Thursday, February 11, 2016
Theft or Transformation? Can Someone Else Sell My Instagram Photos?
My readers know that I am always following developments in and around copyright law and the many ways that developing technology is challenging existing legal structures. [See Here] That’s why I was shocked when the following tweet came across my Twitter feed:
For the uninitiated, Instagram is “a way to share your life through pictures” captured on a mobile phone, often using a “filter” to transform the image. In other words, Instagram is about sharing content that one creates. Under U.S. law, the author (creator) is the copyright owner.
Copyright protects works of creative artistic expression such photographs, and importantly, gives the owner the exclusive rights to reproduce, distribute, publicly display, publicly perform, and modify a work for a certain period of time.
My gut reaction was to think that New York artist Richard Prince’s canvases featuring other people’s Instagram photos is a clear case of copyright infringement. To paint a complete picture (pun intended), it must be noted that Prince has added a short message posted as a comment below what is otherwise just a screen shot of the original image.
However, as many legal pundits have commented [link], the situation may be more complicated. The is a good example of the new legal issues that our culture of mash-ups and remixes have created. The internet is awash with altered, reposted, and aggregated media like text, music, and video. Sophisticated, ubiquitous and surprisingly simple tools pervade a growing range of Internet-based platforms turning amateurs into auteurs. Without doubt these platforms have spawned a huge wave of creativity — but they also raise difficult questions about attribution and ownership.
It is not surprising that Prince is unabashed and unreserved in his appropriation of other’s photographs. This is not the first time Prince has landed in the legal cross-hairs for appropriating another’s art. In the landmark 2013 copyright case of Cariou v. Prince, Prince prevailed after being sued by French photographer Patrick Cariou. Cariou’s lawsuit concerned Prince's 2008 "Canal Zone," a series of paintings that incorporated photographs by from Cariou’s 2000 book Yes, Rasta.
That case turned on an increasingly criticized formulation of the “fair use” doctrine, the “transformative use” test as applied by the U.S. 2d Circuit. “Transformative use” is not one of the four enumerated fair use factors. Rather, it is simply one aspect of the first fair use factor, which looks to the “purpose and character” of the use. The future of the Cariou “transformative use” test was cast in doubt by the 7th Circuit’s withering criticism of its application in the recent case of Kienitz v. Sconnie Nation.
Whether Prince’s “remix” works are “fair use” or little more than theft may depend on how the 2d Circuit chooses to apply the “fair use” test, should it come to that, given the 7th Circuit’s thorough criticism of the 2d Circuit’s previous application.
Thursday, May 13, 2010
Content Creators Rejoice at RIAA Victory Against File-sharing Site LimeWire
In the ongoing war against Internet piracy, the RIAA’s recent victory against file-sharing site LimeWire marks a major victory for content creators. One notable aspect of the ruling is that held the makers of the software at issue responsible for copyright infringement, a departure from the established axiom that only individual users are responsible. Mitch Bainwol, RIAA chairman & CEO, called the decision an “an important milestone in the creative community’s fight to reclaim the Internet as a platform for legitimate commerce.”
The Judge granted the RIAA’s motion for summary judgment, holding that based on the facts produced this far, the RIAA was entitled to judgment as a matter of law. The Court appeared to rely in large degree on Plaintiff's expert witnesses, Dr. Richard Waterman of the Wharton School, who testified that based on a the results of a random sample, some 98.8% were distributed without authorization.
While the immediate result may be a shift by illegal users to other file-sharing software, in the long run, the decision only legitimizes industry’s campaign, which may target every other platform in use signaling a trend away from the “wild West” mentality that has largely dominated the public’s view of internet content. The Court chastised the operators for their awareness of the copyright abuse, active attraction of infringing users and failure to conduct meaningful efforts to mitigate infringement.
The Judge granted the RIAA’s motion for summary judgment, holding that based on the facts produced this far, the RIAA was entitled to judgment as a matter of law. The Court appeared to rely in large degree on Plaintiff's expert witnesses, Dr. Richard Waterman of the Wharton School, who testified that based on a the results of a random sample, some 98.8% were distributed without authorization.
While the immediate result may be a shift by illegal users to other file-sharing software, in the long run, the decision only legitimizes industry’s campaign, which may target every other platform in use signaling a trend away from the “wild West” mentality that has largely dominated the public’s view of internet content. The Court chastised the operators for their awareness of the copyright abuse, active attraction of infringing users and failure to conduct meaningful efforts to mitigate infringement.
Thursday, December 10, 2009
SOCIAL MEDIA GUIDELINES
First, understand that your employees are going to use social media with or without you and recognize it for the opportunity that it is. For companies seeking to leverage the social media frenzy the question is not "How do I control these relationships" but, rather, "How do I leverage the value of all these relationships?" The answer lies in understanding how the content you and your employees contribute to the conversation enhances the value of the conversation.
Second, understand that you are building your social reputation, so you don't want to be frivolous or uninteresting. Simply put, "Just got on a plane to Florida" doesn't add value. A very experienced business consultant whom I follow can seem to tweet about nothing other than his current location or state of nourishment.
