Posts Tagged ‘License’

Oh Man: Dora the Explorer Discovers She’s Been Swiped

Tuesday, November 2nd, 2010

David vs. Goliath, Dora the Explorer vs. Swiper the Fox, Caitlin Sanchez vs. Nickelodeon.

Since our passion is the drafting and negotiation of intellectual property-related contracts, when 14-year-old Caitlin Sanchez, the voice of the popular Dora the Explorer cartoon character, filed a lawsuit against the Nickelodeon cable network claiming that Nickelodeon and its affiliates have duped her out of millions of dollars in royalties and residuals by pressuring her to sign a “bizarre, impenetrable, unconscionable contract,” it tweaked our curiosity.

But was it really a bad contract, or rather bad negotiation that resulted in Caitlin getting a lot less money than she and her family expected?

To answer that question, we tracked down a copy of the agreement (“Agreement”) between Caitlin and Uptown Productions, Inc. (“Uptown”), the production company for the Dora program, and compared it to the allegations in the lawsuit complaint, filed by the law firm of Balestriere Fariello. (Agreement is here, complaint is here.)

And the comparison showed that the contract IS bad, but not confusingly bad, just transparently bad— extremely but obviously one-sided in Uptown’s favor. Despite that, Caitlin and her family signed the Agreement and several subsequent documents literally within minutes of receiving them, without negotiating or asking an attorney to assist them. That was akin to Dora the Explorer not chanting, “Swiper, no swiping!” when the larcenous fox was in plain sight.

In doing so, they made the same mistake that many artists, actors, musicians, designers, and other creative people make when they are approached by television, music, or theatrical producers—they silence their questions and sign, for fear of being ditched and missing their big break.

The framework for the Agreement between Uptown and Caitlin is that Uptown would pay for Caitlin’s exclusive services for seven episodes of the Fifth Cycle of the Dora series and would retain options for 10 episodes for each of the Sixth through Tenth Cycles of the show. Caitlin was to receive: a salary of $5,115 per episode (increasing 5% per cycle); plus residuals based on the number of re-broadcasts of the original episodes; plus merchandise license fees. She was also required to do a “reasonable” amount of promotional appearances and interviews.

(1) The complaint alleges: Nickelodeon “fail[ed] to fully compensate Caitlin for products she voiced, for which she is due a percentage of the products [sic].” Uptown has only paid Caitlin $9,636.39 in merchandising royalties to date, according to the complaint. Caitlin’s attorney claims that that is an absurdly low and definitely incorrect figure in light of the fact that Nickelodeon claims gross retail sales of $11 billion in Dora merchandise since 2002.

The contract states: Uptown “shall pay you 5% of 100% of the ‘net receipts’ actually received by [Uptown] from merchandising, should your name, voice or likeness be used alone in connection therewith, reducible to 2-1/2% of 100% if other artists are used…; ‘Net receipts’ shall mean the amount remaining after deduction of a distribution fee of 50% of the gross receipts actually received from agents and distributors; and all costs related to such merchandising use.”

Our take: Caitlin would get royalties based on only the subset of Dora merchandise that featured Caitlin’s voice or her actual (not Dora’s) image, and that the revenue stream on which the royalties would be calculated could be easily manipulated by Uptown’s “creative accounting.”


How do you say, “Swiper, no swiping!” in Swedish?

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Licensing and the Pharma Patent Cliff

Friday, October 22nd, 2010


Photo courtesy Dennis Barnes Photography

This work is licensed under a Creative Commons Attribution-NonCommercial-NoDerivs 2.0 Generic License.

Peering over the edge of a “patent cliff” that threatens to cut deeply into its profits, Big Pharma is considering modifying its current business model of in-house development of all-or-nothing blockbuster drugs towards a business model of in-licensing from biotech startups and university researchers.

The time and cost of developing new drugs from scratch is enormous– typically $2 billion per successful drug and 10 to 15 years from initial research to final regulatory approval.

But during the next five years, many top-selling blockbuster drugs will come off patent, and face severe price competition from generic versions, including: Pfizer’s Lipitor; Astra-Zeneca’s Seroquel; and Sanofi-Aventis’ and Bristol-Myers Squib’s Plavix. Between 2011 and 2014, four of Eli Lilly’s top five sellers will fall off the patent cliff: Zyprexa, Symbalta, Gemzar, and Evista. Estimates peg the total revenue loss to Big Pharma as high as $140 billion through 2016.

In response, analysts at Morgan Stanley are advocating a move away from the go-for-broke nature of the blockbuster business model, towards a Pharma 2.0 model of in-licensing from biotechs and academic researchers, who do all early-stage research and testing, and assume most of the risk. According to their analysis, the return on investment of in-licensed drugs is three times higher than drugs developed in-house.

