Performing an Intellectual Property Audit of Copyrights
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Performing an Intellectual Property Audit of Copyrights by david l. hayesfenwick & west llpAbout The FirmFenwick & West LLP provides comprehensive legal services to high technology and biotechnology clients of national and international prominence. We have over 250 attorneysand a network of correspondent firms in major cities throughout the world. We have officesin Mountain View and San Francisco, California.Fenwick & West is committed to providing excellent, cost-effective and practical legalservices and solutions that focus on global high technology industries and issues. Webelieve that technology will continue to drive our national and global economies, and lookforward to partnering with our clients to create the products and services that will helpbuild great companies. We differentiate ourselves by having greater depth in ourunderstanding of our clients’ technologies, industry environment and business needs thanis typically expected of lawyers.Fenwick & West is a full service law firm with “best of breed” practice groups covering:n Corporate (emerging growth, financings, securities, mergers and acquisitions)n Intellectual Property (patent, copyright, licensing, trademark) n Litigation (commercial, IP litigation and alternative dispute-resolution) n Tax (domestic, international tax planning and litigation)Intellectual Property GroupFenwick & West’s Intellectual Property Group offers comprehensive, integrated adviceregarding all aspects of the ...
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| Publié par | Anjoi |
| Nombre de lectures | 10 |
| Langue | English |
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Performing an Intelle Audit of Copyrights
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About The Firm Fenwick & West LLP provides comprehensive legal services to high technology and biotechnology clients of national and international prominence. We have over 250 attorneys and a network of correspondent firms in major cities throughout the world. We have offices in Mountain View and San Francisco, California. Fenwick & West is committed to providing excellent, cost-effective and practical legal services and solutions that focus on global high technology industries and issues. We believe that technology will continue to drive our national and global economies, and look forward to partnering with our clients to create the products and services that will help build great companies. We differentiate ourselves by having greater depth in our understanding of our clients’ technologies, industry environment and business needs than is typically expected of lawyers. Fenwick & West is a full service law firm with “best of breed” practice groups covering: nCorporate (emerging growth, financings, securities, mergers and acquisitions) nIntellectual Property (patent, copyright, licensing, trademark) nLitigation (commercial, IP litigation and alternative dispute-resolution) nTax (domestic, international tax planning and litigation)
Intellectual Property Group Fenwick & West’s Intellectual Property Group offers comprehensive, integrated advice regarding all aspects of the protection and exploitation of intellectual property. From providing sophisticated legal defense in precedent setting user interface copyright lawsuits to prosecuting arcane software patents, and from crafting user distribution arrangements on behalf of high technology companies to implementing penetrating intellectual property audits, our attorney’s technical skills enable the Firm to render sophisticated legal advice.
Our Offices Silicon Valley Center Embarcadero Center West 801 California Street 275 Battery Street Mountain View, CA 94041 San Francisco, CA 94111 Tel: 650.988.8500 Tel: 415.875.2300 Fax: 650.938.5200 Fax: 415.281.1350 For more information about Fenwick & West LLP, please visit our Web site at: www.fenwick.com. The contents of this publication are not intended, and cannot be considered, as legal advice or opinion. 1997 Fenwick & West LLP. All Rights Reserved.
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Performing an Intellectual Pr operty Audit of Copyrights
Table of Contents
I. Introduction ....................................................... .......... 1
II. Audit of Copyrights ................................................... ........ 3
A. Ownership Issues: Backgr ound ........................................... 3
B. Ownership Issues: The work Made for Hire Doctrine ......................... 3
C. Ownership Issues: Joint Authorship ....................................... 8
D. Ownership Issues: Termination Rights ..................................... 13
E. Ownership Issues: Recor dation of Transfers & Security Interests .............. 15
F. Ownership Issues: Employee Agreeme nts .................................. 21
G. Ownership Issues: Summary ............................................. 24
H. Compliance with Statutory Formalities .................................... 25
I. Issues of Infringement: Rights of Third Parties .............................. 29
J. Issues of Infringement: Clean R oom Procedures ............................. 31
K. Issues of Infringement: P otential Defenses ................................. 34
III. Conclusion ....................................................... .......... 35
I. Introduction For many companies in the computer industry and other information-related industries, intellectual property may comprise a substantial, if not the major, part of the company’s assets. The company therefore has a crucial interest in ensuring that appropriate steps are taken to create, perfect and maintain intellectual property assets. Creditors lending to such companies also have an important interest in ensuring that such intellectual property assets are preserved and perfected, as creditors often wish to take security interests in the intellectual property assets of the company.