Third, focus on strategies that empower employees to become brand ambassadors, increase knowledge, share ideas and information and promote collaboration. Businesses should stay ahead of the curve and set some basic guidelines as to when, where, how and why an employee can appropriately discuss aspects of their job or the company.
Some appropriate guidelines include the following:
1) Philosophy: how does social media fit into an employees job expectations and performance
2) Behavioral Expectations: areas of expertise; respectful conduct; timeliness; perspective; transparency & judiciousness
3) Channel expectations: Which sites (communication channels) are appropriate for which types of communications.
4) Contextual Expectations: conversational style; perception; value
5) Content Expectations: use of company proprietary information, including current projects, trademarks, names, logos
Second, understand that you are building your social reputation, so you don't want to be frivolous or uninteresting. Simply put, "Just got on a plane to Florida" doesn't add value. A very experienced business consultant whom I follow can seem to tweet about nothing other than his current location or state of nourishment.
Third, focus on strategies that empower employees to become brand ambassadors, increase knowledge, share ideas and information and promote collaboration. Businesses should stay ahead of the curve and set some basic guidelines as to when, where, how and why an employee can appropriately discuss aspects of their job or the company.
Some appropriate guidelines include the following:
1) Philosophy: how does social media fit into an employees job expectations and performance
2) Behavioral Expectations: areas of expertise; respectful conduct; timeliness; perspective; transparency & judiciousness
3) Channel expectations: Which sites (communication channels) are appropriate for which types of communications.
4) Contextual Expectations: conversational style; perception; value
5) Content Expectations: use of company proprietary information, including current projects, trademarks, names, logos
Online social Media Strategy & Guidelines
Is your business interested in using social media? Are you struggling to understand the "best practices" for allowing your employees to engage in social networking, as employees? Many of our clients are asking for guidance on how to go about implementing social media as part of their online marketing strategy. This article is intended to be a guide on how to approach incorporating social media into your marketing objectives.
CREATING A SOCIAL MEDIA STRATEGY: A 10 Step Guide
1. Social Media Overviews: Create an overview of the top ten social media platforms: Del.icio.us, DocStoc, Facebook, Flickr, Friend Feed, LinkedIn, Scribd, SlideShare, StumbleUpon, Technorati, Twitter & You Tube, including how its used and how your business might participate, e.g. brand management, customer service, knowledge management, networking.
2. Competitive Analysis: Build a social media profile analysis of a competitor or client. This might include what platforms they use, how they participate and some metrics to determine how they are successful.
3. Account creation: Create and populate an executive's social media accounts. Then, set up some time for an intern to teach the executive about the platform. (NOTE: the intern should not participate on behalf of the executive).
4. Research: Are your main media contacts using social media? If so, which platforms? Are they blogging? Using Twitter? Do they want to be contacted through any of these by your company?
5. Template creation: If you have design skills, it might be fun to create customized templates for your firm's Twitter pages or a logo/avatar for your company's employees.
6. RSS: Set up an RSS reader to monitor social media activity around your brand, your client or your industry.
7. Blog monitoring: Of the millions of blogs, probably hundreds reference your brand or industry. Conduct research about the most important blogs in your niche.
8. Blogging: Have employees/interns post about their experiences on your internal or external blog. Not only will it showcase another side to your company, namely that you're empowering your interns, but it also provides your team with important feedback.
9. Web Analysis: Conduct an internal, in-depth analysis of your corporate site. A fresh set of eyes from your target demographic might be useful.
10. Video: Editing images and video are important new media skills. Record a few interviews with executives/customers.
CREATING A SOCIAL MEDIA STRATEGY: A 10 Step Guide
1. Social Media Overviews: Create an overview of the top ten social media platforms: Del.icio.us, DocStoc, Facebook, Flickr, Friend Feed, LinkedIn, Scribd, SlideShare, StumbleUpon, Technorati, Twitter & You Tube, including how its used and how your business might participate, e.g. brand management, customer service, knowledge management, networking.
2. Competitive Analysis: Build a social media profile analysis of a competitor or client. This might include what platforms they use, how they participate and some metrics to determine how they are successful.
3. Account creation: Create and populate an executive's social media accounts. Then, set up some time for an intern to teach the executive about the platform. (NOTE: the intern should not participate on behalf of the executive).
4. Research: Are your main media contacts using social media? If so, which platforms? Are they blogging? Using Twitter? Do they want to be contacted through any of these by your company?
5. Template creation: If you have design skills, it might be fun to create customized templates for your firm's Twitter pages or a logo/avatar for your company's employees.
6. RSS: Set up an RSS reader to monitor social media activity around your brand, your client or your industry.
7. Blog monitoring: Of the millions of blogs, probably hundreds reference your brand or industry. Conduct research about the most important blogs in your niche.
8. Blogging: Have employees/interns post about their experiences on your internal or external blog. Not only will it showcase another side to your company, namely that you're empowering your interns, but it also provides your team with important feedback.
9. Web Analysis: Conduct an internal, in-depth analysis of your corporate site. A fresh set of eyes from your target demographic might be useful.
10. Video: Editing images and video are important new media skills. Record a few interviews with executives/customers.
Friday, September 25, 2009
ANATOMY OF A FINANCIAL FRAUD: Part II
By John A. Franczyk, Esq.
