By Christopher Barnett
Scott & Scott LLP

It is common for software solution providers to use third-party products to support the functionalities those providers have developed for their solutions. For example, a network-monitoring solution may incorporate IBM Cognos functionality, or an accounting solution may incorporate a Microsoft SQL Server database. Increasingly, in today’s market, those solutions are hosted over the Internet, and many software publishers maintain licensing models targeted to solution providers operating in that space (such as Microsoft’s Services Provider License Agreement, or SPLA). However, many businesses still prefer on-premises solutions for their business-critical IT solutions, and vendors of those solutions need to be able to accommodate those preferences.

The two principal options for those vendors are:

1. Reselling or otherwise separately procuring on their customers’ behalf the appropriate kind and quantity of licenses to support the third-party software components incorporated in their solutions, and then deploying the solutions and all required third-party components on the customers’ networks, OR

2. Shipping a complete solution to their customers, with all required third-party components embedded at the factory.

In most cases, the first option is relatively simple to incorporate into the procurement process. However, it often may entail more up-front labor and service charges, since the vendor typically will need to support intensively (if not manage) the implementation of all solution components at customers’ locations. For that reason, many vendors are understandably interested in a more turn-key approach, where they can simply ship a packaged product to their customers and then support the implementation remotely. Unfortunately, most off-the-shelf license agreements pertaining to those third-party software components do not allow a solution provider to redistribute the software to end users for a fee. For that, it usually is necessary to enter into a market-specific ISV or royalty agreement.

Under that kind of an agreement, the vendor obtains the right to embed and redistribute specified software components for use in connection with specified solutions, in return for a fee that is typically calculated based on the number of units shipped or the number of users provisioned to use the solution. In theory, that kind of an agreement seems to be reasonable and appropriate, but, as so often is the case, the Devil lurks in the details:

• Narrow Usage Restrictions – In most cases, software licensed under an embedding agreement may be used exclusively in connection with the vendor’s solution and for no other purposes whatsoever. In practice, this may mean that the vendor needs to build its solution to prevent non-compliant usage, which in some cases may be incompatible with how the solution is designed. If that is the case, then the vendor would need to include similarly narrow usage restrictions in its agreements with its customers, and those terms may not be warmly received by prospective customers’ legal departments.

• Defined User Agreements – On that point, the embedding agreements also may include a laundry list of terms that the vendor is required to include in its customer agreements. Those terms almost always are written to be maximally protective of the software publishers’ interests and almost never are particularly palatable to end users. However, absent an amendment to the embedding agreement, the vendors must consider them to be non-negotiable when discussing transactions with new customers.

• Audit Nightmares – Worst of all, many embedding agreements contain audit-rights clauses that give the software publishers not only the right to conduct audits of vendors’ records and facilities, but also the right to audit the vendors’ customers’ compliance with the license terms. Some of those agreements also give the publishers the right to extract licensing fees and audit costs from those customers in the event that non-compliant usage is discovered. In practice, this means that vendors must draft their customer agreements to permit similarly broad and far-reaching audit activity. However, effectively preventing serious or perhaps irreparable damage that could result to the vendor-customer relationship following such an audit is an extremely difficult goal to achieve in any customer agreement.

For all of the above reasons, vendors considering any kind of royalty ISV or other embedding agreement need to carefully scrutinize the terms of such agreements and then carefully consider whether they are willing and capable of satisfying all of the obligations those agreements typically entail. If there is any doubt, it may be far more sensible to undertake a more labor-intensive licensing strategy than to invite the sort of lost business and licensing exposure that can result from non-compliance with controlling agreements.

Christopher Barnett
Scott & Scott

There are many good reasons that businesses often cite in seeking to transition their IT operations to a vendor-delivered Cloud environment.

It’s scalable.

It’s more reliable and secure than what the business may be able to deliver for itself.

It’s (often) cheaper than keeping the environment in-house.

Then there’s this one:

“All I have to do is pay a monthly fee, so no stressing over software-licensing rules.”

Not quite.

In many cases, it is true that, where the vendor is providing licensing for software products to be used in the company’s Cloud, the licensing requirements that are directly applicable to the company may be significantly reduced. Often, the only requirements that remain are things like: “don’t copy or reverse-engineer the hosted software,” or “don’t provide third parties with access to the hosted software.” Pretty easy.

