Category: Uncategorized

Advertising, Branding, Chicago, Compliance, Content Development, Copyright, Creative Content, Entertainment, Entrepreneurs, Facebook, Finance, Infringement, Internet, Legislation, Litigation, Marekitng, Media, Monetizing Content, Privacy, Production, Small Business, Social Media, Start-ups, Technology, Trademarks, Uncategorized

Social Media Legal Risks: Seven Ways to Maintain Social Media Marketing Legal Compliance

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In October 2009, the Federal Trade Commission released it’s updated “FTC’s Guides Concerning the Use of Endorsements and Testimonials in Advertising.” The purpose of the update was to address the increasing use of endorsements by consumers, experts, organizations and celebrities in online marketing. The update is particularly relevant to the explosive growth of social media as a marketing tool.

The updated FTC Guides contain two notable areas of concern for marketers. First, the Guides removed the safe harbor for advertisements featuring a consumer’s experience with a product or service, the so-called “results not typical” disclosure. Second, the FTC Guides underscored the longstanding principle of disclosing “material connections” between advertisers and the consumers, experts, organizations, and celebrities providing reviews and endorsements of products and services.

Even with the illustrations provided within the FTC Guides themselves, it is still confusing for advertisers, marketers, bloggers and social media users to know how to comply with the guidelines. The purpose of this article is to provided simple, concrete standards to determine (1) when to make certain disclosures and (2) the type of disclosures required by the situation. I have grouped the disclosures into seven categories: Personal Opinion, Free Samples & Free Gifts, Promotional Relationship, Employment Relationship, Affiliate Relationship, Healthcare Disclosures, and Financial Guidelines & Disclosures. The key requirement to keep in mind is the obligation to disclose any relationship that may have influenced you.

1. Personal Opinion

If you write a review or blog post and your post contains only your own opinions, you haven’t received any compensation for the review or post, and you otherwise have no material connection to the topic of your post, you have nothing to disclose.

2. Free Sample/Free Gift

If you have been given a free copy, sample, or gift of a product or service and you write a review or blog post, you must disclose the facts and circumstances of how you received the item or service, even if you have not been paid to review or post on that topic. You do not run afoul of the disclosure rules if you receive payment unrelated your content. This disclosure is useful to keep in mind when your content relates to product previews, reviews of samples, services, gifts, books, software, music, movies, etc.

3. Promotional Relationships

If you write a review or blog post and your post is based upon an advertising relationship, and you have received compensation (cash, free services, product samples for personal use or a gift) for the review or post, you must disclose the nature of the relationship, whether you received anything of value, and information about relationships with advertisers or endorsers that would have a material impact about how a prospective consumer would view the message. This disclosure is useful to keep in mind when your content relates to paid posts, sponsored messages, tweets, fan page postings, etc.

4. Employment Relationships

If you write a review or blog post and your post is based upon an employment relationship, e.g. you are an employee or shareholder of a related company, you have a “material business relationship” to disclose, even if you are not being directly compensated for the message. You may post on behalf of a business or brand. In fact, it may even be part of your job description. Again, be mindful of the requirement to disclose any “connections” that may have influenced you, including both direct and indirect relationships.

5. Affiliate Relationships

If you write a review or blog post and your post is based upon an affiliate relationship, e.g., you have included affiliate links on your page, you must disclose the fact that the relationship exists and that you will be paid for referrals from your page.

6. Healthcare Disclosures

If you write a review or blog post and your content is based upon a connection to a pharmaceutical or healthcare product or program, you need to include relevant healthcare-related disclosures or information safety warnings, side effects, or official links with information.

7. Financial Guidelines & Disclosures

If you write a review or blog post and you work for a financial services company, you may be making investor-relations communications and your communications are subject to regulation by the NASD, SEC, FINRA and potentially state and federal regulatory agencies. The FINRA Guidance on Blogs & Social Networking Sites” can be found here. Record Retention: ensure that you can retain records of those communications. Suitability: a particular communication a “recommendation” for purposes of NASD Rule 2310 and is it suitable for potential recipients. Public Appearances: determine whether  your post part of an “interactive online forum” and whether supervision is required. Third-Party Posts: If your firm created or “sponsors” and online forum, be aware that, under certain circumstances, a customer’s or other third party’s content on a social media site may become attributable to the firm. Whether third-party content is attributable to a firm depends on whether the firm has (1) involved itself in the preparation of the content or (2) explicitly or implicitly endorsed or approved the content.

