Copyright Monetization (IPIC McGill Aug 8 2014)

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Issues relating to the monetization and exploitation of copyright August 8, 2014 Lisa Abe-Oldenburg, B.Comm., JD IPIC-McGill 2014 Copyright Master Class

Transcript of Copyright Monetization (IPIC McGill Aug 8 2014)

Page 1: Copyright Monetization (IPIC McGill Aug 8 2014)

Issues relating to the monetization and exploitation of copyright

August 8, 2014Lisa Abe-Oldenburg, B.Comm., JD

IPIC-McGill 2014Copyright Master Class

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• Key contractual issues relating to development by others and licensing of software and other content

• Dealing with source material• Escrow issues• IP due diligence for transactions

Issues relating to the monetization and exploitation of copyright

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• Parties• Who is the Developer , Vendor, Assignor or Licensor? Are they solvent

and able to honor their obligations under the contract? Are parental guarantees needed?

• Will there be use by third parties, e.g. affiliates, customers, outsourcers, subcontractors, agents? If so, will they be directly licensed or will the license be sublicensable or transferable to them? Will they get direct benefit of indemnities and protection under limitations clauses? Will they have right to sue or be sued directly? (See Nautical Data v. C-Map below)

• IP rights in the software or content• What is the subject matter? Code, databases, documents, multimedia?• Ensure assignment or license of rights wording is consistent with statutory

rights in the applicable territory

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• E.g. In Canada, s. 3(1) Copyright Act – right to produce, reproduce, perform, publish, communicate to the public by telecommunication, and depending upon the work, convert, adapt, present, and for software - rent; and s.14.1, moral rights of author (integrity, association, pseudonym, anonymous)

• Which IP rights does the Purchaser, Licensee or Assignee, need to ensure it can meet its intended future use? Which IP rights does the Developer, Vendor, Assignor or Licensor need to continue its business? Type of license or assignment required?

• Will there be any changes/modifications/updates to the software or content? If so, the contract will also need to address right to source code and ownership of the newly developed works, licenses back, etc.

• SaaS/Cloud models – is a copy being made? How about a communication to the public?

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• Entertainment Software Association v. Society of Composers, Authors and Music Publishers of Canada, 2012 SCC 34, [2012] 2 S.C.R. 231 • Issue: Is transmission of musical works contained in a video game

through an Internet download a communication to the public – Copyright Act, R.S.C. 1985, c. C-42, s.3(1)(f)• Copies are identical to copies purchased in stores or shipped by mail• Royalties for reproduction rights were already negotiated• SOCAN applied to copyright board for additional tariff covering the downloads• Copyright Board and Federal Court of Appeal allowed tariff, saying that

downloading of file is a communication to the public by telecommunication

• SCC held: Internet download of a copy of a work/file, is not a communication to the public by telecommunication. Based on history that communication right is connected to performance-based activities, not to capture activities that resemble reproduction.

• Dissent: Communication right is self-standing and independent of performance right

Note: May have been a different outcome if the work had not been a permanent copy

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• Rogers Communications Inc. v. Society of Composers, Authors and Music Publishers of Canada, 2012 SCC 35, [2012] 2 S.C.R. 283• Issue: Is streaming of music files from the Internet (online music

services) triggered by individual users, a communication to the public – Copyright Act, R.S.C. 1985, c. C-42, s.3(1)(f)• A stream is a transmission of data that allows the user to listen to or view a

work at the time of the transmission, resulting in a temporary copy of the file on the user's hard drive.

• Copyright Board set a tariff for streaming, and Federal Court of Appeal dismissed the appellant's application for judicial review of the Board's decision.

• SCC Held: Appeal allowed in part. In respect of downloads, Court referred to Entertainment Software Association v. SOCAN and allowed the appeal. Transmission of a single copy of a work to a single individual is not a communication to the public.

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• However, in respect of streamed music from the Internet, appeal was dismissed. Where there is a series of repeated transmissions of the same work to different recipients, each transmission cannot be analyzed in isolation, even if each transmission is initiated at the request of an individual. True character of the activity – engages the exclusive right to communicate to the public.