And it appears that some of Big Pharma is listening. According to thepharmaletter.com, in 2009 the top 10 pharmaceutical companies entered into 12% more health-care focused licensing deals than the year before. Andrew Baum of Morgan Stanley estimates that large European pharmas will cut research spending by 40% in the next two years, and focus on licensing and acquisitions of promising drugs in development.

But for other pharmaceutical companies, the “Not Invented Here” syndrome still rules the day. Eli Lilly, which faces probably the most severe patent cliff among the major pharmas (above), has announced that it will meet the challenge mainly through cost cuts, job cuts, and modifications of existing product lines, rather than major new licensing or acquisition initiatives. It argues that slashing in-house research and development to boost return on investment is a short-term fix that would undermine Lilly’s long-term mission.

As we have argued in other contexts, while licensing may not always be appropriate as a complete replacement for in-house research and development, it is almost always appropriate as a complementary business model. When you are looking over the side of a cliff, Not Invented Here goeth before the fall.

Licenses 2, Sales 0 in Eminem and Autodesk 9th Circuit Rulings

Wednesday, September 22nd, 2010

The growing popularity of licensing as a strategic business and legal tool is likely to grow even greater as a result of a pair of cases decided one week apart in the federal Ninth Circuit Court of Appeals that broadened the scope of and increased the powers of licenses.

The first Ninth Circuit decision, F.B.T. Productions vs. Aftermath Records, involved a dispute between rap artist Eminem and his record label Aftermath about whether Aftermath’s provision of Eminem’s songs to iTunes was a “sale” or “license” for purposes of a contract drafted in the pre-digital age. The difference was significant, because the agreement provided that the label would pay Eminem royalties of between 12% and 20% of the adjusted retail price of all “full price records sold in the United States… through normal retail channels,” but would pay 50% of its net receipts “[o]n Masters licensed by us… to others for the manufacture and sale of records or for any other uses.” The agreement was signed in 1998, before iTunes was established, and did not further define either “sale” or “license.”

The record label argued among other things that the custom in the recording industry was that the “masters licensed” provision applied only to “compilation records and incorporation into movies, TV shows, and commercials,” and furthermore, that the iTunes download was functionally no different than a purchase of a vinyl record or CD at a record store.

The court rejected that argument, and held that under copyright law, a license is, “an authorization by the copyright owner to enable another party to engage in behavior that would otherwise be the exclusive right of the copyright owner, but without transferring title in those rights.” Because the record label retained ownership of the copyrights for the Eminem songs as well as title to the digital music files that it made available to iTunes in exchange for periodic payments based on the volume of downloads, the transaction was a license, and the higher 50% royalty rate applied.

One week later, in the case of Vernor vs. Autodesk, Inc., the court ruled that most written license agreements will preserve the licensor’s right to prohibit resales not only under the license agreement, but also under the Copyright Act. There the issue was whether Timothy Vernor could sell on eBay outdated copies of Autodesk’s AutoCAD software for a few hundred dollars that normally sell for several thousand dollars per copy when new.

Copyright law confers several exclusive rights on copyright owners, including the exclusive right to reproduce their works and to distribute their works by sale or rental. An important exception to this exclusive right is the so-called “first sale doctrine” codified at Section 109 of the Copyright Act, which says that the, “owner of a particular copy or phonorecord… is entitled without the authority of the copyright owner, to sell or otherwise dispose of the possession of that copy or phonorecord.” So for example if a publisher sells a book to a bookstore, the bookstore is free to resell it to anyone, and the purchaser is in turn free to sell the same book to anyone on eBay.

Vernor had purchased the AutoCAD software from an architectural firm that had licensed it from Autodesk. The AutoCAD license agreement contained standard provisions prohibiting transfer to or use by any party other than the original licensee, however, it did not require the licensee to return old installation disks. Vernor argued that under prior case law in the Ninth Circuit, since the license did not require the architectural firm to return its copies of the install discs, the firm was an “owner of a particular copy,” which kicked in the first sale doctrine which exempted the firm and any of its purchasers from a copyright infringement claim arising out of resale of the discs. Although the architectural firm had violated its license agreement by reselling the discs, Vernor argued that he had not, because he had neither installed the software nor agreed to any online license agreement before the eBay sales.

After an extensive review of prior case law the appeals court disagreed with Vernor, and held that a software user is a licensee rather than an “owner of a copy” where the copyright owner: 1) specifies that the user is granted a license; 2) significantly restricts the user’s ability to transfer software; and 3) imposes notable use restrictions. Like most well-drafted software license agreements, the Autodesk agreement passed with flying colors, despite the absence of a requirement to return old install discs. Thus, because the architectural firm was a licensee, not an “owner,” then the first sale doctrine did not apply, and Vernor had infringed Autodesk’s exclusive distribution rights in violation of copyright law.