Clearly, legal and regulatory compliance for social media remains a minefield. Although this article is intended to give you a working knowledge of the types of risks created by, and disclosures required for, the use of Social Media, it is NOT LEGAL ADVICE. Each situation is unique and you should consult with qualified legal counsel regarding your specific circumstances.

ABOUT THE AUTHOR

David M. Adler, Esq. is an attorney, author, educator, entrepreneur and partner at the boutique intellectual property, entertainment & media law firm LEAVENS, STRAND, GLOVER & ADLER, LLC based in Chicago, Illinois. My responsibilities include providing advice to business units and executives on copyright, trademark, ecommerce, software/IT, media & entertainment and issues associated with creating and commercializing innovations and creative content, drafting and negotiating contracts and licenses, advising on securities laws and corporate governance and managing outside counsel. Learn more about me here: www.ecommerceattorney.com and here: Leavens Strand Glover & Adler, LLC.

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CMO Council Release 2011 State of Marketing Report

The CMO Council released the fifth State of Marketing Report in its annual series that surveys its members to gather insights and views specific to marketing mandates, spend, intentions and frustrations. The Report gathers a broad range of insights from major geographic regions and the top tiers of corporations. The Report identified three critical areas of attention that top the “to do” list of marketers in 2011: Performance, Customer Experience and Brand Loyalty.

Marketing Performance. According to the CMO Council, digital and new media strategies, including Social Media, dominate the imperative to grow market share and refine brand and value proposition. Marketers must use multiple marketing channels with a focus on interactivity, while defining and connecting measurements to assess effectiveness.

Customer Experience: Marketers must focus on providing an “experience” – not just a “message” – that is engaging, personalized and differentiated. While the platform for engaging the customer will undoubtedly include social platforms, it must also integrate the messaging and engagements through traditional channels. The goal is a seamless multi-channel journey for the customer, one that is gratifying and satisfying, thereby improving loyalty, retention and repeat purchase.

Measurement Feedback and Brand Loyalty. A major issue that continues to plague marketers is the struggle to mine customer data, extract valuable insight and create accurate predictive models. Gathering data from every impression, every search, every transaction, status update, or tweet can develop a more complete profile or the customer. However off-line data sources need to be synthesized as well, including localized marketing tools, adaptive merchandising systems, interactive self-serve technologies, mass-personalized messaging solutions, social media channels, mobile relationship marketing platforms, and corporate social responsibility programs (e.g. sustainability).

CLICK HERE TO DOWNLOAD REPORT

ABOUT THE AUTHOR

David M. Adler, Esq. is an attorney, author, educator, entrepreneur and partner at the boutique intellectual property, entertainment & media law firm LEAVENS, STRAND, GLOVER & ADLER, LLC based in Chicago, Illinois. My responsibilities include providing advice to business units and executives on copyright, trademark, ecommerce, software/IT, media & entertainment and issues associated with creating and commercializing innovations and creative content, drafting and negotiating contracts and licenses, advising on securities laws and corporate governance and managing outside counsel. Learn more about me here: http://www.ecommerceattorney.com and here: Leavens Strand Glover & Adler, LLC

Advertising, Branding, Compliance, Creative Content, Finance, Infringement, Internet, Legislation, Litigation, Marekitng, Media, Monetizing Content, Privacy, Social Media, Technology, Uncategorized

Will the News of the World voicemail snooping saga accelerate US privacy reform?

The United States is one the few countries in the developed world that lacks a comprehensive law protecting consumer privacy. Geolocation, personalized ads, group-buying deals, tracking cookies and other technologies have a wide range of privacy implications. Incidents like the phone-hacking scandal in the U.K. underscore the growing concern among both the general public and Congress here in the U.S.