• Nothing in s.3(1)(f) of the Act excludes pull technologies from its scope or restricts communications to the public to a purely non-interactive context. The section is technology-neutral.

• It matters little for the purposes of copyright protection whether the members of the public receive the communication in the same or in different places, at the same or at different times, or at their own or the sender's initiative.

• A stream of a musical work from the Internet is not a private transaction outside the scope of the right to communicate to the public.

Note: Analysis can be applied to software streaming, cloud computing, and "pull" technologies that distribute software and content.

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In 2012, Bill C-11 amended the Copyright Act

• New Section 2.4(1.1) of Act - For the purposes of this Act, communication of a work or other subject-matter to the public by telecommunication includes making it available to the public by telecommunication in a way that allows a member of the public to have access to it from a place and at a time individually chosen by that member of the public.

• New Section 19.1 of the Act - Despite subsection 2.2(1), a sound recording that has been made available to the public by telecommunication in a way that allows a member of the public to access it from a place and at a time individually chosen by that member of the public, or that has been communicated to the public by telecommunication in that way, is deemed to have been published for the purposes of subsection 19(1).

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• Software and content test versions/samples – fair dealing exemption?

• Society of Composers, Authors and Music Publishers of Canada v. Bell Canada, 2012 SCC 36, [2012] 2 S.C.R. 326• Issue: Whether the use of previews constitutes "fair dealing" – exception

to copyright infringement under Copyright Act, R.S.C. 1985, c. C-42, s. 29• Copyright Board and FCA found that 30-90 second excerpts of musical

works that can be listened to by consumers prior to purchasing the work, was "fair dealing" for the purpose of research under s. 29 of the Act

• SCC Held: Agreed with Copyright Board. Test for fair dealing in CCH Canadian Ltd. v. Law Society of Upper Canada, involves 2 steps:• Is the purpose for one of the two allowable purposes under s. 29: "research" or

"private study"?• Given large, liberal interpretation

• From the perspective of the consumer/user, not the online service provider

• Research to identify which music to purchase – need not be for creative purposes only

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• Is the dealing "fair" based on factors of purpose, character and amount of dealing, existence of alternatives, nature of work and effect of dealing on that work?

• Again, from the perspective of the consumer

• Reasonable safeguards in place to ensure previews are being used for this purpose

• Users don't keep permanent copy of preview – file is streamed and automatically deleted from user's computer once heard

• Copies cannot be duplicated or further disseminated

• Look at proportion of preview in relation to the whole work, not the aggregate amount of music heard

• Several seconds is modest amount when compared to whole work

• No alternatives to dealing that effectively demonstrate to consumer what music sounds like

• Previews reasonably necessary to help consumers research what to purchase

• Short, low-quality previews do not compete with or adversely affect the downloading of the works themselves. Instead, effect is to increase sales

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• Type of license: non-exclusive, sole or exclusive?• To be able to sue for copyright infringement, must be owner or have

exclusive license Nautical Data v. C-MAP (2013 FCA ) and s. 2.7 and 36(1) of the Copyright Act

• Examples of sole or exclusive license conditions :• obligation on the Licensee to exploit, effectively market and advertise,

meet minimum performance/volume goals, profits, sales, royalty structure• restricted territory, channels of distribution, markets, products, specific

technology• Licensee maintaining certain product quality standards• requirement on Licensee to provide Licensor with samples, inspections,

testing• license to convert back to non-exclusive if conditions or terms not met• Licensor’s (or third party agent’s) right to audit Licensee

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• License scope and restrictions (can also be applied to partial assignments):• User type, user number, only certain rights exercised by certain third

parties (e.g. affiliates, customers, subcontractors, etc.)• Simultaneous vs. non-simultaneous use• Territory, geography (e.g. world-wide or only in Canada?), site location,

specified equipment or hardware, hot sites, cold sites, servers, workstations, or address; be careful with restrictions on CPUs - re virtualization and cloud computing

• Product/technology, format, subject matter• Purpose, e.g. evaluation, due diligence, testing, internal data processing,

pilot, in-production/live, joint venture, for support services, maintenance, outsourcing, consulting, distribution, back-up, disaster recovery, retrieval, etc.