However, even though some of the more technical requirements may no longer be the company’s contractual obligation, the vendor’s failure to adhere to them can cause trouble.

For example, a Cloud vendor may propose offering hosted virtual desktops-as-a-service (DaaS) running the Microsoft Windows operating system. Unfortunately, Microsoft currently offers only two options for DaaS service providers:

1. DaaS through the Microsoft Services Provider License Agreement (SPLA) via the Microsoft Windows Server Operating System, or

2. DaaS through Dedicated Outsourcing using your customer’s Microsoft Volume Licensing agreement.

Option 1 is incompatible with the proposed services, because it entails use of desktop “experience” functionality included in the Windows Server operating system, not the Windows operating system itself. That leaves Option 2. However…

Option 2 also usually is problematic, because “Dedicated Outsourcing” in Microsoft-speak means that the physical server infrastructure used to deliver the DaaS services must be dedicated exclusively to the company receiving those services and must not be used by any other customers of the DaaS vendor. Spinning up one or more new, physical servers for each customer often is something that many DaaS providers simply cannot afford to do.

Of course, if the vendor messes up in licensing its hosting environment, that is primarily going to be the vendor’s problem. When Microsoft discovers the compliance problem, then it likely will look to the vendor to remedy the problem, not to the recipients of the vendor’s services. However, our experience is that SPLA audit exposure in particular can be very significant and occasionally even financially crippling. If a vendor builds a service model around a misunderstanding of fundamental licensing concepts, then the remedy sought by Microsoft following an audit could jeopardize the vendor’s business operations. The result could be a discontinuation of the DaaS services, a need to transition to another provider within a short window, and, potentially, unexpected and permanent service interruption.

Businesses therefore need to develop and to maintain a working knowledge of software-licensing rules, even if they are not going to be directly responsible for adhering to those rules within the context of a hosted-service relationship. Contract language related to warranties, indemnification and limitation of liability may help to mitigate some of the risk associated with inadequately licensed hosting environments, but a better bet would be to go into a vendor relationship knowing that the services to be delivered do not, on their face, violate applicable licensing policies.

Lex Machina has published an article highlighting IP trends and data from 2015, including the fact that the distribution of patent cases among district courts remains highly uneven, with the Eastern District of Texas receiving 2,540 cases comprising 43.6 percent of all cases filed in 2015.

Patent litigation in U.S. district courts grew in 2015, with 5,830 patent cases filed, a 15.0 percent rise from 2014 (5,070 cases). Except for 2013, which remains the high-water year for patent litigation (6,114 cases), 2015 surpassed all other previous years.

The report, written by Brian Howard, covers statistics showing filing by quarters for the most-active districts.

Another section of the report covers activity at the Patent Trial and Appeal Board (PTAB), charting petitions by quarter.

The section on trademark litigation reports that fewer trademark cases were filed in 2015 than in any of the previous 10 years, although 2015’s total of 3,449 cases is only 11.6% lower than the median over the same time frame.

Lex Machina’s Copyright Report explains the difference between file sharing cases (those having John Doe or anonymous defendants and accusations based on file sharing technology such as BitTorrent), and other, more traditional cases, detailing the trends.

Read the report.

In the day-to-day operations of a company, the distinction between owned IP rights and in-licensed IP rights can easily get lost. But what happens if a licensor files for bankruptcy? Will an in-license protect the licensor’s right to continue to use the IP rights? Jason M. Rodriguez and Jessica M. Pelliciotta, associates with Morgan Lewis, discuss those issues in an article published by The National Law Review.

In the article, they lists contract drafting points that can help protect the licensee’s IP rights in the event of a licensor’s bankruptcy.

They also offer a sample provision to use in drafting.

Read the article.

Samsung has asked a U.S. appeals court to overturn a jury’s $120 million verdict related to Samsung’s alleged infringement of some of Apple’s patents found on iPhones, reports AppleInsider.

“Apple had originally identified eight primary patents it said Samsung had infringed across at least 17 products, but U.S. courts determined that the country’s judicial system didn’t have the resources to consider the volumes of evidence involved in such a massive patent infringement case, and subsequently narrowed Apple’s trial down to a token hearing,” AppleInsider reports.

