San Francisco Business Lawyer Blog

Government and Tech Industry Move to Prevent Trade Secret Theft, Both by Employees and Outsiders

Thu, 02 May 2013 10:57:20 -0800

Protection of trade secrets is a critical component of business success, especially in the technology sector. Software and other tech companies have long known that they must guard their developing work against competitors, but a recent study has shown that they may face a greater risk from their own employees. The federal government launched a new strategy earlier this year geared towards protecting U.S. companies against trade secret theft. While the strategy primarily targets foreign governments and businesses, it offers useful guidance for California tech companies in preventing, and responding to, theft of trade secrets.

Theft of Trade Secrets

"Trade secret" refers to any proprietary or confidential information used by a company in the course of running its business. This includes client lists, designs or formulas for existing products, and designs or notes from products still under development. Information does not need to have copyright, trademark, or patent registration to be considered a trade secret, but individuals who have access to the information must be aware of its secret nature. Companies often require employees, contractors, and others to sign non-disclosure agreements, which identify trade secrets, prohibit unauthorized disclosure of the information, and define penalties for breach. Intentional theft of trade secret is a criminal offense under federal law, 18 U.S.C. § 1831 et seq., and California State Law, Cal. Civ. Code § 3426 et seq.

EULAs May Prohibit Resale by Consumers of Software, Other Copyrighted Materials

Thu, 25 Apr 2013 07:25:42 -0800

When a copyright owner sells a copy of their work, they retain the right to sell or distribute additional copies. A consumer who purchases copyrighted material, such as a book, a CD or DVD, or software, is limited to personal use of the material. A consumer may, however, resell the copy they purchased, such as the specific CD or DVD, provided they do not retain a copy. This is known as the "first sale doctrine." Copyright owners, particularly owners of software copyrights, may restrict first-sale doctrine rights through end-user license agreements (EULAs), which specify that the purchaser is merely licensing the work and does not "own" a copy. Google's recent restrictions on the use of its newest product, along with several recent court decisions, demonstrate how technology companies can protect their copyrights in this manner.

Restrictions on Google Glass

Google has begun a very limited release of the much-hyped Google Glass, allowing a select group of consumers to purchase the product for $1,500 apiece. The terms of service included with the device prohibit the user from selling or even loaning it to anyone else. As Wired reported, these restrictions gained publicity when a purchaser tried to list a Google Glass device for sale on the auction website eBay. The would-be reseller promptly cancelled the auction for fear of the consequences of violating Google's terms of service.

SEC Clarifies Rule Regarding Disclosure of Nonpublic Information by Public-Traded Companies via Social Media

Mon, 22 Apr 2013 11:02:18 -0800

The Securities and Exchange Commission (SEC) recently reported on an investigation into whether a Silicon Valley technology company complied with Regulation FD. "Report of Investigation Pursuant to Section 21(a) of the Securities Exchange Act of 1934: Netflix, Inc. and Reed Hastings," Securities and Exchange Commission Release No. 69279, April 2, 2013 (the "SEC Report"). The agency was investigating statements made by Netflix's Chief Executive Officer on the social media website Facebook. The SEC's Regulation FD covers disclosures of nonpublic information to ensure that the public receives fair notice. The investigation concluded that no enforcement action against the company was necessary, and its report contains useful guidance on how Regulation FD applies to communications made via social media.

Regulation FD

Regulation FD, 17 C.F.R. §§ 243.100-243.103, governs "selective disclosure" of "material nonpublic information" by publicly-traded companies to certain parties. It applies to information about the company that is not otherwise available to the public, but that might affect the company's stock. Publicly-traded companies must publicly disclose such information at the same time as, or shortly after, disclosing the information to stock brokers or dealers, investment analysts, institutional investors, and current holders of the company's stock who might decide to buy or sell stock based on the information. Id. at § 243.100(b). The company may meet the public disclosure requirement by filing a Form 8-K with the SEC, or through another method "that is reasonably designed to provide broad, non-exclusionary distribution." Id. at § 243.101(e)(2).

