Monday 14 September 2015

Electronic Frontier Foundation Successful in DMCA Take-Down Ninth Circuit Case But Issues Remain

The U.S. Court of Appeals for the Ninth Circuit (with jurisdiction over federal appeals in California and several other western states) issued an opinion in Lenz v. Universal Music Corporation.  The Ninth Circuit held that before submitting a Digital Millennium Copyright Act take-down notice a content holder must determine that a use was not a fair use.  The Lenz case involved a take-down notice based on a portion of a Prince song playing during a posted video of Ms. Lenz's children playing.   The Electronic Frontier Foundation, that represented Ms. Lenz with Keker and Van Nest, noted that the decision is particularly important given the upcoming Presidential election and the amount of critical content that may be subject to efforts to censure.  However, the Ninth Circuit also stated that:

To be clear, if a copyright holder ignores or neglects our unequivocal holding that it must consider fair use before sending a takedown notification, it is liable for damages under § 512(f). If, however, a copyright holder forms a subjective good faith belief the allegedly infringing material does not constitute fair use, we are in no position to dispute the copyright holder’s belief even if we would have reached the opposite conclusion. A copyright holder who pays lip service to the consideration of fair use by claiming it formed a good faith belief when there is evidence to the contrary is still subject to § 512(f) liability. . . .

In order to comply with the strictures of § 512(c)(3)(A)(v), a copyright holder’s consideration of fair use need not be searching or intensive. We follow Rossi’s guidance that formation of a subjective good faith belief does not require investigation of the allegedly infringing content. See 391 F.3d at 1003, 1005. We are mindful of the pressing crush of voluminous infringing content that copyright holders face in a digital age. But that does not excuse a failure to comply with the procedures outlined by Congress.

The Ninth Circuit went on to later hold that “willful blindness doctrine may be used to determine whether a copyright holder “knowingly materially misrepresent[ed]” that it held a “good faith belief” the offending activity was not a fair use.”  Notably, the Ninth Circuit briefly touched on the usage of software to discover potentially infringing content, but expressly declined to address the important issue:

We note, without passing judgment, that the implementation of computer algorithms appears to be a valid and good faith middle ground for processing a plethora of content while still meeting the DMCA’s requirements to somehow consider fair use. Cf. Hotfile, 2013 WL 6336286, at *47 (“The Court . . . is unaware of any decision to date that actually addressed the need for human review, and the statute does not specify how belief of infringement may be formed or what knowledge may be chargeable to the notifying entity.”). For example, consideration of fair use may be sufficient if copyright holders utilize computer programs that automatically identify for takedown notifications content where: “(1) the video track matches the video track of a copyrighted work submitted by a content owner; (2) the audio track matches the audio track of that same copyrighted work; and (3) nearly the entirety . . . is comprised of a single copyrighted work.” . . . Copyright holders could then employ individuals like Johnson to review the minimal remaining content a computer program does not cull. . . . During oral argument Universal explained that service providers now use screening algorithms. However, we need not definitively decide the issue here because Universal did not proffer any evidence that—at the time it sent the takedown notification to Lenz—it used a computer program to identify potentially infringing content.

The value of copyrights (and trademarks) rely upon cost-effective enforcement for sure.  And, the issue of automated processing of analysis of trademark and copyright infringement is an important one.  Notably, the U.S. does not have an analogous statutory take-down procedure for trademarks as well.  However, websites are known to follow the basic procedures of the Digital Millennium Copyright Act when trademark owners allege trademark infringement based on third party posting of content on a website.  Trademark owners would be wise to consider whether to follow the Lenz case before issuing a trademark take-down notice. 

Saturday 12 September 2015

The U.S. Presidential Race and Pharmaceutical Pricing (and More)

The U.S. Presidential Race is pressing ahead.  I’ve written a bit about Donald Trump and the value of his name, here.  Trump has continued to receive a mixed response to his ideas about immigration and has come under increased fire from his party.  Notably, (mostly) conservative commentator Charles Krauthammer recently confounded conservative talk-show host Bill O’Reilly of Fox News by making the case that Trump’s “rounding people up for deportation and possible reimportation” was not only illegal, but morally wrong (and prohibitively expensive).  Krauthammer pointed to the heart-breaking Elian Gonzalez episode.