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• License scope and restrictions (cont.):• Term, survival• Confidentiality and non-disclosure obligations• Transferability (beware of silence - licenses are personal)• Sublicensability• Revocability• Contractual obligations and restrictions may create “new rights” which

are beyond what is statutorily available for traditional IP, e.g. digital rights management

• Exclusions and restrictions must be carefully drafted since ultimately these affect pricing calculations

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• Competition Concerns : • Beware of anti-trust/competition violations, e.g. § 77 - 78 of the

Competition Act:• tied selling, e.g. where a supplier of a product, as a condition of supplying to a

customer the “tying product” (i.e. a product in a market in which the supplier has market power), requires the customer to acquire any other product (the “tied product”) from the supplier or induces the customer to acquire the tied product from the supplier by offering to supply the tying product on more favourable terms or conditions.

• abuse of dominant position, e.g. where a supplier of a product, as a condition of supplying the product, requires the customer to deal only or primarily in product supplied by the supplier, or induces the customer to deal only or primarily in product supplied by the supplier by offering to supply the product on more favourable terms and conditions.

• exclusive dealing, e.g. where (1) the entity engaged in the tied selling and/or exclusive dealing must have market power in a relevant market, (2) the tied selling and/or exclusive dealing alone or combined with other conduct must amount to a practice of anticompetitive acts, and (3) the practice is likely to prevent or lessen competition substantially in one or more markets.

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• Fees (or Royalties)• Fixed amounts: base or minimum• Variable rates: volumes (e.g. users, CPUs, locations, access time),

ascending or descending over time, percentages e.g. based on sales, profits (define gross or net), # sublicenses

• Single/one-time or multiple payments (e.g. milestones, deliverables, fixed dates)• Purchaser/licensor wants to ensure what they pay for works – need testing

• Specify timing of invoicing and payment, interest on overdue amounts, any set-off or withholdings (e.g. for cross-border deals or phased in acceptance testing)

• Separate license royalties from fees for other services, e.g. customizations, support, maintenance, consulting or professional services

• Tax issues • Included or excluded from the price • Which party will remit• Certain provinces contain exemptions for tax on custom software or different

tax implications based on where server or user is located – may want to choose license jurisdiction for tax advantages

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• Confidentiality obligations:• How do you define “Confidential Information”?

• Are terms of the agreement confidential?• Intangibles that don’t get statutory IP protection, e.g. trade secrets, ideas and

concepts, raw data, mathematical formulae • Is personal information (as per privacy laws) included?• Other information learned about either party, e.g. from reports, audits, service• Info provided/learned orally, from third parties e.g. customers

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• Types of confidentiality covenants:• Maintain a level of security• Not to disclose• Compliance with privacy laws (collection, use, storage, correction,

deletion and disclosure)• Return or destroy (if possible)

• Each covenant may have separate term/survival• Damages for breach: direct, indirect, third party claims? Required

indemnities and carve-outs from limitations on liability? Need right to seek equitable remedies.

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• Exclusions from confidential information definition (i.e. its non-confidential), or exclusions from confidentiality obligations/covenants (i.e. right to disclose) :• Info publicly available info through no default of other party• Info in prior, rightful possession of other party, without restriction• Info rightfully obtained info from third parties• Info independently developed; residuals• Used for purpose of exercising the licensed rights• Required disclosure under applicable law or investigative authority -

subject to advance notice and opportunity to obtain protective order, if not in violation of applicable law

• Disclosure to legal, accounting, tax, technical advisors – do they have a duty of confidence or are they willing to sign a similar NDA?

• Disclosure in the course of a business acquisition/sale – must sign NDA

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• Purchaser/Licensee representations and warranties:• Authority to enter contract• Scope of business, jurisdiction, territory• For sole or exclusive licenses: ability to meet threshold requirements, e.g.

minimum level of experience, pre-existing technology, customers, distribution channels, market penetration, profits, etc.