Takeaway: the Eminem case is not expected to have much of a practical impact on the recording industry, because since the time of that agreement, almost all record label agreements deem that provision of songs to iTunes will be treated as a “sale” at a 12% to 25% royalty rate. But when the nature of a copyright transaction is unclear, the Ninth Circuit will presume it is a license rather than a sale where the copyright owner retains control of the copyright, retains title to the media on which the content is delivered (CD, mp3 file, etc.), and receives periodic payments after the original transaction. Vernor says that when a standard license agreement is in place during the original transaction, the copyright owner can use both the license agreement and copyright law to prohibit later resale or disposition of the content. This will encourage copyright owners to cast transactions as licenses rather than sales, and with the proliferation of digital content that can be made easily subject to clickwrap license agreements even after the original point of sale, they will likely succeed in their efforts. So the purchaser of a hard copy of The Girl With the Dragon Tattoo will be able to resell it, because she (and the bookstore before her) took title to the media (book) on which the content was delivered. But she might not be able to resell her e-book version, if she purchases it subject to a standard license agreement at the time of download. One practical effect is that copyright owners will now be able to easily assert that resale of software, digital games, and many other kinds of digital content is a copyright infringement. Please note that these rulings only apply in the Ninth Circuit (California, Oregon, Washington, Nevada, Arizona, Idaho, Montana, Alaska, Hawaii, and Guam), and that other circuits may not follow them.

Trademark Licensees Catch a Tax Break

Thursday, September 2nd, 2010

The federal Second Circuit Court of Appeals has ruled that trademark licensees can in certain circumstances immediately deduct royalty payments as current expenses, rather than capitalizing and deducting them over time.

Overruling both the IRS and the United States Tax Court, the Second Circuit ruled in Robinson Knife Manufacturing Company, Inc. vs. IRS that where the royalty payments: 1) are calculated as a percentage of sales revenue from inventory, and 2) are incurred only upon the sale of that inventory, such payments are immediately deductible.

Robinson Knife designs, manufactures, and markets kitchen tools such as spoons, soup ladles, spatulas, and cooking thermometers, and sells them to retail customers such as Wal-Mart and Target. Sometimes it sells the products under the store brand. In this case, Robinson Knife sold the goods under the Pyrex and Oneida trademarks, which it licensed from Corning and Oneida respectively. Both license agreements required payment of royalties as a percentage of sales revenue only on sale to the retailers, with no royalty advance payments or minimum guaranteed royalties.

IRS rules under Section 263A of the Internal Revenue Code require the capitalization of, “all direct costs and certain indirect costs properly allocable to property produced,” and include, “licensing and franchise costs” as examples of indirect costs, “that must be capitalized to the extent they are properly allocable to property produced.” Examples of indirect costs not allocable to property produced include, “marketing, selling, advertising, and distribution costs.”

Robinson Knife argued that because the famous trademarks were intended to boost sales of their products, the royalties were in the nature of advertising expenses and thus currently deductible. It was overruled by both the IRS and the Tax Court, which ruled that the royalty expenses must be capitalized under complex inventory accounting rules and deducted over time.

But the Second Circuit ultimately agreed with Robinson Knife, on the grounds that the obligation to pay royalties was not incurred unless and until a sale was made, thus royalties were not incurred by reason of production activities, and did not directly benefit such activities.

This is an important victory for licensees, but its scope is unclear. It remains to be seen whether: 1) the IRS follows this ruling outside of the Second Circuit (New York, Connecticut, and Vermont); and 2) it applies as well to royalties paid on copyright, patent, and other intellectual property licenses. Logically it should, because the ruling was based on the timing of the royalty payments, not on the nature of the intellectual property.

Takeaway: trademark licensees based in New York, Connecticut, or Vermont that pay royalties as a percentage of sales revenue of goods only upon sale of those goods can immediately deduct the royalties as current expenses. It remains to be seen whether the IRS allows analogous treatment for licensees based in other states, as well as licensees of patents, copyrights, and other intellectual property.

5 Minute FAQ: License Agreements vs. SaaS Agreements

Thursday, August 26th, 2010


Photo Courtesy NASA

Q: Computing used to be based on the model of the end user running another party’s software on its local computer through a client-server or fat client architecture. Now the business model is moving increasingly towards cloud computing and software as a service. If the end-user no longer has someone else’s software on his computer, does that mean the license agreements are no longer necessary?

First, let’s start off with some definitions. Cloud computing means computing where data is input and stored on a remote third party’s computer, on the Internet or “cloud.” Think Facebook. Software as a service or “SaaS” is a subset of cloud computing where not just data is stored, but also processed via a specific application in the cloud, which is often being used concurrently by many other users. Think Salesforce.com and Google Apps. The end user of SaaS pays a fee over the time of usage, using a subscription or utility model, in contrast to local software where the cost is usually paid all upfront. Also, since the SaaS user does not possess SaaS intellectual property, but accesses it remotely through a Web browser, it pays for access to, rather than use of, the IP.

