Business and Technology Law

On August 12, 2010, Oracle sued Google in U.S. District Court in San Francisco based on claims that Google’s Android operating system constitutes an infringement of Oracle’s patents and copyrights related to the Java software development platform. Oracle owns the intellectual property rights in Java following its acquisition of Sun Microsystems earlier in 2010, and in its lawsuit, it alleges that a Google-developed technology called Dalvik, which is integrated in the Android O/S, is a competitor to Java that infringes the various patents and the copyright in Java.

In light of the massive resources Oracle and Google each are able to bring to bear in this fight, the outcome of the lawsuit is anything but certain. Google has countered that versions of Java have been licensed under open-source licenses for years and that Dalvik was developed under that kind of license. In addition, Sun Microsystems’ approach to Java patent matters historically was very permissive, which may call into question Oracle’s ability now to base a patent suit on rights that arguably may have been diminished through past inaction.

However, one thing that is certain is that Oracle’s lawsuit will cause – and should cause – many software developers to think long and hard about the advisability of any long-term plans that depend on the open availability of Java as software development platform. As this case unfolds, developers should be prepared to carefully consider whether it represents a sea-change in Java-related IP enforcement, in which case it may make sense to start identifying appropriate alternatives to Java, or whether it is merely a case of one big fish going after another big fish in an effort to reach a joint-licensing or other context-specific outcome.

Both state and federal governments are seeking ways to ensure citizens’ personal information is secure and remains private, but the laws vary wildly and are sometimes frustratingly complex. For businesses, it is not always clear which laws, if any, the business is subject to. Once applicability of the law to a business is determined, the process of evaluating compliance of IT systems and policies can be time-consuming.

Now imagine you are the vendor of software products that could potentially store statutorily protected data for your customers. You potentially have just inherited compliance evaluation projects for every one of your customers.

For many vendors, such compliance demands are too burdensome, and a quick review of their cloud computing agreements shows that their methods for handling these requirements often consist of avoiding the subject altogether or by expressly absolving themselves of the responsibility. Many vendors attempt to avoid liability by including provision in their contracts disclaiming any liability for data breaches or compliance with data security regulations. Cloud customers that do not carefully evaluate cloud agreements can find themselves holding the bag for data breaches that may have been caused by their cloud vendors.

Some statutes, such as the recently revised HIPAA rules, have addressed such contractual liability avoidance by specifying that business associates of companies covered by the statutes are also liable for data breaches. As the cloud computing industry matures, vendors will learn that they have to comply with statutory security requirements. During this maturation, new and possibly standardized methods to share responsibility for security of customer information will emerge. For now, customers should seek the advice of experienced counsel before entering into any cloud computing agreement to mitigate or eliminate vendor avoidance and to ensure the vendor will adequately protect protected personal information.

Web sites catering to online reviews of businesses – including sites dedicated to reviewing (some might say attacking) only one business – have created public relations nightmares for many businesses. In some cases, the targeted businesses perceive the content of the gripe sites to be defamatory or infringing of the target’s intellectual property rights. However, while it may tempting to threaten legal action against these sites, companies are learning that such action may cost more than it achieves and may risk further bad publicity as a result of so-called oppressive prosecution. A good example is the recent case of Career Agents Network, Inc. v. CareerAgentsNetwork.Biz.

Career Agents Network, Inc. (“CAN”) brought suit against a former customer, Lawrence White, who had developed a web site called careeragentsnetwork.biz solely to warn prospective customers against doing business with CAN. The lawsuit included claims under the Anti-cybersquatting Consumer Protection Act, alleging that White registered the web site in bad faith in an effort to profit from his use of CAN’s trademark. The complaint also included a more traditional trademark infringement claim under the Lanham Act. White prevailed, with the court finding that his site was simply meant as a forum to express dissatisfaction with CAN and not to reap profit by stealing potential customers from CAN. As a result, White not only succeeded in obtaining a dismissal of CAN’s claims but also received an award of attorney’s fees – the court determined CAN had brought the suit in an oppressive manner and that its claims were unfounded.

