Chapter 14

Pragmatic: When Attorneys Influence Technology Even More than Engineers

Early in 2011, the IBM supercomputer Watson thrilled the world by beating two of the most successful Jeopardy! contestants of all time. While IBM basked in the glory, Yahoo! reminded the world that it also deserved a fair amount of credit:

A comment to that blog sought to minimize that claim: “Watson does not use Hadoop during runtime (e.g., when answering questions)—only to prepare it's (sic) corpus of source materials (text, encyclopedias, etc.).”

Another blog boasted about Yahoo!'s contribution: “Yahoo! created Hadoop and since then has been the most active contributor to Apache Hadoop, contributing over 70 percent of the code and running the world's largest Hadoop implementation, with more than 40,000 servers.”²

Beyond Yahoo! and the Cloudera distribution of Hadoop described in Chapter 11, many more technology vendors can claim credit for various implementations of Hadoop:

You may have heard of fuzzy logic. Welcome to the world of fuzzy ownership of intellectual property. The Microsoft Kinect legal story is just as interesting.

The Kinect Legal Scenario

Soon after Microsoft introduced its very successful Kinect in 2010, its gesture-based interface to the Xbox, Adafruit Industries announced OpenKinect, a contest with a $3,000 bounty. Adafruit is a New York City–based company that sells kits and parts for original, open-source hardware electronics projects. It called for “Open-source drivers for this cool USB device, the drivers, and/or application can run on any operating system—but completely documented and under an open-source license.”⁴ The goal was to take the interface beyond gaming to education, robotics, and other applications.

Microsoft did not take kindly to that:

Problem is, Kinect was technically not a Microsoft-developed product. It had licensed technology from PrimeSense, an Israeli company that “developed the method and core software that Microsoft's forthcoming camera/controller uses to read human bodies and gestures.”⁶

Microsoft quickly backed down: “OpenKinect was not a hack, but the new code is not supported and people should use the Kinect as intended, with the Xbox only.”

There are two reasons for the possible back-down, speculated Dana Blakenhorn at ZDNet:

In the meantime, PrimeSense, along with other organizations, launched the OpenNI organization to certify and promote the compatibility and interoperability of Natural Interaction devices, applications, and middleware.⁸

These IBM and Microsoft episodes are actually pretty civil compared to the all-out legal wars that have spread over technology.

Full Employment for Technology Lawyers?

It is tough to remember a time in the past when there has been so much technology-related legal activity. Glancing at the 2010 Apple 10-K and other legal filings, you see disputes involving Motorola Mobility, Inc., Nokia Corporation, Samsung, Psystar, AT&T Mobility, and many others. In 2005, the UK publication The Inquirer analyzed Microsoft's legal track record:

The EU would appear to have proceedings against every major U.S. technology company.

In turn, just about everyone seems to have litigation pending against Google over its Android mobile platform.

“The irony's enough to make your head explode: Microsoft makes more money from Android than it does from Windows Phone. This according to Citi analyst Walter Pritchard, who says $5 from the purchase price of every HTC Android handset sold ends up in Microsoft's pockets.”¹⁰ And Microsoft is rumored to want even more from other Android device makers, such as Barnes & Noble.

Oracle has sued Google directly (not the device makers) and “claims it should be awarded $2.6 billion for Google's alleged infringement of its intellectual property with regard to the Android mobile operating system.”¹¹

With a consortium of companies (Apple, EMC, Ericsson, Microsoft, RIM, and Sony) outbidding Google for a portfolio of Nortel's wireless patent portfolio, it could mean more legal hassles for Android. “Google had been expected to emerge victorious after it set a $900 million stalking horse bid in April. But the auction that started on Monday and saw 20 rounds of bids over four long days ultimately hit a price that became too much even for Google, Reuters reported.”¹²

Google, in turn, looked to the government for relief, “calling on Congress and the Federal Trade Commission to rein in lawsuits, and asking the U.S. Patent and Trademark Office to take closer looks at patents being used in litigation.”¹³

Google also turned to buying pending and issued patents from IBM Corp. in its quest to shore up its defenses against suits by other technology companies, according to documents filed with the U.S. Patent and Trademark Office.¹⁴

Google's biggest move came in the form of its $12.5 billion bid for Motorola Mobility. While it gets plenty of engineers and mobile products from the acquisition, the biggest asset it acquired was Motorola's large vault of approved patents and in-progress patent applications. Larry Page, CEO of Google, did not mince words on the Google blog:

Verizon's 2010 10-K says it and a number of other telecommunications companies:

Verizon's 2009 10-K showed even more diverse disputes:

Let's Go to Marshall, Texas

Many technology lawsuits end up in Marshall, Texas, because “in the rough calculus of intellectual property litigation, [its] tough judges equate with speedy cases—and that's exactly what you want if you're a plaintiff with limited cash, but potentially big-time settlement payments or damages from a company you claim is infringing on your patent.”¹⁷

So the town of 20,000 “with more pottery manufacturers than software companies” has become famous around the world. It comes complete with its folklore of a “rocket docket” for the speed of its cases and of lawyers making “rattlesnake speeches” similar to the loud posturing the local venomous species does to warn of its presence.

