The explosive popularity of tablets, smartphones and other Internet-connected consumer devices has ushered in a new technology ecosystem driven by Apps. These self-contained software programs have not only provided the stakeholders involved with a compelling way to exploit everything from movies and games to magazines and newspapers, but have created a thriving new marketplace poised for ongoing, accelerated growth. While the stakeholders are many, the myriad of complex business and legal issues facing them are no less staggering in number. For publishers, content creators, App developers, content distributors, aggregators, storefront operators and service providers, the successful navigation of a rapidly evolving landscape of shifting terms and conditions, privacy regulations, content restrictions and corresponding business considerations across multiple devices and platforms has proven a daunting but essential exercise for leveraging the economic opportunities available.

In this CLE-accredited webinar, the DigitalHHR team will explore the critical business and legal challenges associated with the development, publication, distribution, sale and use of Apps. We will discuss the contours of in-App purchases, subscription-based offerings, and “freemium” models, as well as in-App advertising and App-based ad networks. We will analyze the evolving privacy terms and conditions associated with the use of Apps, and the corresponding laws, regulations and case law impacting end user data collection, disclosure and ownership. We will also address the terms and requirements promulgated by the various platform operators, including Apple, RIM (Blackberry) and Google (Android), and how they impact stakeholders’ participation across the different App environments.

The webinar will be held on Thursday, April 7, 2011 from 12:30 p.m. to 1:30 p.m. EDT.

To register, please click here.

The FCC’s inquiry involves Google’s call-blocking policy.  In June, Google began noticing extremely high-cost calls to a concentrated number of rural destinations which generated vastly disproportionate costs.  Its internal investigations, using data filters to sort out call patterns, revealed that the top 10 telephone prefixes (the area code plus the first three digits of a seven digit number) to US destinations generated more than 160 times the expected amount and accounted for 26.2 percent of its monthly U.S. costs.  By August, Google began restricting calls to certain high-cost destinations.  Google’s response letter to the FCC describes the Google Voice service and explains Google’s investigation into and rationale behind its call blocking policy.  It claims that its engineers developed a “tailored solution” so that Google Voice currently restricts calls to fewer than 100 specific phone numbers, a practice which Google’s counsel believes is necessary to “prevent these schemes from exploiting the free nature of Google Voice.” 

While Google has only recently began blocking costly calls, the practice whereby rural telecoms charge long distance carriers exorbitant rates to connect and terminate calls from their networks is not new.  In may cases these telecoms partner and share revenue with adult chat service, conference calling centers and others to attract traffic to their networks.  AT&T, and other long-distance carriers, have long complained and sued over these so-called traffic pumping schemes.  However, as common carriers subject to FCC regulations, they were banned in 2007 from blocking calls and are required to deliver phone calls without discrimination to all numbers dialed.  AT&T’s complaint to the FCC is rooted in its contention that Google’s call blocking policy is enabling it to dance around this ban that applies to other carriers.

However, this recent skirmish over Google Voice is really part of a larger debate currently playing out in the regulatory stage over “network neutrality” rules being reexamined by the FCC and AT&T has framed Google’s actions as part of the debate. 

In its Statement on Google Voice and Net Neutrality, AT&T stated that “By openly flaunting the call blocking prohibition that applies to its competitors, Google is acting in a manner inconsistent with the spirit, if not the letter, of the FCC’s fourth principle contained in its Internet Policy Statement.“   The FCC’s fourth principle on net neutrality states that “consumers are entitled to competition among network providers, applications, and service providers, and content providers.“  

Some members of Congress are also concerned about the adverse impact on the market and support for universal service if Google is allowed to operate its telephone services outside of the rules that govern carriers.  As they stated in their letter to the FCC “[I]t is our opinion that a company should not be able to evade compliance with important principles of access and competition set forth by the FCC by simply self-declaring it is not subject to them without further investigation.”

Google responded to these charges by stating that “The FCC’s open Internet principles apply only to the behavior of broadband carriers – not the creators of Web-based software applications.” Google claims that AT&T is attempting to blur the distinction between Google Voice and traditional phone service but maintains that web applications like Google Voice and Skype shouldn’t be treated like traditional phone service.

Google distinguishes Google Voice from traditional phone carriers by explaining that unlike traditional carriers which charge users for their services, Google Voice is a free, web-based software application similar to e-mail rather than a telecom service designed to “supplement and enhance existing phone lines, not replace them” and should therefore be exempt from common carrier rules.   The service is currently available to a limited number of users on an invitation-only basis.  Users are still required to have an existing land or wireless line in order to use Google Voice and are still able to make outbound calls on any other phone device.  Therefore, because Google Voice is a software application, not a telephone company, Google believes that its service is not and should not be subject to common carrier laws or the FCC’s jurisdiction.