You wouldn’t send money to Nigerians who contacted you through the internet on the premise that your payment to them will facilitate a much larger payment to you. So why would you pay fees to businesses or individuals who promise to assist your company to procure lines of credit or other business opportunities? Fraudulent schemes that target individuals are rampant, and estimates of losses due to those schemes range between two and four billion dollars annually. Less publicized, however, are schemes that target businesses with promises of readily-available financing or low-cost loans. Fraudulent schemes that target businesses are remarkably similar to the Nigerian internet schemes, differing only in the gloss of legitimacy that scammers have been able to create.
Last month, we described how one of our clients had been targeted by an unscrupulous individual who had created multiple layers of forged documents and websites in order to convince our client of the legitimacy of his financial resources. Here, we describe a much simpler scheme that was used to dupe a company out of a substantial upfront payment. Both schemes share a number of characteristics, including forged documentation that mirrored the existence of otherwise legitimate organizations. By following the lessons of these schemes, companies can protect themselves from being the next target of scammers who rely on these techniques.
The details of the scam that was presented to us are relatively simple. The scam became apparent when a prospective client came to us to ask for assistance in closing a transaction for an international line of credit. The client, which was a small business headquartered in Europe, had paid €10,000 to a company which represented itself as “Toyota Financial Services” and which claimed that it would be able to facilitate a line of credit to allow the client to pursue business opportunities in the United States. This facilitator presented a one-page contract, which bore a “Toyota” logo and a New York City address, to the prospective client. The contract was purportedly signed by the chief financial officer of Toyota Financial Services. An internet search revealed that the name on the contract was, in fact, the name of Toyota Financial Services’ CFO, and in all respects the contract appeared to be legitimate.
Yet our prospective client had never spoken with this CFO and did not perform any due diligence beyond reviewing the contract that had been presented to it. The client wired funds to an account that was listed in the contract. Once the money was gone, the client lost all communications with the parties with which it had been speaking. We were asked to intervene. Our research quickly uncovered numerous problems with the contract and the entire transaction.
First and foremost, the Toyota Financial Services address that was printed on the contract was non-existent. Moreover, Toyota’s headquarters address is in California and not New York as had been listed on the contract. Moreover, the contract included none of the typical boilerplate terms that are included in even the most rudimentary agreements. Finally, additional research into the individual with whom the client had been speaking suggested that this person had been using a fictitious name and identity.
The prospective client’s loss could have been easily prevented by simple research and due diligence, as well as by following any number of fraud detection systems and procedures that are generally implemented within business operations. Businesses can find advice on those systems and their implementation in multiple locations. Our analysis deconstructed the matter several steps deeper as we considered the factors that might motivate a business to ignore its systems and lead it into the hands of a scammer. Those factors are easily summarized into four areas:
1. Desperation – The client had been unable to procure a letter of credit through its own efforts and latched onto the facilitator as a last resort;
2. Reliance on Famous Names – If the client had not thought it was dealing with Toyota Financial services, it likely would not have pursued the transaction that led to the loss;
3. Mismatched Bargaining Power – This follows from the client’s desperation and its belief that it was dealing with Toyota, specifically, the client did not challenge the contract it received out of a belief that it was not on par with Toyota and that any challenge would harm the transaction;
4. Inadequate Internal Review – The decision to work with the facilitator fell on one person’s shoulders, and the client had not procured thorough legal, financial and management or operating approval prior to authorizing the release of funds to the facilitator.
In addition to implementing fraud detection and prevention systems, businesses need to remain cognizant of these factors when entering into transactions with new entities, particularly where an outlay of capital is required to initiate any transaction. We were unable to help this particular client to recover their funds, as the facilitator had long since disappeared when we were first contacted. The client reported the matter to the district attorney, but the relatively small amount of the loss coupled with the disappearance of the scammer all but precluded an investigation at either a state or federal level.
As long as there are businesses willing to part with their funds, there will be scammers who develop schemes designed to take those funds. The attorneys at Adler & Franczyk remain ready and able to assist our clients to implement fraud detection systems and to review the legitimacy of transactions that involve transfers of funds.
You wouldn’t send money to Nigerians who contacted you through the internet on the premise that your payment to them will facilitate a much larger payment to you. So why would you pay fees to businesses or individuals who promise to assist your company to procure lines of credit or other business opportunities? Fraudulent schemes that target individuals are rampant, and estimates of losses due to those schemes range between two and four billion dollars annually. Less publicized, however, are schemes that target businesses with promises of readily-available financing or low-cost loans. Fraudulent schemes that target businesses are remarkably similar to the Nigerian internet schemes, differing only in the gloss of legitimacy that scammers have been able to create.
Last month, we described how one of our clients had been targeted by an unscrupulous individual who had created multiple layers of forged documents and websites in order to convince our client of the legitimacy of his financial resources. Here, we describe a much simpler scheme that was used to dupe a company out of a substantial upfront payment. Both schemes share a number of characteristics, including forged documentation that mirrored the existence of otherwise legitimate organizations. By following the lessons of these schemes, companies can protect themselves from being the next target of scammers who rely on these techniques.