The case should be viewed as a warning to businesses to think carefully before retaliating against gripe sites and online critics with legal action. Litigation is always an expensive proposition, but the costs in this kind of scenario are augmented by the reputational damage that can result even from sending a threatening letter to a targeted business. Such letters have a habit of being posted on the sites in question and of further exacerbating the existing publicity problem.

A better solution, when possible, is usually to engage critics in an effort to resolve a negative experience through customer service efforts. Barring that, an effective search engine optimization strategy can help to bury search results pointing to gripe sites and to keep the majority of potential customers from encountering the negative content. A knowledgeable attorney can assist with those efforts and can provide an effective battle plan when informal efforts are found to be ineffective.

Like all audits, success in a SIIA software audit depends less on what you own and more on what you can prove that you own. Although not required by law, the SIIA takes the position that a target company is out of compliance for each installation of SIIA member software products for which the target company cannot produce a dated proof of purchase. Many clients are dismayed to discover what does and does not constitute valid proof of purchase according to the SIIA.

Not Considered Valid Proof
1. Copies of Checks to Software Vendors
2. Dated Purchase Orders
3. Undated Software Licenses
4. Credit Card Statements Evidencing Software Purchases
5. Certificates of Authenticity
6. Media, Manuals, or Key-Codes
7. Invoices Bearing and Entity Name Other than the Entity Named in the SIIA’s Initial Letter

Valid Proof of Purchase
1. Dated Invoices in the Name of the Audited Entity
2. Soft Records (online account statements) from Recognized Resellers
3. Signed and Dated License Agreements
4. Soft Records from SIIA Member’s such as Microsoft Licensing Statements
5. Cash Register Receipts for Retail Sales where Product, Version, Quantity and Price Paid are Included.

Understanding how the SIIA analyzes software audit materials is critically important to achieving the most favorable outcome. In our experience, it is the most time consuming and difficult part of the process for clients to handle on their own.

Scott & Scott, LLP is not affiliated in any way with the SIIA.

In Advertise.com, Inc. v. AOL Advertising, Inc., 2010 WL 3001980 (9th Cir. 2010), the Court of Appeals for the Ninth Circuit partially reversed a trial court decision granting AOL an injunction against Advertise.com. In August 2009, AOL – which owns the mark ADVERTISING.COM – filed a complaint and motion for a preliminary injunction against Advertise.com alleging that Advertise.com had infringed AOL's trademark rights. Advertise.com appealed the trial court's decision to grant the preliminary injunction, but it did not contest that part of the preliminary injunction that enjoined it from using any design mark that was confusingly similar to AOL's stylized marks.

On appeal, the Ninth Circuit concluded the ADVERTISING.COM mark was generic . Generic terms are those that refer to the genus of which the particular product or service is a species, i.e., the name of the product or service itself. To determine whether a term is generic, a court determines whether consumers understand the word to refer only to a particular producer's goods or whether the consumer understands the word to refer to the goods themselves. On the other hand, a mark that is descriptive describes the qualities or characteristics of a product. Generic terms cannot be valid marks subject to trademark protection, whereas a descriptive mark can be valid and protectable if it has acquired secondary meaning.

The Ninth Circuit first examined the component parts of ADVERTISING.COM and determined ADVERTISING and .COM were both generic terms. Merging the terms together yielded a generic term as well. The court indicated that AOL accurately could describe itself as an “advertising.com” or “advertising dot-com.” AOL’s references to cases in which a seemingly generic URL mark was ruled non-generic did not persuade the court.

Additionally, the multitude of other domain names incorporating the word “advertising” (Advertise.com cited 32 such examples) convinced the court that AOL’s mark is generic. The court addressed AOL’s remaining arguments as inapplicable or unpersuasive and reversed the district court’s grant of an injunction against Advertise.com to the extent it enjoined Advertise.com from using the designation and trade name ADVERTISE.COM or any other designation or trade name that is confusingly similar to AOL's ADVERTISING.COM marks.