Unlike citizens in Europe, Asia and Latin America, U.S. laws addressing rights and obligations surrounding sensitive-information tend to be sector-specific and inconsistent (HIPPA, COPPA, etc.). Notably, the FTC, the federal agency tasked with safeguarding consumers, has taken a largely laissez-faire approach. The result of Guidelines and enforcement actions is essentially a policy of “do as you like, just don’t lie about it.”

While congressional attention has been focused on updating the regulatory regime, the current legislation reflects the piecemeal approach of the past. Here is a break-down of the Five leading government privacy initiatives. Bills starting with H.R. are from the US House, and bills starting with S. are from the US Senate. The numbers are from the 112th Congress: 2011-2012.

H.R. 654: Do Not Track Me Online Act, sponsored by Rep. Jackie Speier [D-CA12] is to direct the Federal Trade Commission to prescribe regulations regarding the collection and use of information obtained by tracking the Internet activity of an individual, introduced Feb 11, 2011. Status: This bill is in the first step in the legislative process.

S. 913: Do-Not-Track Online Act of 2011, sponsored by Sen. John Rockefeller [D-WV] is a bill to require the Federal Trade Commission to prescribe regulations regarding the collection and use of personal information obtained by tracking the online activity of an individual, introduced May 9, 2011. Status: This bill is in the first step in the legislative process.

H.R. 1895: Do Not Track Kids Act of 2011, sponsored by Representatives Edward J. Markey, Massachusetts Democrat, and Joe Barton, Texas Republican, is aimed specifically at internet marketing to minors, introduced May 13, 2011. Status: This bill is in the first step in the legislative process.

S. 413: Cybersecurity and Internet Freedom Act of 2011, associated with the phrase the “internet kill switch” was, sponsored by Sen. Joseph Lieberman [I-CT], introduced Feb 17, 2011. Status: This bill is in the first step in the legislative process.

S. 799: Commercial Privacy Bill of Rights Act of 2011, sponsored by Sen. John Kerry [D-MA] Introduced Apr 12, 2011. Status: This bill is in the first step in the legislative process

Complete text of the various bills is available at GovTrack.us.

ABOUT THE AUTHOR

David M. Adler, Esq. is an attorney, author, educator, entrepreneur and partner at the boutique intellectual property, entertainment & media law firm LEAVENS, STRAND, GLOVER & ADLER, LLC based in Chicago, Illinois. My responsibilities include providing advice to business units and executives on copyright, trademark, ecommerce, software/IT, media & entertainment and issues associated with creating and commercializing innovations and creative content, drafting and negotiating contracts and licenses, advising on securities laws and corporate governance and managing outside counsel. Learn more about me here: http://www.ecommerceattorney.com and here: hLeavens Strand Glover & Adler, LLC

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Consumer Watchdog Asks FTC to Stop Facebook Virtual Currency

Social gaming, and the market in virtual goods they support is serious business. According to some estimates, sales of virtual goods may be as large as $2.1 billion in 2011. Facebook has recently announced a requirement that Social gaming developers such as Zynga, famous for its “Farmville” game among others, that use the Facebook platform must exclusively use Facebook Credits in the operation of their games.

With over 500 million users worldwide, and a substantial portion of them in the United States, Facebook may well control over 50% of the market for virtual goods offered in social gaming. Scheduled to take effect on Friday, July 1, 2011, in addition tot the exclusivity requirement, the Facebook Credits terms mandate that developers agree not to charge lower prices to consumers outside of Facebook and pay a 30% service fee for all Facebook Credits purchases.

Critics see the risks as two-fold. First, combining its dominance as the leading platform for social gaming with control of virtual commerce may stifle innovation and competition. Second, Facebook is expected to offer streaming media, music, and potentially real-world, non-digital goods for purchase with Facebook Credits as the applications become more diverse on the social network.

In a complaint, the nonprofit, nonpartisan public interest group Citizen Watchdog asks the FTC to issue an injunction that would stop the anticompetitive behavior.