• Not providing any personal information to Vendor/Licensor• Control over affiliates and other end users• Appropriate sublicensing and confidentiality agreements in place with

third parties

• Tips:• Consider whether breach of warranty should trigger termination of

license?• Licensee may prefer stating it as a condition of exclusivity, or payment of

liquidated damages, not termination.

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• Vendor representations and warranties :• Ownership, ability to assign or right to sublicense, as applicable• Registered IP, valid and in good standing• No disputes (actual or threatened), no third party claims in respect of the

subject matter• Power/authority to enter contract, right to disclose the software and

content• Exercise of granted rights by Licensee/Purchaser will not infringe third

party copyright, breach or violate any agreement or duty, or require third party consent

• Functional/performance/technical warranties, quality, security, compatibility, scalability, no disabling devices, locks, etc. or that appropriate tests have been done to identify them• Vendor/licensor will want to tie to objective criteria• May also be linked to payment milestones over course of development

• No open source, or identification of open source software

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• Vendor/Licensor representations and warranties (cont.):• No prior assignments (e.g. partial, equitable, legal), no sole or exclusive

licenses granted previously, no joint owners, no security interests, no options

• Original work, no infringement, legal opinions, developers and source of origin

• Not providing any personal information

• Tips:• Consider commencement, duration and survival period of warranty• Remedies for breach, e.g. obligation to replace or modify, not sole and

exclusive remedy; negotiation of third party consents or settlement, with Licensee approval

• Consider termination triggers• Consider carve-outs from limitations on liability and disclaimer clauses• Corresponding indemnities for third party claims resulting from breach of

warranty• Vendors/Licensors will want qualifications and exceptions (see next slide)

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• Warranty qualifications and exceptions:• Licensee must be in compliance with license, for warranty to be effective• Exceptions as disclosed in schedule• Best of knowledge• Territory limitation• As delivered, unmodified software or content• Only applicable to recorded/registered IP• Warranty term (duration)• Applicable subject matter, scope, materiality • Consider relevance and applicability of standard disclaimers of implied

warranties of merchantability, quality, fitness for a particular purpose, and those arising out of a course of dealing or usage of trade – ensure no conflict with intended scope of warranties

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• Indemnities• Indemnify, defend and hold harmless? Ability to settle?• Who apply to? Parties, directors, officers, agents, subcontractors,

affiliates, sub-licensees, end users, customers, successors and assigns?• Amounts? Only final damages awarded by court of competent

jurisdiction? Only for third party claims/liability (e.g. infringement) or internal losses and damages? Other claims, e.g. legal costs, settlement costs, arbitration awards, etc.?

• Qualifications and exceptions similar to warranties (see next slide)

• Tips:• Ensure all indemnities are consistent/flow-through with any upstream

licenses• Third party claims could be direct damages – if you have an indemnity,

make sure not excluded in limitation of liability clauses (i.e. no indirects)

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• Typical situations where indemnities shouldn't apply:• Claim arose from modifications to the software or content that were made

without indemnifying party’s (Licensor's/Vendor's) direction or control• Claim relates to unlicensed third party or Licensee/Purchaser-supplied

property• Unauthorized use of the software or content - breach of license by

Licensee• Indemnified party fails to notify of a claim• Continued use after notification of infringement or third party claim• Failure of indemnified party to co-operate in defence or settlement• Foreign jurisdictions in which Licensor/Vendor has not registered IP, or

outside scope of license

• Tip:• copyright infringement warranties, indemnities, and damages arising from

breach of confidentiality, privacy and security, are typically carved out of limitations on liability

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• Term:• When is contract effective and if applicable, when does it end• When does license commence? Any conditions precedent?• What is the license duration? Survival of any rights?• Is license renewable?