The number two democratic candidate, Senator Bernie Sanders has introduced a bill in Congress designed to lower the cost of pharmaceuticals (press release).  The fact sheet is here.  While the bill apparently allows the negotiation of drug prices under the Medicare Part D prescription drug program, it also allows prescription drug importation from Canada.  Notably, “The bill also directs the United States Trade Representative to reject provisions in the negotiation of any trade agreement that would raise drug prices in the U.S., extend periods of patent exclusivity, or remove flexibilities in U.S. law regarding drug pricing.”  Additionally, the bill:

would prohibit anti-competitive arrangements between brand and generic drug makers where the brand name drug manufacturers pays the generic manufacturer to delay bringing their generic alternative to market. According to the FTC, these anticompetitive deals cost consumers and taxpayers at least $3.5 billion in higher drug costs every year. In FY 2012, the FTC found that there were 40 potential pay-for-delay deals involving 31 branded products with combined U.S. sales of $8.3 billion.

Finally, the bill also would terminate any market exclusivity if fraud is demonstrated, which would include “off-label promotion, kickbacks, anti-monopoly practices, and Medicare fraud.”  Interestingly, the bill further requires:

pharmaceutical companies to publicly report information that affects drug pricing, including the total costs incurred for research and development and clinical trials, as well as the portion of drug development expenses offset by tax credits or paid by federal grants.

The legislation also requires drug companies to report not only the price information charged to federal payers, but also requires companies to submit prices, profits, and sale information in other countries in which those products are sold.

The additional information will likely set the stage for more criticism about the current systemMore information about the subsidization of federal research through the Bayh-Dole Act for prescription drugs, particularly biologics, will be interesting.  The bill in its entirety can be found, here.

Tuesday 8 September 2015

Lex Machina's Copyright Litigation Report

Following up on its Trademark Litigation Report, IP data analytics firm Lex Machina has recently released its Copyright Litigation Report (“Report”).  The Report reviews and gleans insight from copyright litigations filed in the U.S. Federal District Courts in the last five years.  The Report divides its analysis between “ordinary copyright” litigation as distinguished from “file sharing” litigation.  Notably, in 2014, there were 2138 “ordinary copyright” litigation cases filed and 2127 “file sharing” litigation cases.  Interestingly, the file sharing cases have spiked in the first half of 2015 to 1700.  The Report defines “[f]ile sharing cases . . . as copyright cases involving claims of infringement for BitTorrent/P2P file sharing brought against John Doe(s), anonymous defendants, their IP addresses, or Internet Service Providers (ISP).”  The top three federal districts for copyright filings include: the Central District of California, first; the Southern District of New York, second; and the Northern District of California, third.  The two districts in California dominate the filings with almost 2,500 since 2011 in the Central District of California (Los Angeles) and 400 since 2011 in the Northern District of California (San Francisco/San Jose/Palo Alto).  The Southern District of New York had 1,061 cases filed since 2011.  The Report notes that:

Textile pattern litigation has risen greatly: looking at four leading plaintiffs in the space (Star Fabrics, Unicolors, L.A. Printex, and United Fabrics Int’l.) case filings have increased: from 67 in 2011 and 62 in 2012, to 87 in 2013, and 106 in 2014 (with 95 cases filed through June 30, 2015). Since 2009, these four parties have filed 546 cases. These companies are represented by the Doniger Burroughs law firm, causing that firm to be the top copyright plaintiffs firm as discussed below.

The Report further notes that:

Top plaintiffs include companies in the music (Broadcast Music, Sony/ATV Songs, Songs of Universal, UMG Records, EMI, and more), software (Microsoft), fashion (Coach), and textile  patterns (Star Fabrics) industries.

Top Defendants include retailers (Ross Stores, TJX (TJ Maxx), Amazon, Burlington Coat Factory, Rainbow USA, J.C. Penny, Sears, Forever 21, Wal-mart, and Nordstroms), music labels (Universal Music, Sony Music Entertainment, UMG Recordings), and publishing / education (Pearson Education and John Wiley and Sons).

The Report also states that fair use is “usually” resolved by summary judgment and includes other interesting findings such as, “About three quarters (72.9%) of those who successfully contest ownership / validity do so at summary judgment.”  In discussing file sharing, the Report states that many file sharing cases are brought by “erotic website owner” Malibu Media—around 4,322 cases.  On a very controversial issue—statutory damages in copyright cases, the Report notes that, “The District of Oregon, despite seeing 8 cases, awarded a median of less than $1,000 in statutory damages for consent/defaults, significantly less than the other busy districts. The Southern District of Indiana has the highest such median award ($51,800, 11 cases).”  The Report contains a wealth of interesting information and is available, here.  Enjoy!

