by skipping the offending passage, cropping images, or deleting offensive words. The clean movie companies would then make multiple copies of the edited versions for resale or rent to the general public, along with an original version of the movie, thereby enabling the clean movie companies to argue that the sale of the edited version did not deprive the Studios of a sale.

The Studios cross-complained for infringement and named as cross-defendants a second group of movie editing companies that had developed a different editing methodology. These companies did not permanently edit a physical version of a digital movie, but instead sold hardware and software that ran simultaneously while playing an original DVD, causing the DVD to skip past or mute the offending portions of the movie. No hard-copy version of the edited movie remained. This second class of cross-defendants was dismissed from the case when Congress enacted the Family Movie Act of 2005, which provides an exemption for the editing of motion pictures by a member of a private household if no fixed copy of the altered version of the motion picture is created. This statute protected those parties selling technology that enabled such private editing.

The Studios sought summary judgment against the remaining clean movie companies. The companies sought, as their primary defense, to create a new public policy test within the previously accepted fair use doctrine. The companies argued that the fair use doctrine allows a party to use copyrighted material for the purpose of public criticism and that public criticism could include the substantial copying of such material. The companies further argued that they were providing a more socially-acceptable alternative for family viewing without exposing children to unwanted and potentially harmful content. As such, the companies argued that their edited versions constituted fair criticism of the offending material.

The companies relied on Campbell v. Acuff-Rose Music, Inc., 510 U.S. 569 (1994), which emphasized the fair use doctrine be evaluated on a case-by-case analysis, weighing the following four factors in determining fair use: (1) the purpose and character of the use, including whether the use is transformative or merely supersedes the original; (2) the nature of the copyrighted work; (3) the amount and substantiality of the portion used in relation to the copyrighted work as a whole; and (4) the effect of the use on the market of the copyrighted work.

The companies argued that their “socially-acceptable” version did not deprive the owners of the copyrighted work from sales in light of their practice of pairing the edited version with an original copy. The Court found that this argument, while superficially attractive, downplayed the original author’s “intrinsic value of the right to control the content of the copyrighted work, which is the essence of the law of copyright.” In short, the copyright owner has the right to determine the market for his or her work.

The Court also found that the fair use doctrine did not apply because (1) there is nothing transformative about the edited version, it simply deleted minor portions from the work as a whole; (2) the creative expressions of movies favored the Studios; (3) the substantial amount of the copyrighted work that was utilized in the final edited version compared to the minor portion that had been edited; and (4) the author’s inherent right to determine the market for the creative work.

In short, the Court found that the fair use doctrine “is not applicable here because the infringing parties are exploiting the market for movies that is different from what the Studios have released into and for an audience that the Studios have not sought to reach.”

The Court issued an injunction precluding the continued sale of hard copies of edited versions of the Studios’ works as a violation of section 106(1). Interestingly, the Court found that the clean movies did not violate the Studios’ rights to create derivative works under section 106(2) because the infringing copies are not used in a “transformative manner” and therefore do not constitute derivative works.

One issue left unanswered is whether creation of the initial digital master copy of the DVD constituted an infringement. This question arose because the clean movie companies also asserted the “first sale doctrine” defense, which protects the purchaser of any use of an authorized copy, but does not permit the making of additional copies. The Studios made it clear that they were not seeking a resolution of that issue at this time, but only seeking an injunction precluding the sale and distribution of multiple copies. Nevertheless, the Studios reserved the right to argue that the initial copying and creation of the master copy is a violation of the Digital Millennium Copyright Act, Public Law No. 105-304, 112 Stat. 2860 (1998). This potential argument has generated amicus briefs filed by numerous creative organizations, including the Electronic Frontier Foundation, expressing concern that any finding that the initial copying of the protected work constituted infringement would chill the creative process and impair an individual’s ability to create an interim copy in the process of creating a new, non-infringing transformative work. The Colorado Court, as well as the Studios, left that issue to be determined at a later date.

A class action lawsuit filed this past May by a small group of independent music publishers against major online music services for failing to secure licenses to sell downloadable versions of certain songs brought to light what could be a crack in the way labels, digital content distributors and online music services clear music for digital distribution. The publisher’s copyright infringement lawsuit names as defendants Apple, AOL Music Now. Buy.com, Microsoft, Napster, Real Networks, Yahoo and others.

The standard practice for most labels, digital content distributors or online music services is to secure a license to digitally distribute a song by going through the Harry Fox Agency, the largest mechanical licensing, collection, and distribution agency for U.S. music publishers. (The license to distribute the sound recording itself is obtained from the record label or other owner of the sound recording.) The Harry Fox Agency grants licenses for a variety of digital formats, including full-length permanent digital downloads, limited use digital downloads, on-demand streaming, and more. Most labels and digital content providers prefer going through Harry Fox. However, certain publishers such as those who filed suit don’t use Harry Fox as a mechanical licensing agent, but instead grant mechanical licenses themselves.

