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foundations and issues for netpreneurs:

intellectual property 101

Why can't a Honda motorcycle vroom like a Harley-Davidson? Why can't you "One Click" at BarnesAndNoble.com, but you can at Amazon.com? What makes a fair non-disclosure agreement? The answers point out varying aspects of protecting intellectual property, what Andrew Sherman calls "the currency of the new economy." At this Morino Institute netpreneur.org Coffee & DoughNets meeting held January 18, 2000, a panel of experts took a business approach to explaining what protecting and leveraging intellectual property means to marketing, customer relationships, revenue and finding capital for Internet companies.

Statements made at Netpreneur events and recorded here reflect solely the views of the speakers and have not been reviewed or researched for accuracy or truthfulness. These statements in no way reflect the opinions or beliefs of the Morino Institute, Netpreneur.org or any of their affiliates, agents, officers or directors. The transcript is provided "as is" and your use is at your own risk.

Copyright © 2000 Morino Institute. All rights reserved. Edited for length and clarity.

mary macpherson: introduction

Good morning, I'm Mary McPherson, Executive Director of netpreneur.org at the Morino Institute. On behalf of our entire team, I'd like to welcome you to this morning's program and thank you for coming out so early in the morning. A bit of history: This hotel is the site of the very first Coffee & Doughnuts which had about 35 people about three years ago next month. Today, we have ten times that many attending.

Like everything else around the Internet, the area of intellectual property (IP) is morphing. New boundaries are being drawn in trademarks, patents, unfair competition, copyrights, business methods, protection and branding. This morning, we're very fortunate to have a distinguished, and mostly tie-less, panel of attorneys. Andrew apparently did not learn the lesson about no-suits from his last Coffee & DoughNets, but let me turn the program over to him, our favorite counselor. You can read his bio, but what you won't see there is a person who's been an entrepreneur since his early teenage years. He's counsel to the Young Entrepreneurs Organization, the National Foundation for Teaching Entrepreneurship and Netpreneur.org, and he has a deep passion for working with startups. It's my great pleasure to introduce Andrew Sherman of Katten Muchen & Zavis.

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andrew sherman: just a few lawyer jokes

Four lawyers at 7:30 in the morning after a bitter Washington Redskins loss in the playoffs. Many of you must think you're in purgatory.

The fact is, the only way we all agreed to show up this morning is if we could individually bill all of you, so, if you could please turn in your business cards, we'll prepare invoices. In Proxicom's case, of course, you'll be subscribing for a large Internet services and development agreement. Also, we should be wrapping up in about five hours. Just joking, although, when we told our panelists that they each had 10 minutes for opening remarks, they just froze. "I can't," they all said, "I don't know how to talk for just 10 minutes." Well, I'll do the best I can to keep everybody on track so we get to the Q&A as soon as possible.

Today's topic is about as important as it gets. Strategies for protecting IP are critical. As netpreneurs, these assets give you a competitive edge, yet they are intangible and appear nowhere on the balance sheet. You can't touch them, you can't feel them, yet they are the primary currency of the new economy. A good example is a small deal announced last week which you may have heard of, the America Online (AOL)/Time Warner deal. If you think about it, the primary assets for both companies are four different types of IP—customer relationships, brands, content and knowledge workers—all of which will be touched on this morning.

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That probably describes four of the primary assets you have—whether it's a URL, customer relationships or distribution relationships—these are all protected by some body of IP law. The key is to understand enough about IP law to match your assets with the appropriate strategy for protecting and leveraging them. That's what we'll discuss this morning.

We've got a fantastic panel of three very talented people. I'll introduce each individually before they speak, starting with Eric Fingerhut of Shaw Pittman. You can read Eric's bio yourself, but I do want to highlight a couple of things. He focuses in the trademark Internet practice group, counseling clients on trademarks and other IP issues, often writing and speaking on the topic. Given the role of trademarks and brands in this new economy, we wanted to start things off right, so, Eric, take us away.

 

eric fingerhut: trademarks and brands

Like a new Web site, the law involving trademarks and the Internet is still very much under construction. That said, some clear trends have emerged, one of which is that the entrepreneurial spirit which is so pervasive among talented people like yourselves in the technology community is not always compatible with traditional principles of trademark law. Here's a quick example. You've heard about domain name cybersquatting, but if you go to some auction sites, you'll now see people trying to sell trademark applications, many of which are just applications that were filed for the $345 filing fee. "Granolaware" was an early one which somebody wanted about $1,400 for. Section 10 of the Lanham Act prevents trafficking in trademark applications that are filed on an "intent to use basis." You probably wouldn't know that unless you had consulted your trademark lawyer prior to listing that application for sale.

