Marc is a patent attorney and shareholder in the intellectual-property law firm of Poms, Smith, Lande, & Rose in Los Angeles, CA. Marc specializes in computer law and can be contacted at 73414wn.1226@compuserve.com
The Internet may be the most important new business frontier in coming years. It offers instant access, an international customer base of unparalleled size, a promotional medium more powerful than television, and sales without salespeople. For software vendors, the Internet is particularly alluring because it can deliver software almost instantly. And all of this comes at essentially no cost.
But the very attributes that provide so much new opportunity also markedly accentuate the legal risk. Unlike traditional marketing channels, there is little customer contact, often nothing done "in writing," a mechanism which does not distinguish between a customer down the street and halfway around the world, and a system which operates among the silence of machines without human intervention. What you do on the Internet is also extremely visible.
While the technological changes are continuing at a feverish pace, the legal system is trying to catch up. As it always does, the law tries to decide new questions based on the answers to old ones. Sometimes it works, sometimes it doesn't.
But companies braving this new frontier cannot wait. For them, here are some important legal guidelines.
Infringing a patent, copyright, trademark, or trade secret is one of the fastest ways to bring a new business venture to a crashing halt. Injunctions prohibiting infringing sales can be obtained in a matter of days. The cost of a lawsuit can drain a company of the capital it needs to survive. Customers and prospective customers are often threatened, badly marring any goodwill that marketing efforts have established.
Patents present one of the greatest risks. There are patents claimed by their owners to broadly cover technologies in compression, encryption, and database access. There is even a company (E-Data) that owns a patent allegedly covering the concept of selling software over the Internet. The patent threat is heightened by the fact that ignorance of the patent or independent creation of the technology is no defense. Patents on software are also becoming more prevalent.
If you are hoping that I can now tell you how to avoid all of these problems, you are in for disappointment. There really is no economical way to do so. Although an attorney can be hired to perform an "infringement search," the search is usually limited to one or two features that the client suspects might be covered by a patent. But today's technology is advancing so quickly that each new product often contains dozens of innovative features, making the cost of a comprehensive search prohibitive. (Typically, a few thousand dollars is required to search a single feature.)
But there are things you can and should do to minimize risk. Careful attention should be paid to trade publications that trumpet news of threatening patents. Copies of these patents should be obtained and studied. (For help, see my column "Determining Software Patent Infringement" in the January/February 1996 Dr. Dobb's Sourcebook.) Frequently, the technology can be changed to avoid the patent; a license can be purchased for a livable price; or a defense coalition with other companies can be formed.
Software is also protected by copyright law. Protection will usually be afforded, even if there is no copyright notice or registration. Unlike patents, however, a copyright cannot be infringed by independently created technology. Copying of a substantial portion of the copyrighted code--or at least its underlying algorithms--is usually required.
To avoid copyright infringement, you simply need to be careful. You also need to remember that the childhood limerick "finders keepers, losers weepers" has no place in copyright law. Just because you pick up a graphic image, text file, or segment of code over the Internet does not mean that you can display it or send copies to others from your web site. If you do, you probably will be infringing a copyright.
A more subtle problem arises when you use portions of material provided by others under the erroneous assumption that you have their permission. Most software incorporates underlying libraries, programs, or algorithms written by another company. Just because you paid money for it, however, does not necessarily mean that you are free to display it on your web site or send copies of it to others. Most likely, the transaction was accompanied by a "license agreement" that imposed numerous restrictions on what you could do. These need to be carefully reviewed to ensure that you are not exceeding the scope of the rights that were granted. When in doubt, try to get express permission for what you want to do.
Trademarks are another form of intellectual property that must be respected. In the United States, trademarks will be enforced, even if they are not registered. They will also be enforced against innocent infringers who had no knowledge of them.
The basic test for determining trademark infringement is whether the name you have selected is likely to cause your software to be confused as being manufactured, sponsored by, or associated with another company. The similarity between names is of obvious importance. Also important is the similarity between the products, their promotional channels, and the sophistication of your customers. Under a law recently passed by Congress, a famous trademark will often be enforced against anyone who "dilutes" its significance, even if there is no "likelihood of confusion."
