I recently gave a webinar on Negotiating License Agreements with Start-Ups, and wanted to follow up on that program with some comments for Silicon Valley IP Licensing Law Blog readers on some of the challenges that companies may face when negotiating an IP licensing deal with a start-up.
In the years that I have worked as a tech transactions attorney in Silicon Valley, I have represented a large number of start-ups in negotiating deals with large companies, and I have found that there is a tendency of large companies to approach deals with start-ups with the expectation that the deal is going to be really easy to close due to the perceived imbalance of negotiating power between the two companies. While there is no question that this imbalance of power clearly exists in this type of negotiation, companies who approach these types of deals with the expectation that the negotiation is going to be a cakewalk may be setting themselves up for failure. The very act of entering into a negotiation with a start-up brings to the table a set of unique complications that must be dealt with by the company on the other side of the table.
One of the first issues that a company negotiating with a start-up must contend with is the fact that the start-up on the other side of the table is likely to have a very low tolerance for negotiation. While large companies enter into negotiations as a normal course of business, start-ups often have absolutely no experience with negotiation, which may even rise to the level of outright aversion to negotiation. In some cases this is because they are relying on friends and family with law degrees to advise them who have absolutely no experience in deal negotiation themselves. In other cases, they may have skilled counsel that they rely on but just are unwilling to allocate the necessary financial resources to procure the assistance. It may also be simply due to a lack of comfort with the negotiating process generally.
A second issue that a company negotiating with a start-up will have to overcome is the inexperience factor, which can have a huge impact on the negotiation process. In my role as IP transactions counsel, I often find that an important aspect of my job in working with a start-up involves educating the business on the business model and even the standard terms that would be found in the type of transaction they are negotiating. More often than not, I find that start-up clients have never been involved in a negotiation of the type of deal they are engaged in and that they have never even seen a well-written contract for such a transaction. The lack of familiarity with deal terms may prompt start-ups to negotiate deal terms that are not even appropriate for the type of deal they are doing, and to even remove deal terms from drafts that are essential to the type of transaction they are negotiating. For example, I ran into a situation recently where a client removed a license grant clause from a draft being negotiated in a licensing deal on the grounds that the other side would never agree to it. The inexperience factor often results in start-ups being unable to make decisions in a negotiating context, or reversing their position on critical negotiating points mid-way during the negotiation. It also is not unusual for them to be unsure about where they want to involve outside counsel in the negotiation, including him or her in non-essential conference calls with the other side and excluding outside counsel altogether on calls at key points in the negotiation.
A third issue that a company negotiating with a start-up will often have to address is its confusion over how to manage the negotiation process. It has been my experience that a start-up may put all its energy and focus in lining up the prospective deal partner to do the deal but then find itself unclear on how to proceed and get the deal closed. This uncertainty can put the party on the other side of the negotiating table in a bind, prompting the more sophisticated larger company to take charge of driving the negotiation if it serious about pursuing the deal. However, taking over the deal management role for a start-up you are negotiating with will not necessarily move the deal forward either, since critical negotiation steps may be trampled over in the interest of deal management, and the larger company may put a standard template on the table that has no semblance to the deal that the start-up was proposing to the larger company. To make matters worse, the start-up may then be advised by friends, family, or trusted advisors with no deal negotiating experience that they should just sign whatever the larger company puts in front of them, which often leaves the start-up even more confused and the deal at a complete stand-still.
Of course, there are a number of other issues that may come up in the start-up licensing deal negotiation, but the bottom-line is that they are far from “easy” deals to close and they inevitably present their own unique challenges. Does that mean that as a larger company you should shy away from these types of deals? Absolutely not. Most of the innovation in this country–and even the world–is coming out of start-ups who are uniquely able to nurture and develop new technologies and business models. The level of innovation that I see among the entrepreneurs I have the privilege of working with consistently amazes and inspires me. So, as a large company, it makes a tremendous amount of sense to look to start-ups for innovation and corporate growth. Having said this, in pursuing deals with start-ups, successful companies should approach negotiations with their eyes wide-open about some of the challenges they are likely to face in moving forward with the deals. Appreciating the considerations of the start-up can go a long way to getting your deals closed with early stage companies.