E-commerce is highly regulated, and the regulations continue to come from all angles—legislation, cases, Congress, the European Union and more. They come from everywhere. In the short time I have today, I'm going to touch on three topics: basics, rules to remember and a few comments on brand building.

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the basic of trademarks

A trademark is any word, name, symbol, shape, color, sound, smell—anything used to identify and distinguish you or your company as the source of goods or services. Thanks to the Supreme Court's decision in the Qualitex Co. v. Jacobson Products Co. case, trademark protection is not limited to anything. Colors can function as a mark, like the color pink for insulation, or sounds, like the sound of the Harley-Davidson motorcycle engine.

What about domain names? Domain names are simply Internet addresses, but a domain name, if used in the proper way, can function as a trademark. I don't need to go through the countless examples of how many domain names today function as trademarks.

An interesting sidelight about domain names is that, until recently, they were limited to 22 characters. That has now been increased to 67 characters, so you can start registering slogans as domain names. That's a fairly significant development.

Brands. What are brands? Somebody told me that a brand is like love—not making love—but being in love. Everybody knows what it is, but few can articulate it. Let me try, anyway. Legally, a brand is the equivalent of a trademark. From a legal perspective, there's no difference between NIKE the trademark and NIKE the brand. A brand is the promise of performance. It tells customers something about your company. It tells your prospects and employees what you stand for and what they can expect when they interact with you. It is the sum of a company's marketing position and performance. Really, it is an emotional relationship between the customer and the company. I just bought a Volkswagen. Ten or 15 years ago I would not have bought one. Volkswagen had a reputation then for being affordable and simple; now they've evolved and their brand is high-tech. They've gone from hippie to yuppie, and that's why I bought the car. Maybe that's thanks to clever marketing, but I really think the company has delivered on its product, also. I don't represent Volkswagen; it's just I'm very happy with the car.

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ten rules of trademarks and brands

Let's talk about ten quick rules to remember.

1. Reserving a domain name does not amount to the legal right to use it. There is a popular misconception out there. If a domain name is available—and I realize that very few of them are—it doesn't mean that you have the right to use it. If you don't believe me, ask West Coast Video. They registered the domain "MovieBuff.com" in 1996, then sat on it for two years without doing anything with it. Meanwhile, Brookfield Communications came along and took the Movie Buff mark. When West Coast Video eventually launched their Web site, they were enjoined because they hadn't made any trademark usage of their domain name. Use of a domain name in an email address does not rise to the level of trademark use.

2. The more arbitrary the mark, the broader the scope of protection. In the trademark selection process, remember the spectrum of distinctiveness. There are five types of terms, in order from the most protectable to the least, they are coined (such as "Exxon"), arbitrary (such as "Apple" for a computer); suggestive (such as "Apple-A-Day" for vitamins), descriptive (such as "TomApple" for a tomato/apple juice drink) and generic (such as "Apple" for an apple). "Apple" for apples can never be registered. "TomApple," as a descriptive mark for a tomato/apple juice, is capable of acquiring distinctiveness as a mark, although inherently it's not protectable as a trademark.

Suggestive marks are good marks because they require consumers to use their imagination to figure out what the underlying product is. "Apple-A-Day," which connotes health, is a perfect mark for vitamins. Arbitrary marks are very good—those words with common, everyday meanings that have nothing to do with the underlying product, such as "Apple" for a computer. The best marks altogether, and you see a lot of creativity here in the Internet space, are coined words. Xoom, for example.

3. Conduct a trademark search. Don't stick your head in the sand. Figure out what the risks are up front. It costs less than $1,000 to do a trademark search, and it's a very good investment. Not only can you figure out whether or not your mark is protectable, it also gives you a good idea about what the competition is doing.

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4. Seek federal registration. Federal registration in the US is not required. You can always prove your common law rights, but a registration is prima facie evidence of the validity of your ownership and exclusive right to use the mark nationwide. Also, don't under estimate the deterrent value of being able to use the registration symbol (®) next to your mark. Additionally, the more registrations you have in your portfolio, the more impressive it looks to somebody considering acquisition of your company.

5. International trademark protection is very important. The Internet is a global marketplace and a global medium. Outside the US, many countries require a registration in order for you to have the legal right to use a mark in that country. When you don't register the mark and then you get a little publicity, the next thing you know some pirate may come along and register your mark in a foreign country. On a moment's notice, you're not able to use that mark in at that country without buying it back. Regarding international domain name protection, there are 240 countries out there, each with a country code top-level domain (such as .ca for Canada and .uk for the United Kingdom), and each with the same level of connectivity as .com, .net or .org extensions. Be mindful of them. Some countries have local presence requirements which actually protects you in some way from cybersquatters, but be careful. Think of international trademark protection as insurance.

