Universal’s Zune Deal: A Case Study in Creative Revenue Sharing

Early in November, Universal Music Group announced an innovative deal with Microsoft.  As part of the negotiations leading up to the launch of Zune (Microsoft’s competitor to the iPod), Universal cut a deal to get a royalty payment for every Zune player sold by Microsoft.  This is separate from the royalties generated by the sale of downloaded music from Universal’s catalogue. 

How did Universal negotiate this and why did Microsoft agree to share its (probably slim) margins on the device?  Let’s call it an alignment of interests.  Microsoft needs the big music catalogues on side if its Zune is going to put a dent in Apple’s mighty iPod.  Secondly, the Zune is marketed by Microsoft as a “social” vehicle: the wireless capability of the Zune player allows users to share their music with other Zune owners.  In legal terms, this means that content subject to copyright can be distributed to unnamed users who have not directly acquired any rights to the music.  Sound like a recipe for a copyright lawsuit?  Not if you cut a deal that aligns interests.  If Universal enjoys a cut of sales of the device, then it has a vested interest in having as many Zune owners as possible.  To answer any fears that one Zune owner can distribute music infinitely, the technical protection measures kick in.  The device can only share with other Zune devices within range, and the shared music actually times out after three days.  Music sharing?  It’s more like a short-term loan. 

For its part, Universal had two other motivators: one, the Diamond Rio case in the U.S. made it clear that MP3 players were not subject to the type of copyright levy applied to blank CDs and other digital recording media.  In Canada, the Federal Court of Appeal came to the same decision in 2004. So iPods and Zunes are not generating tariffs for copyright owners the way blank CDs are.   Second, Universal also has its eye on upcoming negotiations for the renewal of its contract with Apple. With the Microsoft deal in its back pocket, Universal will very likely look to Apple for a cut of iPod sales.  Unfortunately for Universal, it does not have the upper hand in that round of negotiations.  Apple’s iTunes accounts for the lion’s share of the legal download market and any threat by Universal of pulling its catalogue from iTunes would be akin to shooting the goose that’s laying the golden eggs. 

Instead of positioning themselves for a future battle over copyright, Universal and Microsoft used a little creative thinking to align business interests.  It will be interesting and instructive for business owners to watch as the deal-making unfolds.  

Calgary - 08:38 MST

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The Innovative Use of Copyright

The use of copyright as a tool to control distribution channels and protect product lines is not new. Neither is it confined to the traditional fields of music or software. Take for example the 2005 case of Euro Excellence, Inc. v. Kraft Canada Inc., 2005 FCA 427, where the Federal Court of Appeal upheld an injunction against an unauthorized distributor of “gray market” Toblerone chocolate bars, based on a claim of copyright infringement. Gray marketing refers to the distribution of genuine goods by a distributor who is outside the manufacturer’s official supply channel.

Manufacturers of all stripes seem to be employing copyright as a way to control unauthorized uses of their product. Take for example Viacom’s well-drafted copyright license terms on the back of its “Dora the Explorer” branded stickers: “This product is intended solely for non-commercial home use. No license has been granted to apply this product to decorate articles which will thereafter be sold. Any such use is an infringement of copyright in the characters portrayed and is specifically prohibited.” Viacom’s Dora figure is big business. In 2005, Viacom’s revenues in Canada alone were $214 million, generated in part from licensing and merchandising of branded products such as Dora stickers. Copyright can be a very useful tool which should be considered when developing a strategy for product distribution.

Just don’t let your pre-schoolers put any Dora stickers on the cups at their sidewalk lemonade stand.

Calgary – 16:04 MST

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Director’s Liability for Trade-mark Infringement

Can a director be personally liable for trade-mark infringement?  We raised this issue in our October 25th post. A recent Federal Court decision has re-examined this question.  Generally, directors and shareholders are considered to be legally separate from their corporation and are not personally on the hook for the debts or liabilities of that corporation.  If the corporation breaches its contractual obligations, defaults on a loan or infringes someone else’s intellectual property rights, then it is the corporation, not the individual, who is liable.

In the case of Petrillo v. Allmax Nutrition Inc., 2006 FC 1199 (CanLII), the plaintiff brought an allegation of trade-mark infringement against both the corporation and Richard Glover and Michael Kichuk, the directors of that corporation.  The individual defendants brought a motion to have the lawsuit dismissed against them personally.  They succeeded.  In coming to its decision, the court made several important points:

One, even though a small company may be controlled by one or two individuals who may function as shareholders, directors and officers, the authorization required for personal liability will not be inferred merely from the fact that a company is closely controlled.  Secondly, the court said that “it is not enough for a Plaintiff to assert personal liability on the part of an officer or director of a company in a statement of claim, in the hope that evidence to support the allegation will be uncovered during the discovery process.  A lawsuit is not a fishing expedition.” (at para. 36)

In the end, no evidence was brought forward to implicate the directors personally and so the lawsuit against them was dismissed. 