“While the jury eventually found Samsung had willfully infringed Apple’s patents, it returned nonsensical damage royalties that awarded Apple $52 million related to Samsung’s Galaxy S3 infringement, but zero for the company’s earlier Galaxy SII, a decision that was so inept that presiding Judge Lucy Koh demanded that the jury either determine the product to be non-infringing or supply a reasonable royalty,” the report continues.

Read the article.

While everyone knows of the need to comply with contractual terms in software licenses (and elsewhere), the salient point in this context, is that under several recent cases, failure to do so with respect to a license for copyrighted  material (which is usually applicable to software), allows the pursuit in federal court for claims for infringement damages under the Copyright Act and related items, such as attorney fees, according to an article from FisherBroyles and published on Lexology.com.

“This is in addition to traditional contract damages, which may be non-existent or difficult to prove,” the article says.

Kimberly Dempsey Booher, Susan M. Freedman, R. Mark Halligan, Martin B. Robins and Alan S. Wernick contributed to the article.

Read the article.

Celgene Corporation has announced the settlement of litigation with Natco Pharma Ltd. of India, Natco’s U.S. partner, Arrow International Limited, and Arrow’s parent company, Watson Laboratories, Inc. (a wholly-owned subsidiary of Allergan plc) relating to patents for REVLIMID (lenalidomide), reports StreetInsider.com.

“As part of the settlement, the parties will file Consent Judgments with the United States District Court for the District of New Jersey that enjoin Natco from marketing generic lenalidomide before the expiration of the patents-in-suit, except as provided for in the settlement,” the story reports.

“Celgene has agreed to provide Natco with a license to Celgene’s patents required to manufacture and sell an unlimited quantity of generic lenalidomide in the United States beginning on Jan. 31, 2026.”

Read the article.

A U.S. appeals court decision Tuesday may reflect favorably on the Washington Redskins football team’s chances to restore federal trademark protections, reports CBSDC.

“Freedom of speech, an argument made in federal court by the Redskins in July, was front and center for a ruling made by the U.S. Court of Appeals for the Federal Circuit in Washington, D.C., writes Chris Lingebach.

The court rejected a provision of federal law that would bar registration of disparaging trademarks on the grounds that doing so violates the First Amendment.

Read the article.

Power Integrations has announced the latest result in one of its ongoing patent cases against Fairchild Semiconductor. After a trial in federal district court in San Francisco, a jury awarded Power Integrations $139.8 million in damages stemming from Fairchild’s infringement of two Power Integrations patents.

The infringement finding occurred in March 2014 and remains intact; the just-concluded trial was solely to retry damages after an earlier award of $105 million was set aside by the court in view of an intervening change in the law. Power Integrations will also be seeking a permanent injunction against the more than 140 Fairchild parts implicated in this case.

Read the article.

By Amy Heller
Law Office of Amy Cohen Heller

It’s that time of year when we look back at what we did and look forward at where we want to go. It’s also a good time to review what we have and whether we have dotted our “i’s” and crossed our “t’s”. In this article, the “t” stands for Trademarks.

Trademarks are an important — but often overlooked — business asset. Managed and properly protected, trademarks can bring significant value to your business and keep competitors at bay. Based on my work with clients and their U.S. trademark portfolios, here are a few easy-to-miss items to check on as we start a new year:

Has your company changed names, ownership or address since the mark was registered? If so, you may need to review whether an assignment of trademarks has been completed and recorded with the USPTO or whether important information has been updated.

For an existing Registered Trademark, what goods and services does the registration reference, and are these the current goods or services using the mark? If the mark is not being used on the goods and services referenced in the registration, the registration may be unenforceable or– worse yet–subject to cancellation. Goods/services that are not in use can be deleted from a registration; if use has expanded beyond what is stated in the registration, you should consider filing new applications immediately.

Are there registrations for marks which are not in use? To be effective and enforceable, the marks must be actively in use in commerce. Reviewing your registrations and confirming that actual use of the marks are being made on the appropriate products or services is important to do on an annual basis. This will also ensure that you can submit required affidavits to renew marks, and encourage the business to periodically use marks to keep them effective.

Are the proper trademark symbols being used with your marks? For marks which are registered with the USPTO, a ® symbol is appropriate. Non-registered marks can use a ™. If your mark has become registered in the last year, it is good to confirm the ® symbol has replaced the TM.

Is A Watch Service in Place?

