International Seminar on Intellectual Property Management & Commercialization

Software and IP Management (9:00-10:30)

The “Own It”Method

for the Software Based Business

Bengalooru, India

November 14, 2006

Sponsored by brain league

Part I –Economics of IP Management

The Own ItMethod of Business Growth

You or your company is in the software business

–So is everyone else

The attributes of a successful software company

–Exclusivity

Monopoly power over the code

Monopoly power over the idea

Monopoly power of the field

–Relevance

Market Relevance –most important application, tool, etc.

Social Relevance –‘hottest’game, gadget or interface

Own ItGoals

Keep the focus on Exclusivity and Relevance

–Identify the tools that give exclusivity

–Build innovation into every stage in the process

–Identify the tools that can be used to improve relevance

Develop the process to maximize the Goals

–Use intellectual property (IP) to create exclusivity

–Monitor IP to assure compliance and ongoing innovation

–Manage relevance to maximize one’s own relevance and erode the relevance of the competition

–Apply scarcity to pricing

The Keys to the Own ItMethod

A new business can only compete if it addresses an unmet need caused by changes

–to demographics, attitudes, the state of knowledge, or

–to internal system flaws such as incongruities, unexpected outcomes, flawed processes, or other innovation

A business must address the unmet need with a unique beneficial solution to the stress on the existing marketplace

The Keys to the Own ItMethod

To protect that unique aspect of the business, the company must make use of patent, copyright, trademark, contract law, trade secrets and publicity rights

A company must use the exclusive rights to create relevance in the company’s products or services in a market large enough to sustain profitability

The Keys to the Own ItMethod

The company can use marketing and branding to highlight the objective benefits and enhance the subjective relevance of the product

These steps are the prerequisites to building a successful start-up enterprise

–Without completing these steps, no new company has the ability to grow beyond the individual efforts of the company’s founder

–With exclusivity and relevance, a company started in a garage or basement can grow into a company like Apple, Intel or Google and not Pets.com

Relevance

Distinctiveness –make the product different from others

–Distinctive can be good –a better browser (with adjustable tabs)

–Distinctive can be bad –AOL’s unique dial-up service and proprietary interface

Relevant products and services

–Distinct in a positive manner

–Objectively or subjectively important to the consumer

–The “must haves”in the marketplace

Objective and Subjective or Social Relevance

Objective Relevance

–Objectively relevant items are items that fulfill basic personalor business needs

Personal -air, water, food, shelter and clothing

Manufacturing –electricity, phones, labor, materials

Subjective or Social Relevance

–Popular luxuries –such as tickets to a “hot”music concert or playoff event in sports-are successful because they are perceived as highly relevant

–Top software games, extra features on cell phones

–Psychology suggests some social relevance is an objective need

Market behavior towards relevance not based on any hierarchy of needs

Scarcity and Pricing

Scarcity –the availability of items

–Value of equally relevant items will vary with availability

The less available, the more valuable

Price minimums based on costs

–Development –the cost to design and bring to market

–Unit cost –the manufacturing, packaging and marketing

Price maximums based on relevance and scarcity

–Scarce, relevant items are the most valuable

Memory chips, gold and platinum used in computer chips

Front row seats to concerts and private screenings

“Specialized”non-consumer software

Exclusivity –Controlled Scarcity

Scarcity –limitations on availability of a resource

Sources of scarcity

–Natural scarcity: land, gold, desalinated water, etc.

–Legal scarcity: Enforcement of legal exclusive rights

Property–titles, deeds, leases, etc.

Employment–typical obligation to provide one’s service to only one employer

Governmentmonopolies and contracts

Governmentjurisdiction –criminal punishment, regulation, etc.

–IP –patents, copyrights, trademarks, trade secrets and publicity rights (marketable privacy rights)

Product Development –the Own ItMethod

IP for Maximum Competitive Advantage

Step 1 –Building exclusivitythrough IP

–Trade Secret and copyright protect software

Employment practices

Non-disclosure agreements

Negotiated and consumer license agreements

Development agreements

Encryption

Step 2 –Avoiding commodity and other mistakes

Developing original software or controlling licensed code

Clean-room requirements for software programmers

Risky Business –Joint Development Agreements

Which IP Matters for Software & IP Management

Trade Secrets

–Most important for idea development

–Employment practices, reasonable efforts to protect, etc.

Patents –Not much impact

–Available in U.S. but not many countries

–Expensive and inconsistent to enforce, but strong value

–Critical for hardware (and business methods in U.S.)

Copyrights –Primary protection for software

Trademarks –Important for marketing

Publicity Rights (marketable privacy rights)

–More than you expect, characters in games, etc.

