As we suspected, the response from the entertainment community has been swift, and the company has since received a barrage of cease and desist letters from television networks, movie studios, sports leagues, broadcasters, syndicators and others in the entertainment industry alleging that the operation of the service as currently conducted amounts to copyright infringement. In response, the company has now filed a complaint for declaratory judgment in Seattle district court alleging that by complying with the Act’s compulsory licensing scheme in Section 111 “it has not infringed any of the copyrights owned by the any of the Defendants.”

We will obviously keep an eye on future developments as this complaint now moves its way through the court system and the entertainment industry’s forthcoming response.

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.

The question of retroactive licensing has been considered in a number of district court cases, however, Daviswas the first time the issue had been considered by an appellate court.  The case centered around two songs written by Mary J. Blige, Bruce Miller and others, all of whom were defendants in the case.  The plaintiff, Sharice Davis, claimed that Blige’s songs infringed her copyright in two songs she co-authored with Bruce Chambliss, the step-father of Blige and father of Miller.  Miller however, claimed that Chambliss, who was not a party to the case, wrote the disputed compositions on his own and orally agreed to give all rights in the music to Miller.  However, the crux of the case turned on a written agreement between Miller and Chambliss, created two days before Chambliss’ first deposition.  The agreement purported to retroactively transfer all rights in Chambliss’ works to Miller from the date of their composition.  This would make Miller a co-owner in the two disputed compositions and validate the licenses he gave to Blige to use the works.  If the Court of Appeals had upheld the agreement, as the District Court did, Davis would have lost all of her claims for past infringement against the other defendants. 

The Second Circuit overturned the District Court decision, holding that a co-author cannot immunize a third party for past infringements by retroactively issuing a license for the infringed work.  To support its decision, the Court of Appeals used the property theory of joint tenancy as a model for the rights of copyright co-owners.  Each copyright co-owner had independent rights to use and license the work, subject only to a duty to account to the other co-owners for any profits that are made.  A co-owner can only convey as much as he possesses and cannot, therefore, transfer or assign the rights of other co-owners.  The court held that a retroactive transfer would effectively allow a co-owner to assign away another co-owner’s right to sue for accrued infringements.  While Chambliss could release Miller and the others from liability from him for past infringements, he could not transfer or assign any rights Davis had against the defendants for accrued causes of action. 

By holding that licenses can only be issued prospectively, the court drew a line between a co-owners right to sue for past and future infringements.  A copyright co-owner can unilaterally issue a non-exclusive license which prevents a co-owner from suing the licensee for any future use.  However, a co-owner cannot issue a retroactive license that would prevent a co-owner from suing for infringements that have already occurred.  This holding, the court believed, provides certainty for co-owners dealing with infringement actions and discourages infringement by ensuring that retroactive licenses aren’t used to lower the cost of infringement.   

In Sybersound, the Ninth Circuit dealt with the question of a co-owner’s right to license their copyright from a different perspective.  Where Davis dealt whether a co-owner could unilaterally issue a retroactive license in order to cure past infringements, the question in Sybersound was whether a co-owner can unilaterally grant an exclusive license that gives the licensee co-ownership in the copyright. 

Sybersound had brought claims of infringement against five of its competitors in the karaoke industry for allegedly infringing Sybersound’s copyrights in nine songs.  Sybersound had acquired its rights in these songs by way of agreement with TVT, a co-owner the copyrights along with other publishing companies.  The agreement stated that TVT was making Sybersound the “exclusive assignee of TVT’s copyrighted karaoke use interest and of TVT’s right to sue,” purportedly making Sybersound a co-owner in the copyright.  The Ninth Circuit held that the agreement was invalid because TVT could not exclusively assign what it did not exclusively possess.  TVT was only a co-owner of the copyright, and therefore, “as a co-owner of the copyright, TVT could not grant an exclusive right interest.”  For Sybersonic to acquire an exclusive license, each of the co-owners of the copyright would have to agree to the transfer.  Since TVT could only unilaterally grant a non-exclusive license, Sybersonic did not have standing to sue and the infringement claims were dismissed.    

It had been a common practice in the media industry to obtain licenses after the fact.  However, after Davis, that practice has become much more uncertain.  The Sybersound decision might have a dampening effect on similar transactions as it seemingly makes it impossible for a copyright co-owner to grant an exclusive license of his proportional share in a copyright without the consent of his fellow co-owners.   