Trademark owners are responsible for policing and protecting their trademarks. A watch service can identify pending trademark applications (either nationally and/or internationally) that may potentially infringe your existing marks. If you have a service, you may want to review the marks being watched and determine whether additions or deletions should be made to the list. If you do not have a service in place, it is a good time to consider whether one should be implemented. There are many types of watch services, from U.S. to worldwide watch services. Pricing depends on the number of marks, number of classes watched and the number of countries and can range from a few hundred to a few thousand dollars per year.

Are appropriate licenses in place for marks being used by third parties? A trademark owner is responsible for insuring that its marks are being used properly and with adequate quality control. If you are permitting third parties to use your marks, it is important to have those marks registered to cover the licensed goods and to have a written license in place to maintain that control.

If after reviewing these questions, you see gaps in your trademark process, it may make sense to conduct a trademark audit covering these and related mark items. Chances are if these items are slipping out of your grasp, you are also at risk in related areas. For example, in reviewing some of these issues with in-house counsel, failure to maintain a registration may violate the reps and warranties in contracts or impact a company’s ability to continue selling a product for which it may no longer own trademark rights; and failure to use the appropriate trademark registration symbols could result in the public perception that the mark was generic. On the plus side, keeping the trademark portfolio up-to-date can be key to any M & A activity, making the company and the shareholders look good. Additionally, these steps can provide useful information on where future trademark protection is needed. Taking stock of your trademark portfolio may uncover and avoid potential liabilities down the road. It’s a good time of year to cross those “t’s”.

• Amy Cohen Heller is an Intellectual Property Attorney specializing in Trademark Law. Her previous experience includes in-house Trademark Counsel at Fortune 500 companies and counsel positions at IP and large national practice law firms. She can be reached at https://www.linkedin.com/in/amy-cohen-heller-1238bb11 or aheller@achellerlaw.com

© December 2015

Lex Machina, a LexisNexis company and creator of Legal Analytics,  has introduced unprecedented new data about trials before the U.S. Patent and Trademark Office’s Patent Trial and Appeal Board (PTAB) offering unique new ways to visualize and analyze the information, the company says in a release.

In addition to providing lawyers with the ability to uncover strategic insights about parties, judges, law firms, attorneys, patents, and arguments involved in PTAB cases, the enhanced Legal Analytics for PTAB offering includes new claims-level findings about trial institution, settlement, disclaimer and ultimate patentability.

The new functionality allows attorneys to answer questions such as:

• How often has a specific law firm succeeded at instituting trials for petitioners?
• Does a specific judge rely on §103 (non-obvious patent subject matter) in institution decisions or final decisions more often than other judges?
• What is the success rate of a specific party in obtaining decisions to deny institution of new trials?

Read more about the data.

Scores of big brands – from AT&T and Yahoo! to Netflix, GoPro and Macy’s – are being sued because their HTTPS websites allegedly infringe an encryption patent, reports The Register in an article written by Shaun Nichols.

Longview, Texas-based CryptoPeak Solutions bases its legal action on US Patent 6,202,150, which describes “auto-escrowable and auto-certifiable cryptosystems.”

CryptoPeak is suing owners of HTTPS websites that use elliptic curve cryptography, a common method for sites to encrypt their traffic.

“Starting in July, CryptoPeak began pursuing companies through the courts in the eastern district of Texas,” the article reports. “Just in the past week or so, the patent-holding biz filed infringement claims against AT&T, Priceline, Pinterest, Hyatt Hotels, Best Western, and Experia.”

Read the article.

As the year comes to a close, many software publishers and trade associations with calendar year accounting are resolving as many outstanding software audits as possible, writes Keli Johnson Swan in the Software Audit Blog on the website of Scott & Scott. Companies currently engaged in a software audit may be able to negotiate favorable resolutions to their audit matters.

The following are a few tips to reach an amicable resolution by the end of the year:

1) Finalize audit results and locate entitlement information. In many instances, smaller companies that are targets of software audits have trouble dedicating resources to quickly audit its network and obtain proof of purchase documentation. However, if a company is interested in a quick resolution, it may be advantageous to dedicate the necessary resources to finalize the audit now in order to potentially settle by the end of the year.

2) Formulate a settlement strategy. If a company is unable to locate the proof of purchase documentation for all of its software, it will likely be required to pay a penalty for any deficiencies in order to obtain a release of liability from the auditing entity. Once a company receives a settlement demand for the copyright infringement damages, it is important to formulate a strategy with the necessary officers or shareholders in order to enter into negotiations with the auditing entity. Agreeing upon a settlement strategy facilitates negotiations and streamlines the process to reach a quicker resolution.