The details of the scam that was presented to us are relatively simple. The scam became apparent when a prospective client came to us to ask for assistance in closing a transaction for an international line of credit. The client, which was a small business headquartered in Europe, had paid €10,000 to a company which represented itself as “Toyota Financial Services” and which claimed that it would be able to facilitate a line of credit to allow the client to pursue business opportunities in the United States. This facilitator presented a one-page contract, which bore a “Toyota” logo and a New York City address, to the prospective client. The contract was purportedly signed by the chief financial officer of Toyota Financial Services. An internet search revealed that the name on the contract was, in fact, the name of Toyota Financial Services’ CFO, and in all respects the contract appeared to be legitimate.
Yet our prospective client had never spoken with this CFO and did not perform any due diligence beyond reviewing the contract that had been presented to it. The client wired funds to an account that was listed in the contract. Once the money was gone, the client lost all communications with the parties with which it had been speaking. We were asked to intervene. Our research quickly uncovered numerous problems with the contract and the entire transaction.
First and foremost, the Toyota Financial Services address that was printed on the contract was non-existent. Moreover, Toyota’s headquarters address is in California and not New York as had been listed on the contract. Moreover, the contract included none of the typical boilerplate terms that are included in even the most rudimentary agreements. Finally, additional research into the individual with whom the client had been speaking suggested that this person had been using a fictitious name and identity.
The prospective client’s loss could have been easily prevented by simple research and due diligence, as well as by following any number of fraud detection systems and procedures that are generally implemented within business operations. Businesses can find advice on those systems and their implementation in multiple locations. Our analysis deconstructed the matter several steps deeper as we considered the factors that might motivate a business to ignore its systems and lead it into the hands of a scammer. Those factors are easily summarized into four areas:
1. Desperation – The client had been unable to procure a letter of credit through its own efforts and latched onto the facilitator as a last resort;
2. Reliance on Famous Names – If the client had not thought it was dealing with Toyota Financial services, it likely would not have pursued the transaction that led to the loss;
3. Mismatched Bargaining Power – This follows from the client’s desperation and its belief that it was dealing with Toyota, specifically, the client did not challenge the contract it received out of a belief that it was not on par with Toyota and that any challenge would harm the transaction;
4. Inadequate Internal Review – The decision to work with the facilitator fell on one person’s shoulders, and the client had not procured thorough legal, financial and management or operating approval prior to authorizing the release of funds to the facilitator.
In addition to implementing fraud detection and prevention systems, businesses need to remain cognizant of these factors when entering into transactions with new entities, particularly where an outlay of capital is required to initiate any transaction. We were unable to help this particular client to recover their funds, as the facilitator had long since disappeared when we were first contacted. The client reported the matter to the district attorney, but the relatively small amount of the loss coupled with the disappearance of the scammer all but precluded an investigation at either a state or federal level.
As long as there are businesses willing to part with their funds, there will be scammers who develop schemes designed to take those funds. The attorneys at Adler & Franczyk remain ready and able to assist our clients to implement fraud detection systems and to review the legitimacy of transactions that involve transfers of funds.
Thursday, September 3, 2009
Innovation and Technology Transfer
Technology transfer is often an integral component of innovation. In fact, it is probably the most often thought-of aspect of innovation. Companies seeking relief from the recent economic turmoil have looked at ways that innovation can differentiate them from their competitors and provide greater value to their customers. Developing, licensing and sharing technology, or other forms of creative content, can help drive innovation within the enterprise.
Recently, I attended ITDA’s 360° Seminar, “Licensing and Partnership for Effective Technology Commercialization.” This seminar consisted primarily of a panel of “experts” willing to share their knowledge and expertise about the subject. The audience was comprised primarily of technology and medical device entrepreneurs and early-stage companies, licensing executives from various industries and a smattering of intellectual property lawyers (myself included). Although many forms of intangible assets should have been addressed or at least acknowledged - such as copyrights, trademarks, trade secrets and other forms of creative content - the panelists uniformly addressed only patents. Since many of the issues discussed regarding the identification, registration and licensing of patents is applicable across other forms of intangible assets, it is useful to highlight some of the key points.
The panel was composed of the following four people: Bruce Lund, an entrepreneur and toy and game inventor, Dr. Alan Hauser, an innovation commercialization expert who currently works with Northwestern University’s Technology Transfer Program, Michael Stolarski, a lawyer formerly with Motorola and currently with Howrey, and Jodi Flax Soriano, Director Business Development at Ohmx Corp., a biotech firm.
A discussion of key issues involved in technology transfer (and joint development relationships such as outsourcing, Joint Ventures, strategic alliances and partnerships) could begin almost anywhere. Although I would leave the valuation issue toward the end of the discussion given what I believe to be the superior needs to determine goals, fit and feasibility, this discussion began with the question (paraphrased): when prioritizing your intellectual property (IP) assets, how do you determine the value of your IP?
Bruce Lund, who tends to develop technology in-house and then commercialize it by licensing to toy and game manufactures and marketers suggested that one begin by introducing the technology to the client and asking whether the client sees a particular application or fit within an existing or proposed product line and then let the Client run the numbers (e.g. conduct a market analysis) to determine what the potential market size, share and value are. In my opinion, this is sage advice only if you are an established company with existing client relationships. For a start-up or early stage business, you are better off determining these parameters on your own.