Distinctions aside, with nearly 1.5 million users, the increasingly popular service is viewed by some as running a rival service to traditional phone companies.  The heart of the FCC’s inquiry is whether Google Voice is a telecom service or an online software application and whether this distinction really matters.  How different is a call traveling directly over carrier lines from one that goes through software applications?  As of now, the difference appears to be the ability to block less than 100 calls, an option not available to AT&T and other carriers.

Whether the FCC agrees with Google’s characterization of its service and its interpretation of the current open Internet principles may have a dramatic impact on both the telecom and internet marketplaces.  And the FCC’s newly proposed rules on network neutrality may also play a prominent role in this debate.  We will continue to monitor the proceedings and keep you posted.

When it initially purchased Skype, eBay attempted to purchase Joltid as well but Friis and Zennstrom refused to sell, wanting instead to retain the intellectual property rights in GI.  They also refused to sell or directly license the GI source code to eBay.  eBay therefore purchased Skype subject to a license agreement for the GI code between Skype and Joltid.  That decision appears to be coming back to haunt eBay.

According to Friis and Zennstrom, the license agreement granted Skype the right to use an executable-only form of the GI code, known as the object code, which is un-editable.  Skype did not obtain any rights or license to the source code of the GI software.  This arrangement worked so long as Friis and Zennstrom remained with Skype because they were authorized to use and tinker with the GI source code.  However after their departure in 2007, Friis and Zennstrom began challenging eBay’s use of the GI technology, claiming that Skype (at that point owned by eBay) obtained unauthorized versions of the GI source code and breached the terms of its licensing agreement by continuing to modify and create derivatives of the source code.

In March of this year, Skype filed a claim in a U.K. court asking for declaratory relief and a finding that it is lawfully accessing, in possession of, using and modifying the GI code in accordance with the terms of the agreement.  Joltid disagreed, terminated the license agreement and filed defenses and counterclaims against Skype alleging that Skype had repudiated the license agreement, infringed upon Joltid’s copyright, and misused confidential information.  The case is scheduled for trial in June 2010.

A few weeks ago, Friis and Zennstrom opened another front in the dispute by filing a lawsuit in Northern California U.S. District Court against eBay that also names the investors as defendants.  These investors include private-equity firm Silver Lake, venture-capital firms Index Ventures and Andreesen Horowitz and the Canada Pension Plan Investment Board.  The suit claims that the investors were aware of Skype’s copyright violations during negotiations of the deal and seeks an injunction on Skype’s use of the GI technology in addition to damages and profits that Skype has made while using the technology in breach of its license. Such damages are allegedly “amassing at a rate of more than $75 million daily”.  The pair also filed another lawsuit shortly after which alleges that new software being developed by Skype incorporated confidential information that was misappropriated by a former executive at one of Friis and Zennstrom’s companies who recently joined Index Ventures, part of the investor group paying $1.9 billion for Skype.

With the benefit of hindsight, many have wondered why eBay would have paid $2.6 billion for Skype without better securing rights to its underlying technology in a manner that would not be interrupted.  While the precise reasons eBay structured the deal in this manner may not be clear, the opportunities it missed to protect itself are apparent.

First, by allowing Joltid to retain rights to the GI code, eBay’s use of the code was subject to the restrictions and limitations that Joltid and Friis and Zennstrom placed on such use as set forth in the license agreement. 

Additionally, without obtaining rights to the source code, eBay was at the mercy of Friis and Zennstrom, the two individuals who understood how the GI code functioned.  While eBay likely felt that having Friis and Zennstrom on its payroll would mitigate any concerns, perhaps additional thought should have been given to what would transpire if and when Friis and Zennstrom were no longer affiliated with eBay.

eBay also apparently did not acquire sufficiently clear rights to develop derivatives and modifications of the GI technology.  Therefore, any next generation versions of the GI technology that eBay wished to develop would have been subject to the restrictions of the original license agreement, including the rights that Joltid, Friis and Zennstrom had in the technology and source code.

While the intrigue and tangled nature of this dispute are in many ways unique, the lesson is clear: the treatment of IP rights in an M&A transaction involves consideration of multiple factors, contingencies and interests.  Careful and deliberate analysis of possible future scenarios–however likely or unlikely–is necessary to avoid losing the competitive advantage that is one of the foundations of the underlying transaction.