3) Do not compromise on key issues simply to settle by December 31st. Often software publishers encourage targeted companies to reach a resolution by the end of the year, and may offer purportedly discounted settlement payments. However, it is important to look closely at the terms and the settlement payment in order to avoid agreeing to unfavorable settlement provisions. Some companies chose to forego a confidentiality provision in order to save money on the settlement payment. Often these companies are surprised and dismayed when a press release is issued by the auditing entity, disclosing the terms of settlement and naming the company.

Negotiating a settlement is an important process and it is critical to understand the terms of the agreement. If in doubt, contact an attorney experienced in software licensing and copyright infringement matters.

By Christopher Barnett
Scott & Scott LLP

Microsoft is in the process of transitioning many of its volume-licensing customers from the Select Plus Agreement to the new Microsoft Products and Services Agreement (MPSA). (More information on the transition framework is available here.)

A notable difference between the Select Plus Agreement and the MPSA is that the MPSA is self-contained and is not signed subject to a master agreement, such as a Microsoft Business and Services Agreement (or its predecessor, the Microsoft Business Agreement). Under Select Plus (and still under the Microsoft Enterprise Agreement), most of the important, substantive legal terms associated with the licensing relationship were contained in the MBA/MBSA. Those terms included Microsoft’s duty to defend against certain third-party claims, limitations of liability, and governing law, among others. They also included Microsoft’s audit rights.

Unfortunately for Select Plus customers, though consistent with Microsoft’s notorious habit of steadily making its agreements less and less advantageous for its customers, the audit terms contained in the MPSA are significantly more onerous and markedly less reasonable than were the corresponding terms in past master agreements. A comparison of the MPSA terms to the terms in an MBA (which still remain in effect for many Microsoft customers) reveals the following:

1. Under the MBA, Microsoft could initiate an audit only during the term of a license agreement and for one year thereafter. There is no such limitation in the MPSA. The practical effect of that difference may be somewhat less significant for MPSA customers than it would be, for example, for Enterprise Enrollment customers, since the MPSA has no defined term. Nevertheless, if an MPSA customer were to decide in the future that it wanted to cancel the MPSA, the audit rights in the MPSA would remain in effect in perpetuity. (It is worth mentioning that Microsoft’s current MBSA also contains no time limitation on audits, so Enterprise Agreement customers face the same problem under the default terms.)

2. Under the MBA, Microsoft’s auditors were required to be subject to “a confidentiality obligation.” We often have relied on that language in advising our clients to obtain non-disclosure agreements with auditors before the commencement of audit activity. There is no corresponding language in the body of the MPSA.

3. Under the MBA, Microsoft was required to provide advance notice of audits, which had to be conducted during normal business hours and “in a manner that does not interfere unreasonably with [the customer’s] operations.” There are no such requirements in the body of the MPSA.

4. The MPSA requires the customer to “promptly provide any information reasonably requested by the independent auditors retained by Microsoft in furtherance of the verification, including access to systems running the Products.” There was no such specificity in the MBA, and there certainly was no requirement for the customer to provide “access” to its computer systems. Especially for licensees in heavily regulated industries, that term may conflict directly with applicable obligations related to IT security.

5. The MPSA indicates: “Additional details about the [audit] process are included in the Licensing Manual.” The Licensing Manual is defined as “the statement published by Microsoft (updated from time to time) at the Licensing Site. The Licensing Manual includes details about the processes supporting this Agreement.” The Licensing Manual (currently available here) includes the notice, confidentiality and “unreasonable interference” audit terms that, as noted above, otherwise are missing from the body of the MPSA. However, the MPSA states: “…Microsoft may change the…Licensing Manual from time to time, subject to the terms of this Agreement.” The MPSA does not contain any stated limitations on Microsoft’s right to change the Licensing Manual. Therefore, the durability of the procedural audit protections noted in the MPSA is wholly subject to Microsoft’s discretion.

6. Finally, under the MBA, in the event that “material unlicensed use” was found, the licensee was required to purchase any necessary licenses at retail rates. Under the MPSA, that purchase must be made at 125% of prices then available to the licensee. That upcharge could lead to significantly higher compliance costs following an audit. (Bear in mind that Microsoft typically does not accept uninstalling software as an acceptable remedy for unlicensed usage – license purchases almost always are required.)