Michael Stolarski, in typical lawyer fashion, suggested that one begin by looking at court rulings. I fail to see how this is truly helpful unless your technology is easily compared to an exiting, known piece of technology. More importantly, Stolarski brought up the “25% Rule.” According to this rule, royalties paid the IP (patent) developer/owner are 25% of the profit margin.
Dr. Hauser suggested that one should used sophisticated financial tools, driven by certain assumptions, comps in the marketplace and marketplace validation. When prompted by an audience member for some suggested resources or places on the Internet where might access some tools or information, Dr. Hauser was unhelpful. My conclusion from this is two-fold. First, Dr. Hauser is a consultant who makes a living by being the go-to person for such information and analyses. Second, perhaps the information and tools are not readily available and an entrepreneur is better served by securing the advice and guidance of a seasoned subject-matter expert.
Lastly, Jodi Flax Soriano provided some very useful insight from the perspective of the entrepreneur. A business can and often does have many different pieces in its IP portfolio. For example, her field – Biosensors - is crowded. Since it is also highly patent-driven, she suggested that one needs to understand the patent landscape. How is this done? By commissioning a patent search firm to evaluate all the exiting patents in the field and “find the white spaces” left open by existing patents. Again, this is a great suggestion for a successful, well-funded company like hers, which originally raised $1MM on an option to license an existing patent.
What I personally like was the notion of the IP Landscape. This can be done with any relevant IP and should be the first step in any innovation strategy. Take a look at what is out there. Determine where the other players have staked their claims. Evaluate the merits of their claims. Look for the “white spaces.” These will be the “open frontier” within which one will have lower operating risks and higher potential to capture market share and sales.
As the valuation discussion tapered, an audience member asked whether the end use of the technology affected royalty rates. Put another way, what is the effect of a technology that is (a) necessary to launch a product or make it marketable, (b) only improves an existing product, or (c) is a category killer?
From the perspective of Lund, their technology is often incorporated into a third-party product. This generally means a smaller royalty. He suggested that the benchmark used is the wholesale price and that the royalty typically runs between 5-10% of that. He also cautioned that this will be affected by industry (e.g. toys v. medical devices) and territory (e.g. U.S.A., North America, global). In addition, Dr. Hauser suggested that operating margin may be a better benchmark than sales.
At this point in the discussion, thoughts (and questions) started turning toward the underlying issue: money. In other words, once licensed, how does an IP licensor ensure that a product is brought to market and that it generates revenue? Both Lund and Stolarski gave some useful input.
First, require contract minimums: minimum production run, minimum amount of sales. Second, set yearly minimums or milestones with an annual review. Tie this to a right to adjust the royalty and/or terminate the relationship and ensure reversion rights. When the parties are unsure about just how much upside potential there is, set escalating royalty rates by volume. Third, require review of annual marketing plans and budgets. Fourth, work with your partner to ensure realistic baselines. Lastly, consider exclusivity which typically commands a premium.
The discussion next focused on the risks of sharing one’s Confidential Information. All parties agreed that it is necessary to share some information with prospective licensors or partners. But how much in enough? Too little? Too much? And what can be done to safeguard that information once it has been shared?
The initial advice was to have the prospective partner/licensor/licensee sign a Non-disclosure Agreement. However, both panelists and audience members pointed out that these are not always airtight and that some, often larger, businesses will simply refuse to sign them. According to Lund, at least in his industry, customers don’t see inside the product, they only see the results. Therefore it would be difficult for a competitor or usurper to backward engineer the exact method of creating the end result. In other words, business circumstances dictate reveals.
Again, the discussion tended to focus mostly on patents and, not only was there some misinformation, but those in the know failed to correct it. Specifically, Lund stated that sometimes after his firm demonstrates a piece of technology, or once it’s viability has been proven in the marketplace, the firm then goes back and files patents on it if they feel it may have more commercialization potential. Stolarski agreed with this approach.
Noticeably absent from this part of the discussion were any caveats regarding the timeframes within which a patent must be filed once it’s been disclosed, nor the effect of the “On Sale” bar, both of which are unfortunately outside the scope of this article.
As a strategic maneuver, Soriano admonished entrepreneurs to look at competitors’ patents, “poke holes in them” and know the competitors’ weaknesses as well as one’s own. Second, she suggested filing provisional patents covering any new inventions that might be necessary to connect-up the Licensor’s technology with the Licensee’s. Lastly, segment the market to understand how your tech fits into your partner’s strategy and entrenched position.
Hauser pointed out that, in academia at least, there is a propensity to talk about one’s research and all its wonderful possibilities. To counter such forces, Hauser recommended having invention disclosures in place to ensure that employers identify and register IP before it’s disclosed.
So what can one take away from this discussion? Although the panel focused nearly exclusively on patents, the tips and strategies apply to all intangible assets and creative content. First and foremost, know your IP and know your market. An effective licensing program requires that the IP owner know the strengths and weakness of its IP and that of its competitors. A strong knowledge of the IP landscape will reveal the strategic opportunities for products, markets and prospective partners. Second, get strategic advice from domain experts. My sense is that this will increase the reliability of the information, decrease the cost of acquiring the information and reduce risks associated with acting on the information. Lastly, proactively identify and protect your IP before you share it with others (or it gets shared without your knowledge).