If you require assistance navigating a trademark dispute or registering your trademark, you should consult counsel experienced in handling trademark matters

On July 13, 2010, online auction giant eBay, Inc. was sued for $3.8 billion in the United States District Court for the District of Delaware by XPRT Ventures, LLC, on claims that eBay incorporated XPRT’s patented business method processes in eBay’s payment processing technology and that eBay breached a confidentiality agreement that allegedly covered the processes in question.

The viability of XPRT’s claims will depend on a number of factors that likely will be points of contention during the litigation. Those factors include the patentability of the processes in question (especially in light of the Supreme Court’s recent Bilski opinion regarding business method patentability), the degree to which the processes incorporated into eBay’s payment methods really are encompassed, if at all, within XPRT’s patent claims, and the enforceability of the confidentiality agreement referenced in (though not attached to) XPRT’s complaint, among others.

Patent infringement claims – especially those involving patented business methods and processes – are fairly common, and especially so when a defendant, such as eBay, has deep pockets and a similarly deep dependence on technological innovation in order to remain competitive. XPRT’s claims are somewhat more incendiary than those involved in many such suits, in that they include allegations of intentional wrongdoing by eBay’s officers and attorneys. However, the case generally appears to fit within a fairly common paradigm of a relatively unknown patent holder making claims for significant monetary damages based on patented technology allegedly incorporated in some aspect of the defendant’s products or services. Microsoft’s litigation with i4i, Inc. regarding XML-related technology in its Word software is another noteworthy, recent example.

The XPRT lawsuit also has the potential to be more of a news item than the average patent-infringement suit, because it alleges that the wrongdoing in question occurred during a period of time in which California gubernatorial candidate Meg Whitman was the CEO of eBay. Recent history shows that California politics – especially those involving contests for the Governor’s Office – almost always entail explosive political drama, so it would not be surprising if the lawsuit is used as a political weapon against Ms. Whitman in the run-up to the election. However, Ms. Whitman is not named separately as a defendant in the lawsuit, and there are no allegations in the complaint that she was directly responsible for any of the allegedly wrongful conduct.

Technology-dependent firms of all types must be prepared to recognize patent exposure as a cost of doing business, and they must be ready to work closely with knowledgeable counsel to evaluate the integrity of any patents they hold as well as the validity of any patent claims with which they are presented.

A new type of copyright lawyer has arrived on the intellectual property scene—not terribly good news for bloggers or online media outfits. Righthaven LLC CEO Steve Gibson is on the attack, beginning a campaign this past March against bloggers and website operators who post articles from the Las Vegas Review-Journal, his first client. Righthaven has acquired copyrights to the LVRJ content and is filing suit against these operators for copyright infringement. According to a Wired.com article, Righthaven plans to continue targeting bloggers who repost entire articles without permission by filing hundreds of lawsuits by the end of the year.

While there is clearly nothing improper about protecting intellectual property, some commentators are accusing Righthaven of “trolling,” a tactic known in patent law circles where a patent owner enforces its patents against an infringer, often in an aggressive manner, without any intention to actually market or develop the patented technology. In the case of Righthaven and LVRJ, lawsuits have been filed against bloggers with miniscule web traffic numbers, where the actual damages caused by the infringement are correspondingly minor. However, Righthaven uses the threat of statutory damages—which can range up to $150,000 per infringement—to scare the media outfit into settlement. For a blogger who receives notice of a lawsuit, often without first receiving a request to remove the infringing material, the prospect of a lengthy federal court battle is far too expensive. Righthaven apparently counts on such analysis to encourage quick, monetary settlement of these cases.

The “copyright trolling” trend being pioneered by Righthaven likely will expand before any material reform to copyright law occurs. Regardless of whether this type of use (or misuse) of copyright law is appropriate, Internet media companies and bloggers must ensure that any use of third-party content is either properly licensed or falls within the safe harbors provided by the copyright law prior to publication.