Calgary - 14:02 MST

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Copyright Takes Aim at Video Sharing

In the ongoing copyright wars, some of the most memorable battles were fought by Sony BMG and Universal against upstarts like Napster and Grokster.   Napster and Grokster were ahead of their time.  Alas, like many pioneers, they were effectively litigated out of existence.  Today, dozens of industry-sanctioned sites like iTunes and Puretracks are flourishing. 

With the upsurge in video file-sharing sites, are we going to see a new round of battles, this time over copyright in video and movie content?  The answer to this question will lie in the degree to which the industry becomes successfully enmeshed in the success of video-sharing.  Yes, we are already seeing copyright lawsuits against YouTube and MySpace.  However, the difference is that these popular video-sharing sites aren’t operated by rogue individualists.  They are part of well-established corporate empires: Google bought YouTube; MySpace is owned by News Corp., the parent company of Fox Interactive.  YouTube has already negotiated deals with CBS, Universal, Sony BMG, Warner Music and NBC.  The content industry is enmeshed.  If industry can generate profit through these distribution models, the battles will be between competing empires over who has the most successful distribution model and the most effective copyright protection measures. 

For Canadian video content producers, the questions remain the same as always: can content be distributed profitably or will profits leak out through copyright infringement?  If copyright infringement is occurring, can it be stopped and at what cost?  We’ll continue watching the latest YouTube and MySpace lawsuits to find some of the answers.

Calgary – 12:16 MST

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Trade-mark Infringement Online

The world of trade-marks is regulated by several underlying concepts. One such concept is that two similar or even identical marks can coexist as long as they are in different channels of trade.  This permits the trade-mark DELTA to be used by an airline, a water faucet manufacturer and a hotel chain without any confusion.  

In the recent decision in Louis Vuitton Malletier S.A. v. Haute Diggity Dog, LLC, 2006 WL 3182468 (E.D. Va. 2006), this concept was put to the test in the internet context.  Are online sales a “channel of trade” for the purpose of determining whether two similar marks can coexist?  The famous hand-bag company sued a manufacturer of pet accessories (such as dog beds and chew toys) for trade-mark infringement.  Louis Vuitton alleged that the use of the mark CHEWY VUITON  infringed its LOUIS VUITTON mark.  Essentially, the court disagreed.  The fact that the sales of both the plaintiff’s and defendant’s products were made online was not, by itself, determinative of the issue.  The court looked at a number of other factors to determine whether the two marks were used in the same channel of trade.  

Trade-mark owners should police their marks and take steps to prevent infringers from trading on their reputation.  This U.S. case provides some guidance for Canadian businesses who are trading into the U.S. particularly in the ever-expanding internet and e-commerce context.  



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Copyright Q & A

Many companies want some basic guidance on copyright. This discussion provides some practical tips and information on copyright in Canada.

Q. What is copyright?

Copyright is at its most basic level the “right to make copies”. It was originally developed to give writers and artists a measure of control over who can rightfully copy their works.  Copyright protects original creations such as books, music, images, photographs, and has evolved to provide protection for software, layout and design of websites, broadcasts and performances.  Copyright is a function of the law set out in the Copyright Act and in the court decisions which interpret that Act.

Q. How is copyright created?

Someone who creates an original work automatically enjoys copyright protection in that work by virtue of the Copyright Act.  For copyright to subsist, the work must be original and it must be reduced to a fixed form (for example, copyright does not protect mere ideas which are not expressed in writing). 

Q. Do I need to register copyright and if so, how do I do that?

Technically, you do not need to register copyright in order to enjoy the protections under the Copyright Act.  However, you can benefit from registration because a registration entitles the copyright owner to the benefit of certain presumptions.  In other words, you are presumed to be the owner of a work in which you have a copyright registration without having to prove that you were the author of the work.  Whereas, without a registration, you would have to prove authorship and ownership of that work in the event of any dispute.  Copyright registration is easy to do (relative to patents or trade-marks, for example).  The Canadian Intellectual Property Office provides more detailed guidance on that process.

Q. What can I do if someone else uses my copyrighted works without my permission? 

When someone else uses works in which you enjoy copyright protection and they don’t have your permission, this is what we call copyright infringement.  There are a number of exceptions in the Copyright Act which permit copying under certain circumstances, but if those exceptions are inapplicable, then you may be able to sue the infringer to prevent the unauthorized copying.  The Copyright Act permits copyright holders to collect statutory damages of up to $20,000 in certain cases where infringement can be shown.