In my opinion, the MPSA’s audit language is wholly unacceptable. Before accepting the agreement, my recommendation would be to insist on amendments addressing the above concerns. However, many current Select Plus customers with agreements that now are set to be terminated may find that they have little leverage to demand any changes to the default terms. Since the MPSA does not require a three-year purchasing commitment (like an Enterprise Agreement), Microsoft may have little up-front incentive to negotiate reasonable and appropriate revisions to the agreement terms.

Finally, the above concerns related to audit terms are in addition to indemnification and limitation-of-liability language in the MPSA that also may be inadequate, especially if the customer has plans to invest heavily in Microsoft’s Online Services offerings (e.g., Office 365 and Azure).

Current Select Plus customers need to carefully weigh their licensing needs and alternatives before moving forward with any significant expenditures under an MPSA.

By Rob Scott
Scott & Scott

I am a lawyer in a boutique law firm that specializes in technology law matters. I support some of the world’s largest legal departments on IT procurement projects. The one inescapable trend I have seen in technology transactions is the prominence of risk balancing provisions in contracts. One of the most notable risk-balancing provisions is the limitations of liability. Historically, IT services and software were offered “as-is” or on a “best-efforts” basis with sweeping limitations of liability in favor of the vendor. For software purchased for on-premises deployment, such limitations of liability were generally accepted by customers. Today, the risk profile of most technology transactions has changed due to increased legal regulation of customer data. In response to this increased risk profile, the market adapted by tying limitations of liability to the revenue paid by the customer under the contract for either a trailing six or twelve months prior to an incident. Sophisticated customers objected to revenue-based limitations of liability because the potential claims scenarios involving data privacy and business continuity substantially outweighed the revenue paid.

As customers demanded greater risk balancing, sophisticated service providers secured professional liability insurance also known as cyber-liability coverage that protected each of the provider’s customers for a single annual premium tied to revenue. For SMB and mid-market deals most of my clients require vendors to carry adequate professional liability insurance to cover likely claims scenarios including data breach incident response, class action response, and regulatory response. Contractual risk balancing is achieved by limiting liability to the proceeds of insurance or a combination of the proceeds of insurance and some multiple of revenue for uncovered claims. For these reasons, limitations of liability provisions need to be reviewed in tandem with the indemnity provisions and the insurance provisions.

The cleanest way to accomplish risk balancing using professional liability insurance is to clearly define the insurance coverage, draft the indemnity provisions to be as broad as the coverage grant, i.e. all claims arising from the services, and craft the limitation of liability so it does not limit the client’s access to the insurance. Insurance provisions should clearly require the provider during the term and for period of one year after expiration, to carry professional liability including cyber liability coverage for data loss remediation, data breach incident response, crisis management, and regulatory response with an aggregate limit no less than the probable claim scenario amount. Even with good insurance language, narrowly crafted indemnity or limitations of liability provisions can be invoked by carriers to limit the availability of insurance proceeds in the event of a claim. I like to mirror the coverage grant language from the cyber liability policy directly into the indemnity provision so it is clear that the provider’s indemnity obligation is identical to the risk that has been transferred. Finally, the limitation of liability has to be crafted so that is tied to the proceeds of insurance or contains a carve-out from broader limitations for covered claims.

Limitations of liability tied to professional liability solves a portion of the risk balancing problem, but it does not solve the risk balancing problem for uncovered claims or for large vendors that do not carry professional liability coverage. When dealing with large vendors, third-party insurance is less common. Providers like Microsoft for example, do not agree to carry third-party insurance. In many instances, I have advised my clients to secure first party cyber-liability coverage to cover the increased risk associated with a transaction. Negotiating limitations of liability with these vendors is even more critical and therefore potentially contentious.

As hosting and cloud based services have emerged, risk balancing has become a central negotiating point in almost all technology transactions. The market is moving toward riskier delivery models. Taking advantage of emerging technology without bearing undue risk will be one of the factors that determines who wins and who loses.

By Stephen Ball and Robert Keeler
Whitmyer IP Group

Clients often ask how they can protect themselves from the sale of counterfeit goods. Counterfeiting is pervasive and has grown “over 10,000 percent in the past two decades.”[1] It is estimated that trade in counterfeit goods is likely to rise to 1.77 trillion dollars in 2015.[2] Increasing use of the Internet, combined with new technologies enabling simple and low-cost duplication, have made counterfeiting easier than ever.