Read the complaint here: http://www.consumerwatchdog.org/resources/cwd_ftc_facebook_credits_complaint-3.pdf

————–
David M. Adler, Esq. is an attorney, author, educator and entrepreneur with a multidisciplinary practice focused on Intellectual Property, Media & Entertainment Law, Ecommerce, Information Technology and Software development, implementation and licensing. Mr. Adler provides legal counsel all aspects of media and intellectual property law, including trademark and copyright clearance, registration and enforcement, digital and new media licensing, production, finance, regulations, litigation and corporate-commercial transactions. Mr. Adler assists interactive and digital marketing and advertising companies, content providers and licensors with advice on affiliate, publisher and partnership agreements, digital content licensing, syndication, distribution, Social Media and many other related deals.

Advertising, Branding, Chicago, Content Development, Copyright, Creative Content, Entertainment, Entrepreneurs, Facebook, Infringement, Marekitng, Media, Monetizing Content, Production, Small Business, Social Media, Start-ups, Technology, Trademarks, Uncategorized

Facebook Marketing: Legal & Regulatory Compliance By David M. Adler, Esq.

Image representing Facebook as depicted in Cru...
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AllFaceBook Presents AF Expo San Francisco June 27-29, 2011

COMMERCE & MONETIZATION: Facebook Marketing: Legal & Regulatory Compliance

The use of social media for marketing and advertising purposes is one of the fastest growing areas for business and marketers. The advent of social media sites like Facebook provides the opportunity for authentic interaction and engagement with customers. Therefore, it is no surprise that it is being used as a marketing tool by companies large and small to help them achieve their strategic goals. But with every technological development and opportunity, new legal and business risks present themselves. Understanding and minimizing these risks will help you maximize the opportunities. A best practices approach to social media marketing involves having the company’s philosophy, methodology, and guidelines captured in a comprehensive written policy that is clearly and regularly communicated to the employees, and regularly updated to keep abreast of new developments, opportunities and evolving legal guidance. Attendees will learn how to identify the legal issues and develop policies and procedures to keep informed about the current technology, marketing strategies and regulatory compliance.

Everyone at AF Expo shares a belief that the Facebook experience represents a paradigm shift in the way that marketing professionals identify, engage and convert customers. In the past, marketers had to conduct research to locate customs and to determine their wants and needs. Once these were identified, you needed to convince your customers to value your brand, understand your product/service and ultimately purchase what you were selling.
Facebook changes all of these assumptions. It offers an interactive platform where customs are actively engaged in seeking out the brands they are interested in – whether individually or through trusted networks, tell brand owned what they do and do not like about their brand and tell marketers whether they are open to receiving more information. Interestingly, the platform allows marketers to continue the conversation even when the customer has nominally disengaged (through trusted networks).
Like everything else, with great power comes great risks. Facebook marketing that is thoughtful, respectful and legally compliant is extremely effective. [give examples] However, marketing efforts that fail to understand and account for the requirements to maintain legal compliance can be a fixated.
In the beginning one could poke, like and comment. But what happens when you can purchase? Facebook is rapidly becoming a platform to identify, locate, contact and transact business with consumers of goods and services, both physical and virtual, using currency that is both physical and virtual.
My presentation will identify and explain the risks for Facebook marketers, grouped  into three risk categories, “The Three Cs” of Facebook marketing:
Content
Connecting
Commerce
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Trending @ The Trademark Office: Bona Fide Intent

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Recent Decisions Highlight Need For Objective Evidence of Intent to Use Mark

Two recent decisions at the Trademark Trial & Appeal Board (TTAB) indicate what may be an emerging trend in Trademark practice: challenges based on lack of evidence of a “bona fide” intent to use a mark for which a Section 2(b) Intent-to-Use (ITU) application has been filed. The two relevant decisions are Kaplan v. Brady and Nintendo of America, Inc. v. Adar Golad.

Every ITU Applicant makes a legal averment, under oath, that it has a “bona fide” intent to use the mark in commerce. “To show a bona fide intent to use, there must be ‘objective evidence,’ that is evidence in the form of ‘real life facts and by the actions of the applicant.’ J. Thomas McCarthy, McCarthy on Trademarks and Unfair Competition, Sec. 19:14 (4th ed. 2009). There should be some ‘definite’ (if not necessarily ‘concrete’) plan by applicant. For example, ‘written plan of action for a new product or service,’ or a ‘re-branding of an existing line of goods or services.’ Id.”  In the two cited cases, lack of such definite evidence proved fatal.