Federal Circuit Court of Appeals Considers Whether Patent Law Applies to Software

Mon, 15 Apr 2013 08:23:11 -0800

The Court of Appeals for the Federal Circuit, a specialized court in Washington, D.C. that hears patent cases affecting the entire country, recently held an en banc rehearing of a prior decision holding that software may be patentable. CLS Bank Int'l v. Alice Corp., No. 2011-1301, slip op. (Fed. Cir., Jul. 9, 2012). The outcome of the rehearing could have major implications for software developers around the country, particularly in Silicon Valley, as it might substantially redefine the standards for software's intellectual property protection.

Patent vs. Copyright

Patent law provides different protections and forms of relief from infringement, as compared to copyright law, which currently covers most software. Copyright law applies to creative works, such as books, songs, films, and software. "Ideas" are not eligible for copyright protection, meaning that a software application does not infringe on a copyright solely because it performs the same function as a copyrighted application. Patent law covers inventions, such as computer chips, but it can also apply to "processes." Federal statutes define "process," rather vaguely, as a "process, art, or method," which could include "new use[s] of a known process." 35 U.S.C. § 100(b). The U.S. Supreme Court has held that "abstract ideas" are not patentable, but that federal patent law may allow protection of "processes." Bilski v. Kappos, 130 S.Ct. 3218, 3231 (2010). This potentially gives patent protection wider coverage than copyright, as it would apply to a software application's method or process, rather than its code.

New Top-Level Internet Domains Are Coming - How California Businesses Can Protect Their Trademarks

Fri, 05 Apr 2013 12:54:10 -0800

The Internet Corporation for Assigned Names and Numbers (ICANN), the organization that manages the domain name system for much of the internet, began accepting applications for a massive expansion of generic top-level domains (gTLDs) last year. It has now announced that it will begin delegating new gTLDs in April 2013, meaning that familiar ones like ".com" and ".org" could soon have quite a bit of company. Aside from a cumbersome application process and prohibitively expensive fee, ICANN had few restrictions on who could apply for a gTLD during the application period. As a result, certain trademarks may be on the list of proposed new gTLDs without the knowledge or consent of the trademark owners. To assist trademark owners, ICANN launched the Trademark Clearinghouse (TMCH) in March 2013, which will allow trademark owners to file proof of their protected marks.

What Are gTLDs?

A gTLD is the two- to four-letter extension seen at the end of a domain name, such as ".com," ".info," or two-letter country domains like ".uk". ICANN allowed applications for new gTLDs during a four-month period in 2012, the first time it has accepted submission from the general public. New proposed gTLDs include ".accountant," ".email," and ".medical," but may also include trademarked words or terms.

Trademark Clearinghouse

The TMCH launched on March 26, 2013, giving trademark owners a central location to register their trademarks and streamline the process of enforcing trademark rights against new gTLD applicants. According to the TMCH's official guidelines, three types of trademarks are eligible for inclusion:

End-User License Agreements and Copyright Law for California Software Developers

Mon, 01 Apr 2013 13:31:14 -0800

End-user license agreements (EULAs) provide notice to a software user, known as a licensee, of their obligations and the limitations on their use of the software. The terms of an EULA protect the licensor's intellectual property rights in the software, including the trademark in the name or brand associated with the software and the copyright in the code among other materials. Despite many EULAs' focus on intellectual property, contract law forms the basis of most enforcement actions. The applicability of copyright law to alleged EULA breaches by licensees is an interesting, albeit less-explored topic.

Enforcement of an EULA as a Contract

While enforcement of EULAs by licensors has been controversial, the trend appears to be towards treating software EULAs as "ordinary contracts accompanying the sale of products, and therefore as governed by the common law of contracts and the Uniform Commercial Code." ProCD v. Zeidenberg, 86 F.3d 1447, 1450 (7th. Cir. 1996). Breach of contract allows a licensor to assert claims for expenses, lost revenues, and other damages caused by a licensee's breach. In cases where the alleged breach threatens more than just immediate revenues and expenses, a licensor might want to consider other causes of action.

Enforcement of an EULA Under Copyright Law

Courts have generally held that copyright law should not apply to EULA breach claims. The ProCD court noted that contracts only apply to the specific parties to the contract, whereas "a copyright is a right against the world." ProCD, 86 F.3d at 1454. EULAs may prohibit certain uses of the software in a manner similar to a trade secrets agreement, rather than copyright law. Courts have generally found copyright claims for alleged EULA breaches to be beyond the scope of copyright law. MDY Industries, LLC v. Blizzard Entertainment, 629 F.3d 928, 941 (9th. Cir. 2010). Specifically, EULAs cannot apply copyright law to acts or materials that federal copyright law would not otherwise prohibit. However, it may be possible to apply copyright law if a licensee's EULA breach threatens to continuously violate copyright ownership rights. Id. at 941 n. 3. Copyright law may therefore be preferable to contract law in some cases, as it allows additional damages, injunctive relief, and attorney's fees. Id.