While lost sales are the quintessential harm of counterfeiting, the negative impact can be more widespread. A brand can be tarnished when used on counterfeit goods, and goodwill lost if a customer has a negative experience with a counterfeit product they perceive to be genuine. Counterfeiting can also lead to price deflation for many consumer goods. Innovation can also be stymied, as companies have little incentive to invest in research and development if they will be unable to recoup their investment. Counterfeit products also present dangers to unwary consumers and could incur warranty costs and legal liability due to their defective nature. Additionally, a trademark registration can even be canceled if it is not properly policed.[3]

Counterfeiting can no longer be considered a general cost of doing business. Trademark owners must combat the problem to help restore lost revenue and reputation, as well as preserve and enhance the value of intellectual property and customer good-will. The value of a company’s intellectual property can be a significant asset that appreciates each year with continued investment. Even if only a small percentage of it can be restored or preserved the company benefits significantly.

Counterfeiters commonly use Internet websites as a sales channel because they are easy to set up and provide for wide reach. However, the use of the Internet also provides trademark owners with the opportunity to centrally coordinate monitoring of counterfeiting activities. Monitoring online auctions and webpages are crucial to both the assessment of counterfeit activity as well as identifying and stopping the same. While it is not possible to stop all counterfeiting, focused monitoring and enforcement can maximize value through deterrence.

Prompt action should be taken to stop any counterfeiting activities. Actions can be as simple as filing a DMCA takedown request for online copyright infringement, or can even include the filing of civil lawsuits. In fact, the U.S. Chamber of Commerce Coalition Against Counterfeiting and Piracy suggests taking legal action “[e]ven on small counterfeiting cases, [as] taking action through litigation will demonstrate to counterfeiters that they are at risk no matter what the level of sales activity.”[4] At the same time, it is important to defend trademark registrations through monitoring services, which provide the capability to quickly identify and address any use or potential use of a mark before serious harm occurs.

Today, the largest online marketplaces have policies in place protecting consumers from purchasing counterfeit goods, and encourage shoppers to report suspect listings. Amazon and eBay, two of the world’s largest online retailers, even offer restitution to inadvertent purchasers of counterfeit goods.[5] Alibaba Group, China’s largest Internet commerce company, recently released an English-language version of its TaoProtect software. The TaoProtect software makes it easier for companies to monitor Alibaba’s marketplaces not only for counterfeit goods, but for instances of copyright, patent, and trademark infringement as well.[6] Rightsholders need only submit proof of their intellectual property and identify infringing listings. Alibaba Group then either removes the infringing listings or handles any disputes between the rightsholder and seller. Alibaba Group has thousands of employees and volunteers who help to monitor for counterfeits, including an “anti-counterfeit special operations battalion.”[7]

Marketing and educational advertising campaigns can be used to help educate consumers to identify and refuse to purchase counterfeit goods. It can also be beneficial to takes advantage of partnerships with national and international law enforcement agencies in order to train customs officers and coordinate intelligence. In addition, information can be shared with trade associations, which provide a great way for industry leaders to cooperate discuss anti-counterfeiting strategies for stamping out their illicit competitors.

The overall return on investment on monitoring and enforcement activities is directly proportional to success. In some industries, where losses due to counterfeiting are estimated in the billions, the cost is comparatively trivial, and can be recouped quickly through recaptured sales. A strategy can be tailored to specific needs and a specific budget. And since the costs associated with enforcement remain relatively fixed, return continues to increase with market-share and industry growth. In other words, as sales and goodwill are recaptured, the continued return on investment increases as well.

A successful enforcement program can restore lost revenue and market-share, defend and enhance intellectual property value, protect and enhance customer goodwill and brand reputation, and deter counterfeiters. While each of these factors contributes to improve overall company value, they do so in different ways. For instance, recapturing sales previously lost to counterfeiters directly affects a company’s bottom line, while policing a trademark allows the goodwill and branding built up over years of advertising to remain relevant in consumers’ minds. Compared to the alternative, in which sales dry up while branding becomes irrelevant and worthless, strategic enforcement provides a great tool for those seeking to grow their business.