Trade Secrets -Maximizing IP Protection

Control the Development Pipeline

Developing and Protecting the ideas

–Where do the ideas come from

Internally

–Need for employee handbooks that give the ideas to the company

–As an employee, know your rights

Externally

–Need for a nondisclosure agreement

–Need for exceptions to the nondisclosure agreement for ideas developed internally or independently

–Where did the idea come from

Stolen ideas, patents, etc. will undermine value of product and company

Control the Development Pipeline

Protect the IP in Development

Protect the ideas in the development

–Keep low engineer turnover

–Use no competes focused on the specific products and competitors

–Don’t show the work to too many people

Internally –within the company

Externally –potential clients

Clients do not really help protect IP

–Clients will share all corporate intelligence to try and negotiate lower prices

–Exclusivity works against the client; they have no loyalty

–Negotiate nondisclosure agreements, but show as little as possible

Software & IP Management

In Search of Exclusivity and Relevance

Commodities have no market value

–Clone games cannot make money

–Cheaper versions of existing software products will fail

Fears of interoperability will keep consumers with known brands

Fears of unknown sources will keep consumers from experimenting unless there is a high value

Stressors suggest the need for innovation

–Look to find problems that can be solved with new products

–Only by creating original solutions can the company separate from the competition

Companies must protect trade secrets and avoid copyright problems

Control the Development Pipeline

IP Theft -What Not to Do

Companies that got in trouble from IP theft

–Napster’s use of MP3’s meant company could not be saved

–Blackberry and many others using patents from other companies

Aggressive patent enforcement common in U.S.

Differences in patent law means different results in different markets

Stolen software a common problem for companies

–Hiring engineers because of experience at competitors

–Use of code from other products

Control the Development Pipeline

Napster v. YouTube –The Development Difference

Commonalities between Napster and YouTube

–Both built their business model on the IP theft

–Both highly popular as a social phenomenon

Differences between Napster and YouTube

–Timing: The media companies know that they can’t stop every company anymore

–Approach: YouTube always respected take down requests and policed whenever requested

–YouTube courted the content owners

Control the Development Pipeline

Napster v. YouTube –The Development Difference

Negotiation Differences

–Napster waited too long

–YouTube found Google and was willing to put much of the purchase price (rumored at $5,000,000) to settle infringement claims

YouTube had more value than Napster

–Napster’s software functionality duplicated by other sites

Peer-to-peer devalues the central site

–YouTube built its social network toward the site

Though it loses money, it had a business model

Because it had some value, it was worth negotiations

Control the Development Pipeline

Protect the IP in Development

Vaporware and industrial disinformation

–Attributes of software closely followed by competition

–Competitors try to anticipate what is coming out

–Microsoft best at it; forces companies to spend time and efforts to compete in fields it does not plan to occupy so that it has less

Ethics of vaporware

–Materiality: Cannot intentionally misrepresent to shareholders or in contracts

–Competitors not entitled to accurate plans

–Clients should not receive false promises, but general comments not inappropriate

Control the Software

Contracts and Copyright

–Software is a literary work, so it is protected when fixed

–Copyright does not protect for protections of functionality, reverse engineering, or compatibility

–Software patents not enforced in most of the world; often too slow

Contracts can provide even more protection

–End user license agreement (EULA) can limit from reverse engineering or any copying or modifications, much tighter than copyright

–Competitors not entitled to accurate plans

–Make click-wrap: require “I agree”and make terms available

Essentials of the Software License

Basics

–Term, territory, operating systems, trademarks, notices, EULA terms, representations, warranties, indemnification, and payments

Source Code License & Object Code License

–A perpetual, irrevocable and non-exclusive license to use, reproduce, modify and create derivative works of the Source Code and/or Object Code of the Software

–A perpetual, irrevocable and non-exclusive license to use, reproduce, or modify any patents that may exist

Marketing

–Bundling permitted or prohibited, press announcements

Software License –Issues in Specific Licenses

Master Licenses

–Master software, number of copies, books and records, limitations on other uses

Websites and editorial content

–Domain name ownership, linking, framing and coordinating editorial content, third party advertising

Joint development agreement

–Deliverables, revenues and expenses, technology license grants, testing and evaluation, ownership interests, documentation, commercialization, patents

Other

–Escrow and deliverables, privacy, regulated industries

Control the Software –Negotiated Contract

For software incorporated into other products

–The contract must be more carefully negotiated

–The Blizzard limitation provision makes a good start

Beware the second edition

–The agreements often assume that they are re-negotiated with each product release, but they aren’t

–Can the licensed software be used in perpetuity

–Must new products be separately negotiated

–Scope of rights critical for both licensor and licensee

Control the Software –Negotiated Contract

More concerns for licensee and licensor

–Specialized software often results in other trade secrets being disclosed

Non-disclosure agreement necessary to keep those disclosures within the scope of reasonable efforts

Licensee must take those steps seriously or contracts are insufficient

–Identify the limits placed on the software licensee

Specify if licensee is prohibited from developing its own product to become a competitor

Specify the trade secret minimum protections in place to protectthe trade secrets from general disclosure

Review employee policies, etc.