Labels and digital content providers can always attempt to negotiate directly with publishers that don’t use the Harry Fox Agency. Most labels and digital content providers don’t particularly like this alternative as it could end up being very time consuming. A label could spend a fair amount of time negotiating the terms of a direct mechanical license only to have the deal implode at the last minute. Fortunately, the Copyright Act provides an alternative for labels and digital content providers seeking to obtain a license to digitally distribute a song – the compulsory license.

The Copyright Act provides for the compulsory licensing of songs (not the sound recording) for the making and distribution of “phonorecords.” Section 115 of the Copyright Act provides that, once a “phonerecord” (which includes within its definition digital phonorecords) of a musical work has been publicly distributed in the United States with the copyright owner’s consent, anyone else may, under certain circumstances and subject to limited conditions, obtain a compulsory license to make and distribute “phonorecords” (including a digital phonorecord) of the song without express permission of the copyright owner.

The first step in obtaining a compulsory license for the manufacture and distribution of phonorecords is to identify the copyright owner of the composition. This can be done by personally searching the Copyright Office, or requesting the Copyright Office to conduct the search. Additionally, there are services that perform these type of searches for a fee.

If the name and address of the copyright owner are located, the party seeking the compulsory license must send, by certified mail, a Notice of Intention to Obtain a Compulsory License to the copyright owner. A separate Notice of Intention is required for each title for which a compulsory license is sought. The notice must be sent either before or no more than thirty days after making a phonorecord of the song, and before the distribution of any such phonorecord. The Notice of Intention need not be filed with the Copyright Office.

After the Notice of Intention is sent and the distribution of the phonorecord commences, the compulsory license holder must make royalty payments accompanied by a monthly statement of account on or before the 20th day of each month for every phonorecord made and distributed in accordance with the license.

If the party seeking the compulsory license is not able to locate the name and address of the copyright owner, the license seeker must file the Notice of Intention with the Licensing Division of the Copyright Office, along with the applicable statutory fee. The compulsory license holder is not required to file a monthly statement of account with the Copyright Office. Any royalties due the copyright owner should be held on account by the compulsory license holder as the Copyright Office will not accept any royalty fees. The compulsory license holder should check the records of the Copyright Office on a periodic basis to see if the unidentifiable copyright owners are later identified. Once they are, the compulsory license owner should make all royalty payments directly to the copyright owner.

XM’s introduction of a new service called XM + MP3 that allows its subscribers to listen to XM’s service on a portable player and record up to fifty hours of programming. In addition, the new service and player (called Inno) allows users to isolate and save perfect digital copies of songs for unlimited replay as long as they maintain their XM subscription. The service also allows XM users to create custom playlists which trigger automatic recording and storage of songs on the playlist when broadcast over one of the many XM stations

The Recording Industry Association of America responded by filing suit against XM for “massive wholesale infringement.” The RIAA claims that the new XM service goes far beyond any type of “radio-like” service for which XM is licensed, and is, instead, distributing sound recordings like iTunes and the new Napster.

Under Section 114 of the Copyright Act, XM is entitled, by statute, to publicly perform sound recordings in a radio-like, non interactive service, via satellite radio. Under this statutory license, XM is not required to seek individual permission to use any sound recordings; but it must pay a statutorily prescribed royalty rate for the digital performance of those recordings. In its federal complaint, the RIAA claims that XM has gone beyond the limited license granted it under Section 114 of the Copyright Act, and is now, through the XM+MP3 service, “distributing” sound recordings without its permission. The RIAA likens XM to other digital distributors of sound recordings, such as Apple’s iTunes, Napster, etc.

The XM+MP3 service shares numerous qualities with other subscription services, such as Napster and Yahoo Music. They both allow users to maintain perfect digital copies of particular sound recordings for unlimited replay for as long as they maintain their subscription. There are some differences, however. The major difference according to XM and the Electronic Frontier Foundation, is that the XM+MP3 service involves the recording by a digital audio recording device.

According to XM, the new players and the XM+MP3 service were designed to follow the Audio Home Recording Act, a federal law passed in 1992 in connection with the settlement of a lawsuit brought by the recording industry against Sony’s DAT recorders. Under the Audio Home Recording Act, digital recording devices are legal as long as they incorporate specific security protocols which prevent serial copying, and the manufacturer of the digital recording device pays a royalty of up to $8 per new digital recording machine and 3% of the price of all digital audio tapes or discs. The royalty payments are made to the Copyright Office which then distributes the money to the copyright owners whose music is presumably being copied. The tradeoff for the royalty payments is that consumers could use the digital audio recorder for the non-commercial home taping of music from digital broadcast sources without engaging in copyright infringement.