Q: Well, that was my question. If there is no license of third-party IP, then is a license agreement even necessary?

I was not ignoring your question. You are correct– although there is technically no license involved in an SaaS business model, a user agreement most definitely is necessary, call it what you will. At the end of the day, the difference between an SaaS agreement and a typical end user software license agreement is more a matter of degree than kind. The meta-theme of a software end user license agreement is, “We allow you to use our intellectual property as long as ____ .” The meta-theme of an SaaS agreement is, “We allow you to access our service as long as ____ .” Despite the difference business models, large chunks of both kinds of agreements are interchangeable, because the software licensor and the SaaS service offeror are addressing many of the same business risks. Also, note that some SaaS offerings require installation of software on the local client in combination with access through a web browser, in which case the agreement would be a hybrid even closer to a traditional software end user license agreement.

Q: In what ways is an SaaS agreement different from an EULA?

Obviously, the SaaS agreement would not contain license grant language, except if it were a hybrid, as noted above. Also, an SaaS agreement needs to address business risks that are specific to a cloud environment, such as:

  • Performance and uptime guarantees and/or SLA’s
  • Data privacy and security
  • Data backups and disaster contingency
  • Data portability, especially in case of nonrenewal of the SaaS agreement
  • Term, termination, and renewal provisions, given the periodic nature of the SaaS subscription model

Besides the license grant provision, a typical SaaS agreement also often omits common EULA provisions relating to maintenance, support, and updates, because it is usually done behind the scenes by the service offeror, on a multi-user basis.

Has Pay for Delay Seen Its Day?

Thursday, August 12th, 2010


Photo by Sage Ross, CC by-sa

What do you call it when a patent holder pays royalties to a possible infringer, and not the other way around?

In the pharmaceutical industry, it is called “reverse payment” or “pay for delay,” a practice in which the inventor of a patented drug pays the developer of a generic substitute not to produce until the patent is nearly expired.

The practice has withstood multiple court challenges, but is coming under increasing fire from the executive and legislative branches of the federal government as anti-competitive.

And a three judge panel of the influential federal Second Circuit Court of Appeals, which recently upheld a reverse payment arrangement, has even taken the unusual step of inviting the challengers to appeal their loss to the entire 10 judge circuit court panel.

The origins of pay for delay are in the Drug Price Competition and Patent Term Restoration Act of 1984, popularly known as the Hatch-Waxman Act. Hatch-Waxman provides that when a developer of a patented drug applies to the Food and Drug Administration for permission to market it, the maker of a generic version of the drug may file a certification that the generic does not infringe the new drug’s patents, or that the new drug’s patents are invalid. The certification itself is deemed an infringement of the new drug’s patents, and sets the stage for the new drug’s inventor to sue the makers of the generic version for patent infringement.

The original logic of Hatch-Waxman was to encourage development of generics without undue cost to patented drugs by resolving infringement issues at an early stage, before either party had invested huge amounts of money in production and marketing. But it did not work out that way. Many innovators chose instead to pay the generics a “reverse payment” not to produce, usually until shortly before the new drug’s patents expire. Often payment to the generic is in the form of a percentage of sales on the patented drug, in effect, a “reverse royalty.”

Reverse payments have been widely criticized as an unreasonable restraint of trade in violation of Section 1 of the Sherman Antitrust Act.

The Federal Trade Commission estimates that pay for delay settlements cost consumers $3.5 billion per year because of the unavailability of cheaper generic drugs.

But pharmaceutical manufacturers reply that the agreements are reasonable commercial agreements to avoid the expense and uncertainty of litigation, especially where the prospective generic manufacturer has not risked significant market entry expenses or infringement damages, and has little to lose in filing a challenge.

And courts for the most part have agreed. The Eleventh Circuit and the Federal Circuit have upheld the practice, while the Sixth Circuit has held it unlawful.

Two of the biggest class-action antitrust challenges to pay for delay were lengthy class action lawsuits decided by the Second Circuit Court of Appeals.

In 2005, the Second Circuit upheld the practice in In Re Tamoxifen Citrate Antitrust Litigation, in which it ruled that reverse payment agreements do not violate antitrust laws, “[u]nless and until the patent is shown to have been procured by fraud, or a suit for its enforcement is shown to be objectively baseless,” or the settlement agreement extends the patent beyond its original scope.