A growing number of companies, both large and small, are acquiring high-technology companies or the proprietary rights to state-of-the-art products. Such acquisitions quickly make available technology that would have taken years to develop internally and allow companies to move into market niches not otherwise available to them.
Acquiring technology-based assets, however, is somewhat more complicated than acquiring more traditional tangible assets such as buildings, finished goods or raw materials. Although these traditional assets can be physically inspected for most defects that would seriously affect their value, the value of a technology-based asset often depends more on how well protected it is by intellectual property rights and how well it functions. Companies acquiring intellectual property assets—from consultants by assignment, in mergers and acquisitions, and by license—must therefore ensure that they can acquire good and unencumbered title to intellectual property rights and that such title is perfected and priority established vis a vis subsequent transferees.
Companies that own intellectual property assets, companies that desire to acquire such assets from a third party, and creditors lending to technology-based companies all have a need for a reliable mechanism to determine the ownership, scope and status of intellectual property rights. An “intellectual property audit” of the company provides such a mechanism and enables the detection of defects in intellectual property rights that may affect the value of the company’s assets so that corrective measures may be taken.
An intellectual property audit is appropriate before a significant acquisition of technology— through merger, stock purchase or other acquisition of assets, or by license or the taking of a security interest. An audit should also be performed in the early stages of a technology company’s formation to institute systematic procedures for protecting and perfecting intellectual property rights, and at critical junctures in a company’s life cycle to ensure the continuing adequacy of such procedures and to detect defects therein.
An intellectual property audit is also appropriate in conjunction with development of, or due diligence in connection with the acquisition of, a major new product, particularly if such product carries with it a demonstrable risk of infringement of the intellectual property rights
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of others. Such risk might be especially high, for example, in the development of a “clone,” “workalike” or “compatible” product. An audit might be necessary to institute, or to review the adequacy of, “clean room” procedures used in the development of such a product to reduce the risk of infringement of third party rights. Clean room procedures are discussed in detail below.
Finally, an intellectual property audit of limited scope may be necessitated in response to a change or new development in the law. For example, a new case decision expanding or clarifying the scope of protection afforded by an intellectual property right—such as the scope of copyright protection for computer program user interfaces or the scope of patent protection for computer program algorithms—may necessitate review of existing products for possible infringement of the rights of others.
The remaining sections of this article provide a detailed illustration of the types of areas of inquiry that can and should be examined in the course of an intellectual property audit using copyrights as an example. Copyrights have been selected for use as an illustrative example for the following reasons:
The full range of the general types of areas of inquiry that might be the subject of an intellectual property audit—issues of ownership, recordation of transfers, perfection of security interests, compliance with statutory formalities, infringement of third party rights, and potential defenses to charges of infringement—can be readily illustrated using copyrights as an example.
Copyrights have long been and continue to be one of the most important forms of intellectual property protection for software. Copyrights will remain of central importance for the protection of works emerging out of new areas of technology, such as multimedia works that combine software technology with copyrighted visual, textual and other artistic content, and digitized works distributed through the Internet and other on-line channels.
with many important decisions in the last few yearsThe copyright case law is ripe that increase the need for fulsome audits and affect the scope and types of issues that must be addressed in the audit.
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II. Audit of Copyrights A. Ownership Issues: Backgr ound One of the most important areas of investigation with respect to an audit of copyrights is that of ownership. The most fertile areas for potential problems occur when consultants have been involved in the creation, in whole or in part, of a company’s product. Use of consultants is quite common in the computer and entertainment industries. When a consultant is involved, at least three potential ownership problems arise: may own title to the work under the “work made for hire” doctrine.The consultant consultant may be a joint owner of the work under rules of copyright jointThe authorship. be able to exercise termination rights afforded by the copyrightThe consultant may statute, enabling the consultant to terminate any transfer of title or license rights after approximately thirty-five years. Each of these problems is discussed in a separate subsection below. There has been a great deal of important new case law in the last few years relating to copyright ownership issues. Because of its importance to intellectual property audits of copyright ownership issues, this case law is discussed at some length. B. Ownership Issues: The Work Made for Hire Doctrine 1 . T h e C o n c e p t o f “ A u t h o r s h i p ” Section 201 of Title 17 of the United States Code (the copyright statute) provides that copyright in a work of authorship vests initially in the “author” of the work. “Author” is a legal term of art: Works Created by Individuals.For works created by individuals not acting within the scope of employment of another or acting as a commissioned author, the individual is the “author” of the work and the owner of the copyright, which comes into existence automatically upon creation of the work and its fixation in a tangible form. Joint Works.authors of a joint work are co-owners of copyright in the work.The Section 101 of the copyright statute defines a “joint work” to be a “work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole.” Any joint author may exploit the copyright in the joint work without permission of the other author(s), but absent an agreement otherwise, each author must account to the other author(s) for any profits derived from exploitation of the work.