Left undiscussed in these decisions was the issue of the representations made by the co-owner of the copyrights in the underlying license agreements.  One can assume that the licensees sought and obtained a representation that the licensors had the authority to grant the underlying rights and that use by the licensee of the copyrighted works would not infringe or violate any third party’s rights.  Obviously these rulings have rendered those representations false, exposing the co-owners to potential claims under the license agreements, including claims for indemnification.

In confronting the commercial landscape created by these rulings, it is critical for licensees to carefully consider the rights they are obtaining in copyrighted works with multiple owners, particularly when rights are being granted on a retroactive or exclusive basis, to ensure that they will be able to exploit the rights as intended.  For copyright co-owners, it is important that any representations they make be tailored to reflect their limitations on the rights they can grant so that they are not promising more than they can deliver.

Our New Media, Entertainment and Technology practice group has extensive experience assisting our clients in understanding and analyzing the impact of new developments in the law on the design, development, implementation and operation of their respective business initiatives across all new media platforms, and we will continue to stay apprised of and routinely report on further developments in the treatment of co-ownership by the courts in this regard.     

* We would like to thank Kate O’Donnell, a Summer Associate at the Firm, for her assistance in preparing this article.

The tremendous effectiveness of video game product placement and in-game sponsorship is no surprise, with gamers maintaining high and sustained exposure to advertisements. A recent study revealed that gaming audiences are more inclined to remember and positively perceive brands featured inside video games than other advertisements and that this form of advertising is even beginning to trump the effectiveness of television advertisements. Another similar study found that, unlike advertising messages in other media, advertising in video games is seen by gamers as making the games feel more authentic and 65% of players agreed that in-game advertisements made the gaming experience feel more realistic and 55% said the advertisements “look cool”.

In this climate, your decision to dress your main video game character in, for example, a pair of Vans (or even kicks resembling Vans) could earn you a thank you note or possibly a temporary restraining order from Vans which may have an exclusive in-game licensing arrangement with Activision Blizzard, the publishers of the Tony Hawk series of skateboarding games. Make no mistake, the major video game developers and publishers are engaged in a well-funded war for market share, and licensing agreements with real-world content owners have become the norm. Whether you’re creating a sports game, a music title or a first person shooter, there is both tremendous promotional value and legitimacy that accompanies the in-game inclusion of popular names, products and places, and the respective owners now want their say as to the games in which they appear and how and under what conditions their content is featured.

Now that content owners have skin in the game (no pun intended, of course), licensing arrangements are being struck left and right–some exclusive, some non-exclusive, some royalty bearing, some royalty free. From guitar makers to gun manufactures, content owners know that placing, for example, a “Smith & Wesson” gun in the main character’s hands, as opposed to an “ACME” rifle, has the potential to sway consumers inundated with options, especially in the already crowded first person shooter genre, from one title to another. With  in-game asset licensing arrangements becoming more and more common, the traditional test for assessing trademark infringement as it relates to video games—the likelihood of confusion among consumers as to whether the assets being depicted in the video game are endorsed or associated with the title—has and will continue to be an easier hurdle for trademark owners to clear as the amount of licensing agreements pertaining to inclusion of trademarked or copyrighted works in video games increases. In other words, circumventing the licensing process in favor of a “fair use” or First Amendment defense will no longer be a viable position from a risk assessment perspective, as plaintiffs will now have an easier time demonstrating and establishing that in-game licensing arrangements have become industry standard and convey substantial commercial value.

This will be the first of many posts to come on the subject of video game licensing and clearances, as well as the legal principles and case law underlying the topic, including fair use and infringement (both for copyright and trademark) and the building blocks of the licensing agreements required to navigate the interactive gaming space.

• One report says that ad spending on social networking sites will be lower than expected this year and will remain relatively flat in 2009.  Details from the WSJ are here. 
• The House Committee on Energy and Commerce has released a report entitled “Deception and Distrust:  The Federal Commmunications Commission under Chairman Kevin J. Martin.”  Some of the highlights of the criticism: lax oversight of telecommunciations companies and pushing for revisions to agency reports in a less-than-open fashion.  One caveat:  the report was prepared and released by the majority staff and is not necessarily a consensus view.  Here’s a link.
• Google has reached agreement to bring the magazine archive and current issues online as part of Google Book Search.  Titles involved in the project are a diverse bunch and include New York Magazine, Popular  Mechanics and Ebony.  The announcement was made via this post on Google’s official blog.
• The New York Times takes a look at licensing and other revenue opportunities that are being exploited in virtual worlds.  We’ll be looking at the legal impact that emerging technologies in the virtual space might have on licensing arrangements in the coming weeks.  Check back for the full post.

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