• Structuring relationships between developers and publishers and the ownership issues that arise in development agreements, including work-for-hire, joint ownership and cross-licensing issues;
• Protecting against developer default or insolvency, including the pros and cons of source code escrow arrangements and the applicability of Section 365(n) of the Bankruptcy Code;
• How clearances and consents have become critically important with the increased incorporation in games of real world elements (cities, buildings, people, etc.) and third party IP (e.g. music, video clips, characters, logos, etc.), with an examination of recent case law (Kirby v. Sega and Grand Theft Auto/Pig Pen); and
• Strategies to maximize revenues from online and mobile games, including sponsored exclusive features and content, “in-game” ads, syndicated games, and tiered subscriptions.

The one-hour Webinar will also feature “live chat” functionality to enable viewers to ask questions and comment on the presentation in real-time.  Presentation materials will be available for download.

The Webinar will be held on September 16, 2009 from 1:00 pm to 2:00 pm EDT.  To register, click here.

Advances over the last decade in the media, entertainment and technology industries have been unparalleled. The new media landscape is dynamically shifting in real time and all businesses must anticipate and react to innovations in technology in order to seize new opportunities and develop unique business models.

Hughes Hubbard and Reed’s New Media, Entertainment and Technology group recognizes the pace at which these advancements are affecting the day-to-day operations of our clients. We specialize in helping clients exploit such developments to stay ahead of the curve by understanding the way technology influences business. It is not merely the convergence of the media, entertainment and technology industries, but the impact of such convergence on the global consumer, which drives the marketplace forward. We combine the resources and experience of a traditional law firm with an understanding and passion for today’s cutting-edge technologies to assist our clients in navigating the new realities and challenges arising from this shifting landscape.

Digital Media and Internet

• Digital audio-visual content licensing, distribution and syndication initiatives on all new media platforms including wireless, broadband, satellite radio and IPTV
• Online social networking services, virtual reality communities, blogging, massively multiplayer online games (MMOGs)
• Mergers & acquisitions, strategic alliances, online sponsorships/promotional collaborations and joint ventures
• Embeddable media player development, deployment and syndication
• Electronic publishing and distribution
• Integrated marketing, contextual advertising and brand management
• Viral marketing and Internet based “word of mouth” campaigns
• Ad serving, syndication, publication, targeting and tracking
• User-generated content ingestion, distribution, syndication and liability-related issues
• Digital content screening, moderation and filtering
• Online gaming, sweepstakes, contests and promotion compliance
• Digital Millennium Copyright Act – safe harbors and anti-circumvention issues
• Adoption and content of website Terms of Use agreements

Entertainment

• Development and production matters for motion picture and television productions, including writer, producer and director arrangements, guild issues, special effects agreements, location agreements, and other production related matters and documentation
• Domestic and international motion picture distribution in all media, including output deals and ancillary exploitation
• Cable and television broadcast, syndication and other distribution
• Motion picture and television finance, including single- and multi-project finance and all forms of debt, equity and mezzanine financing
• Strategic alliances and motion picture and television co-production and co-financing arrangements
• Major record label sound recording, publishing and associated rights clearances
• Independent music recording, publishing and licensing
• Video game development, publishing ,distribution and licensing for all platforms, including console, handheld ,wireless and online games
• Professional sports league television licensing and retransmission
• Professional athlete employment contracts and talent agreements, including spokesperson, appearance and sponsorship agreements
• Literary and other underlying rights acquisition and licensing
• Rights clearance for motion pictures, television productions and video games
• Product, character and technology merchandising and licensing
• Television format licensing
• Overall and housekeeping deals with talent elements and production companies
• Motion picture and television library acquisitions and dispositions
• Network, cable system and satellite affiliation and carriage agreements
• Product placement and commercial tie-ins
• Motion picture and television marketing agreements and arrangements
• Registration and licensing of patents, trademarks and copyrights
• Litigation concerning the interpretation of recording, film and distribution contracts
• Theme park, gaming and hotel operation

Technology and Information Security

• Privacy, data and information security compliance
• Information technology, business process, call center and manufacturing outsourcing transactions
• Website development, hosting and colocation arrangements
• Electronic commerce, publishing and distribution
• Technology and data export compliance
• Record retention and disaster recovery/contingency planning compliance
• Wireless device and network applications
• Software/hardware and intellectual property procurement, development, licensing and distribution
• Micropayment, contactless payment, smart cards and other alternative electronic payment technology implementations
• Technology transfers and acquisitions
• Technology service and maintenance agreements
• Domain name disputes

New Media, Entertainment and Technology Attorneys

• Dan Schnapp
• Rita Haeusler
• Wayne Josel
• Peter M. Langenberg
• Lindsay Orosz
• Matthew Syrkin
• Other Attorneys