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Contributions to Collective Works.Copyright in each separate contribution to a collective work is distinct from copyright in the collective work as a whole, and vests initially in the author of the contribution. In the absence of an express transfer of the copyright or of any rights under it, the owner of copyright in the collective work is presumed to have acquired only the privilege of reproducing and distributing the contribution as part of that particular collective work, any revision of that collective work, and any later collective work in the same series. Works Made for Hire.The “work made for hire” doctrine constitutes the major statutory exception to the fundamental principle that copyright ownership vests in the individual who writes a work. In the case of a “work made for hire” (defined in the next subsection), the employer or other person for whom the work was prepared is considered the “author,” and therefore the copyright owner, of the work. 2 . S t a t u t o r y D e f i n i t i o n o f “ W o r k M a d e f o r H i r e ” Section 101 contains a two-prong definition of a "work made for hire": (1) a work prepared by an employee within the scope of his or her employment; or (2) a work specially ordered or commissioned for use: [a] as a contribution to a collective work, [b] as a part of a motion picture or otheraudiovisual work, [c] as a translation, [d] as a supplementary work, [e] as a compilation, [f ] as an instructional text, [g] as a test, [h] as answer material for a test, or [i] as an atlas, if the parties expressly agree in a written instrument signed by them that the work shall be considered a work made for hire.
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The principal issues under the first prong of this definition are whether the individual preparing the work for the hiring party qualifies as an “employee” of the hiring party, and, if so, whether the work was prepared “within the scope of employment.” Each of these issues is discussed below. With respect to the second prong of the “work made for hire” definition, the Second Circuit recently held inPlayboy Enterprises, Inc. v. Dumasthat the agreement that a commissioned work will be a work made for hire must be reached befor e the work is created. The requirement that such agreement be in writing may, however, be satisfied by a later writing confirming the earlier agreement. But the Seventh Circuit has required the writing before the commissioned work is created. The Second Circuit further held in theDumascase that in order for a work to be “specially ordered or commissioned” within the meaning of the second prong, the hiring or commissioning party need not have or exercise artistic control over the work. Rather, the issue is whether the “motivating factor” in producing the work was the commissioning party’s request, an inquiry which is essentially equivalent to asking whether the work was created at the “instance and expense” of the commissioning party. 3 . T h e M e a n i n g o f “ E m p l o y e e ” The United States Supreme Court, inCommunity for Creative Non-Violence v. Reid, narrowed significantly the circumstances under which a third party who is not a regular, full-time employee can be considered an “employee” within the meaning of the first prong of the work made for hire definition. Before the Supreme Court’s decision inCCNV v. Reid, the lower federal courts had developed three distinct approaches to judging when a third party could qualify as an “employee” within the meaning of the first prong of the work made for hire definition: Test.The Control”liberal approach to the work made for hire doctrineThe most “ was developed by the Second Circuit, which adopted a rule under which even an independent consultant could be an “employee” within the meaning of the work made for hire definition if the independent consultant “were sufficiently supervised and directed by the hiring party.” Other courts adopting the Second Circuit’s approach had applied the test in one of two ways. Some required that the hiring party have had only the right to control the day to day specifics of the creation of the work. Others required that the hiring party have actually exercised day to day control in the authoring of the work. The Test of Common Law Agency.Circuit and the D.C. Circuit adopted anThe Fifth “agency” test, holding that in order to qualify as an “employee” within the work
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made for hire doctrine, the party producing the work at issue must be an “employee” of the hiring party within the meaning of common law agency rules. Under common law agency rules, the right to control the work of the hired party is one factor to be considered in establishing an agency relationship, but is not by itself determinative, as it was under the “control” test developed by the Second Circuit. The Strict Literal Approach.Circuit adopted a strict literal approach, rulingThe Ninth that to qualify as a work made for hire, the party creating the work must be a formal, salaried employee (in the ordinary sense of the term) of the party requesting that the work be prepared. 4 . T h e C C N V C a s e In 1985, the Community for Creative Non-Violence (CCNV) entered into an oral agreement with Reid, a sculptor, to produce a statue dramatizing the plight of the homeless. After the completed work was delivered, the parties, whose agreement did not address copyright in the sculpture, filed competing copyright registration certificates. CCNV claimed copyright under the work made for hire doctrine.