The American Society of Composers, Authors, and Publishers (ASCAP) recently filed copyright infringement actions against 21 bars, nightclubs, and restaurants nationwide. ASCAP claims in its press release that the establishments “either publicly performed the copyrighted musical works of ASCAP’s songwriter, composer and music publisher members without obtaining a license from ASCAP to do so, or had signed a license agreement with ASCAP but failed to comply with the license's payment terms.” ASCAP claims that it gives each establishment an opportunity to license music and pay the appropriate fees and that it resorts to legal action only when amicable attempts at resolution to a licensing dispute have failed.

Establishments that engage in copyright infringement are subject to significant liability if found guilty. ASCAP has the option of electing statutory damages of up to $30,000 per song infringed or up to $150,000 per song infringed if the conduct was considered willful. The exact amount of damages awarded is within the court’s discretion. Willful conduct often is defined as actual knowledge of infringement or reckless disregard that conduct constituted infringement. Willful conduct also does not need to be proven directly and may be inferred from the defendant's conduct. Some courts have presumed an establishment acted willfully if it fails to respond to a complaint or court order or if it fails to appear in court.

Alternatively, ASCAP may elect actual damages, normally calculated with respect to its lost profits. The defendant also may be assessed ASCAP’s attorney’s fees in addition to paying its own fees.

Music copyright infringement disputes with ASCAP, BMI, and other music copyright owners and royalty clearinghouses can become very expensive for bars, nightclubs, restaurants, and other establishments. If you are negotiating a license agreement with ASCAP, BMI, or a similar entity, or if you already are in a licensing dispute with the entity, you should contact counsel experienced with copyright law and license agreements.

An Austin-area software publisher recently obtained a significant court order against Discovery Communications, Inc. related to the popular Cake Boss television show on TLC. The plaintiff, Masters Software, Inc., which consists of husband-and-wife team Kelley and Jon Masters, publishes a computer program called CakeBoss that provides office management functions for professional cake bakers. The Masterses learned about the Cake Boss program, which, for the uninitiated, is a reality-TV program centered around the New York-based cake-baking business of Bartolo “Buddy” Valastro, prior to its debut and contacted both Discovery and Mr. Valastro in an effort to keep the show from airing under the Cake Boss name. The show aired despite the Masterses’ complaints, and it since has become one of the networks more popular shows.

After the show aired, the Masterses began receiving numerous inquiries and requests from people who mistakenly believed that they were associated with the show or with Mr. Valastro’s business, some of which overwhelmed the server hosting their web site. In addition, the Masterses entered into a licensing agreement in 2009 with a supplier to sell CakeBoss-branded cake decorating products, but the licensee stopped selling the kits after Mr. Valastro threatened it with legal action. The Masterses subsequently filed suit against Discovery in March 2010, seeking an injunction against its use of the term “Cake Boss.”

In granting a temporary injunction against Discovery, pending a trial, the U.S. District Court for the Western District of Washington noted the actual confusion that had resulted as a result of Discovery’s heavy marketing of “Cake Boss” and held that there is “a substantial danger that Discovery's ability to saturate the marketplace will lead consumers to assume that CakeBoss is somehow associated with Cake Boss.” The Court also held that, though the products at issue – a software program and a television show – are not directly competitive, it is nevertheless “not a substantial leap for a consumer encountering CakeBoss software in the market place to imagine that Cake Boss might have an interest in selling or sponsoring cake bakery management software.” As a result, the Court issued an order prohibiting Discovery and its affiliates from using the name “Cake Boss,” either to identify the television program currently entitled Cake Boss, or in connection with the sales of merchandise related to the show, though the Court also delayed implementation of the order for Discovery to finish airing the first run of the show’s third season.

Brand selection is a crucially important step when launching a new product line or a new business. Companies owe it to themselves to run thorough trademark screening searches to determine whether there is a likelihood that an initially favored brand may end up being the subject of a trademark dispute in the future, and they certainly should think long and hard before moving forward with a mark that they know, or should know, already is being used by another business in the same or a similar market. Knowledgeable IP counsel can provide valuable assistance with that analysis.