In Re Ciprofloxacin Hydrochloride Antitrust Litigation challenged a settlement of a 1991 patent infringement lawsuit in which Bayer Corporation paid Barr Laboratories reverse payment royalties estimated at nearly $400 million not to manufacture a generic version of Bayer’s patented drug Cipro. A three-judge panel of the court ruled in April that in light of the circuit’s earlier ruling in the Tamoxifen case, it was compelled to dismiss the plaintiffs’ case, because they had not properly alleged that Bayer’s patent was procured by fraud, nor that the underlying patent lawsuit was objectively baseless.

But the appellate panel had significant reservations about the practice of reverse payments as a whole, and invited the plaintiffs to challenge the decision before an en banc hearing of the circuit’s 10 active judges. The plaintiffs accepted the panel’s invitation, and filed a petition for an en banc hearing, which was joined by briefs submitted by the Federal Trade Commission and the Department of Justice criticizing reverse payment settlements. A ruling on the petition is expected shortly.

Sentiment is also mounting against pay for delay in the legislative branch. Senator Orrin Hatch, who lent his name to the Hatch-Waxman Act, has criticized the practice as increasingly anti-competitive. A bill pending in the Senate would greatly curtail pay for delay by presuming that such agreements are anti-competitive, while permitting the parties to rebut that presumption in court. The bill is similar to a measure that has already passed the House of Representatives.

Pay for delay may have seen its day.

Update, 9/17/10: But maybe just not yet. The Second Circuit declined by 9-1 to rehear the Cipro case en banc, which means that pay for delay has withstood yet another legal challenge.

IP & Licensing Trends in Japan

Monday, August 9th, 2010

“It is often said that Japan wins at technology, but loses at business,” said Kimikazu Noumi, chairman of the Innovation Network Corp. of Japan (“INCJ”) at a recent press conference announcing INCJ’s initiative to monetize Japanese intellectual property assets in the life sciences.

This is a welcome reversal of a trend that we have previously noted, in which Japan has not effectively monetized its abundant intellectual property assets, through licensing and similar means.

INCJ is collecting billions of yen from Japanese public and private investors to launch the “Rising Sun Fund” to purchase dormant life sciences patents from universities and public research institutions, package them, and license them to domestic and foreign companies so they can develop new medicines and treatments without fear of infringement lawsuits. The initial areas of concentration will be embryonic stem cells; cancer; Alzheimer’s disease; and biomarkers.

According to the Japanese newspaper Asahi Shimbun, a main purchase target of the fund will be universities, because they use only an estimated 20% of their patents.

A Japanese version of the story from the same newspaper notes that the impetus for the fund was the 2007 arrival in Japan of the American bioventure fund, Intellectual Ventures, and its subsequent purchase of Japanese university research patents for relatively low license fees. The fund founders feared that the technologies would be developed overseas, and that Japan would not share in the fruits of medical innovations developed from patents developed at its own taxpayer-supported universities.

INCJ is expected to invest up to 1 billion yen (approximately $11.7 million), and several private companies, such as pharmaceutical heavyweight Takeda Pharmaceutical, are expected to invest millions of yen more.

On the other side of the coin, Japanese book publishers failure to license e-books has created a phenomenon known in Japan as 自炊 (jisui), or “cooking for oneself,” in which readers purchase hardcopy versions of books, slice out the pages with razor knives, and scan them into PDF form to read on their iPads. Japanese are avid book readers and big fans of compact technology, yet publishers have made only about 50,000 book titles available in e-book form, with few current best-sellers, compared to about 630,000 English language titles available for the Amazon Kindle.


How to Cook Your Own E-Books, Japanese Style

In fact, consumer demand is so great that new businesses have arisen to fill it– companies that will save readers the hassle of slicing and scanning by performing the service for about 200 yen per volume (approximately $2.38). The reader mails in the hard copy, the company e-mails back the digitized book. Between the service fee and the postage, the reader is probably paying a $4 or $5 premium (or 15 to 20 minutes of his time), over the hard copy price, to have his e-book.

It appears that the delay in making more e-book titles available through official channels is due to publishers’ fears that e-books will be sold at discounted prices relative to paper versions (as in the United States), thereby shrinking profits. But it appears that at least some Japanese readers want e-books so badly, they are willing to pay a premium over the hard copy price. It is a shame that publishers have not adapted their business model, and are leaving money on the table.

Update, 8/24/10: for a good survey of the jisui trend, see this article in the Mainichi Daily News (includes link to original Japanese article). It appears that competition in the jisui service bureau industry has pushed the price down to near 100 yen per volume.

Speaking of the iPad, the Washington Post recently ran an interesting article on how the iPad has become a hit with Japanese senior citizens who were not previously computer adept, because of its sleek design and intuitive, user friendly interface. The iPhone is also a smash hit in Japan– when I was in Osaka in late June, there were literally lines around the block of people waiting to purchase the iPhone 4. Many thought that Japanese would never become enthusiastic about a non-Japanese made electronic device, much less a smartphone, a product for which Japan has long had its own specialized, highly competitive market.