Willie and Waylon and the boys put Luckenbach, Texas, on the map. Technology attorneys have done even better for Marshall.

Why This Level of Heated Legal Activity?

Several major trends are converging to cause this heightened level of legal activity:

• The high level of acquisition activity in legacy vendors over the past decade and their sense of entitlement that they need to squeeze every last drop from the assets they acquired.
• Several new mobile, social, and other markets where patents seem to infringe and cross-licensing agreements have not yet stabilized.
• A bit of the jealousy factor about the “Johnny come latelies.” Let's face it—Apple was not a player in mobile markets a few years ago. Google was not a major analytics player. Amazon was not an outsourcing vendor. It is tempting for incumbents to challenge them in court even if they cannot in the marketplace.
• Growing corporate discontent with poor payback and quality for the billions they have spent on IT. It is a miracle we do not have hundreds more lawsuits around ERP projects and data center outsourcing performance and pricing.
• Consumer frustration with poor mobile and other broadband service, combined with outrageous and creative roaming, early termination, overage, underage, and other charges. Then there is their discontent when it comes to warranty service around most technology products, virus protection, and other areas.
• Privacy issues that have grown as mobile, social, location-based services, and smart devices share more and more of our personal data, and companies do not show enough responsibility in protecting that data or restraint in profiting from it.
• Growing pressure on regulators to defend consumer rights when it comes to privacy, net neutrality, and price/performance benchmarks.

Time for a Technology Apalachin?

We have seen it in the movie The Godfather. We have also seen it hilariously parodied by Billy Crystal in the movie Analyze This. It is a meeting where the Cosa Nostra—the major Mafia families—come together, especially during times where rivalries seem to be getting out of hand. One of the few publicly known meetings was at Apalachin, NY, in November 1957, at the home of mobster Joseph “Joe the Barber” Barbara. The sheer number of expensive cars that showed up raised eyebrows of local authorities. In a comic twist, during the raid, many of the crime bosses fled into the woods. There were rumors of large currency notes being found months after the incident as the bosses dumped incriminating evidence. More than 60 underworld bosses were detained and indicted. The incident supposedly also got the FBI to wake up to the fact that the Mafia was a reality.¹⁸

It may be time for a Technology Apalachin. The industry leadership and regulators need to agree to tone down the legal noise and agree that all this litigation expense should be going toward more R&D and innovation.

That would mean tackling, among other things, the minefield of software patents. Brad Feld, a Managing Director at Foundry Group, has an enviable track record as an early-stage investor and entrepreneur for over 20 years. He says:

But instead of hoping and praying for such an Apalachin event to take place, it helps to think through early in its lifecycle the wide range of legal issues around a technology-embedded product. Benjamin Kern, an attorney at the law firm of McGuire Woods, provides a long list of considerations in the next section.

Conclusion

If the hacking and the espionage described in the previous chapter does not paralyze companies looking to build smart products, the spreading lawsuits surely can. In many ways, the technology elite know that good lawyers are just as important as engineers in technology. They can help enterprises to be pragmatic, not paralyzed, even when surrounded by “rattlesnakes.” Benjamin Kern, an attorney, provides some of that pragmatic advice in the next section.

Guest Column: Legal Considerations in Technology Product Launches—Benjamin Kern

Benjamin Kern is a partner in the technology and outsourcing practice at McGuireWoods, an AmLaw 100 firm, with approximately 900 lawyers and 17 strategically located offices worldwide. His practice focuses exclusively on transactional business matters driven by technology, including licensing, services, outsourcing, development, and technology commercialization, as well as venture capital funding, mergers, and acquisitions.

Much of my practice since the late 1990s has focused on contracts between innovators and the companies that help them finance, design, build, manufacture, market, sell, or license their innovations. In the case of new devices, a contract often starts with a framework that details the responsibility and contributions of each party. For example, the inventor of a gadget may agree to license a patent or know-how to a larger company that has the ability to bring that gadget to market. Or two companies with complementary strengths or technologies may team up to make a device that combines their capabilities. In each of these cases, there are many costs, responsibilities, and liability exposures that must be considered and allocated between the parties.