The Audio Home Recording Act specifically allows for the non-commercial home taping of music from digital broadcast sources. However, that law was meant to provide clarity on an activity consumers have been engaging in ever since audio recording devices were available – recording songs from a radio broadcast. Back in the analogue days, a cassette tape recording of a song from an FM broadcast was a poor substitute for the actual record. The sound quality was extremely poor and always included DJ banter. In addition, taping from an FM broadcast was never a surefire guarantee – one never knew exactly when a particular song would play; ones fingers were never quick enough to catch the song from its first note.

The first digital audio recorders vastly improved on sound quality. They produced recordings that rivaled the originals. If a user was lucky or skilled enough to record a specific song from a digital audio broadcast, there really would be no need to buy the record. This is the reasoning behind the royalty payments required under the Audio Home Recording Act – it’s meant to compensate the artists whose work is being recorded for lost record sales.

Technologically, the XM+MP3 unit, the Inno, is far more advanced than the DAT recorders circa 1992. Most DAT recorders required manual activation in order to record, and could not automatically record like the Immo. In my opinion, it’s these features that case the XM+MP3 service and the Inno to go well beyond merely recording a song from a digital broadcast. The ability of an Inno user to disaggregate recordings into individual songs, and save them for repeated listening, and to create a “wishlist” which automatically compiles the selected tracks, makes the player and service more akin to a tethered subscription service than a DAT recorder. This distinction is important because it goes to how the record labels and artists should be paid. Artists and record labels are paid depending on the way in which a sound recording is used. If it is merely streamed or digitally broadcast, the artists and labels are paid less than if the sound recording is available for permanent download. Here, the XM+MP3 service functions more like iTunes than a radio receiver. While I applaud the Imnn’s technological innovations and think the XM+MP3 service is a great way for consumers to enjoy content, if XM is going to continue to offer this service, it should pay a rate similar to that paid by iTunes and Napster. XM’s service offers a quality not available with the manually activated DAT recorders. A user of the XM + MP3 service is practically certain to capture their chosen song; not so with fingers and a DAT recorder. It’s this certainty that makes the XM +XMP3 service exactly like Apple’s iTune service, and XM should pay accordingly.

A Federal district court jury in Nashville levied a $4.3 million dollar verdict against Sean Combs’ (Puffy) Bad Boy Entertainment, Bad Boy, LLC and Universal Records/UMG Recordings for infringing copyright owned by Bridgeport Music and Westbound records. The suit resulted from the use of a six second sample from the Ohio Player’s Singing in the Morning used by producer Easy Money in the title track to the Universal released Notorious B.IG.’s 1994 album “Ready to Die.”

At the trial the parties stipulated that the required license had not been obtained from Bridgeport Music/Westbound Records. The issue left for the jury to determine was to calculate the fair market value of the use of the track. The jury awarded $733,878 in actual damages, which represented the fair market value of the use of the track. In addition, the jury awarded $3.5 million in punitive damages, which include a $1 million award against Bad Boy LLC.
The story is not the fact that Combs et al were hit with a very large verdict for copyright infringement. The story is why the jury levied such a significant punitive damage award. Susan Butler, the legal matters reporter for Billboard Magazine, published a story in the April 8, 2006 edition of the magazine which explained the reason behind the damage award.

According to Butler’s story, it was the pre-litigation activities of Combs, et al. that motivated the jury. Apparently between 1998 and 1999 letters were written from Bridgeport’s administrator to various music publishers, Arista records, which at one time had a joint venture with Bad Boy Entertainment, claiming copyright infringement of the Ohio Players’ sample. According to Butler’s story, Arista apparently forwarded the letter it had received to Bad Boy Entertainment care of Bad Boy’s law firm. Further, there was no evidence presented to the jury that Combs et al. responded to any letters or phone calls that Bridgeport’s administrator apparently made prior to filing suit. Although, according to Butler’s story, there was no letter addressed directly to Bad Boy Entertainment, nor was there evidence that Bad Boy or its lawyers had actually received Bridgeport’s letters, the jury took serious issue with Bad Boy’s apparent refusal to address Bridgeport’s concerns.

Butler’s story quoted the jury foreman as stating that Bad Boy et al should have done something prior to Bridgeport filing its lawsuit or taken some action to show “a willingness to attempt at least a settlement.” According to the quotes attributed to the jury foreman in Butler’s article, it appears that Bad Boy could have lessened the amount of the Punitive damage award by responding to Bridgeport’s concerns.