The first decision is a Cancellation action where one party (Kaplan) sought to have the registration of another party (Brady)  cancelled. Kaplan’s claim for cancellation of Brady’s FUNNY-FACE mark was based on the existence of Kaplan’s ITU application for the mark FUNNY FACE FIZZY BLAST!  Although the parties exchanged several motions, of interest here is the Board’s determination that Kaplan lacked standing to prosecute the cancellation because Kaplan had “produced no documentation supporting his alleged bona fide intent to use such mark other than a “completely phony” and undated business plan that is merely a “slightly altered version” of a business plan for use of the mark BAKE OFF! on a “cleansing product.”

The second decision is an Opposition proceeding where one party (Nintendo) sought to prevent the registration of another party’s (Golad) mark by opposing the application.  Golad filed an ITU application to register the mark FLASHBOY for “plug and play interactive video games … comprised of computer hardware and software.” Nintendo opposed the registration on the ground that FLASHBOY is likely to cause confusion with its Registration for the mark GAMEBOY for game equipment, etc.

During discovery, Golad admitted that he did not have a business plan or any other documentation reflecting plans to “advertise, manufacture or otherwise use the mark FLASHBOY in commerce on the goods for which applicant seeks registration.” That was enough to establish a lack of bona fide intent.

Summary: Practice Tip

Both applicants and trademark counsel need to be aware of the requirement that an ITU application be supported by at least some definite evidence of the applicant’s bona fide intent to use the mark. While it remains unclear whether  a business plan alone is sufficient to meet this burden, an applicant must be able to produce some type of evidence, through documents or testimony, indicating plans to advertise, manufacture, distribute, license or otherwise use the mark.

Advertising, Branding, Certification Marks, Chicago, Content Development, Copyright, Creative Content, Entertainment, Entrepreneurs, Infringement, Litigation, Marekitng, Media, Monetizing Content, Production, Small Business, Social Media, Start-ups, Technology, Trademarks, Uncategorized

Neoformix Tweet Topic Explorer is a Powerful New Tool For Social Media Marketing

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WordCluster Analytics Provide Rapid Visualization of Hot Topics

Kudos to Barry Ritholz and his Blog The Big Picture for turning us all on to a phenomenal new social media metrics tool: Tweet Topic Explorer.  This Tool retrieves the most commonly used words in recent (no word on time period covered by “recent”) “tweets” for a specific user and displays these visually using bubble clusters. The area of the circle for a word is proportional to that word’s frequency. Words most often used together are grouped by color.

For example, using my Twitter handle, @adlerlaw, produces a cloud that shows the words “film,” “media,” “legal,” “social” and “Chicago” are among my most frequently used words.  Looking at groupings, “Film” is used most commonly with words like “tax” and “indie.” The words “Law” and “Legal” appear most frequently with “social,” “media” “brand,” and “trademark.”

The potential for brand managers and social media marketing professionals is obvious. First, a brand manager can quickly and easily analyze what key words are being used and how they are being used for any given twitter handle. Note that if your handle is identical to a brand name, this is critical visual evidence of the words being used in connection with your brand! Second, if you area  marketing professional, you can analyze individual handles to get feedback on words being used by social media influencers and other specific followers.

The value should be obvious by now. This tool creates an amazing feedback mechanism. The brand owner/marketing professional can easily see if the message they are trying to communicate is really coming through as well as they intend. For example, check out the word cloud for “Coca-Cola.” I was amazed to see that the most frequent word is “^GD.” I don’t know about you, but that’s not communicating anything about the brand. Whereas positive attribute words like “sharing” and “delicious” are much less prominent.

Also, the potential to uncover negative words will be displayed prominently. This gives brand managers insight into the areas, issues and users that they need to target.