Enforcement of End-User License Agreements for California Software Developers

Sat, 23 Mar 2013 09:25:11 -0800

Software license agreements range from boilerplate language to carefully-negotiated contractual terms between two or more businesses or individuals. License agreements between a software developer and the intended user are generally known as end-user license agreements (EULAs). In the event that a licensee violates one or more terms of an EULA, a licensor may wish to sue the licensee for breach of contract. Licensors generally have little trouble establishing the enforceability of an EULA negotiated between it and the licensee. However, court rulings on the enforceability of certain types of boilerplate EULAs against licensees vary among jurisdictions. Courts in California are likely to find most EULAs enforceable.

Enforceability of "Shrinkwrap" End-User License Agreements

The enforceability of an EULA may depend on whether it was negotiated directly between the licensor and the user, or whether the license was a "shrinkwrap" or "clickwrap" license, which users accept by opening the software packaging, or by downloading or installing the software. Some courts have found these to be unenforceable contracts of adhesion, while others have ruled them to be valid and enforceable. The trend appears to be in favor of enforcement. The Ninth Circuit, which includes California, has ruled in favor of enforceability.

The seminal case finding a "shrinkwrap" EULA enforceable is ProCD, Inc. v. Zeidenberg, 86 F.3d 1447, 1449 (7th Cir. 1996), which held a shrinkwrap license to the same standard of enforceability as general contract law. The act of opening a software package, with the understanding that doing so signals agreement to an EULA, makes it an enforceable contract, according to the Ninth Circuit in Arizona Cartridge v. Lexmark Intern., Inc., 421 F.3d 981, 987 (9th Cir. 2005).

How California Businesses Can Protect Their Intellectual Property through End-User License Agreements

Fri, 15 Mar 2013 13:24:13 -0800

Businesses that develop and sell software must protect their intellectual property rights in order to stay in business. Copyright law provides protections and remedies for developers and retailers, but it generally only applies once an infringement has occurred. In order to make a purchaser of software aware of the limitations on its use, developers and retailers, known as licensors, include a license agreement in the packaging of the software. For software downloaded from the internet, the license agreement is often included as a separate file or on a screen that appears during the installation process. Because these agreements typically only allow a purchaser to use the software for personal or business use, the purchaser is referred to as the "end user," and the license is called an "end-user license agreement" (EULA).

What is an End-User License Agreement?

An EULA defines the permissible uses of the software by the purchaser, usually limited to personal use or use in the ordinary course of the purchaser's business. The EULA may prohibit the sale of copies of the software, and may even prohibit resale of the original software media. The "first-sale doctrine" usually allows a purchaser to sell the original product, provided the purchaser did not keep any copies. U.S. copyright law also allows a purchaser to make one or more copies of computer programs for the specific purpose of creating backups or performing maintenance. Nearly any other use may be subject to restrictions in an EULA.

EULAs have been controversial because of the manner in which purchasers must agree to their terms. EULAs that accompany software sold in physical media, like CD-ROM discs, are often called "shrinkwrap agreements," because purchasers agree to the terms of the EULA by opening the packaging. Downloadable software may have "clickable" licenses, which require a purchaser to check a box on the screen during software installation. Purchasers are not obligated to agree to the EULA's terms, but they are not authorized to use the software unless they do. Despite the controversy, courts have generally held these agreements to be enforceable.

5 Key Points Licensees Should Know When Negotiating a California Software License

Fri, 08 Mar 2013 12:48:27 -0800

Every business relies on software to some extent, whether they produce software products, use software extensively in a company network, or simply use email. Silicon Valley is one of the world's centers for software and tech development, and businesses in the San Francisco area are ideally placed to take advantage of new products and technologies.