Working with these companies and these contracts proved instructive when I launched my own gadget. Canary Wireless was a virtual company that designed, manufactured, and sold the world's first LCD wi-fi detection device. Canary launched its first product in the 2004 holiday season, with no physical office, a design partner in the Chicago suburbs, an outsourced shipping company that held inventory in Green Bay, Wisconsin, and a manufacturer in Taiwan. By early 2006, within barely a year of making its product available, the company had reached seven figures in revenue. With a Yahoo!-based e-commerce site, a virtual presence, and no prior relationships with customers or resellers, the company had filled website orders to customers in all 50 states and more than 30 countries.

In running my own product initiative, and in advising big and small companies who have launched products on a regular basis as the global marketplace has increasingly embraced connectivity, I have come across many pitfalls and legal hazards that must be navigated by product companies. Here, I outline some of the prominent ones.

1. Patents or Trade Secrets

   It may be helpful to think of a patent review in two parts: (1) a freedom to operate analysis, and (2) an analysis of the ability to obtain protection for a new technology. The freedom to operate analysis focuses on published or issued patents, and in particular on any claims that may cover a portion of the hardware or software that comprise the device. In cases where multiple existing patent claims may overlap with a product, inventors may prepare a matrix to assist in determining where problem areas are, where changes or other workarounds may be possible, and where licensing may be necessary. This review may also need to encompass overseas or international patent and intellectual property laws. Companies that hire contractors or outsourcers to provide design or development services may want to ask for indemnification, which can provide some financial protection if the design created by a contractor results in infringement of an existing patent.

   The analysis of whether an invention can be protected by patent registration may be a separate process from the freedom to operate analysis. In some cases, as where an invention is covered by expired patent claims, an invention may not raise infringement concerns, but also may not lend itself to protection under the patent laws. Alternatively, an inventor may have missed a patent deadline (this is a more common issue in light of recent changes to U.S. patent law), may be particularly sensitive about the publication of certain information regarding a device's processes, or may otherwise elect to seek protection of a device or an invention as a trade secret, instead of going through the patent protection process. When a new product is invented, the inventor or his or her employer should carefully consider the expected cost and time frame to obtain patent protection, and if so, must act quickly to file a provisional or full patent application. If the inventor instead decides to pursue trade secret protection, it is critical that anyone exposed to confidential information about the invention be required to sign a confidentiality or non-disclosure agreement (NDA).

2. Trademarks and Domain Names

   Before finalizing a product name or name-based logo, particularly one that would be imprinted, etched, or incorporated into the housing for a device, it is important to ensure that the product name and identifying information are clear for use. This typically involves trademark searches for freedom to use and protectability. Domain names can also be an important part of the process, but securing a relevant domain name will not provide value if the underlying trademark cannot be used.

   Apple showed, with its release of the iPhone into markets where several other “iphone” trademarks and domains existed, that some types of trademark problems can be solved by creativity, ample resources, and negotiating leverage.

3. Arrangements with Developers, Contractors, and Licensors

   Connected devices may have a multitude of design and engineering attributes, including industrial design, branding, circuit board design, power system design, RF engineering, ASIC design, firmware, other embedded software, databases, operating systems, and applications, to name a few. In many cases, the design and development of a new device may be outsourced or contracted to third parties, may be in-licensed from third parties, or may be procured from open-source or other public domain sources.

   In any of these contracts, allocation of ownership of designs or innovations is critical. If no allocation of ownership is specified by contract, an outside contractor who creates work product (whether software, hardware designs, or patentable material) will likely be considered the owner of the intellectual property rights in that work product. In other words, if a company hires a design firm but does not have a written contract that specifies that the hiring company owns the work product, the outside design company will likely keep ownership of that work product. The hiring company's right to use the work product could be limited to an implied license.

   If existing design elements, software, or other components are included in a new product, the use of these components may require a license from a third party. This may be true for either proprietary components or open-source components. Users of open-source components should review the relevant open-source license to ensure that the terms of those licenses do not have unanticipated effects on proprietary rights in the device. A common concern of design or manufacturing companies is that, under some open-source licenses, innovations or enhancements on the open-source framework must be made available to the public.

4. Labeling Requirements

   Even small connected devices typically bear a variety of information, sometimes in obscure locations or buried in packaging, including serial numbers, country of origin markers, patent application numbers, SKUs, FCC and CE logos, and RoHS (EU Restriction of Hazardous Substances Directive) compliance designations, as well as licensed marks from Underwriters Laboratories (UL), Energy-Star, Bluetooth, the Wi-Fi Alliance, or others. These marks can be necessary for compliance with law, or may be designed to give assurance to a consumer as to the compatibility, quality, or safety of a device. Each of these marks may require the manufacturer to have undergone testing by an independent lab, certification, or licensing from a third party.