I’m not saying its going to be easy. In order to get the most out of this tool, one is going to have to spend time analyzing users one by one. However, this is one of the best tools I’ve seen that breaks tweets down into a clear, visual, actionable matrix.

ABOUT THE AUTHOR

David M. Adler, Esq. is an attorney, author, educator, entrepreneur and founder of a boutique intellectual property law firm based in Chicago, Illinois. With over fourteen years of legal experience, Mr. Adler created the firm with a specific mission in mind: to provide businesses with a competitive advantage by enabling them to leverage their intangible assets and creative content in a way that drives innovation and increases the overall value of the business. Learn more about me HERE.

David M. Adler, Esq.  Safeguarding Ideas, Relationships & Talent®

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Five Things To Know Now

Here are five interesting articles to look at this weekend.

1. Copyright Fair Use Gets a Boost. Last Friday, the federal district court in Nevada held that the non-profit organization Center for Intercultural Organizing’s posting of a copyrighted news article was a non-infringing fair use. The well-reasoned opinion sets a powerful precedent for fair use and against copyright trolling. http://www.eff.org/deeplinks/2011/04/righthaven-v-cio-it-s-hard-out-here-troll

2. Proper Authentication of Social Media “Evidence” Used at Trial. The Maryland Court of Appeals in the case of Griffin v. State examined a relatively new social media legal issue: determining the appropriate way to authenticate at trial electronically stored information printed from a social networking site. http://www.marylandinjurylawyerblog.com/2011/04/the_maryland_court_of_appeals_2.html

3. Commercial Privacy Bill of Rights Act of 2011 Does Not Spell Do Not Track. Although the proposed law requires disclosure of “clear, concise and timely notice” of a company’s privacy policies and practices regarding the collection, use and distribution of personally identifiable information, the bill does not include specific authorization for a do-not-track mechanism. http://www.itbusinessedge.com/cm/blogs/bentley/senators-formally-introduce-online-privacy-bill/?cs=46477

4. Is Your Web Site Eligible For Trade Dress Protection? While Copyright law protects certain original expression from unauthorized copying, Trade dress law protects commercial use of certain distinct features in connection with a product or service. When consumers associate such “look & feel” features with a product or service, trade dress protection exists. Protection has been extended to the packaging of a product, the décor of restaurant, the design of magazine covers, and even kiosk displays.

In Conference Archives v. Sound Images, 2010 WL 1626072 (W.D. Pa. Mar. 31, 2010), a federal district judge in the Western District of Pennsylvania suggested that under the concept of “look and feel,” trade dress law can reach beyond static elements on a website, such as photos, colors, borders, or frames, to include interactive elements and/or the overall mood, style, or impression of the site since a graphical user interface promotes the intuitive use of the website.” Conference Archives, 2010 WL 1626072 at *15.

5. Do We Need An Open Wireless Regime? See what the EFF has to say. http://www.eff.org/deeplinks/2011/04/open-wireless-movement

ABOUT THE AUTHOR

David M. Adler, Esq. is an attorney, author, educator, entrepreneur and founder of a boutique intellectual property law firm based in Chicago, Illinois. With over fourteen years of legal experience, Mr. Adler created the firm with a specific mission in mind: to provide businesses with a competitive advantage by enabling them to leverage their intangible assets and creative content in a way that drives innovation and increases the overall value of the business. Learn more about me HERE and HERE

David M. Adler, Esq. & Assoc.: Safeguarding Ideas, Relationships & Talent®

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Social Media Legal Risks: Copyright

Social Media Landscape

Understanding Social Media Legal Compliance

The use of social media for marketing and advertising purposes is one of the fastest growing areas for publishers. The advent of social media sites like Facebook, Twitter, YouTube and LinkedIn provides the opportunity for authentic interaction and engagement with customers. Therefore, it is no surprise that these services and others are being used as marketing tools by companies large and small to help them achieve their strategic goals.  But with every technological development and opportunity, new legal and business risks present themselves. Understanding and minimizing these risks will help you maximize the opportunities.

How does copyright law impact social media?