Recently, I attended ITDA’s 360° Seminar, “Licensing and Partnership for Effective Technology Commercialization.” This seminar consisted primarily of a panel of “experts” willing to share their knowledge and expertise about the subject. The audience was comprised primarily of technology and medical device entrepreneurs and early-stage companies, licensing executives from various industries and a smattering of intellectual property lawyers (myself included). Although many forms of intangible assets should have been addressed or at least acknowledged - such as copyrights, trademarks, trade secrets and other forms of creative content - the panelists uniformly addressed only patents. Since many of the issues discussed regarding the identification, registration and licensing of patents is applicable across other forms of intangible assets, it is useful to highlight some of the key points.
The panel was composed of the following four people: Bruce Lund, an entrepreneur and toy and game inventor, Dr. Alan Hauser, an innovation commercialization expert who currently works with Northwestern University’s Technology Transfer Program, Michael Stolarski, a lawyer formerly with Motorola and currently with Howrey, and Jodi Flax Soriano, Director Business Development at Ohmx Corp., a biotech firm.
A discussion of key issues involved in technology transfer (and joint development relationships such as outsourcing, Joint Ventures, strategic alliances and partnerships) could begin almost anywhere. Although I would leave the valuation issue toward the end of the discussion given what I believe to be the superior needs to determine goals, fit and feasibility, this discussion began with the question (paraphrased): when prioritizing your intellectual property (IP) assets, how do you determine the value of your IP?
Bruce Lund, who tends to develop technology in-house and then commercialize it by licensing to toy and game manufactures and marketers suggested that one begin by introducing the technology to the client and asking whether the client sees a particular application or fit within an existing or proposed product line and then let the Client run the numbers (e.g. conduct a market analysis) to determine what the potential market size, share and value are. In my opinion, this is sage advice only if you are an established company with existing client relationships. For a start-up or early stage business, you are better off determining these parameters on your own.
Michael Stolarski, in typical lawyer fashion, suggested that one begin by looking at court rulings. I fail to see how this is truly helpful unless your technology is easily compared to an exiting, known piece of technology. More importantly, Stolarski brought up the “25% Rule.” According to this rule, royalties paid the IP (patent) developer/owner are 25% of the profit margin.
Dr. Hauser suggested that one should used sophisticated financial tools, driven by certain assumptions, comps in the marketplace and marketplace validation. When prompted by an audience member for some suggested resources or places on the Internet where might access some tools or information, Dr. Hauser was unhelpful. My conclusion from this is two-fold. First, Dr. Hauser is a consultant who makes a living by being the go-to person for such information and analyses. Second, perhaps the information and tools are not readily available and an entrepreneur is better served by securing the advice and guidance of a seasoned subject-matter expert.
Lastly, Jodi Flax Soriano provided some very useful insight from the perspective of the entrepreneur. A business can and often does have many different pieces in its IP portfolio. For example, her field – Biosensors - is crowded. Since it is also highly patent-driven, she suggested that one needs to understand the patent landscape. How is this done? By commissioning a patent search firm to evaluate all the exiting patents in the field and “find the white spaces” left open by existing patents. Again, this is a great suggestion for a successful, well-funded company like hers, which originally raised $1MM on an option to license an existing patent.
What I personally like was the notion of the IP Landscape. This can be done with any relevant IP and should be the first step in any innovation strategy. Take a look at what is out there. Determine where the other players have staked their claims. Evaluate the merits of their claims. Look for the “white spaces.” These will be the “open frontier” within which one will have lower operating risks and higher potential to capture market share and sales.
As the valuation discussion tapered, an audience member asked whether the end use of the technology affected royalty rates. Put another way, what is the effect of a technology that is (a) necessary to launch a product or make it marketable, (b) only improves an existing product, or (c) is a category killer?
From the perspective of Lund, their technology is often incorporated into a third-party product. This generally means a smaller royalty. He suggested that the benchmark used is the wholesale price and that the royalty typically runs between 5-10% of that. He also cautioned that this will be affected by industry (e.g. toys v. medical devices) and territory (e.g. U.S.A., North America, global). In addition, Dr. Hauser suggested that operating margin may be a better benchmark than sales.
At this point in the discussion, thoughts (and questions) started turning toward the underlying issue: money. In other words, once licensed, how does an IP licensor ensure that a product is brought to market and that it generates revenue? Both Lund and Stolarski gave some useful input.
First, require contract minimums: minimum production run, minimum amount of sales. Second, set yearly minimums or milestones with an annual review. Tie this to a right to adjust the royalty and/or terminate the relationship and ensure reversion rights. When the parties are unsure about just how much upside potential there is, set escalating royalty rates by volume. Third, require review of annual marketing plans and budgets. Fourth, work with your partner to ensure realistic baselines. Lastly, consider exclusivity which typically commands a premium.
The discussion next focused on the risks of sharing one’s Confidential Information. All parties agreed that it is necessary to share some information with prospective licensors or partners. But how much in enough? Too little? Too much? And what can be done to safeguard that information once it has been shared?