   In addition, devices in some industries may require labeling, inserts, stickers, or warnings, because of regulations, local laws, or common liability limitation practice. Medical devices may require extensive labeling to comply with regulations. Wi-Fi access points sold in California must include a temporary warning sticker that must be removed by the consumer in order to allow the use of the device, with warnings about the dangers of unsecured networks. Some devices have safety labeling, or labeling targeted at avoiding specific kinds of accidents (“Not to be used for therapeutic purposes,” “Not to be used for navigation of aircraft or operation of nuclear power facilities,” and “Do not swallow” are examples).

5. Protection of Information and Data

   Connected and location-aware devices, particularly those that cache, store, or transmit personal data, may be subject to claims under federal or state law, if the nature of data, use of data, and protection of data are not carefully and correctly described in a user-accepted privacy policy or other user document. Any loss of confidentiality, breach of security restrictions, or exposure of data can lead to millions of dollars of damage (on average, the Ponemon Institute estimates these damages in excess of $7 million per incident).

   Worldwide, many jurisdictions, including the EU, have comprehensive privacy standards that can be violated by any transfer of user data, or collection of data from users, from the EU to a jurisdiction deemed to have more lax privacy standards (like the United States).

   One type of data that has sparked interest recently is information regarding the location of wi-fi access points. Companies, including Apple and Google, have been interested in collecting data that correlate wi-fi access points with GPS information. With a comprehensive database of this information, these companies can provide location-based services relying on observations of wi-fi access points. This capability can greatly expand the number of devices to which location-based advertising could be served, among other things. While Apple had disclosed that the iPhone and iPad collect this information, and that the user had an option as to whether this information would be returned to Apple, users became outraged (and sparked a Congressional investigation, among other things) when they learned that this information is stored on the Apple devices in unencrypted form. The fear is that a thief or hacker could access this information and recover sensitive information about a user's location history.

   Google has been sued worldwide because, in its collection of wi-fi access-point data, it also collected user information, including emails, passwords, and other information, transmitted by users across unencrypted wi-fi connections. Google has stated that this collection was accidental, and that it was quickly stopped.

   In these two cases and others, device manufacturers have run into legal trouble even when the collection of data was disclosed, or was arguably publicly available, because of heightened sensitivity to the collection or transfer of information users consider private.

6. Warranty Terms

   Basic product warranties provide that, if a product does not function materially in the way described in its documentation, the company that offered the product will accept return, and will replace the product or refund the purchase price. Many manufacturers ship products with an express warranty on a card that states that the manufacturer's only liability is for repair or replacement of the product, and that the manufacturer cannot be held liable for other damages that a device may cause. Offering an express warranty, and disclaiming other warranties, may also allow the manufacturer to reduce liability for certain warranties that are implied by state laws, such as a warranty of merchantability, fitness for a particular purpose, or noninfringement.

   These terms can be particularly useful if a device could be implicated in damages that exceed the purchase price of the device, as when a device handles user data or is involved in vehicular applications. Faulty, inconsistent, or obsolete location-based data, of the kind that many connected devices utilize, has been implicated in situations ranging from automobile accidents to border disputes. As connected devices manage growing volumes of personal data and location-based data, manufacturers and distributors need to be fastidious about the way they construct legal terms that govern this data and work to limit liability.

7. Service Return and Recycling

   Under a product warranty, a manufacturer will often set up a Returned Materials Authorization (RMA) process for accepting returns and processing repair or replacement of devices. For connected devices, the RMA process and any remote device service must be structured to minimize contact with user data, to disclose the collection, use, and protection measures applicable to user data, and to ensure that discarded or recycled devices containing user data are not made available to the public.

   As concerns about the impact of technology waste on the environment have grown, so have regulations about how devices must be recycled or reused. Manufacturers and sellers may be required to register, collect surtaxes, establish recycling facilities or programs, and contribute to state funds for recycling. For many companies, the “throwaway” portion of the device lifecycle has become a significant budgetary item.

8. Export and Cross-Border Issues

   The ready access to a global marketplace offered by the Internet can expose a device company to an enormous and inconsistent patchwork of export and import regulations, costs, and paperwork. Every jurisdiction where a customer lives may impose its own laws on those who ship products to customers in that jurisdiction. In addition, the device company's jurisdiction may regulate the outbound shipment of devices, particularly those with potential military applications or encryption capabilities.

   Manufacturers who outsource development often ship or procure components, work-in-process, and finished goods across several borders. Customs clearance, taxes and duties, and regulatory compliance may be necessary at every step.

   Bringing a product to market has never been simple. While the last decade's swift embrace of connectivity has allowed even small companies like Canary Wireless to reach a global marketplace, the challenges facing product companies have multiplied. Those who are drawn to the revenue streams that spring from connected devices must be prepared for adventure in navigating a landscape marked with legal, regulatory, and liability hazards.