Control the Software -Clickwrap

Clickwrap from Davidson & Assocs. v. Jung:

422 F.3d 630 (8th Cir. 2005)

–YOU SHOULD CAREFULLY READ THE FOLLOWING END USER LICENSE AGREEMENTBEFORE INSTALLING THIS SOFTWARE PROGRAM.

–BY INSTALLING, COPYING, OR OTHERWISE USING THE SOFTWARE PROGRAM YOU AGREE TO BE BOUNDBY THE TERMS OF THIS AGREEMENT.

–IF YOU DO NOT AGREE TO THE TERMS OF THIS AGREEMENT, PROMPTLY RETURN THE UNUSED SOFTWARE PROGRAM TO THE PLACE OF PURCHASE OR CONTACT BLIZZARD ENTERTAINMENT CUSTOMER SERVICE . . . FOR A FULL REFUND OF THE PURCHASE PRICEWITHIN THIRTY DAYSOF THE ORIGINAL PURCHASE.

Control the Software -Clickwrap

First provision makes the contract enforceable, second provision limits the uses

List of limitations

–You may not, in whole or in part, copy, photocopy, reproduce, translate, reverse engineer, derive source code, modify, disassemble, decompile, create derivative works based on the Program, or remove any proprietary notices or labels on the Program without the prior consent, in writing, of [Company]

–Other provisions would limit the uses to number of computers, prohibit

High-Risk Strategy:

Joint Development Agreements

More common for patents than software

Allows both companies to have cross-licenses

–Creates an additional problem of which company has “exclusivity”for copyright purposes

Benefits

–Expand resources to develop software and share costs

–Increase likelihood of software’s use (great for interfaces)

Risks

–Other company may fail to deliver and slow project

–Other company may “tweak”or specialize the software making it less compatible

Additional Techniques –

Anti-Circumvention Provisions

Protecting from circumvention of copy protection provisions

–Copy Protection

Encryption and scrambling technologies

Cannot work because output is analog or beyond encryption

E.g. Since stereo speaker signal cannot be encrypted, all music files must eventually push a signal to the speakers, which will not be secure

–Encryption is an evolving science

Congress wants to separate hackers from scientists (white hats from black hats)

Trying to create laws that promote IP business without locking in technology and doing more harm than good

History of the New Legislation

WIPO Implementation –December 1996

–Beginning of the Internet revolution

–Need to thwart emergence of IP rogue states

–Need to create “effective legal remedies”for developing countries

–Need to create legislation to encourage enforcement in high-piracy states (rules on the books not enough)

U.S. Implementation –October 1998

–Need to comply with International Law, under TRIPS

–Need to simplify evidentiary issues related to copyright

–Need to shore up the “digital deadbolts”so companies will put their content onto disks

EU Implementation –May 2001

–The European Union passed the EU Copyright Directive bringing itinto compliance

Anticircumvention Techniques

Article 11 of the WIPO Copyright Treaty provides

“Contracting Parties shall provide

–adequate legal protectionand

–effective legal remediesagainst the circumvention of effective technological measures

–that are usedby authors in connection with the exercise of their rights under this Treaty or the Berne Convention and that restrict acts, in respect of their works, which are not authorized by the authors concerned or permitted by law.”

The Three U.S. Causes of Action

Protects from unauthorized decryption of a work’s security or picking of any virtual lock

–“No person shall circumvent a technological measure that effectively controls access to a [copyrighted] work….”

–Section 1201(a)(1)(A)

Prohibits trafficking in black box technology “produced for the purpose of circumventing a technological measure that effectively controls access to a work….”

–§1201(a)(2)

Prohibits trafficking in anticircumvention technology “that allow some forms of ‘access’but restrict other uses of the copyrighted work.”