• Tip:• Term may differ as between licensed rights, warranties, indemnities and

other obligations

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• Termination : • By which party?• Typical reasons for termination:

• Without cause, i.e. for convenience – need to discuss amount of notice and any fees/cost

• For cause (e.g. breach of agreement, infringement or disclosure of confidential info)

• For insolvency• Change of control, unauthorized assignment to a competitor

• When is termination effective? • Immediately• Upon stipulated amount of notice• After opportunity to cure• After transitional services provided• Survival of any terms?

• Tips:• Beware of inconsistency with a "perpetual" license• Should Licensor have right to terminate vs. remedy to sue for damages?

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• Determine who the authors of the copyright work are and their status, e.g. employees, contractors, government work – differing ownership rules depending upon jurisdiction

• Any open source software embedded?• Ensure authors have assigned their IP rights and waived moral rights

in favour of all Licensor’s successors, assignees and licensees• Ensure assignments and waivers are properly described in writing

and signed• Effects of joint ownership: limitations in respect of jointly owned IP

rights“work of joint authorship” requires collaboration, non-distinct contributions

and mutual intent

• may need consent of joint owner for transfer/assignment of joint interest, license of rights, right to use and right to enforce/sue; may need to share revenues

• e.g. for copyrights and patents:• in Canada (except Quebec re patents) and U.S., can transfer/assign

without consent of joint owner provided not a partial transfer• in Canada, cannot license without consent of joint owner, while in

U.S. can license if no agreement to the contrary and not exclusive license

Dealing with Source Material

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Escrow Issues

• What is deposited into escrow – is it current and complete? Format?• Additional legal documents required, e.g. assignments, source code

licenses (including right to modify), waivers• Additional materials required, e.g. tools, passwords, compilers,

instruction manuals• When are deposits made? How often? Where held?• Verification and testing of deposits to ensure they work• Ability to solicit and hire developers – need contact info• Triggering events and process: Licensor’s failure to support, no

longer in business, continued force majeure, insolvency, bankruptcy, notification and timing – ensure licensee is relieved of its obligation to continue to pay licensor

• Problems if only 2-party escrow contract (no privity with escrow agent), or requirement of Licensor's consent for release

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IP due diligence for transactions

Identify the technology, software and content and what IP rights exist in it and which jurisdiction's laws apply

Does it include any third party products/rights? Embedded technology? Open source?

What are the copyrights (bundles of rights) available in each applicable jurisdiction?

What specific rights does each party need? Consider future applications, virtualization, modification, reorganization, etc.

Who needs/gets benefit of any licenses? Affiliates, customers, outsourcers? Directly or via sublicense? What does head license say as to survival of sublicensees' rights?

Copyright registry: searches of title for ownership and any registered licenses Have any sole or exclusive licenses been previously granted or any

assignments? Contract review: licenses, assignments, NDAs, development contracts,

maintenance contracts, service/consulting agreements, source code escrow agreements

What is being contracted for? Who owns the technology, software or content? Who owns any developed work or modifications? Any joint owners?

What is the scope of the copyright license? Any restrictions on use? Has the scope of rights been properly drafted, e.g. right to “use” is not a

copyright – must define "use" in light of applicable IP statute(s) Is it an exclusive, sole or non-exclusive license?

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IP due diligence for transactions

Are assignments of ownership in writing, signed and to correct party? Who are the authors of any copyright works? Have they assigned moral

rights? In favour of correct party, its future assignees and licensees? What are the non-disclosure/confidentiality obligations? Any conflict with the

license or assignment of ownership provisions? Any non-compete provisions? Can the contract be terminated early? What happens to the license? What

happens to the physical software being licensed, or content/data? What is the term of the contract vs. license? Is the license perpetual? Does

it conflict with the term and termination provisions? What happens to sublicenses on termination? Does head licensor

acknowledge sublicensees? Is license irrevocable? Is license expressly transferable?

Note: Silence in licenses as to transferability does not mean it will be transferable, as licenses have been held to be "personal" to Licensor.

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416-777-7475www.bennettjones.com

• This presentation contains statements of generalprinciples and not legal opinions and should notbe acted upon without first consulting a lawyerwho will provide analysis and advice on a specificmatter.