6. Watch out for the representations, warranties and indemnities that you give in your licenses or any other agreements that you enter into. I can't tell you how many agreements I've been asked to review where companies will flat out make representations that they own worldwide trademark rights and give indemnities against worldwide trademark infringement. Maybe you don't have the leverage to give indemnities for worldwide infringement, but certainly you don't have to represent and warrant that you own the marks worldwide.

7. Cybersquatting is stupid and potentially expensive. The Anti-Cybersquatting Consumer Protection Act, which was passed on November 29, 1999, prevents against bad faith domain name registrations that are identical to, confusingly similar to, or dilutive of distinctive or famous marks. You can ask me more questions later, but the bottom line is that the big corporations won the battle against the libertarians on that front.

8. Domain name registrants as of January 3, 2000, are all bound by the Internet Corporation for Assigned Names and Numbers' (ICANN) uniform dispute resolution policy (UDRP). The UDRP is in some ways similar to the anti-cybersquatting legislation, except that a complainant filing under UDRP does not need to have a trademark registration, a difference from Network Solution's old dispute resolution policy where you needed a registration to get your foot in the door.

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9. Be watchful of unauthorized framing and deep linking. In other words, don't copy somebody else's Web site and paste it on to your own unless you have authorization to do that. If you're going to hyperlink to somebody else's Web site absent agreement, make sure you link to the home page and not three or four pages deep so as to deprive the site that you're linking to of advertising exposure.

10. Pick and choose your battles. My favorite quote, which is a quote of my own, is "the Internet is everywhere and it's nowhere at the same time." Obviously, everybody is very conscious about their brands. If you see that somebody is using or misusing yours, think before you object. I say that because many of you may have read about a recent dispute involving eToys where they objected to an artist's site that was making fun of corporations under the domain name etoy.com. etoy.com actually had reserved the domain name and was using its mark prior to eToys, but eToys didn't like some of the content they were posting. eToys objected, and, as a result, there was tremendous backlash on the Internet. eToys suffered tremendous adverse publicity, and, at the same time, gave credibility and exposure to the etoy site to which it was objecting. It really was a lose/lose situation and a public relations fiasco for eToys, and they ended up retracting the suit.

 

on brand building

How else can you build your brand? Licensing can be the best way. It's a great opportunity to increase your brand exposure and public awareness, and it's not a bad revenue model either. Of course, there are some risks inherent in licensing, and number one is that if you don't police the licensee's use of your mark, you may end up not only tarnishing your brand, but risking the abandonment of your rights to the mark.

The are basically two legal requirements for a valid license. Number one, all licenses have to have a term. That doesn't mean that you can't have automatic renewals and things of that nature, but don't give perpetual licenses. The law regards those as tantamount to assignments. Number two, any license must have quality control provisions, and those provisions must be acted upon and exercised. Again, failure to police your licensees could result in losing your brand.

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Let me leave you with some food for thought. These are what I call "Fingerhut's Branding predictions." I'm not sure what gives me the authority to give you my branding predictions except that my wife went to high school with Jeff Bezos, President of Amazon.com. She's constantly reminding me that she went to high school with Jeff Bezos and telling me, "you're no Jeff Bezos." I don't know what that means, but whatever.

First, and this is not rocket science, Y2K is the year of click and mortar. You're going to see more E-commerce companies opening up retail locations and more traditional offline retailers sinking significant money into the Web. My two-year prediction is that it wouldn't surprise me if, like Starbucks, you ended up seeing Amazon.coms on every street corner. How? I'm not sure, but I wouldn't rule it out. There will be more co-branding and strategic alliances along the lines of the Yahoo/K-Mart and AOL/Wal-Mart deals. The other day, somebody tried to convince me that in this battle between E-commerce and offline retailers, offline companies have a head start from years and years of brand building. Then somebody else tried to convince me that the Internet has fostered an environment that is much more evocative of the way business was done 40 or 50 years ago with the mom and pop corner stores. He argued that with all of the data collection tools available now, where they know what you bought the last time and can make recommendations, hopping onto an E-commerce site is like having a corner grocer who knows you by name. In that way, maybe the E-commerce companies have leveled the playing field when it comes to creating relationships with their customers.

Last but not least, and this is not rocket science either, the AOL/Time Warner deal demonstrates the increasing power of Internet brands. At the same time, that deal shows that Internet companies are going to be much more scrutinized, and they are going to have to be accountable and profitable more quickly.

Thank you very much.

 

Mr. Sherman: Our next speaker, Marc Kaufman is with Sixbey Friedman Leedom & Ferguson. His credentials are vast. They include experience in preparing and prosecuting trademark and patent applications with a focus on computer software and systems, medical instruments and electric power distribution. He's going to focus on E-commerce business model patents and general patent law strategies as they affect your Net-centric business.

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