Padd Solutions

There is no shortage of players in the music space and niche music sites (like our own client www.urfilez.com) that cater to particular regions or musical styles are no longer uncommon. Now entering the fray are two ad supported music download sites, www.freeallmusic.com and www.guvera.com. However, like urfilez, it is there license catalogue that makes them noteworthy. They both have recently licensed the EMI and Universal catalogues, providing a far reach for upstarts with no fee models.

The name says it all. www.freeallmusic.com, provides users free legal downloads. Just register and agree to the terms and off you go to aural ecstasy. As an ad supported site, the cost of doing business is presumably shifted to the sponsors. After viewing some short ads, users are free to download 5 tracks free per week with a maximum of 20 downloads per month.

And in a hurrah for cross platform, no DRM, compatibility, www.freeallmusic.com claims all downloads will play on iTunes or Windows Media Player and can be ported
to burned cd’s or third party devices.

Contestant Number 2, www.guvera.com, takes a similar route. Again, ad supported free downloads are the mainstay. Guvera’s ads are a bit “smarter” being user targeted and somewhat interactive. In an unsual approach at reverse advertising is employed, whereby the users can actually choose the brand that will pay for their downloaded music. After which, they visit that brand’s channel, which along with making you want their products, will also suggest other music. Hence, users dictate the ad content, as opposed to sitting through ads for things they may never buy.

What does this all mean? Well, simply, it means that there are those willing to try alternative models to the ala carte per download iTunes model (let’s not forget Zune pass and the lovely Zune HD hardware). And in a 21st century ad world, the new ad zeitgeist is all about targeting (why make a 20 something sit through ads about Pampers if you know all about their tastes and wants?). More compelling is the fact it’s not just the startups willing to try, but the publishers as well, who don’t want to be living in an Apple dominated world. And to that point, Guvera even claims that film and TV downloads are on the horizon as well.

Startups seek to cut costs in every facet of their business. Most entrepreneurs may not have the money to invest into a new business venture to get it off the ground. Some are lucky enough, and get their friends and family to invest some seed capital which can get them going. Others, however, need to make do with what they have. This is all the more true for online companies, where the industry offers enough alternatives to get by on a shoestring budget.

One of the biggest hurdles in getting an online startup off the ground is getting the technology to back up the business. Indeed, an online business needs to run on some kind of platform. But what if there is no money to invest in building proprietary software? No problem, open source technology offers free alternatives. But this alternative often comes with many strings attached.

What start-up entrepreneurs fail to understand at such early stages is that open source software, although invaluable in getting them up and running, can have some more complicated consequences when approaching investors, selling the company, or going public.

Open source software simply means that it is software whose source code is open to users and developers to use and manipulate. It can be revised into a derivative work without risk of copyright infringement, with certain limitations. The ramifications of such use need to be understood by a subsequent user. Open source is based on a philosophy that sharing and collaboration fosters creativity and innovation. To foster this particular climate, an open source software developer might include restrictions on the use and development of this source code by requiring subsequent users to disclose any improvements, or derivative works, of the source code, or he may simply restrict any commercial use of it.

There are about 70 open-source licenses, each with different terms, which have been approved by the Open Source Initiative. These licenses can fall into two categories – the first requires some form of attribution without generally any further requirements, and the second imposes some reciprocal obligations. The second is the most common form of license, and the one that can cause the most difficulties for businesses envisaging a potential sale or going public.

Under a GNU General Public License - a reciprocal-style license - a subsequent user who incorporates an open source code into their software must make such user’s software, or source code, freely available under the same license. In other words, competitors could examine the source code developed by such user, and create and distribute derivative works.

Failure to comply with the requirements of an open source license can result in costly litigation. Open source developers are not shy in filing copyright infringement actions, along with all the remedies available under the Copyright Act, including injunctive relief and statutory damages (i.e. up to $150,000 per work infringed + attorneys fees). This means that if a subsequent user has failed to comply with the notice and attribution requirements, for example, that user may be subject to stiff penalties and an injunction. Moreover, open source licenses generally provide no warranties or similar guarantees that the source code does not infringe a third party’s copyright, nor do they provide any indemnification provisions. So a subsequent user is basically using the code at their own risk of third party claims of infringement.

These concerns are real and can impact a company’s bottom line. This is all the more true for small companies who often juggle too many things at once and do not have a compliance system in place for open source software. When selling their business, any responsible buyer will go through a due diligence process where all of these issues will come to light. No buyer will want to invest into a company that is a live wire for litigation. Moreover, when going public, a company needs to be able to verify the ownership of material assets. The Sarbanes-Oxley Act requires that a public company certify that it has a system in place to provide accurate financial statements and internal controls to support such statements. These internal controls would require that it verify ownership of open source software. Failure to do so can result in significant fines and possible imprisonment.