The initial advice was to have the prospective partner/licensor/licensee sign a Non-disclosure Agreement. However, both panelists and audience members pointed out that these are not always airtight and that some, often larger, businesses will simply refuse to sign them. According to Lund, at least in his industry, customers don’t see inside the product, they only see the results. Therefore it would be difficult for a competitor or usurper to backward engineer the exact method of creating the end result. In other words, business circumstances dictate reveals.
Again, the discussion tended to focus mostly on patents and, not only was there some misinformation, but those in the know failed to correct it. Specifically, Lund stated that sometimes after his firm demonstrates a piece of technology, or once it’s viability has been proven in the marketplace, the firm then goes back and files patents on it if they feel it may have more commercialization potential. Stolarski agreed with this approach.
Noticeably absent from this part of the discussion were any caveats regarding the timeframes within which a patent must be filed once it’s been disclosed, nor the effect of the “On Sale” bar, both of which are unfortunately outside the scope of this article.
As a strategic maneuver, Soriano admonished entrepreneurs to look at competitors’ patents, “poke holes in them” and know the competitors’ weaknesses as well as one’s own. Second, she suggested filing provisional patents covering any new inventions that might be necessary to connect-up the Licensor’s technology with the Licensee’s. Lastly, segment the market to understand how your tech fits into your partner’s strategy and entrenched position.
Hauser pointed out that, in academia at least, there is a propensity to talk about one’s research and all its wonderful possibilities. To counter such forces, Hauser recommended having invention disclosures in place to ensure that employers identify and register IP before it’s disclosed.
So what can one take away from this discussion? Although the panel focused nearly exclusively on patents, the tips and strategies apply to all intangible assets and creative content. First and foremost, know your IP and know your market. An effective licensing program requires that the IP owner know the strengths and weakness of its IP and that of its competitors. A strong knowledge of the IP landscape will reveal the strategic opportunities for products, markets and prospective partners. Second, get strategic advice from domain experts. My sense is that this will increase the reliability of the information, decrease the cost of acquiring the information and reduce risks associated with acting on the information. Lastly, proactively identify and protect your IP before you share it with others (or it gets shared without your knowledge).
Tuesday, July 28, 2009
Anatomy of a Financial Fraud: Part I
Copyright 2009 John A. Franczyk, Esq. All Rights Reserved.
Any mention of “financial fraud” will likely conjure images of Bernard Madoff or any number of other big-ticket fraudulent schemes that have been exposed over the past several years. Financial fraud is more rampant and insidious on a much smaller scale, however, and frequently, closely-held businesses are the targets and victims of that fraud. Not too long ago, one of our clients came very close to losing several million dollars in a transaction which, initially, looked perfectly legitimate. The client’s instincts, however, caused it to dig deeper into the bona fides of the transaction, which subsequently exposed a broad but ultimately superficial scheme that had been created to defraud the client of its funds. This article describes the nature of that fraud and the client’s and our joint efforts which exposed it.
The client is a lending institution which originates loans that are collateralized by publicly-traded securities. During the term of these loans, the client holds the securities in its own name with an account that it has established with its own brokerage firm. Once the terms and conditions of the loan are agreed upon, the loan transaction typically closes on a “delivery versus payment” (“DVP”) basis, in which the securities are transferred into our client’s account at the same time as the loan funds are transferred into the borrower’s account.
A prospective borrower came to the client seeking a multi-million dollar loan that was to be secured by a basket of blue-chip stocks, which were then held in an eTrade account. The borrower presented several months’ worth of eTrade account statements showing the existence and value of that stock and gave our client personal references and the name of his eTrade account representative. His only unusual request was that the transaction be closed through an escrow account that would be managed by his attorney at a prominent, nationally-known law firm. The borrower gave our client the attorney’s name and contact information, as well as a copy of correspondence from the attorney on the law firm’s letterhead and a copy of the escrow agreement that the attorney had purportedly drafted.
The escrow arrangement conflicted with our client’s internal underwriting requirements, which ratcheted the transaction into a more rigorous underwriting environment. The transaction would clear this rigorous environment only if the escrow agreement could be modified to meet certain standards. Our client asked us to assist with the negotiation of those modifications while the client completed the remainder of its underwriting. We first contacted the borrower’s attorney through the contact information which the borrower had provided. We later researched the nationally-known firm of which this attorney was a member and attempted to contact him through the law firm’s switchboard. The attorney that we then contacted, however, had no knowledge of this transaction nor of the borrower. The transaction and the underlying scheme began to unravel shortly after this latter contact was made.
Upon closer examination, we discovered that the law firm stationery we had seen included a correct building address, but a different suite number for the borrower’s attorney. Further, the attorney’s email address that we had been given included a slightly different domain name extension than the extension used by all of the other email addresses listed on the law firm’s website. Simultaneously, our client compared the borrower’s eTrade account statements with other eTrade statements in its possession and determined that the account number listed on the borrower’s statements was one digit longer than other eTrade statement numbers. We ultimately conducted a “WHOIS” domain name search on the domain extensions for both the borrower and his attorney, and discovered that the domain names for all of the email accounts we had been given were registered and owned by the same party.