Friday 4 September 2015

Intellectual Ventures: out of sight, out of mind, and maybe that is a good thing for the company

This blogger has begun to wonder whether the onset of late middle age carries with it a bit of clairvoyance. On several occasions over the past several months, he has recalled a person or entity, with whom he has had no contact or information for an extended period of time, only to be reconnected very soon thereafter. And so it was, once again yesterday evening. The object of his thoughts was Intellectual Ventures (IV). It seemed to him that the goings-on of IV were barely in the headlines (or even buried in an inside hard-copy page or on-line sub-link). “What is happening with the company?”, he thought, as he dozed off for the evening.

Lo and behold, he woke up to a brief item that appeared on, under the caption, “Capital One wins again against Intellectual Ventures patents”. And so it was reported:
“The increasingly aggressive litigation strategy of Intellectual Ventures, one of the world's biggest patent owners, took another hit on Wednesday as a U.S. court canceled two of its patents in a dispute with Capital One Financial Corp.

U.S. District Judge Paul Grimm in Greenbelt, Maryland, agreed with Capital One's attorneys from Latham & Watkins that the two patents related to business data processing were merely abstract ideas and could not be patented. He overturned the findings of a special master, who had previously recommended that the patents be found valid.”
Let’s try to put this into context. IV is well known for its strategy of purchasing tens of thousands of patents, partnering with various entities to obtain access to further patents, and maintaining an R&D staff whose goal is to generate further patents. In doing so, IV became the owners of the one of the largest portfolios of patents in the world. The primary aim in accumulating these points was to enter into licensing arrangements. At the outset, the company maintained a public position that litigation was not a preferred means of exploiting its patents. IV was either reviled or admired, depending upon whom you asked, in seeking to monetize knowledge in this manner. What was unconvertible was that IP was the subject of extensive media coverage.

And then—certain developments took hold. Outside observers began to question whether IV’s licensing model made business sense; perhaps as a hedge, the company has increasingly “ventured” into exploring how its patent knowledge can be used as basis for product development and creating new companies; the company announced substantial lay-offs about a year ago while in parallel establishing a network of approximately 25,000 independent inventors who submit proposals based on their idea with the goal that IV will monetize these ideas and pay the inventor a royalty, and the company has become more active in litigating its patents (as seen from yesterday’s report, not always successfully). Thus IV has seemingly become an object of less immediate media interest while it takes steps to become a slightly more conventional IP-based company.

The compelling question is whether all of this portends a brighter future or rather a grab-bag of measures adopted when the company’s original business model failed to pan out as intended. Ask Edward Jung, IV’s chief technology officer and co-founder stated, “We have built an engine that can solve big problems.” As such, the company is simply proceeding with its long-term plans. Under this view, whether or not the next phases of the company’s activities are as compelling, media-wise, would seem to be irrelevant. In the absence of any dramatic IV-based headlines in the near future, this blogger will likely call on his imagined powers of clairvoyance to revisit the issue.

Thursday 3 September 2015

Reducing risks in VC investments Part II: investing in software

Here's the second part of a two-part feature on venture capital, risk and investment, by Martin Callinan (Source Code Control) and Kate Andreeva (Protecode). Their first post dealt with general issues regarding due diligence. The sequel, below, focuses on the special issues facing anyone thinking of investing in innovative software.