[1] Real or Fake: A Final Word, INTERNATIONAL ANTICOUNTERFEITING COALITION, http://www.iacc.org/real-or-fake-final-word.html.
[2] International Chamber of Commerce, Business Action to Stop Counterfeiting and Piracy (BASCAP), ESTIMATING THE GLOBAL ECONOMIC AND SOCIAL IMPACTS OF COUNTERFEITING AND PIRACY 50 (2011), available at http://www.iccwbo.org/Data/Documents/Bascap/Global-Impacts-Study—Full-Report/.
[3] See, e.g., 15 U.S.C. 1064; Fact Sheets Protecting a Trademark, INTERNATIONAL TRADEMARK ASSOCIATION, http://www.inta.org/TrademarkBasics/FactSheets/Pages/LossofTrademarkRightsFactSheet.aspx.
[4] U.S. Chamber of Commerce Global Intellectual Property Center Coalition Against Counterfeiting and Piracy, INTELLECTUAL PROPERTY PROTECTION AND ENFORCEMENT MANUAL: A PRACTICAL AND LEGAL GUIDE FOR PROTECTING YOUR INTELLECTUAL PROPERTY RIGHTS 21, available at http://www.theglobalipcenter.com/wp-content/uploads/2013/01/Brand_Enforcement_Manual_FINAL.pdf.
[5] eBay Against Counterfeits, EBAY, http://pages.ebay.com/againstcounterfeits/; eBay Money Back Guarantee, EBAY, http://pages.ebay.com/ebay-money-back-guarantee/; Amazon Anti-Counterfeiting Policy, AMAZON, http://www.amazon.com/gp/help/customer/display.html/ref=hp_left_sib?ie=UTF8&nodeId=201166010; About A-Z Guarantee, AMAZON, http://www.amazon.com/gp/help/customer/display.html/?nodeId=200783670.
[6] Jim Erickson, Alibaba’s Counterfeit Reporting System Gets an Upgrade, ALIZILA (Aug. 6, 2015, 4:35 PM), http://www.alizila.com/alibabas-counterfeit-reporting-system-gets-upgrade-video.
[7] Jim Erickson, The Latest in Alibaba’s War on Counterfeiters, ALIZILA (Jan. 30, 2015, 1:21 PM), http://www.alizila.com/latest-alibabas-war-counterfeits.

Software publisher Adobe Systems Inc. actively investigates its existing customers to determine whether each customer has properly licensed Adobe software, or is committing copyright infringement, reports Keli Johnson Swan, an associate at Scott & Scott LLP.

Her article follows:

Adobe often pursues its customers directly, but sometimes grants a power of attorney for BSA | The Software Alliance to pursue copyright infringement claims on its behalf. In each instance, Adobe requires its customers to prove ownership for each and every license for all copies of Adobe products installed on a customer’s computers, or face harsh monetary penalties.

Adobe license terms often change as each new product is released, which means that the way a customer may have previously been licensing software is no longer valid.

For example, historically, Adobe has offered easy paths to upgrade older Adobe software by allowing components of Creative Suite to be upgraded to a full suite. However, that changed with Adobe Creative Suite 6, which stopped allowing customers to upgrade from a component of the suite to the full suite.

The change has created an obstacle for clients with older products installed on its network to track the upgrade paths and prove ownership of the upgraded products. While a client may have previously been able to upgrade CS3 Dreamweaver to Creative Suite 5 Design Premium, that is no longer the case for Creative Suite 6. Beginning with CS6, Adobe requires a customer to have an existing license for the full Creative Suite in order to upgrade to a CS6 Creative Suite. However, customers may still upgrade older standalone products to the newer version of the same product.

It is important for customers to keep an accurate record of each underlying license for its Adobe upgrades in order to prove it is compliant with the current software licensing terms, and avoid potential copyright infringement damages. When in doubt, a customer should consult with an attorney with experience defending against software audits.

Technology companies can preserve both significant sums of money and valuable intellectual property rights if they take action when a customer or business partner files for bankruptcy protection, according to a report published on the Buchalter Nemer website.

Shawn Christianson, Valerie Bantner Peo and Ivo Keller wrote the article.

“Far less effort is usually required to preserve these rights than what may be involved in a major piece of litigation; but, in almost every case, the company must take timely steps to ensure that its interests are protected,” they write.

They discuss measures that technology companies can take, and the procedures they should be aware of, to protect their rights in this area of law.

Read the article.