The Supreme Court, noting the divergent split that had developed in the lower courts concerning the meaning of the two prong definition of work made for hire, concluded that general common law agency principles must be first applied to determine whether the work was prepared by an employee” or independent consultant. If prepared by an “employee,” “ then the first prong of the work made for hire definition governs, and the employer is deemed the “author” and copyright owner of the work. If under common law agency rules the hired party does not qualify as an employee, then the work can be a work made for hire if and only if it satisfies the requirements of the second prong of the definition. Thus, the Supreme Court concluded, contrary to the approach of some of the lower federal courts beforeCCNV, that the two prongs of the work made for hire definition are mutually exclusive. The Supreme Court noted that the following factors are among those that are relevant under rules of common law agency in determining whether a hired party qualifies as an “employee,” although the Court noted that this list of factors is not exhaustive, nor is any one factor determinative: [1] the hiring party’s right to control the manner and means by which the work is accomplished;
[2] the skill required; [3] the source of the instrumentalities and tools;
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[4] the location of the work; [5] the duration of the relationship between the parties; [6] whether the hiring party has the right to assign additional projects to the hired party; [7] the extent of the hired party’s discretion over when and how long to work; [8] the method of payment; [9] the hired party’s role in hiring and paying assistants; [10] whether the work is part of the regular business of the hiring party; [11] whether the hiring party is in business; [12] the provision of employee benefits; [13] the tax treatment of the hired party. TheCCNVas to affect all past and existing relationshipstest is to be applied retroactively so among authors and hirers. 5 . T h e N e e d f o r W r i t t e n A s s i g n m e n t s f r o m C o n s u l t a n t s TheCCNVcase significantly narrows the circumstances under which a hired work will be deemed to be a “work made for hire.” Most independent computer programmers and computer consultants will probably not fall within the definition of “employee” under common law agency rules. Moreover, software does not fit generally into any of the nine enumerated categories of the second prong of the definition of work made for hire. Although some programs prepared by independent consultants might be characterized as a “translation” (from one computer language to another, for example), as a “supplementary work” (such as an “add-in” program that works with another program), as part of an audiovisual work (when a consultant creates screen displays, for example), or as a collective work (when a consultant creates a segregable module, such as interface code that is distinct from the main “engine” code), many—indeed probably a majority—of computer programs prepared by independent consultants will probably not fall into the nine enumerated categories of the second prong of the definition. The practical result is that most independent consultants will own the copyright in the work that they produce, absent a written agreement that transfers ownership of the copyright to the hiring party. Accordingly, it is crucial that written agreements assigning ownership of the
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work and all intellectual property rights therein to the hiring party be executed befor e commencement of any work on a project by an independent consultant. An intellectual property audit of copyrights should ensure that such written agreements exist. If they do not, remedial action must be taken to secure them. C. Ownership Issues: Joint Authorship As noted earlier, section 101 of the copyright statute defines a “joint work” as a “work prepared by two or more authors with the intention that their contributions be merged into inseparable or interdependent parts of a unitary whole.” A majority view has developed in recent cases that in order to qualify as a “joint” author, one must contribute copyrightable authorship to the work, not merely ideas or other noncopyrightable contribution. 1 . R e c e n t C a s e L a w (a)Ashton-Tate Corp. v. Ross The case ofAshton-Tate Corp. v. Rossis the leading case in the Ninth Circuit concerning ownership of joint works. That case involved Ashton-Tate’s spreadsheet product “Full Impact.” In 1984 two programmers, Richard Ross and Randy Wigginton, decided to collaborate on the development of a computer spreadsheet program for the Apple Macintosh computer. Ross wrote the “engine,” or computational portion of the product, and Wigginton wrote the “user interface” portion of the product. In the course of a “brainstorming” session between the two during development of the spreadsheet program, Ross gave Wigginton a handwritten list of user commands on a sheet of paper, organized into groups of subcommands, that he thought the program should contain. In 1985, Ross and Wigginton began to disagree about how they would publish and market their new program, which the court refers to in its opinion as the “MacCalc prototype.” Ross wanted to publish the product through his company, Bravo Technologies. Wigginton wanted to use a more established company, and approached Ashton-Tate. When Ross found out that Wigginton had approached Ashton-Tate, the two had a falling out and decided to go their separate ways. Wigginton took his user interface code from the MacCalc prototype to Ashton-Tate, where it was combined with an engine already owned by Ashton-Tate known as “Alembic,” to create the “Full Impact” product. Ross took his engine from the MacCalc prototype and wrote new user interface code for it to create a competing spreadsheet product which he marketed as “MacCalc.”
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