–Internet streaming audio player was tweaked or circumvented to permit the downloading of that content

–§1201(b)(1)

Anticircumvention as Shield and Sword

Shield

–Designed to make digital lock-picking illegal

–Software, games, music and movies protected with encryption can use the anticircumvention laws to stop infringement early

–Should be easier to establish than the more detailed copyright claims

Sword

–Encryption can be put into any software

–Software can be put into almost any commercial product

–Software compatibility can create an artificial exclusivity thathas been exploited (Lexmark, Chamberlin, etc.)

IP for Maximum Competitive Advantage

Review: Step 1–Building exclusivitythrough IP

–Trade Secret and copyright protect software

Employment practices

Non-disclosure agreements

Development agreements and software licenses

Negotiated and consumer license agreements

Encryption and digital rights management

Step 2 –Applying the Own Itmethod to maximize commercialization through relevance

–Trademarks and branding

–Publicity Rights

–Contracts and cross-licensing

Brands & Trademarks

Why Winners Always Win

Purchaser’s dilemma (commercial or industrial)

–Software is a hard to try product

Difficult to return

Problem software can cause other problems

Learning curve for new users

Purchaser’s solution –stick with established products

–Purchase suite software relying on need for one key product

–Stick with known product even if better product in market

Purchaser’s tool –brand or trademark of the company

Trademark reflects source of goods or services, not necessarily the software development

–Acquire compatible products which have same high quality

–Ensure the user interface is truly compatible and the navigation consistent

A strong brand grows with new products

But the brand must make logical sense from one product to the next

–Intel could not branch out to children’s products

–Google has not had much impact in photos, etc.

Brands & Trademarks

Why Winners Always Win

Brand or Trademark –the Difference

Trademark –a word, symbol, sign or device designating the source of the goods

Brand –the identity identified by the trademark that incorporates the consumer experience with the products

Difference between trademark and brand

–Focus of brand is on the overall experience of the purchaser, the stability of the product, the ease of use, the “bugginess,”and the value

Relevance for software is based on brand perception

–The more valued the brand, the more relevant the new product or upgrade

Identity Products –Tomb Raider Computer Software

Manner in Which Identity is Incorporated into Products and Services

–Creation of Product Content

Autobiographies, biographies, personal websites, fan websites, and infomercials

–Endorsements and Promotions

Infomercials, videogames and websites featuring celebrities, sports-based games featuring celebrity players

–Background Uses of Identity

Photographs that viewers can recognize, names used in song lyrics, personally identifiable data that can be culled from databases, actors’images when those actors are portraying characters other than themselves (as actors rather than in theirrole as celebrities)

Two Categories of Rights Necessary

Right to create content

–Adapt, modify, edit, change, alter, merge

–Distort, select, omit, recast, transform

Right to reproduce, distribute, package, and display the final product

–In all media and formats now known or hereafter created

–To advertise and promote in all media now known or hereafter created

Anatomy of the License Agreement

Acquire the broadest definition of identity rights

–Name, likeness, signature

–Biographical information, nicknames, persona and any other attributes of identity used in connection with the following product or service

Expressly acquire identity use for an agreed-upon purpose

–Identify the product or service created or promoted

–Provide that the actual use of the identity is not subject to further approvals by the licensor of the identity

–Allow for modifications of the product or service (including newvariations of websites or sequels to video games)

–Acquire broad rights for creation, alteration, variation of the product or service

Contracts and Cross-Licensing

Extend the brand as far into the marketplace as partner companies will place your product

–OEM Software, coupons in other packages, etc.

–Joint marketing campaigns

“Intel Inside”campaign between chip and computer companies

Apple is a totally integrated product

Open interoperability

–Microsoft, Real Networks, essentially anyone other than iTunes will allow music to move from one machine to the others

–Apple does not need the help (though EU may insist)

Contract Issues of Cross-Licensing

Both trademark licenses and software contracts

–Quality control and approvals at each stage of development

–Control over development

–Protection of trade secrets

–Additional protections that trade secrets revealed cannot be used in other products

–Clear, express termination and sell-off provisions

–Anti-merger provisions (what happens if your competitor buys the other company)

The Own ItMethod -Revisited

A new business can only compete if it addresses an unmet need caused by change –stressors, environment, etc.

Address the unmet need with a unique beneficial solution for the marketplace

Use IP to protect the rights and create exclusivity –all other choices can be duplicated by competitors

Use the exclusive rights to create relevance in the products or services in a market large enough to sustain profitability

–Use trademarks and branding to highlight the objective benefits and enhance subjective relevance of the product

–Use costs to set minimum pricing but use scarcity to optimize price and number of units sold

International Seminar on Intellectual Property Management & Commercialization

Software and IP Management (9:00-10:30)

The “Own It”Method

for the Software Based Business

Bengalooru, India

November 14, 2006