TechCrunch posted an article this afternoon written by attorney David Soofian, which caught my attention, addressing the issue of what to do as a young start-up if you are sued for patent infringement. In particular, the article addressed the challenges posed by so-called patent trolls, who use “weak patents to go after young tech startups” seeking licensing deals.
In the article, Soofian recommended that start-ups consider two key strategies to addressing patent suits.
First of all, if the patent at issue is on software, Soofian urged start-ups to challenge the eligibility of the patent, looking to recent court decisions in Ultramercial v. Hulu and Alice v. CLS Bank International for guidance.
Second of all, Soofian advised start-ups to pursue an Inter Partes Review at the Patent Office and to challenge the patent on grounds that it is not innovative and that it is obvious. Soofian explains that while this type of review was not traditionally available until a significant amount of expense had already been incurred in litigation proceedings, recent legislation has now made the proceeding more readily available to a start-up company with limited resources. Soofian identifies a number of advantages to pursuing this type of proceeding as a start-up over federal court proceedings such as the speed of the proceeding, the limited discovery required in such a proceeding, the fact that the burden of proof is lower, and most importantly, the fact that the court proceeding is stayed while the review occurs.
While Soofian’s article suggests that start-ups need not throw in the towel on their business efforts when they find themselves faced with the prospect of patent infringement litigation looming over them, as a transactional attorney who advises entrepreneurs and start-ups, I would caution businesses who receive demand letters–whether patent or otherwise–not to respond to those letters in a way that invites litigation. The mistake I often see many young start-ups and entrepreneurs make is that they either ignore demand letters altogether or they respond without the assistance of legal counsel and do it in such a way that is unhelpful to their position. In most cases, what is really in the best interests of the start-up is to make the claim go away as quickly as possible–not instigating a fight with the claimant.
As Soofian acknowledges in his article, most infringement demand letters are sent with the objective of procuring a license fee from the recipient, and in many cases, it is going to be far cheaper for the entrepreneur or start-up to settle the claim, whether legitimate or not, than to run up legal fees in litigation. While there is no question that so-called patent trolls and other bad actors may take advantage of this reality, the savvy demand letter recipient will conduct his or her due diligence of the available options and respond accordingly with the information in hand.
The bottom line: Soofian’s article should give hope to start-ups facing patent infringement disputes that will not necessarily run out of money and have to shut down simply because they have found themselves in a legal dispute. However, the savvy start-up will still deal with an intellectual property dispute in a timely fashion when it arises and try to resolve the problem long before it gets to the point of a filed complaint.
Trademark Commissioner Deborah Cohn was reported by The Washington Times to have announced her resignation today after allegations were reportedly made against her that she had violated nepotism laws. A Federal Times article from July provides some additional background on the reported scandal.
This particular Washington scandal has received virtually no coverage outside of the Beltway, so it was a little surprising to receive notices today that the Trademark Commissioner had resigned over a nepotism scandal.
If you are unfamiliar with the departing Trademark Commissioner, IP Watchdog published an interview of Commissioner Cohn in February, 2012, in which she indicated that her career with the Patent and Trademark Office began in 1983 as a trademark examiner, so she will have been with the agency for some 31 years when she steps down. (The second part of the interview is attached here). Commissioner Cohn was apparently not an appointee from the private sector but rather a career Patent and Trademark Office employee.
It is unfortunate to see yet another federal government agency affected by scandal, particularly the Patent and Trademark Office. With so many Washington scandals in the news right now, is it any wonder that many Americans have such a negative perception of the federal government? With all the tax dollars and fees that we Americans are sending to our government each year, wouldn’t it be nice if we could run our federal government a little more transparently and feel like so much of the money that we are sending them out of our pockets was not being misused? Washington D.C. sometimes seems a world away from Silicon Valley, and frequent scandals only increase that perception.
But the underlying story here is still just how very hard it is to land employment for many Americans–even lawyers. For those of us working, we sometimes forget. Perhaps this story would never have developed but for that reality. Who among us hasn’t been asked to do a favor for someone struggling to find work–or even perhaps asked for a favor ourselves?