Technology risk
Not just the software: the business
strategy must be robust too
Following the strategy review comes a technology review. In the case of a software-driven enterprise, the focus is typically on the ability of both the software and the development team to deliver on the product roadmap in line with the investor’s timelines. There will be a detailed review of the software architecture, code quality, software engineering quality, scalability, and robustness. 
If the company is a software start-up, an expected pre-requisite is that software development leverages open source software. There may well be valid reasons why a start-up would use open source software but, in the due diligence of a deal flow, the start-up will need a clear and strong justification as to why open source software has not been used. 
The reality is that many young companies do not understand the value of intellectual property and risks that can be engineered into software applications.  The types of risks that investors will look for are: 
  • Software architecture, scalability, and extensibility
  • Exposure to third-party platforms
  • IP value: an objective view of the software’s unique value in the market
  • IP and patent evaluation – are there any patent infringements?
  • Third party dependencies
  • Open source software risk exposure
To identify these technology risks, typically a third party specialist will be contracted to perform a source code review. This review can be initiated by the technology organisation before seeking investment, by the VC or private equity organisation as part of the due diligence process, or both. If the organisation goes into a funding exercise without visibility of the quality of their code and associated risks, there is a good chance that investors will view the investment as risky, regardless of the functionality of the technology in question 
Why due diligence should include an independent source code review
Apart from identifying current issues in the source code, such as licensing irregularities, problematic intellectual property, or potential security vulnerabilities in software components, which typically can be remedied, reviewing the source code can identify inefficiencies and flaws in the development process.  It can also identify the need to have a proper code inspection process during the development cycle, thus eliminating problems before they arise. 
It may be appropriate to create an open source software adoption process with proper tooling, which can help lower compliance costs, not to mention minimising disruptions during key transactions. Similar to bugs in software, it is far more efficient and cost-effective to catch issues early. 
Before discussing source code reviews it is important we are clear what we mean by “source code.” 
What is source code? 
Source code is a set of programming language statements and commands a software developer creates that becomes part, or all, of the applications that use website or device runs. There are a plethora of languages used by developers such as C, C++, C#, Java, or scripting languages such as JavaScript, PERL, Python, or PHP. The source code is compiled into an executable which the target device will execute.
What is a code review or audit? 
A code review or audit should be performed by an independent third party specialist. VC and private equity firms are unlikely to have these skills in-house. A software company seeking investment is however likely to have somebody in-house with the skills needed to perform the review – but that person may not be able to produce a reliable and objective report. 
Why is a code review imperative? 
Developers today rarely code a complete application from scratch. Applications are made up of components of code from a variety of sources which are stitched together to create the finished application. This makes for dynamic and agile development, but with it comes a number of inherent risks. Each component will have a number of attributes, such as how it is licensed and its version. 
Outside of the function of the application(s), investors need to have details of the make-up and provenance of the code components in the following areas: 
  • Intellectual property and licensing
  • Security of the software
  • How the software be maintained and supported
  • The capabilities and maturity of the components being used
  • Ability to integrate with other applications
  • Quality of the components that make up the application
  • Innovation – if the application be evolved over time
  • Viability of the open source community around the components being used
Fundamentally, the review boils down to assessing the overall quality and consistency of the code. The source code is an indicator of the quality of the organisation seeking investment. Software development is a creative exercise and developers should be allowed to express their personal style and approach, but in line with the organisation’s standards which all developers should follow. 
The code audit process 
First, a non-disclosure agreement (NDA) must be in place between the reviewer and the organisation. Once the NDA is in place, the reviewer will question key stakeholders in the organisations to ensure there is a clear understanding of the reasoning behind the audit and the organisation’s environment, such as the size of the portfolio, languages, and tools in use particularly any automatic code generators. A Statement of Work is then produced and agreed upon. This includes:
  • A breakdown of the software portfolio into audit segments 
  • Full automated source code scanning, analysis, and reporting 
  • Resolve copyrights, standard headers, and author tags discovered in the portfolio 
  • Analyse, verify modules, and issue regular audit progress reports 
  • Quality review and sign off of licensing and copyright attributes of every software file in the software portfolio 
  • Delivery of audit report(s), review of the reports.
The report will be reviewed and signed off by the organisation's management. Once signed of the final reports will be completed and delivered to the organisation. The reports will include:

  • Audit Report: a high level executive report, containing information and graphic representation of licences, copyrights, OSS projects, security vulnerabilities, and encryption content within the software portfolio.
  • Overview Report and Detailed file-by-file Reports: verified machine-generated reports on the software portfolio. The overview report should be delivered in pdf format. A detailed file-by-file report should be delivered in in CSV (readable by Microsoft Excel application) format.
  • Concatenated Licence List report: containing a consolidated text of all available licences within the software portfolio in pdf format.
  • Security Vulnerability Report: a cross reference of all security vulnerability information as reported by the National Vulnerability Database in pdf format.
  • Encryption Report: a list of open source software projects detected in the portfolio that could be subject to export control, in pdf format.
About the authors
Martin Callinan has over 20 years’ experience in the software industry with a focus of Software Asset Management, IT Governance, and risk avoidance. He is currently the director at Source Code Control. Martin contributed to Working Group 21, the group responsible for authoring Standards relating to Software Asset Management, such as ISO/IEC 19770-1. In the past, he worked for Microsoft Limited, FrontRange Solutions, Centennial Software, Snow Software, and Express Metrix Limited.

Kate Andreeva is the Director of Solutions at Protecode and has over 15 years’ experience in the technology industry as an engineer and sales professional. With a background in electrical engineering and software development, Kate has honed her skills at companies including Performance Technologies, Level Platforms, Klocwork, and Coverity.