The lesson to be learned here is to take seriously any and all cease and desist letter received. This doesn’t mean that you necessarily have to admit infringement and pay a settlement. According to the jury foreman’s quote in Butler’s story, it would have been significant if Bad Boy responded to Bridgeport’s letter by denying infringement. But ignoring a cease and desist letter and refusing to engage a party making serious and repeated allegations of copyright infringement can be a very perilous tactic.

Picking an Errors and Omission policy can be an extremely important undertaking, especially for a technology focused company. When legal costs for defending a complex intellectual property infringement claim can exceed half a million dollars, the right E&O policy can mean the difference between the life and death of a company just starting to find traction in the market place. But more often than not, the decision on what policy to buy is left to an inexperienced company employee who only has a broker’s advice to rely on. This arrangement is probably fine for workers compensation and general commercial liability policies, but non-lawyers and lawyers are not familiar with technology companies and all the issues they encounter are out of their league when it comes to determining which E&O policy shifts the most risk.

There are a variety of possible claims that may trigger E&O coverage. Those claims are:
– Patent infringement – the making, using, offering to sell, or selling in the United States, or importing into the United States a patented invention, without authority form the patent owner; performing a patented process in the United States without permission (35 USC 271);
– Right Of Publicity – the use of another’s name, voice, signature, photograph or likeness in connection with a commercial activity without consent (Cal. Civil Code 3344 and 3344.1)
– Cyber-Squatting – bad faith intent to profit from use of another’s trademark as a domain name and engaged in actionable conduct, such as the registration, trafficking or use of a domain name that is identical or confusingly similar to, or dilutive of the registered trademark of another (15 USC 1125(d))
– Database/Network Security – any breach in the security of a database when that breach results in or could reasonably result in the disclosure by an unauthorized third party of personal information about California residents (Cal. Civil Code 1798.82)
– Copyright Infringement – violation of any of the exclusive rights granted to a copyright holder (see 17 USC 106-121)
– Trademark Infringement – use of a mark in connection with any good/service that is likely to cause consumer confusion as to affiliation, connection, association origin sponsorship or approval (15 USC 1125(a)(1); misrepresentation of the nature, character, qualities or geographic orgin of goods/services (15 USC 1125(a)(2); trademark dilution (15 USC 1125(c)(1)
– Trade Secret Misappropriation – acquisition of a trade secret of another by a person who knows or has reason to know that the trade secret was acquired by improper means (Cal. Civil Code 2426.1(b)(1); or the disclosure of a trade secret of another without express or implied consent by a person who i) used improper means to acquire the trade secret; ii) or at the time of disclosure or use, knew or had reason to know that his knowledge of the trade secret was either derived from a person who utilized improper means to acquire it, or acquired it under circumstances giving rise to a duty to maintain security or limit use, or derived it from a person who owed a duty to maintain secrecy.

Not every E&O policy is the same; some policies cover a wider variety of claims than others. That is why it is very important for a company to involve their counsel in determining which policy is right for their needs. If a policy seems broad, but specifically excludes coverage for claims that are the most likely to be brought against the company, then the policy provides very little effective coverage and is a waste of money. Having a lawyer involved who understands the company’s business can help avoid uncovered claims.

Policy by policy, the language granting insurance coverage may differ. The insuring language of some policies may appear to cover everything under the sun (” The Company will pay on behalf of the Insured all sums in excess of the Deductible which the Insured shall become legally obligated to pay as Damages and Claims Expenses resulting from a Claim…”), while other policies are very specific about the coverage granted (“We will pay on your behalf money in excess of the Retention that you legally have to pay as a claim expense and damages because of a covered claim caused by a blip in your connected services”). Either way, the policy will also contain exclusions – or claims that are not covered – which narrow the coverage offered by the policy.

Even within the technology sector, different businesses will need different types of coverage. For example, a software company that makes and sells a CRM (Customer Relations Management) application will likely focus on securing robust IP coverage – patent, copyright, trademark and trade secret coverage. If a component of the application involves storage of user information on the company’s network, or if it sells its CRM application directly to consumers over the Internet, the company will also want to make sure that the policy provides good security perils coverage. If the company’s business involves the distribution of content, for example a news and social information portal, then the company will want to make sure that its E&O policy provides protection for invasion of privacy and defamation claims, as well as IP and security perils.

There are other elements of a good E&O policy than just covering the defense of a potential claim. California’s new database security laws requires notice to the public in the event of a breach in the security of a database that results in the unauthorized disclosure of personal information. If the compromised database is large, the notification costs can be costly. Certain E&O policies will provide coverage for this expense. Also, an E&O policy with robust securities perils coverage can also provide coverage for expenses related to denial of service attacks or computer viruses emanating from the covered company’s server.

E&O insurance is extremely expensive – One Million dollars of coverage can cost a company between twenty and thirty thousand dollars. It just makes sense for a company to be sure that its spending its money wisely and getting value for its premiums.