On July 22, 2010, software publisher AccuSoft sued Northrop Grumman Systems in federal court for breach of contract, copyright infringement and trademark infringement related to Northrop’s use of AccuSoft’s ImageGear and ImageTransport software. Northrop allegedly used and integrated AccuSoft’s products in the development of a paperless records information system it developed for the U.S. military. According to AccuSoft, Northrop failed, in particular, and in violation of applicable software license agreements, to provide the required periodic reporting regarding the number of end-user licenses for the AccuSoft products that Northrop had distributed. AccuSoft did not specify a damages claim in its complaint, though it did state that the unauthorized software distributions number in the “hundreds of thousands,” meaning that a decision in its favor potentially could entail a multi-million dollar penalty against Northrop.

Northrop has yet to answer or to respond to the lawsuit, so its position with regard to AccuSoft’s factual claims has yet to be determined. However, the facts presented in the complaint appear to reflect the kind of dispute that often arises when one or both parties to a software licensing relationship do not have an accurate grasp of controlling license agreements. Especially with many larger enterprises, the business units responsible for software license negotiation and acquisition may lack sufficiently open lines of communication with production departments, resulting in internal confusion regarding what agreements have been signed, what agreements remain in effect, and what those agreements mean for the company’s day-to-day operations.

Compounding the confusion is the fact that larger software license transactions often involve the execution of a master license or services agreement, to which other documents specifying discrete product or service orders are attached, as executed, as schedules or exhibits. Over time, the resulting “document soup” can become nearly impossible to manage unless the company’s has been diligent, in the interim, in tracking all material changes or amendments to the master agreement, all exhibits or schedules that have been executed since the beginning of the relationship, and the effects, if any, of those later instruments on earlier agreements.

Where businesses fail to take pro-active, enterprise-wide, contract-management steps at an early stage, disputes such as the Accusoft v. Northrop litigation become almost inevitable, especially in an age where many publishers, such as Microsoft, IBM and Oracle, to name a few, are proceeding with software audit initiatives, in some cases across their entire customer bases, in order to ensure compliant software use and licensing.

Businesses with a heavy reliance on software and technology licensing cannot afford not to work closely with counsel in reviewing the terms of all agreements that may affect their ability to use that software or technology in the way that their customers demand.

The Library of Congress and the 5th Circuit Court of appeals both recently made significant strides in expanding and clarifying the exceptions to the anti-circumvention provisions of the Digital Millennium Copyright Act (“DMCA”).

In its regular 3-year review of exemptions to the DMCA’s anti-circumvention exceptions, the Library of Congress, which includes the U.S. Copyright Office, added to the list so-called “jail breaking” of wireless telephones, most notably Apple’s iPhone. iPhone users are now able to modify, unlock, and use previously unauthorized applications on their cell phones. Apple had argued that modifications to its iPhones constituted unauthorized modification of its software. However, the Library of Congress emphasized that iPhone owners paid for the product and should have the right to modify their phone for their personal use. The new DMCA exceptions also include:

• Circumvention of security measures in DVDs, when short portions of the content is to be used for “educational uses by college and university professors and by college and university film and media studies students
• Circumvention of security measures in video games accessible on personal computers for certain testing and security-related operations
• Circumvention of security measures in computer programs protected by out-of-date hardware-based security accessories (also known as “dongles”)
• Circumvention of security measures in ebooks for the purpose of making the content accessible for readers with disabilities, provided that no other edition of the work allows accessibility-related modifications

In MGE UPS Systems Inc. v. GE Consumer and Industrial Inc., the 5th Circuit further clarified the overall scope of the DMCA’s anti-circumvention provisions in ruling that bypassing protections on copyrighted software in order to access or use the product does not necessarily trigger a DMCA claim. MGE had sued GE for copyright infringement, claiming GE hacked the software security key to access its copyrighted software. The Court held that simply viewing or using copyrighted software does not constitute unlawfully accessing copyrighted materials in violation of the DMCA, and that a copyright owner’s software security protections must protect against a right specifically granted Act. That holding also might be significant for some companies faced with allegations of unlicensed software use by organizations such as the Business Software Alliance (BSA) or the Software & Information Industry Associations (SIIA).