  • Copyright protects “original works of creative authorship fixed in a tangible medium of expression
  • What this means:
    • any content whether (a) created by you, (b) by some one else at your request, or (c) by an independent third party IS PROTECTED BY COPYRIGHT [Note limited exceptions (e.g. government works, public domain) and work-for hire]
    • GET PERMISSON FIRST if the content is not created by you or under a written work-for-hire agreement
  • Practical Applications
    • Can placing a hyperlink to a photo on a publicly-accessible Web constitute misappropriation of the photo?
    • Can an advertiser’s use of a photo from a publicaly-accesible photo-sharing web site constitute misappropriation? YES
    • Are “Tweets” protected by Copyright?
    • Is Tweeting a Conference Lecture a Copyright violation?
    • Is Tweeting a Major League Sports event a Copyright violation?

About the Author

David M. Adler, Esq. is an attorney, author, educator, entrepreneur and founder of a boutique intellectual property law firm based in Chicago, Illinois. With over fourteen years of legal experience, Mr. Adler created the firm with a specific mission in mind: to provide businesses with a competitive advantage by enabling them to leverage their intangible assets and creative content in a way that drives innovation and increases the overall value of the business. Learn more about me HERE and HERE

David M. Adler, Esq. & Assoc.: Safeguarding Ideas, Relationships & Talent®

 

 

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Create a “Watertight” Software Application Design & Development Contract

Careful Planning Yields Dependable Results

Rapid growth in the high-tech sectors, specifically regarding the Internet, mobile computing and related software and hardware, presents complex issues for small-business owners and their lawyers. Not surprisingly, many issues arise in contract negotiations between Web site or Application owners and their contracted developers.

Application development and hosting contracts are at the core of today’s new media practices. With the exponential growth of ecommerce and mobile computing, these agreements are tailored to cover all critical aspects of the online experience for all involved parties.

Negotiated poorly, contracts can open a Pandora’s box of unintended, unforeseen and unfortunate consequences. Negotiated wisely, Application development and hosting agreements provide predictable boundaries in a medium in flux. Risks, rights and responsibilities are constantly being redefined.

Well-drafted licensing agreements address both today’s realities and tomorrow’s possibilities.

Spell it out:

  1. Deliverables
  2. Project Schedule
  3. Intellectual Property Rights
  4. IP Registration
  5. Confidentiality
  6. Disclaimers
  7. Warranties

Once design and functional elements of an Application or web site have been defined, some businesses develop the Application internally with full-time programmers and project managers. However, the vast majority of small business owners hire third-party Application or software development firms to refine their visions into an interactive, reliable online entity.

An Application development agreement is used to define the development, performance, ownership and service expectations of the parties. Critical issues include understanding by both sides of short- and long-term expectations, designers’ proficiency with technical issues such as software and hardware interoperability, and ensuring project goals are clearly stated.

Key elements include:

Deliverables. The agreement must set forth, in as much detail as possible, deliverables expected to result from the developer’s efforts.
This includes, but is not limited to, a description of functional and design specifications; user interface requirements; operational flowcharts; software descriptions; training materials and documentation; network accessibility information such as passwords; interactive elements; information-capturing capabilities; browser and platform compatibilities; electronic commerce requirements; audio/video format requirements; linking structures; database structure requirements; code standards; screen and file layouts; general “look and feel” elements.

Project schedule. After the scope of the project is defined and mutually understood, parties need to address the schedule. This schedule should set forth development milestones, testing and acceptance periods, and payment timelines.

For example, the first phase usually entails completion of the coding of an Application or Web site’s basic functional components. After coding, the parties test the functional components for defects or errors. If the product thus far is accepted, then either the developer is paid for the completed portion or the client pays a deposit toward completion of the next phase.

The Web site owner needs to be realistic when establishing a schedule for milestones and testing, and acceptance procedures. Time periods for defect corrections need a built-in payment reduction component. In other words, if certain functional aspects do not test properly and the site owner provides written notification to the developer of the defect, the developer shall have a specified time — for example, one week — to correct the defect. If a correction is not made, total development costs will be reduced incrementally.