All in all, this is not the kind of news you want to see come out of the Patent and Trademark Office. Or Washington.
Getty Images made news in the copyright world this week by filing a complaint against Microsoft Corporation in the Southern District of New York for “infringing and facilitating the massive infringement of [its] copyrights” through its release of the new Bing Image Widget service. To review the full complaint, click here.
The case is significant because Getty Images, one of the premiere content companies in the nation, has directly challenged Microsoft, which runs one of handful of web browser companies, over tools that it is making available to web developers to embed images in websites. In taking on one of the key players in the technology world, Getty Images obviously stands not only to potentially enjoin Microsoft from continuing to make this technology available but also to potentially create precedent that it no doubt hopes will discourage the continued development and adoption of similar digital technologies.
As anyone who works in the digital media and content industry today knows, embedding and framing third party content has increasingly become a very widely adopted practice on the Internet, and in many cases the content being embedded and framed has not been procured through any sort of license from the third party–it has simply been “captured” through a developer tool. I definitely have been receiving an increased number of client inquiries regarding various adaptions of this practice and where the lines are on permissible and impermissible uses of these technologies. Evidently, Getty Images is also watching how the industry is evolving and believes that it makes sense from a business standpoint to invest the legal resources into procuring further clarification on where the lines are as well.
While it’s too early to predict what will ultimately happen with this case, any precedent that comes out of the case could have an impact on how the digital media industry goes forward. So, it will definitely be a dispute to watch in the coming weeks.
Twitpic announced in a blog posting today that it will be shutting down on Sept. 25th over a trademark dispute with Twitter regarding the use of the name “twitpic.” Various media outlets have also covered the announcement such as Wall Street Journal and Time.
The reporting on this story has thus far not raised many questions over the rationale provided, but as an IP lawyer, it’s hard to believe that this was the real reason to close down the business. Twitpic has apparently existed for a number of years: it is hard to believe that the company would not have been advised years ago that it was never going to secure a trademark on the name “Twitpic” and that it would not have been warned that a trademark dispute with Twitter was in its future if it went forward with this particular trademark without working out a prior agreement with Twitter. Yet, according to the Wall Street Journal, the company had attempted to register this trademark three times. Really?
A quick search of the most recent trademark registration filing for “Twitpic” reveals that the examiner issued an office action on October 23, 2013, refusing the trademark registration for “likelihood of confusion.” In response, Twitpic filed a response to the office action, arguing that the trademark should be granted due to the execution of a coexistence agreement with Telly, Inc., which was executed by the parties April 22, 2014. The examiner then approved the registration for publication. At that point, Twitter filed the foreseeable opposition to the registration being granted.
Interestingly enough, the USPTO database reveals that in the prior two filings, the application never made it past the office action stage and thus never went to publication.
But it is hard to believe that the company never anticipated that Twitter would oppose the granting of the trademark if an application ever made it to the publication stage. Moreover, even if a trademark application had never been filed, it was almost inevitable that “Twitpic” would have to change its name sooner or later if the company survived long enough to generate revenue and get on Twitter’s radar screen.
So, one can’t help but wonder if the real story behind all the media buzz was more about money and less about Twitter itself. Could it be that the start-up had yet to come up with a successful revenue model and has thus just run out of money and was looking for a convenient excuse to close down? Neither the media reporting nor Twitpic itself has released any information about any trademark infringement litigation being initiated against the company. Thus, in all likelihood, simply dropping the trademark application and changing its name would have been sufficient to resolve its current legal issues with Twitter. I would imagine any outstanding issues with Twitter could then have been easily settled. But obviously, settling the issues with Twitter would not have resolved any underlying financial problems that existed with the company. Those would have remained. And perhaps the company would have been a little harder to find rebranded under a different name that was not so closely tied to Twitter. However, I would assume its customer base would still have been intact.
The bottom line: I think there is reason to suspect that the public explanation being reported on by the media is a convenient excuse for closing down rather than the full story. What do you think?