The DMCA is multi-faceted legislation, with some provisions that historically have been good for small to medium-sized businesses and some that have been less positive. These recent developments represent a net improvement to the effect of the law for most consumers of digital media.

Software copyright plaintiffs typically seek both permanent injunctive relief as well as damages. Recovery of statutory damages under 17 U.S.C. § 504 often hinges on whether the copyrights claimed to have been infringed before or after discovery of the alleged infringement. However, plaintiffs in competing works litigation typically seek an actual damages award, because a potential actual damages recovery often is greater. In addition, the marginal costs of developing the necessary factual record to support an actual damages award are not significant, because the underlying elements of the claim already require the devotion of significant time and effort to evidence collection and presentation. Under 17 U.S.C. § 504, a plaintiff may recover the actual damages it suffered as a result of the infringement or any profits of the infringer attributable to the infringement. Under 17 U.S.C. § 504(b), the plaintiff could recover any profits of the infringer that are attributable to the infringement. Under the statute, “in establishing the infringer’s profits, the copyright owner is required to present proof only of the infringer’s gross revenue, and the infringer is required to prove his or her deductible expenses and the elements of profit attributable to factors other than the copyrighted work.” Those damages could be substantial, depending on the amount of business and profit the plaintiff is able to demonstrate is attributable to use of its works. Claims for attorneys’ fees also usually are the norm, though, again, recovery may depend on whether the copyrights at issue were registered before or after discovery of the alleged infringement. Costs also may be recoverable.

Competing works cases often involve one or more primary, individual alleged infringers as well as the corporate entities with which they are associated. If the plaintiff is able to establish any actual damages as a result of infringement, all defendants could be held jointly and severally liable for those damages. In addition, the plaintiff in the action may seek to hold the individual defendants liable for the “profits” they made independently as a result of the alleged infringement. Specifically, the plaintiff could attempt to recover a portion of the individuals’ income earned while developing and/or selling the competing work at issue.

If you have received a notification from a copyright owner who is seeking damages against you, you should contact experienced counsel to preserve your legal rights.

In Vergara Hermosilla v. Coca-Cola Co., 2010 WL 2232657 (S.D. Fla. 2010), a U.S. federal court in Florida required Coca-Cola to post a conspicuous notice indicating Rafael Vergara Hermosilla’s (“Vergara”) contribution to a song Coca-Cola intended to use in its advertising during the 2010 World Cup soccer games.

Vergara had been asked to translate into Spanish a portion of the lyrics to the song “Wavin’ Flag” by the artist K’naan and to mix and produce a newly recorded Spanish vocal track for the final mix. Vergara penned the Spanish lyrics of the song, sent rough vocal tracks demonstrating how the vocals should be sung to Universal Music Group (“Universal”), who had the contractual relationship with Coca-Cola, added backing vocals to the rerecorded Spanish track, and mixed and produced the final song.

However, before Universal paid the invoice, it asked Vergara to sign a document indicating the work he completed was a work-for-hire under the Copyright Act. Vergara responded that he would not have gone forward with the project had he known it would be considered a work-for-hire, and he insisted that he receive credit for the production work and that, for the Spanish version of the song, his name appear next to the composer(s) of the original English version. Universal did not agree to Vergara’s proposed terms.

In May, 2010, Vergara filed an action for injunctive relief seeking an order requiring that Coca-Cola cease advertising with or distributing the Spanish version of the song and that Coca-Cola make a public acknowledgement of Vergara’s contribution to the song.

Coca-Cola argued it secured an implied and non-exclusive license to use the song, that the work was a work-for-hire, and that Vergara failed to obtain a copyright registration prior to filing the action, barring him from filing suit. The court rejected all of these arguments and issued an injunction prohibiting Coca-Cola from distributing the work without proper credit given to Vergara.