Why has Apple succeeded where so many others have failed? As noted in the link above, Japanese smartphones tend to be feature-centric, but somewhat clunky to navigate, while the Apple devices have been designed from the ground up to provide an elegant, seamless user interface among hardware, software, and abundant content. The usually compact size and sleek design of Apple devices also appeal to Japanese tastes.

License Drafting Rule No. 1: Don’t Say 専用使用権 Unless You Mean It

Thursday, June 3rd, 2010

Just like Alberto-Culver, we don't know what 専用使用権 means, but our hair looks great!

日本語訳はこちらへ>>>

We have said it before, because it is true. Seemingly small differences in contract wording lead to major differences in real-world consequences.

This rule especially applies when the contractual wording is in a foreign language, as Alberto-Culver, the makers of Alberto VO5 hair care products, discovered when they lost an appeal of a breach of trademark license case which turned on a Japanese legal phrase that Alberto-Culver did not completely understand and was not otherwise defined at the time of drafting the license agreement.

With licensing increasingly utilized as a tool of expansion into international markets, the case is a good lesson in what NOT to do.

In 1980, for lump-sum royalty payments of $10 million, Alberto-Culver gave Sunstar a 99 year exclusive license to manufacture and sell hair care products in Japan under the VO5 trademarks, after which Sunstar would own the registrations. The license agreement had appendices showing which VO5 logos and marks Sunstar could use. The agreement said that Sunstar’s license would have the status of a “senyoushiyouken” (専用使用権), which translates literally from Japanese as “exclusive use right.” But the license did not include an English definition of “senyoushiyouken.” Under the Japanese Trademark Act, the “senyoushiyouken” is exclusive even against the trademark owner, and the holder has other rights nearly equal to the owner, including the right to sue infringers in its own name.

Sunstar clashed repeatedly with Alberto-Culver over its ability to modernize the VO5 logos for the Japanese market. Against Alberto-Culver’s wishes, Sunstar went ahead with updated logos once in 1989, which led to a negotiated settlement with payment of an additional $10 million by Sunstar. When it happened a second time 10 years later, Sunstar refused to negotiate, arguing that under Japanese law, a licensee with “senyoushiyouken” status is legally entitled to use a registered trademark with minor format changes. For example, Article 50.1 of the Japanese Trademark Act, which deals with rescission of unused registered trademarks, recognizes that holders of “senyoushiyouken” are authorized to use:

“登録商標(書体のみに変更を加えた同一の文字からなる商標、平仮名、片仮名及びローマ字の文字の表示を相互に変更するものであって同一の称呼及び観念を生ずる商標、外観において同視される図形からなる商標その他の当該登録商標と社会通念上同一と認められる商標を含む…)。”

“…a registered trademark (including a trademark deemed identical from common sense perspective with the registered trademark, including a trademark consisting of characters identical with the registered trademark but in different fonts, a trademark that is written in different characters, hiragana characters, katakana characters, or Latin alphabetic characters, from the registered trademark but identical with the registered trademark in terms of pronunciation and concept, and a trademark consisting of figures that are considered identical in terms of appearance as those of the registered trademark…).”

This set up an interesting legal hall of mirrors for the lawsuit. Alberto-Culver argued that the only reason that the word “senyoushiyouken” was used in the contract was that in 1980 the negotiating parties wanted to give Sunstar language it could use to register the license with the Japanese trademark office. (Many foreign governments require trademark licenses to be registered to be effective.) Since the agreement provided that it was to be interpreted under Illinois law, the Japanese meaning of “senyoushiyouken” and any rights granted by it were irrelevant, said Alberto-Culver. Rather, the agreement should be interpreted as an exclusive license under Illinois law, which would require the licensee to attain prior consent to even minor format changes per explicit provisions in the license agreement.

Alberto-Culver won at trial, but that decision was forcefully overturned on appeal by the Seventh Circuit Court of Appeals in Sunstar, Inc. v. Alberto-Culver Co. (decision available here by entering case number 07-3288), where Judge Richard Posner wrote that when sophisticated parties use technical terms in a contract, they must be presumed to use and understand them in the technical sense. In so doing, the court followed a common rule of contract interpretation that whenever possible, courts should interpret contracts as a reasonable third party would by looking only at the words within the four corners of the contract, and without researching the history of the negotiations or other extrinsic evidence of the parties’ subjective intent. In other words, Alberto-Culver would be presumed to understand and consent to the meaning of any Japanese legal terms included in the license agreement, and therefore Sunstar was not in breach for using modernized VO5 marks.