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ISPs on the Front Line

Internet Service Providers (ISPs) are often on the front lines of the battles taking place in internet law.  In the BMG case (BMG Canada Inc v. John Doe) (which was referred to in our October 30th post), it was the ISP community which took the brunt of the recording industry’s efforts to stop online peer-to-peer file-sharing. In that decision, the court denied the request by copyright holders to force ISPs to disclose their customers’ identities where copyright infringement was alleged.  ISPs fought to for the right to protect their client’s identities (or framed in a business context, they fought for the right to avoid expensive disclosure obligations) and won.

The Modernization of Investigative Techniques Act , a proposed federal law which was first introduced in 2005 by the Liberal government, would impose stricter obligations on ISPs to permit “lawful interception of communications by law enforcement agencies and the Canadian Security Intelligence Service.”  This bill died before being passed into law, but it is certainly cause for concern for ISPs who are navigating the line between privacy rights, legitimate concerns over illegal activity, the interests of copyright holders… and the dictates of profitability in a competitive marketplace.

In a recent case in Ontario [see story link] the quick response of an ISP led to the disclosure of the identity of a subscriber and a speedy arrest by investigators.  That case (involving sexual assault) highlights the issue but does not provide much guidance for ISPs in the more nuanced area of alleged intellectual property infringement.  We will be monitoring developments to see whether the Conservative government will introduce legislation in this thorny area.

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Pharma Patent Decision Released

Last week (November 3, 2006) the Supreme Court of Canada (SCC) issued a decison in the battle between AstraZeneca and Apotex on the issue of “evergreening” the protection available for pharmaceutical products. The decision cane be found at AstraZeneca Canada Inc. v. Canada (Minister of Health), 2006 SCC 49

The Patented Medicines (Notice Of Compliance) Regulations govern patented pharmaceutical products in Canada and provide brand-name drug companies with some extra tools in their competition against generic drug manufacturers. Here’s how it works in a nutshell:  a generic drug manufacturer cannot enter the market without a Notice of Compliance (NOC) and no NOC will be issued if the proposed product is the subject of a competitor’s patent.  However, a generic can challenge that patent’s validity or applicability to its own product by issuing a notice of allegation.  The brand name drug company (which owns the patent) may respond by issuing its own application for a prohibition of the NOC.  This response results in an automatic 24‑month “statutory freeze” on the issuance of the NOC to the generic drug manufacturer.  Even after a patent expires, by applying for new improvement patents of “marginal significance” to the expired patent, the brand-name drug company can obtain an indefinite series of 24‑month statutory freezes, which can effectively shut the generic out of the market for that product.  There has been much criticism of this tactic.  This decision helps clarify the rules and warns against the use of the “evergreening” tactic by patent holders. 

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Open Source Indemnity

In October 2006, open source software company OpenLogic announced that it is offering an indemnity against lawsuits for customers using its code [story link].  The indemnity covers intellectual property infringement claims (including defense of claims, replacement of infringing software, and up to four times the value of the contract for damage awards) for claims arising out of the use of certain open-source software products. These products are listed in its Certified Library.  Of course, there are limitations to the coverage, one of which is that the indemnity does not cover code which is modified by the customer.

The business issue? For licensors, offering such an indemnity is a calculated risk. In this case, it’s designed to give customers confidence in the face of the questions swirling around the open-source community in the wake of the SCO Litigation. Software licensors, whether in the open-source or traditional software market, need to balance the costs associated with risk allocation. The risk allocation analysis has to take into account the potential threat posed by software patents.  Different companies will take different approaches depending on their overall strategy.  For example, Red Hat has developed its own strategy on such litigation, and has taken out a number of software patents for defensive purposes. 

We will be watching these developments closely as open source software legal issues continue to be front-and-centre for many software companies. 

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Faster, Higher, Stronger… It’s super-trade-mark!

The Vancouver Organizing Committee for the 2010 Olympic and Paralympic Winter Games (VANOC) owns the trade-marks related to the 2010 Olympic games – what they call the “Olympic Brand”.  VANOC has given notice of over a hundred marks already, all under Section 9 of the Trade-marks Act which is a unique category of trade-mark known as “official marks”.   Owners of official marks already have the benefit of some very special rights and remedies that the rest of us mere mortals can only dream of. 

According to their recent report, VANOC is now in discussions with the federal government regarding “special legislation to protect the Olympic Brand.” In their view, such legislation would be designed “to protect [VANOC’s] marks and to prevent or reduce ambush marketing of its sponsors during the period leading up to the Beijing 2008 Olympic Games through to the end of the 2010 Games.”  As if the strength of Section 9 marks is not enough they appear to be gunning for some new category of super-trade-mark.  Wouldn’t it be nice if every business could lobby the government for special legislation to protect its own collection of marks?  

Thanks to Neil Melliship for his post on this. 

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