If you would like to license or obtain rights to music, you should consult counsel experienced in negotiating agreements to help prevent disputes like the one described above. If you have already become involved in such a dispute, you should contact counsel to discuss your options to resolve the issues between you and the other parties.

Microsoft’s cloud offering, Windows Azure, is a cloud services platform designed for software development, hosting and web service management. The platform includes a cloud-based operating system with pre-configured developer tools and other options available. The license agreements are available online here and here. So, how does the Microsoft cloud licensing model stack up to our concerns regarding cloud computing?

The basic Azure agreement consists of two parts: a service level agreement (“SLA”); and an online subscription agreement (“OSA”). The SLAs are written in clear, layperson-friendly language, but may not adequately protect the customer from certain types of service outages. Also, the responsibility to monitor service levels and report outages remains wholly on the customer (something many cloud customers may want to try to avoid). The OSA provides some protections against third-party intellectual property infringement claims, but it also severely limits recovery on claims arising from any legal action, including breach-of-contract and negligence claims. These service and liability limitations are typical in low-transaction-cost offerings, and they are likely unavoidable for a product sold online and across such a broad user base.

Of greater concern, however, is the fact that neither agreement addresses compliance or liability arising from federal and state privacy and data security statutes, (such as HIPAA and the new Massachusetts Standards for the Protection of Personal Information). HIPAA, in particular, imposes significant responsibility on third party vendors (“business associates”, under the language of the statute), that may house or transmit protected health information (“PHI”). A company storing PHI on Microsoft Azure servers without an agreement contemplating that type of data storage could be in violation of the law and subject to liability.

Further, there are no provisions concerning ownership, use, or transfer of customer-owned data upon termination of the agreement. As is evident by the low cost of cloud-based solutions, the platform is the commodity and the only real value is in the data. Without specific language identifying data ownership and transfer upon termination, a company may be risking too much relative to any perceived cost or operational benefits.

Microsoft likely will have to address these concerns as the legal issues associated with cloud computing become better understood. In the meantime, careful analysis of intellectual property and data security compliance risks should be undertaken to avoid the unforeseen liabilities and hidden costs present in many cloud computing agreements.

On June 30, 2010, a New York businessman named Paul Ceglia filed a lawsuit against Facebook, Inc. and its founder, Mark Zuckerberg, that has the potential to become a significant distraction for the social networking giant. In the state-court complaint, Ceglia claims he signed into a contract in April 2003 with Zuckerberg, in which Zuckerberg agreed to grant Ceglia a 50% stake in the business to be derived from the expansion of “the project [Zuckerberg] has already initiated that is designed to offer the students of Harvard university [sic] access to a website similar to a live functioning yearbook with the working title of ‘The Face Book.’” Based on that and other language in the contract, and on the completion date for an earlier Zuckerberg-authored site at thefacebook.com, Ceglia claims that he now is entitled to an 84% interest in Facebook.

It is unclear whether the social networking technology Zuckerberg was developing in April 2003 is the same or even related to the technology that was the predecessor to Facebook as we now know it. In addition, Ceglia’s long delay in asserting his claim raises potential statute-of-limitations issues that may result in the claim being tossed out of court. Regardless, though, Ceglia was successful in New York State court in obtaining an order temporarily keeping Facebook and Zuckerberg from transferring or selling of their assets, stocks or bonds, pending a hearing. Facebook then removed the matter to a U.S. District Court in the Western District of New York, where the case currently remains, in an effort to have the state court order dissolved.

Regardless of the hurdles Ceglia may need to overcome in order to prevail on his claim, this case serves as a powerful reminder to developers of protectable, original content that they should carefully consider all of the effects of any agreements related to future ownership of business ventures. Sloppy drafting may cause unintended consequences and could result in expensive litigation to resolve questions of ownership related to the business venture. In light of the risks highlighted by the Ceglia lawsuit, developers considering that type of agreement should consult with knowledgeable counsel before proceeding.