An issue somewhat unique to the Internet is whether a domain name can be the subject of a trademark infringement charge. Although the law in this area has not yet crystallized, it seems clear that the standard test of a "likelihood of confusion" and the protection afforded famous marks against dilution will continue to apply. (For more information on this subject, see "Trademark Wars in Cyberspace," Dr. Dobb's Sourcebook, November/December 1995.)
A quality "trademark clearance search" can be performed at relatively low cost (about $300). One of the most established companies performing such searches is Thompson & Thompson (1-800-692-8833, 500 Victory Road, North Quincy, MA 02171-1545). One or two hours of attorney time is also usually needed to analyze the true significance of the findings. A trademark clearance search should usually be performed and analyzed before any significant amount of money is invested in promoting a new name.
The last fundamental area of intellectual-property protection is trade-secret protection. Violation of this type of right is rarely an accident. Usually, you know if your information is stolen.
A more difficult question is whether you can extract algorithms and underlying concepts by decompiling object code that you lawfully obtained from another company (by purchasing it on the open marketplace, for example). A few months ago, most lawyers would have told you that you could, based on court decisions which have held that decompilation does not constitute copyright infringement. But the recent decision by the Court of Appeals in ProCD, Inc. v. Matthew Zeidenberg is making lawyers rethink this advice.
The trial court in ProCD allowed the defendant to remarket the plaintiff's $10 million database of telephone numbers without paying the plaintiff anything. The defendant purchased CD-ROMs containing the database for about $150 on the open marketplace. Although accompanied by a shrink-wrap license that prohibited commercial use of the database, the trial court concluded that the shrink-wrap license was unenforceable.
The appellate court reversed. It concluded that the shrink-wrap license was enforceable. Of particular importance to this discussion, the appellate court also concluded that the license could impose restrictions beyond those provided by copyright law. If the principals that underlie this new and important decision are broadly applied, a clause in a shrink-wrap license prohibiting decompilation will also be enforced, making such reverse-engineering illegal. My advice is to respect any such clause and to expect trouble if you violate it, at least for now.
The flip side of the coin, of course, is to maximize protection for your software. Unlike most products, software can be duplicated at virtually no cost. Legal protection is usually essential for effective competition. This is particularly true when software is distributed over the Internet, a medium that is unrestricted and unregulated.
The available types of protection are the same as those you must exercise care not to infringe: patents, copyrights, trade secrets, and trademarks. I will now briefly examine what you need to do so secure these types of protection. But it is important to remember that these efforts will not be effective in many countries outside of the United States. If you choose to distribute your software over the Internet, some unauthorized duplication is inevitable.
Patents are often the most effective form of protection. Examine your software for unique functional features that you expect will give it a competitive edge. After doing a search to verify their novelty, apply for a patent on these features in the United States. Do this before disclosing the concept to others or beginning any commercial use or marketing. (The United States will allow the application to be filed up to one year later, but many countries will not.) After you file in the United States, you have up to one year to extend your application into most foreign countries.
Be sure to give notice of any patent rights you have. Place the notice on a web page, in a Readme file that accompanies the software, a boot-up screen for the software, and the online help file for the software. Notice of the patent's existence is also often quite beneficial in promotional materials.
All modern software will automatically be covered by copyright law, even though you do not mark it with a copyright notice or register it. Notwithstanding, you should place a (c) followed by the year of first distribution and the owner's name in the code and on the boot-up screen. You should also file an application to register your copyright within three months after you first distribute it. This will substantially enhance the remedies you can obtain for its infringement. Unlike patents, an application to register a copyright is inexpensive and easy to do yourself. You can obtain the application and instructions from the Copyright Office (http://lcweb.loc.gov/copyright/). You should also be sure to promptly register each significant upgrade.
Trade secrets are protected without any type of registration. In addition to being a valuable secret, however, you usually must demonstrate that you took reasonable steps to protect the secrecy of the information. Traditionally, this means physical security measures and contractual commitments to protect the confidentiality of the trade secrets by all those who come in contact with it, such as employees and, particularly if they are given source code, customers.