Wednesday 2 September 2015

Reducing risks in VC investments Part I: risk and due diligence

If only ...
Here's the first part of a two-part feature on venture capital, risk and investment, by Martin Callinan (Source Code Control) and Kate Andreeva (Protecode). This post deals with general issues regarding due diligence, which this blogger regards as a small headache that one suffers in order to avoid a heavy hangover at a later stage. The second post, which will be published tomorrow, focuses on the special issues facing anyone thinking of investing in innovative software.
What should be included in the due diligence process?
The rapid pace of innovation in the technology sector attracts both venture capital (VC) and private equity investment into UK companies, with the bulk of investment in London-based organisations. The first quarter of 2015 saw London technology smash previous funding records. The amount raised by London companies comprises 80% of all UK companies with a value of $856.7m.With the technology sector being so buoyant, investors are inundated with deal flow, which influences the way investors exercise risk assessments. Early stage investors would review a few good companies each week. With such a competitive landscape, the challenge for technology entrepreneurs is getting the attention of investors. Key to this is clearly presenting the company’s strategy. A solid business plan is important but, if the overall strategy is weak, investment is unlikely to result.
Risk versus reward 
VCs are cautious with their investment money with good reason. Generally, they take enormous risks on untested ventures which they hope will eventually transform into the next big thing. With mature organisations, the process of establishing value and the prospect of a sound investment is reasonably straightforward, as there is a track record of sales, profits and cash flow with early stage ventures, VCs will delve deeper into the business, the opportunity, and the underlying technology behind the business.

Key considerations by late round investors include
  • Management: who is the team behind the organisation and what is its track record? 
  • Size of market: demonstrating the target market opportunity which will indicate the returns investors might expect from any investment. 
  • Product quality: investors want to invest in a great product with a competitive edge that is long-lasting and sustainable. 
  • Current revenue status of the early stage company. 
  • Generation of actual and pipeline sales prior to any investment. 
  • The risks: VCs take on risk; their skill as investors is understanding all risks and making fully informed decisions for a successful outcome. 
The entrepreneur needs to understand that not all money is the same and not all funding sources are equal. The entrepreneur must carefully consider the implications which may follow from the investor and other requirements of various financing sources. Some examples:
  • Require board member status for investors.
  • Require the employment of advisors.
  • Require the creation of an advisory board.
  • Investor invests and observes, but does not play an active role.
Business risk 
The business risk investors look at will depend on whether it is an early stage investment or a late round investment. 
The skill of early stage investment funds is being able to identify the potential of a technology even if the product (today) is not right or needs significant evolution to become successful. This way allows an early stage investor to maximise its return while minimising its initial investment. 
Outside of the technology, early stage investors will view the current revenue status of the early stage company to decide which investment fund(s), if any, the company would fit into. 
Late round investors would, by nature of the investment, seek clarity in the company’s business plan, which would include:
  • Is this the right product for today and the future?
  • Is there enough money in the fund to fully meet the opportunity?
  • Is there an eventual exit from the investment, a chance to see a return?
  • What are the regulatory or legal risks?
About the authors

Martin Callinan has over 20 years’ experience in the software industry with a focus of Software Asset Management, IT Governance, and risk avoidance. He is currently the director at Source Code Control. Martin contributed to Working Group 21, the group responsible for authoring Standards relating to Software Asset Management, such as ISO/IEC 19770-1. In the past, he worked for Microsoft Limited, FrontRange Solutions, Centennial Software, Snow Software, and Express Metrix Limited.
Kate Andreeva is the Director of Solutions at Protecode and has over 15 years’ experience in the technology industry as an engineer and sales professional. With a background in electrical engineering and software development, Kate has honed her skills at companies including Performance Technologies, Level Platforms, Klocwork, and Coverity.

Tuesday 1 September 2015

Patent analytics for business and finance: a handy information source

But how could Einstein have foreseen
computerised processing of Big Data?
Covent Garden, London-based Aistemos is one of a number of companies providing services and expertise in the field of patent analytics. Its objective is to organise intellectual property data of all kinds in such a way as to make it intelligible to, among others, those who buy and sell IP rights, those who finance those deals and anyone who seeks a clear view of the strengths, weaknesses, currency and dynamics of the IP portfolios of other players in the same market.  Aistemos is also a supporter and a prime mover behind the launch earlier this summer of ORoPO -- the Open Register of Patent Ownership.

This blogger, who is a member of the Aistemos Advisory Board, has been helping his friends at Aistemos to build and sustain a cheerful, user-friendly weblog that is designed to provide comment and insight into IP analytics and what might be termed adjacent topics. He is also moderating the company's LinkedIn Group, which seeks to offer a community resource for the discussion of Big Data, analytics and other topics of mutual concern. The company's Twitter account, also under this blogger's supervision, is strictly professional.

A handy check-list of items posted on the Aistemos weblog over the month of August can be found here.