In case you missed the headlines late last year, freelance photographer Daniel Morel was awarded a $1.2 million damage verdict against Agence France-Presse (“AFP”) and Getty Images after it was found that they willfully infringed Mr. Morel’s photos of the 2010 earthquake in Haiti. The verdict caught my attention given the fact so many clients have received demand letters from Getty in recent years alleging copyright infringement of a Getty photo.
The case is noteworthy primarily because the maximum statutory penalty available under the Copyright Act was awarded by the jury. Also noteworthy were the facts of the case, which involved an initial Twitter posting of the photos and subsequent commercial media distribution of the same photos. See a report by Law 360 of the verdict here; and a report by Reuters of the verdict here. To see Daniel Morel’s website, where a transcript from the trial is posted, click here.
Several news outlets reportedly settled with the photographer for undisclosed amounts, but AFP and Getty went to the jury with the damages question, which in hindsight was probably not the best tactical move, given the outcome.
As you might expect, AFP and Getty have already filed an appeal in the case, arguing that the verdict “constitutes a miscarriage of justice.” See the appeal filing here.
It is hard not to see the irony in the circumstances of a company, who in my opinion, is an aggressive enforcer of copyrights in photos, now finding itself on the wrong side of a verdict against a photographer also enforcing his copyrights in photos. Moreover, it is ironic to see Getty raising outrage over the calculation of damages made by the jury, given the fact I often hear the same outrage voiced over the damage calculation Getty uses in its demand letters.
Clearly, this case serves as a cautionary tale to all who have ever taken photos off social media or the Internet and distributed them to third parties, or been tempted to do so. Also, it serves as a good reminder to respect the rights of photographers in their photos, as they perform a valuable service in getting the news and images out to the world in a crisis, and they deserve to be able to make a living for their work. Apparently even big media companies need to be reminded of this from time to time. I think the jury verdict in this case probably gave them quite the wake up-call.
The U.S. Supreme Court recently issued a decision in the licensing dispute case of Medtronic Inc. v. Mirowski Family Ventures, LLC, where the Court held that the patent owner had the burden of proving infringement when the licensee files a declaratory judgment action in a patent licensing dispute.
What are the facts in this case?
Medtronic was a sublicensee of a patent license between Mirowski and Eli Lilly. The original sublicense agreement provided that, upon receipt of a notice from Mirowski that a new Medtronic product infringed a Mirowski patent, Medtronic would have the choice of either accepting Mirowski’s claims and curing the nonpayment of royalties or challenging Mirowski’s claims by filing a declaratory judgment action while still paying the disputed royalties. A subsequent agreement amended this procedure, enabling Medtronic to accumulate disputed royalties in an escrow account in the event that it decided to challenge Mirowski’s claims and file a declaratory judgment action.
In 2007, Mirowski notified Medtronic that seven of its products violated two of its patents. Medtronic disputed the claims and filed for declaratory judgment in the Federal District Court in Delaware while continuing to pay the disputed royalties in an escrow account in accordance with the terms of the sublicense agreement.
The District Court found that Mirowski had not proved infringement but had the burden of proof to prove infringement. The case was appealed to the Court of Appeals for the Federal Circuit, which concluded that a different rule applied, and that the party seeking the declaratory judgment of noninfringement bore the burden of persuasion.
The Supreme Court held that the same rule applied whether the patent owner filed an infringement suit against the sublicensee or the sublicensee seeks a declaratory judgment after being accused of patent infringement by the patent owner: the patent owner must prove that the infringement exists.
From my perspective, the Supreme Court reached the right conclusion: the declaratory judgment procedure and escrow option was put in place to allow the sublicensee to challenge the patent owner’s claims while continuing to otherwise meet the terms of the license. The fact that the sublicensee disputed the patent owner’s claims should not have shifted the burden to the sublicensee to prove that it had not infringed–it is logical to expect that the patent owner should have to prove its claims of infringement.