Takeaway: in any license or other agreement regarding the disposition of valuable intellectual property rights, avoid vague letter agreements or memorandums of understanding, especially those that contain undefined technical words and other shorthand terminology. The contract should include a definitions section with detailed definitions for any technical terminology or terms of art. It will take a little bit longer to negotiate the contract, but 注意一秒、けが一生. [Translation: “An ounce of prevention is worth a pound of cure.”]

Sunstar VO5 commercials featuring 1989 version of updated logo, with song advising, “Don’t cry about split ends,” because the conditioner’s UHM Silicon will fix them.

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‘Scuse Me While I Sue This Guy: The Uncertain Law of Dead Celebrity Goods

Thursday, May 20th, 2010

Jimi sez: "Businessmen they drink my...vodka?!?"

What do Jimi Hendrix, Elvis Presley, Marilyn Monroe, and Princess Diana all have in common?

If you guessed that all of them are dead celebrities, you are only half right.

More importantly, all of them were subjects of messy postmortem lawsuits against sellers of celebrity-branded goods.

Because of great variations in the laws, as well as “favorite son/daughter” influence on local courts, using the name or image of a dead celebrity to sell products without a license is risky business.

Doing so may put a businessperson in violation of two categories of legal rights, rights of publicity laws and trademark laws.

The more direct threat is the law of rights of publicity. Generally speaking, rights of publicity laws prohibit the commercial use of the name (and usually image and signature) of another person without his permission. But that is about all one can say with certainty — the laws are state-based, not federal, and beyond the basics, there are great variations in the laws of the states that recognize rights of publicity. In fact, it is not even certain how many states do recognize rights of publicity, with estimates ranging from the mid-20’s to close to 50.

One of the biggest variables among state laws is whether the right of publicity survives the celebrity’s death, and if so, for how long. States that characterize the right of publicity as a personal right naturally conclude that it is extinguished on the person’s death. New York is one such state. States that characterize the right of publicity as a property right, like New Jersey, naturally conclude that it survives the person’s death, and is descendible to her survivors.

That seems simple enough. So where is the problem?

1) Which state law decides the survivability of a dead celebrity’s right of publicity, a personal right state or a property right state? The estate of Marilyn Monroe has claimed for years that property right based rights of publicity laws in both California and Indiana gave them the right to charge royalties to would be users of Marilyn’s name or image, but they were dealt a severe surprise in 2007 when judges in both Los Angeles and New York ruled that since Marilyn was a New York domiciliary at the time of her death in California in 1962, then New York’s personal right based law controlled, and her right of publicity did not survive her death. Similarly, a Washington court ruled that the heirs of Jimi Hendrix did not inherit his rights of publicity, because Jimi was a New York domiciliary at the time of his death in England in 1970. A broad rule of thumb is that survivability is decided by the state of the celebrity’s domicile (generally the state of legal residence) at the time of the celebrity’s death. But there are many exceptions to this rule, making it risky for a celebrity-oriented business to try to guess without legal assistance. Big band singer Louis Prima died in 1978 after two years in a nursing home in Louisiana, which is a personal rights state, but nevertheless, a New Jersey federal court held that the issue of the survivability of his right of publicity was controlled by the law of New Jersey, where Prima had never lived, and allowed his widow to sue the Olive Garden restaurant chain and its advertisers for use of a Prima sound-alike singer in a television commercial.

2) Even in a property right state, it is not always clear how long after death the right survives. In a case decided four years after Elvis Presley’s 1977 death, a New Jersey court ruled that the state’s case law supported a property right based right of publicity, and ruled that a local Elvis impersonator had misappropriated the King’s right of publicity. However, the court admitted that it had no idea how long the right survived Elvis, and that the state legislature would need to clarify the issue. (It has not to date.)

In addition to rights of publicity law, trademark law may also require a seller of celebrity paraphernalia to take a license from a dead celebrity’s representatives. Here, the issue is usually not survivability after death (because trademark rights normally do survive death), but whether the celebrity’s name has in fact become a trademark — an identifier of the source or origin of goods or services — and if so, for which specific categories of goods or services.

A company called Electric Hendrix LLC (“EH”) decided that it could sell Jimi-Hendrix-branded vodka without a license from Hendrix’s estate, because courts had already decided that Jimi’s rights of publicity did not survive his death (above), and his estate had not filed trademark registrations in any category remotely related to alcoholic beverages, and in fact had vowed it would never license alcohol-related products, so there was no likelihood of consumer confusion as to the source of the vodka, or so EH thought. Nevertheless, a Washington court found that EH was liable for trademark infringement, after performing an eight factor infringement analysis, emphasizing that: (a) consumers would be likely to assume that any Hendrix-branded products came from or were authorized by the Hendrix estate; and (b) evidence of the intent of EH to free-ride on Jimi’s fame was overwhelming. The court ordered the defendants to halt all sales of EH vodka, and to remove all product from store shelves. It is possible that Jimi’s celebrity status in his hometown of Seattle was a factor in the decision.