Intellectual property. Creation of an Application or Web site typically involves a variety of intellectual property rights issues. From purely aesthetic design elements to the structure, sequence and organization of database systems, user interfaces and graphics, the rights are ultimately very valuable. For this reason, ownership must be clearly established in the development agreement.

Although developers prefer contract language that exclusively grants them ownership rights to their creations, the Application or Web site owner should secure ownership of most of these rights through negotiation. Notably, under 17 U.S.C. Section 101 (Copyright Act of 1976), project deliverables can be designated “works for hire” in the Web development agreement. The Application or site owner may acquire rights to all customized creations, while the developer receives a license to use certain scripts and/or tools developed that are likely to be reused on future projects.

In addition, development also often involves the third-party intellectual property rights. In these circumstances, the site owner’s legal counsel should seek to secure the broadest possible scope of the license grant. In particular, the owner should seek a license grant that won’t create restrictions concerning how, where and by whom the licensed rights can be used. Licenses to software updates released during a specific period of time should also be sought.

On a related note, if a site owner obtains a license to use particular software, a source code escrow should be secured from the licenser. This enables the site owner to access the source code under certain defined circumstances, such as the licensor’s failure to perform or the licensor’s bankruptcy. Source code escrows ensure the site owner can correct and/or modify the software under circumstances in which the licensor itself is unable to do so.

Brand/Trademark/Domain name  registration. If the developer will register the domain name, the site owner should insist on being identified as owner of the domain name. In addition, the owner should be designated as administrative, technical and billing contact. If the application will be “branded” or if it the owner feels the name should be protected, the owner should consult with a qualified lawyer to determine whether the name can be protected and the requirements of securing the broadest range of protection.

Confidentiality. Development of an Application or Web site is integral to an ecommerce business, and the process involves an exchange of confidential information between the Application or Web site owner and the developer. Confidential information should be defined. The agreement should set forth the obligations of the receiving party not to disclose or otherwise use the specified information.

Disclaimers and limits of liability. Developers often demand extensive liability disclaimers and/or limits. For example, a developer might disclaim liability for failure to protect credit card or other sensitive user information. A developer can also seek to limit total liability under all circumstances to the amount paid under the development agreement for any damage resulting from the developer’s negligence, intentional acts and/or omissions.

These disclaimers are usually one-sided and overly broad. Therefore, legal counsel should scrutinize these provisions to ensure the Application or Web site owner is not exposed to unfair risks.

Disclaimers or liability limits for intentional conduct — as well as broad disclaimers regarding permanent data loss — should almost never be accepted.

Warranties. Both parties should be required to warrant that content used, including software, links, meta tags, frames and business models, does not infringe copyrights, trademarks and/or patents of any third party.

Regarding this, the developer should specifically warrant that all necessary third-party licenses in third-party products incorporated into the Application or Web site have been secured.In light of recent patents for business models — such as Amazon.com’s one-click buying method — this warranty provision should be carefully examined. In fact, where appropriate, the Web site owner should seek patent counsel advice to ensure third-party patent rights are not infringed.

No surprises

A savvy Application or Web site owner will ask the developer to warrant that the Application or Web site or specific applications will operate “free from any substantial defects” for a specific period of time, such as 90 days after final delivery. In such cases, the developer should be required to warrant that any additional efforts to correct the problem will not materially alter the Web site owner’s original goals.

The developer should also be required to warrant that industry “best practices” have been followed in development, safety and security measures and performance criteria — for example, optimal loading time of Web pages.

Finally, as with all services contracts, the developer should warrant that:

  • The services will be performed in a professional and workmanlike manner and that none of such services or will be inconsistent with any obligation the developer might have to others.
  • The developer will employ adequate personnel and deliver the services in accordance with the specifications set forth in the agreement.
  • All work shall be the developer’s original work, and none of the development, use, production, distribution or exploitation thereof will infringe, misappropriate or violate any intellectual property or other right of any person or entity.
  • The developer has the authority to provide the Web site owner with the necessary assignments and rights.
  • The developer is duly-organized, fully-licensed, validly exiting and “in good standing” in the jurisdiction of its operation and every jurisdiction within which it provides services.