Trademarks are another useful form of protection. Like copyrights, no formal registration is necessary for protection in the United States. But like copyrights, prompt registration will usually provide additional remedies in the event of infringement. However, in many foreign countries (Germany, for instance), registration is a requirement for protection. If you do not promptly register your trademark in these foreign countries, someone else might register it first, then demand money from you for its continued use.
Contractual restrictions are also important and may become even more important in view of the recent decision of ProCD, Inc. v. Zeidenberg.
Export restrictions are a particularly sticky area which few people understand.
At present, export restrictions are principally imposed by three governmental agencies. The Department of Commerce administers the Export Administration Regulations under their Bureau of Export Administrations. The Department of State administers the International Traffic in Arms Regulations. Last, there is the Office of Foreign Assets Controls under the Treasury Department.
All products sold outside of this country (including software) require a license under the Export Administration Regulations. Most software automatically qualifies for a "general license" without the need for any type of application. However, there are still requirements for a "destination control statement" and a "shippers export declaration."
If software does not qualify for a general license, an application (Form BXA-622B) must be submitted for an "individually validated license." Technical material may also have to be submitted. Such applications are granted on a case-by-case basis.
To better understand this area, contact the Bureau of Export Administration (202-482-4811). To determine your software's classification, you may also need to obtain a copy of the Export Administration Regulations (202-275-2091).
Encryption software will often require a valid export license issued by the Office of Defense Trade Controls of the State Department under the International Traffic in Arms Regulations. The sophistication of the encryption software will be a key factor.
The Office of Foreign Assets Controls embargoes exports to certain countries for political and other reasons. The embargoed countries currently include Cuba, Iraq, Libya, North Korea, and the former Yugoslavia. It appears that exports of any type of software to any of these countries is currently illegal. What is not yet clear are what steps a U.S. company is required to take in order to comply with these restrictions in view of the worldwide access the Internet provides and the technical difficulties in restricting that access.
At present, the White House and the Department of Commerce are reevaluating these export regulations, particularly as they apply to encryption software and the Internet. The existing rules and procedures simply do not fit the way business is (and must be) done on the Internet. An excellent source for more information about export regulations is Tradeport at http://www.tradeport.org.
Few retail stores require a customer to commit to an agreement before he "purchases" software. But this is exactly what many software vendors are doing over the Internet, and it's what you should be doing.
The use of an online license agreement that the buyer must "accept" before receiving the software is essential. If properly worded and implemented, it will substantially enhance the protection the law affords to both the software and its vendor. It should also help overcome the problems with the enforceability of shrink-wrap licenses. Online license agreements should be used in connection with all software, including demo software, that is given away.
Include language in the license agreement that addresses each of the following:
All language in the license agreement should be simple and clear.
The manner in which the online license agreement is implemented is also of great importance. It should be presented to the buyer before any software is provided and before the buyer commits to making payment. The buyer should be required to press an "accept" button, by which he acknowledges that he has read all of the terms of the agreement, understands these terms, and agrees to abide by them. The buyer should also be provided with a means to refuse the license, such as a No or Cancel button.
Before allowing buyers to communicate their acceptance, information about buyers should be required, such as name, company name, address, and so on. Such information is also of obvious value in connection with upgrades, notices, new products, and the like.
Lastly, provide buyers with documentation of the agreement. Place the terms of the buyer's agreement in a Readme file or in some other file received with the software. If possible, make the terms of the agreement accessible from within the software during its operation (as an item in the Help menu, for example). Mailing a hard copy to the buyer is also a good practice.
For reasons I have not yet been able to understand, my editor has not yet allowed my columns to occupy this entire magazine. Equally surprising is that my secretary seems unwilling to type forever.
The bottom line is that I can't say anything more right now. But I will flag a few other issues relevant to business on the Internet:
The Internet is most definitely our newest business frontier. As with all pioneering, great opportunity is balanced by equally great risk. So, as you brave this new world, be sure to give consideration to the legal issues that I have raised. An ounce of prevention is worth a pound of cure, particularly on the Net.