What is the significance of this case? The Supreme Court has now resolved the uncertainty that existed over who bears the burden of proof in a declaratory judgment action in a patent licensing dispute. The elimination of uncertainty on this issue may prompt more patent licensees and sublicensees to take the step of challenging licensors’ interpretation of their patent licenses in lieu of paying the royalties demanded of them. In light of this development, licensors who become aware of royalty dispute with a patent licensee or sublicensee should consider the merits of taking a more proactive approach to seeking a commercial resolution of such a dispute with their licensee before the licensee decides to escalate the issue to filing for declaratory judgment. Moreover, this decision may impact the negotiating dynamic in situations where a patent owners seek to enforce its patent rights on a less than enthusiastic licensee, since a heavy-handed negotiating approach by the patent owner may be more likely now to prompt the licensee to file for declaratory judgment after the ink dries on a newly executed license agreement. Patent owners engaging in such licensing negotiations should perhaps give more consideration to reaching an agreement with the reluctant licensee that is not so one-sided that the licensee will feel compelled to challenge the agreement after its execution.
If you are in the marketing/advertising business, your success depends largely on coming up with innovative new ways to promote a customer’s product or event offering. Thus, when a milestone event arises in the sports, music, or film worlds, you may be inspired to try to capitalize on those events by tying your marketing efforts to the milestone event.
There is only one problem: the names and marks associated with those milestone events are likely protected trademarks. Thus, if you launch a marketing campaign without first procuring the necessary license from the trademark owner to use the trademarks, you will likely be the recipient of a stern cease and desist letter. . . .or worse.
What kinds of marks am I talking about? Marks surrounding awards events and sport events are just some of the major events that come to mind that likely have a number of registered trademarks protecting the use of the names. I recall, for example, not too long ago that a client came to me with a cease and desist letter regarding the alleged use of the word “Grammy” in conjunction with a publicized party. According to attorney Gonzalo Mon who recently wrote an article on this issue, he has clients contemplating the use of ring-based marks and reference-based marks to the Olympics right now, any of which could be problematic if the client is not an official sponsor of such event specifically authorized to use the marks in question. While I know from my own practice that marketing professionals have a tendency to grab and use third party marks without giving much consideration to whether or not they have the right to do so, and they often fly under the radar screen in engaging in such actions, it is not an advisable practice and it may catch a third party’s attention, particularly where the third party is charging a premium rate for the use of that mark.
So, as we come up on milestone events, if you are inspired with a great marketing or advertising idea, you should always assume that the marks surrounding such an event are going to be protected and engage in some research before making use of a event-related mark or mark that might be confusingly similar to an event-related mark. How do you confirm that this is the case? Well, a simple search of the USPTO database for the name of the event in question would be a good starting point for your research. While you can absolutely run a question like this by a trademark attorney, searching the USPTO database does not require legal credentials, and I encourage all my clients to learn how to run searches themselves, as it is an easy skill to learn as a non-lawyer. Typing in the word “Olympics” for example, brings up a long list of marks, and should alert you fairly quickly to the fact that there are in fact registered trademarks surrounding the event in question that you need to be aware of. The same type of search should work for other events.
Of course, even if there are no federal trademarks in place surrounding a particular event mark, there still may be common law rights in a trademark that you might be infringing on if you use the mark without first obtaining a license, so just because your search of the database is clear, does not mean that you are free to use a particular mark. Also, you should remember that the database only searches U.S. trademarks, so there are trademarks all around the world that potentially could be a problem if the mark in question may have a worldwide platform.
The bottom line is that you should be cautious in marketing around events to ensure that you stay clear of legal problems in conjunction with those events. The success you achieve with such a marketing campaign could easily backfire and result in legal woes that far outweigh any benefits you received from your marketing efforts.
Like many cable and satellite TV consumers these days, I have been closely following the new options on the market for streaming TV service and hoping that the day will soon come when I can significantly reduce my monthly subscription costs without cutting off my access to live TV. With the cost of living and working in Silicon Valley running so high already, expensive TV service is one of those expenses I just can’t help but resent each month, especially in light of the fact I have so little time to spend watching television programming anyway. So, when I happened to come across the start-up Aereo, their business model caught my attention, as you could access a number of channels with their service for a very low monthly price. I remember thinking to myself that it was only a matter of time before there would be litigation challenging the Aereo model. I did not have to wait long before that in fact happened. As you might expect, a group of broadcasters quickly filed for injunctions. They lost in cases filed against Aereo in New York and Boston, as well as in an appeal to the Second Circuit. However, they had more success in an injunction filed against an Aereo competitor, FilmOn, in the D.C. Circuit. Due to the split circuit decisions, the dispute has already made its way to the Supreme Court and will be heard later this year.