It quickly became apparent that this prospective borrower had prepared forged eTrade statements and law firm stationery, had enlisted one or two accomplices to play the role of attorneys and account representatives, and had concocted a thatch of websites, all of which had a gloss of legitimacy yet none of which withstood a closer inspection. The client then referred the matter to the US Attorney’s Office, and the prospective borrower has since been indicted.
Our client in this transaction was fortunate to have enacted strict internal procedures which precluded it from being a victim. Statistics in this area are hard to come by, as many firms which have been victims of fraud either do not report the fraud or are not able to grab the attention of a prosecutor who is then willing to pursue the perpetrator. The individuals who enact these schemes will generally be long gone before the fraud is uncovered, and the victims will have little recourse as a result.
The best course of action for any company is therefore to impose internal procedures that are designed to catch the fraud before it affects the company. The second part of this article, which will be published shortly, includes a series of suggestions for internal controls that are designed to prevent fraud. Fraudulent schemes remain rampant throughout the world of closely-held businesses. Time- and cash-strapped business owners may well groan over the prospect of the additional work required to implement these procedures, but in light of the alternative, that additional work may well be the best investment of time and cash that the business owner has ever spent.
Any mention of “financial fraud” will likely conjure images of Bernard Madoff or any number of other big-ticket fraudulent schemes that have been exposed over the past several years. Financial fraud is more rampant and insidious on a much smaller scale, however, and frequently, closely-held businesses are the targets and victims of that fraud. Not too long ago, one of our clients came very close to losing several million dollars in a transaction which, initially, looked perfectly legitimate. The client’s instincts, however, caused it to dig deeper into the bona fides of the transaction, which subsequently exposed a broad but ultimately superficial scheme that had been created to defraud the client of its funds. This article describes the nature of that fraud and the client’s and our joint efforts which exposed it.
The client is a lending institution which originates loans that are collateralized by publicly-traded securities. During the term of these loans, the client holds the securities in its own name with an account that it has established with its own brokerage firm. Once the terms and conditions of the loan are agreed upon, the loan transaction typically closes on a “delivery versus payment” (“DVP”) basis, in which the securities are transferred into our client’s account at the same time as the loan funds are transferred into the borrower’s account.
A prospective borrower came to the client seeking a multi-million dollar loan that was to be secured by a basket of blue-chip stocks, which were then held in an eTrade account. The borrower presented several months’ worth of eTrade account statements showing the existence and value of that stock and gave our client personal references and the name of his eTrade account representative. His only unusual request was that the transaction be closed through an escrow account that would be managed by his attorney at a prominent, nationally-known law firm. The borrower gave our client the attorney’s name and contact information, as well as a copy of correspondence from the attorney on the law firm’s letterhead and a copy of the escrow agreement that the attorney had purportedly drafted.
The escrow arrangement conflicted with our client’s internal underwriting requirements, which ratcheted the transaction into a more rigorous underwriting environment. The transaction would clear this rigorous environment only if the escrow agreement could be modified to meet certain standards. Our client asked us to assist with the negotiation of those modifications while the client completed the remainder of its underwriting. We first contacted the borrower’s attorney through the contact information which the borrower had provided. We later researched the nationally-known firm of which this attorney was a member and attempted to contact him through the law firm’s switchboard. The attorney that we then contacted, however, had no knowledge of this transaction nor of the borrower. The transaction and the underlying scheme began to unravel shortly after this latter contact was made.
Upon closer examination, we discovered that the law firm stationery we had seen included a correct building address, but a different suite number for the borrower’s attorney. Further, the attorney’s email address that we had been given included a slightly different domain name extension than the extension used by all of the other email addresses listed on the law firm’s website. Simultaneously, our client compared the borrower’s eTrade account statements with other eTrade statements in its possession and determined that the account number listed on the borrower’s statements was one digit longer than other eTrade statement numbers. We ultimately conducted a “WHOIS” domain name search on the domain extensions for both the borrower and his attorney, and discovered that the domain names for all of the email accounts we had been given were registered and owned by the same party.
It quickly became apparent that this prospective borrower had prepared forged eTrade statements and law firm stationery, had enlisted one or two accomplices to play the role of attorneys and account representatives, and had concocted a thatch of websites, all of which had a gloss of legitimacy yet none of which withstood a closer inspection. The client then referred the matter to the US Attorney’s Office, and the prospective borrower has since been indicted.
Our client in this transaction was fortunate to have enacted strict internal procedures which precluded it from being a victim. Statistics in this area are hard to come by, as many firms which have been victims of fraud either do not report the fraud or are not able to grab the attention of a prosecutor who is then willing to pursue the perpetrator. The individuals who enact these schemes will generally be long gone before the fraud is uncovered, and the victims will have little recourse as a result.
The best course of action for any company is therefore to impose internal procedures that are designed to catch the fraud before it affects the company. The second part of this article, which will be published shortly, includes a series of suggestions for internal controls that are designed to prevent fraud. Fraudulent schemes remain rampant throughout the world of closely-held businesses. Time- and cash-strapped business owners may well groan over the prospect of the additional work required to implement these procedures, but in light of the alternative, that additional work may well be the best investment of time and cash that the business owner has ever spent.
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