5 Minute FAQ: Open Source Licenses

Thursday, May 13th, 2010

http://www.flickr.com/photos/mag3737/ / CC BY-NC-SA 2.0

Q: What is an open source license, and why is it important?

There are many kinds of open source licenses with a great variety of terms and conditions – Creative Commons License, GNU General Public License, Sun Community Source License, and many others. Open source licensing is becoming an increasingly important business model to distribute creative works (below). As explained in the Licensing Glossary, generally speaking an open source license is one that allows broad rights to use, modify, and distribute copyrighted material without payment of a royalty, so long as the user does not place proprietary restrictions on later users of his content. For example, the Terms of Use of popular online encyclopedia Wikipedia state that, “you can use content from Wikipedia projects freely,” as long as users make their own contributions freely available to others. In the context of software, an open source license is one that complies with the ten requirements of the Open Source Initiative, including: 1) “free” redistribution (“free” as in no downstream proprietary restrictions, and “free” as in no royalties on the original or revised code); 2) inclusion of or easy access to detailed source code; 3) the right to create and distribute modifications and derivative works; and 4) no inclusion of “downstream” license restrictions that reduce or undercut the other open source terms, i.e. once open source, always open source, no matter who adds what later on in time. Although open source software is often called “free software,” that is not quite accurate. One of the best known examples of an open source software license, the GNU General Public License, does prohibit royalties, but also permits licensors to charge a small fee for the physical act of transferring the software, as well as service fees for warranties and maintenance. In the context of licensing of text and images, the GNU Free Documentation License and various Creative Commons licenses are guided by similar open source concepts.

Q: Why would anyone just give away their creative work under an open source license?

Why indeed. The success of the open source licensing model is one of the most fascinating phenomena of the digital age. Sophisticated products with major market impact are available for free under open source licenses: the Firefox Internet browser; the Wikipedia online encyclopedia; and Apache server software. Although traditional forms of intellectual property protection are based on the assumption that the profit motive (self interest) is the greatest driver of innovation, open source licensing is based on the assumption that unrestricted sharing of knowledge and innovation (collaboration) best begets further knowledge and innovation. There is also a hybrid business model, based on the “give away the razor for free to make money selling the razor blades” concept. In some cases, for-profit businesses contribute to open source software so they can sell associated databases, or maintenance, or hardware—several distributors of the open source Linux operating system sell warranties and maintenance to go with their version of Linux, while several sellers of smartphones “give away” the open source Android software that runs them. (Smartphones running Android outsold Apple’s popular iPhone during the first quarter of 2010.)

Q: What happens if the user ignores the requirements of an open source license, for example by charging a license fee for its altered version of the open source material?

Until recently, it was not clear if there was any penalty to ignoring the requirements of an open source license. Opponents of open source licensing had previously argued that if licensors gave their product away for free, then even if licensees ignored the terms of the license, there were no damages. But in Jacobsen v. Katzer, the Court Of Appeals for the Federal Circuit put legal teeth in the open source licensing model, by ruling that violation of an open source license was not just a breach of the license, but might also be a copyright infringement. The case involved software developed by physics professor and model train enthusiast Robert Jacobsen to program decoder chips that control model trains. Jacobsen made the software available under the open source Artistic License. Matthew Katzer and Kamind Associates copied several of Jacobsen’s files into their own commercial software, but in violation of the license terms, did not include a notice of attribution to Jacobsen. While Katzer and Kamind conceded that Jacobsen’s software was copyrighted, they argued that since the Artistic License permitted them to copy the files, there was no copyright infringement, at worst only a breach of the license terms. The CAFC disagreed, ruling that since the attribution requirement was drafted as a condition under which the license was granted, copying in violation of a condition was not excused by the license, and was therefore a copyright infringement. The case is significant not only because it is the first major case validating the concept of open source licensing, but also gives open source licensors a much more effective means to enforce the license. Although contract damages are normally calculated on economic harm suffered by the injured party (and therefore difficult to prove when a product is given away for free), under copyright law, creators can collect damages and attorneys fees based on the infringer’s profit, or under a fixed formula called statutory damages. Furthermore, copyright law allows the licensor to pursue licensees of the licensee, while contract law normally does not. Thus, the Jacobsen case gives real teeth to open source licensing—however, at this time it is limited to cases under the jurisdiction of the Federal Circuit. Although the Jacobsen case makes it much easier for open source licensors to get damages to enforce license terms, an important open question is how easily they can get injunctions to enforce open source license terms, for example an injunction ordering a licensee to disclose its source code to the public, or even shutting down all further distribution of the licensee’s software.