Licensing Software for Business or Consumer Use

Companies may wish to license software for use by employees within the business, or they may wish to acquire "white label" software that they can use as part of their own products or services. A carefully-written license agreement is crucial to ensuring that a business can make full use of a software product, while avoiding any liabilities that the software's developer or owner may incur. Here are five tips that a business, known as a licensee, seeking to acquire the right to use a software product from a licensor, should consider:

1. The Scope of Use Provisions Should Be Broad Enough to Allow All of Your Intended Uses for the Software, Including the Flexibility to Expand or Adapt the Use

A license agreement will usually contain a "Scope of Use" clause identifying the permitted uses of the software. This may include the actual application of the software; the physical location where the software is to be installed, such as on a central server or individual workstations; and prohibitions on use of the software by anyone not expressly authorized. A prospective licensee should develop a plan for how they intend to use the software, and should insist on a Scope of Use clause that allows not only the intended uses, but also foreseeable future uses based on the growth of the business.

5 Things Licensors Should Know When Negotiating a California Software License

Fri, 01 Mar 2013 12:40:58 -0800

The principal business of Silicon Valley tech companies is the development of new software and the integration and improvement of existing applications. Businesses rely to an ever-increasing degree on software applications for daily functions. Companies that have an application to sell to other businesses, organizations, or the public must protect their intellectual property rights, particularly when providing software to other businesses to use in their operations.

Software License Agreements

Software license agreements, sometimes known as end-user license agreements (EULAs), are part of the sale of software from a licensor to a licensee. They define what software a licensee may use and the manner in which they may use it. Software sold to the public often includes non-negotiable EULAs. The consumer agrees to the EULA merely by opening the physical packaging or commencing a download. Among businesses, the specific terms of software licenses may be subject to negotiation. The following tips may help licensors negotiate an agreement:

1. Provisions defining the scope of the license should clearly identify the permitted uses of the software.

The license agreement should identify the licensee, who may be an individual, business, or organization. It should also specifically identify the software, including its trade name and any other information that distinguishes it. The specific uses permitted by the agreement, such as exclusive use by the licensee or its agents, the operating system or hardware on which it may be installed, or its use solely for business purposes, should be clearly stated.

The Role of Registered Nurses Under California Law

Thu, 21 Feb 2013 16:43:32 -0800

Registered nurses (RNs) provide an invaluable service to physicians in hospitals and private practices. They perform routine services, freeing physicians to handle diagnosis and direct treatment of patients. They also assist physicians in diagnosis and treatment by observing patients' symptoms and reactions and ensuring that a patient's treating physician has a complete picture of the patient's condition. Physicians who own or manage medical practices must supervise the RNs working for them, monitoring procedures that require the direct involvement of a medical doctor and maintaining the balance of duties prescribed by California law.

Standardized Procedures

Only licensed medical doctors in California may diagnose physical or mental conditions, prescribe medications, or perform invasive procedures to diagnose, treat, or cure illnesses or injuries. RNs may assist physicians in the performance of these tasks, and they may perform certain procedures without a physician's direct involvement if the procedure is standardized in accordance with state law.

A "standardized procedure" is one developed "through collaboration among administrators and health professionals" in a licensed healthcare facility or "organized health care system." Cal. Bus. & Prof. Code § 2725(c). Standardized procedures must be described in writing by the organization or facility that developed them. The document must identify the circumstances in which a RN may perform a specific procedure, and must include a protocol for keeping records of who performed the procedure.

Compliance Officers for California Medical and Dental Practices

Fri, 15 Feb 2013 13:10:04 -0800

Businesses in heavily-regulated fields, particularly medical and dental practices, must pay close attention to compliance with local, state, and federal laws. Many businesses employ compliance officers (COs) with full-time responsibility for these issues. Failure to comply with various regulations may mean professional sanctions, fines, or even loss of licenses that force a business to close.

What is a Compliance Officer?

The CO's job is to ensure that the practice is complying with all applicable laws and regulations, and to monitor policies and procedures aimed at preventing violations or breaches before they occur. A CO should be an officer of the professional medical corporation that operates a medical or dental practice, and should report directly to the chief executive officer or the board of directors or managers.

How is a Compliance Officer Different from a General Counsel?

A company's general counsel (GC) primarily responds to problems, advises on legal obligations, and defends the company against claimants and regulators. The two positions can conflict with one another if they do not have clearly-defined roles. Where the GC is mostly reactive, the CO should be proactive by putting plans for regulatory compliance in place, keeping track of their success, and anticipating problems before they occur. To be effective, a CO should be separate from a GC, but on the same level within the company's hierarchy.