At issue is the question of whether or not Aereo’s service publicly performs copyrighted television programs Petitioners argue that the Aereo model “would seem to be an obvious copyright violation–an entire business model premised on a massive for-profit unauthorized exploitation of copyrights where competitors’ prices are undercut because they seek authorization and pay fees” and that “Aereo offers precisely the kind of service Congress sought to prohibit when it revised the Copyright Act to define public performance to include retransmissions of over-the-air broadcasts to the public.” The other side of the argument, which the Second Circuit Court of Appeals found compelling, is the argument that the Aereo model does not infringe Petitioners’ public performance right since the transmission under the Aereo model is to a single subscriber and therefore is not a public performance. In reaching this decision, the Second Circuit looked to prior precedent interpreting the public performance right and the transmit clause of the Copyright Act in Cartoon Network LP, LLLP v. CSC Holdings, Inc., 5369F.3d 121 (2d Cir. 2008), stating that in that case the same Court had found that “in determining whether a transmission is to the public, it is important to discern who is capable of receiving the performance being transmitted” and held that a transmission of a recorded program to an individual subscriber was not a public performance.
I don’t have much of a track record in predicting how the Supreme Court will rule on a particular case, but as a technology attorney, I am more persuaded by the Aereo argument than the broadcasters’ position. I think that given all the other relevant copyright decisions in this space over the years, there is reason to anticipate that the Supreme Court should decide in Aereo’s favor. Whether they will or not, however, is another question entirely.
Obviously, the Aereo model has the major networks concerned. It has been reported that CBS and Fox are already threatening to turn their broadcast channels into cable channels, asserting that they cannot afford to provide the type of content that they are currently providing from an advertiser-supported-only business model. Professional sports leagues such as the National Football League and Major League Baseball have been reported to have also threatened to move their high-profile broadcasts such as the Super Bowl and World Series to cable, and certain cable and satellite TV companies are already exploring building services to compete with Aereo.
With all the ways to view and consume content now on the market, it was almost inevitable that we would be seeing streaming TV companies emerge on the market and that there would be litigation in an attempt to put any of the more successful models out of business. I personally have been eager to see some changes in the marketplace on how I can access live TV programming, and I’ve been frustrated at the snail’s pace that such change has seemed to occur, as so many other new technologies flooded the marketplace. Without question, a decision in this case has the potential to disrupt and transform the broadcasting landscape as it now exists. Whether or not any such disruption will be beneficial to consumers remains to be seen. As an interested consumer, I am hopeful that any change in the television marketplace that arises because of Aereo will be for the better.
As an attorney who largely represents small businesses and entrepreneurs, I have often found myself in the tough position of explaining to someone with limited resources just how difficult it was going to be to go after an infringer. Either it is simply too cost-prohibitive to go after an infringer, or the client has the resources to pursue litigation, but the damage amount makes litigation difficult to justify.
Apparently the issue is getting some new consideration by Congress and the Copyright Office, as the Copyright Office has been asked by Congress to conduct a study to:
(1) assess the extent to which authors and other copyright owners are effectively prevented from seeking relief from infringements due to constraints in the current system; and
2) furnish specific recommendations, as appropriate, for changes in administrative, regulatory and statutory authority that will improve the adjudication of small copyright claims and thereby enable all copyright owners to more fully realize the promise of exclusive rights enshrined in our Constitution.
If you are a small business or an individual who has been faced with a small copyright claim matter and has any feedback on obstacles that you encountered in dealing with the matter, or if you have any thoughts on how the current system might be changed to better address copyright small claims matters, then the Copyright Office wants to hear from you. You should submit your comments to the Copyright Office by October 19th at the submission link.
I personally would like to see changes made to better address small copyright claims matters, because I think that most copyright infringement at this point in time goes unaddressed because so little can be done about it. I feel confident that many of you feel the same. If you have any thoughts to share on this issue, please take the time to write the Copyright Office and share those thoughts, and make certain you do it in time to meet the deadline.