A small company must therefore carry out due diligence on their systems to inventory what kind of open source software they have. This includes an inventory categorizing when such software was downloaded so as to double check it against licenses then in place. Once this is established, a company can start to understand the ramifications of such licenses and the permissible scope of such software’s use. Moreover, there needs to be a system in place to quickly respond to any complaints about non-compliance, not unlike a copyright agent under the Digital Millennium Copyright Act.

And if you think that developers lack the funds to finance a copyright infringement action, you might be absolutely right. But they certainly do not lack the support from industry associations such as the Software Freedom Law Center who will handle the lawsuit for them.

It may seem daunting to do all of this, but for an online company, the underlying software is the most important asset that it may have. It therefore needs to be treated accordingly.

Looks like it’s time for former Arizona State University quarterback Samuel Keller to do a cabbage patch.

A joint motion by the Electronic Arts and the National Collegiate Athletic Assn. to dismiss a lawsuit by Keller alleging unlawful use of his likeness was denied yesterday by a federal judge from the Northern District of California, Claudia Wilken. The former college ball QB did something of a Hail Mary pass by suing EA and the NCAA last May, which made the general allegation that the giant pair of media entities profited from college athletes’ likenesses without compensation.

For anyone with an XBOX (or a kid), it’s no secret that the NCAA brand has a multibillion dollar presence in the game franchise world, with EA being the number 1 game company in general and in sports titles as well. And EA’s NCAA license is nothing short of a video game pillar with titles such as NCAA Football 10 and NCAA Basketball 10 (yes, there’s a new title every year).

As a legitimate strong-arm tactic, EA and the NCAA attorneys made its own Hail Mary pass (I say this because a motion to dismiss is a very difficult vehicle to succeed with, as it is a “decapitation attack” that immediately kills the plaintiff’s case). However, with stakes like these, it would be downright foolish not to try to score an early victory.

Nonetheless, the reasoning within the motion challenged the court to entertain novel “transformative” arguments in the “right of publicity” realm. For example, EA argued that the games "transform" the players' avatars and are, therefore, protected under the First Amendment. Really? That is a rather heady and amorphous argument. Judge Wilken did not buy it, stating simply "EA's transformative use defense fails.”

On the flip side, for every gain there is a loss (and a vindication of the motion, even if its prime target escaped), and Judge Wilken did dismiss Keller's claim breach of contract claim. That claim alleged the NCAA breached its contract with him and other NCAA players by allowing their likenesses to be in EA's games. Judge Wilken througt the subject “contract” rather intangible itself and stated Keller "has not identified a contract he is seeking to enforce."

For anyone interested in the increasing use of real world likenesses in video games, they may also want to check out Dee-Lite’s case against Sega.

The heart of an LLC is the “Operating Agreement,” a term that many entrepreneurs have heard but rarely understand. Simply put, it is a partnership agreement that can be engineered to speak to the unique facets of the partners’ relationship. And since every venture is unique, the Operating Agreement provides tremendous flexibility to translate those facets into a pragmatic economic and management framework. When speaking of partners, as in multiple partners, the Operating Agreement can and should be the blueprint for the relationship between them.

Secondly, under NY law, the Operating Agreements is one of the few statutorily imposed requirements that a LLC must observe (Section 417 of the NY LLC Act ). And while the NY LLC Act provides some default rules on how the LLC should operate, it is a fairly poor baseline and in many instances may run contrary to the actual wishes of the partners. Worse still, many of the default provisions are very imprecise, which can lead to costly litigation in partner disputes. Hence, it makes sense for the partners to take the time to properly craft an Operating Agreement to fill in these significant gaps.

Also a key term: “Partners” in an LLC are called “Members.”

An Operating Agreement’s Common Provisions:
The following is a summary breakdown of some of the most critical Operating Agreement provisions. These provide a window into its key functions.
• Ownership Interests
• Purpose
• Allocation and Distribution of Profits and Losses
• Special Duties and Restrictions
• Voting Rights and Mechanics
• Managers
• Admission of New Members; Transfer of Membership
• Meetings
• Dissolution of the Company

Ownership Interests. One of the most overlooked functions of the Operating Agreement is to set forth the actual ownership stakes that the members have in the LLC. This is commonly achieved by a “Schedule” in the rear of the Operating Agreement that breaks down the member names, the initial amount of capital they invested into the LLC, and the percentage interest each member actually owns in the LLC. Unlike a corporation that often has share certificates evidencing ownership, LLC’s can and often do rely on the schedule in the Operating Agreement to set forth the relative interests of the members.