Who May Own and Manage a Medical Practice in California?

Mon, 11 Feb 2013 10:28:49 -0800

California strictly limits the ownership and management of medical practices. Many roles within a medical practice must be held exclusively by a licensed physician. The primary rationale for this is to ensure that individuals with the proper medical education, expertise, and credentials handle critical aspects of operating a medical office. More than half of the owners of a California medical corporation, must be licensed medical doctors, and the remaining owners must hold other select professional licenses. The general rule, known as the Corporate Practice of Medicine (CPOM) Doctrine, states that a corporate entity has no professional expertise and may not engage in the practice of medicine. Medical decisions and other decisions that directly affect patient care must remain in the hands of licensed physicians.

Professional Licensing for Medical Doctors

The Medical Board of California (MBC) oversees licensing of physicians in the state. Any person who holds themselves out as a medical doctor or other medical professional, or renders medical services, without holding a valid license issued by the MBC commits a crime, according to California Business and Professions Code § 2052. The acts requiring a medical license are generally described as the "diagnos[is], treat[ment], operat[ion] for, or prescri[ption] for any...physical or mental condition of any person."

Corporate Practice of Medicine Doctrine

California Business and Professions Code § 2400 states that "corporations and other artificial legal entities" cannot hold professional licenses. This law forms the basis of the the CPOM Doctrine which restricts certain decisions and powers to individual licensed physicians, including control and ownership of patient records, determinations of professional competence with regard to the hiring and firing of medical professionals, and the selection of medical supplies and equipment. Licensed physicians also must maintain control over decisions regarding patient care, diagnostic tests, and physician workload. These types of decisions cannot be delegated to non-professionals.

Regulation of Northern California Wines Remains Largely in Local Hands

Tue, 05 Feb 2013 09:23:32 -0800

Northern California wines, from the area commonly known simply as Wine Country, is the source of much pride and prestige for the region. Wine Country's fame spreads worldwide impacting Bay Area tourism and other industries. The laws affecting wines remain surprisingly local. Even as the Internet enables people around the world to access information about Northern California wine, local governments, often at the city level, are the primary sources for legal requirements and restrictions.

Federal Limits on Interstate Regulation

The U.S. Supreme Court addressed state-level regulation of wines in Granholm v. Heald, 544 U.S. 460 (2005), greatly limiting states' ability to regulate the import of out-of-state wines. The case involved laws in New York and Michigan that allowed in-state wineries to sell directly to in-state consumers, but prohibited out-of-state wineries from doing the same. This primarily applied to sales via the internet, since consumers can now order wine that is not available to them in local retail locations.

The Granholm court cited a 2003 report from the Federal Trade Commission (FTC) warning of "anticompetitive" state legislation that could impact internet commerce by favoring local wineries over out-of-state producers. The court held that the New York and Michigan laws, by prohibiting importation of out-of-state wines entirely, were a restraint on interstate commerce that violated the "Dormant Commerce Clause" of the Constitution, as well as the Twenty-First Amendment. The Twenty-First Amendment, mostly known for repealing Prohibition in 1933, also secures much of the regulatory authority over alcohol with the states. The court held that § 2 of the Twenty-First Amendment affirms the Commerce Clause's prohibition on laws that discriminate against interstate commerce.

New Requirements for Business Entity Filings in California in 2013

Mon, 28 Jan 2013 15:18:40 -0800

The California Secretary of State (SOS) made several changes to the procedures and fees for filing business entity formation documents, effective January 1, 2013. The new rules affect all business formation filings submitted to the SOS on or after that date, including Articles of Incorporation, Articles of Organization and foreign business entity registration documents. There are also changes to the procedures and fees for obtaining copies of filed documents. The SOS will reject any filings that are not in compliance with the new rules.

Address Requirements for California Businesses

Any documents used in the formation of a domestic business entity, including Articles of Incorporation for a corporation and Articles of Organization for a limited liability company (LLC), must include a valid street address and mailing address for the entity.

Address Requirements for Foreign Businesses

Foreign corporations, LLCs, and other foreign business entities registering to do business in California must provide both street and mailing addresses in their registration documents. "Foreign" means formed outside of California, and therefore may include business entities formed under the laws of another U.S. state.