1. THROUGH THE PRISM: Software from Three Different Viewpoints Licensors, Licensees and Developers © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Presented by: Tom McThenia, Jr., Chad Duberke and Teddy Shih

2. Software Licensors © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved 1.Licensing v. Selling Software 2.ASP (Software as a service) 3.Protecting your Product 4.Licensing Structures

3. Licensing vs. Selling Software Products © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Licensing –Licensor retains ownership of underlying product, merely granting usage rights to a third party, revenue derived from initial license fee, ongoing royalty stream, or some combination of both. (Typical Software Licenses). Selling –Seller sells all rights to product to third party, retains, revenue derived from sale of product. (Custom Development). Issues of retained rights in modules, code or subcomponents.

4. Protecting your Software © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Copyright Protection –Arises automatically when an original work of Authorship is fixed in tangible medium of expression (17 U.S.C.) –Idea vs Expression – low creativity –Exclusive rights 17 U.S.C. § 106 –Derivative works –life of author plus 70 years

5. Options for Protecting Your Software Copyright protection Patent Protection for Software and Business Methods Trade secret Protection Open Source Software

6. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Copyright Protection / Assignment from Third Parties –Need written assignment from third parties –Work for Hire: employee, written agreement under limited circumstances –Object and copyright separate

7. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Copyright Protection / Software specific issues –Easy to copy Software; Easy to infringe –Types of Copyright Infringement Liability –Protecting Code vs Display vs Gui “look and feel” –Digital Rights Management (DRM) –Electronic Republication

8. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Patent Protection –Patents protect inventions of: useful processes, machines, (articles of) manufacture, or compositions of matter and useful improvements thereof (Utility Patent); –original ornamental designs for articles of manufacture (Design Patent). –Patents do not protect: laws of nature, natural phenomena, and abstract ideas.

9. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Patent Protection / Patent Rights –Right to exclude others from making, using, selling, offering for sale or importing an invention (Governmental grant in exchange for disclosure). –Standard of Patentability: Inventions must be novel and non-obvious. –Term: Utility 20 years; Design 14 years.

10. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Patent Protection / Infringement –Infringement of a patent: Making, using or selling claimed invention (without owner’s consent/license). –Remedies available for Infringement: Injunction (permanent cessation of infringing activity); and –Damages (lost profits, reasonable royalty, treble damages for willful infringement).

11. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Software and Business Method Patents – A Practical Approach –In re Bilski, 545 F3d 913 (Fed. Cir. Oct. 30, 2008) (en banc) – sets out a two-part machine-or-transformation test for determining when a claimed process is patent-eligible under 35 U.S.C. § 101 (1) claimed process is tied to a particular machine or apparatus, or (2) claimed process transforms a particular article into a different state or thing.

12. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Software Patents –General Purpose Computers (GPC), Machine Claims A GPC becomes a “special purpose computer” when the computer is programmed to perform particular functions pursuant to instructions from program software.

13. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Software Patents –Computer-Implemented Processes When can a programmed GPC provide sufficient machine implementation of a method to satisfy the Bilski test? (1) tied to a particular machine or apparatus (2) use of the particular machine or the transformation of the particular article must impose a meaningful limitation on the claim’s scope (3) the use of the particular machine or the transformation of the particular article must involve more than insignificant extra-solution activity.

14. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Software Patents –Data Transformation USPTO takes the view that an article can be electronic data that represents a physical object or substance if the data is more than an abstract value and is identified by indicating what the data represents, the particular type or nature of the data and/or how or from where the data was obtained. Must be more than mathematical manipulation per se. Nature of the data has a different function or is suitable for a different use.

15. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Software and Business Method Patents –Current Examination Guidelines at the USPTO. –Appeal of Bilski currently being decided at the Supreme Court.

16. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Trade Secrets –PROTECTS VALUABLE Confidential information and “KNOW-HOW” that gives a business a COMPETITIVE ADVANTAGE –TRADE SECRETS CAN BE LOST BY - Inadvertence – Negligence - Intentional Disclosure - Independent Discovery Including Reverse Engineering –MEASURES USED TO PROTECT TRADE SECRETS INCLUDE - Employee Nondisclosure and/or Noncompetition Agreements - Physical Security of Buildings, Equipment, and Computer Systems - “PROPRIETARY” Stamped on Products and Documentation Containing Trade Secrets

17. Protecting your Product © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Trade Secrets –Confidentiality and trade secret clauses (what about your code is confidential) –Non-compete Covenants –“Internet Time”

18. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Scope of Use Royalties Territory Term and Termination Transferability Sublicensing Indemnification Warranties Limitation of Liability

19. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Scope of Use –Internal Use v. Resellers / Developers Who is the Licensee? End Users, Resellers, Developers, etc.? –Site or Facility License Use of software at one particular location or Facility, can limit number of users; can permit or restrict copying for use in facility –Seat License Use of software on one particular computer or by one particular employee or person –Concurrent Use License Limitation on the number of concurrent users but not on the particular people that use the software –End User License (EULA) / Click-Wrap Agreement License between manufacturer/developer and End User of Software

20. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Royalties –Structure if Licensee is the End User Up front, one time payment Ongoing payments (monthly, bi-monthly, yearly, etc.) per user, per seat –Structure if Licensee is not the End User Percentage of net revenue Percentage of gross profit What is an appropriate rate?

21. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Territory –Do you want to limit geographic area in which software can be used –This can be solved through the use of a site or facility license –Export Restrictions?

22. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Term and Termination –Term What is the term of the license? For subscription based license agreements with end users the license may renew automatically upon payment of each consecutive royalty Perpetual in the consumer world Set length of time (developers and resellers) –Termination Breach of License, Breach of Intellectual Property rights Unauthorized use of Software For convenience Non-payment of Royalties

23. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Transferability and Sublicensing –Transferability Should the license be transferable? Within the licensees organization, to affiliates, non- affiliates, third parties, not at all? –Sublicensing Should you allow sublicensing? Benefits and Risks Effect on Royalty rates, collection of royalties from sublicensees Sublicensing by Resellers and Developers

24. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Indemnification –Important legal term –Protect yourself from unauthorized use or alteration of the software, infringement of third party intellectual property based on alterations, breach of confidentiality, other potential claims by third parties based on negligence of licensee

25. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Warranties –Typically very limited –90 day physical media warranty –90 day warranty that software will operate in accordance with specifications and/or owner’s manual –Usually nothing else in consumer world –Terms can vary dramatically with resellers and developers –Expressly disclaiming warranties –“As Is”

26. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Limitation of Liability –LIMIT YOUR LIABILITY!!! –Can not always predict how your software will interact with third party programs or third party hardware –Disclaimer of consequential damages –Liability cap for direct damages

27. Licensing Structure © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Limitation of Liability Example: –Licensor shall not be liable to licensee for any lost profits, lost revenues or opportunities, downtime, or any consequential damages or costs, resulting from any claim or cause of action based on breach of warranty, breach of contract, negligence, or any other legal theory, even if Licensor knew or should have known of the possibility thereof. In no event shall Licensor's aggregate liability exceed the amounts actually paid by Licensor in the 12 month period immediately preceding the event giving rise to any such claim.

28. Software Licensees © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved 1.Use and Implementation 2.Support and Maintenance 3.Transferability 4.Software Audits

29. Use and Implementation © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Use –How will you use the software? It is important to consider this question and obtain the proper rights from the Licensor. Installation / Integration –Can you do this on your own? If not, you need a schedule for performance. Access to Premises –If on site, the Licensor should be liable for physical damages caused to people or property on your premises while installing the software. Acceptance Testing –Final step, a license should provide for a time frame during which the licensee may test the software before final acceptance.

30. Support and Maintenance © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Are you purchasing support and maintenance services? –Bug fixes, upgrades, updates, new versions. –Live support Hours of availability (telephone, email, in person) Response Time –Escalation Procedure –Fees –Term of Support

31. Transferability © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Do you need to be able to freely transfer the license? –If so, Why is this important –May cost you additional royalties Would sublicensing be acceptable? Can resolve problem up front by obtaining correct license

32. Software Audits © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Audits of your software use to ensure that you are in compliance with the terms of your license (number of users, number of seats, geographic restrictions, etc.) Violation may result in fines and penalties Frequently conducted by third parties contracted by licensors to perform this function. The Business Software Alliance or “BSA” is one such organization.

33. Software Developers © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved 1.Development Agreements 2.Development Process

34. Development Agreements © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Software Development Agreement Software Consulting Services Agreement Software Beta or Evaluation Agreement Computer System Development and Integration Agreement Web Site Development Agreement Network Development Agreement

35. Development Process © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Define Project Objectives Project Structure Turnkey Company Integrated System Implementation of Existing Software Packages; Team Structure Key Contract Provisions

36. Development Process © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Specifications – functional specs, designs specs Milestones, schedule Deliverables Required third-party software – license rights

37. Development Process © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Phased Development –Design Review and Progress – set design avoid changes –Performance Criteria –Types of software –Compensation –Change Orders - written mechanism for adjustment

38. Development Process © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Deliverables –Software or Equipment Provided –Equipment purchase, installation, startup –Complete user documentation instructions –A system description –Source code listings –Backup and Recovery Procedures –Master Software Copy –Any Other Items Needed

39. Development Process © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Issues of IP ownership of Deliverables Issues re reusing or building on your proprietary code or tools. To patent or not patent?

40. Questions? © 2009 Lowndes, Drosdick, Doster, Kantor & Reed, P.A. All Rights Reserved Tom McThenia, Jr. (Patent, Technology and IP Attorney, admitted in FL, NC, VA, USPTO) Tom.McThenia@lowndes-law.com 407-418-6465 Chad Duberke, (Corporate, Technology and IP Attorney, admitted in FL) Chad.Duberke@lowndes-law.com 407-418-6234 Teddy Shih (Patent Attorney, admitted in DC only and USPTO) Teddy.Shih@lowndes-law.com 407-418-6297