Purpose. Most startups have broad statements as to the LLC’s purpose. Usually, an Operating Agreement states that the LLC can engage in any “lawful” purpose. However, there are times when specificity is called for. For example, if the LLC is being used as a fundraising vehicle for the development of one real estate property, that may be specified in the Operating Agreement. Hence, in particular cases, it may make sense to limit the activities in which the LLC is permitted to engage.

Allocation and Distributions of Profits and Losses. Unlike a corporation, the equity a member has in the LLC and the amount of profits or losses that member is entitled to receive can be different. In contrast, in a corporation, a 50% shareholder would usually receive 50% of the profits of the corporation automatically. However, in an LLC, a member with a 50% Membership Interest could be configured to receive only 10% of the LLC’s profits/losses, which is something that can be specified and agreed to in the Operating Agreement.

This allows for various creative structures to incentivize and facilitate a variety of deals. For example, a member who is contributing labor as opposed to capital may have an escalating profits share against certain milestones, despite having a fixed amount of company equity. Often, the Operating Agreement will also specify timing of member cash distributions as well as distribution minimum amounts.

Special Duties and Restrictions. The Operating Agreement may address the unique arrangements between the members or between the members and the LLC. For example, members may be obligated to work for the LLC on a full time basis (or the reverse, the members may be expressly permitted to work in and for other ventures). In addition, the Operating Agreement may provide for a member “Non-Compete” during and after membership in the LLC. Confidentiality may also be required of the members during and after membership in the LLC. These provisions can all carry penalties for breach, including expulsion, reduction in membership interest, etc.

Voting Rights and Mechanics. While the members often informally work out their issues, sometimes more formal process in needed. Hence voting process should be addressed in the Operating Agreement. LLC’s can be designed to facilitate voting in a variety of ways, unlike corporations, which generally have voting rights that track the number of shares a shareholder has.

One approach is the partners have a voting stake equal to their membership interest in the LLC. So for example, a member with a 51% stake, would be able to trump the vote of the member with 49%. In addition, members can vote on a “per capita” basis, where each member is entitled to one vote irrespective of the amount of equity the members hold in the LLC, as well as other approaches.

Managers. LLC’s can have a dedicated management team, whose powers can be proscribed in the Operating Agreement. Managers are often a hybrid between a CEO and a Director overlooking the “big ticket” strategic decisions affecting the LLC and its day to day operations. LLC’s that have managers often delegate those roles to the managers, while the non-managing members have a passive role in the LLC. The Operating Agreement will, among other things, set forth the Manager selection and removal procedure as well as procedures that govern their management practices.
Admission of New Members; Transfer of Membership. One of the core functions of an Operating Agreement is to set out the mechanics and restrictions for the transfer of equity members ownership interests. One of the common approaches is the so called “right of first refusal” which grants the LLC and other members the opportunity to match any offer obtained from any third party by a member wishing to sell his or her

Membership Interest. In addition, the Operating Agreement can address so called “involuntary transfer” situations such as death, bankruptcy, disability or termination of employment by the company, as triggers that require a Member to sell, or the LLC to buy, a Membership Interest. In these situations, the Operating Agreement should also lay out a procedure and formula for determining valuation and buyout.

Meetings. Unlike corporations, which usually have statutory obligations to have meetings at multiple levels, LLC’s in NY have a default annual meeting rule, unless the members agree otherwise. The Operating Agreement often sets out a basic framework for the members to call meetings to address LLC business or call a vote on certain matters. In addition, the Operating agreement will also commonly set forth how the meeting is actually called and how participation takes place (e.g., in person and/or telephone).

Dissolution of the LLC. Few want to address the possibility of having to “dissolve”. However, relying on State law alone can be disastrous. Rather, the partners should make sure the Operating Agreement sets forth the scenarios in which the LLC can or should be dissolved and the timing and mechanism to do so. Often the two major triggers are the unanimous consent of the Members or by application to a court for a judicial decree. However, many ventures have unique needs that may demand a different approach, which should also be dictated in the Operating Agreement.

Summary. An Operating Agreement is an essential LLC component. In the short term, developing one will assist the partners in identifying and articulating their particular concerns. In the long term, an Operating Agreement will be the reference guide for many if not all of the scenarios that may impact the partners’ relationship.

I was recently a guest lecturer at the School of Visual Arts covering the topic of business and intellectual property. As is often the case in lectures, it is much easier to lecture, and much harder to answer questions. It was late at night, I was tired - a student raises her hand with a quizzical look on her face. I knew this would take me a while to answer even before she started speaking. But her question was a good one, and the issue might leave many stumped for an answer.

Her question was as follows: “Can an artist trademark his signature?” My immediate answer was an emphatic yes - of course a signature can be trademarked. It can be used just like any other trademark for the sale of a variety of things, from artist supplies to t-shirts, alcoholic beverages, mugs and other types of merchandise. But her question was not really whether it can be used for the sale of such goods, but rather whether a signature affixed to original works of art could constitute a trademark and whether it could be registered at the United States Patent and Trademark Office, just like any other valid trademark. The question frankly left me, and my colleague, a veteran copyright practitioner, a little stumped.

The short answer is yes, it can be registered. The issue was first addressed in In re Wood (217 USPQ 1345) where an artist was seeking to register his trademark to prevent others from creating counterfeits of his original works using his name. In approving the registration, the court stated that “[w]e see no other practical yet aesthetically pleasing alterative” to identify the source of the work in question. The issue was also addressed in another instance where Picasso’s heirs sought to enforce their trademark rights in “Picasso” against vendors selling t-shirts bearing the mark. A variety of artists have registered their signatures as trademarks, including Keith Haring and Charles Schulz.

The long answer, however, is a maybe. The problem with registering a signature is that it may fall within the trademark rule denying registrations for marks that are “primarily merely a surname.” In other words, if it mainly looks like or sounds like a last name, the USPTO may deny trademark registration in order to prevent someone from obtaining a monopoly on a last name. To determine whether a mark is primarily merely a surname, the USPTO will look at a variety of factors such as whether the mark is the applicant’s last name, whether it is a last name commonly found in phone books, whether the way the mark is used emphasizes the fact that it is indeed a last name and whether the word could have a meaning other than a last name. See TMEP 1211. There is a way to get over that “primarily merely a surname” rule, and that is by showing “secondary meaning” – in other words, that the public automatically associates the mark with the source of the goods. Clearly, in the case of Picasso, that is not difficult to do. But in the case of lesser known artists, that becomes more difficult. And expensive – to prove secondary meaning, an applicant would need to hire survey experts to demonstrate that the mark has acquired distinctiveness.

But what if you want to use your full name, first name and last name? In those instances, trademark tribunals have found that such marks are inherently distinctive and can benefit from trademark registration. Furthermore, even if an applicant is dead set on using just a last name, he may register the trademark (i.e. the last name) along with an inherently distinctive element such as a logo or monogram. In other words, some creativity is required.

As for a potential trademark description, any of the following may be deemed acceptable by the USPTO:

Class 16: “paintings, art pictures and art prints by artist [insert artist name]”

Class 35: “licensing of artwork and ______ (specify type of image, e.g. art pictures, graphic art reproductions) by artist [insert artist name]”

Class 16: “reproductions of artwork, namely, paintings, art pictures and art prints created by artist [insert artist name]”

Happy filings….


--Olivera Medenica

The 21st century childhood has just a taken a turn into Orwellian weird-ville. A complaint filed as a class action suit against the Lower Merion school district of Pennsylvania for "unauthorized, inappropriate and indiscriminate remote activation" of webcams in laptops issued to students, without knowledge and/or consent(one should be wary of free goods, especially when they are shiny MacBooks on the school’s dime).

As truly bad SyFy channel original movie absurd as this seems, the allegations state that Assistant Principle Lindy Mastko of Harriton High School informed a student that he was "engaged in improper behavior in his home." It even goes further to allege that Mastko told both the child and the child’s father that the school district could remotely activate the MacBook webcam and that such capability was being employed. Why or for what “official” purpose the district would do this is beyond me. Hence, I find the claim deeply dubious, but fiction tends to play it straight, while truth tends to find its way to wonky all too often. Secondly, the answer has not been submitted, so this is only at the allegation stage.

I am curious as to how this will impact or shape the school privacy debate as technology further complicates and blurs boundaries between schoolyards and backyards. A PDF of the complaint available here.

What other big news event can there be on just days after Facebook updates its interface without street riots? How about the fact that Clorox has quietly opened a position for a dedicated social media lawyer to advise it as it makes its continued (and surprisingly robust) inroads into social media?

That is indication enough that traditional brands are not only leveraging new technologies, but that they recognize the unique legal pitfalls associated with talking directly with the customers. So rather than be swept up with the rapids, they are looking to hire an el capitan to steer the ship.

With the news that Engadget just shut down its comment system for fear of a complete nuclear meltdown on the part of some of its users, can a company like Clorox (or any company of any size) be without counsel to guide it?